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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January 2005 Posts

Homeostasis, by Victor Niederhoffer

The human body has a million mechanisms to insure homeostasis to ensure that the least amount of energy is dissipated. An extreme of heat, for example could lead to death. The same thing's true for the market. When it goes up or down too much, bonuses and restaurants seem gloomy. Even more important, the base for buying votes becomes smaller, and the public's desire to generate commissions becomes can dissipate. Worst of all, the public might retreat from its necessary tendency to lose much more than it should.

The market's action this last week was a beautiful case study in homeostasis. The entire week’s range was from 1178 to 1164.50, a measly 1%. But yet, at 3 p.m. on Friday, Jan. 28, the SP was at 1167; at 4 15 p.m., it was at1175. Thus, in the last half-hour it managed to cover 57% of its total range for the week, thereby making it impossible for anyone with the least amount of weakness to make a profit, giving the market makers a certain profit, and in genera , maintaining its homeostatic beauty.

Spec Duo Question of the week: What two great operators, completely at opposite sides of the political and social spectrum, are united by the wisdom of invisible natural forces to start selling the market with abandon every 3 o’clock to express their bearish views, arrived at from completely opposite viewpoints, at the terrible expense of the Duo?

New! Dept. of Personal Finance: Mortgages

(Editor's note: Since our contributors and readers possess far more business acumen than the totality of "personal finance"  advice populating bookstore shelves and newspaper columns, we were happy to see our Daily Spec dinner party conversation forum expand to take on questions of  the nitty-gritty and day-to-day, and will present highlights here from time to time.)

Q. I am in the process of refinancing my mortgage for a major home remodeling project. It was suggested (with a wink and nod) that it would be wise to take a fixed rate conventional (5 3/8) instead of another VA ARM (currently at 4 1/4, 2% over 1 year constant maturity, +/- 1% per year max adjustment, 11% cap). Comments would be greatly appreciated. -- John Lamberg

Read responses

Forwarded by Steve Wisdom
More Practical Speculation, by Murray Becotte

(January 31, 2005) Last week I looked at some conventional investing wisdom that Victor Niederhoffer declares in his book, "Practical Speculation," does not stand up to scientific analysis. (read the article..)

Murray Becotte is a chartered accountant and CFP working as an investment adviser with BMO Nesbitt Burns in Thunder Bay.

A Great Day in Iraq, by Dick Sears

Some 60% of the Iraqi electorate risked their lives for freedom, democracy and self-rule. For me there are two obvious conclusions to be drawn:

1. GWB is one of our great Presidents. With vision, principle, and persistence, ignoring opinion polls and doing what he believed right, he has created two democracies in the Arab world. More will surely follow, and Americans are safer today because of it.

2. The MSM (mainstream media) gave us a false picture of what was going on in Iraq. They showed us only the imperfections and ignored the real story. Iraqis have proven today that they want and are ready for democracy. The MSM should be ashamed of themselves.

Read Dick Sears' Weekly Commentary

Read an eyewitness account of the voting preparations in Iraq.

James Sogi adds:

Vanity Fair magazine glamorizes Spitzer in this month's issue and reports him as feared on Wall Street. First article in New Yorker 12/6/04 issue is on drop in dollar. Anyone who has dealt with the media knows of the tendency not to get the story right. They use available facts to fill in their agenda. I use written statements or a record statement to avoid being misquoting and keep a record for later rebuttal when dealing with the media (unless you know they are on your side). I agree with Dick Sears' note in his Iraq post that MSM (mainstream media) misled us about Iraq. Journalism has degenerated into one journalist interviewing another journalist and calling it news or analysis. Journalism does seek to publish what they believe people want to read. Thus only use of news seems to be as meta news, reflecting the reflection of popular views.

Playing in Your Own Garden, by the Grandmaster

One memorable comment on one of the Spassky - Petrosian games from their match in 1966 was that "Spassky had invited Petrosian to play in the garden in which he grew up." It's always good to stick to the positions you know best, especially in big games. Yet many players, once they enjoy some success, make the mistake of assuming that their skills are transferable to other, sometimes quite unrelated fields.

So if a player who on his first move plays his queen's pawn forward two squares cannot easily switch to a first move advance of his king's pawn, can a computer entrepreneur and value investor have their expertise transferred to currency valuation? Personally speaking I have no idea what the dollar is going to do, but I know enough of human behavior to suspect that the perceived understanding of Messrs Gates and Buffett is being overestimated.

It seems to me that there might be some money to be made in fading big names who start playing away from their own back garden. But where is there a nice testing ground?

Writing It Down: A Low-Tech Technique, by the Grandmaster

A recent development in my trading kit has been the introduction of a card index file containing my different trades, categorized according to theme. Why such an archaic lack of technology? I'm not sure, it just 'feels' right. Certainly the process of writing the trades out and filing them etches the ideas more deeply in my mind, though perhaps there's also an element of nostalgia.

Two memories come to mind from my days of trekking across Europe to chess tournaments. One of them was seeing the diminutive but solidly built Grandmaster Lev Gutman (also a former 'free fight' champion of Riga) carrying two heavily crammed cases with Korchnoi's card index (Gutman was one of Korchnoi's trainers at the time). The other is that of Bronstein advising me to buy two sets of Informators, cut out the games and create my own card index.

With chess it just so happened that the computer intervened, and a card index of several million games would in any case be rather unmanageable. But as I don't have a million trades it seems at least reasonable to go back down memory lane.

The S&P as a Wedge, by Victor Niederhoffer

A wedge is a machine that may be thought of as an inclined plane standing on its narrow end. Like an inclined plane, it make work easier. But instead of being stationary a wedge reduces the force required to move through an object.

The inclined plane works because it splits the force of gravity into a horizontal and a diagonal component. It's only the sloping part parallel to the plane that has to be overcome. The wedge moves through an object and separates the output force into these same two components. The required force (or mechanical advantage) varies directly with the length of the sloping side and inversely with the thickness of the big end.

While I knew that the wedge was used for joining, splitting, and cutting in such common tools as the fork, knife, saw blade, chisel, file and ax, I was surprised to learn that almost all power tools – such as the lathe, miller, shaper, drill and chain saw -- receive their mechanical advantage from the wedge.

The wide range of applications led me to an initial study of the influence of one market in holding, splitting and cutting through two other markets. The force applied to the wedge corresponds to the magnitude of the move in one market, like stocks, and its market value And I envisioned the cutting angle it makes with two markets, such as bonds and the dollar, as the coterminous move in the other two markets. I envisioned the output force as the subsequent move in the two markets.

I thought it best to start with three markets commonly working with and against each other: stocks, bonds and the euro. For simplification I divided the moves in each market into three equal categories: large decline, medium move, large rise.

Let’s start with coterminous one-day moves -- a useful descriptive base, but like most things fed to us, useless for prediction unless you’re a triples trader or related risk-reducer destined to be ground into oblivion.

The results for one-day moves in S&P over the past five years are as follows. The number of coterminous moves the same day is listed and then the expected move the next day for S&P is given in parentheses.

MarketMoveMarketMoveMarketMove# of ObsS&P Point Chg
Next Day

For example, there were 56 occasions when in the same single day, the S&P, bonds and the euro each declined. The average S&P move the next day was a 4-point decline.

Several interesting findings emerge from this study of the wedging effect of the S&P on itself as it cuts through the bonds and euro. To start with, when the S&P and bonds decline, it is about 3 to 2 that the euro will decline in that period. However, when the S&P declines and bonds rise, it is almost 3 to 1 that the euro will have risen during that period. Thus, when the S&P declines, the euro follows the bonds.

When the S&P rises, and bonds decline, it's 3 to 1 that the euro will have declined. But when S&P and bonds both rise, it’s less than 2 to 1 that the euro will have declined.

Thus, when the S&P rises, the euro tends to decline in either case but more so when the bonds have declined.

The expectations the next day speak for themselves, with the moves the day after those rare occurrences when all three market decline -- something that happens less than once a month -- being something that one should always watch out for.

NB: When the euro goes from 120 to 125, that is an increase in the value of the euro against the dollar.

James Sogi responds:

In response to the Chair's S&P Wedge 1/29 article, recall his knot article some months back. Look at SP, Bond and Euro as a rope with these three strands twisting around each other, creating a strong rope, but braided about each other in predictable ways that avoid kinks and knots as the market system provides the lubrication for smooth running.. Women know about braiding hair. Summer camp kids know about braiding lanyards with three strands. Sailors know about braiding line. The individual strands twist in the opposite direction of the lay of the braid for strength. A trader who knew the pattern with these three, if the pattern could be deciphered and predicted, might have a strong line to pull a full boat. Captain Chair points a new course. Avast, ye mateys. Aaaaayyyy. Put your backs into it..

Moon-Gazing with Professor Pennington

Recently the Spec-List started pondering the moon, and whether it affects markets, and then it spilled over into the Hebrew calendar, bass fishing, and other subjects. Even outside of the Spec-List there have been speculations that markets go up and down with the phases of the moon. Some commodity trading books have proposed there is lunar cyclicality in soybean futures, silver, and other things. Here I only test the S&P. Read on

Cad Pi, by Kim Zussman

Did you say bye?
Were you a spy?
Was it a lie?

How does pi figure into it all? Perhaps the problem is that everything important to us is a form of circle. The four natural intimates, as well as the path from infantile toothlessness, baldness, and diapers to aged return to same. The outline of the sun, the planets, and approximately their orbits (ellipses) and movements of the stars and galaxies. What about cipher zero, of prime importance to the community of compounders? Even space-time itself is curved. Is strict linearity artifice of human limitation, and only true in nature over the short intervals we relate to? Newtonian linear mechanics dissolves in the big/fast universe of relativity and the microcosm of particles.

There's Euler's equation: e^(pi*i)+1=0 which relates the important constants. What if our ancestors decided to quantify instead of by counting fingers, based on the ratio of a circle's circumference to diameter-base pi?

e we don't need (except on this list), since if we want to analyze with exponents: log(pi)[pi^x]=x

Complex numbers arise from solutions to quadratics, yet where besides within my brokerage statements is there a need for numbers which multiply themselves and still be negative?

Here are cosmic spheroids , and circular positions of bull and bear markets.

The Common Law, by James Sogi

The common law handed down from England 1000 years ago forms the basis for much of American jurisprudence. The common law takes prior experience and judgment as a basis to judge the present. The common law from prior cases that is "on all fours" has the facts, the law, the issue and the outcome all exactly the same as the present situation. More often than not, however, the present situation does not quite match the past, or any situation that has ever arisen in the past. This is because we live in history, and it constantly unfolds in unique ways. The law then looks to broader principles to judge the specific case at hand and judgment is rendered.

Take for instance the 16 out of 18 down closes. What judgment is proper when the situation is new, different than what has happened before. The Founding Fathers broke new ground in establishing the rules for the new country and looked to the broadest natural principles of natural law, and adopted the basic natural inalienable rights of man as the general principles upon which to base the new nation. Things looked pretty bad back then. They were hanged, and the country was bankrupt. What might a trader do when faced with an unprecedented run of down closes. I say look at the broadest principles of the market, the economy, and mankind, that the optimists will triumph and that the ingenuity of man will prevail as it has for one million years, for the last 20,000 years, the last 1000 years, and the last 100, and the last 10.

Emitte lucem et veritatem - Send out light and truth

The Assistant Webmaster adds: Speaking of light and truth, a banner sometimes seen at Yale ("Lux et Veritas") vs Harvard ("Veritas") football games: "Your Veritas Sux if it Ain't Got That Lux"

The Bluff Charge, by Philip J. McDonnell

Our family made the trek to Glacier National Park a few years back. With my wife, son of 10 and daughter age 7 we headed out on a couple mile hike to a promised lake on the map. Glacier is one of the most picturesque parks in the national system. If you get the chance do visit. On our trek we were treated to a completely unspoiled view of glacier-carved scenery. With the exception of the trail itself there was no hint of humanity.

We left from the trail head right outside our lodge parking lot. We were all very careful to note the bear safety warnings. In particular it was noted that the valley population of some 400 bears was drawn to discarded containers of fruit juices. In August the main staple of Glacier bears is huckleberries as they prepare for winter hibernation.

We began our trek out to the lake being mindful to make ample use of our walking sticks with attached jingle bells to warn off the bears. The stratagem worked because we encountered no bears on our hike to the lake and were able to fully enjoy the magnificent scenery unmolested. Our kids had their treats including berry juice at the lake as we all enjoyed the glassy surface of the smallish lake. Although we were a bit disappointed not to encounter the wonderful white bearded mountain goats which also inhabit this area we were grateful not to have encountered a bear. We dutifully packed up out litter to carry back to the lodge.

At each turn on the return trail we were apprehensive. It was now late in the day and bears are known to come out about 4:30 p.m. or so. Of course we were carrying fruit juice laden garbage. Thus the chances of an encounter were rising. Our walking stick bells kept tinkling. As we approached the trailhead I checked my watch. It was 4:55 p.m. A few minutes later we were safely home without incident.

That night we went to the campfire where travelers could share stories. The park rangers explained that the mother bears were especially aggressive this time of year in defense of their young. They still remember when the gray wolf stalked their young in great numbers although now diminished. We learned that bears run 30 miles an hours and can easily run down any human. Also related was the fact that bears can't see very well but have an amazing sense of smell which allows them to follow the scent of berries for miles.

As the ranger talk ended a white bearded old man stood up to speak. He had an amazing resemblance to one of the white haired, white bearded old mountain goats. His wife had the appearance of a salt-and-pepper gray wolf, she was apparently 15 to 20 years younger.

The old man began to relate that he and his wife had returned to the trail head at exactly 5 pm. About a quarter of a mile from the trailhead they had a mother bear charge his wife at full speed. He immediately interposed his body in front of his wife's. (What was he thinking?!?) The bear continued to close until it was but four feet away whereupon it sniffed and grunted and proceeded to turn away. His theory was that it was a mother bear trying to protect her cub from the supposed threat of a wolf (the gray haired wife). He called it a "bluff charge". No cub was seen. My take on these events is that the old goat confused the bear enough so that it saw no threat and determined he certainly didn't smell like a wolf.

The thought has always lingered that our very careful expedition to the lake with returned fruit juice litter as recommended had somehow attracted the bear back to the trailhead area and thus precipitated the preceding events. The timing of our passage at 4:55 and the bluff charge incident at 5:00 at the same location seems more than coincidental. No one will ever know.

In this context it seems a trader nicknamed "The Flipper" uses huge orders to bluff his opponents into the wrong moves. This strategy is quite common, in my experience, and certainly not restricted to this individual. Essentially the idea is to exploit day traders who use stop losses. He will identify a weak bid or ask and cross with it. If it were a bid he would then offer a bid a tick below and again ask at the former bid. Thus a day trader who likes to maintain tight stops will be forced to liquidate a tick below his price of a few minutes before. Essentially he has been bluffed into a small loss.

I have seen this on the QQQ as well as numerous options markets. An option quote might show something like 8000 options bid and asked. So I put in my order at the bid knowing that there are 8000 options ahead. Somehow I find that I get it before the end of the day. The other 8000 bid was a bluff bid which the buyer was willing to cancel to allow me in. The underlying stock did not move to accommodate me. The bluff order simply disappeared.

Another common bluff scenario is when I sell an option at, say, .50. The previous quote had been .25 to .50 (me). Immediately after buying my options at .50 the bluffer moves the bid to .55 and the ask to say .65. If it occurs in the absence of any significant move in the underlying it is undoubtedly a deception. He hopes to panic me into a mere .05 loss to bail out of my position. I never fall for that ruse. That is one of the fundamental advantages of the options markets. You can easily compare your option to the other options and the underlying to ascertain if you are the goat, the wolf or the bear in this scenario.

Larry Williams adds:

I lived next to Glacier Park for 15 years and know it as well as some of my charts. Yes, bears do a bluff charge and, since their vision is a little blurry if you can make yourself look real big they will bluff charge and leave.

That has been done by holding a bike in front of you, stretching out a tarp over your outstretched arms, etc.

The bears of both Glacier and Yellowstone seem to have a callous disregard for us locals. I do not know of a single local resident being killed by a bear.

At the end of each season a T-shirt is printed up with the count, highest I saw was Bears 6, tourists 0.

Locals know the rules better than those who just come to play.

Sounds like our business.

The Bluff Charge, by George Zachar

In bondland, we used to call this a "facial," as in, "in your face."

Someone lifting an offer and then bidding higher, or hitting a bid and then offering lower, was thought to be attempting to humiliate/demoralize/intimidate his counter-party.

I never observed a case where the tactic worked.

Interestingly, it was possible "in the day" to go back over one's trades and sometimes learn who the counterparty was for a particular transaction.

So we got to learn who the jerks were before the annual rounds of Christmas parties.

And, going forward, we'd have a better grasp of who was doing what in the markets.

For the Record, from GM Nigel

Please note that I come from an environment in which a player's results and games are a matter of public record and can be scrutinized by all. There is no need for 'reputations', hushed tones or anything else because it's all there in front of you. This may account for our difference in attitude.

Also, please note that many of the Senator's trades have actually been posted here in some detail and are covered in his books and seminars. So you do have access to them and can take part or all thereof. And whether the fawning directed towards myself (which in the chess world it is) or anyone else, I do still need that bucket.

Dulcinea, by Victor Niederhoffer

A question was raised concerning the accuracy of the predictions of one of our members recently. I am accustomed to being pilloried by the trend followers and chartists as the poster boy for how not to run a fund, one who can't make a living trading and must turn to writing for a living. One who has written "the worst book in the world" with no practical wisdom in it beyond what could be found in Barron's. Thus, when one of ours was accused of being almost 1/10 as prone to losses, for just one brief interval, as we are at all times, I immediately leapt to his defense in words similar to those of Don Quixote to the merchants of Toledo.

From: Chapter IV, "Of What Befell Our Knight After He Had Sallied From The Inn," Don Quixote

Having proceeded about two miles, Don Quixote discovered a company of people who, as it appeared, were merchants of Toledo, going to buy silks in Murcia. There were six in number; they carried umbrellas, and were attended by four servants on horseback and three muleteers on foot. Scarcely had Don Quixote espied them when he imagined it must be some new adventure; and to imitate as nearly as possible what he had read in his books, as he fancied this to be cut out on purpose for him to achieve, with a graceful deportment and intrepid air he settled himself firmly in his stirrups, grasped his lance, covered his breast with his target and, posting himself in the midst of the highway, awaited the approach of those whom he already judged to be knights-errant; and when they come so near as to be seen and heard, he raised his voice, and with an arrogant tone, cried out, "Let the whole world stand, if the whole world does not confess that there is not in the whole world a damsel more beautiful than the Empress of La Mancha, the peerless Dulcinea del Toboso!"

The merchants stopped at the sound of these words, and also to behold the strange figure of him who pronounced them; and both by the one and the other they perceived the madness of the speaker; but they were disposed to stay and see what this confession meant which he required; and therefore one of them, who was somewhat of a wag, but withal very discreet, said to him,

"Signor cavalier, we do not know who this good lady you mention may be; let us but see her, and if she be really so beautiful as you intimate, we will, with all our hearts, and without any constraint, make the confession you demand of us."

"Should I show her to you," replied Don Quixote, "where would be the merit of confessing a truth so manifest? It is essential that, without seeing her, you believe, confess, affirm, swear, and maintain it; and if not, I challenge you all to battle, proud and monstrous as you are; and whether you come on one by one (as the practice of the laws of chivalry requires), or all together, as is the custom and wicked practice of those of your stamp, here I wait for you, confiding in the justice of my cause."

"Signor cavalier," replied the merchant, "I beseech your worship, in the name of all the princes here present, that we may not lay a burden upon our consciences by confessing a thing we never saw or heard, and especially being so much to the prejudice of the empresses and queens of Alcarria and Estremadura, that your worship would be pleased to show us some picture of this lady, though it be no bigger than a barleycorn, for we shall guess at the clue by the thread, and therewith we shall rest satisfied and safe, and your worship contented and pleased. Nay, I verily believe we are so far inclined to your side that, although her picture should represent her squinting with one eye and distilling vermillion and brimstone from the other, notwithstanding all this, to oblige you, we will say whatever you please in her favour."

"There distils not, base scoundrels!" answered Don Quixote, burning with rage, "There distils not from her what you say, but rather ambergris and civet among cotton; neither doth she squint, nor is she hunchbacked but as straight as a spindle of Guadarrama; but you shall pay for the horrid blasphemy you have uttered against so transcendent a beauty!" So saying, with his lance couched he ran at him who had spoken with so much fury and rage that, if good fortune had not so ordered that Rozinante stumbled and fell in the midst of his career, it had gone hard with the rash merchant.

Let's Get Away from the Opening, by GM Nigel

I've lost count of the number of times I've heard people blame 'lack of opening knowledge' for an untoward result in one of their games. But it's a convenient get out clause, a way of taking the responsibility for a loss away and putting it 'lack of time for study' or some such thing. What has always happened is that they made some sort of tactical or strategic error in or just after the opening and decided that this could have been avoided by 'knowing' a series of moves. But the real responsibility lies in their overall playing strength; tactical ability, positional 'feel' and the sense for 'game playing', which is never touched upon in the supposedly worthy works of certain pretentious chess authors.

The best recommendation I can give is to repeat Frank Marshall's 'game a day' suggestion and ta

Great Moments in Financial Journalism, offered by Steve Wisdom

U.S. Dollar Set to Gain Versus Canadian Dollar, Chart Indicates

Jan. 27 (Bloomberg) -- The U.S. dollar is set to rise to the highest in more than three months against the Canadian dollar, according to charts traders sometimes use to predict moves in exchange rates.

The U.S. currency may gain from C$1.2375 AT 12:22 p.m. in New York to as high as C$1.2590. Such a level would represent a 38.2 percent reversal of the U.S. currency's drop from its May 13 high of C$1.3988 to a 12-year low C$1.1718 on Nov. 26, according to a series of numbers known as the Fibonacci sequence.

Other key Fibonacci levels are 76.4 percent, 50 percent, 38.2 percent and 23.6 percent, breaks of which suggest a currency's gains or declines will extend.

``We're potentially in the third-wave of the dollar's recovery,'' according to a separate technical chart called the Elliott Wave, said Taso Anastasiou, a technical analyst at UBS AG in London.

The Elliott Wave chart, which tries to predict future price movements in a security by dividing past movements into five sections, or waves, and calculating changes in value, suggests the U.S. currency is in the third wave of a rally versus the Canadian dollar, said Anastasiou.

The first, third and fifth sections of the five-wave move are ``bullish'' moves, with the second and fourth waves being ``corrective'' changes. The U.S. dollar is in the third wave, of the sequence, which began from its 12-year low of C$1.1718, reached Nov. 26.

Rip Currents, by James Sogi

A rip current is a strong current in the ocean that can sweep a swimmer out to sea. Never fight it or attempt to swim straight against it to avoid exhaustion, rather swim diagonally across it and with it thus crossing it until reaching a point where the current is not so strong and thence to a position of safety. I would never before believed that surfing would teach lessons for a lifetime of speculation, but there it is. The market is fighting a strong current and attempting to swim diagonally across the current until a place or time that the current abates. Of course many have been drowned when swept out to to sea or under the water and drowning after panicking or becoming exhausted. There are many cross currents and dangerous eddies. My friend had his surf board swept out to sea gone forever yesterday in large surf, and he barely made it in to shore swimming against the rip current.

Mistress in Market Abuse, Offered by James Lackey

from Mensight Magazine:

"The recent article on husband abuse highlighted the emotional and psychological torment many abused men endure from their intimate partners.

"Many abused men hold out faint hope that their situation will eventually change for the better without involving outside help for their partner or themselves. Some who are even physically abused opt to not involve the authorities because they fear that they will not be believed and that the system will take the side of their abusive spouse who will portray herself as the victim and them as the abusive villain in the relationship."

From a chess site:

"Once the royal game of chess was a courteous affair. Because it was a rare possibility for contact between unmarried women and men, romantic notions developed. An idealised version portrays the woman as the superior player. First she beats the man in an encounter at the board. Then she consoles him by giving him her favours."

GM Nigel offers a Game for the Boys

Some brief notes. She was very upset after the game.. Nigel

Chiburdanidze,M - Davies,N
Calcutta, 1990

1.e4 d6 2.f4 g6 3.Nf3 Bg7 4.g3 e5 5.fxe5 dxe5 6.Bc4 Attempted abuse of my f7 square. 6...Nc6 7.0-0 Nf6 8.d3 0-0 9.Kg2 Qd6 10.Bd2 Bg4 11.h3 Bxf3+ 12.Rxf3 Nd4 13.Rf2 b5 14.Bb3 a5 15.c4 b4 The bishop on b3 is not a pretty sight; not to mention those weaknesses on the d-file.. 16.Bg5 Nd7 17.Nd2 Nc5 18.Nf3 Nde6 19.Bc2 Nxg5 20.Nxg5 Bh6 21.Nf3 Be3 22.Rf1 Bd4 23.Rb1 f6 24.Qd2 Kg7 Black can improve his position at leisure. 25.Bd1 Rab8 26.Be2 a4 27.Qc1 Rb6 28.Nh2 Qe7 29.Nf3 Rd8 30.Ne1 b3 31.a3 Rbd6 32.Qd2 Qd7 33.Kh2? Nxe4 If White takes the knight then 34...Bg1+ wins the queen on d2. 0-1

Big, Small and Shaky, by GM Nigel

If your opponent is overweight (I am currently attempting to escape this category), he's likely to feel confined in passive positions and will try to take the initiative. So try to take the initiative yourself and make him defend.

If your opponent is small and writes down the moves very neatly, he may be more comfortable in neat and well controlled positions. Try to create a little confusion by snatching a hot pawn or sacrificing one yourself.

If your opponent shakes his leg(s) whilst he's playing he's probably an adrenaline junky who's calculating a lot but 'feeling' very little. Try to create a position which is devoid of forcing moves; his attempts to calculate will bring him into time trouble, at which point you can move slowly and let him stew in his own juice.

Talk Like a Stock Market Operator
Phrase of the Day: "A Trifling Commission"

One-eighth of one percent equals $12.50 on a transactions in a hundred shares of stock worth $10,000. Yet there are students of Wall Street who charge to this trifling commission all the losses of speculation. If, say these theorists, the speculator neither wins nor loses on his investments he will be a bankrupt after a brief experience, because all his money will be employed in paying commissions.  ("Wall Street," Munsey's Magazine, January 1894) For more on how to talk like a market operator

Seconds, by Bo

There's been a go-around on education among us recently. Today at the Blythe Food Kitchen, while scarfing seconds of a free 5-course meal, a red-bearded man next to me shifted and whispered, I know that new old lady serving us. And she's staring hard like she knows me too. The fellow across the table replied, I know, man. I seen her too but can't place it. They left, and a third street person marched to the new gray-haired server. I recognize you from somewhere but don't know how.

It was Appleby grade school here in town, she smiled.

That was thirty years ago! he gasped.

What's your last name? she replied.

He turned red and mumbled, I don't want to say because I was a bad boy. But it was Nelson.

Yes, but were you Dwight, Gary or Tom?

Dwight, ma'am, and I'm so sorry.

That's OK, young man, she said. I'll still serve you.

Some are born to teach.

Risk in Business, by Dean Davis

Risk plays a role in all businesses, but they rarely manage it as well as they could. Management must better understand where companies and business units are vulnerable by assessing their exposure to each type of risk.

*See graphic of disguised company here.

Companies must take risks to make profits and create shareholder value. But the record of failure and financial distress in many industries shows that too many executives and directors fail to recognize risk and to manage it appropriately. A risk is any event that would push a company's financial performance below expectations, and there are four main kinds: market risk, which affects the value of a company's products or services; credit risk, from changes in interest rates and from debtors who don't pay up; operational risk, arising from internal mistakes or corruption; and business-volume risk, the result of fluctuating costs or of moves by competitors.

The first step for management is to understand where a company and its business units are vulnerable by assessing their exposure to all types of risks, which vary from one industry to another. A heat map like the one in the exhibit can help managers spot high-risk areas that require immediate attention in this case, units B and D are running credit risks that exceed 10 percent of their capital. Other areas too require careful attention. I wonder about the vintage of such a graphic. Any chance this could be Credit Default time bombs?

Spec Lab: Relative Strength, by Philip J. McDonnell

The lore of the market is filled with advice to stay with relative strength. Buy strong stocks in anticipation that they will get stronger. There is something satisfyingly Newtonian about this idea - a body in motion  will continue in motion unless an outside force acts upon it.

 On Nov. 11, 2004, I recorded a list of the strongest 10 stocks on the NYSE  and OTC.

Returns for this basket of stocks to date were:

Strongest stocks: -1.73%
S&P 500:          -0.01%

Although it's a small sample, it seems there is no compelling  reason to  believe that relative strength is outperforming the market at this  time.

Prof. Charles Pennington comments:

Very good, but don't expect to find comfort on the losers' end of the spectrum either.  Shown below are the five worst-performing stocks in the S&P over the 250 trading days prior to Nov. 11, 2004, and their returns from Nov. 11 to now.

Stock% Return
(Yr Ended 11/11/04)
% Return
(11/11/04 to present)

Average return from 11/11 to now is -7%.

(Please don't ask why I'm such an expert on this topic.)

The Clustering Illusion, by GM Nigel

One of the main enemies of the chess player (and indeed mankind) is in attempting to associate outcomes of individual games with certain behavior, when in fact no pattern existed. So we end up jumping around nervously from one idea to another (often regarding the opening, lucky pens or shirts etc) when in fact it was just father random at work.

"The clustering illusion popularly refers to the natural human tendency to "see patterns where actually none exist." Since according to a branch of mathematics known as Ramsey Theory complete mathematical disorder in any physical system is an impossibility, it may be more correct to state, however, that the clustering illusion refers to the natural human tendency to associate some meaning to certain types of patterns which must inevitably appear in any large enough data set."

Repatriation, by Victor Niederhoffer

Pashigian's Price Theory and Applications, Chapter 11, discusses the influence of internal and external monitors of management that alleviate the agency problem of separation of control and ownership in companies. Product competition insures that the firm must maximize profits to stay in business as does internal monitoring by boards. The influence of mergers, leveraged buyouts and tender offers is considered. Excellent work on the free-rider problem citing 1980s work by Henry Manne and Sanford Grossman seems relevant.

Following up on the thread of acquisitions as a external monitor, one would think that the companies that will be repatriating much cash from their foreign subsidiaries will be in an acquisition mode because of the preferential 5% rate they receive. In that connection a study of their non-wholly owned, publicly traded affiliates would seem to be in order. 

Report from Iraq

Forwarded to us by a friend of the author's father

Hi Noah.

Hope you're well.

Check out Edward Wong in NYT today re Sunnis and the electoral process. Read between the lines and you will see a massive endorsement of the genius (flexibility, timeliness, a learning curve, gradualism, incentives for moderation, incentives for participation, real-world guarantees against majoritarianism) within Iraq's constitutional and electoral process. You should get a Nobel prize for this one day. As with when they had to acknowledge my earlier point about Moqtada and Chalabi and the brilliant and momentous co-option of the Shia insurgency, the NYT news editors can't bring themselves to admit the unfashionable import of the facts they sketch, but at least they are forced to acknowledge the facts themselves.

Have been spending 24 hours a day every day w Iraqis here in Baghdad. Election posters everywhere. People campaigning but quietly. The fact is, this is not a disaster because of its imperfections, it's an amazing thing because even a mostly rather than fully functional election is a miracle in the circumstances and the neighborhood. There are as many election workers (8,000) risking their lives as there are insurgents. Add to the election workers all the govt employees, police, army etc who show up to work every day - and you have many many times more Iraqis risking death to make this work than risking death to ruin it. If that measure doesn't mean anything, then nothing does. (The insurgency pays far better.)

Sunnis (except for 5-10,000 insurgents and their friends - who don't deserve a veto over anything) want to vote but can't, for fear. The system allows for that brilliantly, as the Wong article obliquely acknowledges and as I established more fully in the Prospect article about the constitutional/electoral process. Meanwhile the Shia won't screw them. I have spent a great deal of time with Shia of every stripe, especially the most aggrieved and violent fringes, and they unanimously say - I was really surprised at first - that the offenses of the previous regime were Saddam's, and were against all Iraqis; the offenses weren't the fault of the Sunnis generally, and the Shia weren't the only ones to suffer. I know lots of Shia fighters who early in the Occupation prayed at and provided security at Sunni mosques - just to show solidarity and to allay Sunni fears; amazing. So we should not expect bloody, vengeful Shia misrule. And the decent majority of Sunnis know this - that's why their leaders (Zarqawi and the Baathists don't count - legitimate or not, they are unpopular) will participate in the process even if they can't go to this round of polls.

As for the argument that Iraqis are pigs who don't deserve a shot at decent government, and morons who aren't capable even if they are deserving, it's nonsense. I have received more politeness and generosity here than anywhere I have ever been. Granted, that wd be different if I were in Fallujah - but that is a matter of politics not of culture - and the culture behind this politeness and generosity exist in Fallujah and Ramadi in the same way and same degree as they do in Najaf or Sadr City. I bet your own experiences weren't too different. Meanwhile democracy works in all sorts of weird places - look at Germany; or India, with its 750 languages, billion people, and 30% illiteracy.

This could all go wrong, but that will be because of stupid implementation (failure to provide security early, for example, etc etc etc) - not because the project of democracy here is crazy; or because the process for it was flawed.

Really, this election is all about providing cover and legitimacy for the permanent-constitution-writing process and the real elections in Dec. For that, this round of elections needn't be perfect; it needs only be pretty good, w mechanisms to correct for the important failings - and that is precisely what we are looking at. (Again, this is the real importance of today's NYT piece, and my Prospect article.)

Well done on writing a damn fine interim constitution. It's amazing that a piece of paper can have real meaning in a poor neighborhood with lots of guns and no institutions, but I bet in a year, once the process has happened in its careful steps, its importance will be a lot clearer. I only really understood its brilliance once I actually read it. Have you had a chance yet to check out my Prospect piece about it?

All best, BB

When Things Go Bump in the Night, by Russell Sears

The little one jumps into bed,
To hold onto Mom tight.
Tsunamis, blizzards,
And monster to be fed:
Makes Dad take flight.
To fight those wizards
Awaiting him this night.

The fair ladies bid him farewell,
Before he stumbles to the door.

What greeted him?

Only knighted Dads can tell,
But  crumbs on the kitchen floor
Plus a dirty glass and plate,
All imply that someone ate.

The moral for this timid tell:
Fighting random noises causes all loss of sleep,
But at least the brave may eat well.

Buying the Tsunami

YTD performance of major world indexes:

7) STOCK EXCH OF T---L--- INDEX  5.39%

George Zachar comments:

"That's water under the bridge."

George Zachar Suggests: "Pop Austrian" Economics

Excellent brief discussion of Austrian economics and the current financial/ philosophical/ rhetorical playing field. An excerpt:

"Many pop Austrians consequently become unduly suspicious of growth in credit and other financial aggregates and asset prices, interpreting them through the prism of monetary policy error and failing to take account of the importance of innovations in financial technology and preferences that might account for them. This makes pop Austrians unwitting allies of those who argue for interventions in capitalist acts between consenting adults. Pop Austrians often resort to the same empty talk about bubbles usually employed by those who think they know better than markets what financial and other macro outcomes should look like."

Three Down Weeks, by David Baccile

If increasing one's "overplus" is the the only measure of a winning strategy than count me a loser. My "overplus" shrank...but the decline was tempered by reduced positions and newly acquired puts. I'm a wimpy speculator who tries to minimize losses and set up significant advances and Mr E's, Chair's (and others') thoughtful insights either confirm my conclusions or call them into question. Either way I am a better man for reading.

The Influence of Our Past

This winter, I shoveled our pond and created a skating rink. It was a real effort on my part to do so and have enjoyed getting my 4-year-old son and 3-year-old daughter out on the ice for their first experiences with skating. Keep in mind. I'm no great skater. Today both kids "skated" on their own - giving me great satisfaction. Up until now they have not liked it. I went out alone today having been turned down and 15 minutes later they were lined up at the back door ready to come out. I know my wife looks at me in wonder - why would I spend 2 hours preparing the pond? Why would I encourage my kids, spend lots of time dressing and undressing them for the cold, endure the back pain of guiding them around the pond...only to hear them say they DIDN'T have fun.

The answer is a selfish one. I've always wished to be a good skater. When I was young, one winter I flooded our back yard to create a "rink." Ice did form, wavy ice, and my entire backyard was only about 30' x 35'. I'm pretty sure the grass didn't come back in the Spring. Certain experiences from our past stay with us...this is apparently one that stayed with me and for selfish reasons I want to see my children skate.

Our experience in the market also stays with us. As Americans, we try to learn from those experiences. This trait is a great trait - EXCEPT in the markets. The Chair's theory of ever-changing cycles plays right into this weakness. As soon as we think we've learned from the past, the cycle changes. We must not learn from the past but learn to anticipate the future. And I apologize for having NOTHING to add beyond that.


The Chairman Reviews Academic Work on Evolution of Industries

In an attempt to broaden my knowledge of factors affecting the success and failure of groups of firms, I turned to Pashigian's "Regularities in the Evolution of Industries," chapter 8-2 in his timeless book Price Theory and Applications. A search led me to the related more recent work of Giulio Bottazzi, “Invariances and Diversities in the Evolution of Manufacturing Industries"; Harry Bloch, "The Growth of Firms and the Evolution of Industries”; Martin Kune, "Simulating the Evolution of Industries Using a Dynamic Behavioral Model"; and 1.69 million citations on Google for "evolution, stock markets." Read on!

Fish and the Catholic Church, by Yishen Kuik

Just finished H. Gordon Selfridge's "The Romance of Commerce" that was mentioned before. On the topic of unexpected changes from world events, Selfridge recounts the story of the Hanseatic League, an association of powerful merchant towns surrounding the Baltic that declined just as Protestantism was on the rise. As it turns out, the Catholic church was the greatest friend of the herring industry on which the towns of Hansa had a significant economic dependence. With the rise of Luther and the fall of fish on Friday, the League was further weakened until it declined into oblivion.

An Important Review

Jim Holt reviews Extreme Measures: The Dark Visions and Bright Ideas of Francis Galton by Martin Brookes in The New Yorker, Jan. 24-31 edition. Galton, one of the great 19th-century scientists and cousin of Charles Darwin, is a Daily Spec hero for originating the statistical concepts of regression and correlation. He also invented weather mapping and fingerprint analysis. Holt examines the controversies over Galton's work on inheritance in a review that our friend Stephen Stigler terms "better than the book itself."

The Assistant Webmaster adds: The Brookes book is worth reading for the anecdotes about Galton's journeys to Africa.

Macroeconomic Theory and Human Nature, by Mark M. McNabb

Chief problem for any macroeconomic theorist is the fickle nature of the humans who get in the way of his shot at the Swedish smarts token.

While every economist said Mexico had to devalue immediately in 1994, no one, even those most likely to know, suspected the magnitude of the shift. Inflation in 1995 went up from 7% annual to 52% annual and consumer price indexes saw almost a 600% shift. While we can agree that moving toward a market equilibrium is desirable for growth and stability long-term, the short-term effects (which include most career time spans) were significantly adverse to those not protected by US assets or governmental largess.

In the same way, the growth puzzle that is SE Asia, built on labor surplus and easy credit, will face the perturbations of capital redistribution. The opaque-ness that is presented is the degree to which the West is willing to maintain the consumerism of nations whose middle class is based on a slender foundation with shallow footings in capitalism and democracy. One potential outcome is the devaluation of several SE Asian currencies and their closest trade neighbors in spite of rapid economic growth should they choose to divert massive wealth away from productive enterprise and into public aid of many areas with lower trade and export resources (other than selling fish to a nearby village of local tradesmen).

Why Is It... asks Jeff Sasmor

Why is it that people feel the need to compare current equity market conditions to some time period in the past and draw conclusions about what will occur in the future?

I was just watching CNBC (probably a mistake) and some fool just said, "The last time all three major indices went down in the first three weeks of January was 1983. WOW that was a long time ago folks, and it has people talking."

Like, excuse me, but short of Mentor of Arisia (see how many of you get that reference) who could draw any useful conclusion? Or are they just running out of things to say?

Maybe GE should sell CNBC to the Weekly World News. Recent headline: "Two Headed Bigfoot Shot by Iowa Cop." Sidebar: "Find the fake story inside and win $200."

Janice Dorn comments:

CNBC is infotainment at its worst. If one is compelled to watch, the most desirable way is to have it on mute and only unmute if there is TRULY some breaking news of great importance. That happens rarely, if ever.

How many of the people on this list turn on CNBC first thing in the morning and leave it on- even though they know that it is bubblevision and a constant stream of babble because air time must be filled?

There is great value in studying historical precedents for market movements, but one is unlikely to find serious depth of analysis on CNBC, rather bit and bites full of sound and fury and signifying nothing ( with all apologies to the Bard).

CNBC is to the markets what the Arisians were to civilization ( always trying to build it up and make it more than it is).

Bring on the Eddorians, and at least attempt to level the playing field.

Philip McConnell adds:

The infotainment problem is even worse than Mr. Sasmor claims. I heard the "not since 1982" report which he cites and then about an hour later I heard another CNBCreporter state that the Dow, S&P and Naz hadn't had a first three weeks of January down since 1979. It was not a correction, simply a dissonance.

Mr. E remarks:

be THANKFUL for cnbc...they ARE the consensus...let them be wrong

it's good for business

And Kim Zussman memorializes thus:

To: Messieurs Keynes, Smith, Heyne, Buffett, Soros, Lynch, Gross, Ebbers, Kozlowski, Spitzer; and CNBC, Barron's, WSJ, MSN, as well as all the financial academics, universities, journals, financial columnists, editors, commentators, newsletterists, book-authors, webservicers, bloggers, listers, night-traders, and daydreamers

Re: Thank you for the greatest show on earth; invention money and the magnificently leveraged ecological struggle swapping forebrain and fingertips for fang and fight. Please understand that we at times, in the heat of battle, forget that you and we are all the bricks that pave the market building. We know that bustin' you many always-wrong bricks would crumble the building just as surely as bustin' us right ones. We might disparage you, and you us, but if we couldn't where would we get the fever to cut you to bits?

The Sage Bloviates, by Victor Niederhoffer

Warren Buffett, Oracle of Omaha, legendary investor, world's second-richest man, says he sees no way but down for U.S. dollar unless the trade deficit is fixed. Says he's finding it hard to find any stocks to buy. Read the transcript of Buffett's Jan. 19 interview with CNBC-TV.

The Chairman comments: Will someone tell me why when a man is short the dollar by an admitted $25 billion and has been talking down the U.S. stock market since 1998 circa SP 850, he is not held up to ridicule and cross examination when he talks his book like this? And what a commentary on our times that a man could enjoy this degree of prestige and respect and success when he is so ignorant of the subjects he talks about. George Zachar says the answer lies in Brooklyn. Read on>>>

The Virtues of Being Certain Versus Taking Risk, by Victor Niederhoffer

A lively discussion has arisen concerning whether it pays to wait when the market is going down to find an entry. Various rules have been suggested. Wait for a 10% decline from a high. Wait until there has been a 10% rise from a low. These seem impressionistically very good, after a period of decline or rise. But qualitatively they are just two of one million variations in a trend-following milieu. They all must be tested and have been with the result that the vast majority of reasonably testable assertions show that such rules lose vast money during the past 15 years. In addition to subjecting you to a large preponderance of losses, they have the other unfortunate aspect of keeping you out of the market during sustained rises. To people like this, the words "might have been" (see below) and "if only" are very terrible, and they are vigilant in mounting the high horse during the intermittent periods of 3% to 7% declines that occur, telling you how it was so easy to miss them. As for me, I'll stick with the differential of 1.5 percentage points in favor of earnings yield on stocks versus bonds at a time like this.

Bellwethers, by Victor Niederhoffer

It is fascinating to look at bellwethers. In the 1870s, the time of of WilliamWorthington Fowler, they were Fort Wayne and Erie and Chicago Northwestern (before it went banko and Ben Heineman made his fortune from buying it) and Harlem (Morse was there). Then came Pittsburg (they changed to steel in the 1890s) and GM (mid-century) and IBM in the second half.

Is there any truth to the notion of bellwether? Are there stocks that lead the market or predict something above and beyond co-movement? It seems nowadays that IBM has regained its bellwethership, but it must be tested, and changing cycles must be considered.

The influence of the yen on the aforementioned must not be forgotten, as it and the cuttlefish work their deception in an afternoon.

When Is the Bottom? asks the Grandmaster

The grandmaster has recently suffered a loss or two. And much advice has been given him, "Just wait for a turn to get involved." Here is his answer. "OK, so how would you handle the situation on September 1, 2000, when the S&P stood at 1520.77? Presumably you'd buy when it fell 10% from that (ie 1364 on 25/10/2000), assuming it 'felt' right. That would get you in for a nice rally to 1432. But how would you know to get out then? Or would you miss the top at that point, look for 10% down from there (1288, giving you a buy on 20/12/2000) and look for a 10% rise from there (i.e., to 1417). As we now know, this never happened." Read more, with Spec back-and-forth.

The Chairman

Victor Niederhoffer writes that Pfizer's 103-page interim report displayed new euphemisms and strangely unremarked-upon reductions. Read on

The Chairman

Thoughts of resignation and sabbatical letters are much in mind these days. The Chairman and the Surfer Spec considers certain general principles of same starting with that of the Wizard of Oz, Prime Minister's Chamberlain's resignation in 1940 after fall of France, and the Nixon "Checkers" speech. Read on

Jean-Paul Schmetz opines on the U.S. Trade Deficit: "A Broken Statistic"

Popularity, Trend Fatigue and the Dollar, by Jason Goepfert

When something reaches such a head that it becomes pop culture, that to me is a form of trend exhaustion. Prime examples are CNBC adding their quote bugs invariably as a trend is about to change, and Comedy Central beginning a regular stock market segment on its Daily Show about the weak stock market - in July 2002 (!)

Marty Zweig had his Barron's indicator that counted bullish ads in Barron's, and others have tried to quantify magazine covers and the like. But by far the most promising way to quantify this that I have seen is software that spiders major newspaper headlines and counts the frequency of certain words.

Gibbons Burke comments:

Steve Jobs, during his keynote address at Mac World San Francisco last week, demonstrated a new converter dashboard widget in Mac OS X 10.4 "Tiger" to be released early this year. He was showing off how easy it is to do up-to-the minute currency conversions and got a nervous laugh from the crowd when he exclaimed "Dollar still sucks!"

Twenty-First Century Options for Saving, by Kim Zussman

Over the weekend noticed a pattern which has worked historically most of the time and missed big so far in 2005. At the beginning of each year, presumably there are lots of folks with bonuses deciding how to allocate them. Besides discretionary spending, there was the 1990s paradigm, "save for kid's college and your retirement", which has morphed into "save for kid's college, adult support, children of children, all of their retirements, as well as your own long-term care." Perhaps these increasingly formidable goals give pause to investors. What are the options for the few still interested in saving? See Options!

Crowds: Some New Thinking

Steve B. writes: The one question that has me thinking the most is how many people need to be motivated to move to get the remainder convinced that they also need to move, not understanding why they are moving? Here is a short piece that I started writing, let me know any ideas that could be added-on or offline: "The Spread of Information, or Why a False Meme Spreads Faster"

Jim Sogi comments and offers selected quotes of lively interest to speculators  from LeBon's book.


Landing on Saturn's Moon, by Kim Zussman

Huygens' successful landing on Saturn's moon titan is a triumph of human engineering and cooperation (between NASA/JPL and European Space Agency). This frozen world with temperature -292F will be analyzed as data returns. There is evidence of liquid-phase matter (most likely hydrocarbon) oceans and carved canyons as well as ice-land masses. The mission cost less than a NY taxi at about $1.50/mile and there was no traffic; however, the trip was about 2.2 billion miles.

Dubai: The Roaring  Emirates, by Ryan Carlson

Guaranteed Losers, by Victor Niederhoffer, with comment by Mr. E., Andrew Moe, Bruno and J.T.

The Misery/Mediocrity Meme, by Janice

Dick Sears: Weekly Commentary: Not Singin' in the Rain.

Higher Agitation, by Kim Zussman

'I Know It's Not Real, But...' by Karamvir Singh Bisht

Ask The Senator, a continuing series

Q: Where can I get really good shrimp?

A: Farm-raised shrimp taste like Styrofoam cups. There is just no comparison to the real deal. If you have not had freshly caught natural shrimp you have not yet had shrimp. I've been having jmharder24<at>hotmail<dot>com send me fresh shrimp and stone crab claws, the best I have ever had, at very reasonable prices, $7- $8 a pound for claws.

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

Father Random, Part II, by Victor Niederhoffer

That Four-Letter Word, by Hany Saad

The Vendée Globe, by Jeff Beckwith

Bronstein -- One Cool GM
, by Nigel Davies. An eyewitness account of the great chess grandmaster.

Quote of the Day, Offered in Honor of Intel by Victor Niederhoffer

"Through the exercise of superior native wits or the accident of extraordinary luck, speculators flourish marvelously for a time: but only, as a rule, to lose their heads and their balance at last, and go down - often through a single disastrous transaction -faster than they went up. There are exceptions. Some flourish to the end, dying- generally youn jclass class class="small- or retiring with estates unbroken. But they are the exception. Wall Street is a place where a few fortunes are made and a great many are lost. The stories of its magnificent triumphs and of its equally magnificent wrecks, read like tales from the Arabian Nights; some of them like passages from Dante's Inferno. Wall Street has had its suicides"....

from "The Art of Investing" by a New York Broker, 1888.

["An investment manual with chapters on government and municipal bonds, railroad and mining stocks, and speculation on the New York, Philadelphia, Boston and Baltimore exchanges. Authored by a broker who 'prefers to avoid the suspicion of using this publication as an advertisement of his business.'" -ed.] 

Kim Zussman responds:

I often wonder about this, considering that most of investment industry do not live on trading profits. Why is it better to build the plumbing than drink the water?

Perhaps human nature leads naturally to ruin. It's better to become a millionaire if you used to be poor than if once a billionaire. So in the same way that a gambler well ahead can't walk away from the table, instead of saying "enough" we dream of compounding our stake ever higher. At some point it's not even about money, but the status of mastering a daring challenge where almost all fail. Intellectual adrenaline junkies.

Academics would proclaim that the greater the profits the more risk was taken. So when we have been very profitable it tells us either we have recently taken large risk or were lucky. If we leverage a trade that wins 55% of the time with a fortunate winning streak, we might be induced to leverage further. After all, a billionaire is better than a millionaire. Perhaps the black swan is we.

James Lackey adds:

Well, for those of us that do scrape by a living by speculation, today is just another trading day. It is a day where many have lost hope. It is a day where some just can't cope with another loss. Yet, at the end of the year, will it be one of those five or 10 days of the year, that if missed retrospectively, you did not profit on the year?

The Current Account Deficit: Nobody Asked Me, But... by Victor Niederhoffer

The Art of Book Buying, by Pamela Van Giessen

Howl, by George Zachar

Reading the WSJ front page puff piece on Eric Mindich (a talented fellow by all accounts) I literally felt transported.

I saw myself as an old man in a rocking chair reading histories of "the day" where fair haired boys turned away piles of chips, so great was the fever to place capital in their hands.

I eavesdropped on cocktail parties where men measured themselves by how much money they had managed to place with the fair haired boys.

I saw B-team deal pushers culling their databases for firms to tart up and pitch.

I saw skinny young men in Izod shirts hunched over their computers at business schools, scheming to get a resume in front of the fair haired boy.

I saw the future business historian smile when reviewing the database of Federal Reserve minutes, as his eyes hit the December 2004 passage "policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets."

What a wonderful article.

Indian Elephants, by James Sogi

IFN, the India Fund, is down 16% from 31.25 on 12/28/04 to 26.26 today. The May '04 panic resulted in a 31% drop followed by a recovery to new highs. A wise and aged Brahmin might surmise at some point that the Indian market will recover from the effects of the tsunami. India seems to be consolidating its regional power in this time of trouble.

Dr Zussman comments: Interestingly, the illiquid Indonesia Fund (IF) is up in the same period. If IF went up on the prospects of international aid, rebuilding, and new infrastructure for Sumatra, why wouldn't India? The month after 1995 Kobe Japan quake Nikkei was down. However it is difficult to suggest causality unless there are a large number of disasters with correlated drops.


Hero, A Movie Review with Market Insights by James Sogi


A story set in ancient China about a failed assassination attempt told from several viewpoints. Each person who tells the story has different reasons for deception, different motivations and different political agendas, versions vary widely. This explain why news does not have a predictable effect on the markets. Read more>>>

Courage, by Ken Smith

The following is excerpted from Wyckoff's Stock Market Technique, published 1933.

A great deal of talent is lost in the world for want of a little courage. Every day sends to their graves obscure men whom timidity prevented from making a first effort; who, if they could have been induced to begin, would in all probability have gone great lengths in the career of fame. The fact, is that to do anything in the world worth doing, we must not stand back shivering and thinking of the cold and danger, but jump in and scramble through as well as we can. It will not do to be perpetually calculating risks and adjusting nice changes; it did very well before the Flood, when a man would consult his finds upon an intended publication for a hundred and fifty years, and live to see his success afterwards; but at present, a man waits, and doubts, and consults his brother, and his particular friends, till one day he finds he is sixty-five years old and that he has lost so much time in consulting others that he has no more time to follow their advice.

Unobtrusive Measures: The Story of the Yale Endowment Fund, by Victor Niederhoffer

Gloom, Doom and Record Books, by Victor Niederhoffer. When the bears are having an orgy over bad news, the Chair peruses the daily price records  he has kept for 45 years.

Word from the Bluenatic Fringe: Laurel Kenner comments on the Left's call to end consumer spending on corporate products.


Definitive Doom and Gloom: A Classic from the Newport Beach Crowd, forwarded by George Zachar

The Life Aquatic, by Dan Grossman

Saved from Bill Murray's Lost in Translation by Vic,

Mystified by the over-praised Sideways,

I tonight enjoyed tremendously Murray's redemption in The Life Aquatic with Steve Zizzou. Funny, original, fine cast, won't even attempt to summarize the story but it's an eyeful.  

Luau, by Jim Sogi. Fascinating account from the Surfer Spec on preparations for the traditional Hawaiian barbecue.

four Scholarly Reviews by Dr. Castaldo
1. "Variance Risk Premia" by Peter Carr, Liuren Wu; 
2. Cross-Industry Momentum by Lior Menzly, Oguzhan Ozbas;
3. Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance, by Jonathan Lewellen, S.P. Kothari, Jerold B. Warner. 
4. The Cross-Section of Volatility and Expected Returns, by Andrew Ang, Robert Hodrick, Yuhang Xing, Xiaoyan Zhang

What do you believe is true even though you cannot prove it? by Andrew Moe

Slicing the Pie, by James Morin

This explains in detail how the CME is increasing the maximum order size on contracts for the ES and NQ E-minis from 400 to 1500. Any thoughts as to how this will affect trading?

The Assistant Webmaster responds: `A blonde ordered a pizza and the clerk asked her how many pieces she wanted it sliced into, six or eight? "Six", she said, "I could never eat eight".'.. Our Zen lesson for the day..


Kona Gold, by Jim Sogi

I do know Kona coffee... and grow, pick, process and roast my own from our farm. The big rains earlier caused all the flowers to set at the beginning of the season and ripen for one early pick and fewer in the late season. But the beans are big and the price is back up after the fake Kona coffee scam a few years back did wonders to publicize pure Kona coffee. The Molokai coffee doesn't have the same quality due to the climate differences, like wines, and the knowledge of the farmers, processors and roasters.. If you can find it, get sun dried Kona green beans and roast it just before grinding and brewing. A real treat. Its a specialty market though and I don't believe it affects the world market. However, hundred of new acres are being planted; by gentlemen farmers who fly in on private jets. There were 52 private jets lined up on the tarmac, including 727's and private 707's this New Year's.

Mr E adds: I actually buy KONA gold coffee at BJs Warehouse.. small beans with incredible aroma.. and I usually drink four cups at a time in a huge mug with freshly self-ground coffee and super hot spring water.. had one tonight. Vietnam destroyed the coffee business when they figured a way to chemically treat low-grade to taste like arabica..

And Yishen Kuik points out: My father used to work in the coffee business. Cheap robusta tastes terrible, a far cry from arabica but there are techniques to steam off most of the foul flavor. Apparently mixed with other beans they can provide interesting taste notes (not to mention lower COGS). Here is the part related to deception: Some believe the flavored coffee market was developed to sell the large quantities of cheap robusta produced by Vietnam.

Adventures in Retailing Part III: Manhattan Bookstores, by Ross Miller

There was a time when going into a bookstore gave me a thrill. I would go out of my way to visit them. One by one, however, my favorite bookstores have either gone out of business or were co-opted by the mainstream. My earliest bookstore expeditions were as a high-school student in the 1960s. Although downtown Elizabeth, New Jersey still had something to offer the bibliophile--an independent bookstore, the book sections of the big department stores, and two substantial used bookstores (none of these have survived to the present, nor have replacements for them appeared)--Manhattan ( The City ) was where the real books were. Read More.
And See Responses from Zussman, Van Giessen and Burke!

Specs and Academics, by George Zachar

Fed Gov. Bernanke offered this observation on skill acquisition today:

"...Current [economic] analysis is not taught in graduate school, probably for good reason; it seems more amenable to on-the-job training...."

Parallels to trading abound, and it seems to me he's making a case for getting specs to serve on the FOMC instead of academics.

A Case of Hubris?

Pictures from the 2004 CMKX Shareholders Party.

Ice sculptures, Elvis impersonators, live band and a car give away. Not bad for a company which is at .0001 bid and .0002 ask.

See Jack Tierney's Review of "State of Fear"

Mastery, by Jim Sogi

I had a chance to go meet with my daughter Kim's Hula Kumu (Instructor) and watched as she demonstrated some of the moves in preparation for Kim's birthday luau, where there will be a hula show. The whole hula troop offered to help with the luau. Ulalia has been practicing and teaching hula for over 40 years. Watching her mastery of the art, her economy of motion and smoothness, despite her age, brought tears to the eyes. She is a true master of her art arising from a lifetime of dedication.

On the way home we stopped of at the shop of my neighbor and friend, master craftsman and artist Tai Lake, to pick up some pumpkins for the imu. Looking at his high-tech shop filled with glowing works of art made me wonder at his mastery of the art as well as be amazed at all the different tools and skills need developed over a lifetime and his unique supply of rare hardwoods harvested from the mountains of Hawaii. He also is a master craftsman, recognized in Chicago at the national master woodworking shows, in American Express Magazine, and in the megahomes on the Kohala coast. But what a different world, filled with objects, tools, and dust.

I am privileged to meet with and be friends with the masters in the art and science of speculation here, and wonder at the wisdom earned over a lifetime in the markets. I realize the thrill I get from learning some bits of wisdom from each master is a true love of learning and knowledge, and that is why I consider myself a philosopher.  

Laurel notes: Jim's note about economy of motion and smoothness brings to mind the transfixing spur-of-the-moment hula performance by Kim Sogi and her mother at last year's Spec Party, with Jim on ukelele and vocals. One bows deeply to the teacher and respectfully wishes Happy Birthday to the student.

The Assistant Webmaster adds: ``If people knew how hard I have had to work to gain my mastery, it wouldn't seem wonderful at all.'' -- Michelangelo

Youth is a State of Mind, by Tom Ryan

In a biography of General Douglas MacArthur, it was noted that for many years he had the following essay framed and hung up wherever his office went. He quoted the entire passage in a speech in 1955 on his 75th birthday. A good one to reread, now that the media are full of predictions of lower stock prices because of forecasts for 2005 GNP, rising trade deficits, employment, what ten Wall Street economists thought Greenspan meant, and other economic ruminations which have a substantial random component:

"Youth is not a time of life, it is a state of mind. It is not a matter of rosy cheeks, red lips, and supple knees. It is a temper of the will; a quality of the imagination, a vigor of the emotions, it is a freshness of the deep springs of life. youth means a temperamental predominance of courage over timidity, of the appetite for adventure over a life of ease. This can exist in a man of 50 as much as a boy of 20. Nobody grows old by merely living a number of years, people grow old by deserting their ideals. Years may wrinkle the skin but to give up enthusiasm wrinkles the soul, worry, doubt, distrust, fear and despair - these are the long long years that bow the head and turn the growing spirit back to dust. Whether 70 or 16, there is in every being's heart a love of wonder, the spirit of sweet amazement at the stars, the undaunted challenge of events, the unfailing appetite for what comes next, and the joy taken in the game of life. You are as young as your faith, as old as your doubt, as young as your self confidence, as old as your fear, as young as your hope, as old as your despair. In the central place of your heart there is a wireless station. So long as it receives messages of beauty, hope, cheer, grandeur, courage, and power from the earth, from fellow men, and from the infinite - so long are you young. When the wires are all down and the central places of your heart are covered with the snows of pessimism and the ice of cynicism, then you are grown old indeed!"

Samuel Ullman, written in the middle of the Depression, 1934.

Horsepower and Hemlines, by George Zachar

The annual pre-auto show puff piece in this morning's Journal says 2005's car marketing theme will center on horsepower.

Even family four-doors and trucks are getting the treatment. BMW will unveil its 10-cylinder, 507-horsepower M5 sedan at the Detroit show Monday and plans to use the same engine in next year's M6, a hopped-up version of its 645i coupe. The Dodge and Chrysler divisions of DaimlerChrysler AG are expected to use the show to roll out four new models, including a station wagon, with engines that generate more than 400 horsepower. It is unveiling a concept car, the Firepower, a 425-horsepower two-seater that a company official described as a possible rival to the Chevrolet Corvette in a year or so.

With changing culture cycles making the hemline indicator a thing of the past, should we now be be tallying horsepower stats?

Mr. E adds:

At year end, I took advantage of GM and bought a new 2004 Ranier with an 8 cylinder with all bells and whistles at 12,000 off list with GM taking the hit. They were loaded up with horsepower vehicles, but no one was buying. I'm surprised they think people have a need for speed.

James Lackey notes:

All under 200 horsepower. base V-6 or 4 banger.
                                 units sold   base price
1 Ford F-Series           432,969     $19,920
2 Chevrolet Silverado  322,907     $19,485
3 Dodge Ram pickup     223,609    $20,365
4 Toyota Camry           213,625     $19,560
5 Honda Accord           192,106      $16,390

Yet your post shows how electronic fuel injection and new technologies can make the most beautiful car ever made, 1967 Big block Corvette 427 cubic inch-435HP car, would make 550 HP today and pass emissions laws. In 1972 new emission laws killed cubic inch engines and horsepower. It took 25 years of new tech of fuel injection, computers, lower costs of mass production to over come one new Washington law 30 years ago.

The euros are running diesels with out the black smoke and idle rattle or knock that all diesels used to make. They run, get this 17,000 PSI of fuel pressure to achieve a cleaner or more efficient cylinder burn. My old Corvette ran 9 PSI. The fuelie on my 2000 HP race car only ran 50 pounds. New tech like pneumatic valves on F-1 cars is still to come to make that old internal combustion engine more efficient..

Vinesh Jha adds:

We can proxy it by grabbing data from the UC Davis study on car sales and relating it to S&P returns.  The correlations between car sales trends and contemporaneous and subsequent US market returns are as follows (annual data from 1975 to 2001)

        Correlation to:
        This year SPX   next year SPX
% sales small cars                   0.18                     0.23
% sales large cars                  (0.24)                   (0.10)
% sales SUVs                        (0.01)                   (0.10)
% sales domestic                     0.21                     0.16

So it looks like lots of small car sales are good for the market for
this year and next, and lots of SUV sales have negative long term impact
but no impact this year.  And more domestic sales as a % of total car
sales are generally better.

I won't share the frighteningly low T stats on this.  =)


Meaning in a Speculator's Life, by James Lackey

An example is a LETTER from a SELF MADE MERCHANT TO his SON, LORIMAR, "You been in the packing business long enough to know it only takes 30 seconds for a bull to lose his hide; if you believe me when I tell you they can skin a bear just as quick on 'Change you won't have a Board of Trade Indian using your pelt for a rug during the long winter months." "Because you are the son of a pork packer you might think you know a little more than the next fellow about paper pork. There is nothing in it. The poorest men on earth are the relations of millionaires. When I sell futures on 'Change there on hogs traveling to dry salt at the rate of one a second and if the market goes up on me I've got solid meat to deliver, but if you lose the only part of the hog all you can deliver is the squeal." pp 193-94

Many men venture into the world of speculation without the business acumen to succeed. We find a niche, seemingly prosper for a short time before disaster of loss ruins our incentive to continue. Yet the business of speculation that is taught by any a business book is not absolute speculation, but to hedge for a respectable business. It is to provide a so called, economic good. *Read More!


Vic studying the Universal Law of Gravitation in his copy of Newton's Principia at 1:00 pm.

4 Days Down, by Kim Zussman

How many days
Could down days go
If down days still go down

How much heat
Would heat-seeking missles seek
If heat-seeking missiles seek heat

How much wood
Could Pamela Anderson... never mind

Listening to the Market, by Gibbons Burke

When I was at Quote.com we gave away a freebie application (with source code, I think, to encourage our API developers) called TradeTones, written by Michael Phillips, which worked with the QCharts internet real-time feed (QFeed) which would let you pick a MIDI instrument and the notes that would be played whenever there was a trade in a particular symbol. There were three different events you could select different notes to be played: trade at the current ask price, trade at the bid price, and a trade in-between. It was quite useful for walking away from the screen and being able to follow the action from afar. You could launch multiple instances of the application and have it play a different instrument for each symbol. I can't believe these guys are getting $12K for Accentus.

You can still get TradeTones for free.

The Stock Market Level in Historical Perspective, by Peter Gardiner

When Alan Greenspan, chairman of the Federal Reserve Board in Washington, used the term irrational exuberance to describe the behavior of stock market investors in an otherwise staid speech on December 5, 1996, the world fixated on those words. Stock markets dropped precipitously. In Japan, the Nikkei index dropped 3.2%; in Hong Kong, the Hang Seng dropped 2.9%; and in Germany, the DAX dropped 4%. In London, the FT-SE 100 index was down 4% at one point during the day, and in the United States, the Dow Jones Industrial Average was down 2.3% near the beginning of trading. The words irrational exuberance quickly became Greenspan's most famous quote <p>a catch phrase for everyone who follows the market, yadda yadda.

SPX     Open   Close
12/4/96 748.28 745.10
12/5/96 745.10 744.38
12/6/96 744.38 739.60, Low = 726.89
12/9/96 739.60 749.73
Note that Dec S&P EPS was $36; '05 Est = 73.50, or +104%, vs SPX +60% till today

In Honor of Frank Cross, by Victor Niederhoffer

My first partner, even six months before Dan first played a significant role, some 40 years ago, was an erudite recluse who was extremely creative in working with numbers. Our main tool in those days was the S&P Security Price Index Record. And many a happy midnight we found ourselves testing and patterning, sometimes aided with a Friden mechanical calculator we rented for $40 a month and sometimes, starting in 1966, when some computer output with volume and price was particularly suggestive and we couldn't wait for the answer, with hand calculations at the 7094 at University of Chicago. It was out of such sessions that we first discovered that each day or week and hour of day, the market had a different multivariate effect.

Inspired by the down first day of the year, yesterday I took out the Security Price Index Record and made a little hand study of what happens after the first day of the month is down. Regrettably, I took the study back only to 1932, as the record switches to the Dow before then, and I didn't wish to tussle with the promiscuous hypotheses of certain former colleagues prone to fight with Falstaffian characters. I found something like the following. In 72 years, 30 first days of the year were down. Buying on such first days and holding until there was a profit or closing at the end of month if there wasn't, a la the Senator, using closing prices only, led to profits in 28 years out of 30. The average profit of the 30 was 1/3% with losses in 1957 and 1977, about 6% each year. The results seem about in accord with a 1 in 10 shot by chance as there is a profit immediately by chance in 1/2 of cases the next day and 1/8 of cases two days later if the first day is a decline and the next day a profit, etc. An interesting byproduct: the S&P Index in 1932 was about 8; in 1940, 12; in 1950, 16; in 1960, 60; in 1970, 73; in 1980, 106;  in 1990, 360;  and in 2000, 1400. Very Dimsonesque.

P.S.. The chance that the first day of the month will be the maximum of 22 is approximately 17% using a formula derived from Feller, (22 choose (22/2))/(2^22).

Sell the Skyscraper Meme, by Steve Wisdom

Liberty to Build 'Comcast Center' in Philadelphia

"Comcast Center will be a 1.2 million square foot, 57-story office tower ideally situated atop the major commuter rail station at 17th Street and JFK Boulevard in Center City Philadelphia. The $435 million project will rise 975 feet, and will redefine the Philadelphia skyline. The project will also feature a half-acre public plaza, and a dramatic new entrance to Suburban Station."

Cane Sighting

Strangely, a man hobbling on a racquet and cane was seen again heading east at Trinity Church at 10:50 a.m.

Time and Deformation, by Dr. Brett Steenbarger

Driving along California's Route 1, connecting San Francisco and L.A., is conducive to uplifting speculation and, indeed, recently prompted me to reflect upon the market-related lessons I have learned in the past year. Perhaps the greatest lesson concerns the role of time as a market variable and, in particular, how deformations of time <p>resulting from both market and personal activity <p>impact trading behavior.
*Keep reading!

The How and Why of Investment Decisions, by Steve B.

Have you ever wondered why you often change your mind about how you feel about an investment? Feelings start when you are about to purchase a security, the attachment becomes stronger after the purchase, and then over time you come to have mixed feelings, and finally you become pessimistic and sell the security to find better opportunity elsewhere?
*For full story click here.

See Buyback Performance as of Year End 2004

Swordfishing and Trading, by Yishen Kuik

Listening to Linda Greenlaw, a swordfish captain on swordfishing: Greenlaw had last radio contact with the Andrea Gail in "the Perfect Storm".

Fishing boats plan trips in sync with full moons. Opportunity for biggest hauls are concentrated around a quarter moon and the full moon so during these periods crew turnaround quickly and only spend 2 days at port after 30 days at sea, leading naturally to a lot of drinking and craziness when on shore leave. Outfitting a sword fishing boat is $40,000 (groceries, fuel etc) for 30 days of fishing (1999) Gross takings less expenses (nets, tackle etc) gives the net. 50% of the net is retained by the owner and the remaining 50% is divided by captain and crew. The captain might have 1.5 or 2 shares to the crew's 1 share. Boats today use a lot of technology to gauge weather, but the best indicator of weather : radio the nearest boat (usually 200 to 400 miles away) to get a read on the wind speed, wind direction, cloud cover. If in a storm and the nearest boat reports clear weather, a captain might stay the course.

As a captain, you need a good crew to get a good haul and a good ship can be useful in getting a good crew. Captains hook up with owners to get ships. Where warm water and cold water meet in the ocean, this is a usually a good spot to fish. Color (green/blue) of ocean can help identify temperature. Captains do not wish to fish the last fish. When things are going well, captains get nervous if things are going too well. Older hands still circulate sea superstition. No bananas on boat. Women are Jonahs. No pork on board because pigs can't swim. Worse storm experienced was when owner convinced her to keep hauling in an area where a storm was close by. 100 knot winds ripped out a lot of equipment. Captains have to balance risks of storms against haul potential. Fishing is a way of life. Quite a few good analogies to trading it seems.

James Sogi on Fishing:

"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." James Tar

In Kona we fish for big game fish, and several exceeding 1,000 pounds are landed each year. One method is using live bait. We fish for the bait on the grounds where flocks of birds circle and the ocean boils as 10-30 pound fish churn the water. *Read full story!

Cristina de Sobrino on Fishing:

Have you ever read The River Why? by David Duncan? It's got trout fishing and vision quests. I could never find a copy -- last published 25 years ago and hard to come by -- but they just came out with a 25 year re-release and it's suddenly available/accessible again.

Fishing with Mr. E:

As the owner of a 38 ft twin turbo diesel Pursuit, Sport Fisherman, with a tuna tower, I can tell you that women aren't a problem unless they get seasick; they are fantastic fishermen.

Thanks to the turbos and 600 gallons of diesel, we can crank 35 knots and can outrun most major storms where wind and tide aren't against each other, and we have a hull that's a foot thick solid fiberglass which can weather very heavy seas; and the engine room is waterproof, if you can turn them off fast enough should you get overturned.

I fish 100 miles offshore in the deep Hudson and Baltimore Canyons and literally at the edge of the Continental Shelf. The real danger is that storms that develop there can force up huge waves suddenly as currents run up against 1000-2000 feet of granite rock, and roll up. By the way, the same is true in Hawaii where the smoothest rock you have ever seen develops on the sea side of the volcano Kilauea. The rock is pitch black and it gets polished by constant waves which can be very dangerous even to large boats.

The difference with sport fishermen is that we fish when we want to, while commercial fleets don't have a choice. I can tell you that I have many radios including one that has a 16,000 mile single sideband range and multiple antennas and long range radar of 100 miles. The Northstar systems cointegrate GPS, automatic plotting, automatic steering, and surface and deep fish finding and are integrated digitally with downriggers that will automatically adjust 400 ft below the surface to the level fish are swimming at. Fishing is high tech from navigation, propulsion, electricity generation, radar and GPS to communication under normal and storm conditions.

To make it easy for the Coast Guard copters who regularly monitor boats on the Continental Shelf we have our official number in 1 ft letters on the 6 ft fiberglass sun cover over the tuna tower. Finally, you need a survival pod made by the same people who made silk parachutes in World War II. The fiberglass pod unleashes when the boat goes down and floats to the surface with an ocean anchor attached and has food, water and a radio and can be zippered closed and will not flounder in 100 ft seas.. hopefully.

Analysis of Short-Selling, by Big Al

Looking for put/call and short-interest data, I found this interesting article: Aggregate Short Interest and Market Valuations by Lamont and Stein.

There's a nice figure at the end showing how both short-interest and the put/call ratio troughed around the spring of 2000 and then peaked around the summer of 2002. (Makes me ask: Are people who run hedge funds only just as smart as everybody else? Who does most of the shorting and put buying, anyway?)

Lamont's site at the YSOB has other interesting articles, including a couple on the mispricing of stocks under short-sale constraints. In "Go Down Fighting" he examines tactics used by companies against short-sellers and finds that when companies fight against short-sellers, their stocks become mispriced on the "over" side and later decline disproportionately.

Stein's site at Harvard also lists some interesting papers, including one titled, "Thy Neighbor's Portfolio", where he and co-authors determine that fund managers are significantly positively influenced in their purchasing decisions by the purchases of other fund managers in their city.

Where Are They Now? George Zachar

No reference to the Kobe earthquake's market impact is complete without noting that the resulting divergent moves in Japanese stocks and bonds wrong-footed Nick Leeson, and destroyed the once venerable house of Barings.

Tim Hewson adds:

Proving the contrary nature of the Irish mind set and turning of blind eyes to past peccadillos, Specs might be interested to know Irish breakfast television has employed Leeson as a "financial analyst and tipster."

Weightlifting, by Allen Gillespie

In lifting weights for maximum strength gain, it is wise to use a spotter. The presence of a spotter allows one to work out to one's max (the maximum number of lifts before exhaustion). Upon exhaustion, the spotter helps to lift the weight to prevent injury, but only after allowing you to struggle.

I suspect in the market there is a similar propensity for one final failing push shortly after a max or min, and that these might make for good trade entries in the opposite direction.

Dgard expounds on Weightlifting:

This is a post I have been working on for some time, but the recent message from Allen has spurred me to complete it. A theme on the List is to "Write what you know". In this regard the subject is well within my field of knowledge. Those on the List who know me have only seen a shadow of my former self. I was an amateur bodybuilder, and in my prime weighed 225 with single digit body fat percentage. Does this illustrate knowledge? Not in itself, but I have trained several champion bodybuilders and Olympic medalists. I hope relating the Markets to Weightlifting will impart some new perspective on the Markets, and maybe impart a new appreciation for the importance of exercise for one's longevity.
*Keep Reading!

More on Weightlifting and Markets from Krizik, Cohn and Dgard

Eureka!, by Dr Charles Pennington

In line with one of my many New Year's resolutions, I retired my 15 year old Hoover vacuum cleaner and bought a brand new Eureka The Boss for all of $52. It was the cheapest model at Wal-Mart, but it looked pretty good and it was lighter than the others.

The Hoover worked well for the first 10 years or so, but my vacuuming had a reckless style, picking up not only the dust and lint but also bits of paper, dental floss, and tins of tuna, and it doesn't work well any more. They're too cheap to try to repair; you just buy a new one.

What great progress in vacuum cleaners! Here are the major new features on my Eureka (and on pretty much all the new ones):

1) It's bagless. Air's sucked through a filter, leaving the dirt to be collected in a transparent cup that's easy to empty. You get a great feeling of satisfaction seeing the dirt that you've picked up.

2) The add-ons ride around with you. With the old Hoover there were all these attachments that you had to store in the closet somewhere, giving you another piece of inventory to track and possibly to lose when you move. With the new Eureka (and most all the other new ones, I think), there are attachment slots for all the add-ons, so they just ride around on the vacuum cleaner when you're not using them.

My only complaint is that the on-off switch should be on the pistol-grip at the top, and it's not.

I don't know where they do the engineering for things like vacuum cleaners, but I have to believe that computer aided design has made it much, much easier.

The cost of living at a constant standard of living seems to just keep on plummeting over the years, relative to wages and salaries. The two exceptions that I see are that the cost of housing seems to be taking a bigger chunk of people's paychecks, and I'm pretty sure that the cost of college education is too, although arguably in both cases what you're buying has also improved.  

Mr E adds: Electrolux has my vote for longevity and air cleaning quality. They were made in the USA in Massachusetts until last year when the plant was moved to Mexico.

Thoughts, by Leonard Kreicas

"The survival of viruses depends on the survival of susceptible hosts. In fact, there is no evolutionary advantage for the pathogen to cause the end of its host too rapidly. Therefore, the vertebrate and viruses have co-evolved complementary facets to maintain a delicate balance between life and death. A virus should not be overtly cytolytic and must regulate its lytic potential. This type of virus will be able to persist into the host because it does not kill the host cell too rapidly or produce excessive damage. Furthermore, viruses try to avoid detection and elimination by the host immune system. Therefore, the outcome of many viral infections is immune containment rather than complete eradication of infection. The consequence of this immune containment is the development of persistent viral infections that last as long as the host lives."

Is the aim total victory, because that would be destroying the source of enrichment? Or do the markets play the contestants to maintain a source of income without destroying the host?

Historically the 5's have been good years for the market. I look for the market to appreciate in nominal dollars but depreciate in real value. I like INTC because dual- and multi-processor computers will supplant single-processor ones.

4 Colors, by James Sogi

I heard a report on NPR on the four color problem was recently solved by computers. Some time ago a map maker discovered that using only 4 different colors will allow a different color for every country possible on a map. It took years to solve the problem mathematically, but finally a computer solved the problem. The issue was that only a computer could check the solution. This reminded me of Chair telling us last year that E said that last year was pink. I wonder if various stock regimes have different colors and whether there really only might be 4 possible colors needed to map the market and whether it requires a computer to solve the problem.

Excellence, by GM Nigel Davies

I've known very few people who have excelled in more than one field. What are the reasons? Very often successful people have come to me for chess lessons, yet their expectations usually have little to do with reality. It's as if they've forgotten what it took for them to get where they are in their specialty. Others have adapted themselves to whatever they've tried.

Here are a few characteristics I think are important:

a) Passion rather than just interest
b) Persistence when quick success fails to appear
c) Courage in the face of adversity
d) Confidence that they'll get there in the end
e) Judgment that is unaffected by their ego, whether or not the latter is large

The Assistant Webmaster adds: Of course, Grandmaster knows Simen Agdestein, a world-class footballer, striker for Norway's national team, and later a professional, who in his spare time.. became a chess GM, in the world top 20, and beat Anatoly Karpov. Arguing from the orthogonality of football and chess, Agdestein may be the greatest all-around sportsman in history.

GM Nigel Davies: Earthquakes and the Dow

See this list of the the 10 deadliest earthquakes of the 20th century with Dow closing prices. I only have Dow data back to 1930 but I can't say the US market has seemed particularly phased.

Earthquakes, by Philip J. McDonnell

The Aviator, by Victor Niederhoffer.

The Chairman writes that the great idea of the Martin Scorcese film,  whether the director, writer and actors know it or not, is the struggle of an innovator, of technologists, of entrepreneurs to create and sell better products in the face of restrictions, disbelief that our society places on the road to greatness, and the destructive forces that are unleashed on such individuals.

Lessons from the U.S. Army Survival Manual, reviewed by Wil Kenney.

This book was originally commissioned by the Army to train its Special Forces in survival tactics. You will learn how to apply First Aid, procure water, hunt, gather, build a fire, build a shelter, TIE KNOTS, and many other useful skills.
George Zachar on Suckers

I just finished "Amarillo Slim in a World Full of Fat People", the famous gambler's memoir recommended by a list member, and he makes the same points as Mr. E, in nearly the same way.

One must have the highest level of self-awareness, and choose a trajectory that is consistent with one's personal abilities, and not "play another man's game".

Slim's central thesis, which he repeats over and over in different, often hilarious ways, is that SUCKERS BEAT THEMSELVES.

Thoughts on the Tsunami