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September 1-15, 2005

9/15/2005
Cons, by Rip Mackenzie

I began researching cons about a month ago and developed a fascination for deciphering profiles not of con men, but of marks. I believe the study of marks might lead to some valuable insights about predicting bubbles. (It takes two to dance.)

Your site had a discussion on big cons several months ago that mentioned the adage, "You can't  cheat an honest man." I discovered that the original quote lends more understanding to the motivations of marks and the characteristics of bubbles:

I never cheated an honest man, only rascals. They wanted something for nothing. I gave them nothing for something. -- Joseph "Yellow Kid" Weil

Andrew West comments:

One must understand epistemology to understand cons/bubbles. My hypothesis is that irrational and collectivist societies are more likely to be conned. Ayn Rand's presentation of the "second hander" in The Fountainhead is an excellent way to approach the subject, later developed further and more formally by her. In societies in which people are reality-oriented and think for themselves (individualist and primacy of existence), a person would not yield to peer pressure or the momentum of decisions made by others, and he would understand that his decisions must be made based on his judgments of reality, not tips provided by friends or market prices established by strangers. Those who take an intrincisist or subjectivist view of knowledge would more easily be persuaded to suspend individual rational judgement on matters of money, and collectivism of course tells one to lose oneself in the crowd.

The Iranian revolution could be seen as a big con of the intrinsicist-led variety, the Chinese revolution an example of the collectivist/subjectivist variety. The former preacher Wade Cook helped separate people from their money back in the '90s by appealing to intrinsicist errors ("It is written in these tablets that stock splits make thee rich"), while the tech-stock money-separation scheme appeared to be driven by collectivism/subjectivism ("Golly, so many of my friends are getting rich buying JDS Uniphase, etc., even if I can't understand why the stocks are worth so much, so many other people couldn't be wrong!").

9/15/2005
Letters to the Editor: An Exchange of Letters Regarding a Doomsday Analysis of Dividend Yields

Dear Dr. Niederhoffer:

I compiled data on the DJIA dividend yield from 1955 to 2004. The data came from this week's Barron's (see page M22, 9-12-2005). I did a two-tailed, t-distribution on the data, using a 95% confidence level. The results were tabulated using a TI-83+ calculator:

Mean: .03634, SD: .01265, N: 50, T: 2.0096

The range of values I totaled were .03274, .03994. I concluded with 95% confidence that the average yearly DJIA dividend yield falls between those two values above in any random sample of 50.

I noticed something ominous in the more recent data, however. When looking at the DJIA dividend yields between 1990 and 1999, the dividend yield on the DJIA declined from 3.94% to 1.47%.

At the same time, however, the value of the DJIA climbed from 2633.66 to 11497.12. One question immediately came to mind: Does the value of the DJIA average move inversely to yearly changes in the dividend yield of the DJIA?

If there is negative correlation between yearly changes in the DJIA dividend yield and the closing value of the DJIA, could it be that in order for the DJIA dividend yield to return to its long-term 50 year average, the value of the DJIA must decline in the future?

This begs the question of whether changes in dividend yields are predictive of price action in stocks generally? Or could increased dividend payouts from companies in the DJIA cause the DJIA dividend yield to increase when the value of the DJIA remains flat? If so, to what degree?

If the data I compiled are incorrect, I would love to know where (and what) I did wrong. Your reply and review would be most appreciated. Seems like the numbers cause one to ask more questions than provide answers.

Sincerely,
Aaron Koral

Victor Niederhoffer Responds:

Your data don't take into account the increase in buybacks during this period, the decline in interest rates, or the change in tax rates. Nor do you look at future return as a function of dividend yield changes. Nor do you take account of changing cycles, or the obvious differences between the markets of today and 40 years ago. Data on dividend yields are available in the Standard and Poor's Statistical Price Record and the Dow Jones handbooks, as well as on the internet. Like Robert Shiller, you are taking historical figures that show no predictivity and making impressionistic negative comments about today based on statistically insignificant results that have no bearing on today.

Aaron Koral Responds:

It's been a while  since I did any statistics, so I freely admit that my results were rudimentary.  There is, however, one notion you touched upon in your reply, which was "looking at future returns as a result of dividend changes". If I were to focus on this notion, how would I go about proving the "predictive" nature of changes in dividend yields on equity prices?

Should I also be looking at the yearly changes in the DJIA and compare that to the changes in the dividend yield? What should I learn in statistics to pursue a better understanding of how changes in dividend yields cause changes in equity prices (or not)?

Victor Niederhoffer Responds:

Your response reminds me of Galton's to Darwin on the matter of pangenesis which is very poetic and Galton turned out to be right. You don't need fancy statistics. Just make a table of dividend yields in one column and future returns the next year in another. Then divide the dividend yields into four classes from low to high. For each class look at the mean future return . Then compare and see if you note differences. Do the same for changes in yield. Make sure the data in the first column are available and announced well ahead of the return in the second column.

Charles Kim adds:

Regarding Aaron Koral's dividend study and Vic's response, it got me to thinking about how rare it is to see regression analyses that do not take place over an extended time series of data. Are their any quant shops out there that look at how various pricing relationships correlate when conditions are varied against the speed of price changes, or by volatility as measured by option implied volatility

Jason Schroeder rings in:

Having lots of data in order to make strong inferences is required in the common usages of statistics. This part of the justification for making "The Triumph of the Optimists."

Making inferences on smaller amounts of data invites a requirement to figure out "why" one needs "so much" data to begin with. Some souls attempt to subdivide their datasets in order to synthesize more data assuming that more is indeed more.

In common usage, the ability to differentiate between a poor hypothesis and poor inference process renders small datasets useless. In centuries past, data was more expensive to obtain and curiously it did not seem to halt research.

Andrew West adds:

The Financial Analysts Journal has published a number of interesting studies looking at markets and dividend yields. Arnott and Asness wrote "Surprise! Higher Dividends = Higher Earnings Growth", (Jan/Feb 2003) concluding that contrary to conventional formulas, periods of high earnings retention tended to lead periods of slower earnings. Arnott & P. Bernstein also found dividend yield useful in evaluating market risk premiums in their article "What Risk Premium is Normal?" (Mar/Apr 2002).

Regardless of whether one agrees with Arnott's negative conclusions, the collection and presentation of the data relating to dividends, earnings and the market were very interesting.

9/15/2005
Cleaning the S&P Mini Hotel in Chicago, by James Sogi

Sep 8: The prices go up and down the hotel elevator like maids going up and down the same floors until the rooms are clean and they move on to the next level. One bar breaks through to a new 15 point range in a rush.

Counting the number of rooms, there seems to be about 22 rooms in each level of SP 500 Mini Hotel in Chicago, and it takes about 1/2 hour for maids to clean each room. this last couple of weeks. Survivorship stats should reveal significance of this count and how reliable the maids are.

Last Friday-Monday 23 rooms in penthouse level.. Tuesday - today, 23 rooms, 1/2 hour each room in deluxe level. Maids go down elevator to lower economy level. 23 rooms?

From a physics point of view under states of matter analogy, assuming fixed energy in market, the water will heat heat, heat, 22 minutes, then break through to gas in a fixed time given fixed energy. Or cool, cool, cool, then crack, it crystallizes into ice in a fixed time per given volume.

9/15/2005
Underwater Bubbles, by Andrew Moe

Speculators already playing an integral part in the rebuilding of New Orleans:

In some ways, Hurricane Katrina seems to have taken a vibrant real estate market and made it hotter. Large sections of the city are underwater, but that's only increasing the demand for dry houses. And in flooded areas, speculators are trying to buy properties on the cheap, hoping that the redevelopment of New Orleans will start a boom.
This land rush has long-term implications in a city where many of the poorest residents were flooded out. It raises the question of what sort of housing if any will be available to those without a six-figure salary. If New Orleans ends up a high-priced enclave, without a mix of cultures, races and incomes, something vital may be lost.
"There's a public interest question here," said Ann Oliveri, a senior vice president with the Urban Land Institute, a Washington think tank. "You don't have to abdicate the city to whoever shows up."
For now, though, it's a seller's market, at least for habitable homes.
Two months ago, Steve Young bought a two-bedroom condo in New Orleans' Garden District as an investment for $145,000. Last month, he was transferred by Shell Oil to Houston. Last week, he put the condo on the market.
In a posting on Craigslist, an Internet classified advertising site, Young asked $220,000. He got a dozen serious expressions of interest enough so he's no longer actively pursuing a buyer.
"I'm pretty positive the market's going to move up from here," he said.
So, to their surprise, are many others.
"I thought this storm was the end of the city," said Arthur Sterbcow, president of New Orleans-based Latter & Blum, one of the biggest real estate brokerages on the Gulf Coast.
"If anyone had told me two weeks ago that I'd be getting the calls and e-mails I'm getting, I would have thought he was ready for the psychiatric ward."

9/15/2005
The CIA on Experts Versus Counters, from George Zachar

From a CIA study Integrating Methodologists into Teams of Substantive Experts, via Mahalanobis:

Experts are much better at describing, explaining, performing tasks, and problem-solving within their domains than are novices, but, with a few exceptions, are worse at forecasting than actuarial tables based on historical, statistical models.

9/15/2005
Brazil as a Pilot Fish, by Victor Niederhoffer

Brazil is the pilot fish that is the first to reduce a discount rate, and Mr. Zachar has a wry way of referring to this collegiality, "After you, Alphonse" dance of fellow travelers among central bankers that leads to an avalanche of similar actions in inevitable propriety.

George Zachar Responds:

Another useful metaphor here might be "weakest link in the chain".

We're going through yet another emerging market debt cycle, where historic narrows in spreads are publicly characterized as "evidence of the maturity of the asset class" etc. etc.

Brazil has been a regular feature in the international political pages, where evidently it is news that there's corruption in Brasilia.

Concurrently, and with zero fanfare, credit default swaps on emerging market debt have been creeping higher, as other such measures of concern (on US debt) have remained stable.

I believe it was Stan Jonas who first observed "When the Fed tightens, someone always goes through the windshield". Let's hope there's someone in the ER who speaks Portuguese.

Charles Kim Responds:

This chart from an OECD publication speaks volumes about recent improvements in the national accounts. I know, its nearly a year out of date, but Brazil continues to be an important trading partner for the US, and despite the huge social inequities and corruption issues there, I'd venture to say that they are headed the right way on the path.

Could credit default swaps widening be a result of recent and expected EM borrowing plans?

"Someone in the ER who speaks Portuguese... " Tutta bene!

9/20/2005
CFA SAT study questions answered by James Lackey

A fulcrum for the future profit potential of a trader is the fear of losses over the fear of missing profits.  I find it laudable when traders go into self-preservation mode. When an individual daily loss could wipe out a trader's career, he finally runs.

However, that point is only reached after a cumulative loss over many days, when my friends are scared: "This is just like January when the market closed down from 2-cl every day day after day." "This is like '98, oh no, 198. ,"

I retort: "The last time I parked my car there it was stolen....Redheaded women are dangerous...Don't drink the water in Mexico."

An individual's buy or sell decision and what emotions motivate movement are as individual as the individual. Crowd dynamics: a fire in a movie theater, the appearance of a man with a handgun at his employer's workshop -- the crowd would seemingly evacuate to the path of least resistance.

Yet if a man at the door was met by a gunfighter, in perfect position, with his back to the wall, the crowd may not have time to move. The gunfighter took down the the X-employee invader, before anyone in the crowd knew what happened. Gunfighters are trained over thousands of rounds to fire, move, fire, cover and fire.

The after-action report would then include statements of the men to the left and the right who were at the table of the gun fighter. "Were you scared?" "No, I knew he was the fastest gun in the West, and we were in little danger." Or at the next table: "It happened so fast I didn't have time to move."

Now add the infinite combinations of invaders and gunfighters. Who would shoot first? Who would be last?  Would an invasion ever be attempted if the X employee knew there were gunfighters present? How would the crowd react if they knew they had security at their firm vs. just a bunch of gunfighters?

The security guard (risk manager), if entirely honest would always say, "I didn't see it coming, lucky we had the fastest gun in the West at our firm." Finally and most regrettably a certain statement would follow, "We need more funding for security". We need more gunfighters.

9/20/2005
James Lackey on Pleasure and Pain

You all saw the silly report circulated this week that the best traders are psychopaths. Dr Z posts behavioral finance coupled with his experience in his medical profession, that patients and perhaps traders seek drugs to avoid pain. We have all met athletes that "like pain." That is the difference in not feeling pain, enjoying it, avoiding pain or, God forbid. an individual seeking pleasure by profiting.

Assuming that all traders came from the same base of education and are "smart," what feelings would motivate them to move individually and as a crowd is of great importance. A seemingly good descriptive way to explain would be a post civil war period. Let's assume that all traders, research and managers are war veterans. They were all educated in the basics of infantry, firing rifles, marching formations for battle and, most importantly, supply lines and moving camp.

A good question is what do these "veterans" do after the war? There is a great migration west, savages to be fought, gold to be sought, 40 acres and a mule for all. Some move back east.

After a few years of study and a bit of experience on wall street what does the individual choose to do now? Some stay in the government, become Pinkertons. Some become gold miners, some sell the dry goods for mining or farming. Some populate cities, a few prefer the lawless camps of the wild west.

A gunfighter or warrior as a solo act has few choices to profit. He could become a thief or he could provide security in lawless camps for honorable speculators in gold.

A gunfighter takes on the biggest risk to provide security. Does that make him a psychopath? Does it make him smart for seeing and taking on the big risk for a big profit? Is he just using what god gave him his natural ability to be cool in the face of fire? After all it is not the ability to use a gun. Anyone can pull a trigger.

I would hypothesize the best gun fighters are as scared of death as any man. I would think they hate to see the death of others especially at their own hand. God for bid a daytrader profiting off of a financial disaster and the losses of others.

I know the last thing a gun fighter or trader would need is a lack of emotion. As a matter of fact a trader might have more of a feel for others pain and ones fears which gives him the ability to cope with loss. I guess a 19th-century gun fighter laments others deaths and looks at his own scars, wounds and inabilities to cope in the real-world-crowd-behavior as costs of doing his business. I wish day trading was as romantic as the Wild West.

Jeff Rollert adds:

One should read the story of Wyatt Earp, including that of his very-wild-almost-too-much-so wife. Many forget he stole the wife of another man, which precipitated a number of things. His reputation was such that no one would offer to fight him, and he lived quite a full life in Alaska and other places usually off of his reputation. I've met a number of traders who also use their reputation to get others to back-off on trades.

From Kevin Depew:

Can anyone pull a trigger?  I don't think so. It doesn't matter whether it's a gun or a trade or a marriage proposal, and some who even manage to pull triggers regularly do so with extreme reluctance.  That is perhaps  why so many  methodologies that appear to be successful are in fact acts of randomness whose success is rooted in an external affirmation that, yes, it is OK to pull the trigger this time. If you visit a racetrack for a few hours and listen carefully, you'll find that pulling the trigger is actually one of the most difficult tasks.

Trading is similar.  Analysis is the easy part.  Initiating the risk is another story, and what about emotions when pulling the trigger?  Emotions are often used in a catchall sense, and occasionally used in sense where any one is believed to be as good, or as bad, as another.  Trade with emotion, trade without emotion. Trade with little emotion.  Or not. Indifference is itself an emotion. Stendhal wrote beautifully about indifference in The Red and the Black.  Julian and Claire engage in a feedback loop where ones indifference creates a sense of urgency in the other.

Markets are indifferent to our love.  That is why the emotions we feel toward the market are often perceived as negative. She never reciprocates. Worse, she is indifferent.

9/20/2005
From FEMA to WEMA: An article by John Tierney, sent in by Kevin Eilan

I don't think Washington needs any more czars. But if President Bush feels compelled to put someone in charge of rebuilding the Gulf Coast, let me suggest a name: Lee Scott.

Scott is the chief executive of Wal-Mart, one of the few institutions to improve its image here after Katrina sent a 15-foot wave across the north shore of Lake Pontchartrain. If you mention the Red Cross or FEMA to people in Slidell, you hear rants about help that didn't arrive and phone lines that are always busy. If you mention state or national politicians, you hear obscenities. But if you visit the Wal-Mart and the Sam's Club stores here, you hear shoppers who have been without power for weeks marvelling that there are still generators in stock (and priced at $304.04). You hear about the trucks that rolled in right after the hurricane and the stuff the stores gave away: chain saws and boots for rescue workers, sheets and clothes for shelters, water and ice for the public.

"This was the only place we could find water those first days," said Rashan Smith, who was shopping with her three children at Wal-Mart on Saturday. "I still haven't managed to get through to FEMA. It's hard to say, but you get more justice at Wal-Mart."

That's the same assessment you hear from public officials in Louisiana, and there's even been talk of letting Wal-Mart take over FEMA's job. The company already has its own emergency operations center, where dozens of people began preparing for the hurricane the week before it hit by moving supplies and trucks into position.

I realize that Scott would not be a popular choice with Democrats. They concede that Wal-Mart and other private companies were far better prepared for Katrina than FEMA was, but they say FEMA would work fine if it were under the control of a virtuous, compassionate public servant - someone, as Bill Clinton suggested, like himself.

Clinton looks back on the 1990's as FEMA's Age of Pericles. "I think we did a good job of disaster management," he said on ABC's "This Week." While criticizing the Bush administration for leaving poor people stranded in New Orleans, he said that he and his FEMA director, James Lee Witt, had been especially sensitive to the needs of poor people because of their own backgrounds.

But if they cared so much, why didn't New Orleans ever work out a feasible way to evacuate poor people? FEMA had a golden opportunity to plan it during the 1990's. The threat of nuclear war had receded and terrorism wasn't yet a priority, so the agency's biggest concerns should have been an earthquake in California and a flood in New Orleans.

But it was too busy dealing with the record number of other "disasters" that Clinton declared - an average of one a week, which meant FEMA was mailing out checks for every flash flood within range of a major media market. Upstate New Yorkers suddenly became incapable of coping with the cost of snow removal.

In 1997, Congress gave FEMA $500,000 and ordered it to develop a comprehensive plan to evacuate New Orleans. The agency passed on the money to Louisiana, which used it instead to study building a new bridge. As Rita Beamish of The Associated Press reported on Sunday, FEMA didn't bother making sure a plan was drawn up - an aide to Witt said its job had just been to pass on the money.

How often do you suppose someone at Wal-Mart headquarters dispenses $500,000 and doesn't bother keeping track of it? The company can tell you the precise location of every thumbtack in its inventory. It's legendary for tracking every transaction and pinching every penny.

Its executives fly coach, and they empty their own wastebaskets. When Scott, the chief executive officer, travels with the chief financial officer, they cut costs by sharing a hotel room.

That's the kind of leader we need to oversee the tens or hundreds of billions that Washington will be spending on the Gulf Coast. Scott could insist on low everyday prices while still leaving the area as well prepared for the next disaster as Wal-Mart was for Katrina.

David Vitter, the Republican senator from Louisiana, was so impressed with the rapid response of Wal-Mart and other companies that he promised to introduce a bill to abolish FEMA and contract its job out to the private sector. I'm afraid the Wal-Mart Emergency Management Agency will be a tough sell on Capitol Hill. But I'd vote for WEMA. I don't think Washington needs any more czars. But if President Bush feels compelled to put someone in charge of rebuilding the Gulf Coast, let me suggest a name: Lee Scott.

Scott is the chief executive of Wal-Mart, one of the few institutions to improve its image here after Katrina sent a 15-foot wave across the north shore of Lake Pontchartrain. If you mention the Red Cross or FEMA to people in Slidell, you hear rants about help that didn't arrive and phone lines that are always busy. If you mention state or national politicians, you hear obscenities. But if you visit the Wal-Mart and the Sam's Club stores here, you hear shoppers who have been without power for weeks marveling that there are still generators in stock (and priced at $304.04). You hear about the trucks that rolled in right after the hurricane and the stuff the stores gave away: chain saws and boots for rescue workers, sheets and clothes for shelters, water and ice for the public.

"This was the only place we could find water those first days," said Rashan Smith, who was shopping with her three children at Wal-Mart on Saturday. "I still haven't managed to get through to FEMA. It's hard to say, but you get more justice at Wal-Mart."

That's the same assessment you hear from public officials in Louisiana, and there's even been talk of letting Wal-Mart take over FEMA's job. The company already has its own emergency operations center, where dozens of people began preparing for the hurricane the week before it hit by moving supplies and trucks into position.

I realize that Scott would not be a popular choice with Democrats. They concede that Wal-Mart and other private companies were far better prepared for Katrina than FEMA was, but they say FEMA would work fine if it were under the control of a virtuous, compassionate public servant - someone, as Bill Clinton suggested, like himself.

Clinton looks back on the 1990's as FEMA's Age of Pericles. "I think we did a good job of disaster management," he said on ABC's "This Week." While criticizing the Bush administration for leaving poor people stranded in New Orleans, he said that he and his FEMA director, James Lee Witt, had been especially sensitive to the needs of poor people because of their own backgrounds.

But if they cared so much, why didn't New Orleans ever work out a feasible way to evacuate poor people? FEMA had a golden opportunity to plan it during the 1990's. The threat of nuclear war had receded and terrorism wasn't yet a priority, so the agency's biggest concerns should have been an earthquake in California and a flood in New Orleans.

But it was too busy dealing with the record number of other "disasters" that Clinton declared - an average of one a week, which meant FEMA was mailing out checks for every flash flood within range of a major media market. Upstate New Yorkers suddenly became incapable of coping with the cost of snow removal.

In 1997, Congress gave FEMA $500,000 and ordered it to develop a comprehensive plan to evacuate New Orleans. The agency passed on the money to Louisiana, which used it instead to study building a new bridge. As Rita Beamish of The Associated Press reported on Sunday, FEMA didn't bother making sure a plan was drawn up - an aide to Witt said its job had just been to pass on the money.

How often do you suppose someone at Wal-Mart headquarters dispenses $500,000 and doesn't bother keeping track of it? The company can tell you the precise location of every thumbtack in its inventory. It's legendary for tracking every transaction and pinching every penny.

Its executives fly coach, and they empty their own wastebaskets. When Scott, the chief executive officer, travels with the chief financial officer, they cut costs by sharing a hotel room.

That's the kind of leader we need to oversee the tens or hundreds of billions that Washington will be spending on the Gulf Coast. Scott could insist on low everyday prices while still leaving the area as well prepared for the next disaster as Wal-Mart was for Katrina.

David Vitter, the Republican senator from Louisiana, was so impressed with the rapid response of Wal-Mart and other companies that he promised to introduce a bill to abolish FEMA and contract its job out to the private sector. I'm afraid the Wal-Mart Emergency Management Agency will be a tough sell on Capitol Hill. But I'd vote for WEMA.

9/19/2005
Bonds and Conviction, by George Zachar

There does seem to be a very solid consensus behind the notion that the Fed will raise rates another 25bp tomorrow, but will also alter the press statement in an unknown manner.

I lack the street's faith in the rate hike, as it ignores the political atmosphere in Washington and press' obsession with looking for politically expedient places to lay blame for every news cycle's hard-luck story.

The energy price spikes could provide ideological "cover" for a Fed pause. There's ample evidence in the data and anecdote stream to justify characterizing energy prices as a tax/headwind/hurdle, making a rate hike for the moment, unnecessary/redundant.

Long end implieds haven't done much, but short end vols have firmed, correctly discounting the heightened uncertainty/broader probability distributions for rates.

9/14/2005
See Our Buyback Study Update

9/14/2005
George Zachar Watches the Fed

Everything was pure Goldilocks till the moment Katrina hit. Greenspan had to be rehearsing his victory dance. Inflation low/falling, production cooking along nicely with no dreaded "imbalances", employment growing smartly with wages showing signs of firming. Now his last moves will be jarred by scrambled data and a budget-busting competition by both parties.

9/14/2005
Lobagola, by James Sogi

It's fun to look at the tops of the Lobagola moves and imagine who the actors are in the firmament. I like to imagine my place in the firmament just as a kid does staring into a starry sky. Who were the smart ones to sell the top? Who were the unlucky ones to buy the top tick? Who sold 1627 contracts at the top? What was he thinking? Why did he what he did?. Why did the market move the way it did? Is there a way to predict it from the available data, as it happens? The data reveal some of the workings of the Globex algorithm and the nine-point move, up and down. Why did it do that? Is there something before or during that would allow quantitative prediction at any point in the move? Someone has figured this out already.

It is a Bayesian Martingale model that adjusts prices in a manner to keep the appearance of fairness, but to keep the money flowing and extract the largest amount of vigorish possible. That is why CME is so successfully. Why? Each piece of information, trades, orders is placed into a learning formula that adjusts the price up or down and registers the trades in an ordered mechanical manner updating as each piece of new information comes in to the system by way of transaction or order. The price does not clear the orders at a price level, but moves with orders remaining. Why? What is the weighting of the prior trades and the orders. How are they weighted as to price, as to time and size. Recent proposed rule changes against pulling orders indicates that the gaming is throwing off the system to their detriment. In the same manner Wolfram attempts deconstruction of the simple rules of automata, the deconstruction of the Globex algorithm might have been accomplished, for it is only automata. Is there more hidden data? This is our opponent. Its is good to keep your enemies close and to know them.

9/14/2005
A Retired Floortrader Reminisces

09/14 7:38 Ex-CME Floor Broker Given 1 1/2-Yr Prison Term For Fraud
CHICAGO (Dow Jones)--A former floor broker at the Chicago Mercantile Exchange will spend time in federal prison for a trading scam that cheated his customers out of thousands of dollars. Judge Ronald Guzman on Tuesday sentenced ex-Nasdaq 100 futures broker Salvatore A. DeLaurentis to 1 1/2-years behind bars. DeLaurentis, who turned 39 on Tuesday, pleaded guilty in June to one of seven charges lodged against him for offenses that occurred in April 2000. Prosecutors dismissed the other charges as part of the plea agreement. The customer lost $17,500 on the trades, according to court records. All told, prosecutors alleged that seven customers lost a total of $81,500 from illegal transactions. Dorn, 56, pleaded guilty last May to similar charges. He is scheduled to be sentenced later this week. The judge ordered DeLaurentis to start serving his sentence Oct. 25. Upon his release, DeLaurentis must perform 300 hours of community service. DeLaurentis and Dorn were ordered to pay restitution to their victims as part of disciplinary proceedings conducted by CME. The exchange also permanently took away their membership and floor privileges.

I remember these guys vividly as I was a clerk right below them and believe their badges were SD and FLSH. In the history of open outcry, the NASDAQ 100 pit from late 19999 to mid 2000 will be ranked as one of the craziest. Brokers were getting paid five bucks a contract to fill since errors would be enormous and eat up a lot of their profit and that's perhaps what drove these guys to steal.

The Naz pit got so full that traders had to be on a list just to stand in it and there was a line of people waiting to get in. When the CME finally enlarged the pit, it was pretty much the top of the bubble.

9/13/2005
Gartner's Hyped Technologies Report, by Vincent Fulco

A good source of ideas for bleeding-edge traders/investors in technology or, more appropriately, those who lean against the crowd:

Hyped technologies: digital paper, P2P VoIP, podcasting, grid computing, corporate blogging, desktop search, XBRL, RSS, biometrics. Expectations inflate, disillusionment sinks in and eventually a plateau of productivity is found. Gartner researchers have charted the lot. Yesterday the company released its 2005 Hype Cycle for Emerging Technologies, assessing the maturity, impact and adoption speed of 44 technologies and trends over the coming decade.

Carbon nanotubes and speech recognition, service-oriented architecture and RFID also feature in the Hype Cycle which charts the progression of an emerging technology from conception, to market over-enthusiasm, through a period of disillusionment, to an eventual understanding of the technology's relevance and role in a market or domain.

9/13/2005
What Autumn Brings, by Tim Melvin

Football, I think, has even more correlation to markets and life than baseball. It is the dull boring stuff, endless practice, off tackle runs and power sweeps that soften the defense for the down the field aerial spectacular. In life and markets, it is studying, learning, reading the filings, setting up the stats tables that make possible above average success. Melvin's entire take on the first full weekend of the season.

9/13/2005
Briefly Speaking, by Victor Niederhoffer

  1. The key to understanding the world of choice and decision making is incentives. One blade of the incentive scissors is that higher prices elicit increased supply and reduced demand. Today we read that gold is down $3 because of concern that Indian jewelers will reduce usage and that oil was down yesterday on increased levels of shipments from Europe. I note that the CRB Index is at 320, approximately where it was six months ago. Another blade of the scissors is that people work harder when they can make more money out of something. The Wall Street Journal article yesterday contrasting the beautiful and effective efforts of Wal-Mart and Home Depot to provide food, equipment and shelter for the hurricane victims, and the knowledge that the jails in New Orleans were emptied and prisoners released because no evacuation plans were developed by the city or state, reminds one of the heroism of business in responding to the profits incentives, the many escapes from jail that have occurred in conjunction with natural disasters, and the importance of developing the taste and experience of property as a necessary concomitant of civilized conduct, and of Martin Anderson's Federal Bulldozer in which he records how public housing, residents of whom again constituted an inordinate residue of the remaining occupants of New Orleans after the flood, leads to looting and bad behavior.
  2. What is the magic bullet, the golden key, the Open Sesame that will open the chest for market prediction? Is it the movement of a certain market in a certain hour? The market sentiment that arises from the happiness of people, the nearness of releases of energy from fixed decision makers like the trend followers, or those lacking in margin, the changes in uncertainty and a priori risk, the influx of liquidity from monetary injections, corporate buybacks, the changing mix of money being raised by equity versus debt, the flows of money from into money market funds versus stock funds, the liquidity of the public based on money received, the prospects for future profits, inflows from abroad, the strength of the existing holders of stocks, the path of least resistance, et al? Yes, all these are important. and all can be quantified. But if there is one single lozenge that I like to hang my hat on, one that's not always discounted, it's the relative moves of fixed income versus stocks. Yes, there's always a relation, a feeding relation between them, a substitution that is the golden key.  The problem is, it's always changing. (I attempted to reduce the fogginess of same in my chapter on Kira's education about the evils of regulation of health lozenges, and my own amiable idiocy, in chapter 16 of our worst-selling book, a book reviewed most recently as "feeding on each other's insecurities and inadequacies .. lack of success as a trader ... stupidity and embarrassment ... an empty message from an empty mind. " Reading such, one can hardly refrain from a sense of satisfaction.
  3. If there's one key mistake that traders make, it's to base their decisions on information that is past or ephemeral. The former has been discounted many months ago, and the latter, like the employment last month, or PPI last month, has nothing to do with the value of stocks. Of what moment is it that PPI in August was up 0.6% when the CRB is down 10% since then, except for those who would spur friction to cover the costs of the market firmament? Or as Bacon would say, to cause the public to lose so much more money than they have any right to lose.

Paul Marino Responds:

Regarding today's Briefly Speaking, especially the Martin Anderson reference, I came across this abstract while searching for similar problems which may happen in China and other developing nations. This seems worth reading:

Is History Repeating Itself? From Urban Renewal in the United States to Inner-City Redevelopment in China, by Yan Zhang and Ke Fang.

This study compares urban renewal in the United States in the 1950s and 1960s with inner-city redevelopment in China since the late 1980s. It finds that both programs use government authority and subsidies to make large-scale private or quasi-private investment attractive in the name of ameliorating living conditions. Cautiously applying Logan and Molotch's "growth coalition" concept to China, the authors assert that a "growth machine" has formed during China's economic decentralization processes. Despite the similarities, America's urban renewal was an ill-fated federal program in which the local government and downtown business interests cooperated to boost declining inner-cities that were competing with burgeoning suburbs. In contrast, China's redevelopment has been propelled by emerging local elites using decentralized state power to pursue fast growth in rising real estate markets. Greater insights into urban redevelopment can be gleaned through this comparative analysis.

9/13/2005
Should FEMA Take Orders from Wal-Mart?

There’s a good article in the Wall Street Journal called At Wal-Mart, Emergency Plan has Big Payoff which details how Wal-Mart was more prepared and better organized for Hurricane Katrina’s approach then was FEMA, and how quickly and efficiently they responded in the wake of the storm with their relief efforts to their stores and workers and citizens, often well ahead of FEMA’s response time.

9/12/2005
An Incredibly Minimal Range, by Victor Niederhoffer

The 3.60-point range in the S&P today -- from a high of 1249.10 to a low of 1245.50 -- may be the narrowest for a non-holiday in history, and certainly not conducive to the wheels of commerce extracting excessive wrong trading at extremes. As usual, the unusual will be in store tomorrow.

9/20/2005
Five Variations on Creative Destruction on the NYSE, by Victor Niederhoffer

"Creative destruction" is the name given by the economists Joseph Schumpeter and David Ricardo to the process whereby companies pursuing their changing comparative advantage destroy the old and grow the new. It's a buzzword for the great deeds that the Wintels performed in the '90s and the dotcoms in the Oughts.

Looking through the 42,000 entries on Google, "creative destruction, NYSE" one finds a patchwork quilt ranging from the most virulent pro-capitalist writings of Becker and Posner, the always politically astute centerpiece of almost every Alan Greenspan speech to 500 references to the job destruction, the discrimination against women, and the "monopolistic" nature of the leading retailer, and numerous references to the churn and turnover of all the typically used indexes with particular reference to that old standby, GE, the one company from the original Dow that is still with us, to numerous academic studies on such matters as performance of companies by concentration ratios and time of entry in this or that index. The subject cries out for some current work free of the slow-moving , retrospective, out-of-dateness and political biases that makes work of this nature so hard to pick the wheat from the chaff.

If there's one prime example of creative destruction, reinvention, flexibility, churn and dynamism on the NYSE, it has to be Corning, which sold at 113 in 2000, 1.1 in 2002, and now has ground back to 20, with sales of $3 billion projected for 2005, down from $8 billion in 1996 but up some 25% from 2003. Its major business read like a poster for what is, was or will be good in tech: display technologies, environmental technologies, control substrates, optical fiber cable, life science equipment, diesel engine filters, advanced materials -- what a whirlwind it is. Hardly a quarter goes by without a major spinoff, acquisition or joint venture, shift in strategy, changed core, sale of now non-core, restructuring of the balance sheet, change of chair, major contract ready to be signed or business ready to enter, closing of factories, massive layoffs, etc.

Amazingly, Corning has done this repeatedly since its founding albeit on a slower time scale. Yes, this is the same company that used to be known mainly as a sleepy manufacturer of plate glass, fiberglass and cookware in the formerly sleepy upstate NY company town of Corning.  Some of the things they've pioneered and subsequently deemphasized include fiber-optics, glass for the first light bulbs, traffic lights, all the plate glass and cookware of the '30s, specialty glass for cookware in the '40s, lab service in the '70s, the artful spinoff of bankrupt Dow Corning in 1995 and Qwest, selling off consumer brands in late '90s. Five billion dollars of acquisitions in 2000 in optical fibers. Laid off 25% of its staff in 2002, closed plants.

In short, a company that changes its game to keep in step with the pitiless consumer, the consummate Rod Laver of tennis who can hit any shot from anywhere on the court with four kinds of spin, the very model of a flexible young-hearted company at 140 years old. Definitely not the kind of company that the Sage would buy, and that's probably a good summary of one of the reasons that Corning is within a stone's throw of its five-year high and the Sage's company at a 25 month low. Subsequent installments will provide a systematic study of the performance of companies manifesting various syndromes of creative destruction.

9/11/2005
Bruce Lee, by James Sogi

Bruce Lee was a famous master martial artist and movie star in the '60s and '70s. He called his style of martial arts Jeet Kune Do. He taught effective strategies useful to traders.

5 ways to attack:

  1. Simple angle attack. Coming from an off angle, punching and kicking, closing the distance.
  2. Combination attack. Sashay in, kick to shin, upper cut, cross., move in to lock and immobilize or incapacitate.
  3. By drawing. When moving back, drawing the opponent off balance, pull to take down when opponent off balance, or kick during opponent's lunge.
  4. Hand immobilization attack. Closing distance, immobilize opponent's hand with wing chun, slip in, upper cut/cross.
  5. Progressive indirect attack.

An attack must be determined and continuous until a hit is scored or the attack is parried. There are three factors in an attack:

  1. A fine sense of timing.
  2. Perfect judgment of distance.
  3. Correct application of cadence. (the shift in cadence before and after 8/28 was key in this last three weeks trade.)

Avoid getting locked into a fixed martial arts style regardless of the conditions or the personal differences. This is the same message as Chair's advice: don't get stuck with fixed systems. The martial artist should be like water which can't be grasped or hit. When in a cup, water is a cup, when in a bottle water is a bottle. Running water never grows stale.

Some of the best strategy comes from mixing styles and switching from system to system in the course of combat. Moving in with a kick and punch (boxing), slip inside with wing chun, immobilize with with jitsu bar, then take down incapacitate with aikido move. Don't limit to one style as the conditions constantly change.

Growth stops when bound by set patterns. (To those who trade fixed patterns, no matter how significant) True observation begins when devoid of set patterns. Freedom of expression is beyond systems.

On Footwork:

  1. Shuffle. Double and single. Forward and backward.
  2. Slide step.
  3. Sashay.
  4. Circle. (Know how to move around within a trade, adjust.)

The purposes of foot work are to:

  1. Move ahead of the attack.
  2. Put the opponent on the defense.
  3. Control timing and distance.
  4. Control play.
  5. Build confidence.

(A trader with good footwork can stay ahead of the game and get good entries and exits with confidence, and be ahead of the attack.)

A Singaporean Trader responds:

A famous General once observed that 'Fixed Structures are monuments to the stupidity of Men' ( I think it could have been Patton).

Bruce Lee's Jeet Kune Do (literally ' Way of the Intercepting Fist') is actually classified not as a martial art, but part of a small list of fighting systems called 'combatives' - the Israeli 'Krav Maga', Russian 'Systema', 'Defendu' etc all come under this list- all with only fighting intent and nothing by way of 'Art' or tradition.

Perhaps the one notable feature of combatives is that they often eschew Forms or Kata in favor of two-man fighting drills.

Another feature is the embracing of non fixed-forms of combat, and by encouraging their practitioners to experiment and adopt flexible tactics/mindsets -- as long as the fundamental concepts are adhered to -- which is in itself a form of fixed structure.

The key to good speculating is to be able to differentiate the conceptual frameworks we work within, between the fixed structures we create as edifices to our own egos.

But do tell me how. The search for the right balance for me is elusive at best, and illusory at worst.

Now imagine my bewilderment when my teacher of Taichi boxing/ Imperial Palace Bagua (eight trigrams) boxing tells me to flow like water when fighting but stick to the fundamentals. -- Kevin Ho

Nick Marino adds:

Most people don't know that one of Lee's legs was much shorter than the other, which could have been a severe handicap to a lesser man. He also had bad vision. One of the most inspiring quotes from Lee:

"I accepted my limitations for what they were and capitalized on them...Instead of trying to do everything well, do those things perfectly of which you are capable...The past is an illusion. You must learn to live in the present and accept yourself for what you are now. What you lack in flexibility you must make up with knowledge and constant practice."

A Concise thought from Bo Keeley:

A distillation into one sentence of the Bruce Lee books that I read in Niederhoffer's basement library (on a shelf under the chess book collection) is to strike at the part of the opponent's body that comes closest to you. There is great wisdom here, and the mystery of it being an aggressive or defensive fighting style.

James Sogi rejoins:

One technique our kick boxing teacher, former middleweight kick boxing champion of the world, showed us was to punch the opponent's GLOVE, hard, rather than trying for a knockout. First, the shock travels up his arm. Second, let the opponent know you've got a punch and can use it. It will disconcert him. Third, you may knock it out of the way and get a clear shot with the other hand combo or a back hand to the head.

When that SP bar comes at you, at the end of its extension, hit it. If you step in too far, you'll get it in the face, so keep the other hand up. Always keep the hand guard up. Remember Million Dollar Baby? "Always protect yourself."

Kedrick Brown concerts:

Laurel wrote:
I also read Helmholz on the physics of sound, in an attempt to understand how music affects listeners. Overtones are incredibly important in performance. A performer should hear between the notes. It's like a trader being able to keep his awareness beyond the linear progression of the seconds as they tick away.

Speaking about overtones, I remember reading somewhere that vacuum tube based amplifiers may emphasize different overtones than transistor based amplifiers. Some musicians swear that vacuum tube based amps create a "warmer" sound, but of course the incredible convenience of transistors, which can now be dramatically miniaturized, have driven the musical technology the majority of us use today.

Of course a completely misplaced analogy, but my feeling is that the discerning speculator (who has to be a contrarian in some sense to be successful), might be likened to the aficionado of vacuum tube based amps - a musician's musician, so to speak, who focuses on different areas of emphasis in the market symphony than the majority, who are content to listen to the same symphony on the standard widespread transistors.

9/12/2005
Hearing Market Music, by James Sogi

Hearing is not discussed or used much in markets. Most work is visual. Chair described some primitive and abortive sound experiments in EdSpec. There are squawk boxes. But hearing has some interesting qualities. R has functions for sound generation.

1. When listening to music one does not initially hear the individual notes or instruments in a symphony. Is this similar to S&P trading when not hearing the role of the individual companies? With ear training or study of the score, or watching a performance, the individual notes, the cadences and the individual instruments can be distinguished.

2. Sound has some interesting qualities. Overtones add depth. Overtones extend beyond the range of audible hearing, but are felt, and may go on infinitely in the spectrum. Sound has the power to destroy, boil water, shatter glass, incapacitate humans. Sound can evoke emotional strong responses. Sound is multidimensional in that it has the capacity to convey on many levels. There is speech and meaning, volume, tone, chords, minor chords, seventh chords, timber, bassy, trebley, high pitch, low pitch, reverb, location. Many layers of meaning can be conveyed in a single sound byte. It is an efficient and rich method of communication. The Marvel superhero Daredevil got around fabulously using hearing, like a bat, though he was blind.

3. The mind subconsciously filters noise quite effectively. My wife was standing in the subway in New York during the recent Spec Party and asked, "How can you stand that shrieking sound?" I looked up in the subway oblivious and upon her mention, realized that right overhead sounded like a jet airplane. The mind filters things. What types of information in the market gets filtered out based on prior fixed conceptions. MP3 algorithms filters elements not heard on the forefront of the sound threshold.

4. This weekend I was teaching the guitar part from Gimme Shelter by the Stones to a fellow band member. I played the part many times, but he could not get it in the sense of understanding what the notes were. So I asked him to sing the guitar part. Only when he was able to sing it, was he able to play it. Transferring the music from the ear to the finger required an intermediary step of internalization by singing. Transferring market profits through the fingers requires an intermediary step of analysis.

5. I've written about 'seeing' fish after looking at them, but not seeing their form against the background. Hearing can mask sounds. Songs of birds in a forest. The background hiss on a telephone line, or the stereo. The tell tale rattle in an car engine that your daughter never hears over the loud music.

6. Hearing what people say. You say something, but the other person does not hear you. The spouse says something, but you do not hear it. You tell the kids something, but they do not hear you.

7. Hearing can see through opaque objects, or around corners and has advantages over sight. You can hear many things at once, but see only one. You can hear behind you, but have no eye in the back of your head.

8. These all relate to hearing what the market and economy has to say. These are functions of attention, understanding, analysis, training and transferal. Progress might be made using hearing in analyzing markets This would not be just converting data to sound alerts, but sensing the the deeper layers in the data streams, the harmonies. It might also encompass multilevel data monitoring using sound techniques.

Laurel Kenner comments:

I was riding the airport bus home from La Guardia one night when suddenly I had this idea that the market really was a big orchestra. I used to visit  the listening library at UCLA with a film composer friend, Jeff Silverman. His hearing was remarkably acute, and he would say, with much excitement, "Here come the trombones," "Hear that great oboe line," "See how Composer X combines the flutes with the double bass here." This knocked my socks off. My goal was to achieve something near his level of hearing. So I read books on orchestration, took a class, and played in a 20-piece chamber music orchestra at Cal Arts.

Playing with an orchestra, either as soloist in a concerto or as a member of the orchestra, is the best experience in the world. Your mind operates on so many different levels at once, and you're doing a highly demanding part while enjoying everyone else's and being part of a whole that encompasses everybody, including the audience. I also read Helmholz on the physics of sound, in an attempt to understand how music affects listeners. Overtones are  incredibly important in performance. A performer should hear between the notes. It's like a trader being able to keep his awareness beyond the linear progression of the seconds as they tick away.

Anyway, that night on the bus, it occurred to me that the big market themes of the time were like riffs from the various sections -- brass bursts, sad string melodies, percussion rhythms, etc. Of course Greenspan would be the clarinet, with wacky Berliozian Symphonie Fantastique personality changes -- sometimes the lover, sometimes the witch. Sometimes the orchestra is tuning up, and sometimes it gets going and plays a symphony.

Tom Ryan Chimes in:

I wrote about this once before several years ago. Back in the heyday when one could trade certain ind'l stocks and make money above and beyond the grind because the average daily ranges were 4-6%, I watched and traded a few particular stocks. (yes CSCO was one of them). I made a program in VB that played from a library of assigned music fragments depending on how each stock did that day. Each stock had 5 statistically assigned (based on its history) fragments - big down, little down, flat, little up, big up. And then at the end of each day the program would assign the music for each stock and play the whole sequence starting with JPM and ending with AMZN.

The naive idea was that the technique would help me sense the patterns, especially if one played the past weeks sequence. What I found was that at least in my simple system, I got three things. Big down day music, big up day music, and total cacophony. Well that's not entirely true sometimes it would get into this weird rhythm with some sectors up/down a little and tech up/down big. But it didn't help pick out anomalies nor did it help me sense the cycles. Mostly it was just noise until a big day and on the big days you don't need a musical score to know what is going on so it didn't help at all. But hey that was just me, maybe this could be resurrected for major market movements - oil, bonds, bunds, s&p.

Charles Humbert adds to the Tenor of this Theme:

Wow - this color symphony market montage concept sounds neat, almost mesmerizing. I can think of two reasons that it might not have caught on that have nothing to do with the system's own usefulness.

1. Although I have only observed a limited number of Fortune 100 companies' treasury departments first hand (in my former capacity of a capital markets executive), I submit that most younger management staff of public firms are rotated among various positions for time periods lasting perhaps six months or so. Thus the individuals that would be in charge of hedging or trading positions have but a brief amount of time to get used to the system before moving on to other responsibilities. There would be limited opportunities to put on transactions that are even remotely speculative, and since the Procter & Gamble, Gibson Greetings, and Orange County debacles in the mid 90s, very few firms treat their Treasury operation as a profit center.

2. I submit that it is possible that simple currency trading may actually be somewhat subsidized by money center banks that are competing for more profitable work, such as securities underwriting, derivative contracts, and M&A advisory. Thus, trading on one's own might be slightly higher cost, especially if in doing so, it required an additional letter-of-credit with another bank in order to complete transactions.

Frankly, if I were CFO of a corporation that frequently accessed the capital markets, I would demand that many of the more mundane banking services be done for free, given the profits generated for the bank in underwriting securities.

Too bad, I'd like to have seen a screen like that, but I wonder if it would be so hypnotizing that I'd lose focus on other things. Also, I remember seeing a documentary on people with unusual brain injuries, including one subject who claimed to "see" music. Rachmaninoff was apparently the most visually stimulating.

9/12/2005
The Senator on Hearing the Markets

The best trader I ever knew was Charlie D, the largest bond trader in history and a real character. I asked him his secret while we we watching the prelims before a heavyweight championship fight in Vegas, boring fights so we are talking up trading.

Charlie said he just listened to the noise and when it got really loud he'd see if bonds were going up or down -- if up, he'd hop in and buy 10,000 to 20,000 contracts and jump out with a tick or two profit, if down he'd sell with the same exit strategy.

He was noise-driven.

Dave Goodboy's recent interview with Larry Williams

9/12/2005
Major Airlines, from Steve Wisdom

LUV is now the only major airline, as measured by market cap; larger than the other 30'ish airlines combined:

Ticker  Name              Current Market Cap
LUV     SOUTHWEST AIRLINE     10,848,590,000
AMR     AMR CORP               2,047,903,000
JBLU    JETBLUE AIRWAYS C      1,995,651,000
SKYW    SKYWEST INC            1,412,564,000
CAL     CONTINENTAL AIRLI        833,334,800
AAI     AIRTRAN HOLDINGS         916,682,200
ALK     ALASKA AIR GROUP         870,329,100
XJT     EXPRESSJET HOLDIN        513,181,790
NWAC    NORTHWEST AIRLINE        289,069,100
FRNT    FRONTIER AIRLINES        375,468,900
AWA     AMERICA WEST HOLD        259,179,890
DAL     DELTA AIR LINES I        142,331,100
WLDA    WORLD AIR HOLDING        234,292,100
MESA    MESA AIR GROUP IN        248,421,300
HA      HAWAIIAN HOLDINGS        157,062,900
MAIR    MAIR HOLDINGS INC        186,403,500
UALAQ   UAL CORP                  41,839,550
MEH     MIDWEST AIR GROUP         41,056,430
UAIRQ   US AIRWAYS GROUP          32,904,700
FLYI    FLYI INC                  15,222,490
ATAHQ   ATA HOLDINGS CORP          6,503,350
GLUX    GREAT LAKES AVIAT          9,850,370
VIVI    VIVA INTERNATIONA          6,932,660
BLTA    BALTIA AIR LINES           5,137,600
ACHT    AIRCHARTER EXPRES          2,000,000
EFLT    ELITE FLIGHT SOLU            151,610
LAIR    L AIR HOLDING INC             66,910
MDWYQ   MIDWAY AIRLINES C              1,510

9/12/2005
Market Observations from Victor Niederhoffer

The Euro was at 122.87 and the Bund was also at 122.87 at 11:29 EST. All commodities are in free fall and the trendfollowers are going from long to short in energy but not in gold. I think of Pascal's Law and how pressure in one part of a liquid is transmitted equally to all other parts.

9/12/2005
Federer and the Markets, by James Tar

We should be so lucky that the markets are much more forgiving than Roger Federer. Otherwise, we would all be broken, or dead broke anyway.

Yesterday, Agassi was playing incredible tennis, tennis so good and so incredibly rarely seen that it actually foiled and frustrated the game's most dominant player. Agassi leveled the match at one set all, then had the break of serve to lead the 3rd 4-2, then 30-love while serving. The door was slightly open. Federer blistered an inside out backhand return of serve winner (so perfect some thought it was a mis-hit), and Agassi clearly felt the pressure, and the rarity of the occasion, and could not take advantage. Like a hardfought position in the markets, as the pressure mounts watching it go up and down, a scary print goes up on the tape, it gets to us, and we bail out, precisely at the wrong time.

Naturally, Federer stormed through the eventual fourth set tie-breaker, and Agassi was done. I do not think the markets are this dominant. We do not get one slight chance to book a winning trade, we are offered repeated occasions to have profit. Federer does not even give you one, you have to fight tooth and nail, play to a level that is rarely seen, to earn just one opportunity to book a profit. Being able to execute on that one opportunity is even more difficult.

9/11/2005
A September 11 Note: Dr. Kaufman and Our Society, by Yossi Ben-Dak

It seems that people that I have respected for many a year as experts who allow me, a curious mind, to avoid studying every field from the base, are variants of Dr. Kaufman. Anyone exposed to body snatchers or mind snatchers in the movie or in Jack Finney's novel or in Practical Speculation could come to similar conclusions about trading. Experiencing the darker hours of the markets with hope, sanity and analysis that penetrates the point of immediate or mid-course correction brings themes that can boost our joy of life. The antithesis of giving up to despair and to laziness starts from probing constantly whom to trust and why.

Political life is generally carried out by people who accept mediocrity as a way of life. But as the cost of consulting doctors who cannot be trusted is getting higher and higher (management and leadership mistakes cut into our right to enjoy the joy of life and fellow humans) we must take a second look at the people who have maintained higher standards of concern and professionalism. Somehow, I have been finding more Dr. Kaufmans now than ever before:

  1. Paul Volcker, with a budget of $34 mm to impartially pursue the case of Humanity vs "UN As It Is," could not obtain even half of the key relevant UN documents; or rather, perhaps he avoided them.  When one writes a correcting/formative report, the difference and logical order between data, findings, conclusions are fairly regimented. Only when such logic is present will serious evaluators, arbitrators and policy formulators offer recommendations. Truly caring and aware doctors offer recommendations -- let alone their own reflections -- to others only when they have examined their own methodology and integrity. I have found it always necessary to check first if the order and degrees of influence and causality are fairly lucid, as policy recommendations must allow for more options for correcting moves than those recorded -- options that may be backed by better reasons. Serious organizations must be able to see/examine findings and conclusions before judging what is necessary or sufficient. Much of what I have seen in the past seven years in these UN reports suggest a clear mixing of this critical order and caring "regime of inquiry." Ideological bias toward treating the Secretary General and his selected style of management as a necessary evil is wrong. It's even worse to eliminate any conclusions that suggest that he has been carrying an irresponsible, overly formalistic and hence insensitive overseeing of the UN's financial and managerial focus ever since he was appointed. He is most probably more personally guilty in kinship-related profit than data that has reached the public would suggest. The same data applied to anyone else would have led to more-negative conclusions and therefore due judgment and recommendations. The effectiveness of an organization created to help governments more rationally manage earth is at stake. An ideology devoted to saving the leader and the organization "as-is," baby and bathwater -- typical of the U.S. Association for the UN whereof Volcker is a member -- does not allow for the snatching to stop. Clearly, snatching in the global community has been evolving for most of its organized existence and now apparently has taken over the available doctor, Volcker. We still urgently await a Miles who can take a look at the option of cutting a global government to a size consistent with function.
  2. In the New Orleans/Gulf Coast disaster. it appears that FEMA's clear lack of preparation is taken much too lightly in too many circles. The very same disaster, the levees' breakdown, could have been caused not by Mother Nature but by a crook in search of glory, or a moderately informed terrorist with a budget of less than $100k. This type of reasoning was anchored, I thought, in the background of putting FEMA under the Department of Homeland Security. Is it not one of the first links to be thought about? Nature may strike again and again, even during this season. So, the focus on "let's resolve it now," while of course mandatory and reasonable, begs these questions:

    The type of mental closure in the face of looming and happening disaster is first-stage snatching. The kind of education, set of manifest skills and preparation are evidently the most minimal among the leading seven officials in FEMA, excluding the Vice Admiral who is in charge in NO as of very recently. The idea that the current FEMA director, Brown, will serve better when he is in DC rather than in NO must be explained by sheer snatching even in DC itself. Brown's concept of urgency and coordination as elucidated in NO can only insure that he will help more U.S. regions to be expertly macro-mismanaged and that the lack of awareness between and among local, regional and federal agencies will continue to be so beautifully orchestrated that disaster will be the only option. My puzzlement with this case of engineering more disasters and the curious presidential judgment in keeping Brown at FEMA must be extended to other administrations and all previous FEMA leaders, as they all did so magnificently well in keeping us more alert by making us realize that we cannot trust them, nor should we have, even in the most obvious responsibilities. Mind snatching and body snatching is no longer a single community issue as it was in the novel. It is a country issue.

  3. There is increasing evidence at the poles and on the coastlines that the heating of earth is more problematic and perhaps linear, as opposed to cyclical or slow, than previously thought, and that it may have contributed to the causal background of the recent Gulf Coast and Southern Asia disasters. Reading the Kyoto Protocol and recent background papers, and seeing how data has been dealt with, suggests that the doctors have not been reaching reasonable conclusions in the past six years, or maybe even longer -- and worse, that a mechanism is lacking for drawing conclusions from the data from the Asian tsunami, Kyushu Taifuns and Hurricane Katrina. Conclusions and policy must be more faulty than we thought possible (at least some of us).
  4. The 9/11 Commission's recommendations -- e.g., the appointment of a single person to oversee the 18-plus intelligence agencies, the conclusions resulting from the lack of responsible treatment of the complex themes of the interaction between terror and natural disaster, the almost as amateurish treatments of data in the subreport on terrorist finance, and the sudden reappearance of the Able Danger syndromes --- suggest that some brilliant minds failed fairly consistently. Can it be that their minds were taken by pods (or Potts, as Yiddish speakers would suspect) quite long ago?

Responsible management must always consider second-order consequences. Iraq is another case in point. Political management should not be an exception when the stakes in democracy are so exacting. Just as traders must study market disasters to do better, those who care for people must do likewise. They could emulate individuals like Mark Sloan who, faced with government helplessness in New Orleans, created a response system of individuals who care for mutual improvement at the community level, just as Benjamin Franklin and our Chair's Junto deserve appreciation for moving the local community away from snatching by mental laziness, disaster and evil pods. Perhaps it should dawn on us all that the mediocrity of government has reached such a low that a very much more libertarian influence on reconstructing politics locally, nationally and globally is critical for survival. The snatchers and/or their mentality should be sent to the planet that mentally they have already populated for centuries so that they cannot condition us to more passivity. The continuous and devastating effects on our future must find different doctors and different medicine, preferably soonest.

We all are Miles and Becky and have no right to waste ourselves.

"Terrorism and the Markets -- Is This the Solution?" (Aug. 24 interview of Yossi Ben-Dak by Dave Goodboy)

9/11/2005
Dept. of Competition: A Jim Thompson Tale, offered by Steve Wisdom

When Elizabeth and I were married there was another show in Stoneville. It wasn't much of a house -- five hundred chairs, and a couple of Powers projectors that should have been in a museum, and a wildcat sound system. But it was a show and it pulled a lot of business from us, particularly on Friday and Saturday, the horse-opera nights. Not only that, it almost doubled the price of the product we bought. In a town of 7,500 people, you hadn't ought to pay more than thirty or thirty-five bucks for the best feature out. And you don't have to if you've got the only house. Where there's more than one, well, brother, there's a situation the boys on film row love. If you don't want to buy from them, they'll just take their product across the street. And the guy across the street will snap it up in hopes of freezing you out and buying at his own price next year.
The fellow that owned the other house was named Bower. He's not around any more; don't know what ever did become of him. About the time his lease came up for renewal, I went to his landlord and offered to take over, paying all operating expenses and giving him 50% of the net. Of course he took me up. Bower couldn't afford to make a proposition like that. Neither could I. I gave Bower $150 for his equipment, which was a good price even if he didn't think so. Motion picture equipment is worth just about as much as the spot you have it in. It's tricky stuff to move; it's made to be put in a place and left there. (.. )
Our film bill only runs about 30% more on the week than it used to, and our gross is about 90% more. Of course, we've got to pay rent on the other house, and the extra express and insurance charges plus paper -- advertising matter -- runs into dough. But we've done all right. Plenty all right. We've got the most modern, most completely equipped small-city house in the state, and there's just one guy responsible. Me.
from Jim Thompson, Nothing More Than Murder, 1949

9/12/2005
Hearing Market Music, by James Sogi

Hearing is not discussed or used much in markets. Most work is visual. Chair described some primitive and abortive sound experiments in EdSpec. There are squawk boxes. But hearing has some interesting qualities. R has functions for sound generation.

1. When listening to music one does not initially hear the individual notes or instruments in a symphony. Is this similar to S&P trading when not hearing the role of the individual companies? With ear training or study of the score, or watching a performance, the individual notes, the cadences and the individual instruments can be distinguished.

2. Sound has some interesting qualities. Overtones add depth. Overtones extend beyond the range of audible hearing, but are felt, and may go on infinitely in the spectrum. Sound has the power to destroy, boil water, shatter glass, incapacitate humans. Sound can evoke emotional strong responses. Sound is multidimensional in that it has the capacity to convey on many levels. There is speech and meaning, volume, tone, chords, minor chords, seventh chords, timber, bassy, trebley, high pitch, low pitch, reverb, location. Many layers of meaning can be conveyed in a single sound byte. It is an efficient and rich method of communication. The Marvel superhero Daredevil got around fabulously using hearing, like a bat, though he was blind.

3. The mind subconsciously filters noise quite effectively. My wife was standing in the subway in New York during the recent Spec Party and asked, "How can you stand that shrieking sound?" I looked up in the subway oblivious and upon her mention, realized that right overhead sounded like a jet airplane. The mind filters things. What types of information in the market gets filtered out based on prior fixed conceptions. MP3 algorithms filters elements not heard on the forefront of the sound threshold.

4. This weekend I was teaching the guitar part from Gimme Shelter by the Stones to a fellow band member. I played the part many times, but he could not get it in the sense of understanding what the notes were. So I asked him to sing the guitar part. Only when he was able to sing it, was he able to play it. Transferring the music from the ear to the finger required an intermediary step of internalization by singing. Transferring market profits through the fingers requires an intermediary step of analysis.

5. I've written about 'seeing' fish after looking at them, but not seeing their form against the background. Hearing can mask sounds. Songs of birds in a forest. The background hiss on a telephone line, or the stereo. The tell tale rattle in an car engine that your daughter never hears over the loud music.

6. Hearing what people say. You say something, but the other person does not hear you. The spouse says something, but you do not hear it. You tell the kids something, but they do not hear you.

7. Hearing can see through opaque objects, or around corners and has advantages over sight. You can hear many things at once, but see only one. You can hear behind you, but have no eye in the back of your head.

8. These all relate to hearing what the market and economy has to say. These are functions of attention, understanding, analysis, training and transferal. Progress might be made using hearing in analyzing markets This would not be just converting data to sound alerts, but sensing the the deeper layers in the data streams, the harmonies. It might also encompass multilevel data monitoring using sound techniques.

Laurel Kenner comments:

I was riding the airport bus home from La Guardia one night when suddenly I had this idea that the market really was a big orchestra. I used to visit  the listening library at UCLA with a film composer friend, Jeff Silverman. His hearing was remarkably acute, and he would say, with much excitement, "Here come the trombones," "Hear that great oboe line," "See how Composer X combines the flutes with the double bass here." This knocked my socks off. My goal was to achieve something near his level of hearing. So I read books on orchestration, took a class, and played in a 20-piece chamber music orchestra at Cal Arts.

Playing with an orchestra, either as soloist in a concerto or as a member of the orchestra, is the best experience in the world. Your mind operates on so many different levels at once, and you're doing a highly demanding part while enjoying everyone else's and being part of a whole that encompasses everybody, including the audience. I also read Helmholz on the physics of sound, in an attempt to understand how music affects listeners. Overtones are  incredibly important in performance. A performer should hear between the notes. It's like a trader being able to keep his awareness beyond the linear progression of the seconds as they tick away.

Anyway, that night on the bus, it occurred to me that the big market themes of the time were like riffs from the various sections -- brass bursts, sad string melodies, percussion rhythms, etc. Of course Greenspan would be the clarinet, with wacky Berliozian Symphonie Fantastique personality changes -- sometimes the lover, sometimes the witch. Sometimes the orchestra is tuning up, and sometimes it gets going and plays a symphony.

Tom Ryan Chimes in:

I wrote about this once before several years ago. Back in the heyday when one could trade certain ind'l stocks and make money above and beyond the grind because the average daily ranges were 4-6%, I watched and traded a few particular stocks. (yes CSCO was one of them). I made a program in VB that played from a library of assigned music fragments depending on how each stock did that day. Each stock had 5 statistically assigned (based on its history) fragments - big down, little down, flat, little up, big up. And then at the end of each day the program would assign the music for each stock and play the whole sequence starting with JPM and ending with AMZN.

The naive idea was that the technique would help me sense the patterns, especially if one played the past weeks sequence. What I found was that at least in my simple system, I got three things. Big down day music, big up day music, and total cacophony. Well that's not entirely true sometimes it would get into this weird rhythm with some sectors up/down a little and tech up/down big. But it didn't help pick out anomalies nor did it help me sense the cycles. Mostly it was just noise until a big day and on the big days you don't need a musical score to know what is going on so it didn't help at all. But hey that was just me, maybe this could be resurrected for major market movements - oil, bonds, bunds, s&p.

Charles Humbert adds to the Tenor of this Theme:

Wow - this color symphony market montage concept sounds neat, almost mesmerizing. I can think of two reasons that it might not have caught on that have nothing to do with the system's own usefulness.

1. Although I have only observed a limited number of Fortune 100 companies' treasury departments first hand (in my former capacity of a capital markets executive), I submit that most younger management staff of public firms are rotated among various positions for time periods lasting perhaps six months or so. Thus the individuals that would be in charge of hedging or trading positions have but a brief amount of time to get used to the system before moving on to other responsibilities. There would be limited opportunities to put on transactions that are even remotely speculative, and since the Procter & Gamble, Gibson Greetings, and Orange County debacles in the mid 90s, very few firms treat their Treasury operation as a profit center.

2. I submit that it is possible that simple currency trading may actually be somewhat subsidized by money center banks that are competing for more profitable work, such as securities underwriting, derivative contracts, and M&A advisory. Thus, trading on one's own might be slightly higher cost, especially if in doing so, it required an additional letter-of-credit with another bank in order to complete transactions.

Frankly, if I were CFO of a corporation that frequently accessed the capital markets, I would demand that many of the more mundane banking services be done for free, given the profits generated for the bank in underwriting securities.

Too bad, I'd like to have seen a screen like that, but I wonder if it would be so hypnotizing that I'd lose focus on other things. Also, I remember seeing a documentary on people with unusual brain injuries, including one subject who claimed to "see" music. Rachmaninoff was apparently the most visually stimulating.

9/12/2005
The Senator on Hearing the Markets

The best trader I ever knew was Charlie D, the largest bond trader in history and a real character. I asked him his secret while we we watching the prelims before a heavyweight championship fight in Vegas, boring fights so we are talking up trading.

Charlie said he just listened to the noise and when it got really loud he'd see if bonds were going up or down -- if up, he'd hop in and buy 10,000 to 20,000 contracts and jump out with a tick or two profit, if down he'd sell with the same exit strategy.

He was noise-driven.

Dave Goodboy's recent interview with Larry Williams

9/12/2005
Major Airlines, from Steve Wisdom

LUV is now the only major airline, as measured by market cap; larger than the other 30'ish airlines combined:

Ticker  Name              Current Market Cap
LUV     SOUTHWEST AIRLINE     10,848,590,000
AMR     AMR CORP               2,047,903,000
JBLU    JETBLUE AIRWAYS C      1,995,651,000
SKYW    SKYWEST INC            1,412,564,000
CAL     CONTINENTAL AIRLI        833,334,800
AAI     AIRTRAN HOLDINGS         916,682,200
ALK     ALASKA AIR GROUP         870,329,100
XJT     EXPRESSJET HOLDIN        513,181,790
NWAC    NORTHWEST AIRLINE        289,069,100
FRNT    FRONTIER AIRLINES        375,468,900
AWA     AMERICA WEST HOLD        259,179,890
DAL     DELTA AIR LINES I        142,331,100
WLDA    WORLD AIR HOLDING        234,292,100
MESA    MESA AIR GROUP IN        248,421,300
HA      HAWAIIAN HOLDINGS        157,062,900
MAIR    MAIR HOLDINGS INC        186,403,500
UALAQ   UAL CORP                  41,839,550
MEH     MIDWEST AIR GROUP         41,056,430
UAIRQ   US AIRWAYS GROUP          32,904,700
FLYI    FLYI INC                  15,222,490
ATAHQ   ATA HOLDINGS CORP          6,503,350
GLUX    GREAT LAKES AVIAT          9,850,370
VIVI    VIVA INTERNATIONA          6,932,660
BLTA    BALTIA AIR LINES           5,137,600
ACHT    AIRCHARTER EXPRES          2,000,000
EFLT    ELITE FLIGHT SOLU            151,610
LAIR    L AIR HOLDING INC             66,910
MDWYQ   MIDWAY AIRLINES C              1,510

9/12/2005
Market Observations from Victor Niederhoffer

The Euro was at 122.87 and the Bund was also at 122.87 at 11:29 EST. All commodities are in free fall and the trendfollowers are going from long to short in energy but not in gold. I think of Pascal's Law and how pressure in one part of a liquid is transmitted equally to all other parts.

9/12/2005
Federer and the Markets, by James Tar

We should be so lucky that the markets are much more forgiving than Roger Federer. Otherwise, we would all be broken, or dead broke anyway.

Yesterday, Agassi was playing incredible tennis, tennis so good and so incredibly rarely seen that it actually foiled and frustrated the game's most dominant player. Agassi leveled the match at one set all, then had the break of serve to lead the 3rd 4-2, then 30-love while serving. The door was slightly open. Federer blistered an inside out backhand return of serve winner (so perfect some thought it was a mis-hit), and Agassi clearly felt the pressure, and the rarity of the occasion, and could not take advantage. Like a hardfought position in the markets, as the pressure mounts watching it go up and down, a scary print goes up on the tape, it gets to us, and we bail out, precisely at the wrong time.

Naturally, Federer stormed through the eventual fourth set tie-breaker, and Agassi was done. I do not think the markets are this dominant. We do not get one slight chance to book a winning trade, we are offered repeated occasions to have profit. Federer does not even give you one, you have to fight tooth and nail, play to a level that is rarely seen, to earn just one opportunity to book a profit. Being able to execute on that one opportunity is even more difficult.

9/11/2005
A September 11 Note: Dr. Kaufman and Our Society, by Yossi Ben-Dak

It seems that people that I have respected for many a year as experts who allow me, a curious mind, to avoid studying every field from the base, are variants of Dr. Kaufman. Anyone exposed to body snatchers or mind snatchers in the movie or in Jack Finney's novel or in Practical Speculation could come to similar conclusions about trading. Experiencing the darker hours of the markets with hope, sanity and analysis that penetrates the point of immediate or mid-course correction brings themes that can boost our joy of life. The antithesis of giving up to despair and to laziness starts from probing constantly whom to trust and why.

Political life is generally carried out by people who accept mediocrity as a way of life. But as the cost of consulting doctors who cannot be trusted is getting higher and higher (management and leadership mistakes cut into our right to enjoy the joy of life and fellow humans) we must take a second look at the people who have maintained higher standards of concern and professionalism. Somehow, I have been finding more Dr. Kaufmans now than ever before:

  1. Paul Volcker, with a budget of $34 mm to impartially pursue the case of Humanity vs "UN As It Is," could not obtain even half of the key relevant UN documents; or rather, perhaps he avoided them.  When one writes a correcting/formative report, the difference and logical order between data, findings, conclusions are fairly regimented. Only when such logic is present will serious evaluators, arbitrators and policy formulators offer recommendations. Truly caring and aware doctors offer recommendations -- let alone their own reflections -- to others only when they have examined their own methodology and integrity. I have found it always necessary to check first if the order and degrees of influence and causality are fairly lucid, as policy recommendations must allow for more options for correcting moves than those recorded -- options that may be backed by better reasons. Serious organizations must be able to see/examine findings and conclusions before judging what is necessary or sufficient. Much of what I have seen in the past seven years in these UN reports suggest a clear mixing of this critical order and caring "regime of inquiry." Ideological bias toward treating the Secretary General and his selected style of management as a necessary evil is wrong. It's even worse to eliminate any conclusions that suggest that he has been carrying an irresponsible, overly formalistic and hence insensitive overseeing of the UN's financial and managerial focus ever since he was appointed. He is most probably more personally guilty in kinship-related profit than data that has reached the public would suggest. The same data applied to anyone else would have led to more-negative conclusions and therefore due judgment and recommendations. The effectiveness of an organization created to help governments more rationally manage earth is at stake. An ideology devoted to saving the leader and the organization "as-is," baby and bathwater -- typical of the U.S. Association for the UN whereof Volcker is a member -- does not allow for the snatching to stop. Clearly, snatching in the global community has been evolving for most of its organized existence and now apparently has taken over the available doctor, Volcker. We still urgently await a Miles who can take a look at the option of cutting a global government to a size consistent with function.
  2. In the New Orleans/Gulf Coast disaster. it appears that FEMA's clear lack of preparation is taken much too lightly in too many circles. The very same disaster, the levees' breakdown, could have been caused not by Mother Nature but by a crook in search of glory, or a moderately informed terrorist with a budget of less than $100k. This type of reasoning was anchored, I thought, in the background of putting FEMA under the Department of Homeland Security. Is it not one of the first links to be thought about? Nature may strike again and again, even during this season. So, the focus on "let's resolve it now," while of course mandatory and reasonable, begs these questions:

    The type of mental closure in the face of looming and happening disaster is first-stage snatching. The kind of education, set of manifest skills and preparation are evidently the most minimal among the leading seven officials in FEMA, excluding the Vice Admiral who is in charge in NO as of very recently. The idea that the current FEMA director, Brown, will serve better when he is in DC rather than in NO must be explained by sheer snatching even in DC itself. Brown's concept of urgency and coordination as elucidated in NO can only insure that he will help more U.S. regions to be expertly macro-mismanaged and that the lack of awareness between and among local, regional and federal agencies will continue to be so beautifully orchestrated that disaster will be the only option. My puzzlement with this case of engineering more disasters and the curious presidential judgment in keeping Brown at FEMA must be extended to other administrations and all previous FEMA leaders, as they all did so magnificently well in keeping us more alert by making us realize that we cannot trust them, nor should we have, even in the most obvious responsibilities. Mind snatching and body snatching is no longer a single community issue as it was in the novel. It is a country issue.

  3. There is increasing evidence at the poles and on the coastlines that the heating of earth is more problematic and perhaps linear, as opposed to cyclical or slow, than previously thought, and that it may have contributed to the causal background of the recent Gulf Coast and Southern Asia disasters. Reading the Kyoto Protocol and recent background papers, and seeing how data has been dealt with, suggests that the doctors have not been reaching reasonable conclusions in the past six years, or maybe even longer -- and worse, that a mechanism is lacking for drawing conclusions from the data from the Asian tsunami, Kyushu Taifuns and Hurricane Katrina. Conclusions and policy must be more faulty than we thought possible (at least some of us).
  4. The 9/11 Commission's recommendations -- e.g., the appointment of a single person to oversee the 18-plus intelligence agencies, the conclusions resulting from the lack of responsible treatment of the complex themes of the interaction between terror and natural disaster, the almost as amateurish treatments of data in the subreport on terrorist finance, and the sudden reappearance of the Able Danger syndromes --- suggest that some brilliant minds failed fairly consistently. Can it be that their minds were taken by pods (or Potts, as Yiddish speakers would suspect) quite long ago?

Responsible management must always consider second-order consequences. Iraq is another case in point. Political management should not be an exception when the stakes in democracy are so exacting. Just as traders must study market disasters to do better, those who care for people must do likewise. They could emulate individuals like Mark Sloan who, faced with government helplessness in New Orleans, created a response system of individuals who care for mutual improvement at the community level, just as Benjamin Franklin and our Chair's Junto deserve appreciation for moving the local community away from snatching by mental laziness, disaster and evil pods. Perhaps it should dawn on us all that the mediocrity of government has reached such a low that a very much more libertarian influence on reconstructing politics locally, nationally and globally is critical for survival. The snatchers and/or their mentality should be sent to the planet that mentally they have already populated for centuries so that they cannot condition us to more passivity. The continuous and devastating effects on our future must find different doctors and different medicine, preferably soonest.

We all are Miles and Becky and have no right to waste ourselves.

"Terrorism and the Markets -- Is This the Solution?" (Aug. 24 interview of Yossi Ben-Dak by Dave Goodboy)

Victor Niederhoffer adds:

One of the beautiful things about business is that no matter what the desire or unrequited needs of pitiless consumers, it will spring up to satisfy them. And competitors will appear thereby sharpening the quality and pricing of the product until the point of competitive profits. Thus, it was good to read in connection with the New Orleans damage that Kenyon International a specialist in emergency disaster services has its people "riding with police and military teams on the recovery missions. Our teams left at first light with the police escort and they'll work until the end of the light today" according to a Bloomberg news story. Kenyon is owned by SCI, and has the same position in the funeral parlor and cemetery business that H and R Block does in taxes. It has 10 mobile morgue units and telephone operators and trained medical personnel that are available for emergency crises. SCI has been disgorging many of the acquisitions that it made in the 90's, and it's sales have been declining to the 2 billion level, in part because of declining mortality rates, and competition from discount purveyors.

9/11/2005
Bruce Lee, by James Sogi

Bruce Lee was a famous master martial artist and movie star in the '60s and '70s. He called his style of martial arts Jeet Kune Do. He taught effective strategies useful to traders.

5 ways to attack:

  1. Simple angle attack. Coming from an off angle, punching and kicking, closing the distance.
  2. Combination attack. Sashay in, kick to shin, upper cut, cross., move in to lock and immobilize or incapacitate.
  3. By drawing. When moving back, drawing the opponent off balance, pull to take down when opponent off balance, or kick during opponent's lunge.
  4. Hand immobilization attack. Closing distance, immobilize opponent's hand with wing chun, slip in, upper cut/cross.
  5. Progressive indirect attack.

An attack must be determined and continuous until a hit is scored or the attack is parried. There are three factors in an attack:

  1. A fine sense of timing.
  2. Perfect judgment of distance.
  3. Correct application of cadence. (the shift in cadence before and after 8/28 was key in this last three weeks trade.)

Avoid getting locked into a fixed martial arts style regardless of the conditions or the personal differences. This is the same message as Chair's advice: don't get stuck with fixed systems. The martial artist should be like water which can't be grasped or hit. When in a cup, water is a cup, when in a bottle water is a bottle. Running water never grows stale.

Some of the best strategy comes from mixing styles and switching from system to system in the course of combat. Moving in with a kick and punch (boxing), slip inside with wing chun, immobilize with with jitsu bar, then take down incapacitate with aikido move. Don't limit to one style as the conditions constantly change.

Growth stops when bound by set patterns. (To those who trade fixed patterns, no matter how significant) True observation begins when devoid of set patterns. Freedom of expression is beyond systems.

On Footwork:

  1. Shuffle. Double and single. Forward and backward.
  2. Slide step.
  3. Sashay.
  4. Circle. (Know how to move around within a trade, adjust.)

The purposes of foot work are to:

  1. Move ahead of the attack.
  2. Put the opponent on the defense.
  3. Control timing and distance.
  4. Control play.
  5. Build confidence.

(A trader with good footwork can stay ahead of the game and get good entries and exits with confidence, and be ahead of the attack.)

A Singaporean Trader responds:

A famous General once observed that 'Fixed Structures are monuments to the stupidity of Men' ( I think it could have been Patton).

Bruce Lee's Jeet Kune Do (literally ' Way of the Intercepting Fist') is actually classified not as a martial art, but part of a small list of fighting systems called 'combatives' - the Israeli 'Krav Maga', Russian 'Systema', 'Defendu' etc all come under this list- all with only fighting intent and nothing by way of 'Art' or tradition.

Perhaps the one notable feature of combatives is that they often eschew Forms or Kata in favor of two-man fighting drills.

Another feature is the embracing of non fixed-forms of combat, and by encouraging their practitioners to experiment and adopt flexible tactics/mindsets -- as long as the fundamental concepts are adhered to -- which is in itself a form of fixed structure.

The key to good speculating is to be able to differentiate the conceptual frameworks we work within, between the fixed structures we create as edifices to our own egos.

But do tell me how. The search for the right balance for me is elusive at best, and illusory at worst.

Now imagine my bewilderment when my teacher of Taichi boxing/ Imperial Palace Bagua (eight trigrams) boxing tells me to flow like water when fighting but stick to the fundamentals. -- Kevin Ho

Nick Marino adds:

Most people don't know that one of Lee's legs was much shorter than the other, which could have been a severe handicap to a lesser man. He also had bad vision. One of the most inspiring quotes from Lee:

"I accepted my limitations for what they were and capitalized on them...Instead of trying to do everything well, do those things perfectly of which you are capable...The past is an illusion. You must learn to live in the present and accept yourself for what you are now. What you lack in flexibility you must make up with knowledge and constant practice."

A Concise thought from Bo Keeley:

A distillation into one sentence of the Bruce Lee books that I read in Niederhoffer's basement library (on a shelf under the chess book collection) is to strike at the part of the opponent's body that comes closest to you. There is great wisdom here, and the mystery of it being an aggressive or defensive fighting style.

James Sogi rejoins:

One technique our kick boxing teacher, former middleweight kick boxing champion of the world, showed us was to punch the opponent's GLOVE, hard, rather than trying for a knockout. First, the shock travels up his arm. Second, let the opponent know you've got a punch and can use it. It will disconcert him. Third, you may knock it out of the way and get a clear shot with the other hand combo or a back hand to the head.

When that SP bar comes at you, at the end of its extension, hit it. If you step in too far, you'll get it in the face, so keep the other hand up. Always keep the hand guard up. Remember Million Dollar Baby? "Always protect yourself."

Kedrick Brown concerts:

Laurel wrote:
I also read Helmholz on the physics of sound, in an attempt to understand how music affects listeners. Overtones are incredibly important in performance. A performer should hear between the notes. It's like a trader being able to keep his awareness beyond the linear progression of the seconds as they tick away.

Speaking about overtones, I remember reading somewhere that vacuum tube based amplifiers may emphasize different overtones than transistor based amplifiers. Some musicians swear that vacuum tube based amps create a "warmer" sound, but of course the incredible convenience of transistors, which can now be dramatically miniaturized, have driven the musical technology the majority of us use today.

Of course a completely misplaced analogy, but my feeling is that the discerning speculator (who has to be a contrarian in some sense to be successful), might be likened to the aficionado of vacuum tube based amps - a musician's musician, so to speak, who focuses on different areas of emphasis in the market symphony than the majority, who are content to listen to the same symphony on the standard widespread transistors.

9/11/2005
Dept. of Competition: A Jim Thompson Tale, offered by Steve Wisdom

When Elizabeth and I were married there was another show in Stoneville. It wasn't much of a house -- five hundred chairs, and a couple of Powers projectors that should have been in a museum, and a wildcat sound system. But it was a show and it pulled a lot of business from us, particularly on Friday and Saturday, the horse-opera nights. Not only that, it almost doubled the price of the product we bought. In a town of 7,500 people, you hadn't ought to pay more than thirty or thirty-five bucks for the best feature out. And you don't have to if you've got the only house. Where there's more than one, well, brother, there's a situation the boys on film row love. If you don't want to buy from them, they'll just take their product across the street. And the guy across the street will snap it up in hopes of freezing you out and buying at his own price next year.
The fellow that owned the other house was named Bower. He's not around any more; don't know what ever did become of him. About the time his lease came up for renewal, I went to his landlord and offered to take over, paying all operating expenses and giving him 50% of the net. Of course he took me up. Bower couldn't afford to make a proposition like that. Neither could I. I gave Bower $150 for his equipment, which was a good price even if he didn't think so. Motion picture equipment is worth just about as much as the spot you have it in. It's tricky stuff to move; it's made to be put in a place and left there. (.. )
Our film bill only runs about 30% more on the week than it used to, and our gross is about 90% more. Of course, we've got to pay rent on the other house, and the extra express and insurance charges plus paper -- advertising matter -- runs into dough. But we've done all right. Plenty all right. We've got the most modern, most completely equipped small-city house in the state, and there's just one guy responsible. Me.
from Jim Thompson, Nothing More Than Murder, 1949

Victor Niederhoffer adds:

One of the beautiful things about business is that no matter what the desire or unrequited needs of pitiless consumers, it will spring up to satisfy them. And competitors will appear thereby sharpening the quality and pricing of the product until the point of competitive profits. Thus, it was good to read in connection with the New Orleans damage that Kenyon International a specialist in emergency disaster services has its people "riding with police and military teams on the recovery missions. Our teams left at first light with the police escort and they'll work until the end of the light today" according to a Bloomberg news story. Kenyon is owned by SCI, and has the same position in the funeral parlor and cemetery business that H and R Block does in taxes. It has 10 mobile morgue units and telephone operators and trained medical personnel that are available for emergency crises. SCI has been disgorging many of the acquisitions that it made in the 90's, and it's sales have been declining to the 2 billion level, in part because of declining mortality rates, and competition from discount purveyors.

 

9/09/2005
Cane Investing, by Victor Niederhoffer

Just nine trading days ago, at 2 a.m. EST Monday, Aug. 29, the market was at 1192 -- down 68 points, about  5% from a high of 1260 set 12 trading days before on Wednesday, Aug 10. Such a decline brings to mind the many times that old investors have taken out their canes to hobble down to Wall Street, where they bought stocks to the full extent of their bank balances, depositing the overplus when they sold a bit later in sound real estate. Readers were urged to follow the old investors' example in many 19th-century books, including Clews' Fifty Years in Wall Street. It sounds like good advice, but is it true? We ran some tests from year-end 1899 with daily Dow Jones Industrials prices to test it.

Here's a typical result. The table shows what follows a decline of more than 10% over a five-day period , close to close.

Date       5.Day.Move    Price   Price[t+200] Return
   5/9/1901  -10.4%      67.38      65.27      -3.1%
 12/12/1904  -10.2%      65.77      80.92      23.0%
  3/14/1907  -11.9%      76.23      58.65     -23.1%
  7/30/1914  -11.3%      71.42      89.90      25.9%
  5/10/1915  -10.8%      62.06      94.35      52.0%
   2/2/1917  -10.6%      87.01      72.95     -16.2%
 10/24/1929  -12.4%     299.47      221.08    -26.2%
  6/17/1930  -11.2%     228.57      167.03    -26.9%
 12/16/1930  -10.8%     157.51      96.61     -38.7%
  9/18/1931  -10.3%     115.08      41.22     -64.2%
 12/14/1931  -14.3%      77.22      71.53      -7.4%
   4/6/1932  -13.9%      66.46      61.46      -7.5%
  6/27/1932  -10.2%      42.93      72.64      69.2%
  9/14/1932  -17.6%      65.88      105.04     59.4%
 11/30/1932  -10.8%      56.35      93.18      65.4%
  2/27/1933  -11.0%      50.16      98.87      97.1%
  7/21/1933  -15.5%      88.71      93.91      5.9%
 10/19/1933  -14.6%      84.38      88.97      5.4%
  7/26/1934  -12.1%      85.51      116.58     36.3%
 10/18/1937  -12.7%     125.73      141.73     12.7%
  3/28/1938  -10.8%     107.25      148.26     38.2%
  5/14/1940  -13.2%     128.27      120.88     -5.8%
  5/28/1962  -11.0%     576.93      673.73     16.8%
 10/19/1987  -29.6%     1738.74    2134.07     22.7%
  8/31/1998  -12.0%     7539.06    10490.51    39.1%
  9/20/2001  -12.8%     8376.21    9096.09     8.6%

                                        Mean  13.8%                            

Note that since 1932, the average move was about 40% in the next 200 trading days, with one decline of 6% out of 14 occurrences. Mr. Tom Downing and I systematically looked at numerous other definitions of a panic, varying the extent of the decline and the duration--- for example, a decline of 5% in three days. The results are qualitatively similar. Much regret and potential lodging on the Bowery in the first third of the 20th century, and much valuable real estate stashed away for the rainy days thereafter. All things considered, the old-time advice on what to do in panics holds up quite well.

9/09/2005
Why I Love Trading, by Hanny Saad

In a simplistic world, you go to an interview for a job for which many have applied, you fudge a little what you've done and could do, like a male in heat trying to attract a female, you land a high paying job, you play the political game, you last in your job and you live handsomely ever after, but...

  1. Does that make you the best fit for the job?
  2. Does that make you the best at the political game?
  3. Does that make you the best at preparing/wording a winning resume?
  4. Does that make you the one with the necessary connections to land and keep such job?
  5. Does that make you the one with the best interview skills?

I can go on and on forever. The measure of worthiness in the business world in terms of employee/employer relationship is very subjective and at times questionable. In order for a business to survive (and multiply) over the long run, the fittest must prevail. But I find the long run a subjective matter that depends largely on the type of business. A cut-throat fast paced environment will weed out the unworthy faster than a slow bureaucratic, government-like environment. This is the reason why capitalism is the only way to carry the day. The problem is that even capitalism is flawed in certain ways. Are minimum wages in line with capitalism and free supply and demand? Are unions? And so forth? Yet, all countries apply these concepts.

However, there is one field where your skills at playing the political game, your resume, your connections and so forth do not matter a bit to your success. One field where capitalism really shines and only the fittest survive and multiply. One field where only numbers will determine your success or failure. One field where even an outsider with a reasonable understanding of numbers can judge success or failure. This is the field where you can't avoid blame or credit. This one field is trading.

Last Wednesday my models showed me a wonderful setup on the long side. The road to riches was freshly paved. The mistress showed me her hand, finally. Only one thing a man could do in this case to be a real man. As Zorba would say, take the mistress by the waist, drag her to her large bed, and be a man. Exactly the way my grandfather would have done it. Instead, I sat there nickeling and diming, weighing things up and reflecting. I missed my chance. Again. Only I take the blame. That's why I love trading.

9/09/2005
George Zachar adds:

No discussion of the philosophic basis for attitudes toward money is complete without a reference to Francisco's Money Speech from Ayn Rand's Atlas Shrugged. The money quote:

"So you think that money is the root of all evil?" said Francisco d'Anconia. "Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?"

9/09/2005
Sailing, by J Rollert

Last week, we had a great race in the channel of Marina Del Ray. The prior week, with much lighter air, was the opposite.

In the channel, we had 3 knots of wind and about a 1 knot of current. The power boats going by led to much cursing as their wakes stopped forward motion.

All of a sudden a large maxi-boat went by us going five knots. Their 75 foot mast reached over the apartment buildings and pulled enough force from the breeze to move them to five knots, even giving them a small wake.

We lost three places in the standings because we tacked too much, trying to find the breeze between buildings, a half mile from the finish.

All because we couldn't just sit there.

It reminds me of today.

9/09/2005
A response to Briefly Speaking, from Martin Lindkvist

"But by the time Labor day has passed the general form change is well under way." Secrets of Professional Turf Betting - from the "Picking September's Wake Up Longshots" chapter.

The wake ups that Bacon talks about are fillies and mares, which have been performing badly during the summer and then wake up at long odds in September. During the summer months, the fast tracks have made it possible for the on form horses to have repeat winnings at low odds.

As a whole, the stock market seems to have a tendency for reversal more than for continuation. But what a about seasonal influence? Does summer have more repeat winners (serial correlation) due to fast tracks (low volume)? And will reversals upset the public choice more than usual in the fall? Perhaps there will also be a change in industries, for example from oil stocks to something that has performed bad during summer, as fall comes.

9/09/2005
Patrick Wegner on 'unemployment and market rigidities'

In the article 'Unemployment and Market Rigidities: Europe vs. North America' by Nickell, he tests the received wisdom that increased market rigidities create higher unemployment. This presumes that North American unemployment will be low, whilst European unemployment in general will be higher. Written in 1997, some of Nickell's data is out of date, and some countries he notes as having low unemployment rates at the time show higher unemployment rates now, however research updating these results to 2000 comes to similar conclusions as Nickell's.

Identified rigidities

Direct rigidities:

  1. legal employment protection (include: working time/ fixed-term contracts/employment protection/ minimum wages/ employees representation right): increases difficulty of firing and hence opportunity cost of hiring reduce short term increase long term

The treatment of the unemployed

  1. Benefit replacement rate(% of previous income): reduce fear of unemployment need for employment
  2. Benefit duration (years)
  3. Active Labor market policies (active labor market spending/ unemployed as a percentage of their labor force)

Wage determination and Unions

  1. Union density (% of workers in unions)
  2. Union coverage (number of workers covered by unions (1-3))
  3. Co-ordination of wage bargaining (employers/unions (1-3))

Labor Taxes

  1. Payroll tax rate (labor cost/wages = tax burden on employer (%))
  2. Total tax rate (real labor cost/real take-home pay=tax burden on labor (%))

Results here

9/09/2005
George R. Zachar on family values

Maybe a root cause of a dislike of the wealthy is the "affluenza" that afflicts the children of privilege. Accustomed to manna from heaven and unwilling/untrained to take any responsibility for their own lives (or the lives of others, as MaryJo Kopechne and Carolyn Bessett tell us from beyond the grave), and contemptuous of the everyday labors of those outside the "lucky sperm club."

But of course every generation has this fear of the generation after; there's even an evocative Latin phrase "laudator temporis acti" (i.e., "I walked eight miles to school, barefoot, in the snow, uphill both ways").

9/09/2005
Pendente Mercor by Jim Sogi

The statistics reading gives bias and edge to initiate a trade and during a trade. That is critical. Once in, after manifestation of an idealized pattern, the continuing development of the bars will not necessarily continue to be significant as the random variable kicks in. Diebold analyzes the prospective error factor in a good forecast in the t+i as being pure noise. The accuracy of a prediction is best one bar ahead and added randomness creeps in further steps ahead. So as a trade progresses, the one bar ahead reading remains the most accurate. The debate is between the traders who insist on trading the initial idealized pattern through as per the original optimum stats at trade entry vs adjusting in the middle. The initial idealized trade is more like the Sports Illustrated Swimsuit issue, just too perfect, and as the date wears on, the makeup wears off, just like the trade. The trade that looked so good at the beginning, even as it get profitable and because it gets profitable, gets less likely to continue so in many cases. Counter intuitively, a trade that goes against, may get even better odds in trader's favor.

In real time, as a trade progresses, the original edge will deteriorate, but new developments will still give you a reading on the extent of your edge. This edge is a a guide to leverage. To quote Chairman Vic's talk at the Rose Garden Conservatory "size should be inversely proportionate to your edge"

The question is whether it is better to use idealized data patterns with high probabilities, or use real days data that may not be as s#xy, but still gives an edge. Ideally the parameters used will uncover the ideal patterns while incorporating the daily nitty gritty.

9/09/2005
Mr. Ckin Recommends

You might be interested in a nonfinancial application of counting that I encountered recently: Tom Brown, who runs Second Curve Capital, as well as its bankstocks.com website, referenced a statistical study of punting in professional football.

9/09/2005
Racquet Wisdom from John Humbert

Bjorn Borg was quite a character in his own right; there is a small book by his onetime wife Marianna Simionescu called "Love Match". it describes Borg's extraordinary attention and almost scientific approach to every detail he could control. As I recall it, he watched his weight in grams, taking action when it moved more than five grams from optimal. He slept in a room kept around 55 degrees, on top of bed, nude, no sheets. Meticulously "pinged" several racquets strung for next day's match and if there were the slightest difference in tone, out they went. Never changed his demeanor on court, always cool, and seemed as extremely attentive also to garb as some of the modern top players with the large product endorsements. It is strange to watch those wooden racquet matches today; the equipment seems miniscule and the players undernourished and amazingly slow.

I've been a tennis fan since I was first taken to Forest Hills one day in the late 50s. I remember seeing Herb Flam, Victor Seixas, Shirley Bloomer and Althea Gibson. The most memorable moment: Shirley Bloomer was being trounced and in a fit of rage took a ball and hit it with some serious vehemence at the retreating back of Althea Gibson, who was returning to the baseline from the net after yet another successful foray forward. Gibson, hearing the sound of ball on racquet, turned her head slightly to the left as she strode away, and seeing the ball racing in her direction extended her long right arm directly upward and nonchalantly caught the ball at full extension, her back still turned. Combined wonderful coordination pleasant to any fan and put-down to which as a teenager I was quite attuned. The crowd roared, loving it. Or so my memory tells me almost fifty years later.

9/08/2005
Oil and S&P Intraday Today, a Mirror Image:

9/08/2005
New Science? by Phillip J. McDonnell

Wolfram's A New Kind of Science is quite a tome. It rivals Webster's Unabridged Dictionary for sheer tonnage.

The book deals with the very clever idea that a computer can generate complex patterns simply by iterating on simple rules. Suppose we start with say 4 dots in a row which are either black or white. Then we use rules such as if 2 black dots are adjacent to each other make the left most one white. A rule could be, if three whites or three blacks are in a row change the middle one to the opposite color. At each iteration we might add a white and a black dot at the ends of the row so that the row grows each time. Then the rows of dots are printed out and form visual patterns which the eye can see.

The same sort of thing can be done with colored blocks. Again simple rules can produce complex patterns. Rules can be deterministic or random. If we have red, white and blue a rule might be that two reds produces a blue and a red. Some sets of rules produce boring patterns, while others yield beautiful complex patterns worthy of a modern art gallery. There are lots and lots and lots and lots and lots of examples presented in the form of pretty pictures of the outputs of the author's rule machines. A good 10-20% of the pictures would be judged as complex and interesting by most people.

However this is where the book loses all semblance of a scientific exploration. No where does the author present a rigorous definition of concepts such as "complex", "interesting", "random" or "beautiful". Rather they are only defined in the eye of the author. So when the author claims that his methodology of iterated simple rules can model any real world process he is already on shaky grounds because his terms are ill defined. Without rigorous definitions the methodology can only be descriptive and never predictive. Without predictions and the ability to falsify same no methodology can ever be considered a true scientific discipline.

In this sense the author's concepts appear eerily similar to the work of the fractalists and chaos theory adherents. Both areas are rich with descriptive comparisons and fascinating concepts but lacking in any proven ability to predict real world phenomenon. He mentions Mandelbrot's claim that that market variance is infinite as though it were proven. Also discussed repeatedly is the "difficulty of removing trend" from time series data and several still extant controversies in finance. All are dismissed with the unsatisfactory argument that these things are difficult to test and therefore why bother?

This book can be recommended to anyone who is interested in computer generated abstract art. However, as a purported scientific work I find it wanting.

Kim Zussman adds

I went to a Wolfram talk on NKS at Caltech, where he defended admirably against a panel of opposing experts. His cellular automata take after ideas Von Neumann had, and Wolfram was a MacArthur genius who PhD'd at age 20. He also developed Mathematica, and this success allows him to self-publish and promote without ivory tower encumbrances.

Neither taking sides or fully understanding the numerology, the most natural application seemed to be in modeling biological systems. Especially compelling because a matrix of cells send chemical and electrical signals to adjacent cells in ways that might follow simple close-spaced rules. Wolfram's models of shells and similar structures seem convincing. Perhaps there is application in the simple informational transmission between trader cells.

Phil McDonnell adds

In all fairness to Wolfram, he is a brilliant mathematician and programmer. His work on Mathematica alone is a testimony to his abilities. His web site MathWorld is highly recommended.

The above Mathworld link is specifically to a page on difference equations, recurrence relations and cobwebs. The link also implicitly refers to Von Neumann's suggestion for a computerized random number generator using a logistic map with r set to 4. Note that the notion of random needs to be precisely defined because the generator is deterministic - if you know the last number and the formula you can precisely determine the next number. If you don't know the formula the sequence can appear random with a random (uniform) distribution.

Personally the arguments about similarity are not convincing. What NKS is doing is tantamount to curve fitting with an unknown and possibly unknowable number of parameters. How many degrees of freedom are in a rule if you can select any rule you like? I would compare it all to the current state of neural networks, fractals, chaos theory and now NKS. They all emphasize descriptive terminology and graphical analysis. Emphasis is on "similarity" to what is being described. Until these disciplines adopt a paradigm in which predictions and validation or falsification of same are the cornerstone of the discipline, they shall remain useless intellectual curiosities.

Jim Sogi adds

Phil, I respectfully disagree with you and the others The proof of Wolfram's complexity is simple. You cannot derive the generator, even a simple one, from the result after a few generations. In later chapters he describes branching algorithms that create surprisingly natural looking structures, complex structures, derived from simple algorithms.

This insight is useful to market analysis because the basic structure of trading is simple but generates complex permutations. Analysis of random walks, a simple model using a basic generator lead to important understanding about markets. Basic coin flipping and counting led to important discoveries about probability and ultimately to statistical analysis, the bedrock of our scientific methods. Both seem trivial at first glance. Methodical study revealed great insights. Maureen O'Hara's , Market Microstructure Theory, examines numerous models of market structure. The models themselves are trivial, but reveal important characteristics of market dynamics allowing quantification of important issues such as the deviation of prices, and time expected to return to its mean.

Take the S&P action over the last 4 days. Look at the mechanical clicking up hour by hour, up tick by tick, and down tick by tick. It doesn't appear so random, but rather generated by some mechanical process. In fact, models of such action are predictive. In a similar manner, simple iterative differential equations generate complex structures. See Elaydi, An Introduction to Difference Equations, pages 40-41. The application of differential equations to markets might similarly be viewed as trivial, but they have important applications to forecasting methods.

Wolfram did not purport to have the answer to reduce the generators from the results. However, Monte Carlo processes take random generations to test models. Wolfram's methods might be used to test microstructure models that on reverse engineering turn out to be predictive. Rather than use deductive reasoning to construct models, sheer brute force of computers can be used to test hypotheses of models and discovery whether they generate accurate results. Is that so different than statistical tests of sample data? I say it is not. It is a mistake to dismiss the work as trivial and non falsifiable description only.

9/08/2005
Let's Do Lunch

Greg Cohen, summer intern at Chair's firm, meets Jared the Subway Guy at Wharton

9/08/2005
The Four States of Matter, by the Chair and Doc Castaldo

We took a walk to discuss volatility and the artful statistical properties of the elements that make up such a thing as the market. We thought it might be good to extend the ideas about the movements, components and temperature of the market volatility situation by working with models, constituent elements and stocks.

There are four states of matter: solid, liquid, gas, and plasma. These four states can be characterized according to the kinetic particle model based on the attraction between, and the speed of, the particles. Change from one state to another requires considerable energy, with much potential energy relative to kinetic energy and much greater movement of the particles as we move from solid to liquid to gas. This simple model enables us to predict and explain many of the properties of matter, ranging from where and when something is going to melt or boil to how much heat and movement will be generated or lost as we move from state to state.

It would seem that we need a similar understanding and benchmark for the market's states, and as a first step towards this we have calculated the movement and degree of closeness of the components of the market as of the end of the month, for all months from year-end 2003 to August 31, 2005. To measure the degree of proximity of the individual members we used the inter-quartile range, and the divergence between the 90th and 10th percentile, and to measure the speed of movement of the market, we used the monthly change. All data are for the S&P 500 companies as they exist today. Adjustment for adds/deletes would have added 1000-fold to the time for the study, and a man cannot have breakfast all day.

        25th%ile        75th%ile          IQR  S&P Return
        --------------  ----------------  ----  ----
Jan04    JPM        5.9%  ING RAND   -2.0   7.9   1.7
Feb04    APPLE      6.1   COOPERTYRE -1.6   7.7   1.2
Mar04    OFFICEMAX  2.8   AUTOZONE   -4.2   7.0  -1.6
Apr04    ACE LTD    2.8   PERKELMER  -7.0   9.8  -1.7
May04    JONESAPPL  5.1   FNMA       -1.5   6.6   1.2
Jun04    3M         6.5   ST JUDE    -0.8   7.3   1.8
Jul04    NORFLKSO   0.6   MERRLYNCH  -7.9   8.5  -3.4
Aug04    LINCNATL   3.7   XPRESSCRPT -3.7   7.4   0.2
Sep04    WYRHAUSR   6.4   SOUTHERN   -1.2   7.6   0.9
Oct04    CSCO       6.1   AFFIL CO   -2.0   8.1   1.4
Nov04    FORTUNEB   7.8   DOMINION    1.8   6.0   3.9
Dec04    XPRESSCRP  6.2   WATERS      0.3   5.9   3.2
Jan05    PPG        0.9   YAHOO      -6.6   7.5  -2.5
Feb05    KROGER     5.2   JPMORGAN   -2.1   7.3   1.9
Mar05    MERCK      2.1   BLK&DECKR  -4.7   6.8  -1.9
Apr05    FPL        1.7   HOMEDEPOT  -7.5   9.2  -2.0
May05    EMC        7.2   MELLON      0.2   7.0   3.0
Jun05    PG&E       5.0   KELLOGG    -2.3   7.3  -0.0
Jul05    MAYTAG     7.8   SOUTHERN    0.9   6.9   3.6
Aug05    HMA        2.2   I.F.F.     -4.8   7.0  -1.1

Months with a large rise have a small IRQ, (such as Nov'04 and Dec'04), and months with a large fall have a large IRQ, (such as Apr04, Jul04). There seems to be a negative contemporaneous relationship between IRQ and S&P return, (-0.56 correlation). The down months are perhaps the ones that correspond to the gaseous state, the up month to the solid. Also there seems to be a positive relation between IRQ and next months return, (+0.30 correlation), but there may be a more direct way to get at that. All in all no breakthrough findings here, but that is often how science proceeds - in small steps.

9/08/2005
Jim Sogi adds

The S&P's recently, regularly occupy states within 15 point ranges. There is a barrier on either side of that range for about a week, when it breaks through and changes to a different state where it occupies a different 15 point state for a week, then breaks up or down with the addition of energy or increase of entropy. The time periods are regular. The ranges are regular.

It is like a hotel in New York. You have your lower story rooms, 1200-1215, 8/24-31. The lower price rooms tend to be more noisy. You have your deluxe rooms floor 1215-1230, 8/16-24 and 8/31-9/2. You have the super deluxe rooms on the upper floors 1230-1245 from end of July to the beginning of August and now through - ?. The prices go up and down the hotel elevator like maids going up and down the same floors until the rooms are clean and they move on to the next level. One bar breaks through to a new range in a rush after three or five bounces to start a new cycle.

Thermal states provide parallels and insights.

Water crystals have characteristic snowflake patterns, three points on each side. The endless, intricate, delicate and varied patterns seemingly carefully crafted by a master craftsman never cease to astonish in their complexity and beauty and bilateral symmetry. Photos of snowflakes. In a short time, the bump sticks out even farther than it did before, and so it grows even faster. We call this a branching instability -- small bumps develop into large branches, and bumps on the branches become side branches. Complexity is born. This instability is a major player in producing the complex shapes of snow crystals. Markets form branches as traders who are too impatient to wait pile on the closest branch.

When we put cool tap water into a beaker and place this on the stove and turn on the heat we may see ripples in the water as the water heats. These ripples are called Schlieren patterns and arise from light being diffracted off of the regions of water with different temperatures and hence different densities. This is exactly the same optical effect that gives rise to mirages."

Many of the patterns and movements in the markets are mirages. Don't be fooled by the appearance of water in the desert, or the little mini ripples.

9/08/2005
Ask The Senator, a Continuing Series

Q: Who's responsible for the disaster in New Orleans?

A: This is from a lawyer from New Orleans to a trader friend of mine also in Louisiana:

When you get right down to it, the levee boards used all the money allocated to maintain the levees on building casinos! Board members have controlled vast amounts of money there for longer than you and I've been alive put together and they blew it. So did our teary eyed governor. A governor should lead even if it's in the wrong direction. Mistakes can be forgiven but inaction cannot and I'm a D#mocrat!
Send queries for the Senator to senator<at>dailyspeculations<dot>com

9/08/2005
Determining the Potency of an Attack, by Nigel Davies

A flimsy attack with one or two pieces extended far from the base of a position rarely has a chance to succeed. But if one of the players establishes a bulkhead and masses his forces behind it, the storm, when it breaks, is usually very powerful.

9/08/2005
Introducing the DailySpec Department of Fish and Lobster

Follow me, and I will make you fishers of men. (Matthew 4:19)

9/08/2005
A Study of the Predictive Properties of Brokerage House Stocks by Owen Wilson

9/08/2005
Physics and the Market, by Yishen Kuik

I think it's useful to look at nature or science and then take what we learn to try and find market analogies. It probably less useful to do the reverse: take what we already know about markets and then try a little too hard to find analogies in nature and science.

Chair's suggestions to use ecology as a starting point has strong logical underpinnings - both nature and markets are shaped by the forces of competition for resources. Energy in one and profits in the other. Evolution in nature is the result of how organisms cope with these forces, and so we expect to see analogies of these natural results in the market. If nature produces fire resistant trees to cope with rare fires, what are the fire resistant equivalents in the market? If nature stratifies into decomposer, prey and predator - who fulfils those roles in the market?

What is the logical support for using physics as a starting point? In Emanuel Derman's book, he points out quite succinctly that physics is about God and markets are about God's creatures, suggesting that there are limitations in making analogies. I would humbly suggest that one of the contributions of physics is to provide a good framework for describing particle motion. In "Six Easy Pieces", Richard Feynman wrote that if the world were to revert to a dark age losing all it's accumulated knowledge, the one insight that he would want to keep in physics is that all matter is comprised of moving atoms. From there, he argues, a very great deal of how the world works can be explained.

Markets are complex systems, in the sense that there are millions of decisions constantly being made producing a stream of uncertain and dependant outcomes. The results are commonly compared to being very close to Brownian particle motion, and maybe this is one area where the contribution of physics is useful.

Perhaps physicist / traders might be best able to shed more light?

9/07/2005
Letter of the Month Competition, by Vic and Laurel

The decision is in on the first ever Letter of the Month competition. We chose three favorite correspondences from August 2005. The competition was tough!

1st place prize of $1000 -- Bullish on the Big Easy by Andrew Moe, an inspiring letter on a bright future for New Orleans

Runner-up prizes of $500 -- Jim Sogi for his letter Drowning and Phillip J. McDonnell for his writings on Competition

Congratulations to the winners, and we hope that their entries will inspire a healthy spirit of competition for September.

9/07/2005
Reversion and Aversion, by Tom Ryan

I think there is some evidence that both processes (mean reversion and mean aversion) could be at work in the markets.

For example, in dual regime choice models, most of the time the data fluctuate randomly around a fairly stable mean, but then there is a window or period of time when there is a shift from one regime to the next and during that shift "mean aversion" would be at work.

The dual choice regime type of model fits a lot of social behavior: crime patterns, marriage patterns, and voting preferences in democracies (for reference see Butterfly Economics by Paul Ormerod or the writings of Alan Kirman). A dual regime model is often called an "ant algorithm" based on the work done by Kirman. Ants are presented with two piles of food and must make a choice about which one to forage. The ant has three choices, return to the pile last visited, change to a different pile of its own accord, or be persuaded to change by another ant. If the propensity to change is high, the distribution of ants at each pile with time appears to be random and a standard normal Gaussian distribution tends to develop for each pile around a population mean of 50% (half of population of ants around each pile). However, as the propensity to change one's preference decreases, the system suddenly shifts to a dual regime model where the population tends to be very large at one site and very low at the other site, with occasional large shifts back and forth. Many human behaviors involving opinions can be modeled well with this algorithm, for example - the election results in the US two party political system (conservative-liberal).

As can be seen in the following table of the presidential voting results for the Republican Party from 1856 to the present, the Republican Party candidates have typically received between 35% and 60% of the popular vote (Taft's poor showing in 1912 was because Roosevelt ran as an independent and split the Republican vote)

33.27%  1856
39.79%  1860    Lincoln
55.15%  1864    Lincoln
52.71%  1868    Grant
55.94%  1872    Grant
48.49%  1876    Hayes
48.38%  1880    Garfield
49.88%  1884
48.46%  1888    Harrison
43.08%  1892
52.19%  1896    McKinley
53.17%  1900    McKinley
58.16%  1904    T. Roosevelt
52.92%  1908    Taft
23.53%  1912
46.80%  1916
61.61%  1920    Harding
54.33%  1924    Coolidge
58.80%  1928    Hoover
39.94%  1932
36.80%  1936
45.05%  1940
46.23%  1944
45.39%  1948
55.41%  1952    Eisenhower
57.75%  1956    Eisenhower
49.92%  1960
38.66%  1964
43.56%  1968    Nixon
60.93%  1972    Nixon
48.95%  1976
51.62%  1980    Reagan
59.13%  1984    Reagan
53.90%  1988    Bush
37.69%  1992
41.40%  1996
48.45%  2000    Bush
50.73%  2004    Bush

The popularity of the Republicans has shifted back and forth unpredictably over time within this range. However, if the voting results were truly a random walk, then one would expect a higher rate of turnover in the White House from one party to the next over time. However, in the 37 election results since 1856, there has been a change in party only 14 times, and the Republicans are currently narrowly favored to retain office in 2008 on TradeSports. Admittedly, 37 elections is a relatively small sample, but if the election results were a coin toss process, then there is only a 9% chance of 14 or fewer regime changes in 37 tries. Therefore, it is possible that there are factors, both psychological and other (monetary, third party candidates), that are involved in the tendency toward fewer regime changes, specifically, that when one party is voted into power, there is a tendency for that party to continue to win votes. This would occur is there is a propensity among voters towards consistency in their voting, or if there were economic reasons for their choice, which would lead to consistency unless there is a fundamental change in their outlook or philosophy.

The tendency towards consistency is probably also a factor in the financial markets. I think this is what Vic is referring to as 'congestion' as the traders in the capital markets also operate on a modified voting system that presents two fundamental choices each trading day (buy/sell, too low/too high). It is possible therefore that one could reasonably expect alternating periods of reversion as well as some periods of 'aversion' with respect to short term price ranges in somewhat irregular cycles but with cycles that have a longer duration than what would be explained by a random walk process. Just one day traders opinion , of course.

9/07/2005
Victor Niederhoffer on the Wisdom of Crowds

A recent post on James Surowiecki's book The Wisdom of Crowds appears. I've read this book and in my opinion it is completely meritless, misleading, deleterious and part of the doomsday and hate business. Part of the hope for collapse meme that is the hallmark of L#wis, Gl#dwell, and similar people described by Ayn Rand in her novels. Much better and less likely to lose money for the reader and make the crowd less unwise is Biderman's book on following the flow of large acquisitions and buybacks.

9/07/2005
Recent S&P Ranges, by Victor Niederhoffer

Recent ranges in daily S&P futures always give me reason to pause and reflect. Is there an inordinate tendency for ranges to be relatively similar around 10:00? Is there a Shillerian tendency for the ranges to be too great relative to the daily moves? Why the range of only five points on August 25th, right before the August 29th crisis? Was the August 31st range of 19 a blowout, or the disruptive move that extricated the weak from their good positions and gave the strong their rightful chips? Are there any constancies in the ranges that allow profitable intraday trading based on the proximity to a high or low at a given time and the range up to that time as a function of the previous ranges? The test the market mistress gives each day is more worthy of study than the IQs, galvanic responses or E.E.G.s of traders.

           date         hi      lo    close
           9 06        1235    1224    1234

           9 02        1226    1217    1220
           9 01        1228    1217    1222
           8 31        1224    1205    1221
           8 30        1211    1202    1209
           8 29        1216    1202    1214

           8 26        1213    1205    1206
           8 25        1215    1210    1214
           8 24        1226    1209    1210
           8 23        1225    1216    1221
           8 22        1231    1218    1224

           8 19        1227    1221    1224
           8 18        1225    1217    1221
           8 17        1228    1219    1222
           8 16        1235    1220    1222
           8 15        1239    1228    1238

9/07/2005
James Lorie Obituary

9/07/2005
A Chip Off the Old Block

Vic demonstrates a proper forehand to his first granddaughter, Magnolia.

9/07/2005
J. Rollert sent in this extract from the Washington Post:

Earl Weaver: Moneyball Man
August 28, 2005

From the Washington Post today comes a story about the "bunt debate" in baseball:

Earl Weaver

"As a future Hall of Fame outfielder in Baltimore, Robinson played for four seasons under Manager Earl Weaver (himself a Hall of Famer), who is widely considered the father of the anti-bunt movement. In his book, "Weaver On Strategy," the legendary skipper lists his "laws" of managing, the fourth of which is, "Your most precious possessions on offense are your 27 outs." Weaver's Fifth Law is a corollary: "If you play for one run, that's all you'll get." "I hated playing for one run," Weaver said recently. "But I didn't always take my own advice. I never bunted with Frank Robinson or Boog Powell or Eddie Murray at the plate, of course. But I did it with [Mark] Belanger and [Paul] Blair, two real good players. I think I bunted them too much."

Isn't that a great line? Play for one run and that's all you will get. There it is in black and white the "secret" to baseball or trading success. ... "Earl Weaver designed his offenses to maximize the chance of a three-run homer. He didn't bunt, and he had a special taste for guys who got on base and guys who hit home runs."

9/07/2005
Jay Pasch on Inspiring Tennis

I'm quite impressed with the remarkable fitness of both the Belgian ladies. Clijsters barely drew a deep breath last night as she ran Williams clean out of gas. A great display of come-from-behind victory that has given a trader the determination to get back in the chair and get on with the business of winning...

J.T. Holley adds:

Oh so similar to those fixed rules guys and nice example being a sore loser or not courteous in loss

Williams on Clijsters's wonderful comeback victory:

"Asked about the turning point in their match, where Williams was serving with a 4-2 lead in the second set, she blamed Clijsters.

``I was playing decent and she started playing really bad and it totally threw me off,'' Williams said. ``She started hitting these really weird shots and short balls, just weird stuff. It threw my game off. Next thing I knew, I was playing as bad as she was."

Maybe Clijsters can work on that part of her game before she plays Sharapova next?

9/06/2005
A new letter from Stephan Bisse on his new website, and from Javier Benites on Barcelona, can be found at Letters to the Editor

"A full cycle can be subdivided into three substages: liquid refilling stage, bubble nucleation, growth and coalescence stage, and transient annular flow stage" A study of bubble formation on a micro time scale. Little bubbles form, break away and dissolve. New ones form, like the price bars. No good chasing little bubbles.

Wolfram discusses the properties of iterative sequences. A random walk is a form of stochastic sequence. Despite simple rules, the patterns developed from simple iterative algorithms become complex and hard to predict. Important observations have been derived from studies of random walks. Similarly, studies of other forms of iterative processes may reveal important processes at work in the markets. The key is the deconstruction process to reveal the underlying simple interactive algorithm that created the complex patterns. These exist in the markets and can be deconstructed. This is what we do here.

9/06/2005
Briefly Speaking, by Victor Niederhoffer

The Dax is up 2% from a Friday close of 4838 to 4935, while the S&P 500 is up a mere 0.4 % from 1220 to 1225. Such divergences often occur while both individual stock markets are trading and while one is open and the other is closed. Several queries arise. Is there a systematic tendency to underestimate the large changes in one by the other? Are the big moves in one transmitted to the other to an inordinate degree? What are the predictive properties of the levels and changes in the ratios between the two markets. Are holiday moves in one foretokened by the regular moves in the other? Are there bell weather markets, e.g. New Zealand, that tend to be the pilot fish for the others? Do moves that are un-harmonious between the markets tend to have different predictive properties than those that diverge? Are there key hours in the one market that are the magic bullets? Is the price response of one market , a good predictor of news to be released in the other. How do the varying and related interest rate markets enter the picture? Is there a systematic tendency to underestimate the degree of change in state? Such are the questions that arise with many others, as one wakes fretfully to the beginning of a new regime in the markets, one that traditionally begins after the July 4 - Labor Day holiday period is over.

9/06/2005
Dick Sears's Weekly Update of the Gilder Technology Index

9/06/2005
Adventures in Money Supply, by Yishen Kuik

Just finished reading Stan Sesser's The Lands of Charm and Cruelty: Travels in Southeast Asia (1989), where Mr Sesser relates the unusual story of the 1987 demonetization of the Burmese kyat.

Like most hermit states run by army generals, the official market didn't work too well in Burma. The black market in smuggled goods thrived. General Ne Win did not approve and decided on drastic measures. In Sep 1987, the Govt of Burma declared the 3 largest denomination banknotes (25, 35 and 75 kyat) worthless and revealed new 45 and 90 kyat bills (Ne Win was into numerology and liked the number 9). However, there was no exchange program of old bills for new - you simply lost your money. Some believe Ne Win's plan was to teach the black marketers, who held a great deal of cash, a lesson by bankrupting them. According to Mr Sesser, 56% of money in circulation was eliminated.

Most Burmese at the time kept their money under the mattress - this is because to withdraw money from a bank, you had to stand in line for half a day, and if you wanted to withdraw more than USD 200, you had to see the authorities for permission. So most Burmese, who held cash, also lost their savings overnight.

According to standard texts on economics, a reduction of money supply should be deflationary. But what happened next was quite different.

Because no one trusted the kyat after the incident, every dollar earned went straight into land and tangible goods. The black market boomed as people bought rice cookers, radios - anything. And contrary to standard economics, there was actually price inflation, presumably because the increased velocity of money more than compensated for the decreased quantity.

Not surprisingly, the Burmese did not share Ne Win's passion for 90 and 45 or any note of high value whatsoever and people took to bringing plastic bags filled with money to handle purchases - oddly enough the same phenomenon noted many times during times of hyperinflation! This time though, it was filled with small denomination notes.

As a "wealth of nations" side note - Burma was once the dominant exporter of rice at 3.4mm tonnes in 1934 and had at least a 50% market share. To put this into perspective, the US only recently exceeded 3.4mm tonnes of export production.

Reuters article on Burmese rice production today

World Rice Trade Figures

Mr Sesser wrote for the WSJ and 'New Yorker' at the time, and there is a human rights/tree hugging undercurrent to the book.

9/06/2005
"Another Man's Game," from Farmer Boy, sent in by Steve Wisdom

There was a man in a tail-coat and a tall shining hat, who put a pea under a shell and then paid money to any man who would tell him where the pea was.
"I know where it is, Father!" Almanzo said.
"Be you sure?" Father asked.
"Yes," said Almanzo, pointing. "Under that one."
"Well, son, we'll wait and see," Father said.
Just then a man pushed through the crowd and laid down a five-dollar bill beside the shells. There were three shells. The man pointed to the same shell that Almanzo had pointed at.
The man in the tall hat picked up the shell. There was no pea under it. The next instant the five-dollar bill was in his tail-coat pocket, and he was showing the pea again and putting it under another shell. Almanzo couldn't understand it. He had seen the pea under that shell, and then it wasn't there. He asked Father how the man had done it. "I don't know, Almanzo," Father said. "But he knows. It's his game. Never bet your money on another man's game."
from Chapter 21, COUNTY FAIR, of Farmer Boy, Laura Ingalls Wilder, 1933

9/05/2005
The Behavior of Volatility, by Dr. Alex Castaldo

Is volatility a mean-reverting quantity?

Certainly the academics would argue that their success in fitting GARCH models to the data shows that volatility is mean-reverting. But the mean reversion is slow (i.e. volatility is highly persistent). As an example, in F.X. Diebold's forecasting book a GARCH(1,1) model is estimated for stock returns from 1988 to 2001. The fit is highly statistically significant (page 402). The estimate of tomorrow's sigma2 (squared volatility) is found to be

0.919714 * Current_sigma2_estimate + 0.067410 * Today's_squared_return

The first coefficient is close to 1, showing just how gradual the mean reversion is. (if the coefficients were 1 and 0, the volume would be constant).

The author finds that at the end of the period the volatility is well above above its mean value of 14% per year. He makes a forecast (Fig. 13.11 on Page 405) which seems to show that the vol excess is expected to be cut on half in approximately 75 trading days (if I read the chart correctly). So the half life is about three months.

Dr. Ross Miller adds:

While I don't think it is infinite like some do, I do think that it requires more infrastructure than finance and economics currently provide to refer in any meaningful (pun intended) way about the mean of most commonly followed volatilities (VIX, VXN, Donner, etc.). The problem is that if you are talking about a historical mean, that value depends on how far back you go and what weighting scheme you use. If you are looking at some economically justifiable number for volatility, then that value is probably well below historical experience and could be zero. Yeah, that's the ticket. Volatility is mean-reverting because it's going to zero. In which case it will never technically cross that level. And if the Cauchy boys are right, and it's going to infinity, it isn't crossing that either. Coming up with a long-term mean that is neither zero nor infinity (and I am pretty sure it lies within that interval) based on "fundamentals" and not statistical magic seems very difficult and a waste of time.

9/05/2005
A Normal Day, by Steve Wisdom

For the past several years I've weighed in the low 190's, which felt about right. Last Christmas I got a fancy bathroom scale, one that matched exactly to the pound against the tall crossbar-with-sliding-weights scale at my doctor's office, so now I can figure my weight very precisely, when I feel the urge to.

Lately I learned about "Body Mass Index" (BMI), which is apparently a dimensionless measure of overweightness. With this BMI Calculator I can plug in my height, 6'1", and find that above 189 lbs I'm Overweight, and therefore subject to all the associated infelicities.

As an aside, the BMI formula is Weight/Height^2, times a constant. It was developed by the Belgian statistician Adolphe Quetelet in the 19th century. Now, Quetelet is a respected statistician, so he must have some reason to think the mass of a 3D object scales as the square rather than cube of its length. But I have no idea why this should be. I'm not a PhD.

At any rate, yesterday morning I weighed myself: 188!! The first time in memory I'd been Normal. A special day! I wondered how life as a Normal person felt. I tried on a few of my bike-jerseys and golf shirts. The size-L's were still too small; I still needed XL. Seems insulting, that a Normal guy wound need Extra Large clothing. No justice for the Normal Man!

I took a walk outside. Recalled an outing with a Realtor when I first explored Connecticut: she showed me a new development spread across the Stamford/New Canaan town line. Identical houses on either side of the line, but the Stamford houses were $200k cheaper. Naively I asked why. She breathed deeply, then walked across the street, breathed deeply again, and said "Can't you smell it? The air is sweeter over New Canaan." But, alas, the air was no sweeter as a Normal guy.

And then, this morning: 190 lbs!!! Overweight again; the spell is broken. But I have my fond memories of a Normal day.

9/05/2005
Evaporation & Markets, by Victor Niederhoffer

With all the news about excessive water, I thought it would be good to study up on evaporation, the process by which water is turned into gas. Evaporation is the primary force in the water cycle process by which water moves from the liquid state to the atmosphere and then back to the ground. What I learned about evaporation is quite different from what I read in school. It depends on pressure and entropy, for example, as well as the common factors I learned about in school such as wind, humidity, energy and temperature. A good article on this is "Why do things sometimes melt and sometimes sublimate?"

To simplify, Evaporation is going on at all times. Its rate depends on the distribution of molecules and how many are close to speeds necessary to turn them into a gas. (I would be pleased with a more precise market-related simplification.)

I hypothesize that evaporation in the stock market comes when a stock or other market is near a new high or new low and it receives energy from the fixed momentum boys to raise it to new highs or lows. The process provides a net cooling of the stock market, which I analogize to a net reduction in volatility. And when the markets or stocks setting new highs or lows return to the non-extreme parts of their distribution there is an increase in the velocity and temperature of the market.

I hypothesize also that other things that provide evaporation for the market would be sources of heat from political , monetary or weather events. The rate of these process will depend on the volume of trade during the day according to the same principles in the sublimation article.

Someone's going to tell me that I am an ignoramus and clown for trying to draw analogies from this simplification, and that markets are different, and that it's already been done in the area of econophysics or some such, and I tip my hat to them and join them in their critique.

Dr. Kim Zussman comments:

One could also look at the Boltzmann distribution, which describes the kinetic energies of (say) molecules in a beaker of boiling water. None of the molecules are perfectly stationary (absolute zero), and most move at speeds consistent with the overall temperature. However some have energies many times the average temperature, and are much more likely to escape the hydrogen-bonding and gravity holding water in the beaker.

Mr. Ckin adds:

Maxwell-Boltzmann had some particular constraints and assumptions in order to make the curve continuous. Among them, the sample only applied to an ideal gas (not a "sticky" gas in which electromagnetic induction or electronegativity would cause to molecules to interact), all molecules would be in the ground state, and there would be no collisions which would cause an excited state of any molecules. I think that it also assumes cold gases, which would not lose radiation into space.

I remember doing fairly well in statistical mechanics in college, but when I went back to look at my old notebooks, I see handwriting that looks like mine, but the math (differential equations, triple integrals) looks like a foreign language. Nevertheless, statistical mechanics probably has lots of relevant tidbits for financial markets, but when one starts to consider differential equations relating to dynamic systems, keep in mind that there are an infinite number of solutions.

Here's an issue that I have been pondering relating to dynamic systems and moving bodies as they relate to financial markets: Is volatility a mean-reverting quantity? Any sort of volatility measure will do, VIX, VXN, historic, implied, average daily trading ranges, etc. Grant's Interest Rate Observer touched upon this question a few months ago, but with limited reference to any analytical work. Knowledge of the answer would have a meaningful impact on pricing of securities with embedded options such as convertibles and MBS.

9/05/2005
Storm Signs, by Jack Tierney

Last night at our Sunday B*ble study group we were one member short. Jeff is a major in the National Guard and has already served a year in Iraq. He has spent most of the last week in Nashville dispatching what remaining troops we have to Mississippi and coordinating the placement of the roughly 30,000 displaced persons Tennessee is expected to take in. He received a call from the group leader who had just arrived at their Mississippi destination. It was an urgent request for ammunition. Every shell issued to the departing troops had been expended in returning sniper fire on the trip down. This did not make any of the news channels I check regularly.

9/04/2005
Velocities & Distance, by Victor Niederhoffer

Several interrelated aspects of the distance the market has covered in short and long time intervals seem somewhat non-random and possibly predictive to me now. We’re at 1220-ish in the S&P, exactly where we were two weeks ago, six weeks ago and eight weeks ago. We've had some seemingly bad news in the last two months that most of us would have predicted would have left the market 5% to 10% lower with all the manmade and natural destruction and the price of oil above $70 a barrel. Yet -- such is life -- we have not given ground. I note a seemingly inordinate number of sudden jumps in price, such as the 15-point rise from 2 p.m. to close on Aug. 31; the 10-point drop starting 9:30 a.m. on Aug. 22, the 10-point decline starting at noon on Aug. 24, and the 10-point rise starting at 9:30 on Aug. 26.

It's so much easier to describe these things than predict, but without concentrating unduly on the meals for a day rather than the meals for a lifetime, our hallmark -- a hallmark, I might say, responsible for the somewhat elegant and uplifting aura that pervades our backdrop -- and without interfering with the terra firm of the Professor of Non-Predictive Studies, I propose a simple measure.

As of a given time, what is the maximum and minimum distance it's covered (above or below), say in the previous month, and is this nonrandom or predictive? For example, on Aug. 31, the close at 1221.4 was 27 below the Aug. 3 close of 1248 and 15 above the Aug. 26 close of 1206.

Here's a table:
          END OF        Price   Distance Below  Time   Distance Above  Time
                                Maximum                Minimum
           Aug          1221       27            28         15          6
           July         1237       10             1         38         25
           June         1196       25             9          0          0
           May          1197        4             2         28         29
           April        1163       37            20         19          6
           March        1184       30            28         14          2
           Feb          1208       08             4         14         28
           Jan          1186       24            27         16          7

The current price of 1221 is very high on the distance below maximum and time scale, comparable only to April and March in this regard.

Many fruitful queries would seem to be generated by such a counting.

9/05/2005
A Spec Rocks in Italy, by Andrea Ravano

Strange thing to see a volatile crowd ranging from three months old to "close-if-not-retired"  building up a party in small Riviera town of Bordighera on the notes of  Kool and the Gang. Maybe not the best musicians of the world, maybe the vocals not what they used to be. What struck me is the magnificent skill of producing a show that builds up steam and ends up with the crowd cheering the American way, only you are in Italy.. Great evening, great concert, although it benchmarks time as it passes with your hair turning a notch to grey along with that of some of the group.

9/05/2005
The Grandmaster on Schadenfreude

One of the wonders of the tournament hall is in how the frog pond starts to croak when they think a strong player is on the ropes, but the final outcome is rarely what they hope for.

9/03/2005
Professor Pennington Goes to the Open: Federer Defeats Underdog Fabrice Santoro 7-5, 7-5, 7-6

Roger Federer is everywhere, just off a win at Wimbledon and ranked number one in the world. Tradesports betting recently had the going probability that Federer would win the entire tournament at 58%, so he was a heavy favorite in this match. Santoro, the underdog, achieved his highest world ranking of 17 back in 2001. The crowd mostly pulled for an upset, though I couldn't understand why. Federer was so plainly better that a victory for Santoro could have only resulted from a very unlikely random fluctuation or some crisis in Federer's confidence.

Nevertheless, Santoro was very likable. Tenacious is the first word that comes to mind, even in the literal sense, as Santoro grips the racket with two hands on both forehand and backhand. He rescued at least three points with dramatic trick shots. In the first set he retrieved a deep lob over his head with a backwards-between-the-legs underhead (as in an overhead , but upside-down) winner that Federer almost couldn't get his racquet on. Despite Santoro's likeability, his overall playing style grated on me. This approach of using two hands for everything seems like a weak approach to tennis, limiting range and power. It might be the best way to play when you re six years old, but I suspect Santoro might have become an even better player if he had endured the process of switching to more conventional strokes.

In contrast, Federer's picture should be in the dictionary next to the word grace . As has been widely noted, his game really has no weaknesses in any category serves, forehands, backhands, volleys, overheads, drop shots, speed he's got it all. I don't recall his hitting a single overhead, from any depth, that wasn't a full-fledged winner. He actually did make many more unforced errors than his opponent, but he made even more winners, and the unforced errors themselves were often beautiful, missing the line by inches.

Federer consistently had Santoro on the move, and the outcome seemed preordained, despite the close score in each set. When Santoro, through some heroics, reached a tie-breaker in the third set, he visibly smiled. I knew it was over. The smile meant that he was happy simply to be playing in almost the same league as Federer. Federer promptly won the first six consecutive points of the tiebreaker, and then took it 7-2.

The player with the best name was Anna Smashnova. My companion suggested that her middle name must be Overhead.

9/02/2005
In our usual rapid response to our readers' interests, we are pleased to announce a brand new segment to the website, the DailySpec Department of Child Rearing

9/02/2005
A Growing List of Reading and Music Recommendations

9/02/2005
From the Professor of Non-Predictive Studies, The Nearness of You (And Your 52 Week High).

In their paper The 52-Week High and Momentum Investing, published in the Journal of Finance Volume LIX, page 2145, authors Thomas George and Chuan-Yang Hwang find that it's a good strategy to buy stocks that are near their 52-week highs. When stocks are sorted into deciles according to their nearness (as a percentage) from their highs, the deciles that are closest to the 52-week highs perform the best, and those furthest away perform the worst. It's a variation on the Jegadeesh and Titman paper that's been discussed here in the past.

I won't do a full review of the article here, but there are some tidbits in the article that would be of concern if you wanted to trade on it. For example, all stocks in the CRSP database are used, even though many or even most stocks out there are too small to be traded more than once per decade.

So I decided to test the idea using only S&P 500 stocks with prices greater than $5, looking at a "High" portfolio and a "Low" portfolio. The portfolios are defined below, and their performance is given for the period from 1/1997 through 12/31/2004. The S&P component list is updated at the start of each calendar year.

"High" Portfolio: Each day go long (with equal weighting) the 50 stocks in the S&P 500 that are closest (as a percentage) from their 250-trading day highs.
Annualized return: 2.2%
Annualized Std Dev: 16%
Max Drawdown: about 35%

"Low" Portfolio: Each day go long the 50 stocks in the S&P 500 that are furthest (as a percentage) from their 250-trading day highs.
Annualized return: 16.4%
Annualized Std Dev: 34%
Max Drawdown: about 80%

The "High" portfolio is the tamer one, with an annualized standard deviation of 16%, much smaller than that of the "Low" portfolio, 34%. The "High" portfolio also suffers a smaller drawdown, about 35%, than the the "Low", about 80%. But the "High" portfolio's returns are miniscule, only 2.2% annualized, as compared with 16% for the "Low".

So regrettably it doesn't seem that there's too much to be gained from the nearness/farness split; one only gets the usual tradeoff between reward and painful risk.

I did one further update to look at performance so far in year 2005. So far the "High" portfolio is up about 8% and the "Low" is down about 2%. (I did use slightly different assumptions in the 2005 study. For one, I chose the highest and lowest 100 stocks in the S&P, rather than the highest/lowest 50 stocks, and I held positions for 20 trading days before re-balancing.)

9/02/2005
Book Review by Victor Niederhoffer: To Rule the Waves

Every nation and empire able to exert its will over the seas has thrived and prospered, from ancient Rome to Modern Britain. -- Captain Alfred Mahan, The Influence of Sea Power Upon History

The ocean is very much like the market. It's unfathomable, ever-changing, and seemingly orderly despite the unpredictable weather and enemies that might attack you at any time. I always read naval books with an eye on what they can teach.

To Rule the Waves: How the British Navy Shaped the Modern World, by Arthur Herman (New York: HarperCollins, 2004) is everything a good history book should be: insightful, predictive, heroic, and profitable for markets and living. The basic thesis is that naval power is key to implementing the leitmotif of a country; that England had the best navy for 300 years; that through it, she extended her ideas of a society based on property rights, commerce and voluntarism and defeated dictators whose basic idea was a society based on war, status or servility -- such as Philip, Louis XIV, Napoleon, Bismarck and Hitler.

The book points out that it was the British system of freedom, property rights and rule of law that allowed the flexibility at sea that enabled her captains to win battle after battle. British captains were free to change tactics as needed, giving them the edge over enemies under authoritarian systems. Again and again, timely British naval blockade carried out by great innovative captains with better strategies, better ship design and better technology furthered civilization based on law, honor and property to the detriment of barbarism and slavery throughout the world.

I like the emphasis on science and technology that always characterized the British navy. Over and over again, an enterprising British naval officer gain the edge over enemy forces by fitting his ships with more accurate cannon, better copper on the bottom, better steam engines, better iron or wood or sails, better signaling systems, better navigation equipment for avoiding the shoals and maneuvering in the dark. And it was a naval surveying expedition that took young Charles Darwin to South America aboard the Beagle, eventually leading to the greatest insight of the 19th century.

The incentive system was a major factor in British naval success. Every hand on deck received a piece of the action, in the form of a payment based on the value of the goods, ships and number of men of the belligerents captured. Trading operations that do not put their men on profits remind me of the French system in that they appeal to honor and duty rather than the desire to improve one’s situation.

Here's a quantification of the profit incentive at work:

The all-time record was 485 pounds, paid in 1762 to each sailor on the Active and Favorite for their joint capture of the Spanish galleon Hermione: enough to let men buy gold watches on Portsmouth Hoe and cook them in frying pans for fun. But sailors who were part of less spectacular catches still made tidy sums. One sailor from Anson’s Centurion, who was paid only the first portion of his prize money, was able to get so drunk that he fell into the Thames and drowned with fifteen guineas still in his pocket.

Certain shipboard practices resonate with the speculator. When Napoleon surrendered to the Bellepheron after Waterloo, he remarked on the clear decks and orderly discipline. “’What I admire most in your ship,” he told Maitland, ‘is the extreme silence and orderly conduct of your men; on board a French ship, everyone calls and gives orders, and they gabble like so many geese.’” I have seen many trading operations like the French ships, and hope that mine will always maintain that austere silence and orderliness of Nelson's band of brothers.

Yet the British knew the importance of flexibility. Herman wrote:

Nelson had learned a valuable lesson: no admiral no matter how organized or enterprising, could control the action and tempo of a battle from his quarterdeck. The pace was too fast, the noise and smoke too distracting, the sudden opportunities too fleeing. The best an admiral could do was to devise his strategy, point his shipping in the right direction and trust his captains to carry out the plan as they saw fit.

This balance of discipline and enterprise served as the dynamic for good.

"Naval warfare and sea power had always demanded a delicate combination of organization and discipline on the one hand, and independent judgment on the other,” Herman writes. Britain’s peculiar virtues fashioned her into a great maritime power, even as the maritime power fostered these same virtues in the society at large.

England’s control of the seas and trading routes prevented countries she was fighting with from supplying their citizens and warriors with grains, fuel and ores, thus creating poverty for their businesspeople and revolt among the suffering populaces. Britain could have used this devastating supremacy to aggrandize its power and dictate terms to its neighbors – or to umpire the balance of power in Europe, maintain the general peace and protect the worldwide trade upon which worldwide prosperity depended.

The defeat of Napoleon had been a dramatic repudiation of one of the oldest assumptions about government in human history: that maintaining a large standing army, led by a charismatic ruler and serviced by a centralized bureaucracy, was a natural and effective way to organize the political community. In the final analysis, all power was about domination, and all domination about control of land and territory. The French Revolution and Napoleon had modernized this formula for land-based empire, and perfected it to pursue the complete domination of the world system. This was the great dream of power that Britain had checkmated at Trafalgar, and definitively defeated at Waterloo (although it would revive again in German hands a century or so later).
Instead, what emerged after 1815, thanks to the British navy, was a very different view of how the political community could be constituted, and how the world system should be organized. Instead of a charismatic ruler and his centralized bureaucracy, Britain could offer the world the idea of limited government, with a strong parliamentary sanction and deep suspicion of authoritarian leadership except in times of crisis. This was a direct legacy of the British navy, since the island kingdom’s reliance on maritime strength had made building large standing armies seem unnecessary, even dangerous, rather than a natural part of governance.
Instead of dividing society into those who serve the state – soldiers, courtiers, and bureaucrats – and those who obey it, Britain had made the defining social element the ownership of property. These included mobile and dynamic forms of property associated with commerce and trade, as well as static forms of land ownership. In fact, the more mobile the form of property, the more dynamic and flexible the social structure becomes. This was a point Adam Smith had made in his Wealth of Nations, the bible of the new British world order. But at its foundation was the Royal Navy’s historical role as the defender of the most valuable and mobile part of the nation’s wealth, its overseas trade. Indeed, trade and commerce had increasingly become Britain’s principal relationship with its neighbors and outside world. That, too, could be articulated as a principle for a new global order.

Owen Wilson adds:

To see how much worldwide prosperity still depends on maritime transport I looked at correlations between returns in the shipping industry and returns in the S&P 500 futures (t). To do this I took the 12 largest shipping companies available on my data source, MarketQA, for the last five years and I computed correlations and regressions using the program Eviews.

Whilst weekly data, (since 2000), showed little but randomness, monthly data showed a small positive correlation for shipping (t-1) of 0.02, but more significantly a larger negative correlation for (t-2) of -0.17 and then a positive 0.12 for t-3. The cyclical pattern continued with smaller numbers until (t-5). More likely it seems it is the strength of freight routes that helps the markets to prosper, and in return, the prosperity of the markets that supports the success of the shipping industry.

9/02/2005
The Assistant Webmaster Looks at Acronyms

A Bo Keely'esque offbeat indicator of a market top: the public learns the acronyms. Suddenly everyone (in the colorful language of a NYMEX pit clerk I use, "people who don't know d!ck about the energy markets") knows acronyms such as OPIS and LOOP.

Reminiscent of the tech boom when everyone knew DWDM, CLEC, etc.

9/02/2005
Summer 2005 Travel Notes (Nobody Asked Me, But...) by Laurel Kenner

Oldheartedness in the Masai Mara

When the Kenyan Cape buffalo grow old, younger males kick them out. Thereafter, these venerable outcasts roam alone, ill-tempered and nasty. "They will charge anything," our guide told us. The same thing happens to people whose ideas get old. That's why it's best to stay curious and humble rather to rail at the young.

Young Hunter, Old Master

The crowd at Arthur Ashe Stadium cheered for Andre Agassi today in his match against a 6'10" Croatian kid named Ivo Karlovic. I was cheering for Karlovic, just because I like to see somebody with great natural endowment put his powers to full use without shame, like The Incredibles. I felt a little sorry for him, too, since his home country is unloved and since there didn't seem to be much of a Croatian contingent to cheer him, and there he was at the U.S. Open, facing one of the greatest tennis players who ever lived. And nobody could even pronounce his name to yell.

It was like a clash between a young samurai and the old master. In the first set, Karlovic's typical first serve was 138 mph. Agassi, who's probably about a foot shorter than the Croatian kid, couldn't return practically any of them. He's known as a great return artist, but against Karlovic he was as helpless as a young girl picking up the racquet for the first time. One game consisted of four straight Karlovic aces. Karlovic has made 62 aces at the Open -- apparently just at that match -- making him the Ace of Aces.

But Karlovic's backhand wasn't up to his serve. So the games went like steps; Karlovic would win his serve, then Agassi would by cleverness and skill win his serve. Agassi played well and waited for the kid to make errors. First-set tiebreaker went to Agassi by a point. In the second set, the pace of Karlovic's first serve slowed to 134 mph and Agassi started to return more of them, and even put a serve right in the far backhand spot where Karlovic had been tormenting him. Second-set tiebreaker went to Agassi by two points. Third-set tiebreaker he won by three points. It could have gone against Agassi so easily, and yet.. it didn't. He is worthy of emulation.

Homage to Catalonia

The most fascinating place in Barcelona is not Gaudi's Sagrada Familia cathedral or Guell Park with its Masonic symbolism, but the Maritime Museum. The museum is located in the old medieval shipyards on the waterfront. You can learn all about the Barcelona shipbuilding industry's greatness in the 13th, 14th and 15th centuries there, and you can see beautiful old fishing boats of solid oak. Some of these boats used to go out with lights to lure the fish (the market parallel would be the analyst's report). Perhaps best of all, there is a full-scale copy of the flagship galley that led the European forces in the Battle of Lepanto in 1543, where a coalition of Spain, the Papal States and Venice chased the piratical Turks out of Cyprus and turned the tide in the battle for Europe.

Even as the battle was won, Barcelona's glory days were almost over. With the discovery of the New World and its riches, the Mediterranean was suddenly not where it was at. The Castilian kings who took over Barcelona in the 16th century favored the shipyards of Valencia and Malaga for military shipbuilding; and they made it illegal for large craft to be used for commercial purposes. When coal power and iron came into use, the numerous small businesses of Barcelona's shipbuilding industry could not come up with the large capital investment necessary to compete. So the shipyards went into decline.

The most remarkable aspects of Barcelona today are seafood (try the barnacles at the Bottafumeiro) and the tennis; the Polo Club next to the Hotel Rey Juan Carlos I had no fewer than 40 courts; and the Polo is just one of three similar big clubs in the area. A pro told me that 14 of the 16 Spanish players in the world top 100 are from Barcelona.

A Weston reader and Quixotic connoisseur objects that Laurel has neglected the most beautiful thing about Barcelona, in Letters to the Editor

Death in UNESCO-Occupied Venice

As in Barcelona, so in Venice; the triumph at the Battle of Lepanto heralded decline rather than further glory. The exotic Eastern ornamentation that makes St. Mark's basilica such a fairy tale place was salvaged from Constantinople after the fabled city fell to the Ottomans in 1453. The basilica makes an odd contrast to the stolidly unimaginative bell tower of the piazza, and a parallel exists with the current state of affairs. Venice has been declared a world treasure by UNESCO; in practical terms, this means that nobody can touch a brick or a stone or a piling without submitted voluminous permit applications to the authorities, in a process locals describe as eternal. So many of the lovely buildings one passes on the waterways are empty and crumbling; bureaucracy has made renovations impossible. The 10,000 gondolas that once plied the waters have dwindled to a mere 400, with some additional power boats and ferries, so getting around quickly is a challenge for business. Thus the stolid central planners have reduced to tears a city that has thrived since the 5th century thanks to the cleverness and inventiveness and good taste of its inhabitants.

Zanzibar, A Real Place

I have wanted to go to Zanzibar for years. When I lived in Sierra Madre, California, a small hillside suburb near Pasadena that is home to the Rose Parade and one of the most boring places on earth, I would put myself to sleep by poring over a world atlas and lingering over the exotic names. Like Zanzibar. It sounds so poetic that it might almost not exist. You can visit Zanzibar quite easily nowadays. The country shed its Marxist straitjacket about 15 years ago, and started to welcome tourists. There's a lovely hotel, the Serena, with hammocks on private balconies right over the water, and you can watch the fishing boats go out with their lateen sails and drink the spiced coffee that I think is the best in the world.

I bought a long pink skirt and a long-sleeved white blouse for my trip to the market, along with a big striped pink-and-blue scarf that the seller kindly pinned to my head in the nunnish style considered proper for Moslem women. Draped head to toe to avoid offending Arab sensibilities, I ventured out into the narrow streets and found myself being applauded by the Arabic men I passed. They pointed to the scarf, nodded approvingly, said "That's good! We like it!"

Bill Clinton had stayed at the Serena the previous week, and people was still abuzz with admiration and good feelings for our President. He posed for photos with everybody, including our porter, who proudly displayed his photo to me. It seemed that everybody in town had come to the hotel to be photographed with Bill. The President won further good feeling by wading into the souk with only one bodyguard. He shook hands with everybody and spent 45 minutes talking with one of the shopkeepers. President Bill bought a Zanzibar chest -- a lovely brass-finished piece with a secret drawer -- and so did I.

Laura Bush also had been there recently, we heard, but she was accompanied by a phalanx of bodyguards who wouldn't let anybody near her. As to why both Bill and Laura were in Zanzibar -- the rumor was that there may be a military base in the country's future. As for the past, I recommend the book Zanzibar Princess, sold at the Serena. Zanzibar has a prominent place in the history of the spice trade; a few books have come out recently on this subject, and I can recommend Jack Turner's Spice: The History of a Temptation. to those who appreciate markets.

9/02/2005
Kim Zussman  on Jesse Livermore and Current Markets

Even though today's media dissemination rate is a fraction of his era, the paradigm that herding and over-reaction are immutable is central to statistical trading.

The analogy with the great 1906 San Francisco quake is not far-fetched. The full extent of some disasters are not expressed immediately since events can occur in stages. Like the quake which was not nearly as devastating as the ensuing fire, Katrina was not a cat 5 direct hit but the real disaster occurred later when the levees failed. Surely major quants (now not posting) are busy estimating petroleum and gas deficit duration and expectant market reactions. And liberal quants using their Macs to calculate human costs, their play in the media, how Bush was at fault, and the expectant market reactions for Hillary calls.

New Orleans shares features of 911: an unprecedented tragedy targeted at national economic vulnerability. Four years ago, when markets re-opened, stocks fell 13% in 5-days but came back in two weeks. Once again rumors of the death of western culture were greatly exaggerated. Are the SAT's of today's button-pushers so high that prior sell-off patterns have been hunted to extinction, or worse, slow to come out of the woods?

9/02/2005
Gimmie Shelter (Dedicated to the Survivors of Katrina), by Jim Sogi

C# B A B (8x) intro
C# (sus)

Ooh a storm is threatening my very life today
If I don't get some shelter, Oh yeah I'm gonna fade away

Chorus (3x)
C# B A E A E A E B E B

War, Children, It's just a shot away, It's just a shot away

Verse 2
Ooh, see the fire sweepin, our very streets today
Burn like a red coal carpet, Mad bull lost its way
C# B A E A E A E B E B
War, Children, It's just a shot away, It's just a shot away

Solo

Chorus (3x)
C# B A E A E A E B E B

Rape, Murder, It's just a shot away, It's just a shot away

Verse 3
Mmm, the flood is threatening, my very life today
Gimme, Gimme Shelter, I'm gonna fade away

Chorus (3x)
C# B A E A E A E B E B
War, Children, It's just a shot away, It's just a shot away

Chorus (5x)
C# B A E A E A E B E B

Love, sister, It's just a kiss away, It's just a kiss away
It's just a kiss away, It's just a kiss away, kiss away, kiss away, yeah

9/02/2005
George Zachar on Fed Points

Goodwill is very important in a political culture driven by images and emotion. Most of what Washington does is image-oriented, not real world-oriented, so this fits in perfectly.

9/01/2005
Big Al Appreciates the Heroism of Business

I was dining at the bar at Garlic Mike's (great Italian place just outside Gunnison) when I struck up a conversation with the older gent who sat beside me. He was from Oklahoma City, and many years ago studied agriculture at Oklahoma State.

"Agriculture?" I said. "Then you must have studied statistics."

"Yes, indeed. We had lots of math and statistics. And we used to do our calculations on a MonroeMatic calculator." He then described the manual operations needed to do simple calculations on it.

In my comparative youth and expansive ignorance, I had never heard of a MonroeMatic, so I did a little research and found this vintage calculator site and the Society of Exploration Geophysicists - Virtual Geoscience Center.

And here's a story about counting and the MonroeMatic:

"In the early 1940s, Nicholas Fattu was the leader of a team at the University of Minnesota working on some statistical calculations involving large matrices. He brought about ten people together in a room, each of whom was given a MonroeMatic desk calculator. These people worked full-time for ten months in a coordinated way, carrying out the computations and cross-checking each other's results as they went along. About twenty years later, Professor Fattu redid the calculations on an IBM 704 in twenty minutes."

Helps me appreciate my laptop.

Monroe is still in business!

"I should like to have this company noted the world over for its pull together spirit, its liberality and fairness to customers. You can be sure we intend always to have the best machines." J. R. Monroe, 1883-1937

9/02/2005
A Perspicacious Spec Reads the Newspaper, a Continuing Feature

CLOONEY'S ATTACK ON AN AGE OF DISHONESTY
Hollywood star GEORGE CLOONEY has slammed modern broadcast journalism, because he fears viewers are fed lies they want to hear instead of "a common truth".
He recalls, "When I was growing up there were three networks and basically the same information. Now, because we've fractioned into little pieces, you go look for the things that reinforce what you already believe to be fact and don't get a common truth."

The "common truth" is a common theme now on the left and in journo-land. There is only one truth in their view, and anything that impedes their ability to impose it on the masses is an evil allowing amoral conservatives to unduly influence those who should be under the sway of informed elites.

9/01/2005
James Tar on the Open Road

Last week was one of the highlights of my life. I got to live out one of my childhood dreams racing around the Southern States in my dream car, a 1978 Pontiac "Smokey and the Bandit" Edition T-Top Trans Am. I saw most of northern Georgia and southern South Carolina. The BBQ was good, and so were the people I met along the way. Every hour or so a large semi would blow the horn and the trucker would yell out, "Go Bandit! Go!". The weather started getting fierce Friday afternoon as Katrina started to show her curves, so I decided to abandon Georgetown, SC and head out on Highway 521 for 95 North. I had a long way to go and a short time to get there.

A speculator learns a lot when out on the open road: wondering off a chosen road can bring about all sorts of randomness. I did meet a few stray brides along the way. It was out on a farm road heading north when I came up with the following scenario/question that I feel is a good gauge of a speculator's ability to successfully navigate the markets for profitability:

You are out on the open road, on a two way highway, without radio or the latest weather forecast. You have no idea what lies in front of you. Do you take the T-Tops off? How do you know what the weather is like in front of you?