Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner


Nov. 16-30, 2006


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Incongruity Theory of Humor and Markets, from John De Palma

I have a couple thoughts related to your recent writing on the Humor of the Markets ... There was an article in The Economist last year on theories of humor:

One description of how laughter is provoked is the incongruity theory ... This theory says that all written jokes and many other humorous situations are based on an incongruity -- something that is not quite right. In many jokes, the teller sets up the story with this incongruity present and the punch line then resolves it ...

With the "incongruity theory" of humor, I'm reminded of something that interest rate analyst James Grant wrote a few years ago in Forbes when he was commenting on how he approaches the markets:

... I look for financial non sequiturs -- ideas and prices that apparently make no sense ... [The market] is not so efficient that it doesn't propagate, occasionally, titanic errors and absurdities.

On a separate note, the stadium indicator is being flagged again. A nuclear waste disposer will follow Delta Air Lines as the sponsor of the arena for the Utah Jazz

Gary Rogan adds:

I also believe that success in dealing with the markets and telling jokes is based on the common theme of incongruity. In my opinion though, there are substantial enough differences between the two areas to warrant very different approaches.

Punchline-based jokes rely on the following property of human brain that is becoming better understood with the latest research: people are always predicting the very near future when seeing, hearing, etc. Therefore, perfect timing in telling jokes depends on waiting just long enough for the setup to register and the non-humorous version of the punchline predicted, and then surprising the listener.

Market "jokes" tend to be not jokes at all but fairy tales. They work by suspending disbelief and lulling the "listener" into a false sense of complacency with what starts to seem like a perfectly natural state of affairs. There is no general sense of timing, as the "punchline" is revealed after a fairly unpredictable interval.

While a good sense of incongruity is useful in both areas, dealing with humor involves quick and obvious surprises, and with markets, digging out the non-obvious ones.

Briefly Speaking, by Victor Niederhoffer

It is hard to believe that the moves of the Nikkei on Wednesday and Thursday overnight, before the US stocks opened, were not indicative of the imminent break through from below of the round 1400 by the S&P, but this must be tested.

Date Open Close Open Close
1-Nov 16375 16380 1386.1 1372.9
2-Nov 16395 16350 1368.8 1371.3
3-Nov 16350 16330 1375.8 1368.5
6-Nov 16320 16380 1372.8 1383.8
7-Nov 16385 16420 1385.0 1389.0
8-Nov 16420 16235 1382.5 1391.6
9-Nov 16235 16245 1392.5 1384.0
10-Nov 16240 16080 1383.5 1384.8
13-Nov 16085 16020 1384.0 1388.0
14-Nov 16025 16295 1391.3 1397.7
15-Nov 16300 16260 1397.0 1401.5
16-Nov 16270 16170 1405.4 1405.1
17-Nov 16175 16065 1400.2 1404.8
20-Nov 16065 15735 1403.2 1405.3
21-Nov 15740 15720 1404.8 1406.2
22-Nov 15720 15855 1407.0 1408.4
23-Nov #N/A #N/A #N/A #N/A
24-Nov 15800 15725 1401.6 1402.9
27-Nov 15725 15860 1401.9 1383.6
28-Nov 15860 15865 1381.2 1388.6
29-Nov 15855 16080 1392.7 1402.2
30-Nov 16080 16310 1402.5 1402.9

An Earnest Spec replies:

On a related note regarding moves in the East, I was wondering if you might critique this Kindergartner's effort in the quantitative world. What is worthy? What is worthless? What to add? What to omit?

IF was up 9.5% yesterday, completing a five-day percentage gain of more than three standard deviations above the average five-day percentage change measured over the last 30 trading days. I queried IF's history for like moves while trading over the 200sma. The table is expressed as percentage change, T+(X) days out from yesterday's event.

Date t+7 t+8 t+12 t+28 t+30
04/23/1992 -7.1 -7.1 -5.9 -2.4 -1.2
05/28/1993 2.3 0.0 2.3 3.5 3.5
12/27/1993 -11.1 -15.3 -21.7 -22.8 -24.9
05/11/1995 -6.1 -7.1 -6.1 -8.2 -8.2
04/25/1996 -5.7 -3.8 -2.8 -5.7 -6.6
07/08/1997 -11.1 -11.1 -16.2 -29.3 -33.3
01/06/1999 -11.9 -3.0 -14.9 -9.0 -10.4
06/08/1999 -4.5 -3.6 -1.8 -5.4 -11.6
08/23/1999 -8.6 -10.8 -14.0 -8.6 -11.8
04/09/2002 -4.0 0.0 -0.4 -6.0 -5.2
05/09/2003 -6.7 -6.7 -1.8 -0.9 0.9
10/13/2003 -1.3 -2.9 -4.0 -5.1 -6.9
12/26/2003 -14.1 -14.2 -16.8 -23.7 -22.0
11/29/2006 NaN NaN NaN NaN NaN
Avg -6.9 -6.6 -8.0 -9.5 -10.6
AvgPos 2.3 NaN 2.3 3.5 2.2
AvgNeg -7.7 -7.8 -8.9 -10.6 -12.9
PctPos 7.7 0.0 7.7 7.7 15.4
PctNeg 92.3 84.6 92.3 92.3 84.6
Maximum 2.3 0.0 2.3 3.5 3.5
Minimum -14.1 -15.3 -21.7 -29.3 -33.3
StdDev 4.5 5.0 7.7 9.7 10.6
Avg/SD -1.5 -1.3 -1.0 -1.0 -1.0

Date t+7 t+8 t+12 t+28 t+30
01/06/1999 : 1 Obs. Min. :-14.100 Min. :-15.300 Min. :-21.700 Min. :-29.300 Min. :-33.300
04/09/2002 : 1 Obs. 1st Qu.:-11.100 1st Qu.:-10.800 1st Qu.:-14.900 1st Qu.:-9.000 1st Qu.:-11.800
04/23/1992 : 1 Obs. Median : -6.700 Median : -6.700 Median : -5.900 Median : -6.000 Median : -8.200
04/25/1996 : 1 Obs. Mean : -6.915 Mean : -6.585 Mean : -8.008 Mean : -9.508 Mean : -10.59
05/09/2003 : 1 Obs. 3rd Qu.: -4.500 3rd Qu.: -3.000 3rd Qu.: -1.800 3rd Qu.: -5.100 3rd Qu.: -5.200
05/11/1995 : 1 Obs. Max. : 2.300 Max. : 0.000 Max. : 2.300 Max. : 3.500 Max. : 3.500
Other : 7 Observations
t.test(Dataset$t.7, alternative='two.sided', mu=0.0, conf.level=.95)

      One Sample t-test

data:  Dataset$t.7
t = -5.492, df = 12, p-value = 0.000138
alternative hypothesis: true mean is not equal to 0
95 percent confidence interval:
 -9.658867 -4.171903
sample estimates:
mean of x

t.test(Dataset$t.30, alternative='two.sided', mu=0.0, conf.level=.95)

      One Sample t-test

data:  Dataset$t.30
t = -3.6192, df = 12, p-value = 0.00352
alternative hypothesis: true mean is not equal to 0
95 percent confidence interval:
 -16.969087  -4.215529
sample estimates:
mean of x

Henry Carstens Reviews Dr. Brett's Latest Book

Dr. Brett Steenbarger has written a new and wonderful book, Enhancing Trader Performance, that has kept me thinking about trading, performance and niches since I got it.

The book starts with four composite traders built up by personality type. It's just so fascinating to see oneself illuminated that way. Next, the book takes each composite trader through a series of hurdles before he discovers his trading niche. Again, quite illuminating and it sets the stage for the second part of the book which provides sound, proven tools and techniques for performance enhancement.

The book is beautifully written, easy to read and worth orders of magnitude more than the price of admission. A psych book for quants -- imagine that!

Barron's Roundup, from Professor Gordon Haave

Abelson: The O.J. episode happened. A handy chart tracks the number of times the press uses the word "goldilocks". It is up lately, which might mean people are using that as a reason to stay bullish in the face of bad news. (Of course, a simple look at the chart shows basically zero correlation between the number of times goldilocks is used in the press and later stock market action.) The dollar has gone down, it will go down further, which will hurt the economy. Miracle of miracles, there is some good news: The world is awash in liquidity. In other news, the sky is falling.

Page 18 (follow-up section): We were wrong about B of A. The US Trust purchase was smart, and B of A stock is doing well. Avon stock is up despite lack of improved fundamentals, plus there are a lot of clouds on the horizon. Snap-On Tools has been doing great.

Page 21: One of the reasons there has been so much buyout activity is that corporate managers are risk adverse compared to the LBO guys. With debt financing so readily available, the LBO guys have been willing to load up their targets with debt... something that corporate and/or strategic buyers aren't willing to do. This has given the LBO guys an upper hand in the buyout game. The Private Equity boom will end badly if the economy weakens.

Page 22: The Schwab Equity Ratings system has been doing great. The guy who designed it doesn't focus on forecasting earnings, rather he looks for factors that help to predict earnings surprises. Free Cash Flow is the most important factor. He also compares inventories to sales. Profit margins have no correlation with future stock returns.. rather FCF to equity does. Another good indicator is comparing rates of change in sales vs. assets. The higher the capex rate, the lower the return over time, for various reasons. Tracking short selling in a stock also had predictive ability.

Page 25: Lots of people have Hepatitis C, and there is no cure. Wall Street is betting on Vertex to find one. However, the doctors think you should be looking at IDIX, ITMN, ACHN, VPHM, XTLB. You can read the rest of the article to learn about Hep. C, or you can just google it.

M3: For those of you cruising the Gulf of Bothnia last week, there were a lot of big buyout deals, Dell did well, and the dollar declined, resulting in profit-taking by Kirk Kerkorian and insiders in general. It was a good week for copper stocks, and it could get better. The Phelps bid could move higher. KFC has a new logo, and a nice start in China. Large cap stocks are finally outperforming small caps.

M6: Lots of reasons to worry about Google, mostly that we haven't really seen any sort of big payoff to its non-cores businesses yet. Fred Hickey things consumer spending, which will hurt Google advertising.

M7: There are lots of people in China who don't have mobile phones yet, so buy China Mobile and China Unicom.

M8: M&A activity is going crazy, and bondholders are taking it on the chin. It used to be you could buy the bonds of big, safe, companies and be ok. Not anymore. Deal sizes are huge, and getting bigger. Bondholders are fighting back, asking for better covenants.

M9: It used to be that options markets predicted takeovers, but that didn't happen on the big deals last week. The reason is two fold: 1. The prevalence of all cash deals (that makes no sense to me whatsoever, the stock will still go up if the cash is at a premium), and perhaps there is so much option volume it is not as obvious that there are inside traders. The new technique for insiders is selling calls that go out more than a year.

M11: Air France-KLM is silly for even thinking of buying Alitalia. So silly, that people are speculating that there are political reasons behind the deal.

M14: Gasoline futures have been clobbered lately, but they should do well through the winter, better than crude oil.

Page 27: It used to be that philanthropists gave their dough to popular causes like hunger relief. Now people are tailoring their giving in a much more narrow manner where they feel they can have a greater impact and more personal meaning. There are 4 pages of various example of this, if you care.

Page 32: You don't have to give away cash, you can give away stuff like rare books. You should talk to a lawyer to figure out if you should give them directly, or give them to your family foundation and then sell them, etc.

Page 34: A Mellon activist hedge fund wants ASM International to break up. ASM doesn't want to. This is ironic because Mellon is having the same problem with its shareholders. Either way, ASMI shareholders should be winners.

Page 35: The Human Genome Organization needs help naming new genes. The CEO of Cyberonics stepped down.

Page 36: There is a pretty cool Wine service called Vintrust. You buy wine, and store it at their facility. Then, you can trade wine back and forth with people, and all it does is require the moving of the barcode on the bottles. They have about 2 million bottles under management.

Page 37: Buying insurance online is pretty cool, but you still want to take your time and know what you are getting. With a lot of these sites, after you enter all your info, etc. you get phone calls from insurance agents, which is a pain.

Page 38: The AMT was designed to snare people who used every trick imaginable to avoid taxes. However for a few reasons, including inflation, it is nailing all kinds of people. It is not fair, and needs to be changed.

Page 39: Hedge fund Roundtable. blah blah blah. Overview of strategy returns. Going forward, M&A activity will continue. A way to hedge against geopolitical events is to go long volatility by buying VIX options. If Volatility goes up, equity markets will sell off, credit spreads will widen, and the dollar will strengthen. Where are we in credit cycle? Defaults low but rising, when will it really head up - who knows? 50% chance credit cycle goes bust next year. Interesting take on Amaranth: Investors were screwed because the creditors were running the show with nobody looking out for the investors.

Page 44: Joe Queenan went to the $99 dollar wealth Expo at the Javits center that Trump spoke at. The two pages can be summed up as: "As you might have expected, it is one big fraud, and the people who pay many for this thing are idiots".

Page 45: The democratic congress is going to try to force net neutrality, which is the dumb idea of forcing the fiber providers to charge the same thing to everybody, when really they should be able to charge more to access bandwidth clogging sites.

Page 46: Interview with Will Chester of the Westcore Select Fund. It is a midcap growth fund. He oversees $2.8 billion. He thinks midcap growth stocks are great. He likes DOX, CSE, ERTS, STZ, DVA, GHCI, DOV, OSK, TPX, COH. Also, CAL and AMR. He just sold TROW because of valuation. The playstation 3 and Nintendo Wii will help Electronic Arts and Gamestop. He has a positive outlook on health care.

Page 47: Everyone tells you to diversify, but if you want to build wealth you need to concentrate and leverage your investments. You also need to be a hard-core contrarian investor. For example, you should like GM and F better than Toyota or Honda. Sometimes, of course, beaten down companies stay beaten down, like Kmart. Take a look at the Forbes 400, most got there because of large concentrated bets.

Page 48: Silicon breast implants are back on the market, and Mentor and Allergan, who make them, are up, and could go higher.

Page 51 Editorial: Airlines lose lots of money in general, despite there being lots of travelers. They keep buying lots of new planes during the good times, and receiving them in the downturns. The US Air and Delta merge will be bad news, and synergies are never realized. The bankruptcy judge should liquidate Delta.

Ken Smith Contributes to the Department of Self-Improvement

Vocabulary brings the world to an individual. Without words we are reduced to surviving by non-verbal signs and gestures, primitive. Basic survival.

Some have expressed irritation when I write about incarceration, convictions, and whatever is associated with penal servitude, but any convict can vastly improve his life if while serving time he takes up the task of building his vocabulary.

My grandmother sent me a Webster's Dictionary and a thesaurus at my request when I entered Walla Walla State Penitentiary without more than a 9th grade education. I took a liking to words and began reading just the dictionary.

In adult life I carried a pocket thesaurus, in my shirt pocket, and whenever a moment was idle I would read it.

A pocket thesaurus, maybe leather bound, would be perfect gift for any occasion, as a birthday for a child with some basic language skills to evolve with.

One word can lead to another, to an association. One association leads to another, until the student has gone into another dimension and left others behind.

I did not however, leave my street vocabulary behind and I cherish the way it can embellish a conversation with exclamatory frills.

Stefan Jovanovich comments:

Ken would have been right at home in 1780. In the 18th century nine out of ten Americans could read and understand the King James Bible, and all who could afford it owned a copy. (Today only an optimist would argue that the number was higher than three out of ten.) The extraordinary exception of the American Revolution and the Federalist Papers comes from the fact that the "average" American of that time had a larger vocabulary than present day college graduates. That fact also explains the lethality of Continental marksmanship that the British Army so justly complained about. The use of rifled barrels has been the conventionally accepted academic explanation, but the far more likely one is the extraordinary literacy of the "ordinary" American soldier, who carried a musket (not a rifle). The ability to read and write and think correlates directly with the ability to shoot, as Scott Brooks' postings and hunting skills amply demonstrate.

Those of us who hate the draft do so for two simple reasons: it is a reminder of how far we Americans have gone on the road to serfdom, and dumb conscripts make lousy soldiers. The two best memoirs of "ordinary" American soldiers were written by Joseph Plumb Martin and E. B. Sledge. The first was an 18th century farm laborer; the second a 20th century biology professor. Both were volunteers.

Dr. Kim Zussman Flirts with Evolution

A very cute 26 year young lady was temping at the office recently and told of her experience at a convalescent home where she had just quit. It seems there is an 87 year old Romeo who, just as she turned around, planted a big wet one right on her lips.

Another lady who works there and is pregnant is telling this guy, who has some Alzheimer's, that the baby is his.

From a Darwinian view, a man of any age should construe any attention from a woman as an invitation (evolution occurred before lawyers); the goal is maximum projection of genome into the future, and you have to risk refusal to get it there.

In Russia flirting, sexual innuendo, and fondling, which used to be legal here between opposite sexes, is alive and well. Funny thing is, most of it is in jest (a Russian aphorism: "Every joke has some truth to it") and women crave the attention tremendously. In fact, even married Russian women become quite furious if they cast a furtive glance at a man and he doesn't respond. Even though they are busy poisoning their enemies, they haven't yet polluted the soul.

Towing Icebergs, by Victor Niederhoffer

The main point of Towing Icebergs, Falling Dominoes, and Other Adventures in Applied Mathematics by Robert B. Banks, is that mathematics is a language that can describe, measure, and help inform us about everyday points of human activity. The book uses mathematics such as differential equations, integro differential equations, the calculus of variations, and some physics (mainly the laws of motion and free body diagrams) and statistics (least squares regressions). Using these methods Banks explains many events such as; the impact of objects falling from the sky, the shape of a sagging flexi-cable, the shape of a jumping rope, how to throw a curve ball, how strong waves are, oscillations in the records of football teams, how fast one can run and how high and efficiently one can jump, how strong bridges and buildings are, how fast epidemics spread, how far it is possible to tow an iceberg... and how fast dominoes fall.

Like all good books, this one can be read on many levels and many times over. I read it because I want to see how math could better prepare me to understand the physical and market factors that move. I found it very interesting in this context, and particularly liked the many uses of the Logistic equation to explain such as the spread of rumors. I also enjoyed seeing the various estimates of pi that simple geometric diagrams like inscribed circles in a square can generate.

Unfortunately the author is woefully uninformed about statistics. Indeed it does not look like he knows how to compute a standard deviation from individual observations, as he classes observations into groups and intervals and then computes the standard deviation based on the numbers in each group rather than the individual observations. Nor does the author know about the common limitations of regressions, when such factors as multi-co-linearity appear, and why one should hesitate to use squares and cubes in some regressions. The chapters where he applies mathematical methods to deficits and debts contains numerous omissions and errors of analysis. His discussion of predicting the future height of a child based on the child's percentile height at an early age, which is the kind of thing that market people think about all the time, is terribly naive and misleading. Indeed on all the subjects that I have even a rudimentary knowledge of, such as those that touch on economics, I find the discussions and models painfully inadequate. But they are suggestive.

The author is a professor of fluid mechanics and he is not sheepish about believing that the lay reader has some expertise in that field. Within the first eight pages he develops a mathematical model of a baseball that assumes the reader knows about functional relations between viscosity, roughness, velocity, the Reynolds number, the velocity of sound in a gas, and such things as the Fronde and Weber numbers. Admittedly , my physics knowledge is deficient, having had only a college level course in the field and dabbling in electronics as a hobby, but it would have seemed that the author could have chosen a subject for his introductory chapter that the educated layman who he is writing for, might have had more familiarity. Indeed, most of the chapters suffer from either being much too technical for a reader not familiar with physics and accustomed to using such things as free body diagrams, or, when the author deals with economics, being much too naive and out of date to have much import.

Despite this, the topics covered raise many interesting ideas and tests for the market speculator. Some that sprang to mind after reading the book the second time were: What is the area of a chart that is covered by points, and lines, relative to randomness? How long can one market tow another along for? What is the time to travel a certain distance in a market that is showing parabolic growth? What is the price limit of how much a soybean oil can sell for when it is limited by the size and price of the soybean crop itself -- perhaps according to a logistic relation? What is the easiest and most effective path for a price to take from one level to another a'la a pitcher throwing a curve ball to the plate? How high can a stock go, based on its initial ascent during a year or a day?

The author is apparently an old timer who likes to use puns and jokes, and I believe that his persona and style is captured by the following quote:

I decided to be a bit light hearted in the analysis of some of the problems. It just seemed like a good idea to not always be entirely serious about everything.

I recommend this book to all market people who have a reasonable interest and background in physics, and to all others who like to gain insights from other fields and other methods of analysis that might help them to improve their feel for the markets.

Rick Foust adds:

For anyone seeking a practical compilation of engineering formulas and methods, the books engineers use to prepare for Professional Engineer exams are hard to beat. These are available at most university book stores.

Or If you prefer a high tech approach Mathcad is the tool of choice. And then there are various widely accepted topical references, such as Crane Technical Paper 410, Flow of Fluids.

But as in statistics, it is essential to understand the assumptions implicit to the formula.

A standard engineering calculation follows the format: Problem Statement, Data, Assumptions, Formulation, Calculation and Conclusion. Of these sections, "Assumptions" is the most important. Assumptions are the cornerstones for calculations ranging from bridge to nuclear reactor design.

The worst calculations I have seen were generated by engineers having excellent memories yet poor understanding. As an example, such a fellow engineer once asked me to verify his perfectly logical three page calculation that proved a long bolt can take more torque than a short bolt (it can't, of course). Fortunately, important calculations are typically verified by a second engineer, and engineers like to find things wrong with the works of other engineers.

A Book List, from Victor Niederhoffer and Laurel Kenner

Our readers often ask what suggestions we have to generate new ideas and improve knowledge. We have a book list of essential reading as a background for everything else, but often supplement these books with current texts in related fields that we find at good book stores on our visits to bookish cities (like London, where we prefer Hatchards and Blackwell). Here are the books we purchased on recent trips to Chicago and Austin:

Prehistoric "Jaws", from Dr. Kim Zussman

The fossil record of life on earth can be read as sequential ecological dominance. It is interesting how formidable species at the top of then-current food chains often become extinct.

Dunkleosteus terrelli is a fish which bit with 11,000 pounds of force (twice that of great white shark), which along with other big-biters (T. Rex) are dodos of other eons.

When this creature terrorized oceans full of big prey, what were eminent forces that would end his reign? Temperature change? Small prey? Disease?

Species success and dominance appears to require risks of commitment and inertia, which pay off competitively but increase vulnerability to unforeseeable environmental shifts.

Dylan Distasio comments:

An interesting creature for sure ... This type of fish (Placoderm) was wiped out in one of Earth's great mass extinctions in the late Devonian period. It is rather startling to look at just how many species died as a % of the total on Earth during any one of the given recorded mass extinctions.

The Joy of Soft Landings, from George Zachar

Quarter/Quarter Activity Annual Returns 3rd Quarter 2006 2nd Quarter 2006
GDP 2.2%2.6%
Goods 3.7%3.6%
Services 3.0% 2.4%
Quarter/Quarter Annualized Prices
Market based PCE 2.2% 4.2%
PCE Price Index 2.4% 4.0%
Market PCE Core 1.9% 2.7%
PCE Core Prices 2.2% 2.7%
Market based PCE 2.6% 3.2%
PCE Price Index 2.8% 3.3%
Market PCE Core 2.0% 1.9%
PCE Core Prices 2.4% 2.2%

Note: This moderate and modest report will no doubt be seen on Constitution Ave. as validating both the Fed's pause and the markets' dampened vol readings.

Balderdash, from Robert McAdams

Over the holiday my family and I played a board game we've played many times before named Balderdash. The game is pretty straightforward. A dealer pulls a card containing several categories ... a name, a date, an acronym etc. The entries are almost entirely unknown to the players. The goal then of each player is to make up a trivia fact that is believable to the other players. These fake facts are added to the real one and read by the dealer to the table. Points are awarded for picking the truthful fact, as well as getting other players to pick the one you conjured. The dealer scores by convincing the other players not to pick the correct one.

This got me to thinking about the markets, life and bluffing specifically. When prices change, people wonder why. The truth is always that the supply/demand relationship has changed, but there are many people willing to fill in the "answers". What are the motives of those supplying the answer.

In the game, one of the strategies employed is to pick the answer that you made up in an attempt to convince other players to do so. Do market participants ever do this? Generally, the more believable the fact you make up, the better. But sometimes, a preposterous answer works wonders. People simply can't believe its made up. When several answers have equal believability, the ludicrous answer stands out. The players almost talk themselves into believing it. Do we ever talk ourselves into things we know are bold faced false? When I was the dealer I always read the true answer somewhere near the middle. I know that in any list, the first and last thing a person hears sticks in their mind. Is the first explanation given for a market move the one that will be believed going forward, even when a better truthful answer comes along? I would like to hear more about bluffing from your readers.

Steve Wisdom adds:

Santa brought us a game called Blokus last year, and, as mentioned by Tom Ryan, kids are eerily capable at it. Like Checkers and 9-Ball and (circa 1982) Space Invaders, it has a beautiful simplicity that hides much depth.

Also, Blokus can easily be 'handicapped' by a simple rule such as 'adults must play their pieces from smallest to largest' (i.e., starting with the 1-square piece). I like to play the kids even-steven, subject to a some such simple constraints or rules-changes, but I find that not all games lend themselves to this. (Though many do: e.g. at Go Fish, I play level with the kids if I enforce on myself 'wait one full turn before asking for a card I just picked up!')

Another great game to play with kids is Mille Bornes, though it seems not to be as widely circulated nowadays. They do make a new version, but I bought a 1970s set for a few dollars on eBay. It is self-handicapping because the kids gleefully gang up on Dad, taking delight in fixing my wagon again and again... until they get close to 1,000 miles and need to turn their attention to each other.

Market Swings, by Victor Niederhoffer

In the office we were talking about the repeated action of the S&P's move to a certain level, and then it's falling back from this level, that occurs on a day like today. This repeats until the potential energy of the market is converted to kinetic energy, and the market rises higher. We were looking for analogies for this, such as power lifting where you bounce the weight before extending it to maximum lift, or pole vaulting where you can take up to three tries to get over the bar. In the process of this we were also considering the energy transfer involved in making a child's swing set go higher with each swing. The following brief explanation was found but I would be interested in any ideas people have on a proper model for the back and forth; the trying to get there but failing, that happens so often in the markets.

Each time the swing moves forward and then returns to its starting position counts as one cycle. Using a stop watch determine the length of time a swing needs to complete say 20 cycles. Divide 20 cycles by the time and you have the swings frequency in cycles per second or Hertz (Hz).
Since a swing is basically a pendulum it's possible to calculate its resonant or natural frequency using pendulum equations as follows:
Note that the natural frequency of the swing is not influenced by the mass of the person in it. In other words' it makes no difference whether a swing has a large adult or a small child in it. It will have the about the same natural frequency. Slight differences can be caused by slightly different locations of the person's center of mass. This is located about two inches below the navel. When people are sitting the center of mass is in about the same place relative to the seat of the swing regardless of whether the person is an adult or a child.
If a forcing function is applied to a swing at the natural frequency of the swing it will resonate. The amplitude of the swing will increase during each back and forth cycle. The forcing function can be provided by a second person pushing on the swing. In this case even a small child can make a large adult swing by pushing in sync with the swing's back and forth cycle. The forcing function can also be provided by the person in the swing. In this case the person in the swing shifts her center of mass very slightly by changing the position of her legs or torso. This creates a slight pushing force which makes the swing go higher and higher. It takes a very small force but it has to be timed perfectly.
The big question is what keeps the swing from flying apart or spinning over the top of the swing's frame and subsequently killing its rider? After all, if it is a resonating system then it should be very dangerous to keep applying force in time with the swing's frequency. The answer is fairly simple. The equation given above is only good for small angles. When the swing goes beyond a certain height it is no longer possible for the person in it to apply the necessary small force in sync with the natural frequency because the natural frequency changes. In other words the motion of the system is naturally limited.

Jim Sogi offers:

The apparent back and forth motion around the round number is a chart artifact, and as with so many chart artifacts is an illusion. The motion is in three dimensions and only appears on the chart in two. The model is a tether ball, like at summer camp. It has circular momentum from whacking it, and tightens, then rebounds off and unwinds. The angle of the wind depends on the angle of the whack. Circular math a'la Newton might work.

The other model is a guitar string. It has harmonics and standing waves along its length as the axis of vibration meet along the string, similar to price action harmonics. The higher harmonics are recreated in the higher and lower price levels.

Gary Rogan comments:

I also view the market gyrations as something similar to a swing, except it's nothing like a physical, earthly swing because there are two forces involved, and one of them is "unusual" for a physical-world system. In the physical world, there is only gravity (other than a small amount of friction) involved in the dynamics of a swing that results in a simple differential equation describing the motion for small deviations. I see two basic "forces" involved in market motion: "momentum" and "value pricing". Positive momentum is the force that causes people to buy when the market is moving up (buying interest proportional to market velocity), negative momentum is the force that causes people to sell when the market is moving down. Thus momentum is a force proportional to velocity, sort of like inverse friction that doesn't exist in the real world. Value pricing is what causes people to buy when prices are "too low" and sell when they are "too high".

Of course all of this exists in the environment of slow upward drift and real-world-like friction of various trading costs as well as news events and money-supply formations that are not completely dependent on the immediate market dynamics. The relative amplitudes of the two forces also change with time.

Normally the two forces are balanced enough to keep the market gyrating around some sort of a temporary equilibrium that itself is slowly drifting. However, when the momentum force gets too high (as in 2000) it will break the swing.

Jeff Sasmor adds:

Another thing to consider is inertia. There is a nice article on this in Wikipedia and other sources.

The principle of inertia is one of the fundamental laws of classical physics which are used to describe the motion of matter and how it is affected by applied forces. Inertia is the property of an object to resist changes in velocity unless acted upon by an outside force. Inertia is dependent upon the mass and shape of the object. The concept of inertia is today most commonly defined using Sir Isaac Newton's First Law of Motion, which states:
Every body perseveres in its state of being at rest or of moving uniformly straight ahead, except insofar as it is compelled to change its state by forces impressed. [Cohen & Whitman 1999 translation]

Perhaps this explains the recent upwards moves in stocks in spite of multiple discouraging memes. Humans have a lot of inertia, we've probably programmed a lot of it into the machines that do a lot of the trading these days.

It's odd that this came up today, I was mulling the concept last night before falling asleep. Interesting questions that came up are:

It is a system with a lot of inputs and time-varying coefficients. Maybe it's a reverb chamber?

David Wren-Hardin mentions:

Swings and oscillations are found throughout nature where systems on different time courses interact with each other. One obvious relationship is the classic predator-prey population dynamic. As prey animals increase in number, predator numbers rise on a lagging basis. A peak in prey animals is followed by a crash as they consume their resources, dragging the numbers of predators with them. One can cast value investors in the role of rabbits, with their steady grazing on low-calorie fare, and the momentum investor in the role of the coyote, waiting for concentrated packets of dense nutrients. Or one could place the casual investor in the role of rabbit, and the average financial professional in the role of coyote, but I'll refrain from that comparison so not to risk defaming the coyote.

Animals also use oscillations to find out information about their environment, much like the technical analyst or trading-surfer surveying their charts. The weakly electric fish, Eigenmannia, emits an electric signal as a sort of radar to find objects in its surroundings. The problem arises when another Eigenmannia is nearby, sending out a signal at a frequency near the first fish's signal. This results in a "beat" frequency equal to the difference of the frequency of the two signals, composed of amplitude and phase modulations. Much like the market, when the agendas of different market participants collide, the result is confusion and little information for anyone. The fish responds by moving the frequency of its signal away from the other, a process known as the Jamming Avoidance Response. The fish doesn't know if it is higher or lower, and has to solve the problem based on how receptors spaced over its body are receiving the phase information of the two signals. In essence, each receptor "votes" on whether it perceives the signal to be leading the other, i.e., it's at a higher frequency, or lagging, i.e., a lower frequency. Any one neuron may be wrong, but in the aggregate, the animal arrives at the correct conclusion. In classic research, the late Walter Heiligenberg termed this organization a "neuronal democracy".

As traders, individual neurons awash in the market's oscillations, we are faced with the same problem. Are we leading? Are we lagging? It may come as little comfort that the market will eventually get it right, even if we are wrong.

GM Nigel Davies offers:

In chess this would be quite a typical scenario. Often when you inflict some kind of permanent damage (structural or material), there is a temporary release of energy from the other side's pieces. The 'trick' is to balance the gains against the likely reaction, and this is also necessary. To improve a position you often have to allow some temporary (hopefully) counter play, kind of like a wrestler letting go of an opponent temporarily so as to get a better grip.

Dr. Michael Cook adds:

Gary comments that market gyrations are "nothing like a physical, earthly swing" because there are two forces involved. How about the case of a damped oscillation, which has physical analogues? Using this analogy, momentum investors are "damped" by the "restoring force" supplied by value investors.

And what happened in the bubble was the disappearance of effective value investors, which led to an un-damped oscillation, which, when driven at the appropriate frequency, leads to wider and wider oscillations which no physical -- or financial -- system can sustain.

The collapse of the Tacoma Narrow Bridge is the canonical example, and here is an illustration of the math behind the phenomenon.

Rick Foust contributes:

Imagine a ball rolling down a slight incline that has a crown in the middle and rails on the sides, similar to a highway with guard rails. The ball seeks the nearest rail, bounces repeatedly and eventually stays on the rail as it continuous forward.

Now imagine that the roadway has an irregular surface and rough rails. The ball will once again seek a rail. But this time, it will do so in a careening fashion that depends on the roadway surface. As it encounters a rail, it will briefly run down the rail, bouncing as it goes, until it eventually hits a point of roughness large enough to kick it to the other side. The amount of roughness required to cause a change in state depends on the slope of the underlying surface.

In the market, the rails are accumulations of large and small limit orders. Rail roughness is created by variations in order size and position. The roadway surface is formed by underlying market orders that create a natural drift. The roadway surface may undulate in a rhythmic fashion, similar to the Tacoma bridge, if market participant psychology is undecided. Or it may consistently lean in one direction if there is a prevailing sentiment.

At some point, limit orders at one rail or the other are exhausted, pulled or merely absent. At that point, the ball is free to discover the location of other rails. Stops are now run, creating new market orders. New participants are drawn in. If the new rails encountered are small and scattered, the ball will plow through them and may even gain momentum until it eventually encounters a rail large enough to stop it. Until this rail is reached, the underlying roadway slope will likely increase as sentiment is self-reinforced.

A Wealth of Experience for New Speculators? from Greg Rehmke

I thought there were a couple interesting aspects of Steve Leslie's Nov. 22nd post. He concludes: "Success in poker is like success in life. It is attainable but not easy and it requires lots of work. That is why so few attain it." Yet if everyone, or a significant number, were to follow professional advice, the quality of poker play could jump nationwide without any change in levels of success (though perhaps many would gain by feeling less stupid about losing, since bad luck rather than bad play would be responsible).

Similarly with sports. Every NBA or NFL team could raise their quality of play 20% with no change in levels of success.

Except in international competition. NBA teams and players, as well as gamblers, might do better in world competition following a popular U.S. book, lecture tour, or movie that somehow inspires competitors to higher quality play.

Unlike gambling and sports, which are zero-sum games, (apart from the mental or physical pleasure gained through competing), investing is a positive-sum game. Higher quality investing directs funds to higher quality projects. Insight into foolish corporate or commodity projects and positions, provides both returns to winners and instruction to losers. Losers don't just lose pots or games, if left alone they continue to misdirect and waste capital and labor resources. "Capital" belongs to people and "labor resources" are people. Misdirecting them wastes the time and money of people in production, and deprives consumers of goods and services that could have been produced with better "play" by investors (assisted by speculators).

The question arises whether there might be a similar difference in the quality of play across cultures. If the game is basketball, U.S. beats China. If the game is ping pong, China beats U.S. (for now, at least). I don't know how good the Chinese are at poker, though I hear gambling is very popular. As hundreds of millions of everyday Chinese gain enough wealth for everyday gambling, there will be some thousands or tens of thousands wealthy enough for big-time gambling as well as big-time investing and speculating.

As these newly minted big-time speculators jump into the game, will they make systematic "newby" mistakes? I don't know enough about Chinese culture to know what to expect. But with commodity prices jumping up and down in front of tens of millions of gambling-prone newly capable investors what might we expect? (Plus, thousands of local government officials seem able to gamble and speculate illegally with local bond revenue.) Markets will draw in an influx of low-skill, limited-experience players, flush with success from one culture and range-of-experience (wealthy Chinese manufacturers), trying their hand with commodity speculation.

A Piece on Milton Friedman, sent in by Susan Niederhoffer

The following is from Gary Becker and Richard Posners' Blog. It is a piece by Becker on Milton Friedman, who sadly passed away this month. [Read the NYTimes Obituary]

I will not dwell here on what a remarkable colleague he was. However, I do want to describe my first exposure to him as a teacher since he enormously changed my approach to economics, and to life itself. After my first class with him a half-century ago, I recognized that I was fortunate to have an extraordinary economist as a teacher. During that class he asked a question, and I shot up my hand and was called on to provide an answer. I still remember what he said, "That is no answer, for you are only restating the question in other words." I sat down humiliated, but I knew he was right. I decided on my way home after a very stimulating class that despite all the economics I had studied at Princeton, and the two economics articles I was in the process of publishing, I had to relearn economics from the ground up. I sat at Friedman's feet for the next six years-- three as an Assistant Professor at Chicago-- learning economics from a fresh perspective. It was the most exciting intellectual period of my life. Further reflections on Friedman as a teacher can be found in my essay on him in the collection edited by Edward Shils, Remembering the University of Chicago: Teachers, Scientists, and Scholars, 1991, University of Chicago Press......
To conclude on a more personal level, I was most impressed by Milton Friedman's sterling character--he would never soften his views to curry favor--his perennial optimism, his loyalty to those he liked, his love of a good argument without any personal attacks on his opponents, and his courage in the face of prolonged and virulent attacks on him by others. I cannot count the number of times I participated with him in seminars, nor how many visits my wife and I shared with Milton and Rose, his wife of almost 70 years. Rose, a fine economist, would not hesitate to differ with her husband when she believed his arguments were wrong or too loose. When I spoke on the phone with him last Monday, he sounded strong and a bit optimistic about his health, even though he had just returned from a one-week hospital stay with a severe illness, an illness that a few days later took his life. Although his ideas live on stronger than ever, it is hard to believe that he is not here. I can no longer seek his opinions on my papers, but I will continue to ask myself about any ideas I have: would my teacher and dear friend Milton Friedman believe they are any good?

Steve Wisdom adds:

I also like these vignettes from Ben Stein:

When I was a Columbia undergrad in the early '60s, Friedman taught there for a year and was a good friend to me. He even used applied statistics to save me from romantic desperation when I was worried about replacing a girlfriend. If there were only one right woman for every right man, he advised, they would never find each other. Another time, he stopped me from crossing against the light on Broadway and 116th Street, telling me, "Why risk your whole life to save 10 seconds?"

Bernanke: Profits or Prices?, from George Zachar

There was a nice overview of Bernanke's current thinking on the economy in today's speech. There were No bombshells, with both the rhetoric and the conclusions between the 40 yard lines of recent Fedspeak and Centralbankese.

One passage struck me as being modestly noteworthy:

What implications does the pickup in labor costs have for price inflation? One possible outcome is that increases in labor costs will largely be absorbed by a narrowing of firms' profit margins and not be passed on to consumers in the form of higher prices. The fact that the average markup of prices over unit labor costs is currently high by historical standards suggests some scope for this outcome to occur. If higher labor costs are mostly absorbed by firms and not passed on, then workers will see the gains in their nominal compensation per hour of work translated into greater real compensation per hour; in the process, workers would capture a greater share of the fruits of the high rate of productivity growth seen in recent years. The more worrisome possibility is that tight product markets might allow firms to pass all or part of their higher labor costs through to prices, adding to inflation pressures. The data on costs, margins, and prices in coming months may shed some light on which of these two scenarios is likely to be the better description of events.

Bernanke echoes his predecessor in calling attention to the rise in profit margins, and implying it is business' slicing of the wage/profit pie that is central to inflation pressures. This plays perfectly in the rhetorical framework of the labor union-backed Democrats who will be holding the gavels on Capitol Hill.

(Anecdotal) Updated Macro Information, from Dr. William Rafter

I find that at this time there is no evidence from the Monetary Base numbers suggesting a change in policy. Additionally there is no change in the job growth numbers as evidenced by the payroll tax receipts.

George Zachar adds:

This morning William Poole observed that the MZM and M2 monetary aggregates "are chugging along at pretty steady rates." Year over year, he noted, MZM is up 4.3%, while M2 is up 4.9%.

Although they have accelerated in more recent months, Poole said those money supply growth rates "are pretty close to the growth rate we've got for nominal GDP" and are "consistent with the growth that's being forecast for next year."

Since real GDP growth is expected to be "a little below 3%," he said, "if you take a 2% inflation target that adds up to 4 1/2% to 5%, which is really very close to where money growth is right now." So he said, "money growth is not telling you that monetary policy is tight or easy, just in line with GDP growth.

Bill replies:

If you think of the Monetary Base as a window on Fed policy, then the data makes the case that there has been no change in policy. Since the beginning of 2005 that policy has been moving from accommodative to restrictive. Thus there is no deviation from a restrictive policy, which at this time is very restrictive (more below).

George Zachar's comment was more insightful. George pointed out how the Fed's statements on M2 and MZM growth were contradicted by my data. The boys at the Fed think that they are walking the narrow line between restrictive and accommodative. The data suggests otherwise.

At this time the Monetary Base is in excess of 4 percent below the long-term mathematical fit of that data. This is more restrictive than in 1998. Perhaps our "planners" wanted to be more restrictive in 1998, but had to back off because of (a) Asian contagion, (b), Russian bond default and (c) Long Term Capital Management. In any case, the current data shows the present to be more restrictive, and there is no anxious moment to force a change. The period of 1990-92 had the most restrictive policy. Remember that as the period of "It's the economy, stupid".

Monetary Base is an interesting number, consisting of currency and deposits at Federal Reserve Banks. Breaking the Base down into those two components does not give you as complete a picture as the two together. For example, look at the two spikes: the earlier one was the Y2K spike caused by excess currency (the ATMs were all going to fail). The later spike (9-11) was caused by the Fed goosing the bank reserves. Only if you look at the Base data do you see both spikes.

I'm looking forward to Diebold next week.

Read our Movies Page, with new reviews from Scott Brooks and Marion Dreyfus

An Alternative Use For Canes, from Arthur Cooper

Monday's Barron's (p 32) describes the efforts of a collector to donate her collection of over 1,000 walking sticks (some dating back to the 1500s) to charity. If you can't use them for investing, you may as well get a tax deduction for them.

FNMA Delinquency Rates, from George Zachar

This table is the latest FNMA delinquency data ... contra popular doom, it shows a declining loan problem.

100 Largest Declines, by Victor Niederhoffer

Below is the distribution of months between the chronological record of the 100 largest declines in S&P futures from January '01 to date. Starting with the January 2, 2001 decline of 27.1 points and ending with today's, decline of 19.3 points, they range in size from a 57.0 point decline on 9/19/2001 to a 17.3 point decline on 8/28/2001.

Months Between Consecutive Declines in Top 100
Number of Months Number of Observations
0 61
1 28
2 03
3 03
4 02
6 01
14 01

The average duration between each of the top 100 declines was 1.5 months. A time series of the durations between consecutive large declines however shows that the average duration between them was 1/3 of a month in 2001, 1/4 of a month in 2002, 1 month in 2003, 1 and 3/4 months in 2004 , 14 months in 2005, and 2 months in 2006.

Kim Zussman adds:

The attached graph is a plot of big daily moves of SPY since January 2003 (up or down more than 1%) by date. Since late 2003, big daily moves look to be less frequent, as well as smaller, which fits with the secular decline in volatility. The frequency change is shown by counting moves per year:

Year Down Up Up/Down
2006 13 13 1
2005 21 16 0.76
2004 22 23 1.05
2003 38 42 1.11

The ratio of up/down is 1 or more for all years, except for 2005 (Which fits with other studies suggesting interval-returns scale contemporaneously to count down days).

Another observation is that yesterday's decline is the first in a while, whereas big advances have been more evenly spaced. In fact when ranking gaps between big declines, yesterday's was the longest hiatus dolor of any since January 2003.

An Ongoing Thread Entitled Greed and Healthcare

Some Thoughts on December, by Victor Niederhoffer

  1. December is a generally good month averaging about a 1.5% rise in the S&P, and having declined only 7 out of the last 26 years since 1979.
  2. The biggest decline during this stretch came in 2002 with a 7% decline, which had been preceded by a 20% decline over the previous 11 months, and the next biggest decline was of 4% coming in 1980, following a 30% rise over the preceding 11 months. The biggest rise came in 1991 which was 11%, and followed a 10% rise over the preceding 11 months. The second biggest rise of 6% came in 1987, which was preceded by a big decline of 4% in the preceding 11 months. Thus, big declines come after big rises and big declines, and big rises came after big rises and big declines -- in aggregate there is certainly not a linear relationship. All one can say about the extent to which this is non-random is that about half the moves were approximately 1% rises, and there were a few outliers that followed enormous rises and declines from the preceding 11 months.
  3. An attempt to get proper percentage changes, and proper adjustments for a series like this shows the need for careful work. The S&P Index started out at around 108 in year end 1979 and now is at 1400, but the algebraically adjusted futures (the only way to go), started out at approximately 600. Any calculations that do not take into account the influence of dividends and levels on studies like this are woefully inadequate.
  4. A look at adjusted S&P futures shows that, from November 1998 when they stood at 1400 to date, a buy and hold strategy would have broken even. It is no wonder that there is so much potential for people who have missed the boat -- for the Abelprechflecfals of the world to join the party and create a big move or to catch one up.
  5. Some of the changes this year are somewhat inconsistent with the 10% yearly volatility one would compute from extrapolation of daily variations. There is a nice 30% move in the first 11 months of 1980, a rise of 31% in 1995, and four other changes of approximately 25% for the year during the test period. The problem with selling calls and covered writes is clearly indicated by these moves, as is the reason this is all so popular on Wall Street, causing the public to lose much more than they have to lose.
  6. The Astronomer Royale, Dr. Kim Zussman, has performed a nice regression with an r2 of 8%, showing that the first 11 months is positively correlated some 30% with the next month. Unfortunately, with small numbers like this, a non-linear relationship and a few 30 percenters contributing to the sum of squares, this is not overly meaningful and certainly not predictive.
  7. I am often asked the proper way to learn to count. A good way to do it is to wrestle with monthly adjusted prices and unadjusted prices and do some calculating ... In fact, I propose a method. Start with 1979 year end, as 1969 year end or anything else is much too far back to be relevant to anyone but the chronic bears. Consider four hypotheses as to the predictive powers of December:
    1. Compute a regression prediction of December based on all the data available up to that time. For example, in 1982 you would have two observations, 1980 and 1981. In 1983, you would have 1980, 1981 and 1982 to fit.
    2. Compute the average move in the Decembers up to that time and predict that the next month will be the same.
    3. Compute the average move in the last three Decembers, and predict that the next month will be the same as this.
    4. Take the prediction generated by the first three methods each year and find which one has the best forecasting record in the past, and use that method for the next prediction.
    Now you have four methods of prediction. Does any beat just predicting the average change from month to month based on simulation, by a reasonable amount. If you want to make money, or test seasonality properly you have to use your head.
  8. Some of the years are amazing in retrospect. There was 1997 where some people, I am told, lost a lot of money in Thailand and elsewhere from the bull side. Yet the market went up 26% in that year. There were the '5 years of 1985 and 1995 where the market pushed up 30% on the year. Also the year 1987, where the market was actually making a comeback in December. There was a run of fantastic rises in 1995 to 1999 pushing 20% or more in each one.
  9. As we have seen the market went from 100 to 1400 during the 26 year period that I have reviewed. Were there any negatives in any of these years, and were they more or less than the present? Are they counterbalanced by any positives or has this been discounted, and is this more or less bullish than usual?
  10. There would seem to be a tendency for the market to do well in December over the years. Is this due to the generally optimistic spirit that most of us have in December and is there more than one way to make a profit from this?
Year Adjusted Futures Move for first 11 Months (%) Adjusted Futures Move in December (%) Start of Year S&P Index
1980 30 -04 108
1981 -09 -03 136
1982 13 01 122
1983 15 -01 141
1984 -03 01 165
1985 20 05 167
1986 20 -03 211
1987 -04 06 242
1988 10 01 247
1989 25 01 278
1990 -10 01 354
1991 08 10 330
1992 03 01 417
1993 08 01 435
1994 -02 01 466
1995 30 01 459
1996 25 -02 616
1997 25 01 741
1998 15 05 971
1999 12 04 1229
2000 -10 03 1469
2001 -15 01 1320
2002 -20 -07 1148
2003 15 04 880
2004 06 03 1112
2005 05 -0.5 1211
2006 09 1248

Dr. Kim Zussman adds:

Looking further at the same monthly data, December moves seem large compared to the prior 11 months. To check this (and eliminate effects of sign), for each year I looked at the ratio of absolute values:

|Dec ret|/|J-N ret|

One would expect each month to contribute something like 1/11 of the return of the prior 11 months. But Decembers are larger, as shown by the data:

Year Jan-Nov Dec |Dec|/|j-n|
2005 0.031 -0.001 0.031
2004 0.056 0.032 0.583
2003 0.203 0.051 0.250
2002 -0.184 -0.060 0.327
2001 -0.137 0.008 0.055
2000 -0.105 0.004 0.039
1999 0.130 0.058 0.445
1998 0.199 0.056 0.283
1997 0.290 0.016 0.054
1996 0.229 -0.022 0.094
1995 0.318 0.017 0.055
1994 -0.027 0.012 0.450
1993 0.060 0.010 0.169
1992 0.034 0.010 0.296
1991 0.136 0.112 0.819
1990 -0.088 0.025 0.281
1989 0.246 0.021 0.087
1988 0.108 0.015 0.136
1987 -0.049 0.073 1.487
1986 0.180 -0.028 0.158
1985 0.209 0.045 0.216
1984 -0.008 0.022 2.733
1983 0.183 -0.009 0.048
1982 0.130 0.015 0.117
1981 -0.069 -0.030 0.434
1980 0.035 -0.034 0.966

The attached plot depicts |Dec|/|J-N| vs. date, and though variability in this fraction has damped out over time, it still seems high. Even discarding two out-lying years of '83 and '87, the mean ratio is 0.26; almost 3 times 1/11.

Rick Foust comments:

I suppose that there are two major factors (amongst other smaller ones) that cause the December effect.

The first is money flowing into IRAs prior to the end of the year. Someone on the retail side of the business could confirm or refute this.

The second is large fund rebalancing. Some funds operate on the basis of maintaining a fixed ratio in various asset classes (percent stocks to percent bonds...). Periodic rebalancing of the ratios forces them to buy the asset class that has done poorly and sell the asset class that has done well. It seems that rebalancing predominantly takes place towards the end of the year. Surely there is someone here that could confirm or refute this.

Scott Brooks offers:

IRA fund flow is bigger towards the end of March thru about April 20th or so than it is in December (I say April 20th because the envelope the IRA deposit check is mailed in need only be post marked April 15th).

One can also look at index reconstitution as issues are dropped and others added to the indexes. However, this has the greatest effect on the smaller issues (smaller in terms of cap weighting). Most larger capitalized stocks are going to stay in the index and could be bought in an effort to rebalance a portfolio fund back into the index weighting.

As a result, the index funds have to go thru a flurry of rebalancing, selling the issues dropped from the index and buying those that are added....and proportionalizing those stocks that stick (again, mainly the largest capitalized issues).

Something else to consider (for both money managers and individuals) ...

Stocks that have a loss are often sold to realize capital losses to offset the fact that ...

Stocks that managers or individuals feel have run their course and have a gain are sold.

Another phenomenon that occurs are RMD's (Required Minimum Distributions) for those with qualified money that are over 70. This is a forced sale for no other reason than realizing taxable income. What's interesting is that this now becomes money in motion and as a result, opportunity to invest in other areas. As the baby boomers age, this will become more and more of a factor ... especially since such a large number of boomers bought into the myth that they will retire in a lower tax bracket than when they were working.

I'm sure there are are many other reasons that our resident bond mavens and options experts (as well as anyone smarter about the market than I) could add to this discussion

An Anonymous Contributor says:

In his post Kim Zussman wrote that:

Looking further at the same monthly data, December moves seem large compared to the prior 11 months. To check this (and eliminate effects of sign), for each year I looked at the ratio of absolute values:
|Dec ret|/|J-N ret|
One would expect each month to contribute something like 1/11 of the return of the prior 11 months.

No, one wouldn't. Since you already have all the data, go ahead and look at every month relative to the other eleven months of the same year (or to the preceding eleven months, it won't make much of a difference). My own back-of-the-envelope calculations with unadjusted data show a mean of about .22 over all months, with December being somewhat below average.

Give thanks for Pilgrims -- and McDonald's, by Victor Niederhoffer and Laurel Kenner

Thanksgiving is about sharing prosperity, and it's a good time to think about where prosperity comes from. The Pilgrims figured it out in 1623. We'll retell that story as we celebrate the way it lives on in countless U.S. families and companies today. And in particular at one company, McDonald's (MCD, news, msgs), that in its humdrum way beautifully demonstrates the source of prosperity and the American way of life.

The Pilgrims started with so little. They had to hide in England because the authorities considered them dangerous. They fled to Holland but found themselves compelled to take menial jobs. On the way to America, many of the company died. They lost their way to Virginia and landed in Massachusetts just as winter set in. The Virginia Co., their backers in London, went bankrupt and couldn't send relief supplies.

To cope with want, the Pilgrims made the same mistake that so many countries do even today: They divided all their land, efforts, supplies and produce in common, to each according to his need.

As always in such systems, need surpassed supply.

The Pilgrims spent their first three years in America suffering from hunger, illness, cold and infighting. People stole from the common stores "despite being well whipped," according to William Bradford's "Of Plymouth Plantation."

Bradford, governor of Plymouth Colony, records what happened next: "They began to think how they might raise as much corn as they could, that they might not continue to languish in misery. After much debate, the Governor decided that each settler should plant corn for themselves."

Under the Land Division of 1623, each family received one acre per family member to farm. That year, three times as many acres were planted as the year before. Prosperity was not long in coming.

The Pilgrims turned from their Old World system of common ownership to incentives. They didn't go that way out of ideological conviction, but because they didn't have the luxury of waiting for support to come to them.

How many families in America tell the same tale? "When we came here, we worked hard and our lives were better."

But that wasn't the end of the story. Before the switch to incentives, the hungry settlers were at each other's throats. Hard workers resented receiving the same portions of food as those who were not able to do even a quarter of the work they did. Young men resented having to work without compensation to feed other men's wives and children. Mature men resented receiving the same allotments as did the younger and meaner sort. Women resented being forced to do laundry and other chores for men other than their husbands. Many people felt too sick to work.

But when they were allowed to farm their own plots, the most amazing thing happened. Everybody -- the sick, the women and even the children -- went out willingly into the fields to work. People started to respect and like one another again.

It wasn't that they were bad people, Bradford explained; it's just human nature. Adam Smith came to the same conclusion later, and Friedrich Hayek updated Smith's ideas for the 20th century. But we don't need to go back to New England for understanding. Similar outcomes can be seen at McDonald's every day.

For centuries, people on the lower rungs of the social ladder weren't able to eat meat. They ate grains and beans. But people like beef. And chicken.

When McDonald's started popping up in every neighborhood, all of a sudden there was an affordable place for families to eat. Previously, one of the main differences between the upper and lower classes was that the rich could eat out. Even if the poor could afford the tab, they couldn't hire baby sitters, and they couldn't bring their kids to the elegant establishments designed for the rich because they would have disturbed the other diners.

Most kids don't like fancy restaurants anyway. They want fries, not polenta with wild mushrooms. They want fried codfish, not turbot. They want burgers, not lamb chops.

How many people has McDonald's made happy? How many families has it brought together? How many Happy Meals have been eaten there? How many kids have enjoyed the playgrounds? How many tired workers have been able to catch a quick meal? How many women are able to pursue careers and other productive activities and dreams because McDonald's has freed them from the task of having to cook every night?

The Pilgrims might have served 200 or 300 American Indians at their Thanksgiving feast. McDonald's serves 26 million customers a day at 13,700 U.S. restaurants.

For the traveler, McDonald's is a home away from home, offering so much for so little. The restrooms are clean. And McDonald's serves hot strong organic coffee in smooth cups of some wonderful material that keeps liquids hot without burning the hand, shaped to fit into the cup holders that just happen to be in your car, with carefully designed tops that permit just the right amount to be sipped.

No regulator, no fascist dictator, no socialist planner decreed sip tops or cup holders. But how many late-night drivers have died for the lack of a good cup of coffee? What could be more munificent than saving lives?

And the story doesn't end there. Consider the employees of McDonald's. How many people have worked there and learned the most important lesson in America: The customer is always right?

The anti-this-and-that people who demonstrate against profit incentives and free markets like to single out McDonald's as a symbol of modern capitalism. (They don't mean that in a nice way.) As the McLibel Support Campaign puts it: "(McDonald's) has pioneered many business practices that have been taken up by others, and have come to represent a symbol of the way that society is going --'McDonaldization.'"

But when have you ever seen an unhappy customer at McDonald's? There couldn't be too many of them, because about 10% of America eats there each day. Given the choice of cooking at home or going to other restaurants -- and competition ensures that there are other restaurants -- people go to McDonald's because they trust they'll find good food, quick service and value for money. What could be more munificent, more representative of sharing the fruits of hard work than McDonald's?

McDonald's and the Pilgrims are the essence of America. The people work hard, motivated by the chance for profits. They provide a welcome to others, whether to Indians joining in harvest celebrations, or to customers looking to satisfy their hunger. Their work results in high quality, low costs and family togetherness.

Those humdrum, everyday attributes are what makes America great. That's what we should be celebrating. It's the source of all our munificence, from the first Thanksgiving to today.

Thank the Pilgrims for eBay, by Victor Niederhoffer and Laurel Kenner

The story of the Pilgrims' first years in America shows how a change from common ownership to private property led to the feasting celebrated today at Thanksgiving. Similar tales of expanding harvests and benevolence are told wherever people can keep the fruits of their labor and trade them as they please.

The story illuminates why eBay and Chicago Mercantile Exchange Holdings, the owner of the Chicago Mercantile Exchange, were among the two best-performing stocks in their class during each of the last two years, and it provides a useful signal that other markets now preparing to go public might be good investments.

After landing at Plymouth in November 1620, the Pilgrims endured a cold, hungry winter during which half of them died. Promised supplies failed to arrive from London. The 1621 harvest wasn't as big as hoped, nor was the 1622 harvest. More famine seemed inevitable.

And then the colony began to talk through the problem. The London merchants who financed the Pilgrims' settlement specified "that all such persons as are of this colony are to have their meat, drink, apparel, and all provisions out of the common stock and goods of the said colony." In 1621, the Pilgrims planted 26 acres, according to Judd W. Patton, an economics professor at Bellevue University in Nebraska. In 1622, they planted 60 acres, but that wasn't enough to keep hunger away.

People began to steal by night and day, "although many were well whipped," Gov. William Bradford reported.

The system made no sense to anyone. The hard-working subsidized the slackers. The young and ambitious didn't want to do work for anyone else and get nothing for their trouble. The wives of some of the men objected to be commanded to wash clothes, dress meat or do other tasks for other men.

As Bradford would later write in "Of Plymouth Plantation 1620-1647," "At length, after much debate of things, the Governor (with the advice of the chiefest amongst them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves, in all other things to go on in the general way as before."

In what's known today as the Land Division of 1623, each family was allotted land at the rate of one acre per family member and told to go out and produce. More than 184 acres were planted that year. And, Bradford reported, "This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little ones with them to set corn."

What is apparent from this history is what we all know from our experience: When you can benefit from working hard, you work harder. Under the system of common ownership, there was stealing, shirking and malevolence. Under the incentive system, there was good feeling, hard work and benevolence.

News of the success at Plymouth and other settlements like it attracted more and more immigrants to the New World. And everyone who lives in America today has a personal story that is part of that great continuing tale.

The impulse to improve one's conditions through greater effort and trade is as natural as breathing, and this has been so since the beginning. New York University economist Haim Ofek, in "Second Nature: Economics Origins of Human Evolution, argues that trade helped spur the growth of the brain.

"Exchange requires certain levels of dexterity in communication, quantification, abstraction, and orientation in time and space, all of which depend on the lingual, mathematical and even artistic faculties of the human mind," Ofek writes in the introduction to his 2001 book. "Exchange, therefore, is a pervasive human predisposition with obvious evolutionary implications."

Relatively flexible and acute people had an edge in trading. They survived and prospered, they had bigger, healthier families, and their descendants became dominant.

The success of eBay since its founding in 1995 shares many similarities with the Pilgrim story. Now a public company with a market value of around $75 billion, eBay has created an electronic network of niche markets that takes account of the infinity of human tastes and aptitudes and specializations. The stock is up 72-fold since its September 1998 IPO, from a price-adjusted initial price of $1.50 to $109.42 as of Nov. 15. That is after a 77% drop in the tech crash of 2000.

Like the Pilgrims, eBay gives each of its sellers a piece of land (though in virtual space) to carry out his or her business. A spirit of benevolence is apparent in the company's feedback system; in almost half the transactions, both buyer and seller rate each other, with almost all them highly favorable. But to us, there is one overriding reason for eBay's success: It unleashes the desire and provides a forum for buyers and sellers to improve themselves by trade in a million ways every day.

The CME, odd as it sounds, also bears some similarities to Plymouth Colony. Founded in 1897 as a member-owned organization, the Merc started out as a market for the trading of foodstuffs. Its activities and goals were torn between the interests of the members and the interests of the public. A low point was reached in 1989, when a widely publicized sting operation uncovered conflicts of interest and failures to give the public a fair shake.

For years, the Merc had been content to play a sleepy second fiddle to the Chicago Board of Trade both in volume and number of products traded. In 1972, an inspirational governor -- in this case, Leo Melamed -- decided it was in everyone's interest to match members' interests with the growing public interest in financial products such as currencies, Treasury bills, Eurodollars and stock market futures. Growth exploded in 2000 as the CME prepared for the shift to public ownership by converting members' interests to shares. Since the Merc went public in December 2002 with its shares listed on the New York Stock Exchange, the stock has risen nearly six-fold, and it has stayed in the top 10 of NYSE performers.

In effect, the CME transformed itself from a tradition-bound club with the image of a raucous den where men shouted at each other to get an edge on the public in trading pork bellies. Instead, it became a pioneering company that lets hardly a week go by without introducing a new electronic product designed to give the public more ability to improve and hedge their ownership of stocks and debt.

The table below shows how acreage planted and revenues grew at Plymouth, the CME and eBay.

The Plymouth, Chicago Merc and eBay experiences
Year Plymouth acres planted CME revenue* eBay revenue*
(1621/2000) 26 $226.6 $431.4
(1622/2001) 60 $387.2 $749.8
(1623/2002) 184 $453.2 $1,214.1
(2003) $526.1 $2,165
(2004)** $743.8 $3,260
* In millions    **Analysts' estimates

The Pilgrims originally agreed with the London merchants who financed their settlement to hold their land and its products in common, a sort of forced socialism, much as the communists imposed on Russia after the 1917 revolution.

And the Pilgrims learned, as the Russians would, that the system led to misery and poverty. Whenever trade and its rewards are permitted, well-being and output improve across the board. The principle is so mundane that it's hard to believe that it could ever be forgotten. But it was. The Soviet economy broke down because people had no incentive to reduce costs, to produce a quality product, to provide the kind of gracious service that an American expects from even a humdrum retailer.

If it weren't for those who risked death -- literally -- to start private enterprises on the black market, the Soviet system would have collapsed long before it finally did.

Everyone knows a million examples of how people respond to incentives. It's no accident that when President Bush won a reduction in taxes on capital gains and stock dividends in May 2003, the S&P 500 ($INX) responded with a 27% rise. Incentives to buy stock increased, so prices rose. The after-tax returns from stocks increased, so the public decided to place more dollars into stocks versus the alternatives.

In Plymouth, thanks to the gift of the Land Division of 1623, trade was created, and it did what it has always done:

  1. It allowed economic freedom. The Pilgrims borrowed the money to start their colony. Their decision to redistribute the land allowed rapid repayment and the freedom to practice their beliefs as they wished.
  2. It financed new enterprises. The Virginia Company of Plymouth served its own interests by lending to farmers, giving the company a chance to increase its agricultural imports.
  3. It increased output. When each Pilgrim family gained the freedom to labor as they wished in exchange for the freedom to keep their crop, yields increased.

We believe the successes of the Pilgrims, the CME and eBay are not anomalies. And we will predict success for any company or country that lets people trade as they are predisposed to do by instinct and common sense. If the International Securities Exchange and Chicago Board of Trade follow through on plans to offer shares to the public and if the New York Stock Exchange ever goes public, we'd recommend buying those stocks.

In Search of a Trading Purpose, from Martin Lindkvist

I often ask myself what is the purpose of my trading. Yes, I know, I do it for the money, for the intellectual challenge, and all that. I also understand how the markets function by allocating capital and signaling value, etc., and how I am a small, small part of that. But I mean it from a different perspective. Having worked a lot with business planning (mostly with LOTS) in different companies, I often think of how I would characterize my reason for trading if I were to write it in a business plan format. If I sold some gadget for example, I would ask: What is the purpose of the selling of the gadget? Who benefits from it? What is the underlying reason that there will be a value gained from my selling the gadget, from which I can make a profit. I think that the same applies to trading. Furthermore, a good purpose should also function as a day to day rudder and make sure that I do not deviate from my niche. To do that, it should encapsulate what we should do, why and for whom. With a well thought out purpose, we should be guided both in our every day activities as well as our important long term decisions.

During the talk this year in Central Park, Mr. Wiz mentioned something that perhaps is not spelled out as a company or trading purpose, but which I nevertheless think was one of the best fitting purposes I have ever heard, as far as I understand the underlying thinking in the company. He said: "We provide the market with liquidity in fearful situations". Well, it seems to have worked out quite nicely, and I think there is a lot to be gained by all traders from being very clear with what it is their niche is in the market, and spelling it out in a "trading purpose".

Scott Brooks adds:

Providing the market with liquidity in fearful situations is tantamount to buying low. The flip side of this coin is providing the markets with liquidity during the great times, which is tantamount to selling high!

This is an investment philosophy that I invented years ago ... it is called "Buy Low and Sell High" ... (I know, you're shocked, you did not know I was the inventor of "buy low and sell high")

But seriously ...

This was described to me by a college professor as the "good guy school of investing". It works like this:

If someone wants to sell you something for far less than it is worth, be a good guy and buy it from them. Conversely, if someone wants to buy something from you for far more than its worth, be a good guy and sell it to them.

The "Good Guy School of Investing" is providing liquidity to the markets during fearful situations (and also providing liquidity when the party the market mistress is throwing is at its crescendo.)

In between, just take advantage of the long term positive drift!

Dr. Kim Zussman comments:

I recall Viktor Frankl's Man's Search for Meaning. His conclusion was that we are not in a position to ask life it's meaning - life will ask you to determine it's meaning.

Something like 'what you get out of it is proportional to what you put into it.' Even if you lose, or under-perform various benchmarks, you get to be ironic.

For some, trading has analogies in most aspects of the universe, and can become self-consuming. To others it is just money; and Buffett, Soros, Ken Smith, etc. all put on their pants one leg at a time and suffer the same frailties we all do.

Laurence Glazier contributes:

This brings to mind the great Armstrong lyrics:

If I never had a cent I'll be as rich as Rockefeller Gold dust at my feet on the sunny side of the street [More]

So above all let us trade for the love of it! Trading is a two way process and equally important as our purpose is the realization that it shapes us, acting, like other arts, as a mirror.

GM Nigel Davies mentions:

Something I've noticed with many very strong chess players is that they don't need to think about purpose, they are simply at one with the game. And one of the best ways to nobble a tournament leader is to congratulate him on his excellent play and ask what it is that he's doing right (not that I'd use such a tactic myself).

Accordingly I suggest that one of the goals of mastery is get past the stage of awkward consciousness and discussions such as the present one. For a chess player it should be enough to say 'I crush, therefore I am', and the trading version would be 'I'm profitable, therefore I am'. And the strategies required should be in one's blood, things that are so well studied and deeply ingrained that one uses them as naturally as breathing.

Jim Sogi adds:

In Trading and Exchanges by Larry Harris of USC discusses why People Trade. People trade to invest, borrow, exchange assets, hedge risks, distribute risks, gamble, speculate, and deal. Understanding the reasons different people trade and the taxonomy of traders, including ourselves, allows understanding the opportunities that arise. Interestingly a smaller percentage of participants are true investors, and even fewer are speculators. Of those even fewer of what he terms informed speculators are the statistical arbitrageurs, of which we compose a small part. Oddly Many do not trade to profit but for other reasons. This is where the speculators purpose in the firmament comes in, and for which we are rewarded, to facilitate the other purposes of the other participants. They pay us for that privilege. Dealers are the ones who sell liquidity, not the speculators. The above does not answer the heart of Mr. Lindkvist's query, but it does set the framework for the answer which must vary according to each of our purposes and which niche into which we fit in our respective operations.

Larry Williams mentions:

Years ago we did a personality profile at seminars asking traders to list the 3 primary reasons they traded.

None of them listed as the first reason to make money.

Answers were like, "Excitement, Challenge, to show my brother in law I'm smarter than him, etc"

Kim Zussman creates a masochist/self-loathing correlation matrix:

Long Only Bought Hold Sold
Too Soon -$ -$ -$
Too Late -$ -$ -$
Too Long -$ -$ -$

Long/Short Short Flat Long
Market Up Up/Down Down

Short Only
100 Year Return -1,000,000%

Steve Ellison comments:

There is a technique used in ISO certification called SIPOC. In this technique, an organization identifies its suppliers, inputs, processes, outputs, and customers (hence the acronym). The organization divides its processes into those that create value, triggers for value processes, and supporting activities that do not themselves create value for customers but facilitate value creation. This technique can help an organization articulate its value proposition and focus its processes on value creation.

Participating in a SIPOC exercise this week challenged me to consider how I might apply this technique to trading. A trader might create value in any of several ways, including providing liquidity, moving price closer to true value, assuming risk that others wish to avoid, and providing psychological relief by taking other traders' losing positions off their hands.

The Benefit of Achievement, from GM Nigel Davies

Bronstein once complained to me about how today's players lacked the responsibility of his generation. Indeed chess was bound up with ideological considerations during the era of Soviet domination, the leading Soviet GMs being representatives of the state, examples to the masses. Even before this the game was imbued with meaning as Steinitz, Tarrasch and others debated points of strategy on the board, their own struggle reflecting a larger battle in the war of ideas. Players were said to have founded 'schools' and felt obliged to write books expressing their ideas, something which these days would be laughable.

Now there is no ideological battle, no war of ideas, just the game as a 'sport'. So if a single player tries to perfect his game, without writing books or teaching, is he serving no broader purpose, giving nothing back? Actually I would argue that the act of self improvement will inevitably bring benefits to the world at large as it changes the way we are, how we interact with others and in doing so has a knock-on effect. Perhaps this game is 'smaller' than in the days of Steinitz or Botvinnik, but it is nonetheless there.

One of my goals is to write a good chess book, for what I believe to be similar reasons that Ken feels compelled to play a bigger game and the chair has written books and founded the speclist. But I wouldn't call it 'social justice', it is something else.

Some Highlights of my Recent Visit to Texas, by Victor Niederhoffer

I made some excellent trips to the Seminary Book Store in Chicago and University and Follets book store in Austin, both of which had many good books.

I also found that the roller derby in Austin has many similarities to market moves, with two sparks waiting 20 yards back while the rest of the pack jockies for position, reminding one of the battle that stocks and bonds often play while the other markets jockey around to let their side win. I will relate this to the Texas proverb about 'never talking big unless you can shoot well', and Laurel's two stepping at the Broken Spoke, imminently.

With money unlimited in Texas due to incentives provided by a lack of income and estate tax, museums in Texas are on a par with anywhere. We particularly enjoyed the State History Museum, the Blanton Museum of Art, the Zilker Botanical Garden, the Harry Ransom Center and the North East Texas Childrens Museum, as well as a spectacular visit to the Museum of Science and Industry in Chicago. Austin has many advantages over many other warm cities that I have visited, with its many entrepreneurs and techs, a University, and much culture, diverse landscapes, many young people, the Austin Opera on a par with New York (We caught a fantastic performance of Madame Butterfly), and more live music than anywhere in world. Prices for real estate seem rather modest relative to other warms cities.

It is good to be back with the Specs again. And the market finally scored a down day on Friday, setting one up for a good study of the first 11 months of the year as a predictor of the last. Vic

Thoughts on a Not so Random Walk, from Anthony Tadlock

When I was younger and people would try to talk to me about Skinner and operant conditioning; I would always counter that "humans are not rats". Rats do not have the option of opting out of the cage and finding food elsewhere. Rats are bred so that there is basically only one type of rat, humans are diverse. Traders, speculators, investors ... subtypes of each -- quants, value, growth, etc. If the market does not give a profit often enough the trader dies, yet the buy and hold investor (so far) eventually thrives. Yet, for short time periods -- the buy and hold investor is often subject to ridicule. It seems to be assumed that a buy and holder is so stupid that they never take profits or cut losses on individual stocks, or build cash (from dividends/stock sales) to take advantage of downturns. Buy and holders in turn scoff at traders, assuming they all day trade until they go broke.

I live in an affluent neighborhood in San Francisco. Ten years ago, when walking around doing errands, I would see perhaps one or two baby carriages, pushed by obvious nannies (Hispanic women-blonde children), now the sidewalk is so filled with carriages that it can be difficult to get around them; and they are being attended to by women who actually appear to be the mothers. Is this happening elsewhere? A new baby boom among the affluent seems to me to be a hugely bullish sign and counter to the "everyone is going to sell their stocks when they retire" meme.

Luck is important in any undertaking. Can luck be counted? Is the VIX becoming unreliable as a fear/greed indicator? Is it possible to have equal but ever increasing amounts of both fear and greed?

I know it is time to start selling a speculative position when I start worrying about the tax consequences of taking profits, although I am usually early.

Steve Leslie on Le Chatelier Principle

In honor of the Chair I am submitting this post: a short explanation of Le Chatelier Principle and the further development of the principle by Paul Samuelson.

Henry-Louis Le Chatelier -- born Oct. 8, 1850, Paris, France and died Sept. 17, 1936, Miribel-les-Échelles.

French chemist who is best known for the principle of Le Chatelier, which makes it possible to predict the effect a change of conditions (temperature, pressure, and concentration of reaction components) will have on a chemical reaction.

What is this principle which is so highly recommended, and who is its author? The nature of the principle itself is as easy to grasp as it is difficult to state succinctly, and the man himself is almost totally eclipsed by the popularity of his most famous observation.

Any system in stable chemical equilibrium, subjected to the influence of an external cause which tends to change either its temperature or its condensation (pressure, concentration, number of molecules in unit volume), either as a whole or in some of its parts, can only undergo such internal modifications as would, if produced alone, bring about a change of temperature or of condensation of opposite sign to that resulting from the external cause.[2]

This may prove to be a cumbersome description of the principle so a more simpler version can be postulated.

If the conditions of a system, initially at equilibrium, are changed, the equilibrium will shift in such a direction as to tend to restore the original conditions.[4]

This principle which worked well in explaining how changing variables in a chemical reaction affect the equilibrium was expanded upon by the esteemed eonomist Paul Samuelson.

Paul A. Samuelson (born May 15, 1915, in Gary, Indiana) is an American economist known for his work in many fields of economics. He was awarded the John Bates Clark Medal in 1947 and Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1970.

His Economics: An Introductory Analysis, first published in 1948, has become the best selling economics textbook of all time. The textbook has sold more than a million copies and has been translated into French, German, Italian, Hungarian, Polish, Korean, Portuguese, Spanish and Arabic.

Le Chatelier principle as explained by Samuelson, deals with constraints on maximizing behavior, explaining that short-run demands have lower elasticity than those in the long run since a longer time frame allows new factors and prices to change.

Le Chatelier principle has since been used to explain such events as domestic economic issues to market analysis to its efficacy in outlining a Theory of International trade.

I am sure there are many more and the wise speculator would do well to ponder upon them.

Beer Goggles, from Kim Zussman

British scientists have quantified morning-after regrets in the UK.

Scientists believe they have worked out a formula to calculate how "beer goggles" affect a drinker's vision. The drink-fuelled phenomenon is said to transform supposedly "ugly" people into beauties - until the morning after ... [Read More]

In the less inebriated US we rely more on Botox.

Beyond thanksgiving, from Mark Goulston

You cannot be grateful and feel like anything is wrong or missing at the same moment in time.

Before the Thanksgiving spirit wanes, I for one, am going to try to hold onto gratitude, because in the Jack Nicholson line from the movie, As Good As It Gets, "It makes me want to be a better man."

Try it. Think of three people that you are grateful to. Who were those people? What did they specifically do that you feel grateful for? Remember those people and what they did in detail and then try to feel angry, embittered and/or cynical. You will find it difficult to do so (unless by nature you take more pleasure out of being unforgiving).

There are a number of explanations for this, but my favorite involves neuroscience. When you feel angry, embittered and/or cynical, deprived, that something is missing or that something has been taken away from you, you react to that hole in your happiness -- and neurophysiology -- with resentment and may even feel the impulse to seek revenge.

When however you imagine in your minds eye the people you feel grateful to and envision clearly what they did to cause you to feel that way, the hole in your happiness--and in your brain and mind--spontaneously goes away, and is replaced by satisfaction and gratitude. In most people it even leads to the impulse to express that gratitude or even give back to the world.

If you want even more of an explanation for this, the entire process of remembering these wonderful people and feeling grateful to them is mediated by mirror neurons. These are cells that read minds and enable us to understand and empathize with others. And when in reverse we feel understood and empathized with by others, these are the cells that cause us to feel grateful and to borrow and recast a line from a famous old Beatles song, that is "what fixes a hole where the pain gets in."

50 Cases of Perfect 1982 Bordeaux, from Bruno Ombreaux

I looked at the following time series:

  1. Champagne and Sparkling wines, a French CPI component from INSEE.
  2. 11 49/64 red wine, another French CPI component from INSEE.
  3. CAC40 index

In addition, I defined a "Feelgood Index", which is the difference between champagne and red wine log-returns. The rationale is that when people are feeling good, they drink champagne rather than your average Joe's supermarket 11 49/64 red wine.

The CAC40 choice could be discussed. France is accounting for only 25% of champagne sales, the rest being exported. However, due to the correlations between world stock indices, this choice is not critical.

Data is monthly from 1998 to 2005 included.

The conclusion is that there is no correlation between champagne, red wine, feelgood and the CAC40 returns, either contemporaneous or lagged one month. Wine is a proper vehicle for diversification.

A second study, with different prices, those from the Association of Champagne Dealers, looking at yearly returns from 1990, also concludes that there is no correlation. Since there are only 16 yearly data points, the 95% confidence interval is huge: -0.54 < correlation < +0.50 Then this second study can be ignored. However, it doesn't contradict the first one.

Champagne returned 22% over the period and 11 49/64 red wine 31%. These are poor returns, far below the stock market, even before storage costs. However, annualized volatility of returns is very low: 1.3% for champagne et 1.9% for red wine.

Nota Bene:

  1. This is not a study about returns from investing in top wines like Margaux or Haut Brion. This is a study of run-of-the-mill champagnes and red wines, who shouldn't commend any age, scarcity or snob-appeal premium.
  2. It is neither a study about generating alpha from wine-picking. We are only looking at broad wine indices from INSEE.

Results for contemporaneous series (lagged series give similar results):

*CAC40 vs Champagne*
    Min        1Q       Median        3Q        Max
-0.0107351 -0.0021576 -0.0002676  0.0019569  0.0105993

            Estimate   Std. Error  t value  Pr(>|t|)
(Intercept) 0.0020951  0.0003879   5.402    5.05e-07 ***
cac         0.0010887  0.0064082   0.170    0.865
Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

Residual standard error: 0.003771 on 93 degrees of freedom
Multiple R-Squared: 0.0003103,  Adjusted R-squared: -0.01044
F-statistic: 0.02886 on 1 and 93 DF,  p-value: 0.8655

*CAC40 vs red*
    Min        1Q     Median       3Q       Max
-0.025410 -0.001498 -0.001408 -0.001034  0.014695

            Estimate   Std. Error  t value  Pr(>|t|)
(Intercept) 0.0014074  0.0005554   2.534    0.0129 *
cac         0.0022486  0.0091757   0.245    0.8069
Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

Residual standard error: 0.0054 on 93 degrees of freedom
Multiple R-Squared: 0.0006454,  Adjusted R-squared: -0.0101
F-statistic: 0.06006 on 1 and 93 DF,  p-value: 0.807

*CAC40 vs Feelgood Index*
    Min         1Q      Median        3Q        Max
-0.0141041 -0.0032415  0.0001090  0.0033706  0.0277683

             Estimate   Std. Error  t value  Pr(>|t|)
(Intercept)  0.0006878  0.0006367    1.08    0.283
cac         -0.0011599  0.0105198   -0.11    0.912

Residual standard error: 0.006191 on 93 degrees of freedom
Multiple R-Squared: 0.0001307,  Adjusted R-squared: -0.01062
F-statistic: 0.01216 on 1 and 93 DF,  p-value: 0.9124

Craig Mee on Work Ethic

I propose One of the biggest problems of trading successfully is the in-built work ethnic, that is instilled in "us" at an early age. This may be something which is regional or religious based, but I believe this certainly works against us when looking to apply discipline to allow for a nice gradual equity curve.

Being from the "west" and school'ed, fed and watered from day one in the pursuit to work hard, thus achieve , reproduce and run a successful family, is I believe not conducive to allow the best characteristics and education to become a trader.

To sit for long periods, and hold the gun, during normal working hours, even though you may of been cleaning the gun and burning the midnight oil looking into research , number crunching and the like, and have done the time, still does not prepare the individual for long periods of holding positions without lifting a finger. These positions also, maybe out of the money, in the money, flat for weeks, before a solid explosion in volatility takes off, where unless risk and money management procedures are solidly adhered to, the human conditioning of work work work, starts to take over, and interferes with correct operating procedures to gain the most out of the position. So in reference to discipline I believe this relevance should be centered on, more so because it is what predominantly disables it.

It could be argued regions, where less importance is placed on routine and normal work practices, could produce interesting results , which of course does nothing to take away from the need for a suitable trading plan and approach to trading.

Tony C. adds:

I have often tried to explain to the young uns' how I can be wrong most of the time and still make money ... and that is a problem with trading.

Typically, you go through 16+ years of schooling, where very early on you quickly come to learn that getting anything less than 9 out of 10 right is a sort of mediocre performance, and getting anything less than 7 out of 10 right is failing ... and results in an 80 year old practically blind nun, (who inexplicably possess an arm like Koufax's), nailing you from across the room with a felt eraser ...

Which is to say, you become conditioned.

And then you engage in a profession where getting 6 out of 10 right results in great riches, and even getting 4 out of 10 right results in a more than comfortable living [if you gain 61 cents the 40% of the time you're correct, and only lose 39 cents the 60% of the time you're wrong, ... and you play often enough.]

So, folks that did reasonably well in their main activity in their formative years are fighting 16+ years of conditioning.

"Geez, I'm right only 4 out of 10 times, I must be stupid to be wrong so often ... my success is all luck, I'm a fraud", etc, etc. If only we could all think like baseball players.

Robert Bacon, Horse Racing and Market Tactics, by Hany Saad

First let me preface my post by emphasizing that I am only posting this model because the analogy presented below ceased to exist within the sector (Canadian Banking Sector) subject of this model. I still believe that the model can provide a meal for lifetime with some modification and/or refinement. In this very simplistic model, I assume that all the Jockeys (CEOs) on top of the horses (Canadian Banking Stocks) are of similar skill set and reputation in the street (which in this case they actually are), I also assume that all the horses are of similar quality (the Bank Stocks are of equal fundamental quality, an assumption I make due to my inability to dig into fundamentals and pick favorites); and I also assume that every month is a different race.

In other words, Jan 1st to Jan 31st is the first race, Feb 1st to Feb 28th second race, etc...

A different model might want to consider Jan 1st to Sept 30th as the 1st race and Oct 1st to Oct 31st as the second since mutual funds report results then and since they own the biggest chunk of the sector under consideration. Another variation might regard the 12 months as one long race and each month as one lap in a 12 lap race and so forth.

For example, in the table below, at the end of January, BMO (Bank of Montreal) was the winner, followed by RY (Royal Bank) and so forth.

CM (Canadian Imperial Bank Of Commerce) was at the bottom of the list. Notice how the slacker for the first 5 races (CM) ended the year taking the lead.

My theory, playing on psychological biases and incentive is that given equal horses of same weight, speed, history, etc, the 2 jockeys with the most incentive to compete in a given race are the second horse that was so close to winning the previous race and the horse that came last since coming last race after race will cut into the jockey's bonus that's very highly correlated to where his pony ended in the overall race.

but, that needs to be tested ...

This is how my racing form usually looks:

January - February bmo ry td bns na cm
February - March td ry na bmo bns cm
March - April ry td na bmo bns cm
April - May ry td na bns bmo cm
May - June ry na bns td bmo cm
June - July ry bns cm bmo td na
July - August ry bmo bns cm td na
August - September ry bmo td cm bns na
September - October ry bmo cm td bns na
Year to Date cm ry bns td na bmo
1 month na bns ry cm td bmo
3 months cm bns bmo ry td na
6 months bns ry bmo cm td na
1 year ry cm bmo bns td na

Larry Williams on the Prestige

If you like your movies to twist and turn like switchback roads in Glacier Park, splashed with a twist of love affairs, intrigue and the mystery of Nicholas Telsa, this is a very good movie. Michael Cain, who seems to go from very bad movies to very good ones is in a good 'un this time.

Steve Leslie comments:

I agree wholeheartedly. I particularly liked the time period, 1897, and the cinematography. very artistically done. Plus it was extraordinarily well written.

There were great set designs and the lighting and costumes should receive plenty of nominations.

Four stars acting for Michael Caine, three stars for David Bowie and Christian Bale, and maybe even the ever present Hugh Jackman. I believe the director is the same person who directed Batman Begins.

One cautionary note. Watch very closely or you will miss some very important clues to the Prestige.

Web Surveys and Elections, from George Zachar

The elections held in The Netherlands on Wednesday have shaken the country. Almost 10 million votes were cast, and statistics show that a full half of those who voted used a popular web-based voter guide. This guide is operated by the independent institute for the public and politics. Advice is given to the visitor upon answering a number of multiple choice questions on some common political topics. Statistically, a number of people ended up scoring in support of populist parties both on the far left and far right. No bias was reported to exist in the test itself. However, these parties have ended up with an unforeseen amount of power as a result of the election. The voter participation was high, and the web-based advisories may have motivated people with little interest in politics to cast a vote anyway. Can politics be simplified to a ten minute test?

The above thread discusses the impact of a neutral opinion test on the recent Dutch election. The test, English version here, took me less than 5 minutes to take. It is interesting to contemplate the impact this sort of thing might have going forward.

An Evolutionary And Ecological Discussion With Connections To The Markets From Antipodeans Who View The Zodiac Upside Down. By Jim Sogi.

Tasmania's land bridge to the Australian sub continent was flooded about 14 thousand years ago, which cut off the isolated island from all outside influence. The land enjoyed a cool but stable climate untouched by ice ages. The relative isolation, the lack of predators and the stable climate and geological environment led to the evolution of relatively docile, primitive and slow moving marsupials which survive today in abundance. The aboriginals were exterminated completely by the Anglo-Saxons. There are now few humans, making Tasmania the least crowded, cleanest first world developed place that I have ever visited. The half a million very friendly, talkative and hospitable people are 99.999% of European descent. They and their children appear to have much less anxiety and stress than Europeans, Americans and Asians from more crowded areas. The cities reminded me of Portland Oregon 40 years ago and San Francisco 100 years ago.

The primitive marsupials tended to be gentle, docile and slow moving due to the low environmental stresses. This is compared to aggressive placentals such as the fox which was a recently introduced problem in Tasmania. Though there were only a few cars per hour on the roads, road kill was abundant. The hypothesis is that the low environmental stress leads to less aggression and slower moving adaptations. There were impressive predator birds such as Harrier hawks swirling close with sharp eyes for unwary prey hovering close to the road sides. The image of the speculator as the predator hawk and the docile foragers as the prey is apt. The marsupials have interesting adaptations to stresses (such as drought). They can have three embryos, each on a different feed teat, and can retard development of the embryo when conditions are harsh, or speed it up when feed is abundant. Unfortunately the last Tasmanian tiger, a marsupial carnivore, was killed in 1936 and is now extinct. Even high level predators suffer extermination at the hands of even higher level killers, in this case the humans. When a storm blows the rain, all the sheep face in the same direction.

How can the lessons from Tasmanian ecology help with an understanding of the market ecology? The current remarkable low volatility market reminiscent of the Tasmanian experience leads to the hypothesis that the long periods of low stress and low volatility promotes docile and slower moving participants and slower evolution. Applying this to the current market we observe that there has not been any new 20 day lows for 90 days now, and there has been a steady march upwards with low volatility. There has not been a 20 point open to close drop for almost a year since 2006-01-20.

As with physics and geology, the study of micro structure allows insights into macro and cosmic structures and function. The same holds true in finance where micro structural elements can explain markets. A descriptive theory for the reason for the low volatility is that the CME futures are causing or contributing to the broader markets low volatility. CME equity index futures hit record high volumes CME E-mini equity index volume set a monthly record of 2.1 million contracts per day, up 70 percent, and a quarterly record of 1.7 million contracts per day. Globex does not have true market orders but limit and modified limit orders only.

As explained by O'Hara in Market Microstructure Theory and by Osborne in The Stock Market and Finance, it is the interest of the market maker to have only limit orders to avoid the uncontrolled gaps that pure market orders cause in panics, without specialists where the market makers get caught with an inventory imbalance. With only limit orders micro-structural theory predicts the benefits to the exchange and the market makers resulting in the steady clicking up and down in orderly increments of limited price change, allowing maximum profit to the exchanges with maximum volume and steady but small price changes to benefit the market makers. In fact we see the increase of market making type behavior in the predicted market motion of a steady clicking up and down and very structured waves in the market with relatively low volatility and limited ranges. The behavior is characterized by a buy at or near bid and a sell at or just above ask. A steady click up and down in limited ranges allows a steady foraging income to the participants. This explains in part the current low volatility index future type action. As more participants are attracted to this cycle by necessity, the volatility goes down and size and leverage goes up. The tail wags the kangaroo as arbitrage causes the rest of the market to start following the future and further decreasing volatility. If this hypothesis is true, it is not likely for volatility to increase cyclically which is what Professor Ross has been telling us as well. There are periods when the density thins, such as right before an announcement, and the resultant opening up of volatility, but it shuts down right away. When a storm blows the sheep face in the same direction. This type of low volatility foraging allows growth of the population as there is steady and adequate food for these participants, but complacency is dangerous as population grows and the demands on the food stock and competition for resources increases. This is why the fox is so dangerous.

Evolutionary cycles and the market ecology require adaptation to survive and prosper. This might mean avoiding overcrowding over grazed foraging areas. It means developing better predatory tactics or low effort foraging. Mid level predators such as foxes and harrier hawks need to avoid extinction by higher level market participants even in low volatility environments. The smaller operations are at risk from large farming/hedge fund operations and their need for bigger trend moves or perhaps vice verse. As in nature, in the markets, understanding the cycles and their causes enables survival and prosperity.

How to Win Poker Tournaments, from Steve Leslie

Through my observations playing in many many tournaments and cash games, and through reading of countless books and columns, there are a few points that one needs to always keep in mind.

Poker is like golf in that one can never master it one can become more skilled at it. There is always something to be learned every time you play. There is no black box that can be manufactured to help one master the game. You can become successful by learning basic skills, but to go to the next level, you must constantly refine the skills and always be willing to adapt. Doyle Brunson said that the problem he had with writing Super System is that everyone read it and whenever he played a game, his opponents played against him using his own strategies as outlined in the book.

In poker, if one is not studying the cards one needs to study the people. the dynamics of the human spirit is what makes poker fascinating. Therefore poker is much more than statistics. Blackjack is pure statistics. Poker is a microcosm of life. In my view, the best poker players are great students of behavioral psychology, sociology etc. They love to study people. The phenomenon of social interaction combined with money is the engine that powers the train. You can only get so good at poker by playing online. It is a world of difference between playing someone online and looking at them across the table.

The great poker players are the most consistent. They play their style successfully. They have amazing abilities to focus. To stay in the moment and to play within themselves.

Poker is generally straightforward. Meaning most of the time one should play the hands that have the highest probability of success. I have heard poker pros state that amateurs always overestimate and overvalue the bluff. In other words, pros bluff rarely. Dan Harrington says that one bluff every hour and a half is usually sufficient to keep others at the table wary and off guard. And they are surprised as to how often they get called down when it is obvious that they have the best hand. If you saw Jamie Gold at the end of the tournament at the 2006 WSOP he would tell players that they were beat and they would call him anyway. Phil Hellmuth states that he has built a career out of getting his money in the pot when he has the better of things. Daniel Negreanu says that he enters every tournament with the same goal in mind: not to do anything stupid. That means calling out of position steaming, overplaying hands, becoming too sophisticated in plays, showing off.

Pros have great control over their emotions. They know that they have no control over the cards but they do have responsibility over themselves. Chip Reese is a great example of this. Dan Harrington and Dewey Tomko are some others. They are completely unflappable. The emotional wrecks like Mike Matusow have very volatile lives and wide success variances. The great survivors in my view prosper because of their consistency.

Cash games and tournament games are diametrically opposed. What works in tournaments does not work in cash games. Cash games are infinite. In a sense, they never end. As long as there is money there is a game. Furthermore there is no time limit.

Tournaments have time limits. Not in the pure sense, but in the sense of blinds. The blinds continue to rise. As a result, there are separate acts to tournaments:

  1. The opening stage of the tournament. This is where one needs to survive and begin to accumulate chips. Straight forward play is rewarded. Reckless play is punished. You want to win the hands you contest and not show up second best very often. You don't want to get into pots that become chip bleeders. The goal here is to stay in the game.
  2. Later, when positioning begins to play out. This is where the big stacks go after small stacks and knock them out of the tournament. I think of this like Highlander who gained power by vanquishing his opponent and then cutting off his head and collecting his life force and power. You begin to use your chips to your advantage to intimidate. If you have acquired a big stack, you will get to see some more flops. And as the players begin to tighten up. You can therefore loosen up. You are setting yourself up for the end stage.
  3. Toward the end, it's all about aggression. There is only so much time left and to win or cash aggressive play is rewarded. Showdowns occur all the time. Good hands get beat by better hands, Junk hands are played all in. Bad beats jump up with regularity. Every possible scenario gets played out. Ultimately the champion is declared by outlasting the field through skill, cunning and a great deal of good fortune.

Success in poker is like success in life. It is attainable but not easy and it requires lots of work. That is why so few attain it.

Dean Tidwell adds:

I have played poker since allowed in the room at age 17 ... 15 years later I can attest to 1 thing: all good players understand odds and therefore much of your success comes from feel, being around your opponent and understanding that most players have immense EGOS which can be used against them if the right comments are made. I have learned a few tips from an old timer -- Mr. Hooks, who was Binion's "man" in the older days, and even he went on losing streaks that lasted several months and had him questioning himself...

Trust, by George Zachar

Freakonmics author/blogger Steven D. Levitt asked his readers to name the "most trusted" person in America. (He didn't know that was Walter Cronkite's nickname.) The results, from among 150 replies:

Warren Buffett 8
Bill Gates 7
Jon Stewart 7
Oprah Winfrey 6
Alan Greenspan 4
Billy Graham 4
Colin Powell 4
Bill Clinton 4
Tom Hanks 3
Dr. Phil 3
Paul Harvey 3
Mister Rogers 3
George Bush 3
Homer Simpson 3

The only positive thing I can say about this list is that it is led by two notional capitalists.

A Funny Thing Happened on the Way to Disinflation, from Allen Gillespie

Gold has gone up 23% on the year and 11% since the Fed got a new chairman. By making the actions of the Fed transparent, and hence the cost of money completely predictable, assets are being driven to their maximum valuations because there is no uncertainty to be discounted. This I believe has raised the market's crash potential should a change in expectations occur. And while I have long believed the Nasdaq could potentially make it back to the lows of its crash at 3042, I also think gains from this point in time will prove to be fleeting a few years hence as yields have a tendency to chase speculative activity.

Dollar Signs, by George Zachar

I was eyeballing a Daily Mail article on the Paul McCartney divorce, and came upon this passage:

I remember him saying that all she thought about was money and that she had asked for £80million. He said something like, 'She is going to take me for £80million, because we now know it's for £80million. All she thinks about is dollars'. He even drew dollar signs to emphasise it.

What struck me was how a UK subject would talk about money and specific amounts denominated in pounds sterling, but when it came to symbolize the wealth, he spoke of dollars, even drawing $ signs.

Something to contemplate amid the unending litany of dollar doom stories.

Some People Are Really Giving Thanks..., from Al Mabry

According to the article S&P fears defaults after merger boom:

...the value of deals agreed worldwide this year has jumped to $3,230 billion (£1,700 billion), up 40 per cent compared with the same period last year.

And according to Wikipedia, here are the worlds largest markets (plus a few extras) as of some recent date:

Ten Largest Stock Exchanges by Market Capitalization (in trillions of US dollars)

New York Stock Exchange - $22.6
Tokyo Stock Exchange - $4.5
NASDAQ - $3.6
London Stock Exchange - $3.5
Euronext - $3.3
Toronto Stock Exchange - $1.83 [3]
Hong Kong Stock Exchange - $1.55
Frankfurt Stock Exchange (Deutsche Börse) - $1.4
Madrid Stock Exchange (BME Spanish Exchanges) - $1.1
SWX Swiss Exchange - $1.1


Milan Stock Exchange (Borsa Italiana) - $0.94
Australian Stock Exchange - $0.73 (June 2005)
Bombay Stock Exchange - $0.73 (October 2006)
Shanghai Stock Exchange - $0.64 (November 2006)
Johannesburg Securities Exchange - $0.58 (September 2006)

This is a total cap of $48.1T, so YTD buyouts are at $3.23T, or 6.72% of global cap.

You would think that this would put a little upside pressure on the markets. Not to mention whatever the receivers of that $3.23T in buyout payments plan to do with their money!

Read Several Brand New Bo Keely Stories on Hobo Memoirs

Memories From Before The Web, from Laurence Glazier

In a land far, far away, almost thirty years ago, I worked on a mainframe with hundreds of terminals, and it occurred to me that I could write an OS script to enable users at different screens to have text conversations with each other. As perhaps the only person in the building with any interest in so doing, when the script was finished I had to test it by informing colleagues that I had written an AI program. When they typed the appropriate command at the prompt (on teletype printers I think rather than screens) they would be presented with two options -- Psychology or Polite Conversation. By this time I had disappeared to my own console ready to don my Freudian or friendly hat. Not everyone guessed immediately what was going on and some polite conversations or analyses were able to develop -- I was eventually quizzed by my boss who I suspect was not entirely unamused.

Ten years later, it was the birth pangs of the Web and bulletin boards were already popular with techies and those with access to equipment at work or school. I set up a math group on one of the UK boards and set a programming puzzle that seemed of technical as well as philosophical interest -- to write some code (in any language) whose output is the same as the code which drives it. I think someone solved it by using a print file command where the said file was suitably set up first -- if I ever set this poser again I must be sure to exclude printing files.

Thankfully the web came along and now one has to be truly original to be original. I love the way we all act as synapses and what used to take years can now happen in a day.

Steve Wisdom comments:

"To write some code (in any language) whose output is the same as the code which drives it" is a well-known idea, at least nowadays. This is called a Quine, after the philosopher W. V. Quine.

R and WealthLab, from Bruno Ombreux

Most professionals would frown upon such a piece of software as WealthLab, but it is very cheap with good backtest functionality. This is my own opinion, but I think that backtests are useful, even if no substitute for rigorous statistical analysis.

What's nice is that they have a utility for using R inside WealthLab, and someone on their R forum posted code to communicate the other way, from WealthLab to R. All these efforts are yielding a decent low cost exploratory analysis and backtest solution for the small guy.

Robert Engle interviewed by F. X. Diebold, sent in by Rich Bubb

I stumbled upon an interesting interview of Prof. Robert F. Engle by Prof. Francis X. Diebold (guest speaker at the December NYC Junto) from 2003. The whole interview is quite readable.

Monkey Business, from Prof. Marion Dreyfus

Male Chimps Prefer Mature S-x: Study

Mon Nov 20, 4:02 PM ET

PARIS (AFP) - Male chimps, unlike their human counterparts, show a distinct s-xual preference for females on the riper side of life, an American anthropologist reported in a paper.. Male chimpanzees consistently sought out the oldest females within a troop for s-xual intercourse..

Male chimps don't need ego enhancement. Ripeness counts for more than coquetry backed by ineptitude, perhaps, for the more developed simians.

Barron's Roundup, from Prof. Gordon Haave

Sorry I missed last week folks, was traveling quite a bit:

Abelson: The USDA has gotten rid of all the hungry people in the US by defining them away. Now they have "very low food security". "Speculative sap" is rising, as indicated in increases in bullish sentiment. Exiting early could be costly, but exiting late could be disastrous. Housing is collapsing, and is going to get worse. Alan Newman suggests that the market is up because of the $34 billion that has gone into ETF's this year, which must purchase their underlying stocks. He also says that insiders are selling financial stocks on a major scale. The sky is falling.

Page 18: Barron's was bullish on airline stocks last month, and we were right. Barron's has been generally upbeat on Sony, but the stock keeps languishing, will continue to do so until Sony proves that a broad turnaround is underway.

Page 21: The interests of CCE and KO have diverged, so KO ought to buy CCE back, should be willing to pay $21 per share.

Page 22: The street thinks that MGIC is great, but the housing bubble collapse is going to hurt them worse than everyone thinks. The troubles facing them are the same things everyone has been talking about for a year, but somehow two pages were written about it.

Page 24: Dupont has been saying for years that they are going to have to be a science company again, but nothing has really happened. Now, they really, really mean it. They are getting into the kinds of GM seeds that Monsanto does, and they have a new fiber coming out.

M2: For those of you in Saamiland, stocks were up last week. They might keep going up because even those who are skeptical have to chase the market in order to not lag behind the indices. There could be more mergers happening before the end of the year. Despite a lack of buzz, Verizon's yellow pages spin-off looks interesting. Consumer stocks have been doing well since oil has been down.

M4: The Nymex IPO did well, it went up. ("Doing well" obviously refers to those who bought stock, and the bankers who will get paid a good sum despite having totally mispriced the IPO., costing the sellers of stock massive amounts of money. - This is one of the last great Wall Street scams. Such a poor job performance would, in any other industry, be a matter of disgrace and shame. Instead the I-bankers will get nice bonuses this year).

M5: The socialist candidate from France may be good for investors because she may wipe away the last vestiges of Mitterrand era socialism. On the downside, she is still a socialist. The film Blood Diamond looks to be a winner for TWX. The diamond industry, not surprisingly, isn't too happy about it since it is about how the diamond trade results in all sorts of misery and death in Africa. On the other hand, its not as simple as that, so don't get all worked up after seeing the movie.

Also on M5: Lot's of stuff happened last week in the credit markets. What is all suggests is a general lack of worries. Volatility is low. It's time to count our blessings.

M6: Singaporean stocks are finally doing alright. Ng Guan Mean thinks that this is going to continue. Long term, however, if the US economy goes south it will hurt Singapore. He likes property stocks, and the marine, oil, and gas sectors.

M7: High wholesale prices mean that supermarkets won't be offering good deals on Turkeys this year (For what it's worth, I recommend brining your Turkey as taught by Alton Brown). Turkey production is down. Chicken prices are down, however. Crude-oil and copper were down last week.

M12: Options on retail stocks are inexpensive, which is surprising because Black Friday is just a few days away. (Another possibility is that the markets are somewhat efficient and there is no reason to assume that known events recurring events should impact the markets a few days out). Retail investors should sell their high priced retail stocks and buy low-priced calls. If they are concerned about taxes, they should buy contracts that expire in January '08.

Page 27: Cover Story, the Death of the Floor: You need a cover story to tell you that technology is destroying the trading floor as more and more trades are being done electronically.

Page 31: Cardiac device makers, who have been pummeled in the past, may start doing better thanks to some reassuring safety studies. Investors will be watching Medtronic's earnings report. A new wireless protocol is out.

Page 32: Gates, Nealy, Doerr, et all are spending a lot of money and knowledge on green technology to try to save the world.

Page 33: Free trades aren't free. Not all of the costs of investing are commissions. Execution quality plays an important role, and you should consider the interest paid on your cash balances as well. Some brokers might route your orders to market makers that pay them for the order flow, even if that market maker is not offering the best prices.

Page 34: Picking the right bonds requires care, but don't worry, you subscribe to Barron's. We like Harvard College 6.3% 2037. Dallas, Texas, 4.75 2026. Freddie Mac 4.75 2009, Wal-Mart 6.875 2009, Kraft(Nabisco) 7.55 2015, K. Hovnanian 7.75 2013, GMAC 8.00 2031. Two good places to look for bonds are www.bonds4sale.com and www.shop4bonds.com. Tax free munis can be good.

Page 35: UAS is a great separate account manager.

Page 37: After the Blackrock-Merrill deal, everyone thought that there would be a bunch of other huge M&A deals in the mutual fund industry, but that hasn't happened, although it still might. Basically, the Mutual Fund companies are over-priced.

Page 38: Everyone keeps saying that the dollar is going to go down, but there is a huge demand for the dollar since it is the main currency used for trade, and global trade keeps increasing. Plus, other countries all have an interest in keeping the dollar strong so that we can buy their stuff. Now is the time to be long the dollar.

Page 39: Wynn resorts is going to pay a fat dividend. JCI and ADP are boosting their dividends.

Page 40: The KBR spinout will help Halliburton. HAL is a complicated company, so its energy services business doesn't trade at the same multiples as SLB and BHI. Without KBR, Halliburton will be "cleaner" and should close the multiples gap with its competitors.

Page 40: Farewell, Milton Friedman, for all of the reasons that ever other right of center pundit has made clear.

Page 41: The money fund/Wilshire gauge indicates how much cash is sitting around, waiting to fuel a stock rally. It currently suggests that the rally could continue. (However, looking at the graphs they supplied, there appears to be zero predictable relationship.)

Page 42: Interview with David and Lyric Hale of Hale Advisors and China Online. This couple gives advice to hedge funds and has an internet site. Their stunning insight is that the election creates risks to trade and tax policy. That the coming report from the bipartisan commission on Iraq will be important, that the US economy is in a slowdown, and that inflation is creeping up. Asked what asset classes are most attractive, they offer that that equities are more attractive than bonds because interest rates are low, but, at the same time, the slowing economy should help bonds. Also, the private equity boom is spinning out of control.

Page 44: Chinese manufactures are able to undercut their competitors. How come? Is it because of mercantilist policies, or something else? The U of Cal/Irvine China price project is trying to figure that out. They say 39% of the Chinese price advantage. 11% of the advantage is an undervalued currency. Export subsidies count for another 17%. Piracy and counterfeiting are 9%. 5% due to lax environmental and worker safety regulations. Network clustering i.e. supply chain members in close proximity accounts for 16%, and foreign direct investment 3%. What does all this mean? For one thing, US corporations should be careful transmitting technology there. They should also consider the ethics of relocating to where there is slave labor.

Page 46: The good news: There will be more nuclear power plants built. The Bad News: There is no place to store the spent fuel. The source of the Problem: Jimmie Carter made it illegal to reprocess spent fuel rods. The solution: Recycling.

Caravan Days, by GM Nigel Davies

Looking at a chart of my ratings, January 2000 to October 2006, it shows a dramatic rise from April 2003 followed by a plateau and recent decline.

So what was I doing prior to the rise? I 'decided' that I had to get the International Grandmaster title. The Berlin Wall had come down and International Masters were not making much of a living. Another incentive was that my solitary GM qualifying score (from 1987) was given a new lease of live by an extension of its validity.

Towards the end of 1992 I devoted myself to improving my game making chess the number one priority. My 'investment' into this project was to live off savings, the single payoff was the title. In early 1993 I went to the UK and lived in my parents small caravan during the time I was not at tournaments. My Dad drove it to a remote caravan site from which it was difficult to reach any distractions. I had some chess books I was studying plus Chessbase on the computer. And not much else.

I set a time-table for my studies which mainly featured two weak spots, openings and endgames. I also took long walks in the country and swam a couple of times a week. The goal was not so much 'mastery', I was already a strong IM. The idea was to become a beast of prey, to have an edge.

My results do not tell the full story -- I was also second in Lichtenstein with 7.5/9. My results in 1993 were around 2570, which is not indicated by the rating chart (it takes time to catch up). This was more or less a 100 point jump in a relatively short space of time. I should stress that I was 32 at the time and not a teenager.

One of my main regrets is that I did not continue and go for a 2600 rating, but the incentive (survival within the way of life I was used to) had gone.

More Thoughts on Expertise, by GM Nigel Davies

I think I have a solution, something I 'knew' about before but the memory of which got buried beneath the rust. The problem with achieving mere 'expertise' is that it doesn't necessarily give you an edge, an area of your game or field where you are a world leader. Some 'experts' got their reputations by being a leader at one time, but didn't maintain this edge. Others got their reputations by being reputed to be leaders, but in fact they just talked a good game. I liked Larsen's honesty in 'How to Open a Chess Game' that he was never the 'expert' he was reputed to be in openings like Alekhine's Defence. But he was the only GM who was playing them, so relatively speaking he was the best.

This is not my idea, in fact I know of three sources in the chess world and one in investment. Tony Miles once advised me that it didn't matter too much what someone played as long as they knew more than anyone else. This echoed Lev Alburt's advice in 'Test and Improve Your Chess' in which he advised studying a few positions in great depth. It's even there in Kotov's 'Think Like a Grandmaster' in which we are advised to know 'something about everything and everything about one thing' in the openings.

In the field of investment Jim Slater's 'Zulu Principle' was based around knowing more than anyone else about a particular company, but there's no reason it should be restricted just to that. There are plenty of niche areas and approaches in markets, but the 'trick' is to know one of them better than anybody rather than be able to do nothing more than be able to hold a conversation about them. Of course if you do know them better than anyone then it's probably wise to keep your mouth shut. Knowledge shared can mean an edge gone, unless of course you share with those who will help you to maintain and improve your edge.

So now I realize my mistake, I'm an 'expert' without an edge on a gradually descending plateau. How can I get off? Well to be a leader it's not enough to read books.

Tom Ryan counters:

With all due respect I suggest you are confusing expertise with competitiveness. Last night for example while swimming, despite the fact that it doesn't really matter -I am just swimming for my health, but you know how these things go - I did notice this guy two lanes over who was lapping me while I was chopping away for 2000m. Subconsciously you always wind up trying to synchronize yourself with the faster swimmer in those situations but I couldn't keep up with him. When I got up out of the water at the end of my workout I found that I was swimming mentally against a 22 year old. Now I may be an "expert" in freestyle after 30 years but that doesn't mean I can compete with a 22 year old who is in great shape. I could do two sessions a day in the pool for six months and still never out swim that guy, I am in my mid-40s for pete's sake! FOC Ming Vandenberg tried to get me to race her in the pool two years ago and I just laughed, as if I could stuff myself silly at Tony's place, then eat like a horse at Vic and Susan's for two days and go out with FOC Tim Melvin and Wiz on Saturday night then the next day jump in the pool and race someone 25 years my junior. How would we handicap that one? But compared to you, in the pool I am the "expert".

On the other side of the equation, we have all experienced people who are competitive, but yet, are not experts. For example in martial arts it is possible, and I have seen, people who perform well in competition, at least in the initial rounds, because they have honed a small "bag of tricks". But of course once the trick is observed and they run up against someone who has more knowledge and skill they lose, because they have nothing to fall back on.

Not being a chess GM, I can't comment on aging and competitiveness in chess. However the problem with the analogies between chess and trading is that chess is a head-to-head competition, whereas trading is a statistical game against a huge field of players where you have to be better than a certain % of the field, not every single other person. And in trading you can walk away when you are one piece up, whereas in chess the only way out is to withdraw or win. 0 or 1. There is a lot of money in trading between the 0 and the 1. Trading is not a single elimination tournament, well it needn't be anyway unless you get carried away with margin. Good discussion!

GM Davies clarifies:

Maybe I am 'confusing' or 'melding' the two, but are you very sure I'm wrong to do so in fields such as chess and short term futures trading? The number of people who are 'successful' (i.e. win money overall) is so small that most experts, by your broader definition, will be losers. I also disagree with your definition of chess success being defined as a simple win/loss - it is similar to trading in that there are a certain number of prizes and you need to finish in the top few places to get one of them. Then deduct the frictional costs of getting to the tournament and you need to be really good to have a chance to make money overall.

How does one get really good? This is where I maintain that the goal must be to do 'something' better than anyone else as a way of bootstrapping oneself above the mere 'experts'.

Tom Ryan adds:

I think the more relevant point which you have already alluded to is that in a competitive environment you have to find, and constantly be searching for ways (plural) of staying sharp and developing your 'edge' or your 'focus' or your 'shape'. That's a tough one although I think there is certainly value in practice, practice and more practice. But that's not exactly the same as being knowledgeable above and beyond others in a subject. For example, we have all manner of really bright, smart, engineers and geologists on the Spec List who are experts on various facets of the work, statistical analysis of data, 3-d modeling etc., but who can't pull it all together to make a decision about where to drill or what slope angle to use or how far apart the pillars should be.

In the posts between you, me and Spec List member Scott that didn't make it to the this website, I was trying to make a distinction between 'expertise' and 'mastery'...sure its syntax but it's a subtle and I think important difference. Expert is sort of a relational context whereas mastery goes beyond and supersedes that. Really, anyone who knows more than me in a certain field and who can impart that wisdom to me so that my game improves, that person is an expert to me...even if they are not to you. But that doesn't mean they have mastered anything. To me mastery is where something gets to the point where the art/skill just simply becomes a part of you - there is no longer any notion of doing/not doing, achieve/not achieve, as there is no peak to stand on top of. You just walk the path and keep walking and keep walking and keep ... It just simply internalizes to the point that it's part of who you are.

The New Patent Index, from Russell Sears

A new patent index was recently launched by Ocean Tomo:

The Ocean Tomo 300(TM) Patent Index, which is priced and published by the American Stock Exchange(R) (Amex(R)), is a diversified market-weighted index of 300 companies that own the most valuable patents relative to their book value. The 300 member companies have an average market capitalization of $21 billion and a median market capitalization of $7 billion. The Index is split equally between small cap, mid cap, and large cap stocks. The smallest member company has a market capitalization of $400 million.

According to the site, over the last 10 years it outperformed the S&P by 3.10% annually.

However, I have the following observations of this:

  1. Though this is one "value" index, a growth guy may embrace it as a measure of "growth" potential. I wonder if it suffers from the common value survivorship bias problem -- especially when one considers that 2000 seems to account for its outperformance.
  2. Though it attempts to "measure" patents, I am not sure I endorse their measurement method. It would prove much more useful if it was somehow weighted by this measure, instead of simply market weight.
  3. Eyeing the comparison chart  to S&P over last 10 years, it appears that it tracked closely until 2000 when it outperformed before underperforming through the 9/11 drop and then it outperformed again since late 2002. But this is hard to say without numbers.
  4. Considering the notion that stopping to tie your shoelaces hurts you only if you are going intellectually fast, (i.e. laying off people) I wonder if the outperformance in 2000 is due to employee job security in these companies and how the individual components are ranked on this basis. Though I suspect the stock and the index lead the lay-offs.
  5. It seems to be best of both worlds -- it tracks the S&P when it dominated with growth stocks, and it outperforms the index when it dominated by "value".

It seems a good idea, but hard to perfect, to try to measure a patents worth.

Allen Gillespie replies:

This is something we have been trying to understand for awhile, because I once read an article about the development of the steam engine. The idea was developed and patented in 1818 but not commercialized until 1831. There is a difference between having a patent and successfully monetizing a patent.

In short, I believe there are lags in the value of patents. Some patents turn out to be valuable, some do not. Sometimes managements reward shareholders, sometimes they do not. During the internet bubble ('99) we conducted a study of biotech stocks from the early 1990s. In our study we found purchasing a basket at the top eventually yielded a return over 7 years roughly equal to the risk free rate and closer to the market rate over 10 years, however, your results were completely driven by the success of a few ideas like Amgen and Biogen which developed multi-billion dollar products. Buying the same basket at the lows, when the market had sorted out what was valuable and what was not, produced returns in excess of 40%/year. Even the successful stocks like Amgen experienced 70+% drops.

Our study of Biotech and subsequently Internet stocks shows a similar pattern. An initial flurry in the stocks based on concept, followed by capital raises by investment bankers, a fall due to lack of profits, taming of euphoria by the increased supply of stocks, and finally recovery as the ideas begin to bear profits and managements are forced to show profits as opposed to developments.

One of the things we have noticed in our momentum studies is the tendency for certain stocks to reappear after a number of years on a much sounder financial basis (though it frequently doesn't look like it at the time). For example, energy trading companies were high momentum stocks during the bubble period, collapsed, but then reappeared in 2003 as high momentum stocks as distressed recovery names.

Another company which illustrates the concept is SEPR. The company for years as been run more like a research company than a business, as they have maintained a very high plowback ratio into new ideas, now however management is beginning to run it like a business for the shareholders rather than the lab. Here are the earnings and stock price:

Year   EPS   High    Low
1999  -2.77    70     29
2000  -2.80   140     45
2001  -3.19    81     23
2002  -3.11    59      3
2003  -1.33    32      9
2004  -2.05    59     23
2005  -0.11    66     48
2006   1.31
2007   2.18

Important times in the life of a stock are inflection points like when earnings can be anticipated to begin recovery or decline (because this creates an earnings slope) - at year end 2002 you had inflection from 2001, crossovers into profitability, and eventually new highs in profitability matter because the valuations get more compressed if the stocks do nothing or go down. Companies with new highs in earnings power can recover quickly from some fantastic declines.

Steve Ellison adds:

Patents are a one-dimensional view of intellectual property. Intellectual property also includes trade secrets, processes, and expertise. Pepsi has enormous intellectual property, none of it patented. Dell and Southwest Airlines became successful by perfecting processes that their competitors could not imitate because of constraints imposed by the ways of doing business that had made the competitors successful.

A patent measure can be gamed.

An ex-CEO trumpeted increased patents while cutting research.

Questioning Expertise, by GM Nigel Davies

I have been considering areas in which I am supposed to be an expert. And it's sobering to realise how many flaws there are and how I haven't improved my knowledge at all during the last few years.

Could it be that the thought that one is an 'expert' starts to close the mind to new developments and counter-arguments whilst fostering stultification. I suspect that many great players have had this thought, and they counter it by changing their game as soon as they know what they're doing.

Scott Brooks agrees:

Interestingly, I have felt the same way for some time about deer hunting. I am confident that I know what I'm doing, but in the last few years, I have found it difficult to improve my "game". I used to like to read all the deer hunting magazines. I got bored of them. It's the "same 'ole...same 'ole" in every magazine story. Nothing new.

I then got into the Quality Deer Management Association. It's a scientific organization that gets into the real nitty gritty of deer managment (with the emphasis on hunting). Good stuff and more detailed. But still, it is becoming a more detailed version of the "same 'ole...same 'ole".

It makes me wonder:

  1. Is there really anymore to learn about deer hunting (chess, trading) or is just a different rehash of the "same 'ole...same 'ole"
  2. What am I missing? There has to be more, and I'm just not seeing what the next level really is...of course, no one else is either...but that's no excuse....just because others aren't seeing the "next level" is no excuse for me to not see it.
  3. Maybe the "Peter Principle" is real and I've risen to the level where I'm no longer competent (I reject that, of course. Which means that I'll break thru to the next level. Or its further proof of the principle in action).

So maybe it's my complacency in what I "think" is competence in an area that I "think" I have expertise. I have been feeling this way for sometime about many areas of my life. Deer hunting, trading, and my businesses. There is either more or there isn't. If there isn't more, do I have the intellectual capacity to see my limitations and find happiness with "my level of competence"? If there is more, how do I tap into my intellectual capacity to find it?

J. T. Holley offers a suggestion:

“If there isn't more, do I have the intellectual capacity to see my limitations and find happiness with 'my level of competence'? If there is more, how do I tap into my intellectual capacity to find it?”

Don’t necessarily forget everything that you’ve read, watched or seen; but wipe the slate clean. I personally feel that a lot of those “hunting” and “fishing” magazine are just like the “financial pornography” that exists on Wall Street via papers, TV, and radio programs.

Go out and get nothing more than a .99 cent composition notebook and pencil and start writing down everything that comes to your mind. Approach hunting as if it were a “science experiment” and don’t limit anything that comes to your mind.

My Papa did this back in the early 1900’s and kept many a journal. He has one on trapping minks and muskrats that I cherish and feel honored to have read due to the fact that only a handful of people have done so. The other journal comes from hunting deer in Picco Gap of the Blue Ridge Mountains. It gives insights that nothing today would give or come close to.

Persistently writing and keeping notes and reviewing will allow you to see things that you’d have never before paid attention to or might have been distracted over “other’s experience”. Once you have enough of this data and writings then you’ll be able to form hypothesis and see that certain things are or aren’t predictable when it comes to hunting. Sure beats taking David Petzl’s or Bill Dance’s word for it.

The approach above is one of the main parts of Vic’s two books that I cherish. If you read  Education of a Speculator he didn’t promise a “get rich quick” but a way of thinking that will apply to everything you do. The joke is that nobody wants to take the time to do the work to get the results. They would rather cheat themselves and farm it out or not do it at all and rely on others.

I am not a single expert on anything. Maybe the outdoors in general but that’s about it! That comes from Cub Scouts, Hunting, Fishing, Rafting, Hiking, Climbing, Skiing, Camping, and going places and experiencing things that other people simply wouldn’t do.

Some Predictions, by Victor Niederhoffer

Inspired by breaks of round at 1,400 in SPU and 1,800 in NDX and Google moving to 498, one is tempted to make some numerical, gravitational, uneconomic predictions for end of year.

Joyce Shulman observes:

A completely uneconomic prediction for the end of the year is that trouble might be brewing. Some months ago Victor asked what do you notice that you do when you are possibly making emotional mistakes in the market when the market is rising. It took me a while to realize what I do. I begin to make reservations and plan expensive trips. I am doing it again.

Steve Ellison invokes some quantitative techniques:

Using the arc-sine distribution, I predict the S&P will make its high for 2006 on December 29.

The ratio of the earnings yield on the S&P 500 index to the yield of the 10-year bond was 1.17 at yesterday's close (using trailing earnings, not yet adjusted for the September quarter). The 2006 high to date is 1.23 on September 25, and the 2006 low is 1.03 on May 9.

Jay Pasch guesses:

Nasdaq futures, open gap @ 1807.25 from 1/17/06...

On Government Statistics, by Pamela Van Giessen

CHICAGO A police watchdog group is calling Tuesday on the FBI to review whether the Chicago Police Department is hiding crimes to lower the murder rate and make the city seem safer.

We have anecdotal but first hand evidence that they are massaging the data so that reports indicate a rosier scenario in more crimes than just murders. It's been an ongoing bone of contention that property damage crimes are not being reported, that shootings that don't result in murder get reported as "assaults," and similar sorts of schemes are taking place. Frankly, I don't think that the CPD is driving the data distortion but that commands to do such are coming straight out of city hall, happily aided and abetted by our Rocky Horror Show cast of a city council. God love an oligarchy.

National Book Award Winners, from Clive Burlin

The National Book Award winners were announced yesterday: