Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.



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December 2004 Posts

Auld Lang Syne, by GM Nigel Davies

New Year's Eve often brings back memories. This evening I have been thinking about one of my early mentors, Sam 'Roberts'. He was an old Jewish guy who ran a linoleum shop in Liverpool, always wore a hat and once won the British Veterans chess championship.

When I was a boy he used to invite me to play chess with him at his house every Sunday afternoon. His wife brought us regular supplies of biscuits and tea, He counted the material out loud (always the pawns before the pieces) and took greater pleasure in my wins than in his. He told me I would be a great player, but warned against being a professional because of the sorry state of Yates.

Had he lived I would have disappointed him on both counts, I became a not-so-great professional. But when my son was born there was never any doubt about what his name would be.

O Deceptive Earth!, by George Zachar

I've not followed the details of the horror in SE Asia, but this account describes how inquisitive humans were literally drawn to their deaths by the initial "tell" of the tsunami:

"... In another minute or two we noticed LOTS of rocks we hadn't seen before, and realized that the bay was emptying very fast. We saw lots of people from the beach following the receding waters out, and we both realized - probably because of all those years of watching the Discovery Channel - that we were about to witness a cataclysmic event. We were about 100 feet above the beach, but I raced up two more stories to the parking lot above. Jim elected to move up to the reception area one floor above the restaurant.

I watched the bay continue to empty, and people continue to walk farther and farther out. By that time I was already horrified about what I knew would happen, and I kept muttering, "Those people, they need to run," but no one else I watched with seemed to realize the danger. They just thought it was an extremely low tide.

Then we could hear the roar. The sound materialized a few moments before we could see the wall of water moving toward the shore. It seemed like we could "hear" it through our feet as well as our ears. That's about the time Jim joined me on top. It was a long time before the people on the beach realized they were in danger. They started running way too late. We just watched as the huge brown wave washed over them, then over the beach, over the bungalows and shops, and everything else that was on lower ground..."

The Meaning of Life, by Jim Sogi

What is life and what is the meaning of life? The answer depends on the viewpoint. The atoms in the body will exist forever, so it doesn't matter to the atoms if we live or die. The difference between the quick and the dead is the transference of information through DNA. In one view, human existence appears to be a mere by-product of the spread of information by DNA. The more 'successful' the organism, the more its information will spread. Thus life can be considered information or in other parlance, a meme. History has shown evidence of numerous cataclysmic events which have wiped out many species, kingdoms and genera of life. Asteroids, volcanoes, continental migration, global cooling, and climatic changes all have wiped out life across the face of the planet. Ultimately it is of little matter if any one individual lives or dies, if the species carries on, or on a broader view whether any one species lives on, as life will continue to spread in one way or another. As market participants it make little difference if one or more of us is wiped out. The information or money is transferred on through the system to useful production like atoms or DNA. DNA has many apparently redundant patterns allowing reproduction with many missing parts. DNA carries obsolete patterns from long since dead prehistoric viral strains. The larger system of information, life, markets and the universe are the higher orders of existence that supersede the individual. The individual experience makes this difficult to accept.

Boom & Bust, by Russell Sears

I am bullish on the S&P, bearish on bonds for the following reasons. The S&P has had 40 quarters which it has been in recession, with a slightly negative return, average of -0.24% ignoring dividends, while during all 180 quarters it's had on average a 2.43% return. I read an article for my first CFA exam in 2000, which said that the feds cannot stop the business cycle, they have just expanded the time between cycles.

Both the Boom and Bust will be longer.

My interpretation has been that the expanded boom will allow more misallocation, irrational exuberance, and longer reallocation bubbling popping periods. The bubble's about to pop on bonds.  

Breaks & Breakouts, by Bruno

I daytrade patterns, and I keep seeing situations very similar to bridge.

Bridge requires a lot of pattern recognition. There are patterns in suit management, in game plans, in bidding... Bridge is all about recognizing a pattern and playing it correctly. However, even if you play a hand well, you can still lose, due to the random nature of card distribution. For instance, at the simplest level, if you have six cards against you, you know that they'll break:

3-3, 35% of the time,
4-2, 48% 
5-1, 15%
6-0,  2%
It makes sense to go with the odds and plan for 3-3 and 4-2 breaks. This is the proper way to play in most cases. But you'll still lose 17% of the time.

It's the same in daytrading. I'll buy a breakout on the hourly chart if I see volume lifting offers on the tape. But even though this is the way to play, I fully expect this type of trading to show its share of losing trades.

Hungry Hungry Hippos, by Andrew Moe

We often compare the markets to games of strategy and skill like chess and checkers where opponents observe rigid rules of movement and decorum. Thanks to the generous bounty bestowed by Santa, I bear witness to a game that parallels the more primal nature of the markets: Hungry Hungry Hippos.

Four players sit at polar corners of a convex circle. Each has a hippo lurking on the surface in front. A lever on the hippo's back causes the head to lurch outward and upward towards the center of the ring until the head suddenly snaps downward, capturing everything beneath the oversized snout. The head then returns along the surface, dragging its prey into the throat.

The object of the game is to snap your hippo's head in time to catch balls rolling on the surface.

Though the rules of the game call for the deployment of a single ball at a time, we have developed a ritual where my three year old, Makenzie, collects all of the balls into a bucket, then swirls them around as we all open and shut our hippos and yell "The Hippos are Hungry - Better Feed the Hippos". With great ceremony, Makenzie dumps all of the balls at once into the middle and the feeding begins.

Player with the most balls at the end wins.

We have rapidly developed our own styles of play, as outlined below.

Madeline: The House Trader
At just over a year, Madeline can be an active participant or more interested in eating the balls herself. Though her participation is random, she benefits from a secret alliance with Mommy and Daddy when active. She is the ultimate insider.

Makenzie: The Scalper
Makenzie possesses both limitless energy and a focus of purpose that borders on fury. Relentless pounding guarantees a steady supply of balls although the orange hippo is already a little off.

Mommy: The Macro Trader
A college athlete, Mommy excels at games of fast motion and is perfectly suited to time her snaps to the apparent random rolling of the balls. Always alert, she can change the face of the game in seconds.

Daddy: The System Trader
Besides counting everything from snaps to snatches on the table, Daddy regulates his play to observe the effects on the other players. Though he thinks he's running the show, Mommy and the girls exchange occasional glances that smack of nails, shopping, Nordstrom and credit cards.

No wonder my hippo goes hungry.

Cutting Through the Fog, by GM Nigel Davies

I wonder if there's a relationship between the number of words someone uses to say something and his efficiency. I suspect this is the case, but how can it be counted? One thought is to compare the share price of the company with the number of words in the last annual report.

A related area might be to count the number of words per sentence and characters per word. My hypothesis is that a more hubristic CEO might use longer words or sentences.

Another thought on these lines is that a higher Fog Index by the same CEO (or Fed Chairman) at different times might imply a degree of deception.

Tactics, by George Criparacos

In trying to speculate against market movements that seem overextended, like oil in late October and now the Euro against the dollar, and against the yen also, I am using the following tactics:

1. First hide the king. Indian Defense tactics against d4 in the opening seem appropriate.
2. Forget about stop orders. They provide targets. Keep your pieces in defensive positions.
3. Expect the offense to play aggressively, to sacrifice, to put you off track, to give you tactical opportunities to counterattack, to lure you to open up. Avoid all. Stay back.
4. In the middle game play for the draw.
5. Let the offense exhaust itself.
6. A small pawn ahead in the endgame can make all the difference.
7. Expect the game to last long.

My "Fed Model", by Allen Gillespie

People often speak of the "Fed Model", which is an intramarket comparison model that unfortunately has several flaws, but does yield an answer to the question "what is the market worth?". One datum I began tracking in July 2003 is a bottoms-up "theoretical" value of S&P 500. I wish I had been tracking this for longer, but such is life. This is calculated by running the dividend discount model on each stock in the index, multiplying the discount/premium by the index weight, and then summing the totals. What I like about this model is that it yields much more insight because you get an index valuation, list of stocks that are theoretically over/undervalued and distribution of the number of over/undervalued issues. While this model has suggested steep undervaluation for most of the year, it had recently tightened up to overvalued by .74% on Dec 2, but now is opening up again since December 13 as the earnings data remain strong. Currently it suggests an undervaluation of the S&P 500 by 5.54%.

Cross Sections: Man-of-War, Stephen Biesty et al (Dorling Kindersley, 1993)

Reviewed by the Assistant Webmaster

In reading to my young sons, I often (re)learn a subject myself, typically in a for-dummies way. But this book, like others by Biesty, is a masterpiece, Each page is a large, incredibly detailed cross-section of a British man-o-war circa 1800, with tidbits of explanatory text & anecdotes sprinkled about. Thirty minutes with this book will increase your understanding of Patrick O'Brian many-fold. A sampling :

"Sailors accepted some risks, such as enemy fire or falls from the rigging, as a part of the job. But what they feared most was disease. For each seaman killed in action, as many as 40 died of disease."

"To scrub the decks, sailors used blocks of stone. They were the size and shape of big family bibles, so they were nicknamed 'holystones'."

"Getting rid of maggots: (1) Put a large dead fish onto the sack of biscuits, and the maggots crawl out to eat it. (2) When maggots cover the fish, throw fish in sea and replace with a fresh one. (3) Repeat (1) and (2) until no more maggots appear."

"Scuttlebutt: Working aloft in the sails was hard work, and a tub of 'fresh' water, called a scuttlebutt, provided refreshment. Men drank from a mug chained to the tub."

"Some women who came on board tried to smuggle gin to the sailors by storing it in a pig's bladder and hiding it under their petticoats. Officers searched them when they arrived."

"'I'm not sick!': Sick seaman had their grog (rum) ration stopped, so many pretended to be well rather than go to the sick bay."

"Loose cannon: A loose, heavy object, such as a cannon, was as dangerous as enemy fire. As the ship rolled, the cannon rolled too, and could crush anything in its path."

"Sold before the mast: If a seaman died, his messmates 'sold his possessions before the mast' -- they auctioned off his belongings. The proceeds went to the man's family, so out of generosity everybody paid far more than the goods were really worth."

"Carpenter's walk: A narrow corridor, running around the ship just below the waterline, allowed the ship's carpenter to check for leaks. The quiet and secrecy of the carpenter's walk made it the ideal place to plan a mutiny."

"Hanging cot: The captain slept in a boxlike cot that hung from the deckhead (ceiling). It's no coincidence that the cot looks like a coffin: it was made to fit the sleeper, and if he died, he was nailed into it with some shot. The crew heaved the cot-coffin over the side, complete with cannonballs and captain, and it sank like a stone."

"The naval salute was unusual: the sailor held his palm turned in toward his face. This concealed his palm, which was blackened by tar from the ropes."  

A Visit to Zimbabwe, by Ryan Carlson

But Wait, There's More!, Timothy Samuelson (Rizzoli, 2002)

Reviewed by the Assistant Webmaster

What a brilliant book, wonderfully written and elegantly produced. The author is the curator of architecture and design for the Chicago Historical Society, who as a guilty pleasure has assembled the world's leading collection of Popeil & Ronco products, many of them familiar to Americans of a certain age.. Veg-O-Matic.. Pocket Fisherman.. Smokeless Ashtray.. Inside-The-Shell Egg Scrambler.. GLH9 spray-on hair..

A testament to ingenuity & entrepreneurship, brothers Samuel & Raymond Popeil, the children of Polish Jews who came to New York in 1915, began a dynasty of manufacturing & "demonstrating" affordable kitchen gizmos. In the 1940's, 50's and 60's, demos were held at county fairs, the Atlantic City & Asbury Park boardwalks, and Chicago's Maxwell St Market. The Popeils were the finest "pitchmen" in the business.

Later, Samuel's son Ron Popeil, after some intrafamily scuffling, founded "Ronco" and used television as his distribution channel in the 1970's, 80's and 90's, with a brief regrouping after a 1984 bankruptcy:

"Not in a financial position to return to television, Popeil made a bold career choice. He packed up his products and sold them at country fairs and public events as he had done at the start of his career. By 1987, the humbling task of hawking the surplus Ronco inventory was over."

The Popeils were the first to grasp the utility of television, but were baffled by how to shrink their boardwalk "pitch" into a brief timeslot. The result was a frantic, breathless tone to their ads, in contrast to today's minimalist, atmospheric TV ads. Obvious parallels here to the struggle to understand how to make commercial use of the web in recent years. But later, others understood the power of TV; Samuel Popeil wrote:

"I created a monster. Everyone tried to imitate our television marketing. Because of that, the demand for TV time is so great that spots that we used to buy for $200 to $300 cost seven to 10 times that much"

The Popeils shifted back & forth between manufacturing in-house and "outsourcing" several times over the decades, as business conditions warranted, a theme that resonates today.

The author was able to interview Ron Popeil as well as many other family members and business partners, and it's fascinating to see how the economics worked from the inside. And his affection and respect for the Popeils is clear; he owns & uses a kitchenful of vintage Popeil gadgets.

A great fast read, full of lessons and lore.

Dr Zussman adds: Ron's sister Lisa (a friend of a friend) is a professional vocalist with genetically similar promotional proclivities, which raises a capitalism nature vs nurture question.

Victor Niederhoffer: Nobody Asked Me, But...

1 . The beaten-down companies in the Dow and S&P seem like very good candidates before the palookas come in to buy them in force at the beginning of the new year.

2.  The movie The Aviator about Howard Hughes almost presents a heroic picture of a businessman trying to produce and create against the backdrop of corrupt government trying to buy votes through redistribution and bribery. Like The Untouchables, this touches on the problem . But of course the filmmakers limn this as examples of special veniality rather than a natural function of robbing Peter to pay Paul. The only way they are able in their collective consciousness to praise a businessman is to present him as a freak or a nutcase. Or else people might actually feel big and this would be against the idea that has the government in its grip.

3. I have been brushing up on polar coordinates and complex numbers lately and see many areas where this could be fruitfully used in describing the moving time series relations between two markets in a simplistic way.

4. I am going to an area where much shuffleboard is played shortly and will hope to find the many strategies employed there of blocking and then going for a high number and throwing with a spin, applicable to forecasting the shuffleboard game of the market in a week.

5. So often, I find that the insights that one has in a field one knows the most about are directly applicable to the market. And I encourage you to think about what you know the best, and relate it to making money in the market as much better than following the ideas of gurus in books such as the one Doc promised to hide from us when not perfecting the shuffleboard or other games here.

Ask The Senator, a continuing series

Q: What's your view on the S&P today?

A: Yesterday I spoke of a sell pattern which sold at Thursday's high. That trade should be liquidated now and profits taken. It is a short term sell pattern that does not know about more than a day or two, nor do I. The setup to the pattern was 2 consecutive up closes in an overbought market while bonds are in a down trend.

Send queries for the Senator to senator<at>dailyspeculations<dot>com

Study vs Practice, by GM Nigel Davies

There's much anecdotal evidence about a difference existing between study and practice, but the size of the difference is completely underestimated. One might study the physiological behavior of people in love but this has nothing to do with being in love yourself. Reading about death has nothing to do with coming close yourself. And players in various sports may practice like crazy without this having much to do with actual competition.

Can one study the differences in a systematic way? It's still going to be nothing more than a study. I don't believe you even notice a lot of stuff unless you're there, in the arena. And when you're there you've got to mean it, and not just play at playing. A lot of people think they are playing but detach themselves from the experience.

In chess there are many factors that are processed by a player, both consciously and subconsciously, which never show up when you look at the naked game score. Is the opponent bleary-eyed or dishevelled? Is he confident? Does he play particular moves quickly or slowly? What are the respective players' aspirations in both the individual game or the tournament? Are you in control of your nerves?

Body language, energy levels, thinking times and emotions are permutated in an infinite number of ways and interwoven with technical knowledge and vision. And this is what shocks and frightens people with a dry, academic view if they ever come to sit down and play. They might be thinking that 'it's not supposed to be like this'. But that's EXACTLY how it is.  

Why I never listen to NPR news very long, by Professor Miller

Big news item today: "Massive environmental damage caused by the recent earthquake and tsunami."

It's always great to hear how the environment is destroying the environment.

And E mentions this Australian editorial: To be fair, even the most animated America-hater, though, baulks at the idea of blaming George W. Bush for the destruction and death in southern Asia. (.. )  

A Holiday Lobagola for Sharper Image

The Edge and the Ever Changing Cycles, Av Oddmund Grøtte, skrevet 22. juli 2004

On Victor Niederhoffers home page, there are many good stories and arguments. I strongly advise any aspiring trader/speculator to scroll through his page once in a while. Yesterday I found this absolutely brilliant metaphor from "everyday life" related to trading (.. )

La Dolce Vita, by John Bollinger

Some years ago I had the pleasure of being a guest at Valentino's Rome apartment for New Year's Eve. It was one of those left-very-old-on-the-outside, stunningly-modern-on-the-inside restorations. At midnight champagne was served and toasts were made, then everyone rushed to get his bowl of lentils. The lentils are said to resemble coins -- the more you eat, the more you'll get in the coming year. The spirit of the thing seemed not only to be wealth, but good luck, good health, happiness, etc...

I think I'll have to serve some Roman lentils this year.  

Doc writes from Rome: Dr Bollinger is indeed right. The traditional Italian New Year's dish is "cotechino con lenticchie" or pork sausage with lentils. Here is a picture taken just now in my Mom's kitchen. 

Marcus Semones adds: Our traditional southern New Year's feast, hosted by my great grandmother, consisted of collard greens (quite unpleasant smell while cooking), black-eyed peas and ham hocks. According to family folklore having this menu on News Year's Day will afford good luck and financial reward, for the next year. Bon Appetit!  

Fishing and Markets, by James Tar

As a response to Victor's request that we make more of an effort to write about our areas of knowledge and how they relate to the markets:

One of life's activities that has rarely been discussed on the Spec-List and its relation to the market, outside of a few comments on boating and the oceans by Mr. E, is Fishing.

Fishing is a wonderful activity. Only a few other activities offer man such a test of patience, intelligence, and physical range. Man has lots of variables to either adapt to or control in order to be a fishing success. Man has to adapt to a myriad of nature's elements (the market): the water depth, the water current, the water temperature, the often changing bottom surface (flat, rocky, sunken trees or other structures, all that can create snags or snapped lines), the wind and its always changing gusts, above water brush and trees that one has to avoid when attempting a perfect cast.

Having the intelligence to understand what nature, or the market, has put in front of you is another must to be a success. Understanding what species of fish lies in the water is a primary. You must also know what they typically eat and where they lurk in the waters. Only then can a fisherperson properly begin. On countless occasion I have seen people leave a stream, lake, or oceanfront claim, "the fish just weren't biting today." Their efforts started in error because they did not have the knowledge to use the proper indigenous bait or mimicking tackle. I liken it to amateurs buying tech stocks in a bear market. On the contrary, in more bullish phases, you can cast your money lure at almost any fish or stock and come home a winner.

Successful fishing also requires a special range of physical skills: strength to delicate finesse. In order to land (reel in) a larger, more athletic fish, you have to combine strength and finesse in a way that counterbalances a fish's varying efforts to get away or break off the lure or line. When the fish suddenly surges away from you, you have to be firm with your rod and line, not to let out any slack, yet gently give the fish a little room to run and play which requires delicate strength and feel. When trading or taking a position, you need to be prepared for sudden strong moves against your cost (often caused by friction or a lame specialist) yet hold your ground. Don't let the temporary slack in your position bait you into dumping some or all of it at a nasty loss. Understanding the way the fish fights (the way a stock trades) will help you reel in more winners.

The Art of Casting requires a special combination of strength and delicate skills. Strength and efficient technique is required for the distance you might need to get your lure to a spot on the water where the fish may be lurking. Your technique also requires a deft touch to gently land the lure in a way that does not make a scary splash or large noise, both of which will spook the fish from biting. A quality cast is like a quality execution in the market. It gets you in proper position for a winner. You are there quietly, you do not disturb the market so that the risks of friction and publicity go by the wayside.

Experience and knowledge can not be reiterated enough. Equipment and information is also a necessity. Only then can one be properly positioned for success.

S#xulation, by Lopez

When eight people were killed in an Everest blizzard in 1996, Sherpas claimed the s#xual activities of a New York socialite before the climb had brought bad luck to the climbers. "For them, it's a very sacred mountain, but people treat it in unsacred ways," Pettman said. (.. ) He said having s#x - known as "making sauce" to Sherpas - was as much a desecration of the sacred mountain as rubbish and pollution.

Come to think of it - on that dreadful day in 1997 - Monty [VN's trader -ed.] was bragging about "making sauce" the night before. I wonder if that brought us bad luck....

Professor Miller adds: It's official: More s#x makes you happier! Money, S#x, and Happiness: An Empirical Study  Abstract: This paper studies the empirical patterns in money, s#x and happiness. Using 1990s data from the General Social Surveys of the United States, the paper shows that s#xual activity enters strongly positively in happiness equations.

Professor Schnytzer replies: You betcha! Although I did my own research on the subject and I got the same results but didn't publish since I figured the results were trivial.

Ben Franklin on Printing Money, by James Sogi

"About this time there was a cry among the people for more paper money, only fifteen thousand pounds being extant in the Province, and that soon to be sunk. The wealthy inhabitants opposed any addition, being against all paper currency from an apprehension that it would depreciate as it had done in New England, to the prejudice of all creditors. We had discussed this point in our Junto where I was on the side of addition, being persuaded that the first small struck in 1723 had done much good by increasing the trade, employment and the number of inhabitants in the Province, since I saw all the old houses inhabited and many new ones building, where as since I saw most of the houses in Walnut Street with bills on their doors, "To be Let," and many likewise in Chester Street and others which made me think the inhabitants of the city were deserting it one after another.

Our debates possessed me so fully of the subject that I wrote and printed an anonymous pamphlet on it entitled The Nature and Necessity of a Paper Currency. It was well received by the common people in general, but the rich men disliked it, for it increased and strengthened the clamor for more money.....The utility of this currency became by time and experience so evident as never afterwards to be much disputed, so that it grew soon to be fifty-thousand pounds, and in 1739 to eighty thousand pounds since which it rose during war to upwards of three hundred fifty thousand pounds, trade, building, and inhabitants all the while increasing, though I now think there are limits beyond which the quantity may be hurtful."  -- The Autobiography of Ben Franklin

The question is, what are those limits. We will soon find out, it seems.

The Assistant Webmaster adds: Philadelphia changes very slowly. In 1988, as in 1723, there were houses "to be let" on Walnut Street, and I "let" a pleasant residence at Walnut & 23rd.

Review: Writings of Marty Whitman

Reading through his books The Aggressive Conservative Investor (with our good friend Martin Shubik) and Value Investing, and the chapter precis "Value With a Difference" in "Forbes: Greatest Investing Stories," and following up on the first 100 entries about him on Google, I am impressed with the sagacity, intelligence and fruitful hypotheses that jump from this 80-year-old investor whose Third Avenue Value Fund was about the best-performing mutual fund in 2004.

Yet it wasn’t always so. When he was at the height of his fame in 1999, his fund was losing assets at the rate of $50 million a month, or about 33% a year, because of his lackluster performance. His fund was about unchanged in 1998 and 1999 while his peers were racking up 25% a year.  Characteristically, he told Kiplinger's: "As for dealing with the public, scr#w him. You may quote me."

The main elements of his style are to find vulture investments in such things as bankruptcies, underutilized assets, turnarounds and beaten-down technology companies. He looks for stocks and bonds that are so far down that if almost everything  goes wrong, shareholders should still come out ahead -- i.e., things that everyone else hates that appear to have reached a dead end. A very conventional method, but one that he seems quite expert at, disregarding his lackluster performance.

Some of his ideas are: "Safe is better than cheap. The less the risk the greater the potential reward." But this shows he hasn't kept up with the main wisdom of modern finance, that you get paid for undiversified risk. It also is against studies like prospective yield-based studies of Value Line, which would show that Timeliness Group 1, the least safe, perform much better than Safety Group 1.  It also would preclude him from doing what Collab and I told everyone to do in the last two years: to buy every new issue and make 50% a year or so the easy way.

Much more to the point is Whitman's focus on bankruptcies. He's an expert on this, knows everything there is to know about it, made his first fortune in Penn Central debt (achieving a 500% return). He is good at spotting value in the debt of certain troubled companies, especially those that possess substantial physical assets or perform vital services, like utilities and railroads.

Like many people without much of an education, he's a frustrated academic. Whitman suffers from the Marilyn Monroe syndrome. He's proudest of the things he doesn't have and sees his two books and his 25-year-old value course at Yale as his proudest achievements. "The course was absolutely terrific," he told Syracuse University Magazine, in a puff piece. "The students were absolutely super." He believes he has displaced the father of security analysis and is convinced his seminar "will shed new light on the subject and make a major contribution to finance."

There is much of the "just plain folks" technique of seeming small that the Sage possesses. "He is proud of his rolled-up sleeves and corduroy, the mail-order,  extremely casual, open-collared mind set. "After all, I'm just a poor man who just happens to have a lot of money." He succumbs and has been snatched  by  the fund-raisers rather guilelessly. "Lois and I are fortunate to be able to support the causes that mean so much to us, empowering others, leaving an imprint on the future." The kind of person that you'd think might be a friend of  the financial weekly cult leader, and indeed when his performance was better he used to sit next to the others at the leading financial weekly's round table.  

He likes to buy discounted debt when the only good stocks outside tech are things like "the biggest and the best"  (may they pay their policies when the holders lose) (ACE, et al.). He made a killing in KMart on this, debt and common, and apparently this is one of reasons he reached the top of the bottle of vipers in 2004. 

He suggests that audit reports are much more important than earnings forecasts and this, I believe, a person could make a few meals for a life time. "Bad enough that estimates are often wildly inaccurate . . . that's lateral thinking." He likes to buy them when they're really down in the dumps in earnings and no one will buy them, and all the forecasts are bad. This seems very good to me , especially when the things such as the Starmine and IBES and Value Line ratings are lowest.  

He points out that where entry is difficult and capital spending and research necessary to get in is highest, these companies tend to come back. This should be tested and is probably why so many of us have found that the companies that perform the worst in any year tend to come back the next year, especially in the earliest years.

Like most, Marty and his partner Martin have prospered and suffered mightily in the Orient. They are always finding companies with market values of assets 10 times as great as their market value. But they get hurt by institutional features and the old boy network there. A good reading of "Shogun" and a viewing of Sondheim's "Pacific Overtures," as well as a review of the Chair's own downfall, might be a good remedy here.  

He uses multistage reasoning often. First he looks to the probability of default when a company's stock or debt is in the dumps. Then he looks to see what he can get when it does default. And since he works with lawyers all the time, there's a third stage when he directly or indirectly uses the legal threat as a tool for profits.  

Martin Shubik Responds:

There are a thousand ways to make money on Wall Street and a thousand ways to lose money ----and they are all the same. Your picture of Marty is pretty good----my big problem with him is that he is unnecessarily one-down to academia and in spite of great brilliance and perception in his specialization he does not acknowledge the legitimate niches filled by math. Fin. Or other hustles.

Concerning myself ---I picked a modest adequate number (inflation corrected) as my financial goal---a 1988 Golf gets me the 8 miles to my office as well as a 2004 Porsche) and I spend my time trying to finish a decent theory of money ---not because I do not understand the money game, but because I believe that being a serious pro is a 24 hour a day proposition----and time, not money is our prime asset.

The economy is a dynamic stochastic system with constantly changing parameters----the macroeconomists delude themselves and others by acting as though ephemera such as the Philip's Curve are invariants---invariants with a 1/2 life of at most 5 years. They mistake applied advice to politicians with science. Many of the micro economists (including the fin crowd) are either consultant guns-for-hire or mathematicians manqué--proving more and fancier theorems than the physicists--with a disconnect from reality caused by little care or understanding of the connect between their level of abstraction and the phenomena.

I neither know nor worry about why I get my jollies from searching for the invariants in the economic system---but it keeps me out of the pool halls and in a game where I am reasonably good at controlling the deck. I am deeply fond of my old friend Marty and have tried but failed to teach him what real theory is about. He is deservedly rich, but to some extent using the appropriate metric I am richer---because to this very day he still is one down to the Steve Rosses of the world.

Concerning the Japanese market, you say we took hits----that depends on your time horizon and expected return---to phrase Marty, Herb Simon and I we did "good enough".

Victor, one of the important features that carries both you and me along---is that we can coldly and objectively know what we don't know. I have taken plenty of hits and expect to take a few more before the end---but like some disastrous shorting the blame was with me and I chalk it up to Rebbe-gelt [tuition -ed.]. I expect that both of us will leave the table still learning---and it does not matter whether you are 18 or 80---that is what "young" is about. On roughly the same topic----if he wants to, young master McClennan has a good shot at making a major league player in finance. Take no plugged nickels.

Juncture Recognition in the Stock Market, W. G. Bretz (Vantage Press, 1972)

Reviewed by Alex Castaldo, PhD

I looked at this book after it was favorably mentioned by Mr. Argyle. I hoped to find some new ideas; I found instead that it is the traditional technical analysis that was largely discredited in the 1960s by academicians like Roberts and is criticized in PracSpec for its lack of clear definitions and tendency to circular reasoning. On the one hand we are told that prices have been moving up recently because we have been in a bull market, on the other hand that as long as prices keep moving up the bull market continues. It is true enough, but non predictive, non falsifiable and not very useful. The title of this post (quoted from page 134) is another example of this kind of intelligent sounding but scientifically empty statement.

A brief summary of the book:

Page 50. The history of the United States since the 1920s shows that whenever the yield on the DJIA moves past the 3.5% mark and into the 3% area, it is a danger signal which should always set the investor double checking other information to see what else might be wrong. It also appears that a yield on the DJIA in excess of 6.5% represents bargain prices for the long term investor. Such a yield is not likely to be seen again, however, until inflation is completely stopped .

Page 51-80 The author, apparently inspired by Milton Friedman but never mentioning his name, presents a variety of money supply statistics and tries to relate them to the stock market. I found the idea interesting, although some of the indicators (like the ratio of time deposits to demand deposits or the ratio of money supply to U.S. gold holdings) seem quaint and probably no longer meaningful. Main conclusion: p67: When the rate of money expansion (demand deposits plus currency) is falling sharply, caution is advisable .

Throughout the book, the author presents charts of the Dow Jones average at the top of the page and a chosen indicator at the bottom. He then discusses the relationship between the two. Perhaps because I haven t looked at the charts long enough (or because the author has looked at them too long) I don t always see the same wonderful predictions that the author sees.

p119 Recommend looking at the crossover of 10 week and 30 week moving averages of the DJIA.

p137 What Mr. Argyle likes: industry groups. Measure how broad a group of industries is participating in a market movement, because a strong market must be characterized by a preponderance of industry groups moving upwards. As long as there is a rotation of interest which propels a majority of industries to increasingly higher prices the bull market is sound . The index is calculated by counting the number of industries that advanced during the week and adding it to a previous total; the number of industries that declined in the week s trading are subtracted from that total. It is the trend of this indicator that is important; during bull markets draw trendlines along the series of bottoms formed by the index, and become very wary when the trend breaks .

P149. General Motors is more important than any other common stock .

P239. Another highlight of the book according to Mr. Argyle: how to identify trends. Basically it is what some other books call a Channel: you draw a straight line above the DJIA chart and another parallel straight line below. The two lines hugging the index on either side. As long as the index stays in this channel we can say that the trend is continuing, if it goes outside we can say that the trend has been broken. Saying these things sounds very intelligent but it does not seem very useful to me.

In conclusion I am embarrassed about this book, I really am. When I put it back on the shelf I am going to put it in backward so the spine doesn't show and when my co-workers walk by they cannot see that I have such a stupid book.

John Bollinger retorts: The sign of an open and enquiring mind is an office littered with the literature of the opposition.

One of our Favorite Stories: Merry Christmas from Daily Speculations

Fed Model Forecast for 2005

The S&P has risen 8.5 percent year-to-date. This compares with our Fed Model forecast from January, which called for a 15 percent return for the year. Assuming there are no year end surprises, the Fed Model will have correctly predicted the direction of S&P performance for the past 5 years running.

For 2005: The S&P 500 is currently at 1212, and consensus forecast earnings for 2005 are 69.83 for the aggregate S&P 500, indicating a forward earnings yield of 5.76 percent. With the 10 year bond yield currently at 4.21 percent, the differential between forecast earnings yield and the bond yield is still a robust 1.5 percent. Our regression specification of the Fed Model predicts that the S&P 500 will rise by 17 percent. See details here.

Ask The Senator, a continuing series

Q: Have you developed a way to avoid drawdowns in trend-following strategies?

A: Yes, it is a mechanical way to make certain there are no large drawdowns. It actually goes way beyond that. I'm trying to hook up with a fund, that's where it would help the most, and have found one I showed the idea on a non-compete basis and they are burning midnight oil on it as it is rather simple -- but dramatic.

Send queries for the Senator to senator<at>dailyspeculations<dot>com

George Zachar Notes Russian Leader's Description of the Seizure of Yukos: "Perfectly Legal, Absolutely Normal"

Putin minced no words in describing the de facto re-nationalization of Yukos: "Today, the state -- using absolutely legal, market mechanisms -- is ensuring its interests. I consider this perfectly normal."

We may now ponder the meanings of "absolutely legal", "market mechanisms" and "perfectly normal" in the context of 21st century Russia.

I think it is fair to say the Russian state now officially claims for itself what a classical liberal would define as full dictatorial control over its economy.

Not that this is a surprise, mind you, but noteworthy nonetheless.

Also, the response of the US business community is similarly unsurprising.

Gary Litman, the vice president for Central Europe and Eurasia at the U.S. Chamber of Commerce, said, "As long as state control does not imply that the state is using the company for noneconomic purposes, nobody is going to have a problem with it."

Oh, the Russians would never EVER do that....

How to Talk Like a Stock Market Operator

It is good for your image with the friends, kids, and others you are trying to impress to pepper your speech with Wall Street talk of the 19th century so that you gain gravitas as well as a rudder to understand present-day manipulations and squeezes. As an example of how effective this method can be, I note with approval the response from Duncan Coker to a request for his opinion of a certain stock: “Looks like the syndicates are bidding up pooled interests and public taking notice of tight control of capital stock and intentions of inside operators to advance. Some of these operators lending to the shorts precipitating a squeeze for which the syndicate at that time unloads large blocks to the public.”

Mr. Coker, of course, is noted not only for his Conversational Activities (see list) he is also quite the debonair man about town who is equally proficient at Factory Activities, (see list) (his family founded Sunoco Products) and Financial Activities (he serves as head patternmeister at our firm) and such Recreational Activities as fly-fishing and helicopter skiing. You can imagine the enormous esteem this combination realizes upon the fair sex.

You, too, can take a step in this direction, by studying this list of words from a dictionary the Collab and I are compiling, and using them to pepper your lingo at work and at home. Be sure to engage in this luxuriant activity before you trip the light fantastic or succumb to fair Morpheus each evening. Click for our small but growing list of Market Operator Talk:

Victor Niederhoffer: Reduced Capital

In talking about the values of real estate on Wall Street in 1900, Garret Garett says in Where the Money Grows: "You pass through the low-rent establishments of the tailors, stationers, tobacconists, and small shopmen. There are also a few dark places below street level , where even yet one whose capital is reduced may wager a dollar on the going up and down of one share of stock, stop one's loss at ninety-five cents, and lunch on the remainder." One is reminded of all the losers I have met who have a two-bit mentality and try to take out very small profits relative to the bid-asked spread and commissions. These have been the invariable losers I've come across and indeed after rescuing a few of these from certain death, some of these actually have, are or will be achieving gainful employment with me. But the thought of it still makes my blood boil even now. And whenever I take a trade that has just one small way of getting out with a horizon of a few hours or two, I grow apoplectic that my own pettiness in thinking it possible to make a fast buck has made me succumb to the same syndrome I rail against and remedy in others. 

Ask Pam Poweruser, a new feature

Q: Any suggestions as to an under 3lb laptop that doesn't require a separate docking station? -- Tony Corso

A: I am a big fan of the super small Sony Vaio but I have small hands and only use it when I travel and for downloading music and digital pics, and personal stuff like taxes, so the overall smallness of it is fine for my purposes. The screen, even though tiny, is amazingly clear and readable (even my computer guy is impressed with Sony's XBrite technology). It only has one USB port but I just got a multiple USB hub and have loaded it up with a Blackberry, mini iPod, digital camera, and a mouse, and it all works great. The Vaio comes with an internal CD/DVD drive so no need for external drive. Mine is the TR2AP (about a year old so the model numbers have likely changed). The machine is small enough that it literally fits in my handbag.

Send queries for Pam to pam<at>dailyspeculations<dot>com

Dick Sears: Weekly Technology Commentary

Victor Niederhoffer: Higgledy-Piggledy at Year-End

Frederick Hill in talking about the boom in Wall Street construction after the great fire of 1835 wrote in 'The Story of a Street": "Almost before the ruins had cooled the work of tearing down and building up was resumed. It is as difficult to wend one's way through Wall Street as it ever was. Physically as well as financially there is peril in perambulating that street. Stocks may rise but stones are falling prodigiously in all directions." The perils are still great but one has noticed that there is a tendency for the fees taken by funds to be maximized at the end of the year relative to "long-term values." Anecdotally, there is a tendency to extremes near the end of year and reversals at the beginning, so that the amount of frictional payment to cover the costs of keeping the wheels of commerce is well greased. And in that direction, one notes the dollar near a low at the end of the year, and wonders if it will take the same zigzag higgledy-piggledy course as Internet stocks from year-end 1999 to the first week in 2000, as so many other markets in similar positions have taken. But this must be tested.

Victor Niederhoffer: Sometimes a Word is Very Important

Old timers remember how in 1991, Secretary of State Baker was able to drop the market 5 percent in a second, by using the word "regrettably" to indicate that no solution short of war with the Iraqis was possible. The book "What Makes Stock Market Prices" which the Collab and I are using as one of the sources for "How to talk like a big 19th century operator" with a view to walking the walk and talking the talk of manipulators of current day stocks knocked down to unseemly levels by bear raiders of the current day has a similar incident in December 1916 relative to Bernard Baruch and US Steel Common.

Mr. Baruch -- "The thing that affected the market first was the German Chancellor's speech. This was followed by Lloyd George's speech in Parliament on December 19th. The first cable said that he refused to consider peace. Later as the full speech came through he went on to say "but." The next day I covered a third of the stocks I was short on. The technical position was bad and this speech was a body blow." Somehow the linguistics of this speech remind me of the Palindrome and Bin Laden in addition to bringing back many pleasant memories of the tone deafness of Secretary Baker who single-handedly caused the crash of 1987 by his attempt to intimidate Germany into raising the value of the mark. I am interested in other single words that have had terrible impacts also.

Gregg van Kipnis Responds:

I do not think this is the correct explanation for the stock market meltdown in 1987. It was Congressman Rostenkowski who, for the 2nd or 3rd time, the week before Black Monday, said he would have his committee move a new tax bill to deny the deductibility of the interest costs associated with leveraged buyouts that did the market in. There we nearly 100 large cap stocks that had large price bubbles built in to their price on the rumor/belief they were takeover targets. As these stocks plunged simultaneously they brought down indexes which in turn kicked in futures selling to maintain the delta of the synthetic put protection products (i.e., portfolio insurance invented by Leland O'Brien and Rubenstein) that were all the rage at that time. A rather obscure white paper was published by the Fed about a year later emphasizing this explanation over all the alternative theories circulating at the time, that confirmed my own conclusion on this point.

Mark Mitchell and Jeffry Netter, "Triggering the 1987 Stock Market Crash: Antitakeover Provisions in the House Ways and Means Tax Bill?", Journal of Financial Economics, September 1989, pp. 37-68

Roger Arnold Replies:

As the chair pointed out in his original post on the subject the classic single word message is the "BUT"; as in I love you BUT I can't marry you. And of course the similar words, ALTHOUGH, HOWEVER, NONETHELESS, etc. are just as much fun to watch for in political and economic discourse. It's a particularly fun game to play when reading FOMC statements; as in :

From the March 16, 2004 FOMC statement:
ALTHOUGH job losses have slowed, new hiring has lagged. Increases in core consumer prices are muted and expected to remain low.

From the December 14, 2004 FOMC statement:
With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. NONETHELESS, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

From the January 29, 2003 FOMC statement:
Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses. HOWEVER, the Committee believes that as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time.

George Zachar Responds:

On June 3, 2003, in a by-satellite appearance before a conference in Germany, Alan Greenspan said, "We're far more unclear on the issue of deflation (than inflation), and as a consequence, we need a wider firebreak, in logging and forestry terms, because we know so little about it. So we lean over backwards to make certain that we contain deflationary forces.''

When the word "firebreak" crossed the tape, the debt market's front end gapped a dime instantly, taking the 2 year note through 1.25 for the first time in memory.

It bottomed yield-wise 8 days later at 1.08.

Allen Gillespie Responds:

Neither of those people put in the sell orders, nor failed to put in buy orders, so how did they cause anything? With yields on high quality bonds reaching double digits, it was natural for pension funds to asset allocate. That process however hit many a leveraged speculator as margin debt was up a full 20% Dec to Sept that year despite the fact the cost of that money was rising at a rather rapid clip. Any hard down, which the market experienced that Friday, would naturally lead to additional margin liquidation in a process not dissimilar to the sequential drops that occurred in the Nasdaq in 2000 following Bill Clinton's genomics speech. Once control passes from the spec to the banker (who will always move to liquidate collateral) the rest becomes a formality.

Art & Commerce, by Tom Marks

The remark about Joyce smiling at the notion that he could effectively ply his craft without any noticeable perspiration, is well taken. Deeper art dawns on the observer, and tends to dwell; that which initially overwhelms tends to be more ephemeral.

Perhaps the hardest thing for a writer, or any artist, for that matter, is to find a distinctive voice, and carve out a niche all his own.

Amidst all the cacophony around Spec List sometimes, if I were to do a blind taste test, I think I could only conclusively determine the jottings of Mr. E; Victor's idiosyncratic luminescence; and Kevin Depew's Racing Form raconteuring. To be among three of 200 means that you're obviously doing something right.

In 1904 George Russell offered £1 each for some simple short stories with an Irish background to appear in a farmers' magazine, The Irish Homestead. In response Joyce began writing the stories published as Dubliners (1914). ..

Joyce's epiphanies appeared alongside the week's manure prices (he was so humiliated by this location in "The Pigs' Paper" that he took cover under the pseudonym Stephen Daedalus). On more than one occasion [he] called himself "only a scissors-and-paste man". ..

A Young-Hearted Man, by Charles Pennington

BEIJING, Dec. 17 (Xinhuanet) -- Nobel Prize laureate Chen Ning Yang, 82, will marry a 28-year-old post-graduate from south China's Guangdong Province next month, an official with Beijing-based Tsinghua University announced here Friday.

"He also offered 'guidance' to post-graduates and attended all sorts of academic 'workshops'." (Quotation marks added.)

There is a very famous theory on elementary particle physics called "Yang-Mills Theory", named after this laureate and Bob Mills, who was a professor at Ohio State for decades after the development of the theory. Yang, who has wide fame in the Chinese community, was always being asked by friends what to order at Chinese restaurants. He would write some Chinese characters on a sheet of paper, and tell his friends it was difficult to translate, but just tell the waiter you want what's written here. Inevitably the friends would be treated lavishly with wonderful food, but the food items were different from one time to the next. Yang had written "These are my very close friends. I would be so grateful if you treat them as your honored guests. Signed, Prof. C. N. Yang."

Calling Dr. Steenbarger, submitted by Steve Wisdom

Here's How You Can Get a Bigger Bonus Next Year: Mark Gilbert

Dec. 23 (Bloomberg) -- Disappointed with your 2004 bonus? Traders, it's time to ditch those New Year resolutions to build bigger biceps or slim that waistline, and give your personality a workout to earn more in 2005. Be an introvert. Keep your emotions stable. Stay open to new experiences. Oh, and try not to be misled by randomness, stop thinking you are in control of the situation, and don't expect any help from your boss. Those are the conclusions of a study on what makes a good trader by four U.K. academics specializing in psychology and behavioral science. To get answers, the quartet interviewed 118 London-based traders and managers -- only two of them were women - - from four unidentified investment banks, three with U.S. headquarters and one based in Europe. The researchers are trying to fill an information gap. They discovered that while banks are willing to pay millions of dollars to their top profit-generators, they don't know how to spot or develop potential Masters of the Universe. Until he goes `ka- ching' or `ka-boom,' a trader's bosses have no idea whether they have hired a star or a turkey.

Are You Special?

`The traders and managers we spoke to were almost all clear that superior performers had `special' qualities, and yet no-one was able to articulate clearly the precise set of skills and attributes implicated,' the researchers wrote in their book. `There seem to be few resources directed toward identifying what makes a top trader, despite intense speculation on the subject, the large costs of recruiting a new trader and giving them several years to see how potential develops into skill.' The results of the study are in a new book, `Traders: Risks, Decisions and Management in Financial Markets' (Oxford University Press, 244 pages). The authors are Mark Fenton-O'Creevy, senior lecturer in organizational behavior at the Open University Business School; Nigel Nicholson, professor of organizational behavior at London Business School; Emma Soane, senior lecturer at Kingston Business School; and Paul Willman, a professorial fellow of Balliol College, Oxford. Using interviews, questionnaires and tests, the researchers tried to find the personality traits that make some traders more successful than others. `Personality accounts for significant variation in earnings,' the investigation found. `The higher performing traders in our sample are emotionally stable introverts who are open to experience.'

Keyboard Impotence

One of the tests featured a chart on a computer screen. The line on the graph started at zero, and then increased or decreased every half-second for 50 seconds. The traders were told that pressing keyboard keys Z, X or C might affect how the chart developed. When the chart stopped moving, they were asked how much influence they thought their typing had on the chart. The test was a placebo. The typing had zero effect on how the graph developed. While some traders realized the chart was predetermined, others were convinced they had full control. (The mental image of a guy in shirtsleeves bashing impotently at a keyboard, convinced he's making a difference, is very appealing. Not so different from what he does for 10 hours a day, maybe.) 'The results produced a statistically significant negative association between illusion of control and both total remuneration and desk profits, but not risk management, analytical ability or people skills,' the authors wrote. `There is a clear case for saying illusion of control is associated with poorer performance and lower earnings.' In other words, while the traders fooled by the graph were as competent as their less gullible peers, their earnings were typically lower.

Thick-Skinned Introverts

When everyone else is selling, there's often money to be made by buying, and vice versa. You have to have a thick skin, though, to go against the crowd. `Introversion insulates traders against social distractions including the need to be liked and accepted; useful especially where there is a need to seek or tolerate contrarian positions,' the academics said. They also found that traders' behavior typically changed as bonus time approached. `Traders expecting a good performance (and thus bonus) outcome will be reluctant to put those anticipated gains at risk, whereas a trader anticipating a poor outcome will be more willing to take risks that avoid that negative outcome,' they said.

`Training-Free Zone'

Think your boss is useless? You may well be right. The authors reserved their most scathing comments for the way trading rooms are managed. `Trader management is a training-free zone,' they said. `In a combined 70 years of experience, the authors have never encountered so little management development in sophisticated organizations of vast resource.' Banks are happy to leave traders alone provided they are making money. Managers only intervene when a trade has gone sour; post-mortems are held when money is lost, with scant investigation of why some trades are profitable. `The combination of trader autonomy, reliance on bonus and management spans of control generates an environment where managers see themselves as a safety net rather than as creators of value or profit,' the professors said. `Put another way, trading environments rely too much on managing outputs.'

If the 2004 bonus fell short, try these New Year resolutions from the authors to shake the money tree harder next year:

  1. Trade more often; the study suggests the best way to test a market hypothesis may be to implement it in a trade, securing long-term learning benefits from taking on short-term risks.
  2. Spend as much time examining your profitable trades as you do autopsying your failures.
  3. And try to stay cool when your spreadsheet is awash with losses. Losing money makes you want to `avoid its recurrence at all costs,' the study says, even when random events are the cause. In other words, sometimes, stuff happens; it's not always about you.

The Memory Hole, by George Zachar

Most of the images of FDR have vanished from the Fannie Mae website.

I did find one remaining, next to this link:

>CEO Raines Answers Frequently Asked Questions<

That link yielded:

Error 404
The requested object does not exist on this server. The link you followed is either outdated, inaccurate, or the server has been instructed not to let you have it.  

Pools, by Duncan Coker

In the Style of Edwin Lefevre's "Wall Street Stories"

...looks like the syndicates are bidding up pooled interests and public taking notices of tight control of capital stock and intentions of inside operators to advance. Some of these operators loaning to the shorts precipitating a squeeze for which the syndicate at that time unloads large blocks to the public

...Invariably some in the syndicate break ranks and begin to hurl at full at the market. Then the room traders as a favorite trick offer to sell thousand of shares lower than people are willing to pay in order to frighten the timid holders until the movement becomes general. Exacerbated by the Trust-maker's decision to simply pour the remaining shares on the market as one pours water from a pitcher to protect the interests of the associates while sullenly commenting " Somebody has been selling on us.."

Depression Babies

Barry Broadfoot, writes Daily Spec correspondent Jason Schroeder,  is a Canadian historian who took his tape recorder to capture Canadian recollections of the Depression, crop failures, the Japanese internment and the War.  "The stories open a window on a world of individual attempts to remember and comprehend what they went through," Jason says. "He has hundreds of them.  I find them instructive and telling about people's impressions of making it through.

"I can pick a Depression Westerner out on any street, anywhere, and I'd rather have their company than any kind.  Mind you, they are cautious folk.  They keep the bird in the hand until they squeeze it to death.  Give them three percent interest on their money and they'll love you to death.  Offer them a nice piece of land that reeks of profit and they'll say, 'No thanks.  I knew a time when they couldn't give whole sections of that stuff away.'  They plod onward and upward towards that pension, giving the boss his due, and they get downright dewy-eyes when the day comes and they get their gold watch. They marry and sire and sigh and die and friends gather in the parlor and drink the widow's tea.  And that's the end of it, except they made an honest mark.

"The trouble is, of course, that children of the Depression rarely realize their true potential because the experience of it glued them to the safe way.  Breadth of thought must have budded in thousands of brains back in the Thirties, only to shrivel in the face of too many dust storms.  Myself, I would quit my job right now and take a whack at something I like better but I dasn't because, deep down, I figure I was overdue for another grasshopper plague. See, that's Depression thinking."

Russell Sears comments:

I find this very one-sided. Sure, going through hard times whips the spirit out of many like a stick to a dog. However, in distant running, the stories of desperation bringing out the determination and heavy personal risk taking needed to succeed in this sport, have become standard. It is almost a requirement. Many of the entrepreneurs I know come from such hard times. The military has it down to an art: Strip a person down to the essential and they find they have what it takes to survive within them. Such confidence in your survival ability is very freeing of the paralysis of high risk. Geronimo, Washington and many military leaders believed they had providential protection in battle, due to surviving the worst. My Grandparents faced hard times, first as kids fleeing Communism, and then in the Depression... and they would never think of hiding their money in the mattress. As my first track coach told me, "Hard times can make you bitter or better."

Ken Smith comments:

Good post. I have seen media stories that seem to be an attempt to deny the suffering of the Depression, as if it did not exist; and attempt to say capitalism is pure wonder and cannot fail at bringing prosperity. The Depression was real. I was there.

Money and the lack of it was the worst part of the Depression. I was a child during the depression and I have a clear picture in my mind of sitting down to breakfast to a cereal that had weevils in it - squirming things, like worms. I called attention to my mom and she said I did not have to eat it.

The rent was due, we could not buy coal to heat the house, the water was about to be shut off, electricity too. My mom had tuberculosis and doctor bills could not be paid. The problem was work. There was no work for men with families.

Then the WPA came in thanks to Saint Roosevelt. My Dad got work driving a truck carrying rock for a jetty the government decided to build. Then as a former Navy seamen he got a job on a costal lumber vessel. But pay was almost nothing. Then Dad got a job on land so he could stay close to his family. He got on thru a Labor Union, which saved our lives. He started work on a logging job, rafting logs on the water as they came down from the mountains on rail flat cars.

Dad got food at times by hunting deer and killing bear. He dug clams on the ocean beach when he had time. But I wish to point out that although there were men who were in an environment where deer and bear and clams and oysters and crabs and salmon were at hand this did not enable them to pay the rent, water, sewer, garbage, electricity, phone, prescription drugs, doctors, dentists, gas station owner.

Since no money, then no one bought anything new. No one consumed. And consumption creates demand. If no demand, then no one will supply. If no supply then no jobs. A vicious circle.

In short, money is very important. The Depression was a money-related phenomenon. I will always stand by the fact that government intervention saved the lives of a million Americans. I am not saying this intervention cured the Depression. I am saying the people of this country were saved.

George Zachar comments:

Murray Rothbard and the Austrians (see Rothbard, "America's Great Depression", Mises Institute, 1963) argue forcefully that "government intervention" both caused and prolonged the Depression...fitting with the modern pattern of Washington creating a problem and then demanding the power and cash to solve it. The cash is spent, and the centralization of control in DC ratchets ever-upward.

One under-discussed result of FDR's New Deal/WW2 tenure was the utter transformation of the federal system into an unassailable centralized leviathan, whose credibility rested on mass memories of gratitude such as Ken's.

It is no coincidence that as those memories fade from our midst, skepticism of Washington (Reagan, Gingrich) started to take root.

Politics too has ever-changing cycles.

None of this, of course, is to suggest that Ken's experiences and those of millions more are without meaning.

FDR was a saint in my boyhood home as well.

Jason Schroeder Replies:

Great-great-uncles of mine are reported to have been involved in Alberta's plan during the Depression to get the money/economy moving.

Supposedly the goal was to issue currency that was to lose a portion of its value every week and require a (purchased) validation stamp to bring it up to par. The idea was to force a pattern of spending or devaluation.

The plan was halted because the federal government did not like another legal tender.

The Canadian history books state that a rogue province tried to print money and took appropriate action. It is curious to me if such a scheme would be more dastardly or be more upfront about the government's role in the economy. That is increase the government's power or force the people to take more responsibility.

Kim Zussman comments:

"Give them three percent interest on their money and they'll love you to death. Offer them a nice piece of land that reeks of profit and they'll say, 'No thanks."

Most of us with depression-era parents notice that the "buy on dips" meme was strange and anathematic to them. This relates also to the paradigm that one can learn from experience in markets and trading, since dynamics during the depression wood-burned different life long mindsets than the modern life of plenty. Luddism vs. adaptability.

How does one distinguish between advantageous learning new ecosystems vs. environmental ruses that dupe the cyclically unwary?

One answer is the chorus of statistical harmony singing repeating patterns. Yet they take root in "this is not your father's market", which remains fertile as long as the trend (1.5m%/100yr) remains the trend. Deception en masse: if everyone knew that dips were dips there would not be dips.

Then there is deception on the individual level.

Pocket Man

Father was an artist who painted depression street-toughs with wizened faces pulling smokes, hands deep in pockets jingling pennies in the cold.

An acquaintance stands by default with hands in pockets. In public, at the gym. Observing, surmising, cool. No one suspects and I did not know the secret of his common pose. Except on one occasion when it seemed odd to gesticulate with only his left hand with the other pocketed. Then I saw it. The hand-it was deformed-disfigured-underdeveloped from birth. Casually pocketed, especially when both, seems nothing amiss. A skill, a deception, learned in hard lessons at school taught by taunting boys and unsympathetic girls.

His performance is sleek automatic and smooth as he leaves the room, smooth coat over twisted arm. Does he think about this autonomic deception? Do we think about ours?

Russell Sears Responds:

I find this very one sided. Sure going through hard times whips the spirit out of many like a stick to a dog.

However, in distant running, the stories of desperation bringing out the determination and heavy personal risk taking needed to succeed in this sport, have become standard. It is almost a requirement.

Many of the entrepreneurs I know come from such hard times. The military has it down to an art, strip a person down to the essential an they find they have what it takes to survive within them. Such confidence in your survival ability is very freeing of the paralysis of high risk. Geronimo, Washington and many military leaders believed they had providential protection in battle, due to surviving the worst.

My Grandparents faced hard times, first as kids fleeing communist, and then in the depression... and they would never think of hiding their money in the mattress.

As my first track coach told me, "hard times can make you bitter or better".

Victor Niederhoffer: It is rare..

that one has a chance to help the President since he is much wiser than us on all matters except for hard ball squash rackets. However, he recently asked how the dangers from heart attacks vis a vis Celebrex compare to those of being struck with lightning while playing golf. He reports that there were 550,000 heart attacks in a year which, based on a population of say 100 million above the age of 50, is a normal 1 in 200 per year or 5 per 1000 which as Dan says is much higher than the 1.5 in 1000 per year found in the placebo group of the NCI study. The 5 per 1000 that the NCI study found for those taking the high doses of Celebrex is in accord with the total probability of getting a heart attack that the President reports from the American Heart Association above the placebo group was taken as the base .

And the President as usual is quite correct that the small incremental total chance of getting a heart attack that the government found of 3.5 per 1000 i.e. a 1/3 of a % a year, is much too low to even consider changing your life style considering the pain reduction and the side effects of the other alternatives even if the government statistics weren't completely random. The government study shows only one thing if you didn't know it was faulty. The way to stay healthy is to enter into a government study at the NCI, where you kindly don't know if you're going to get a placebo or not, and hope you got the placebo as that would reduce your heart attack risk by half.

Ask The Senator, a continuing series

Q: Is it safe to do business in Russia these days?

A: The people I have dealt with in Russia have been more honest than in any other country. Maybe I just got lucky, but there has never been a question about their integrity. What they say the will do, they do. Maybe I can get Vic to go lecture there? They have large symposia 2-3 times a year.

Send queries for the Senator to senator<at>dailyspeculations<dot>com

James Tar: Cooking and Markets

The Food Network (see your cable provider) is perhaps the most useful and instructional channel on television today. The range of techniques, ingredients, and genres across the programming is exceptional, and each of the shows' stars has an individual skill that stands out alone. I spent 5 or 6 hours a day resting while totally focused on the Food Network. I learned a great deal and feel that my cooking is more disciplined and creative. Despite the shows diverse programming, common themes emerge. Yes, perhaps well known, but they can not be spoken enough and they are more than applicable to our love of the markets:

  1. The Importance of Fresh Ingredients - Never discount the need for accurate, fresh Data.
  2. Likewise, the importance of good equipment - Having real time access and reliable systems can not be underestimated.
  3. Fewer Ingredients, Tastier Foods - Multivariate systems can leave a bad taste in the mouth, and lose customers.
  4. Follow the Recipe, Respect the Process. If you make a mistake early on in the cooking process, don't try to fix it, you'll end with an even greater disaster. Throw it out, and start again. Why do we hold on to bad trades with the hope that they'll turn around well after we acknowledge we are holding on to a loser? Should I add? No, take the loss and move on.
  5. Boil an Egg, Don't start with Soufflés - I am reminded of the first time trader who starts off by trading options. Beginners are an important element to the professional component of the market, they are the prey, but how true it is if you can't cook, please stay out of the kitchen!

Bruno Replies:

I have read James Tar's thoughts on "Cooking and Markets" with interest. I agree with most. However, I would like to add that there's much more to it.

Point number 4, "Follow the Recipe, Respect the Process", is fine, but it applies only to the intermediate stage. In the beginner stage, you try to cook a steak. It gets burnt. Then and only then do you realize your inexperience and purchase cookbooks. That's like my former girlfriend's first "investment". She bought a gold contract, lost money immediately, then bought a book about investing in metals.

In cooking, in the intermediate stage, you spend a lot of time following recipes. But there comes a day when you don't need cookbooks any longer. And there comes another day when you create your own recipes. You develop your own style. That's similar in trading.

Now, very interesting developments are taking place in the field of cooking. They should please this list since Vic and Laurel's site is "dedicated to the scientific method".

For years, cooking has been more art than science. For many years. In fact, most of the utensils we are using today are exactly the same as the ones our forebears cooked with in the middle ages. The only significant technical progress in 1000 years has been the micro-wave oven. But the times they are a-changing. Science is invading gastronomy.

There are two schools of scientific cooking:

The first one is led by Ferran Adria, in Northern Spain. Many consider him as the best chef in the world today. His restaurant El Bulli is open only six months a year. The other six months are spent experimenting innovative recipes in his laboratory. He and his team run many experiments. Things such as dropping orange juice into liquid nitrogen, or bean puree into calcium chloride. Sometime, an amazing new recipe is discovered through experiment, and served to happy customers in the next season.

That's very similar to a trader testing models, discarding most, finding one that shows promise, and eventually running it in the markets.

The second school is lead by Professor Herve This. He is a physico-chemist specializing in molecular interactions. He is also at the heart of a new branch of science: molecular gastronomy. What he does is to test the age-old sayings cooking is replete with. For instance, we have been told for centuries that gnocchi should be boiled until they rise to the water surface. But when Herve This measured floating gnocchi heart-temperature, he found that over a certain size, gnocchis are not cooked. Therefore, the old saying is wrong. It should be amended to: "boil SMALL gnocchis until they rise. Bigger ones should be kept in the pot longer".

His findings sometime infirm tradition. They sometime confirm it. The experiments can also yield innovative ways of cooking. For instance, it is now determined that the perfect hard-boiled egg is obtained at exactly 68 Celsius. This has to do with yolk/white relative densities and protein coagulation temperature.

In the same manner, there are many old sayings and cliches in the markets: "don't fight the Fed", "sell in May and go away", "rain in November, Christmas in December"... The trader equivalent of a molecular gastronomer thoroughly tests these sayings before committing any money. And in the process, he sometimes comes up with new ideas.

Ask The Senator, a continuing series

Q: How did your Darlings of the Dow do this year?

A: I advised all subscribers to exit longs on the close, to take home profits. As most know, I select the Darlings of the Dow each October; here at the results:

STOCK       10/25/2004 ENTRY  EXIT SHARES
HEWLETT PACKARD       17.70  21.21  565
ALTRIA                47.05  61.04  212
HONEYWELL             32.50  35.79  308
HOME DEPOT            38.90  42.11  257
ALCOA                 31.73  31.26  315
NET GAIN FOR DOW      10.1%
Send queries for the Senator to senator<at>dailyspeculations<dot>com

Intelligence from Mr. E

Wal-Mart Breaks Price Barrier with $498 Linux Laptop Running Linspire

New low-cost computer features complete operating system and Microsoft file-compatible office suite

SAN DIEGO, December 20, 2004 Walmart.com has released the $498 Balance laptop, which runs the Linux-based operating system Linspire. The laptop comes fully equipped with the operating system, Internet suite, and Microsoft-file compatible office suite, and can be used with both dial-up modems and broadband connections. The $498 price does not require coupons or rebates and can be purchased immediately.

Wal-Mart and Linspire worked together to offer a laptop that would give customers the best user experience at the lowest price possible. The Balance notebook is the lowest-priced laptop currently on the market to include a complete operating system and office suite - comparable machines cost hundreds more even without an office suite or software included.

Hardware specifications:
*1.0 GHz processor
*128 MB RAM, expandable up to 512 MB with included SODIMM slot
*14.1'' LCD screen

Included software:
*Linspire 4.5 operating system
*OpenOffice.org - full-featured Microsoft file-compatible office suite with word processor, spreadsheet, and presentation programs
*Internet suite including email with spam blockers, Internet browser, and built-in firewall
*More than 1,900 free software programs for download, with guaranteed software updates for 3 months

The $498 Balance notebook with Linspire is an extremely affordable Linux-based computer perfect for use as a second or third home machine. Users can connect to the Internet and create, edit and share documents within minutes of bringing the laptop home without paying extra charges for software or licensing fees. Wal-Mart and Linspire partnered to bring a full-featured laptop to consumers at the lowest price point possible.

With this post, we start a new Department of Don Quixotian and Maqrollian Financial Writings of the 19th Century with timeless lessons for today. Contributions from readers are encouraged.

Like Don Quixote or Maqroll the Gaviero of Alvaro Mutis, I often "console or amuse myself by reading obscure historical texts, escaping into these books at moments of tension or danger, meditating on the centuries old lessons at moments of imminent decision". I am presently consoling myself with the silk and velvet leisurely lessons of obscure financial texts of the 19th century as I endure yet another of a Gaviero-like "life threatening and doomed money making scheme" this time by accumulating a line of Pfizer while a mountain of lava flows on its corporate soul. I find the 19th century books replete with that leisurely contemplation of universals that so often eludes the spare and also doomed attention to get rich schemes and disguised promotions of the more recent books. And I like the allusions to such things as ”unloading stock, tornadoes on the planes , foundering of ships, and clipper ships of speculation”. In those days like ours according to such 1857 classics as "Young Men in Wall Street", by George Train, "fraud in high places was the word of the hour, money in trust vanished with the air; and mercantile morality was hardly known among the pullers of the wires". I will take the liberty of sharing some of these timeless insights and locutions with you in coming days in hopes that it will increase your overplus.

The first contribution comes from the estimable Bardophile Mr. Duncan Coker:

In my research on the operators, syndicates and pools of an earlier era, I came across a nice history of Bears and the markets. It seems in mid 18th century New York City, bears of the four legged variety were not all that uncommon to be seen crossing the North River, where the locals would have" very good diversion and sport with them". Once killed they would be brought to market and where many would go to watch the "Bear down to the market" A Mr. Finck was credited with introducing bear meat to the populus which prior would only be eaten by Indians, hunter or slaves. Mr Finch's bear having been " dressed and cut up nicely" was well received and since that time was carried and sold in a particular market know as the Bear Market, circa 1732.

Later The authors of the Hand-Book of NYC gave this same market the title of Bare Market,as a play on words. By this time in "consequence of the sparseness of the population, business and supplies occasioned by the great fire of 1776". They state that in "the progress of improvement, it happened that the market-house was finished long before the streets were rebuilt or the generality of the inhabitants reestablished" As a result for a considerable time, few purchasers, or sellers for that matter. "This led the citizens when they mentioned it to distinguish it by the name of Bare Market or the market at which there is nothing of sale"

The Market Book, pg 310-312,Thomas de Voe

Dr. Alex Castaldo's Contribution:

What price Wall Street ?
by Forrest Davis
Goodwin Publishers, New York, 1932

Page 93:
The Western Blizzard - a name applied by an ironical Wall Street to the panic of '57 - howled and blustered down that narrow lane on October 13. Blowing a clean swath through the nation's top-lofty credit, it upended banks and solid merchants. It whipped the rigging of steam packets laden with gold bullion from the Sacramento for the greedy banks of London.

The rising town of New York, grown tall on seven jaunty years of California gold, bent under the blizzard's blows. Again, Wall Street surged, curb to curb, with the army of the disappointed. Unhappy speculators, now beggared; luckless depositors, usurers, ruined merchants, with chimney-pot hats awry, feverishly hurrying brokers' clerks, profane scamps, timid and respectable ladies.

But the blizzard did more than momentarily to wreck Wall Street's credit towers. [...] The raging wind tossed the aged David Leavitt out of the Wall Street scene and, passing, deposited Daniel Drew - the most pious rogue who ever descended from New York State on the metropolis - to plague the republic's finance for twenty years.

Alston Mabry's Contribution:

This idea of perusing old writings on the stock market brought to mind immediately a vague memory of something a little more recent, from FORTUNE magazine, which I then had to track down. Turns out that the article tugging at my tired neurons was called, "10 Stocks To Last The Decade", and was in the issue dated August 14, 2000.

Now this may seem a perverse exercise by the end of it, but the holiday season, while hopefully a time of joy and reflection, might also be a good time to explore one's inner Grinch, if only to see just how small his heart has gotten over the last year.

?Also, it is only fair to admit that the article's focus is ten stocks "to last the decade", and the decade has far to run. All may be well by Christmas, 2010.

So, here are FORTUNE's "10 Stocks To Last The Decade" (with a little follow up):

CompanyTickerPrice: 08/14/00Price: 12/20/04ReturnRequired Return*
Morgan StanleyMWD96.8453.65-44.6%10%
Charles SchwabSCH39.2611.71-70.2%22%
Nortel NetworksNT793.41-95.7%69%

*Required Return: compounded annual return required to return to August 2000 level by end of 2010

Total, equal-weighted portfolio value of the 10 stocks: -58%.

You can read the entire article here:

Tom Ryan's Contributions:

Tom Ryan: Not quite 18th Century but:

"I remember the bank holiday. I was one of the lucky ones, I had a smart brother in-law who was an attorney. One day he said to me 'I don't like the banking situation'. About eight weeks before the bank closings, we decided to take every dollar out. We must have taken close to a million out between business and personal. In Clyde Ohio, where I had a porcelain enamel plant, they used my signature for money. I would go around the department stores I knew in Milwaukee and give 30 day IOUs of $1.05 for every dollar in cash they would give me. We did this because we could trust only the best and biggest banks and nothing in Ohio was any good for banking. The funniest story I have is in 1933, we were at this night club that got robbed. An associate of mine, his wife, and my niece from Wyoming we were all dancing in this night club and each of us had $25,000 in our socks. We were leaving the following morning for Clyde, and I was to deliver $100,000 for bills and payroll. We were dancing on $25,000 apiece when these thugs come in and take a few purses and the cash from the bar. Damn fools, if they had only known they could have shaken us down and got some real cash money." from "Hard Times"

Tom Ryan: "I Knew Livermore..."

"Yeah I knew him. I had a great friend, John Hertz. At one time he owned 90 percent of the Yellow Cab stock. John also owned the Checker Cab and the Surface Line of buses in Chicago. He was reputed to be worth 400-500 million. He asked me one day to join him on a yacht. There I met two men of such stature that I was in awe: Durant and Jesse Livermore. We talked at one point of their holdings. Livermore said he owned controlling stock in both IBM and Philip Morris. I asked him 'why do you bother with other speculations?' He answered 'I only understand stock I can't bother with businesses'. So I asked 'Do men of your stature ever put away 10 million where no one can touch it?' He looked at me and said 'Young man, why bother with 10 million if you can have big money?'

Later, in 1934, my accountant asked me if I was interested in backing Livermore as he was bankrupt and looking for help. He always made a comeback and would pay back with interest. I agreed and put up $400,000. By 1939 we had made enough to take out $1,300,000 after taxes. Jesse was by this time in his late 60s. He thanked me but I took mine out. I said to him 'Wouldn't it be wise to cash in?' In those days you could live like a king on $50,000. He said he could never get along like that.

So I sold out and took my profits. He kept telling me he was going to make the killing of the century. Ben Smith, known as Sell'em short Ben was in Europe and was wiring Jesse and telling him that there was going to be no war. Believing in Smith, Livermore went short on grain for every dollar he had plus everything he could pyramid.

When I got to Argentina that fall, Germany invaded Poland. Poor Jesse was on the phone. 'Art you have to save me'. I refused to do anything, being so far away. Plus I knew it would be throwing good money after bad. A couple of months later I was back in New York and he came to visit. He was destitute and I gave him a $5000 loan. Three days later he went to eat breakfast at the Sherry-Netherlands, went to the lavatory and shot himself. This was the man who said 'Whats the use of ten million when you can go after the big money?'"

Arthur A. Robertson

Tom Ryan: Another one I always chuckle at

"When Uncle Dan'l says 'up'
Erie goes up
When Uncle Dan'l says 'down'
Erie goes down
When Uncle Dan'l says 'wiggle waggle'
Erie bobs both ways"

......Drew then proceeded to sell short Erie shares to the extent that he sold more shares than actually existed. Ordinarily, such a practice would bring ruin, but Drew had a reserve of stock unknown to the rest of the market. Like Jacob Little, he had purchased convertible bonds and could use them to cover his shorts, making a fortune in the process because he wouldn't have to buy back his shorts in the open market. In order to get the price of Erie as high as possible before this operation, he visited a New York City club where stock traders congregated after work. Sitting down on a particularly hot day, he pulled a handkerchief out of his pocket to mop his brow. As he did so a small piece of paper fluttered out and fell to the floor but no one bothered to tell him. After he left, the other traders pounced on the paper which was a bullish piece on Erie. They then proceeded to frantically buy the stock pushing it to new highs in the market. It was only then that Drew began selling it short, wiping many of them out in the process as the stock plummeted.

from Geisst 'Wall Street'

Tom Ryan: Sage

Another of my favorite stories is in Geisst and also I believe in Clews...

Russell Sage approached Gould who owned a controlling interest in the Union Pacific at the time. The target was the Kansas and Pacific which held a virtual monopoly on land and rights of way in the central region out to Colorado. The UP let it be known that a branch line would be built down to Denver from Wyoming which could then compete with the K&P for freight to/from Colorado. Denver politicians were paid to praise 'the public interest in ending the K&P monopoly', a crew was gathered, newsmen were invited all expenses paid to a ribbon cutting ceremony out on the Wyoming prairie, and a rail line started south. This created a small panic in K&P common stock and when the stock had dropped 50% Sage and Gould began buying. Rumors were planted that the AT&SF would also secur land rights to build a line to Denver from the south. Before long Sage and Gould owned a controlling interest in K&P and forced a sale of the company to the Union Pacific. Gould got the company added to his empire for 15 million less than market and Sage netted 40 million. Of course the 'competing line' was abandoned immediately after a cost of half of a million dollars.

Tom Ryan:The other Story that I always like..

was the one about Jay Cooke in 1862. Cooke had worked for Clarke and company which had gone bust in the panic of 1857 but he had walked away intact and started a small bank of his own in Philadelphia making commercial loans. When the war broke out between the states Pennsylvania wanted to raise money by selling an issue of bonds. All the big banks went after this issue and bid discounts of 5-7% from par. Cooke bid at par for the whole issue. All of his competitors thought he was crazy. The state treasurer was suspicious but Cooke was legitimate and had a good reputation and sold the governor that he could place the whole issue on two conditions, 1. he would take the issue in lots once per quarter for five quarters rather than all at once, 2. the face denominations would be lowered to one fourth and one-tenth the normal. This was agreed to although he was forced to take Drexel as a partner to ensure the ultimate financial backing. Cooke proceeded to sell these "little" war bonds to the public as a patriotic act and they sold well. So well in fact that he collected money well in advance of the quarterly placements. By collecting the client money and then placing it months later he was able to create a cost free float which he turned around and lent out to manufacturers of munitions in New Jersey and Pittsburgh as 30-90 day commercial paper rates had soared to 10-15% rates as the demand for war production soared and specie payments were suspended by the banks. This way he was able to multiply his commercial banking business five fold on his capital employed. It was the perfect arb play that the larger banks didn't see coming. this story is apparently not just legend like many of the others but is documented and is in several books including I believe Clews.

Richard Gula Contributes:

A Recollection on Greed, Hubris and Ugly Endings I (How the Grinch Won...)

In the late 1970s there raged a truly wild bull market in companies destined to make fortunes outfitting the casinos being built in Las Vegas-east, Atlantic City. Some of the stocks seemed sure things: Bally Manufacturing (BLY) was the RIMM of its era, a highly volatile issue with very heavily traded options (maybe convertible bonds as well, I think.) The stock often moved well over 2 percent in a day. It quickly became the darling of the retail brokerage world, and the Group (CASINO AND GAMING) created was credited to one Joseph Granville, the father of On Balance Volume and his CLIMAX Indicator.

Bally manufactured one-arm bandits, slot machines. The clientele of Atlantic City was considerably less prosperous than that of Sin City itself, choosing nickel-dime-and-quarter slots over craps, roulette (my favorite...my roulette model still works, is perfectly suited to statistical testing, and the roulette crowd is generally better -educated than, say, black-jack!) The profits from the slot machines had an exponential curve attached to them, and the stock responded accordingly. It kept splitting...so my memory is unsufficient to recall its final highs...but I think the stock moved from something like 10 to 240 in its "lifetime."

More interesting were the stocks that "became" gaming stocks because gambling would be legalized most everywhere, in short order. Hilton (HLT), Holiday Inns (HIA) (yes the same corporate entity that now brings you "Hey, But I stayed at a Holiday Inns Express last night" commercials today) Ramada Inns (RAM) and Marriott would all have one-arm bandits in their lobbies, perhaps in the rooms. The most unlikely of companies drifted into the sights of the speculators: Howard Johnsons Motor Inns (HJ): along with 25 varieties of ice cream, one could get as many choices in the slots. These stocks ran like crazyfor several years without the benefit of ANY valuation crutch. The years were 1977 to 1980, more or less. Caesar's World and MGM were the pure plays: they already ran casinos in Las Vegas and their empires would double and triple in Atlantic City, as busloads of crazed New Yorkers would bus and train and drive to Atlantic City every weekend.

But the Big Cahuna of the era was Resorts International, a casino development company with a very shady past. As i recall, RTA (RTA.B was the hot stock, the less liquid B shares) was once the venerable Mary Carter Paint Company, whose assets were bought up by some pretty crafty investors who reincorporated RTA in the Bahamas. The stock moved from the 10 area to 210 before it peaked. I was sitting with a very sharp stock broker when RTA opened at 198, traded to 203, then 210, then 200 and never looked back as it broke to oblivion, as did the entire group, in the 1980-1981 period. High interest rates (not the puppy rising rates the spec list rants about these days, but 20% plus SHORT RATES) killed construction projects and consumer spending, and even the movie Atlantic City showed the desperate side of impoverished gaming clients.

My broker friend, Warren S., tape-watched the high in Resorts B. He said those last prints, all gaps in the intra-day chart, were non-economic trades. I asked him what the latter were? "Shorts shorting to shorts covering" he said.

True speculation was like that, when Santa brought us Texas instruments Calculators and the floppy disk had yet to be invented, when digital equipment, data general, wang computer, and prime computer ruled technology, and a mainframe was a Counter's best friend.

The stocks of the pure gaming companies turned to ashes, as did all of the technology companies just mentioned. NONE trade today.

That was a mere two decades ago!

BY the way, Resorts International disappeared under the weight of accounting irregularities documented by none other than Barron's! Will wonders never cease!

Thoughts on Relative Health in Asia vs. US, by Victor Niederhoffer

1. The 3 percent up move last week in Nikkei from 10756 to 11078 while the S&P showed a lackluster 0.5 percent rise is the kind of divergence that leads one to speculate upon the gravitational influence of one market on another, or push pull what have you.

2. The Nikkei was up 2 percent or more in a week, 37 times from 2003 to 2004, and the change in the S&P the next week was up an average of 1/10 of 1 percent. Thus, there was no follow through from one unconditional on the other.

3. On the nineteen occasions when the Nikkei was up more than 2 percent more than the S&P, the average change in S&P the next week was close to zero. Thus, no conditional superior performance from the Nikkei.

4. The longest interval during which the Nikkei didn't go up at least 2 percent was 5 weeks. The hazard ratio for a rise of 2 percent or more seems to be about 1/2 when there has been 3 weeks without such a rise versus its 35% norm and this appears non-random.

5. The relative perturbations in markets such as this, augmented by the currency moves between the two and perhaps the comparable European moves would seem to provide a nice kind of living for an industrious sole.

Ask The Senator, a continuing series

Q: Any last-minute holiday gift suggestions?

A: If you fly, you just gotta have a noise-cancelling headset.. I've used Bose and Sony, which is about half the price; best deal is on eBay, and just as good if not better than Bose.

Send queries for the Senator to senator<at>dailyspeculations<dot>com

Celebrex Study, by Dan Grossman

Deep in today's WSJ article on Celebrex, one finds:

Cardiovascular deaths in 2,000 members of placebo group in terminated NCI study: 6 or 0.9%

Cardiovascular deaths in 2,000 members of placebo group in PFE study reviewed simultaneously by same cardiologists: 11 or 1.8%

There were 2000 middle age people with polyps in each branch of study, for two years plus.

The placebo group had 6 heart attacks.

400mg group had 15 heart attacks.

800mg group had 20 heart attacks.

The most obvious question to me, which I don't see commented on in the news reports of the study: suppose 6 heart attacks in the placebo group is unusually low.

It sounds quite low to me, for middle age people with polyps.

Victor, your view?

Victor Niederhoffer Responds

You don't have to be much of a statistician to know that numbers like this and the comparable numbers of Sornette, or for that matter the comparable numbers that show the large tails in markets based on the one occurrence in 1987 are completely consistent with chance. The standard deviation of the expected number of observations in a binomial success/failure such as this is sqrt(n*(p)*(1-p)) with the expectation being n*p. The p in this case is 40 heart attacks out of a 6000. i.e. 7 out of a 1000. The standard deviation of the expectation is completely consistent with chance. We would expect each group to have 13 heart attacks. The standard deviation of the expected number is 3.3. Thus, the 20 observed is 2 stand deviations higher than expected. And indeed only 5 percent of random samples will have an outcome more than 2 standard deviations + or minus from expectation. But like the promiscuous hypotheses of the behavioral science types, there was no reason to expect that one or the other would be worse. So there were 4 chances for the 1 in 20 event to occur here. And indeed such studies have been repeated dozens of times, thus making it a sure thing trade like so much we have commented on before. And it's just one disease out of dozens that could have reasonably been found like strokes.

Also of relevance is the wrongness of concentrating on the earthquakes or in this case the heart attacks when the figure is only 1/2 percent per year. A doubling is relatively meaningless relative to the much more important effect on cancer reduction or in our case the expectation for market rises and falls.

Please note that my interest in Celebrex is piqued by 3 factors:

1. The same kind of faulty multiple comparisons, and searching for rare events that marks stock market research is exemplified in the random phenomena adduced.

2. I am a long term user of Celebrex and wanted to ascertain whether it was in my interests to continue taking them.

3. I own Pfizer shares and wanted to know the extent of the harm or lack thereof caused by one of their products. What I say about the statistics has nothing to do with whether it's a good or bad buy, as political and legal factors will determine the impact of this.

Dr. Alex Castaldo Responds

Here is a Monte Carlo evaluation of the Pfizer study in honor of the Chairman.

There are three groups of 2000 people each. There are 41 heart attacks in total. Required: what is the probability that any of the groups has 20 or more heart attacks.

Answer: 8.8% (not statistically significant).

I do not think that a large number of heart attacks in the first (placebo) group is of interest, so I also computed the probability that Group 2 or Group 3 has 20 or more heart attacks.

Answer: 6% (not statistically significant).

Conclusion: the results of this study alone are not that strong statistically. However, coming after a study that found similar results for Vioxx, I personally find this study disturbing.
Find source code for this simulation here.

Kim Zussman: Naproxen's Turn...

in the heart-risk rumba:
"John Breitner of the Veterans Affairs medical facility in Seattle and the University of Washington, an investigator in the trial, said only preliminary data is available. But he said it suggests that about 70 patients of the 2,500 suffered stroke or heart attack, including 23 deaths, and that there were about 50 percent more such events in the naproxen arm of the study than in the placebo division."

Naproxen, which inhibits not just cyclo-oxygenase-2 but other isozymes as well, is the active ingredient of Alleve and Anaprox. Unofficial medical opinion is a great arthritis and musculo-skeletal analgesic. Investment thesis: send junior to law school.

Pamela Van Giessen Responds:

I know spec list is not for sounding off but I can no longer read the paper, turn on the news, or, apparently, my computer, without my blood boiling to dangerous levels over the recent spate of hysteria over these painkillers. Has the world gone insane? The increase in heart attacks and strokes, whatever it's statistical significance, is due to SUPER HIGH doses of this stuff to old sick people. Is the rest of the world to be denied effective and relatively safe relief from pain because old sick people on high doses of these drugs for cancer treatment, no less, are having more problems than some placebo group?

Two things come to mind:

1. Victor is absolutely correct when he says that aspirin would never get FDA approval in our current world.

2. E's liberal dummies (found mostly in the media) clearly hate big pharma more than they hate being in pain, which seems to indicate they have a bit of a sadomasochistic streak. And they really are dumb because they may be taking from big pharma but all they are doing is turning it over to the lawyers. Where's the honor in that?

I don't want to wish ill on anyone but it's tough not to wish really hard that those complicit in the withdrawal of these drugs from the marketplace, and the reduction in pharma's capital resources (to develop other drugs that might be beneficial) develop really really bad arthritis as they age. And that it hurts like hell. Then they will learn that there is nothing noble about pain.

The Chess Grandmaster as a Simple Butcher, by Nigel Davies

One of the most memorable notes of Dr Lasker was to a much lauded combination of Tschigorin. Rather than join in with the chorus of approval Lasker pointed out a much simpler win and concluded: "Even the most lenient critic would have to say that Tschigorin fought with a corpse, gave him a spell of life and then killed him again." Lasker in fact went way beyond Steinitz in promoting a scientific and effective approach to chess rather than the commonly held view of what was 'art'. This is probably what his contemporaries and critics hated most in him after the fact that he was Jewish but insisted on winning.

Nowadays it's difficult to find a Grandmaster who insists that chess is a thing of beauty. In fact most of us would be quite amused by the term 'artist', preferring instead to be simple butchers. As one of my students recently exclaimed, "You'd use anything you thought would give you an edge!". Indeed, anything at all whilst staying within the rules and treating my opponent with courtesy and respect. But to leave myself open in the attempt to create a thing of beauty? NEVER!

Daniel Flam: Physics of Finance

I find the paper Physics of Finance, by Kirill Ilinski, very interesting. The author tries to separate out the dynamic traits of the market vs the static behavior using QCD and claims that Black Scholes is a special case of his system.

The Line of Least Resistance, by James Lackey

The line of least resistance in women is an ever changing cycle.

"you don't ever take me anywhere" Comes after I tell her I love her and give her a hug.

"you never tell me you love me" Is what she says after we spent a family vacation with children.

"can't we just cuddle" Is what I heard my whole adult life..no joke.

I learned there is 3 modes of communication, visual, auditory and kinesthetic. There is a meme that we communicate 80% with body language. Well my wife tells me different. I do far too much talking.

My wife is primarily visually constructed and visually remembered. I am visual, yet auditory remembered. I am one of those annoying guys that read out loud, yet demand a silent work area, except for the music at an appropriate level.

Woman are all over the place, monthly cycles and daily mood swings. My wife is no worse than any woman or the market with the moodiness. I am worse than most men, as my mood is marked to market. Yet, for effective communication, I must first determine what mood my wife is in and then, what mode, visual, auditory or does she need a hug. That gives me data on the line of least resistance. If we can figure out women, certainly we can beat the mistress of the markets.

I think that is appropriate for traders. One must first attempt to find what mode the market is in, then their own mood for risk, then act. There is too much "me" in the markets. I have a friend that wont sell his MSO because he wanted to defer taxes to next season. He had a rough afternoon the other day after anchoring that 12pm time and price. Day traders do this for a living. It is one of the most difficult businesses in the world.

Finally, the market goes from mode to mode cycle to cycle and then every now and again a panic ensues. When my son gets a bit out of control and my threats of punishment are met with "you are unfair" I give him the military version of starting over. I take away everything except a light bulb hanging by a cord, a chair, a desk in a tiny office and a bible. He panics.

The markets do the same to us. Every year or so they strip us down, shave our heads and send us back to basic training. Then the markets build us back up ever so slowly tick by tick.

The market gives us the old panic by dropping 5 or 10% in a few weeks, when the long term investors become too abundant. Like a train in Bangladesh overloaded with passengers on every inch of the market, freeloaders, along for the ride on the long term line, destination the magic of compounding village. The train's engineer, might then take the next corner a bit too fast, to shake a few freeloaders loose, then a big accident can occur. In any event the fear of the crash keeps a few from hanging on to the caboose...

Daniel Flam Responds

I think once one observes the path the price takes from one place to another we could look at how lightning works and see some interesting market similarities:

Even though the theoretically the charge must go through the path of least resistance there are other phenomena associated with the charge movement

1) Leaders - first the charge ionizes in various directions until it reaches a point of discharge

2) Streamers - every object on the receiving end creates "virtual antenas" that try to capture the stream

Once they meet they discharge is immediate although it is seen on all the branches of the ionization because the charge must leave the braches that are ionized!

I could see many theories stemming out of this analogy such as market friction discharge (like the gap and noise created when the friction is resolved...)

Also we have the possibility of a new technology seeking money and we see the flash of lighning ones a company manages to create a "useful" implementation so all the money runs it's direction and we get quite a jagged market there.

The way the companies reach out for the money in order to provide a discharge path for the customer's money,

Any other idea?

Law of Probability and Management of Risk, by James Sogi

Mankind has struggled with the Law of Probability and the management of risk since the beginning of sentient history and before. No man has succeeded without being on the right side of them, and every man who has failed has been on the wrong side. The cause of mediocrity , if not outright failure, is the search for the sure thing. Investors search for the sure thing leads to losses greater than they deserve and to meager returns. Understanding the law of probability and management of risk leads to success. It takes a paradigm shift in thinking to address both. These two elements of reality were, like many scientific principals , unknown. Ancient Man addressed the issues of probability and risk in the forms of superstition, blind luck, ethics, law. and many spurious system of life and society and business. Man's natural tendency to focus on the present obscures probabilistic understanding and thus mismanagement of risk. Observation of changing occurrences across time leads to an understanding of probability and risk. Understanding that if in fact the law of probability governs reality as much as the laws of physics leads to advances in speculation. Given a statistical edge, losses are as sure as the apple is sure to fall, and by the same law, the profits are sure to follow. The hungry scientist does not cringe as the apple falls to the ground, but anticipates the sweetness of the fruit. So the probabilistic speculator should not cringe at a loss, but merely anticipate the coming profit. Learning systems to understand probability and risk such as statistics and counting are the keys to understanding the law of probability and speculative success.

CAPM, by Kim Zussman

The paper "Expected Returns, Yield Spreads, and Asset Pricing Tests" analyzes factor loadings in tests of expected (rather than historical realized) returns and finds significant prediction in market beta, size, and value, but not momentum. It seems the authors dispute the assumption that past patterns of equity returns will be repeated, and that some proxy of expected returns, such as bond-yield spread, is a better test of factor significance:

".. the ex-post average excess equity returns provide for an easy-to-implement, seemingly unbiased estimate of expected equity risk premium. Despite its popularity, the above empirical strategy has potentially serious limitations.In particular, the average realized return might not converge to the expected risk premium in finite samples. This, in effect, conditions any inferences based on ex-post returns on the properties of the particular data under examination. In his AFA presidential address,Elton(1999) observes that there are periods longer than ten years during which stock market realized returns are on average lower than the risk-free rate (1973 to 1984), and periods longer than 50 years in which risky bonds on average underperform the risk-free rate (1927 to 1981). Based on this counter-intuitive evidence, Elton predicts: "[D]eveloping better measures of expected return and alternative ways of testing asset pricing theories that do not require using realized returns have a much higher payoff than any additional development of statistical tests that continue to rely on realized returns as a proxy for expected returns." (p. 1200). Since most findings in the empirical asset pricing literature were established-and are often revisited-with the use of realized returns, it is natural to ask whether extant inferences about risk{expected return trade-offs)hold under a direct measure of expected return. In this paper, we construct an ex-ante measure of risk premium based on data from bond yield spreads.."

Information in the Idiosyncratic Volatility of Small Firms?, by Kim Zussman

This BIG recent paper claims that idiosyncratic volatility of SMALL firms is predictive of next month's stock returns. I know this hos been studied here, and perhaps looking only at small stock vol as independent variable has value.

Dr. Alex Castaldo's Review:

This paper defines small firms as those with a below-median market cap in the CRSP tape. Because of the large number of companies in CRSP these are very small firms (median market cap $42 Million, aggregate market cap of 1% of the US stock market cap).

They measure the volatility, both systematic and unsystematic of several classes of firms, big/small, old/new etc. In a regression with dependent variable next month's return for the market as a whole, the only variable that is significant is the unsystematic volatility of small firms.

There is a positive relation between the unsystematic volatility of small firms and next month's return.

In a regression for 1962-1999 this variable has a t-statistic of 2.7 and the adjusted R-squared in 1.45%, however in a regression for 1962-2001 the t-statistic drops to 1.1 and the R-squared to 0.35%. Basically the relationship has fallen apart in 2000-2001.

In my humble opinion a pretty weak result.

James Lackey: As a Joke...

I log off J trader and work or read. I take a peek at free delayed quotes of a yahoo finance to get the gist every 15 minutes or so. A trader can't ever be more than 15 minutes removed from his passion, the live markets.

However, even a well seasoned day trader is subject to ticks disease. It is a form a turrets syndrome. You blurt out random quotes, "Oh gauche here comes 1200, Bonds 113 again", usually just seconds before it happens. Yet lose money as it happens, make self defeating statements, curse words, with vivid memories of past trades.

Ticks-disease is from obsessive screen watching. Of course, If one has an edge or a position in the markets, I think it is imperative for a day trader to sit from 7 am 415 PM. To do his duty, a day traders general order is to trade his post and everything within the limits of his post, until properly relieved.

However, if a trader makes random market commentary to pictures of the ghosts of Wall Street lining his office walls, "this market drives me nuts." Or "damn this is boring"... at the very least, are early signs of screen watching addiction.

I am not sure how many traders suffer from tick-data syndrome or worse ticks-disease. I do not know if bed rest, a year off the trading desk or even big profits can cure ticks disease. It is ruinous.

Tick-data syndrome, a completely different disease, yet seemingly the same symptoms, is from over analyzing trades. It can be from poor research known as data mining. Most times, it is looking at data, seeing a pattern and then forming a hypothesis. Chart watchers are famous for spreading tick-data syndrome. Perhaps, the DNA of the disease is visual in nature. Yet, a poorly trained quant or two has suffered here from tick data syndrome.

It is noted that red spots from losing P&L's have often been reported as the causes of ticks-disease and or tick-data syndrome. A reporter that covered a local Market Wizard for years quotes,.....

"Other symptoms may include but not be limited to, blotches of red ink on P&L, premature buying or selling, inability to sit still, burning sensation or pain in the abdominal area, excessive phone calls to fellow traders or 'opinion fishing', second guessing with lamentation, so please if you or someone you know has any or all of these symptoms please seek help." Craig.

However, after rigorous study of money management techniques, one can only conclude the system comes before the losses. Therefore, the disease obscures the fact that the trader is system-less. He laments the annual big loss with the same line every year, "without that bad loss in April I would have made a fortune. The fluctuations of the market can only be ridden. Money management is the holy grail." That is advance stages of ticks-disease. If you suffer, Please seek professional help.

The mistress will do everything she can to make the markets look beautiful. Those with a passion for screen watching may also have a passion for the beauty of woman. Hence, they find the mistress irresistible. I do love her so....

The wise grandmother of the trader once said, "if you kids keep staring at that market long enough you will turn into a bad tick."

Thoughts Inspired by the Wisdom Kids, by Victor Niederhoffer

At a Wiz party last night, I took the liberty of playing with the gear set the kids have on display and was incited by the President of the firm to find some applications to the market the next day.

1. Gears can be used to convert motion from a horizontal plane to a vertical plane, or a vertical to circular. And indeed in the Science Museum in London, one can see living examples of how factories and steam engines made use of that. Preliminary studies of the performance of companies with horizontal motion in recent years show that they were lack luster performers in subsequent years.

2. For many years, I have heard the adage that football players die young. Indeed there appear to be some studies floating around that show that pro linemen live to the age of 55. Worse yet, their late years are miserable ones as they gain weight and can't exercise due to arthritis. After extensive googling, I still cant track the definitive study on this although it's accepted as true. But there seems to be a medical consensus that the clashing of 300 pound bodies into each other at 30 miles an hour is not what humans are designed for and this is the cause of the problem. One notes that oil has had a fast Lobagola going up 25% from June to October, and then down 25% from October to date. The market must abhor such wasted energy, and I hypothesize that such markets perform significantly worse than random. I hasten to add that like the Daniel and David gear set I played with which suggested the use of a suction cup to convert the vertical motion to horizontal, this must be tested to enjoy the fruits.

3. Recently, much talk has been made (by people Grandpa Martin would have called "a bunch of amateurs" when his boy Artie did not have the ball) about the tendency of the beaten favorites to expand vigorously in the new year as tax loss selling and window dressing ends. But you have to put the connectors in first, in gear sets and markets and such moves are inconsistent with rational expectation so one cannot refrain from getting the jump on such fixed amateurs with propitious anticipatory positions.

Kim Zussman Replies:

Large and complex gearbox reduction assemblies are often found at aerospace surplus stores by inquisitive teen boys seeking esoteric applications. The interplay between gears, with different speeds, mechanical advantage, and rates of return is similar to the economic interactions between corporations in closely and distantly related industries. Only later courses in physics revealed inevitable sources of friction and energy loss inherent to such mechanisms, both in customer/supplier exchange and investment

One of the driving principles is the search for the frictionless machine and perpetual motion. So is the tendency to gear for and see motion when there is, in fact, none.

Dr. Charles Pennington Responds:

I need to disagree with Dr. Z's comment. The Chair has been talking about simple machines, such as levers, pulleys, wedges, and gears. The "inevitable" sources of friction that Dr. Z talks about aren't really inevitable, in that there's no fundamental lower limit on them. There are examples of truly frictionless motion, such as superconductivity, in which metals carry electrical current with absolutely zero "friction" or resistance, and superfluidity, in which a fluid (for example, liquid helium below about 2.2 Kelvin) can flow through a pipe with zero friction. Superconductivity or superfluidity currents can flow perpetually, and this doesn't violate any kind of physical law. It is, in fact, "perpetual motion", and it is possible to design simple machines, analogous to levers, pulleys, wedges, gears, etc., using it. For example, you could make an electrical transformer using superconducting wires. You could make a mechanical "lever" by pushing a superfluid through a pipe with a tapered diameter. (You push the fluid 1 meter at the fat end of the pipe; the fluid moves 10 meters at the narrow end.)

"Perpetual motion machine" is a phrase that is used, inaccurately, to mean a machine that perpetually provides useful power output greater than power input. That you can't do, unless there's some an inexhaustible fuel supply hidden in the machine. There's no fundamental reason though that the Chair's simple machines can't yield a power output exactly equal to and not less than the power input. See, for example, here and here

So in your trading, keep searching to lower your costs relative to your profits, because there's no *fundamental* reason that those costs can't go to zero.

Kim Zussman Responds:

Notwithstanding perpetual motion of supercooled nature, is zero really the lower limit of market friction? Zero commissions, perhaps, but spread zero? Price impact zero? Perhaps this requires infinite liquidity (sounds like a Miller question). No market makers? In this case, what incentives would intermediaries have to facilitate trade? Computers as intermediaries-who pays?

In any case, as far as humans are concerned, I suspect whenever money is involved the lower limit will be definied by an always present clever few who can make a buck off the flow (first law of the casino).

Mr. E. Responds

These are wonderful points you make Charles and totally consistent with the current state of engineering and logic.

I however see things differently.

I believe there is a "PMM" perpetual motion machine.

It is the eliptical world that survives above us and the very breathe of its totality

Let me give you some thoughts on this topic

wall street and the worlds very best engineers which i reepct you as oneof them, take for granted as TRUE that the day and night are always 24 hours, they take for true that GRAVITY acts rationally because it may be so here on earth...yes on earth the concept of a perpetual motion machine may be hard to create..

BUT that may not be so elsewhere

I for one dont accept the concept of a 24 hr day, and accept it as a false belief that i take advantage of

I dont accept the idea that a PMM doesnt exist and i argue that black holes and three trillion items moving between here and Mars dont require a mass of power to move them such as occurs here

what I am saying is heresey but once upon a time 1000 years ago the worlds smartest men believed in things that have long ago been disproved

What is the momentum of hope ?

What is the momentum of trust ?

These are issues that the athiestic scientific community doesn't have answers for, for no power source is required, no gravity can effect, no non belief can explain

Dr. Charles Pennington on Isaac Newton:

Mr. E, I think you would enjoy the biography "Isaac Newton", by James Gleick. Newton lived on the borderline between the scientific and the pre-scientific eras, which is not completely a coincidence, since he was a major cause of the transition. The book shows though that his mind was filled with concepts that we wouldn't call scientific. He put his life efforts into about 10 areas, one being math/physics, but in the other 9 he had few successes, and his efforts today would be regarded as quackery. They included all sorts of mystical things, astrology, alchemy. It's ironic that his physics thinking ushered in the idea of the "mechanical universe", while Newton himself believed in a universe animated by all kinds of spirits.

The book leaves the impression (and I don't know enough to confirm or dispute) that Newton's physics sprung out of nowhere. His father died when he was a small child, and then his mother sent him off to live with his grandmother. As an adult he became celibate and seemed to not even have any close personal friends of either gender, which is a very different response to such circumstances than that of our ex-President.

Late in life, at the peak of his fame, Newton arguably wasted his talents by taking on the job of Warden of the Mint. "By tradition the Mint posts offered easy income; Montague had promised Newton ''tis worth five or six hundred pounds per An, and has not too much bus'nesse to require more attendance than you may spare'..but (Newton) ran the Mint until his death, with diligence and even ferocity. He was, after all, the master of melters and assayers and metallurgists who multiplied gold and silver on a scale that alchemists could only dream of...In pursuing clippers and counterfeiters, he called on long-nurtured reserves of Puritan anger and righteousness...(He) oversaw prosecutions himself, all the way to the gallows."

Newton was slow to publish, hording his scientific ideas, and only the hint that Leibniz was gaining ground on him could cause him to finally publish Principia. The Gleick book reminded me that Newton even explained quantitively the cause of the precession of the earth's axis, which is not extremely difficult if you've just completed a semester on angular momentum of rigid bodies, but seems much more so if you have to invent calculus just to get started.

I found the book inspirational in an unusual way. Here was a man with many weaknesses and repellant qualities--some misanthropy, vindictiveness, stubbornness, greed, obsessiveness, provinciality (The book notes that he explained the ebb and flow of the tides, a mystery to countless seamen for thousands of years, but in his lifetime he never visited the ocean.), yet he changed the thinking of the entire world more than any other scientist before or since.

Mr. E. Responds

I will buy and read this book on my long flight to and from Belarus ..a flight that will take me back 50 years to the golden age of tyranical communism and collectivism...and i am grateful for your good counsel.

Hentry Gifford Responds

The question of Newton's physics springing from nowhere has been asked many times, but was answered by Newton himself when he said "I have stood on the shoulders of giants that came before me" in reference to this question.

Calculus was nescessary for his law of cooling, which describes the ever changing rate of cooling of say, a hot potatoe on a plate that loses a lot of heat at first, then less and less as it approaches room temperature.

Ross Miller Responds:

Those seeking physics analogies to the market may wish to indulge in Gish, a physics-based videogame about a tar blob with yellow eyes in such of profit and his lost, cuddly girlfriend. The usual addiction warnings apply.

From the GameSpot review of Gish:
"Physics" is quickly gaining currency as the newest "must-have" game industry buzzword. Gish is one of those rare games that actually manages to integrate realistic physics into its gameplay in a way that's both meaningful and, more importantly, enjoyable. That it does this with humor and style, and without the benefit of a large budget, is a small miracle.

James Sogi Responds:

The JPL has detected unexplained anomalies in the acceleration of the Pioneer spacecraft 10 and 11 out in interstellar space that is unexplained by known phenomena. The possibility exists that gravity and time does not behave out there as it does on earth.

See discussion beginning on page 44 of Study of the anomalous acceleration of Pioneer 10 and 11 on Dark matter or modified gravity, time variation. One explanation is that the gravitational field is not static with respect to cosmological expansion. Another possibility is a time variation in the Newtonian constant , or a result of an expanding universe.

Seasonal Effects in Chess, by Nigel Davies

Amongst the many benefits that speculating can have on your chess game, it seems there are seasonal effects in correspondence chess. Players tend to leave their moves on the server at specific times of day, so if I make a note of this and play my move shortly after their regular slot for chess, they will use more time on the clock.

The standard tactic in over-the-board chess is to wait for your opponent to leave the board to visit the mens room before playing your move. Or when he goes for a cup of tea.

What do you get when you short a stock?, by Nigel Davies

What do you get when you short a stock
A moment's glee, if it ticks dow...own,
But then its rise, will make you frow..own,
I'll ... never short a stock again,

What do you get when you short a stock,
A moment's glee, if it ticks dow...own,
But then it's rise, will make you frow..own,
I'll ... never short a stock agai..uh...ah..ain,
I'll never short a stock again.

What do you get when you play the bear,
A shock of greyness in your hai..air,
The money's gone, when it was the..ere,
I'll ... never short a stock agai..uh...ah..ain,
I'll never short a stock again.

Better to buy than sell 'em son,
Even if they're on a ru...un,
Shorting really ain't no fu..un,
I'll ... never short a stock agai..uh...ah..ain,
I'll never short a stock again.

Index trackers - they're not bad,
The long-term drift will make you gla...ad,
But short 'em and you'll be so sa...ad,
I'll ... never short a stock agai..uh...ah..ain,
I'll never short a stock again.


The Value of a Diary in Chess and Speculation, by Nigel Davies

It's difficult to overestimate the value of studying things of practical value, which is why it's so good to keep a diary during tournaments. Away from the combat zone people get all sorts of unrealistic ideas about what their capabilities are. We all want to be lion tamers until we actually get to meet one.

It's clear from my early correspondence games (which I'm using mainly for training purposes) that I'm not immune to this tendency, having played 1.e4 in all games when I should have been taking the opportunity to beef up my usual lines. But I'm not making this mistake with my current round of games.

First (Month) Impression, by Victor Niederhoffer

There is a popular impression that January is a very volatile month. Indeed, during the last 76 years or so, one notes that there was a decline of 6% in 1981, this being the maximum decrement that has visited the optimistic during that time. As usual, the unusual. And why is the the public always behind the form. And they have no right to lose that much & etc.

What a difference an "A" (or "a") makes, by Ross Miller

VaR is Value-at-Risk
VAR is Vector Autoregression
CVar is Conditional Value-at-Risk
C-VAR (or CVAR) is Cointegrated Vector Autoregression

VAR can be a valuable tool in the right hands; VaR is a deadly tool even in Nobel hands.

The Right Questions, by James Sogi

With Google opening a whole new world of information with simple queries, it is critical to ask the right questions. When Lexis Nexis became accessible it changed the legal world. It allowed a small country lawyer to compete on the same levels as the big city lawyers, and we did, time and time again. However, when finding the right case and legal authorities made the difference between winning and losing a case, it highlights the necessity of asking and framing the right question to find the right case using the search engine. In analyzing legal issues, the first element of analysis is to "frame the issue" or in other words to frame what is the question that is being decided. The goal is to frame the issue so that the answer is favorable to your position which is where rhetoric and science diverge.

When the Internet allowed electronic brokerages, it allowed an investor to live in a rural area and have access to price data and information currently rather than three days late as it was when print was the only information available. Again, with all the information, the issue to out performance is asking the right questions. What is the relevant data to predict price? As I struggle with the statistical language R to analyze price data, it is readily apparent that the questions to ask and the specific way to frame the questions are critically important. The power of Google is the ease of asking questions and coming up with relevant answers from such a large body of information. The power of R is certainly not its ease, but rather its power to make custom queries and to manipulate the data for ease of analysis. When framing statistical issues or framing a hypothesis for scientific analysis the assertion must be capable of being disproved. While this sounds odd, it is the heart of the scientific method. This avoids relying on a trading hypothesis or system that is plainly wrong, and which will result in losses. This also enables the speculator to stop using a once successful strategy when its effectiveness can be disproved through analysis and study, rather than increasing trading losses.

Recent Moves in Bund and SP, by Vic Niederhoffer and Alex Castaldo

With SP moving past the 1200 level from 1100 and bunds moving to 11995 today with 12000 a nice striking target, leads one to speculate about push/pull forces. A little googling brought me the usual many pleasant vistas as I found the push/pull in weight training, demography, and the main amplifier circuits used today. Particularly memorable was my tour of hysteresis comparator circuits on bringing it to a more mundane level, Doc Castaldo quickly looked at whether bunds had exerted a pull on SP this year. His results in a nutshell: after the 10 largest weekly ups in bunds, the SP next week went down an average of 1/2%. After the 10 largest weekly downs in bunds, the SP next week went up an average of 2% with a standard dev. of 15%. Thus, no pull from bunds this year.

10 Largest weekly Bund changes in 2004

Moves Up:

BundChgS&PNext wk S&PChg

Moves Down:

BundChgS&PNext wk S&PChg

Pause for Cause, by Kim Zussman

From: Gregg van Kipnis: "If there are lag structures in a relationships (that usually argues for causality, unless you think time runs backwards)..."

Recently had the pleasure of attending Junto as a guest, which featured speakers Larry Kudlow and Steve Kagann, NY state chief economist. Dr. Kagann made the point that "blue" (Dem) states had the highest unemployment and taxes and worse economies than "red' states. The message was less government is better which makes sense. However there was the causality question, which I did not phrase very well but will try now:

Does voting Democrat cause states to have worse economies, or do worse economies tend to vote democrat? (there is a related hypothesis about taxes and economies). Addressing such (and all related) questions by introducing a lag seems like a logical leg up on causality:

Define fraction Democrat voting as (Dem votes)/(Rep+Dem votes), and use as independent variable following Presidential elections to evaluate effect on dependent state economy variable (such as state per capita GDP) in 4-years following election. Repeat regression over many Presidential cycles, and look for significant relationship.

OTOH, it is possible that states with poor economies tend to vote Dem. For this one could reverse the variables and the lag such that prior 4-year's state economy per capita is the independent and the election vote (fraction Dem) the dependent.

In medical research there are often many confounding variables. This week's Time features a timely article on sleep biology, and refers to the old saw about needing >8hr/night is false since prior research showed people who sleep>7.5 die sooner. Story fails to mention that one symptom of depression is somnolence, and depression shortens lifespan for many reasons. Other known relationships which are not causative include male seated height and prostate CA risk, male pattern baldness and coronary disease, earlobe fold and coronary disease, left-handedness and shortened lifespan (possibly flawed study).

In speculation we look for lagged dependence with statistical significance, especially recently. Is this equivalent to causality, and should we care? If a certain move in bonds presages (by back-testing, with significance) a move in stocks, does one cause the other, and if so should we be more confident in the relationship? What if the bond move effects a multitude of factors, a cascade, which ultimately moves stocks. Does one need to know the mechanism? Perhaps economics would approach the deterministic veracity of physical sciences upon elucidation of mechanistic cascades were it not for the profit incentive of non-disclosure.

"But Doc, Is It Predictive?" A query to Alex Castaldo who found this paper.

A paper to be published soon in JFQA adds some new info on the puzzle of stock-bond correlations:

- - - - - - - - - - - - - - - - - - - - - -

Stock Implied Volatility, Stock Turnover, and the Stock-Bond Return Relation Chris Stivers, Licheng Sun, and Robert Connolly Working Paper 2002-3a September 2002

The authors study time-variation in the co-movements between daily stock and Treasury bond returns over 1986 to 2000.

We find that the level of VIX and [a] detrended stock-turnover measure (DTVR) are both negatively associated with the future correlation between stock and bond returns. For example, when VIX is greater than 25% (about 19% of the days) then there is a 36.5% chance of observing a subsequent negative correlation between stock and bond returns over the next month (days t to t+21). However, when VIX is less than 20% (about 54% of the days) then there is only a 6.1% chance of observing a subsequent negative correlation between stock and bond returns over the next month. We find qualitatively similar results with DTVR, across sub-periods, and for a variety of different empirical frameworks.

The "Election Effect", by Victor Niederhoffer

I recently posited that companies that backed the winner performed better since the election than those that backed the loser. A recent Bloomberg article written from the typical agrarian reformist vantage point apparently concluded this was true before the election. Nock and I would attribute this to the thing that led the Secretary of the Interior to hold the only important appointment in Washington in Nock's day, and led to his dancing an extraordinary kind of Kazak as described in Memoirs of a Superfluous Man. But I would also posit that these companies are infused with a belief in the creative power of the enterprise system. .

Ari Siegel Reviews Election Effect Article:

According to a December 13 Bloomberg report, companies that back the winning president’s party in an election year seem to do well on Wall Street. The article states that the top 50 companies that donated to Republicans in 2000 saw their stocks rise an average 44% from 2001-2004, compared to a decrease of 4.1% for the S&P 500. In the 2004 campaign, the 102 large corporate donors that favored Republicans saw an average return this year of 19%, compared with 9% for the S&P 500 and Russell 1000. The 17 companies that donated over $100,000 and favored Democrats in 2004 have returned 11% this year. The five companies favoring Democrats with large donations in both 2000 and 2004 saw share prices drop more than 6% in the past four years. However, in 1996, large corporate donors to both parties lagged the S&P. Those favoring Republicans returned 104% from 1996-2000, while those favoring Democrats returned 86%. The S&P 500 increased 132% during the same period. A simple reason for correlation could be that companies support parties whose agenda would be most beneficial to their bottom line. “The stocks outperforming during the Bush era tend to be ones that underperformed during the Clinton era, which in large measure were names in energy, materials, and seemingly old- fashioned, `old economy,' smokestack manufacturing companies that pay dividends…Dividend tax cuts, capital gains tax cuts, and depreciation bonuses under Bush clearly helped these guys out a lot.”

A System from the President of the Old Speculators' Club-- Mr. John Tierney, Himself.

It seems List members are permanently engaged in searching through nature (both human and animal) for successful adaptations that might be profitably put to use in making market selections. I confess to having indulged in this sport in the past and while it has been stimulating to draw broad parallels, none have ever been specific enough to adequately measure for veracity or profit.

I believe I may have stumbled upon one which can be measured. Though charts, bands, scatter plots, and relative strength measurements may be considered elegant by some and fraudulent by others (with both sides well equipped to demonstrate the accuracy of their positions), we rarely get to that point where it is boldly proclaimed that this equity or list of equities will outperform the market (Mr. Williams's listing of his Dow Darlings may be one of the few examples we have of someone courageous enough to provide specificity...true, some may carp that this is a refinement of the Dow Dog theory but, nevertheless, he put forward a measurable hypothesis). I've often wished I could do something similar but have lacked the insight; and I often wondered that if, provided with that insight, I would possess the courage to present it to this august body. As mentioned in a previous post, I rarely bother studying the mega-securities and giant indexes. Those are too frequently the targets of investors and/or speculators who frequently have more cash than smarts, but who, when grouped together in significant enough numbers and provided with a ton of leverage can bootstrap a failing market or thrash a vibrant one.

Instead, I spend my time looking for smaller, under-covered, and under-appreciated companies and cast my soda bread upon those waters. However, the number of potential equities is so huge that even the most diligent study could cover but a fraction. So I've searched for a way in which to narrow the scope, but still maintain access to some of these stocks whose performance annually dwarf that of the widely known and broadly bought behemoths.

Some investors are compulsively drawn to technology, others to natural resources, still others to consumer non-durables. My search has been for some atavistic element that unknowingly and inexplicably draws us all to certain equities. I believe I have found it. Longer-term List member may recall the Duo's work of a couple of years ago breaking down equity performance by the letter of the alphabet. I but vaguely recall it myself but in light of some things I've stumbled upon recently, it was enough to get me thinking. If you go over this post carefully you'll notice a number of words are used repeatedly. In fact, if you go over most of our post you'll notice a number of words used repeatedly. Going further, if you examine almost any writing or speaking you've done anywhere at anytime, you'll find this repetition. But after you've thrown out all the articles and prepositions I believe you'll find one word is used far and away more often than any other. That word is: "I". Yes, it's everybody's favorite personal pronoun; hell, it's just about everybody's favorite person. Except for royalty, popes, and schizophrenics, I'd wager it's just about everybody's most used word. Would it be strange then if this word, really this letter, proved to be a powerful but unconscious attractor in equity selection? I pose this since many of the more interesting situations I've come across recently have involved equities whose symbol begins with I or which possesses at least one or (better yet) two I's. So, in the spirit of counting I'm throwing out The Indomitable I Portfolio. Many of these companies you've probably never heard of; a few I own, most I don't (and I'll not identify those I do...although if I could negotiate a fee I'd buy them all). I'll check back in a year or when the portfolio achieves 100% appreciation, whichever comes first.

Tickermon. cltue cl.Change

The Indefatigable Capitalists--China? by James Sogi

Mr. E wrote: "China is more capitalist than we are."

A friend in Taiwan reports that ALL that the Chinese in Taiwan think about is finding flat land, pouring concrete, getting into business and working 24/7 to get ahead. It's like a mantra and a mania there. He says they are formidable businessmen from the small kids right up the the grandmas selling vegetables. I remember visiting Japan 17 years ago and Mike Yoshida and other executives at the large Japanese companies were studying Chinese. They had already spent years in the US learning English and US business.

Shopping for Holiday Bargains, by James Sogi

Over the holidays many spend time shopping around for good deals. It's worth shopping round for a good price on your market purchases or waiting for a sale. The idea of buying after prices shot up wouldn't make sense to a prudent shopper. Seems like the big indexes are marked up pretty high at retail before the holiday, but looks like some good deals on commodities. Must be not many kids want 5000 bushels of corn. When I get a good deal on some hot item, I don't really get too bent out of shape when the next guy gets a few cents better deal, and it may inspire me to buy a few more if the price is good. Watching price bars go down after buying can be disconcerting, but seeing an occasion to buy more can ease the feeling as it's rare to get the bottom tick. It helps of course to have some measure that the price is good, the goods are high quality items and that you'll have a chance to unload some inventory later this spring for a better price to some anxious buyers who like to buy when prices are rising fast. Seems like a regular kind of deal. Just don't buy too many cabbage patch dolls though, since no one wants one after Christmas. The idea of approaching market operations as holding a good supply of inventory at good prices like the retailers and specialists (or horse traders) do took me some mental paradigm shifting, from a directional bar hopping mentality.

Keeping Fit in Today's Market, James Sogi

The elements of fitness are strength, flexibility and endurance. Weight lifters are strong but often lack flexibility. Runners have good endurance, but may lack strength, so a balance results in good all around performance and health. Fitness for market operations requires training and work to build a solid foundation. Do you have the financial strength to handle a draw down period or are you trading on a credit card loan? Do you have the emotional strength to handle the adversity? Do you have the flexibility to trade different markets, different styles, different time periods, different regimes, different system? Do you have the endurance to handle a draw down in a trade. Do you have the physical health to work the hours needed to succeed? Fitness does not come overnight, and takes years of training. You can lose fitness in about 6 days of inactivity. Keep moving and keep healthy physically and financially.

Tim Melvin Reviews "A Salty Piece of Land"

I have just finished Jimmy Buffet's new epistle "A Salty Piece of Land". As Chief Parrothead First Class (ret).. (a rank bestowed upon me several years ago when I announced my intention to stop organizing.. after eight consecutive years.. the annual Bacchanal and bus trip to the salty one's annual concerts, in a ceremony reminiscent of an inauguration, provided the President and Chief Justice were roaring drunk and wearing grass skirts) I can state beyond a shadow of a doubt that this book has nothing to teach any of us. Other than a little lighthouse trivia and bone-fishing tips, there is nothing of any redeeming social value. Therein, of course, lies its value. It is total and complete escapism, decently written, a good story with pirates, cargo cults, shamans, rum and a Fresnel lens...the troubadour mentions several times the novels of Patrick O'Brien and references Jack Aubrey at a few points in the book. Like his music, Mr. Buffet's book has no point other than enjoying life and celebrating its magic.. light fluffy and easy to read (or sing along with), best consumed with a rum concoction close at hand. It is not for everyone but if the approach of winter and the daily stress have you a little blue, best knock around the Caribbean for a few hours with Tully Mars, Cleopatra, Solomon, Willie Singer and the Pink Boys.. For blues aficionados the Alligator Records Christmas Album is the real deal with some great house rocking holiday blues.. Opens with Koko Taylor doing Merry, Merry Christmas and gets better from there.. Includes a breathtaking Elvin Bishop version of Little Drummer Boy and Charles Brown's Boogie Woogie Santa Claus.. Also in the holiday scheme of things musical, break out the thin ties, cigarettes and highball glasses.. Christmas with the Rat Pack is a winner.. Sammy, Dino (nobody, anywhere has ever done Silver Bells like Dean Martin) and Frank move from classic to classic with swingin' ease and bring back memories of days gone by (or perhaps yet to come) and holidays of bright lights and happy parties.. Good stuff..

China, Russia Plan Joint War Games, by Roger Arnold

Background - Russia is building a new water pipeline from North to South to feed the drying Aral sea. China is moving to reopen the 1000 year dead east to west "Silk Highway" by starting with the three gorges dam in the east. Both will terminate relatively close to each other in Southern Russia (Uzbekistan) and western China (takla makan) near the mountains of Hindu Kush; on the border of the worlds oil reserves. The US is currently building several permanent US military installations in those mountains and spread throughout the area. As China and Russia move to form closer ties it may be considered a direct attack on the the US hegemonic model for globalization. That model dictates that Russia move west and join the European states as a trading block and China move east and join the Asian states to form a trading block. If they choose not to do so and instead move toward each other to form a new massive Eurasian trading block it won't simply lead to the end of US hegemony or US lead globalization; it could result in the economic subjugation of the US to that block, along with the demise of western Europe and Japan. The US will not stand idly by and watch that occur.

BEIJING,China (AP) -- China and Russia will hold their first joint military exercise next year, the Chinese government has announced, and President Hu Jintao is calling for further expansion of the rapidly growing alliance between the former Cold War rivals. For full story, click here.

Bears and Socialist Linchpins, by Mr. Beg

It seems in today's world many forgot what capitalism is. The common misperception has become that greed and accumulation of money is capitalism. Naturally when the tech boom of the '90s began the bears (most of who seem like the socialist definition of a capitalist) gawked in disgust as value was created beyond their definition of money. They could not fathom how the free flow of information and communication has become a currency more valuable then gold and fiat standards. It is through this new currency that hundreds of individuals scattered across the globe built an operating system (Linux) more stable and efficient then the one created by a multibillion dollar corporation (Microsoft). The bears bash the evolution because it reminds them of their age which reminds them of the eternal fear of death, and the socialists resort to bearish tactics because they can't admit that capitalism is coming closer to the socialist dream then socialism has been able to. They bash outsourcing, but I have a friend who recently had a website built for him by an Indian firm, he could not afford to have the site built by a domestic firm. Had it not been for outsourcing he would not have been able to build this site.

Steakhouse Indicator, by James Tar

Steakhouse Indicator (crowdedness of steakhouses and their bars with substantial corporate card use) is currently demonstrating robust business atmosphere. Spark's, The Palm, Bobby Vans, Ben Bensons all had private, extremely expensive "private", "closed door" events in this last past week. Brokerage firms were the sponsors of these events. This has not been the case in each of the last 4 years. Interesting that these events were held immediately prior to "broker week" (reporting of 4th Q and 2004 year earnings for GS, MWD, LEH, BSC).

George Zachar adds:

Adding to this anecdotal indicator, I recently chatted with a restauranteur who expressed surprise at how strong his Wall Street market has been. He even mentioned, unprompted, that these were not self-congratulatory "deal meals" to celebrate transaction closings, but merely generic non-specific celebratory banquets.


Topic: Tobin's Q.

Question: I don't remember seeing Tobin's Q. in PracSpec, and it's not in the index. That tells me how important it probably is, but I've seen it in more articles recently and wondered why. I know what it attempts to represent, and assume there is a gray area in obtaining the inputs. Is this something that has any predictive value?

I'd appreciate any feedback on this. Yes, it's something from the doom & gloom writers, and if the sky falls I'd like to think there was some other reason than a 2.0 Tobin Q.

Patrick M.

Chair' Response:
1. Have you tested that?
2. It's been bearish like the price to book ratio since 1980.
3. As the numerator varies much more than the denominator, it's the same as saying that the higher the price, the better to sell.
4. It's one of Alan Abelson's favorite indicator and the Old Tennessean, now Floridian, savant used to have 100 pages of related bearish information. It belongs in the trash basket with other value indicators that worked in 1929 and haven't worked since that time.
5. It's based on a zero sum view of the world, where the gains from productivity and innovation are impossible and costs rather than choice and subjective values is the critical variable.
6. In the bad old days when consumers of technical indicators weren't educated to the fact that cycles change and that something that worked in 1929 but hasn't worked since, mite not be worthwhile. It's chart was featured as one of the 50 bearish indicators in value section of the savant's handbook .

Send queries for the Chair to chair<at>dailyspeculations<dot>com

Philip J. McDonnell adds:

Recently use of Tobin's Q Ratio as a market timing indicator has been criticized: "Many people do conclude from the record high value of Q that the market value of equity is bound to fall. They may be right, though they haven't been yet. There are other logical possibilities. Maybe there has been a fundamental reduction in the cost of equity capital, the risk premium on stocks relative to bonds and federal funds. Then the high value of Q is a signal and incentive for real productive business capital investment; gradually the increase in stock of corporate capital at replacement cost will reduce the marginal productivity of capital and reduce Q , but no bubble and no crash. Another problem is that increasingly the capital value of companies is not tangible assets but human capital, more precisely the ability of the management to find and hold the brightest innovators. It's like betting on the coach of a sports team. That kind of asset is not in the denominator of Q as we calculate it."

The author of the above criticism was none other than Dr. James Tobin.

Technical Analysis, by Kim Zussman

Technical Analysis in Financial Markets is a book-sized summary of PhD thesis which uses statistical techniques to assess an array of trend-following and moving-average systems in commodity and stock markets. This recent and thorough-appearing work tests many systems, some of which show significant profits over some periods in different markets. Not surprisingly no system stands out (if it did, the nascent academician might have left university and moved to Manhattan), but the analysis might deballyhoo some common practices.

Changing Yield Curve Cycle, by George Zachar

In addition to enormous domestic liquidity and foreign central bank buying, a major factor in the compression of yield spreads over this cycle has been a decline in issuance. The GSEs have dramatically scaled back debenture creation at the same time outstanding fixed-coupon mortgage paper has net contracted (for the first time in more than a decade). Corporations, flush with balance sheet cash, are now more inclined to buy credit market products than create them. And despite all the scare stories, net federal debt growth is not off the rails.

The result is low absolute and relative yields. Now for the problem:

The Fed manipulates the economy by manipulating both short interest rates, and the market's perception of the forward trajectory of interest rates. Historically, to slow things down, the kids on Constitution Avenue will hike the Fed Funds target (now 2%) and also "jawbone" the long end higher, by hinting at, say, "imbalances" that "must be addressed". Now, if there's a lot of paper floating around, or being issued, then yields can rise easily and quickly, as competing issuers will be forced to offer ever-higher yields to attract buyers.

That's not the case now. We have an on-the-move Fed, but capital market interest rates are range-bound overall, and even falling in some areas, like mortgages and junk, as the wall of money offers down yields in the hunt for incremental return. What this means for the Fed, is that if they deem it necessary to raise rates to slow the economy, capital market rates may not move up as they have in the past. Bernanke's prominence on the board implies a focus on mechanistic historical analysis that could lead the Fed to raise short rates higher than they otherwise would, due to the potential "stubbornness" of the long end. Implications? A prematurely flat or even inverted yield curve. This is not my forecast, but is a risk I've not seen noted in the press, or Street research.

In Memory Of

Mildred Kenner (July 10, 1924-Dec. 12, 2004)

Mildred Kenner, artist, pilot and mother of the Collab, died at home in Santa Monica, California, on Sunday. She was 80.

Millie was held dear throughout her life by her family and an ever-widening circle of friends. Married at 28 to John Kenner, she had two children, Laurel and Steve, whom she raised with great love and devoted her considerable talents to giving them a head start. A fluent pianist, she gave Laurel her first lessons, an introduction to music that sent Laurel on a path to a college major and a lifetime of performance. She taught both her children how to read, and spent thousands of hours taking them to music, ballet and tennis lessons, and sewing their clothes.  She helped found a preschool in Santa Monica so that Laurel could attend, and led Laurel's Girl Scout troop in Glendora, California, planning unforgettable hikes, camping trips and fashion shows.

A woman of great intelligence and vitality, she enjoyed tennis and once took a sledgehammer to the interior walls of a newly bought house to make the living room more spacious. She earned a private pilot's license in her free time as a young nurse in Hawaii. She mastered the arts of homemaking, gardening and entertainment, delighting guests with ethnic meals and stylish presentations. A learned gardener, she filled the yards and patios of her homes with exotic succulents, ferns and cymbidium orchids. She hosted many holiday gatherings during the 1950s, 1960s and 1970s at the Kenner residence at 10 Latimer Road, Santa Monica Canyon.

She held a variety of responsible positions at hospitals in Santa Monica and West Los Angeles. In her later years, she developed her artistic talent and became widely honored for her exceptional style. In her 40s, she designed and wove fabrics on a large loom situated in the family living room. She next turned her attention to pottery, inventing distinctive shapes and glazes. Her best work came after age 50, when she learned the craft of California Indian basket weaving. Her creations, based on centuries-old techniques, were made from pine needles, palm leaves and other "found" fibers she and John collected around Santa Monica. Her baskets won many art fair awards and were displayed in galleries throughout the West.

In 1980, Millie and John moved to Fallbrook, California, where she became a member of the Fallbrook Art Gallery co-op. After John's death in 1999, she lived in Fallbrook for five years. In November 2004, shortly after being diagnosed with lung cancer, she returned to Santa Monica to settle in an apartment looking out on the beach and the Malibu coast, where she had spent many happy days and sunsets with her family.

Born in Portland, Oregon, Millie moved to Southern California as a young girl with her parents, Elmer and Pearl Fields Bame, and her brother, William. She is mourned by her surviving relatives: her daughter, Laurel Kenner, whom she inspired with her love of life and loved through thick and thin; her brother's widow and children, Louise Bame of Santa Monica, Michael Bame of North Hollywood and Richard Bame of Iowa; and two nieces, Christina and Barbara Dalton of Los Angeles.

Socialist Weekly Tosses Capitalist Coin, Finds Workers Lose Heads or Tails, by Victor Niederhoffer

Googling a rich topic like contagion is like taking a tour around the world and through time. One of the highlights I found on such a tour, which involved reading the first 500 entries of 42,000 covering “contagion, stock market” was a column from the World Socialist Weekly of April 4, 2001. The article focused on a “new form of financial contagion spreading via stock markets.”

Some of the reasons for being bearish included the $10 trillion loss in paper wealth which, via the wealth effect, would create a global depression. (Apparently the prior $10 trillion increase would not have an opposite effect.) This problem could have been exacerbated by big shifts in the desired balance between savings and investment in the U.S. and Japan. Such imbalances, according to the article, would be worsened because even after the recent fall stocks were still overvalued by the standard measures which then brought stocks down to the level they had realized at the previous peaks in 1928 and 1967.

(The socialist press isn’t the only media purveyor of such thinking. Indeed, a Bloomberg summary this week contained the very same argument: that stocks still are overvalued since the price is too high to be covered by earnings.) . Another bearish factor cited by the “Socialist Weekly” was the excess of consumer and business spending over income. "Suppose that a vicious circle of tumbling wealth, declining investment and increased household saving were to push a disillusioned private sector back to the spending and saving patterns of the early 1990s.”

The contagious decline in the Asian markets in 1997 was seen then (and now, whenever there's a big decline in any stock market) as a model for the kind of global reassessment that could cause spillover effects to occur. Then as now, a yen is seen as the cause of imminent disaster. The problem then was that the decline in the yen might make other Asian exports noncompetitive and thus lead to disaster. But now, when the yen is strong, that could lead to disaster as Japanese refuse to finance our current deficit with investment in stocks and bonds.

Interest rates were low then as now, but they couldn’t help spur the economy because of chronic overcapacity. Factories all over from the U.S. to Taiwan were operating at just 70% of capacity compared to 95% a year ago.

The “Socialist Weekly” sees the problem as the chronic tendency for falling profit rates in a capitalist economy. While the stock market was and is going to ever higher levels, profits peaked several by about 1997. And here's the ultimate result: "The logic of the capitalist profit system dictates only one response: the shutdown of whole areas of production, the sacking of millions of workers and the imposition of poverty." And this is a certain consequence of the expansion of such things as outsourcing, searches for efficiency in manufacturing and lower cost sources.

The next time you read that the loss of jobs from one sector such as manufacturing in the U.S. in the 2000s or the agriculture sector in the 1900s are the source of coming malaise in our economy or the stock market, please understand this is the linchpin of the socialist argument as to why capitalism must fail. The antidote is a reading of the first chapter in most modern economics books such as those written by Heyne, Stroup, or Pashigian, where the principles that lead to gains from trade, comparative advantage, division of labor and specialization are taught.

Bear Watch, by Victor Niederhoffer

One of the market constants over the past 40 years has been the consistently bearish view of the lead writer for the major financial weekly. The aging commentator’s current arguments for a bearish case, in his latest “Up and Down” column, are at once so typical and so off the wall that they deserve to be memorialized. You see, the market “has been trying to puzzle out mixed vibes from the economy, oil, the dollar, the Fed and the mood of the consumer.” One might hope that the 23% decline in oil over the last six weeks and the 2.5% decline this week, together with a 2.5 % rise in the dollar, might be cited as bullish factors given that their converse moves were presented as the main pillars of the bearish argument over the previous several month. But such symmetry and consistency is not expected from a commentator who has not found the bullish case predominating in 2,000 columns. In a review of his oeuvre presented in our worst-selling 2003 book, “Practical Speculation,” which by an oversight was never reviewed by any Dow Jones & Co. publication, we presented the results of a content analysis and graphed the quadrupling of the Dow Jones Industrial Average during the 1990s, highlighting representatively bearish quotes taken from the from his 500 bearish columns during the period.

One might wonder whether this selective reporting is a perfect example of card stacking of the kind that high school students are hopefully still educated to spot as one of the principal techniques of propaganda.

Here’s how the weekly writer explains himself this time: “Since we're unremittingly bearish on the economy, interest rates, the consumer and the dollar, the buck’s rally is just a reflexive rebound. It goes without saying we're also bearish on the market. But so far, obviously, the market hasn’t been very accommodating. (One notes that the S&P is at its highest since the second half of 2001).

The writer reports that his oft-quoted friend Fred Hickey, author of the High-Tech Strategist newsletter, see this his way.. Both are troubled by what they see as the excessive optimism that investors have in the face of negative technology news. They are particularly troubled by the recent strength in semiconductor stocks (although one would think this might be tempered by the fact that the S&P Semi index fell 5.6% last week, its second-worst decline in a year). After all, there has been some negative earnings guidance from companies lately, and Intel’s earnings were still 10% or so below analysts’ predictions in early September and will lag year-earlier totals; and “the PC market continues to soften and the pickup in IT spending remains conspicuous by its absence.”

The writer concludes: “What the sound and fury about Intel's revised estimate does reveal is how readily investors are willing to clutch at fantasy when the facts aren’t especially encouraging.”

And yet, investors actually found Intel and its pronouncements especially DISCOURAGING last week; its stock dropped 7% from 24.2 to 22.7, and the S&P Semiconductor Index was the worst-performing group in the S&P 500.

This case study in card stacking and testimonial is regrettably typical of what the public is exposed to week after week. But it also contains a good lesson. The market reacts to changes in expectations, not realizations. In general, the market is most favorable for purchase when realizations are worst and sentiment is negative.

As to whether a bullish case or bearish case seems more promising, that depends on such factors as how far prices have sunk or risen, what the likely future news is going to be relative to expectations, and the opportunity cost of such competing investments as long-term bonds, and the spectrum of other less risk-free assets.

(One of the columnist’s greatest virtues, in addition to his stylish wit and the skepticism he focuses on Wall street hype, is the total lack of any personal interest in the outcome, since according to the Collab’s interview with him, he doesn’t trade or invest in individual stocks.. I am not able to climb that high plane in this case (or any other), as I own Intel shares. At least I can say that my visceral reaction against this very special kind of bearish argumentation technique is not galvanized by a bullish view, as I am quite short the market at this moment.

Ask The Senator, a continuing series

Q: What is a "down range" day? I would have guessed that the "range" was the high minus low, and so a "down range" day's range would be less than the previous day's range. -- Dr. Charles Pennington

A: You have described a smaller range day, as opposed to a down range day, and a down range day can be a larger or smaller range day.. See.. What your daddy told you is true.. The devil is in the details and the devil reigns supreme on Wall Street.

Send queries for the Senator to senator<at>dailyspeculations<dot>com

The Skyscraper Indicator Rises Again, by Debashis Basu

The stunning decline in oil prices coincides with the news that Dubai will soon have the tallest building in the world. With appropriate hubris, Mohamed Ali Alabbar, chairman of Emaar Properties, which awarded the contract, said that Burj Dubai will be taller than any existing manmade building .

Wall Street Behaviors, by James Tar

Wall Street and most of what is connected to it has to be the best place or field on earth to work. Nowhere else is one exposed to the full spectrum of human emotion and behavior: happiness, anger, sharing, greed, sorrow, elation, despair, fairness, cheating, love, lust, extravagance, humility. Everywhere around you someone is having the best day of their life and at the very same moment someone is having their very worst. Much of which is right out in the open, in front of your eyes, and a lot hides in the shadows or behind closed doors. The Spitzer Movement is a good thing in that it is uncovering and changing much of what was wrong with Wall Street conduct. I have played the role of both predator and victim, I have been cheated out of at least a million dollars, and I regretfully now admit that five years ago for no mature reason at all, I underpaid a member of my team.

Money, and the opportunity to make it, for many at any cost, really is the fuel behind Wall Street behavior. Give a prick a sharp suit and a bill clip with a thousand or so bucks in it and he becomes a real monster: arrogant, rude, loud. These devils ruin every nice restaurant, especially my beloved steakhouses. They drink the top-shelf single malts excessively, they tell the loudest and foulest of jokes, and they grope every woman walking by. Thank God the market's dump in 2000-2003 wiped out a lot of these guys. I have noticed that the good guys have survived and managed to stick around, and the a##h###s are long gone. Indeed, bear markets have their benefits.

On the lighter side, I once witnessed a 24-year-old new hire get into a bet with a senior desk trader that involved eating 12 McDonalds Big Macs in 15 minutes. He was new to the desk, broke, and hungry to make money, and he did make a ton of money that very day. Almost all of Wall Street's equity desks were dialed into the challenge. The "action" on this Friday was historic and hysterical. Rumors have it that a group head of Troster Singer (a market maker at the time, a division of Spear Leeds) lost $25,000 on a side bet with another trader. Well, the kid ate the Big Macs in just under 15 minutes and made $5,000 as he was getting 50-to-1 odds on the only $100 he had to his name.

One of the more peculiar behaviors that I have seen on every single trading desk I have ever worked on: "Phantom Phone Calls." The PPC is the behavior of salespeople who are tired, burnt out, or even worse, scared of the phone and scared of sales failure. It is characterized by holding the phone up to the mouth/ear as if he or she is actually on the phone and pretending to be in an intricate conversation with a customer. The practitioner will also be seen reaching for pencil or pen and taking notes during the PPC. An extremely high paid institutional equity salesman at a top top Wall Street firm was doing PPC everyday, all day, for well over a year until finally after a restructuring and reorganization his new managing director out of curiosity decided to check the phone records for the entire sales team, and through their Etrali phone system, discovered that this salesman had not made any calls to any clients over the course of a year. Smith Barney's commission and client-salesperson record keeping was in such disarray it took a week or two to learn that this salesman's assigned clients hadn't traded with the firm in over a year. It was a stunning discovery and sudden departure.

As similar stories hit the tape this week (Fido and Jefferies/client gifts) and Spitzer's investigation into mutual fund gift giving of three weeks ago news, I am reminded of Larry (last name not to be mentioned). He was the head equity trader at a very well-known mutual fund company - a household name. He paid the Street millions in commissions a year, and he also was Wall Street's biggest ticket scalper for the best of the best seats to every big game, concert, or other event. Larry would demand that his brokers give him tickets to every big event in the city and country (Super Bowl, whatever). They would oblige, then Larry would turn around and scalp the tickets at astronomical prices. He would pocket thousands and thousands of dollars a year. Another of his behaviors was to take all of his friends out to huge dinners at one of the more popular steakhouses (where many brokers often hang out), run up huge tabs, order the best wines on the list, and then look for any broker in the joint, walk over, and hand the tab over demanding payment. He was also known to order cases of his favorite wines direct from the restaurant to take home with him and have someone else pick up the tab. All of this of course was discovered and Larry was shown the door.

I could go on and on and I do not want to bore you all, but what I am trying to illustrate is just how amazing a place Wall Street is and it isn't always discussed in such a light. Though I have brought up some things that may be taken negatively, we should commend people such as hedgefundists Paul Tudor Jones and George Weiss, whose foundations, Robin Hood and Say Yes, respectively, are phenomenal examples of how Wall Street and its people can make superb contributions to society. Similarly, there are do-gooder groups and organizations loaded with Wall Streeters that give back a great deal to communities, etc. There is a whole lot of good going around because of Wall Street, and it is a shame that it goes so unmentioned.

Looking the Gift Bull in the Mouth, by Pam van Giessen

I'd like to add a potential new indicator to the plethora of observational situations used to ascertain economic strength (cigar butt, hemline, skyscraper, et al): the chocolate indicator.

Here's what it looks like - corporate gift-giving usually takes the shape of standard fare such as Godiva and Fannie Mae chocolate (maybe Frango for Midwesterners). But this year, the chocolate gifts are a bit more exotic and come in simple yet obviously more expensive boxes from Teuscher and Dean & Deluca, and there are more of them. Of course, when markets are hitting all time highs (particularly the Nasdaq) the really good champagne pours in

A Birthday Message to the Chair, from Tom Ryan

The further on I get the louder the sunrise blooms, the stronger the sea foams and the more storms I brave.  I tackle this whole world then with more triumphant faith than ever since the world was made.

On the Left Hand

Trader Bipin Pathak forwards this story and wonders if there is a trading equivalent of this advantage.

Dec. 9, 2004 - Why has left-handedness survived among humans? French anthropologists believe they have the answer: left-handedness, far from being a disadvantage, is an evolutionary boon.

Their theory is that left-handers survived - and in some cultures thrived - because they were better at fighting, having a built-in advantage in combat with a right-handed opponent.

They analyzed data from eight societies: the machete-wielding Kreyol of Dominica; the Ntumu of Cameroon; the Dioula-speaking people of Burkina Faso; the Baka in Gabon; the Eipo of Irian Jaya; and Inuit in Alaska, Greenland and Canada; the Jimi of Papua New Guinea; and the Yanomamo of Venezuela.

The societies which had the most killings had the most left-handed people, they found.

At the most peaceful end of the scale, the Dioula had a homicide rate of only one hundredth of a death per 1,000 people per year, while left-handedness occurred only among three percent of the population.

At the other end of the scale, the Yanomamo had four homicides per 1,000 inhabitants per year, while left-handers accounted for a huge 22.6 percent of their population.

Contagion, by Victor Niederhoffer

On October 27, and October 28, a particularly virulent strain of decline in oil was released as it dropped from 54.76 to 52.17 to 50.74 . Such a 7% decline broke the back of many relatively weakly resistant longs who had not been immunized to such moves by long exposure . Shortly thereafter the disease spread to almost all others who had not previously been infected like a spider descending down from her Cobweb as she had previously descended to spread her terrible plague and killing in the areas of soybeans, corn and wheat. Regrettably but inevitably, a mutant strain of the disease spread into silver, gold, copper, and was transmitted into almost all of Euro dollar and Japanese yen areas despite the protestations and naysayings of officials. Let us hope that this terribly contagious disease will not totally demoralize and morbitize those who recently became exposed to such the disease by investing in highly susceptible areas such as funds sold and touted by white shoe firms and travelers who believe that they can find pockets of resistance to same in the event that high prices do not induce increased output of the virus.

Crude Contagion, by Ari Siegel and Victor Niederhoffer

At the close on November 29, oil was trading at $49.76. At the close on December 9, oil was $42.53, a decline of 15%. The past week has seen oil’s slide reverberating through the commodities markets: since Dec 1 gold is down 4.1%, copper down 8.7%, silver down 15.8%, and platinum down 7%.

Can big moves in oil predict other commodity price moves? Taking pencil to paper, we conclude that large price moves in oil do have a leading and significant impact on the prices of other commodities, particularly metals such as gold, copper, silver and platinum.

Ari Siegel
Victor Niederhoffer
December 13, 2004

Stocks--The Little Engine That Could, by Philip J. McDonnell

Since August the stock market has been remarkable. It has resembled the little engine that could - the engine that could climb the mountain beyond all reasonable expectations. This remarkable ascent can be broken down into several distinct stages. In fact the whole rise can be thought of as a multistage rocket. The first stage was clearly VIX related. Prior to the election the VIX was relatively high. In the week prior to the election the VIX started to decline slightly. However during the election week itself the perceived risk as measured by the VIX dropped dramatically as the uncertainty of the presidential race, the uncertainty as to whether the race itself would be decided without a constitutional crisis. Most importantly the perceived risk of a pre election al Quada attack was eliminated. All of theses factors coincided to produce the largest rally of the year during the election week.

Rather soon after election week the VIX indicator ran out of gas. I liken this to the first stage of a multi-stage rocket running out of fuel. Subsequently the market did all the right things to keep everyone guessing and to keep itself going up. To paraphrase a rock song the market was running on Entropy. I use a group of about 30 indicators to help me keep in touch with the market. Early on the market was driven by the VIX indicators. Then it was driven by the randomness or Entropy indicators. Yesterday the number of positive indicators fell to only 4 - a new low for this move. Yet suddenly for the first time after the close today the VIX indicators kicked in. Even the German version of the VIX indicator is now positive for the first time since after the election week. The analogy for me is that the first of the rocket driven by the VIX has had time to recharge its batteries (via solar power?) and is now ready for the next stage.

Navigating the Unknown: Charts End, by James Sogi

In the early 1400s many Europeans believed that the earth was flat and that if you sailed over the horizon the ship would fall off the edge. Primitive navigators relied on dead reckoning, measuring the speed of the boat with a line with knots tied in it and a sand hour-glass. We still refer to a boat speed in "knots." To this day, nuclear submarines use dead reckoning but with super-accurate gyroscopes and inertial detection instruments and figure their position within inches thousands of miles from their start. Primitive navigators in time realized that the Sun and Polaris were angled overhead and could give an estimate of the latitude when measured with a crude astrolabe. But since they didn't know without accurate time clocks when noon was, they could not determine their longitude and were often off by 175 miles or more, which often spelled disaster for the mariners. The invention of an accurate chronometer in 1764 by John Harrison opened a new era in accurate navigation and hence reliable shipping trade, and was instrumental in the dawn of the industrial revolution. Utilizing modern mathematical tools and more accurate measurement devices, navigators could travel the globe with confidence and ply their trade to their enrichment. Now, with modern tools any person can determine a position within 50 feet.

Modern speculators are navigators of the markets. Many still believe that as they sail off into the blackness where the charts end that they will fall of the edge of the earth. Others rely on mystical jargon and mumbo to predict where the charts will end up in the black right edge of the market world. Other scientifically minded speculators have devised new methods beyond dead reckoning to determine their position and the ultimate landfall of the voyage in the markets. These speculators use scientific methods and tested hypotheses to map a course into the unknown of the chartless blackness of the future. The new alchemists of the markets confidently predict the future utilizing complex physics, math and statistics, the same tools that allowed us to navigate the oceans and now the stars. Even with modern tools, like the ancient navigators on a cruel and fickle ocean our modern speculators are subject to the whims of a cruel market where vicious storms can sink even the most sophisticated. May you have a fair wind at your back and a smooth sea in your travels and trades.

Practical Gift Ideas, by Nigel Davies

Wifey just told me a great story about someone she knows from work (employed by the Royal National Institute for the Deaf, I hasten to add) who invented a portable lap-dancing pole. Apparently this woman was attending classes but wanted to practice at home. She drew up some plans and took out a patent. You can pull it down from the ceiling and it doubles as a smoke detector. A must for every British (and American?) housewife.

And, Good Products Always Breed Copycats

Whether you are learning to pole dance or enrolled in striptease aerobics the Original Lil Mynx dance pole or our new Lil Mynx Rotator dance pole is for you! The Lil Mynx removable dance pole (a.k.a. stripper pole) weighs only 20 pounds and adjusts to fits any size ceiling between 8 and 10 feet. The removable nature of our product offers the flexibility of only having the Lil' Mynx installed when you want to use it. You regain the space in your home when the pole is not in use.

It takes less than 10 minutes for the initial installation. Our unique ceiling mount, disguised as a plant hook for discretion, requires only a single screw. A threaded compression systems holds the pole in place. The Lil Mynx can withstand up to 250 pounds of body weight. After initial installation it takes only seconds to put up or take down the pole, with no tools needed! And now you have the choice of either the Original Lil Mynx, which is stationary, or the Lil Mynx Rotator , which is a combination spinning/stationary removable dance pole. If you prefer the Lil Mynx can easily be made into a permanent pole.

-- The Art of Exotic Dancing, Vol. 1: Pole Work

This 45 minute instructional video will show you:

* Safe warm-up and stretching techniques
* Step-by-step how to gracefully perform over 30 pole moves
* Correct hand, body, and leg positions
* "Follow up" moves for your pole techniques
* Hints for making pole work easier

12/9/04 10:45am

I saw the Chair at Trinity Church hobbling briskly in an easterly direction with cane in hand. Faithfully yours, Laurel Kenner

A Weak Bond Market Ahead? by Paul DeRosa

I'm entirely bewildered by the bond market strength -- not what I would expect with the currency in free fall. It sometimes takes a while to sort things out, however, and perhaps a weak bond market still lies ahead. With dividends, the average return to the SP over the last two yrs is now over 15%, with the T-bill rate at 2%. Can the equity premium really be 13%?

Rousseau, by Hanny Saad

Jean Jacques Rousseau was a capitalist, reversalist, a genius with a high
sense of self. Nobody knew it, probably not even Rousseau himself.

Here are some quotes from his confessions; my interpretations are merely a
subjective matter from someone who finds an analogy to markets in everything
he reads.

Money that we possess is the instrument of liberty...

Necessity, the parent of industry, suggested an invention...

Passed my days in languishing in silence for those I most admire...

Rogues know how to save themselves at the expense of the feeble... (why do I
think of Soros every time I read this?)

Myself the principal object....(selfishness is a virtue....I agree)

Obtain their wishes, without permitting or promising anything....(good trait
for a trader)

Placing unbounded confidence in myself ...(another one!!)

Remorse sleeps in the calm sunshine of prosperity

Hopes, in which self-love was by no means a loser

Endeavoring to hide my incapacity, I rarely fail to show it

Endeavoring to rise too high we are in danger of falling...(if that's not a
reversalist I don't know what is...)

Love of the marvelous is natural to the human heart

Mistake wit for sense

Though not a fool, I have frequently passed for one...

Idleness is as much the pest of society as of solitude...

In a nation of blind men, those with one eye are kings...(still looking for
my niche in markets...still in the blind league)..

When everyone is busy, you may continue silent..

All animals are distrustful of man, and with reason..

Finding in every disease symptoms similar to mine...

First time in my life, of saying, "I merit my own esteem"

Looking on each day as the last of my life...(the right to pursue our own
happiness anywhere anytime..)

Men, in general, make God like themselves

True happiness is indescribable, it is only to be felt

I am charged with the care of myself only

I strove to flatter my idleness

Men of learning more tenaciously retain their prejudices

Die without the aid of physicians

Knew how to complain, but not how to act

Moment I acquired literary fame, I had no longer a friend

An author must be independent of success...(Suzan and the chair picking up
the garbage!!! ring a bell?)

I never much regretted sleep..(me neither)

In company I suffer cruelly by inaction..

Obliged to pay attention to every foolish thing uttered....(no CNBC or a
newswire in my office either..)

Writing for bread would soon have extinguished my genius....(I trade for
bread...but wait, I have no genius to extinguish)

An Extraordinary Man's Timeline

Asking Good Questions, by Victor Niederhoffer

The hallmark of good research is to ask rich and scientific questions. One good way not to ask questions is those that involve a trade that occurs less than once a year and one that implicitly has five or six qualifiers in it. You see, with five or six qualifiers, there are at least 32 categories of whether to buy or sell. Thus, it is 100% likely that one of them will have 100% accuracy on such a pattern. I encourage all to frame their queries so that they will be refutable, not tautological, and properly humble.


A student of the market prone to poker, but new to trading, who we shall call Mr. Ace queries the following:

1) Bonds in very tight range over the past 2 days after a big up day Friday.
2) At close yesterday, SP had 3 days in a very tight range following a big up day. And, SP big down day today.

Could bonds have a similar big down day tomorrow or Thursday? Or perhaps Friday jobs will be very high prompting drop in bonds. In any case, strange for bonds to stay so high given still high chance fed will raise rates next meeting plus such a weak dollar.

Chair's response
: Don't try to do fundamental analysis on bonds. Too many experts know infinitely more than you or we. That's the beauty of the market. These experts always bring things to the proper level.

Send queries for the Chair to chair<at>dailyspeculations<dot>com

George Zachar responds:

The writer of 2001, Childhood's End, and countless other science fiction classics, Arthur C. Clarke, famously observed that "Any sufficiently advanced technology is indistinguishable from magic." So it is with highly specialized expertise in increasingly fractured and technical markets. In currencies, there are times interest rate differentials matter, and times they don't. There are times relative economic growth rates matter, and times they don't. Currency market survivors are those who are able to divine the context shift in time to profit, or at least avoid disaster. Ditto bonds.

The US credit market (IMHO) remains in a phase where it is specific technicals driving prices, and not macro fundamentals. Today's debt market rally, despite the impending 5 and 10 year auctions, cannot be ascribed to the overnight rally in the dollar. Both the debt and currency markets are essentially continuous, so the moves should have taken place simultaneously. They didn't. Reportedly, a huge short US/long bund trade was unwound after Chicago futures pit trading opened, running US paper against those who were "set up" short for today's 5 and tomorrow's 10 year auctions. Also, as noted prior to last Friday's payroll data, the market "felt short", flagging its technical condition by refusing to decline on bearish fundamental news. Likely, the continuous bid for American paper from China, manifesting itself in ever-tightening credit spreads, still underlies the overall "short" technical condition of the US debt market.

I doubt that even the Chinese buyers, hunched over their telephones, know when they'll stop. Therefore it is impossible to forecast when the current mode of a-fundamental price action will stop. Unless one is privileged to be on a dealer desk where the big players are transacting, or have access to scuttlebutt on those flows, it's a good time to watch but not trade debt.

January Dippers

In a new article, Michael Brush hypothesizes that stocks which do well in a given year tend to have an early January blip down after which they continue to perform above average. He believes this January blip is caused by investors waiting until after the new year to sell their winners, since capital gains taxes can then be avoided for a full year. This is the opposite of the well known “January Effect,” where stocks which have done poorly in the previous year tend to perform strongly in January.

To test this, the Spec Duo and our ace value analyst Mr. Tom Downing, former right-hand man of the redoubtable Sam Eisenstadt, took out the pencil and paper and followed this procedure: each year-end from 1997 to 2003, we divided the stocks in the S&P 500 into five equal-sized groups based on previous 12 months performance. We call the best-performing stocks “Winners” and the worst-performing stocks “Losers.” Then we measured the subsequent performance of these groups in the first week, second week, and subsequent quarters of the following year.

1.) In all but one year from 1997 to 2003, the previous year Winners was the worst performing group in the first week of the subsequent year.
2.) In each sample year except for 2004, Winners continued to outperform Losers in first three months of the year.
3.) During the subsequent 12 months, the Winners handily outperformed the Losers, but much of that out-performance is attributable to a few good years during the technology boom. Go to year-by-year results

Reflections on Jefferson, by Victor Niederhoffer

The book "Light and Liberty, Reflections on the Pursuit of Happiness" by Thomas Jefferson, edited by Eric Petersen, is a most enlightening and uplifting read highly recommended for all. Jefferson believed that the purpose of life is the achievement of happiness, and that there were four main methods of securing it: good humor, integrity, industry, and science. In thinking about great personages I have known, I find that all of them have shared these virtues. Jefferson's take on industry I find particularly resonant. "A mind always employed is always happy," he says. And he never went to bed without reading a good book for at least a half hour. He got up in the morning and took a nice half-hour walk without a book in his hand. In talking to a bereaved friend (who could have been me after a severe loss), he said, "Find solace in the vigor of mind, health of body, talents, habits of business, and a consideration that you have time yet to retrieve everything and a knowledge that the very activity necessary for this is a state of greater happiness than the unoccupied one."

Jefferson's political methods were so contrary to what we do now and so much more enduring. So that his every act would be in the open, he never ran a campaign in which he met privately with advisers. He was always sincere, and he never considered any act of personal gain. He never got together with a hundred others to do anything that would not be honest if he did it acting alone. He felt that if that if it's not right to rob your neighbor, it's not right to get together with your fellow neighbors to do it, or indeed with a population of voters. He resolved when he first entered public life "never to engage while in public office in any kind of enterprise for the improvement of my fortune." Thus, he had nothing to hide. And like the other great personages we know who follow these precepts, he died a happy man and his memory ennobles us.

Jefferson's greatest idea of politics was that governments were the main impediment to paradise on earth, which would be achieved "were it not for misgovernment, and a diversion of all his energies from their proper object, the happiness of man, to the selfish interests of kings, nobles, and priests. If we can prevent the government from wasting the labors of the people, under the pretense of taking care of them, they must become happy." He clearly delineated the differences between the republican and democratic party at that time as the former being concerned about the power of governments to do harm to individuals, and the latter being concerned about the inadequacies of the people to make decisions for themselves. He was thus able to befriend people like Adams and Hamilton despite their love of the English.

It was good to find his discussion of how the senators and representatives wanted to call George Washington "His Highness, G W, President of the US, and Protector of their Liberties." Washington refused and insisted on "president of the US " only. And Jefferson wished that the title Mr. would disappear as well.

A market application: The grander the honorifics applied to a CEO, chairman or government employee, the closer to the dangers of royalist worship of lordly activities and servile acceptance. This is exactly what the humble Jefferson wanted to avoid. "I had rather be shut up in a very modest cottage, with my books, my family, and few old friends, dining on simple bacon, and letting the world roll on as it liked, than to occupy the most splendid post which any human power can give."

King For a Day, by Kim Zussman

On this throne
I thee do sell
Wireless internet
Porta-bowl hell

They sold them off
There was a crash
Bought them low
Then made some cash

Left too much
Upon the table
They were willing
I was not able

Illiquidity-made a splash
Greater gains
Flushed in a flash

OK, now let's move on to the question of when cycles change:

How can you tell when a working system has stopped working, as opposed to
merely hitting a drawdown streak (say) within 95% CI of prediction?  This
might relate to Chair's and Doc's recent work on path to high of a period.
ie, within known properties of a back-tested system, can a certain number of
consecutive failures (or a chain of win/loss much different from predicted)
evidence the end of the cycle?  Would Markov regime switching (whatever that
is) be useful?

Philip J. McDonnell responds:

One approach to this problem is to review a book on Statistical Quality Assurance. Suppose a given part being manufactured has a certain defect rate d. Then the idea is to have lower and sometimes upper confidence bands. If the recent history of defects found exceeds a certain threshold, usually two standard deviations, then the current rate is determined to be "out of norm" and some action is taken. Visually QC/QA charts are often viewed as 2 sigma (Bollinger band type) intervals above and or below a random walk on a chart.

Since the beginning of the Money Ball era in baseball you will often see one of the starting rotation pitchers plotting a pitch by pitch chart in the dugout while his teammate is on the mound. The chart is plotted as a "random" walk with a strike being a plus one (win), and a ball a minus (loss). When the random walk trends toward too many balls, it's time for a relief pitcher. The usual practice is to use something less than a 2 std deviation lower limit, more like one std deviation is the norm.

In the same manner a trader deciding whether to continue to use a system which has recently failed has a subjective judgment to make. If this system is your only one and was developed at great expense and cost in time then you may want to apply a 2 sigma criteria before deciding to eliminate this system. Basically a 2 std deviation threshold says "I am 95% sure that something is wrong". Using a one standard deviation level is really tantamount to saying "probably something is wrong" or "maybe something is wrong". It is essentially a 51% criteria.

10 Variations on Theme of Fibonacci and Markets, by Victor Niederhoffer

Often one is playing a game in play, life or markets where the best or worst score could come at any point . For example, during a week, Monday could be the highest price for the market, or Tuesday or Wed or Thur or Friday. Or you could be playing dice for 8 hours and you wonder exactly how likely are you to be at your maximum of wealth at the end of 4 hours? Or perhaps like Professor Pennington, the tennis playing physicist who studies individual stocks here, you're wondering what happens if you divide the Globex S and P price moves from 1 am to 930 am until 1 am into 51 10 minute intervals, exactly how likely is it to end at a minimum at 930 by chance alone? He observes that it happens fully 18% of all days In the last 7 years and wonders at this seemingly high number. Similar seeming non-randomness has been observed by the Eisenstadt student Mr. Downing who notes that Friday's max and minima in the market occur much more than they should taking account of the drift. Both the Professor and Mr. Downing appeal to simulation to find the answer. They wonder if a closed form solution is readily at hand. If you divide the Globex S and P price moves from 1 am to 930 am until 1 am into >51 10-minute intervals, exactly how likely is it to end at a minimum at 930 by chance alone?

Dr. Castaldo addresses the problem:

"If you divide the Globex S and P price moves from 1 am to 930 am until 1 am into 51 10-minute intervals, exactly how likely is it to end at a minimum at 930 by chance alone?"

Definition. A 'simple random walk' starts at S0 = 0 and increases or decreases by one at each step. The values of an N-step walk can be written S0, S1, ..., SN.
We want to know the probability that S0 is the maximum (which by symmetry and time-reversal is the same as the probability that SN is the minimum).

The answer is given in Feller, Volume 1, 3d edition, on Page 89.

The probability is either Choose(N, N/2) / 2^N or Choose(N, (N+1)/2) / 2^N depending whether N/2 or (N+1)/2 is an integer (that is whichever of these two expressions makes sense). Choose(N, k) is the number of combinations of k objects chosen from N objects. For N=51 we have Choose(51,26)/2^51and this evaluates to 0.110116

Adventures in Retailing Part II: Two Guys in Retail Land, by Ross Miller

My mega-store memories of youth are of the Two Guys from Harrison (later known as Two Guys ) in Union, New Jersey just off infamous Route 22 and down from its even more infamous Flagship--the ship-shaped building that has hosted several different establishments over the years. Two Guys never ventured far from its roots in Harrison, a burg best known to commuters for its woebegone PATH station, but it foreshadowed the future of retailing. The Union Two Guys store was huge and filled with discount merchandise and much of which said Made in Japan when that was still a pejorative term. Many of my cherished toys and my first transistor radio came from that store. When my parents went shopping there, they would leave me in the play area with a handful of nickels and I would immerse myself in the various pinball machines and other forms of electric entertainment until they gathered me back up. Two Guys had everything school supplies, clothing, records, electronics, house wares, jewelry, hats, and in its last days, groceries. Unlike the downtown department stores (Macy s Bamberger s, etc.), which were where the retailing action was in New Jersey during the early 1960s, Two Guys was all on a single sprawling level with seemingly unbounded parking. For entire story, Click here!

A Philosopher Plays the Stock Market, by James Sogi

Everything constantly changes. The illusion of and desire for persistence causes internal dissonance. These two ideas are the basis for many Eastern philosophies. Understanding these two basic conditions is the beginning of the path to enlightenment. In the markets the illusion of persistence and denial of change often result in the buying high or selling low, loss, and the popularity of equity trend following systems. The beginning of the path to market enlightenment came to one poor philosopher when he realized that change was the rule; not persistence. The odds favored reversal on short time frames, and that any particular short term condition was likely to change rather than persist. Having come to that realization, as usual quite late in the cycle, the market promptly turned into a month long trend with hardly a pullback leaving the impoverished acolyte to meditate quietly on the nature of things and their tendency to change rather than persist.

The Buddhists study the Eightfold Path as a guide to enlightenment. Perhaps such a philosophy has lessons for the philosopher who intends to play the stock market.

1. Right Understanding: Understand the nature of change and the cause of unhappiness.
2. Right Thought: Being resolved on renunciation, on freedom from ill will.

3. Right Speech: Don't say bad things.
4. Right Action: Do the right thing.
5. Right Livelihood: Don't let your job prevent pursuing other important things in life.

6. Right Effort: Activate persistence, exert intent for the maintenance, non-confusion, increase, plenitude, development, & culmination of skillful qualities that have arisen: abandon evil, unskillful qualities.
7. Right Mindfulness: Remain focused on mental qualities in & of themselves -- ardent, aware, & mindful -- put away greed & distress.
8. Right Concentration: Equanimity, mindful & fully aware.

The Market, by Peter Gardiner

It is really a funny thing about this year. I had to force myself to maintain a bullish bias. The numbers made me do that. In past years - going back some time - I was far more willing to be short, and even to be short in size - but the one thing I would never do was hold a big short loss, or press a short which was wrong too much. In my trading for a long time, I have avoided any real wipe-outs, and I think done pretty well most years; but this was the first year that I felt that I might have played more aggressively and done much better. I don't know. I feel that I have learned a lot, but that to some extent, there is no end, no finite point to the learning, and the market beast is able to be approached and petted every once in a while, but not really tamed. There is an unfortunate (and I think deadly) tendency among the really quantitatively adept to think that one can control the outcomes by virtue of the knowledge of the quantitative methods, and I think that is a real danger, as you have always counseled.

Digestion, by Nigel Davies

With so much information available these days (not to mention computer analysis of this information), one of the main challenges chess players face is in how to use this information to make better decisions. There are many 'techies' who spend all their time collecting the latest games and have beautifully maintained databases, but when it comes to an actual fight they find themselves bereft of reliable weapons.
I think the issue is one of digestion, a subject that does not seem to be well covered in chess literature. Interestingly there is highly detailed section on eating and other bodily functions in the 'Ethical Writings of Maimonides' (Dover, 1975) which describes the order in which one should eat various foods (and perform other bodily functions) and links good digestive practice to spiritual welfare. It seems that they took such matters quite seriously in ancient times. One wonders if there's something to be learned from this as we attempt stuff ourselves with information. It seems to me that the greatest masters have been highly selective in what they've eaten and always given themselves plenty of time to digest.

The Trend-Following Thread Continues

Ask The Senator, a continuing series

Q: Mr. Kuik and I were having an interesting discussion about whether money management can turn a losing system into a winner. He disagrees. Can it? This relates to discussion about one big win changing results on a system or gambler's money management enabling a profit when odds are against player. -- James Sogi

A: You can turn a losing streak into one making money with money management, but you cannot beat a losing game; it catches up with you. The simplest formula to prove this is the growth rate of casinos in Las Vegas and elsewhere. There it's a losing game with only a small net advantage and if it could be whipped with money management it would have been.

Send queries for the Senator to senator<at>dailyspeculations<dot>com

Philip J. McDonnell on Money Management

Steve Ellison reviewed some of the money management points from Stuart's book which I would like to rebut one by one (so I numbered them) because they appear to be based on several myths and half truths about probability. Here are some key points of Stuart's money management philosophy:

1.Most players are winning at some point and can remain winners by quitting at the right time.

There is no way to determine the right time. There is no guarantee that you will EVER be ahead at a casino. In fact the arc sine law says that a very large percentage of random walks will go above zero and stay above zero or go below zero and stay below zero indefinitely. See Feller for more on this. However, quitting is ALWAYS a superior strategy in a casino - even better is not to start at all.

2. Designate in advance an amount to put at risk and walk away if you lose that amount.

As I discussed in my earlier post today, this strategy will double your probability of being at or below that loss level. However it will neither give you an edge nor take one away. Walking away is your best bet.

3. If you get ahead, do not lose any more than the original amount at risk from that point.

This is a rising trailing stop idea. The same caveats apply here that your probability is going to double - only now you are ratcheting the stop up based on the recent high water mark. Thus the probability that you will get stopped out on a low is undoubtedly greater but I can't quantify.

4. If a streak of three or more is occurring, either bet with the streak or not at all. You can only lose once betting on a streak to continue. You can go bankrupt betting on a streak to reverse.

This is some more silliness. Dice and wheels have no memory. What they did on the last three realizations has nothing to do with the next outcome. You can also go bankrupt betting every time you see a streak of 3 or more.

5. If you win a bet, take the money off the table rather than pressing the bet.

Not betting and betting less in a casino is always a good thing!

Nathan Stewart replies :

Here is the best way to bet against the casino and come out ahead:

Ogle the hot women, throw the dice, have your favorite drink at your side, and relish the craziness and delusions of the crowd. Pretend you are on a hot streak if the feeling strikes you. Bet against the shooter if he gets on your nerves, being loud, fat, and ugly. Perhaps you plunge on a lucky number, or double up after a series of losses, because after all bad luck can only last sooo long.. Mean reversion and trend strategies are equally effective, so jump from one to the other as the urge strikes you.

Quit when either you are no longer having fun or you have lost your allocation for this form of entertainment.

Making A Living, by Victor Niederhoffer

Occasionally at a discussion with the colleagues here, someone will propose a field of inquiry, and the comment will be made "some good research on that could make a good living for someone". This is one of the only fields that study and hard work, and a bit of enumeration, and organization can start a person down the road to a career. There are numerous areas that come to mind. For example, a field of inquiry based on the overnight moves in the various Asian, USA, and European stock markets as a predictor of what's going to happen in the USA. An "Adam Robinson" theoretical approach, might be very good here. Another field of inquiry that could provide numerous employment and wealth enhancement opportunity would be a study of the prices of a commodity over, say, the last 20 days. What is the highest exact price that has been hit over such a period? For example, 1195 rite now in SP futures. What is the lowest price that has been hit? Let us say 1170. Where we are now 1190--we are 80% of the range of 25 above the low and 20% of the range below the high. That's a good thing to study as a predictor I would hypothesize.

John Bollinger reacts:

Yikes! Can it be? H*ll must have frozen over. The chair become a card carrying technician!!! What will be next, MTA membership? The % position in a 20-day range is exactly equal to a 20-day raw Stochastic. It is also the inverse of William's %R. These are time-honored technical tools designed to forecast commodity prices. Time to get up and do the Eagle Rock up and down a aisles--no music required. Holy Guacamole!

Victor Niederhoffer counters:

Yes, indeed, the chair is very naive, but perhaps someone wishing to make a living mite start back testing how the durations from the highs and lows, and the position within the range classified by percentile and recent move mite shape subsequent distributions of price changes for fixed intervals relative to time, and subsequent price moves---- all, of course, as a function of the previous running history of such distributions. If nothing of value turns up, it's an encompassing system like market profiles et al that could foster a series of seminars around the world, books, and newsletters, and money management services (placed of course in a fund of funds to reduce risk). And, that's just for openers.

Nothing Humdrum About Numbers, by Victor Niederhoffer

"I am dating a man who makes his living based on where price is relative to the recent highs and lows".
"But Beth, isn't that a bit---- shall we say ---- humdrum?"
"Oh, not at all. It's what you do with the number, the durations, the look back, the walking forward, the ever-changing momentum cycles within that makes it quite fascinating. And besides he's very good in the martial arts ."

With homage to Maurice Kendall's preface. This quotation appeared in the front of The Advanced Theory of Statistics, Vol. 2, by M.G. Kendall and A. Stuart. He attributed it to K.A.C. Manderville, The Undoing of Lamia Gurdleneck.

"You haven't told me yet," said Lady Nuttal, "what it is your fiance does for a living."

"He's a statistician," replied Lamia, with an annoying sense of being on the defensive. Lady Nuttal was obviously taken aback. It had not occurred to her that statisticians entered into normal social relationships. The species, she would have surmised, was perpetuated in some collateral manner, like mules.

"But Aunt Sara, it's a very interesting profession," said Lamia warmly.

"I don't doubt it," said her aunt, who obviously doubted it very much. "To express anything important in mere figures is so plainly impossible that there must be endless scope for well-paid advice on the how to do it. But don't you think that life with a statistician would be rather, shall we say, humdrum?" Lamia was silent. She felt reluctant to discuss the surprising depth of emotional possibility which she had discovered below Edward's numerical veneer. "It's not the figures themselves," she said finally. "It's what you do with them that matters."

This appeared in O. Henry's, "The Handbook of Hymen."

"Let us sit on this log at the roadside," says I, "and forget about the inhumanity and ribaldry of poets. It is in the glorious columns of ascertained facts and legalized measures that beauty is to be found. In this very log we sit upon, Mrs. Sampson," says I, "is statistics more wonderful than any poem. The rings show it was sixty years old. At the depth of 2000 feet it would become coal in 3000 years. The deepest coal mine in the world is at Killingworth, Kentucky. A box four feet long, three feet wide, and two feet eight inches deep will hold one ton of coal. If an artery is cut, compress it above the wound. A man's leg contains 30 bones. The Tower of London was burned in 1841."

"Go on, Mr. Pratt," says Mrs. Sampson. "Them ideas is so original and soothing. I think statistics are just as lovely as they can be."

Trust, by T. Ryan

At Rick Calls' funeral service at the Unitarian church yesterday there was a period where they had an open mike for people to eulogize or tell their favorite stories. Despite 200+ people in attendance of course people are reticent in public so after a brief moment of awkward silence I stood up and went to the microphone.

In the 1980s I went to Colombia with Rick for Exxon, it was our first trip there and we didn't really know what the hell we were doing. We arrived in Barranquilla late in the evening, and by the time we got our bags and a taxi into town and checked in to the famous Old Colonial Hotel from the Marquez novels it was after 11 and no food to be had. But with our biological clocks it was only 8 PM so Rick decided that we should go for a walk. Now Rick was a tall man, and he could walk quite "briskly" so he grabs his pipe and out the front door he goes. The security guards being caught off guard began gesticulating wildly to me and wanted me to go and retrieve him but when I caught up with Rick and mentioned this fact he shrugged it off and continued on so I followed in tow. After a few blocks I began to notice some things, the beautiful architecture, the lush vegetation, the scent of gardenias, the full moon, it was a very beautiful night which I can still remember quite clearly. Rick was a believer in the observational method of science and after a few more blocks we both began to notice that there was nobody about except us....and a few people dressed in olive drab with assault rifles slung at their shoulders. I mentioned this observation to Rick and he nodded and said he also thought it quite odd and that it looked as if we would not find a restaurant open. But in any case after being cooped up for so long on the plane he was intent on stretching the legs a bit more so we continued on for awhile until finally we arrived at the old town plaza near the cathedral and one of the soldiers approached us and spoke to us in English and told us that martial law had been declared in the city as of 11PM. So Rick chatted with the fellow a bit. Now if it was me alone, or if I had been with anyone else, I would have been in jail that night or worse. But Rick had such a benevolent, charming demeanor that before long we were given a history of the plaza, and the buildings all around. And then we simply headed back to the El Prado Hotel. The reason I tell this story is that Rick was among the most trusting people I know. When I speak of trust it is not in the sense of etiquette, but rather that he had a deep personal, spiritual trust in life. He would always say to me that life is uncertain, messy at times, and yes, it can be difficult, but you have to trust in the process of life in order to live a good life. And I will always be grateful for that lesson.

Deconstructing CNBC

Pamela van Giessen asks: "Just out of curiosity -- why do specs watch CNBC? Everyone says just about everything on the channel is worthless and no one I know admits to taking anything said on CNBC as valuable, helpful, or even interesting, yet all you trader types seem almost glued to this channel. Why?"

Philip J. McDonnell responds: "Most of what you hear on CNBC is not to be taken at face value. For me that's not the point. It often represents the sudden nearly instantaneous dissemination of news to millions of viewers. As such it represents an impulse which can move markets. The value for a spec is to understand why the market has suddenly moved and further to understand if the news is "persistent." The latter is, of course, a value judgment.

"Assuming one has made a judgment that the "news" is over and done then there is no persistence to it - it has no predictive value going forward. In that case the news can be expected to do a LoBagola. If it was a big drop then the day trader play is for a quick return to the original level. If my judgment is for a persistent move and that the news implies future consequences (similar news in the future) then I often step aside. The news is usually out and probably discounted by the floor traders.

"Lastly I like to keep abreast of the spins, memes, ideas du jour and other flimsy excuses proffered by the sell side to explain stock market events. They are all presented uncritically on CNBC s though they were brought down from Mt. Sinai. What I look for is not the literal statements but rather the motivations behind the spinners. That's where the value is."

Oil and S&P, by Russ Sears

May I suggest numbers on the table: 4 day moving average of change in oil versus 4 day average change in S&P has a - 30% correlation on a concurrent bias and a negative 41% correlation for 4 day lag for oil predicting S&P for 59 non overlapping 4 day periods since beginning of the year. While on concurrent one day basis for the year there has been only negative 17% correlation. Granted not exactly how the media spins this and perhaps I am doing a little data mining, because graphing oil versus S&P, it mythically appears to me to be a mirror symmetry with a few days lag. Even though I enjoy dissing the media, what numbers do you have that implies that both of us are wrong?

It's Just a Game: Part 1, by Tim Melvin

At the Naval Academy this week, as has been the case in 104 previous years throughout one of the greater rivalries in all of sports, the primary focus is on beating Army. But a palpable sense of pause has grabbed the coaches and players, who are thinking often these days about J.P., the young man who was all about sacrifice, the young warrior who died doing exactly what he had set out to do.

When word came three weeks ago that James Blecksmith, a 2003 graduate and second lieutenant in the Marines, had been gunned down on Veterans Day in Iraq by a sniper during the takeover of Fallujah, football got kicked down the priority list. One of their heroes was gone. And the Midshipmen, especially the seniors who soon will embark on obligatory five-year commissions, were left with a taste of what could await them in a world considerably more perilous than the day they arrived in Annapolis four years ago. "When you're here for four years, your mind-set about life in general changes," Jenkins said. "The longer you're here, the more you start to grasp what your job is going to be. You grow up fast."

The reality checks are unrelenting. Two weeks ago, the seniors, who committed to their military duties two years ago and will graduate in May, chose their service assignments. Smith will train to become a fighter pilot, and could be put into action within two years. Jenkins will be a surface warfare officer. He could be exposed to battle much sooner. They harbor no delusions about their possible fate. Nothing drove that realization home more sharply than hearing about Blecksmith, the strapping, 6-foot-4, Southern California native with the strong arm who passed up a chance to play quarterback in the Pacific-10 Conference because he was determined to become a Marine Corps officer

It's Just a Game: Part 2, by Tim Melvin

Army-Navy. If you served in either, or simply live in Annapolis or near West Point, the words themselves are good for a few extra bips of blood pressure. One forgets at times that these young men aren't looking forward to NFL tryouts and new careers...they are going on to ships, into tanks, troop carriers submarines, fighter cockpits. No attaché cases and corner office prospects.... rifles and sand dunes will be much more the order of the day for the young men who will face off Saturday on the Philadelphia gridiron (am I the only one who misses the VET? I know it was a crappy stadium at the end but the place had attitude to spare). They will be playing for the commander in chief's trophy, bragging rights, the honor and glory of their respective institution. However, a few short months from now the sacked army quarterback( I am a Navy fan so it's army that has to be sacked in my example) may well be calling the linebacker who slammed him to the turf of Lincoln field for fire support or air strikes in the sands of Iraq.

I know I've written something similar to this on previous occasions, and I will again I'm sure next year when the town is hung with blue and gold n star flags and Tecumseh dons his annual war paint in anticipation of the big game. These kids are the best of the best in athletics, scholastics, attitude and achievement. They could have gone anywhere, probably on a full ride. Indeed Lt. Blecksmith, the academy grad who was recently killed in Iraq had an absolute gun for an arm and could EASILY throw the ball 80 yards--an Elway type of arm. He could have played at any pass-oriented big college program. He came to the USNA and played mostly special teams, a little safety before finally lettering as a receiver. The mids play an option oriented attack and had no use for a classic passer. But Lt. Blecksmith wanted to be an officer in the United States Marine Corp and serve his country. Goodbye NFL, Hello discipline, duty and honor and finally Hello folded tear stained flag. These young men and women endure a rigorous schedule, an intense academic program and those who don the school uniform for football, basketball or any sport, are not exempted from anything. They have to fit it in around the regular schedule. Service is not an illusion. Volunteering is not mandatory, but every year back in the days I helped run Special Olympics in Anne Arundel county, I always had over 100 mid volunteers visit my sister on one of her ER shifts the young man or woman, following her around with a clipboard, fetching drinks, ice, bedpans whatever she or the patient needs, is an academy student volunteering what little free time he or she has. They are smart, talented good kids. They are here because they believe in their country and chose to serve.

Yup, it's just a game. I hope it's not even a good close game and that Navy beats the tar-snot out of Army again this year (this of course, unless you are Mr. Earle or one of the other West Pointers on the list, or Mr Lackey of the tank brigade makes it a damn good game). The President will be watching from the stands, I will be from the confines of some blue and gold be-draped adult beverage establishment, and millions of servicemen and women from all over the world a carrier in the China Sea, a mess tent in Iraq, a shortwave in the mountains of Afghanistan will be tuning in to cheer on the teams of their choice. There are other big games Harvard-Yale was talked about on the list. Most of those playing go on to I-banks, brokerages, and teaching positions. USC-UCLA--most are headed for the NFL. Florida-Florida state--again the ones who don't go back to Raiford at season's end are headed for the big bucks of pro ball. If you tune in Saturday and if you like good solid football played by true scholar athletes as I hope you do, keep in mind that every single player on both sides of the ball is going off to serve in the Armed Forces of a nation at war and that they do so of their own choosing, to serve their country and preserve the spirit and idea of democracy and freedom. Just a game. Oh yeah GO NAVY

See our Monthly Buyback Study Update

Companies announcing buybacks so far in 2004 have outperformed the S&P 500 by 3 percentage points, while stocks announcing buybacks in 2002 and 2003 have outperformed the S&P by 15.9 percentage points and 9.4 percentage points since inception respectively.

But the Professor cautions they outperformed the equal-weighted S&P 500 by much less

Bankruptcies, by Allan G.

I picked up up my FT today to see the top story on a Singapore oil trading scandal and I could not help but think of Nick Leeson from the Barings catastrophe 1994-95. In this case, a company has gone bankrupt shorting oil. I would like to quantify the after effects along with other high profile bankruptcy events from 1995 to 2002. On the surface it would appear that other bankruptcies lead to prolonged moves in the right direction, but just too late for the unfortunate party, but just in time for those specs willing to take on the losing position. If so, this oil decline may just be getting going in earnest.

Tales of Bankruptcy, by T.C.

Well, metalgeselshaft was long a ton of front to backs on the Merc, and short the contango to a bunch of heatoil jobbers otc. The NYMEX locals wound up gunning for the front month positions, and eventually the mismatch twixt mg owing margin to NYMEX, and not being able to collect margin from otc counterparties bankrupted 'em. Two months after the unwind, [a certain white shoe was the adviser on the unwind AND the counterparty on the unwind,], heat went from 1.5 ct/mo carry to an 11 cent inverse.

Similar story for the collapse of Kloppers [another? German commodity company]. On the other hand, De'levera blowing up copper, and the Sumitomo copper scandal a few years later, did not result in huge reversals in copper. NB: De'levera, once just a guys name, is now a Spanish verb meaning "to flip a sign in a lotus 123 spreadsheet so you think you're long when you were really short"