Letters to the Editors July 2006 Write to us at: (not clickable). Please include your full name, and omit attachments

Notice from the Editors: Competition for Contributions

31-Jul-2006
England and the Culture Premium, by Kim Zussman

Observations on a recent journey to England:

One strong first impression is that black people of London seem noticeably less angry than in major US cities, and there appears to be more integration of classes and races from many countries (including shrouded Muslims). Friends we stayed with are in real estate, and they explained that developers of flats are expected to donate 30% of the units to the government, which in turn allocates them for low-income housing. Unused houses are often occupied by squatters, and it is legally difficult to dislodge them when an owner wants to renovate or rent the property. In addition, the 17% V.A.T and other taxes helps finance a large social entitlement program such that the un- or under-employed are quite well taken care of. Consequently, you see professionals and welfare recipients living in the same neighborhoods and buildings, shopping at the same markets, and using the same clean/efficient public transportation.

One hypothesis is that social remediation pays an anti-hostility dividend, but of course it is hard to disentangle this from centuries of American attention to guilt over African slavery.

Like the rest of Europe, people in England are noticeably more intense about life than work; these are considered as separate, and unlike in the U.S. you are not what you do. This manifests as longer vacations, and a missing sense of urgency in the workplace. With high taxes, as well as very high cost of living (food, clothing, fuel, housing approximately double Los Angeles), perhaps the struggle to get ahead is just too difficult, so why bother?

However there is something else in the air, recognized also in travels to Russia: a deep and prideful culture. In contrast to America's short pedigree, England has been colonized by various peoples for thousands of years, and the richness of this ubiquitously visible history seems to form a foundation that in some way supplements the standard of living. The average Brit is surprisingly well versed in art, music, history, and literature, and they identify with culture similar to the way that Americans obsess about competition, work, and money. The intercept of self esteem is higher in England. If you are poor and uneducated in the US you are much closer to intellectual, economic, and cultural zero. A similar pattern was observed in the intellectual elite. An elderly Oxford-educated artist, and his professional musician wife, lived in the country on an old farm estate. In contrast to the American dream life of building a business or profession, he devoted his to pursuit of the arts. On the farm he had built an out-building which served as a small theatre; where, after many hours of mandatory rehearsals, family and friends put on yearly Shakespeare plays complete with elaborately painted sets and professional musical accompaniment.

31-Jul-2006
Deceptions, from Peter Grieve

It seems to me that the most dangerous deceptions are not those in which facts are distorted (such as misrepresenting the demand function of a security, or misrepresenting one's title to the Brooklyn Bridge), but those in which the very roles of the participants are distorted. To quote the old poker adage, "If you're in the game for half an hour, and you don't know who the fish is, you're the fish."

In the Indian wars, most Federal defeats were caused by the Indians convincing the cavalry commanders that the commanders were the attackers, when in fact they were the victims. And it is well known that in most short cons, the victim thinks he is the cheater or con man.

Can anyone think of examples from other areas?

31-Jul-2006
Market Conditions Updated, from David H. Tracy Jr.

In Daniel Dennett's book Consciousness Explained he proposes a theory called The Multiple Drafts Theory whereby subjective reality is continuously updated. As the senses gather new information the brain constructs a new outlook about every second or so. This is not unlike continuously updated market conditions.

From the stand point of improvisational jazz an individual musician has to be ever alert to subtle changes in tempo, rhythm, model theory, accent velocity and the general mood of the other musicians. Every move by each person in the ensemble contributes to the whole. The music itself is randomly variating; there is no telling where the song will go. Like consciousness it is under continuous revision and yet it makes sense because the musicians play by specific rules. The music spontaneously takes on a life of its own.

In Richard Dawkins book The Blind Watchmaker he describes a spontaneous positive feedback occurring in one of his experiments related to evolution. He places a touch sensitive computer screen in a garden programmed to flash random shapes and colors. In short, the bees in the garden create pictures of flowers by touching the screen as their favorite colors and shapes evolve. Our senses mirror our environment. The markets also evolve into pretty pictures that mirror specific factors and events.

27-Jul-2006
Commodity as an Asset Class, from Henrik Andersson

In an enlightening article Julius Baer writes about the characteristic of the much referred to total return commodity index, (GSCI TR). It turns out that the out-performance over the last 35 years is overwhelmingly due to backwardation of the energy futures during the time. Crude futures currently trade with Contango, we might see tougher times ahead for the GSCI TR.

27-Jul-2006
Junior Dodge Ball, from Scott Brooks

For those of you that have seen Vic's indoor Squash court, you may have thought to yourself that it could also be used as a raquetball court. Well there are many creative uses for a squash court, and who better to come up with creative ways to use a squash court than two eleven year old boys.

My son David and Lack's boy, Austin, were making noise in the squash court on Friday. I went to see what they were doing and witnessed a new and creative way to use the court.

Then watch as the rules formulate and change as the game progresses. I am not sure who had the highest score, David or Austin, but they both couldn't stop laughing! What a genuine pleasure! What an experience!

Thanks to Vic, Laurel, Susan, Linda, and everyone that made the party possible.

26-Jul-2006
George Zachar on Ever Changing Cycles

I found the following article with a beautiful and succinct application of ever changing cycles, involving global climate dynamics.

... carbon dioxide is a driver of ice sheets only at the relatively small 23,000-year cycle, but not at the much larger ice-volume cycles at 41,000 years and approximately 100,000 years. In those cases he found that ice sheets instead control atmospheric carbon dioxide and drive feedbacks that amplify ice growth and melting.... [continued]

24-Jul-2006
An update on why people Buy and Hold, from Kim Zussman

Updating Marlowe Cassetti's Report using the recent 35 years S&P500 daily compounded returns (incl. dividends), I found that $1000 invested on July 23 1971 (back in those innocent days when all one could think about was the opposite sex, not cash, and languished hopelessly green of the correlation) resulted in:

Present value -- $12535.77
Value if skipping worst 5-days -- $21234.97
Value if missing 5-best days -- $9311.46

So there are two miracles here; compounding, and correctly predicting the top- and bottom- 5 days out of 8800. There are few who could predict 1 in 1700 type events (except by reading political tea-leaves), so for mortals there is really no use trying.

Perhaps market movements resolve into knowable and unknowable components such that K + U = B / H. So if you do not think you can dissect K from U, you buy and hold. And even if you have some insights about K, every interval's return has some large element of U, such that when you trade based on K, especially with leverage, and U goes against you, there is the associated pain and self-immolation that fuels the markets' long-term rise.

24-Jul-2006
A Spec Compliment ...

Wow -- I thought the piece by Steve Leslie about brokerages was eloquently spoken! I would be very interested in your longer piece, and your thoughts and advice, both for myself and my loved ones.

My mother died last fall, and a few months later I sold about 50K of her stocks, to pay expenses and disburse money to two friends she left money to. It did not occur to me to ask what the commissions would be, but they turned out to be about $530. When I questioned the broker about it, he said it is a 'full service brokerage'.

Meanwhile I have wealth management people approaching me and it is interesting, I spend more time thinking about the portfolios we manage at our firm than my own personal portfolios, which are therefore far from optimal. Not only that, but the various restrictions we have on trading our personal account make it difficult to implement many ideas. For instance, we cannot sell for 60 days, except at a loss. Our compliance officer claims this is 'best practices', but its brutal ...

24-Jul-2006
What Pumps You Up? An open letter from Dr. Mark Goulston

This is probably pointing out the obvious, but I have noticed that people who are able to remain motivated more of the time seem to lead more productive, successful, happy and satisfying lives. Those who have trouble, or are at least find it challenging to become and then sustain motivation, seem to lead less productive, successful, happy and satisfying lives.

Being more closely aligned with the second group, I have discovered certain activities that I may not want to do, but when I do do (without giving into negative or pessimistic thoughts), nearly always result in me feeling motivated, if not inspired. For instance, getting up and making myself attend meetings of a networking organization in which I seem to be welcome will nearly always pump or lift me up, (I usually describe myself as a founding member of the: "dread going, but glad I went" club of socially avoidant people).

What activities pump you up?

21-Jul-2006
Counting Rally Failures, a letter from Marlowe Cassetti

On Thursday the markets failed to follow through on Wednesday's impressive rally. Just recently we had another such failure after a good rally. Is this a good thing, bad or just noise? It appears this is a good subject for counting. Where is the market one month and six months after a rally follow-through failure? Likewise, how about a rally follow-through conformation? If this hasn't already been examined, I may take a shot at evaluating the rally failure puzzle.

20-Jul-2006
Packing Granular Material with Heat, a letter from Jason Schroeder

Nature: Department of Physics and Materials Research Institute, Pennsylvania State

We know that shaking a container of granular material packs it more tightly. Experiments using thermal cycles have the same result. Higher temperatures have a greater effect than lower temperatures. Performing multiple thermal cycles increases the packing (with diminishing returns). This result has been observed for a single cycle 10 degrees higher than room temperature.

A trading analogy anyone?

20-Jul-2006
Dissenting Voices, a letter from Laurence Glazier

One looks forward to the day when Israel can celebrate its own Thanksgiving holiday as do Americans. There is no indication of that day dawning soon, but I have great respect for the educational benefit of new technlogy as outweighing outdated cultural memes. However the evolution of human nature is another matter, and I am not sure I see much evidence of historical change there.

Just as a price chart is pulled back and forth by the great market wave, so our cultural and religious mores are shaped by our childhood, so to find what represents our true nature we might look to those values we hold dear that have always run counter to the prevailing trend and the cheering crowd.

15-Jul-2006
Testing Leading Markets, from Yuri

It is interesting to note that oil is hitting new highs but oil stocks are down. Which leads to the question, does the commodity lead the stocks or do stocks lead the commodity? How can this be tested?

12-Jul-2006
How do Market Prices Move?, from David Lamb

How do market prices move? What makes, let's say, the bond market move from 106 30/32 to 106 31/32? It is my understanding that when bid/ask are in place the participants either purchase or not purchase, depending on the attractiveness of that price. And since there are literally thousands of participants then the attractiveness of that price could be different depending on the participant. But the weight (if the market actually goes to that bid/ask price) of a particular move should depend on the sheer volume that is traded. Let's say a little trader (me) purchases a hundred bond contracts. Most of the time this purchase has a very weak influence on market price, but often it depends on the time of the trading day. Even if for the next five straight minutes 100 contracts are purchased in each minute, all bull contracts, this volume size would have little or no effect on market movement. I could be wrong. But what if a bigger fish comes in and purchases 1000 (or 5000) bull contracts per minute for the same period of time? What overall effect would this have on the market price? My opinion is that it would weigh greatly, and it wouldn't matter who the market participant was, would it?

12-Jul-2006
Anybody trading grains?, from Bud Conrad

Anybody trading grains? Wheat is way up. World supplies of both wheat and corn are at multi decade lows. Weather looks to get hot and dry.

12-Jul-2006
Producing a Hit Record is Creating Value, from David H. Tracy Jr.

Dear Victor,

Producing a hit record is creating value. One begins by selecting a good song. Careful analysis of the pop market will reveal cycles. Producing a song because we like it is like opening a position because we want it to be a winner. We have to take into account the trends we see in the pop charts. So our song is constructed for a very specific market.

We can compare the rapid growth in the Brittney Spears type pop market with the explosion of the currency market; very liquid, something for everybody and a tight spread (like a low cost computer production). Hiring a symphony is like buying into a large commission fund, more front-end expense.

New instruments are being developed such as the Euro. A musical equivalent would be the electric guitar in the 50's or the synthesizer in the 60's. Each instrument has a long history. Without the knowledge of this history we can only see a single time frame.

A producer needs all the latest gadgets but to use them correctly we need to know the old methods. With the computer based sequencer as our primary tool we can see an equivalent in our pc based trading station. The playback engine is a virtual multi-track tape deck. For each track we open a position. The old tape deck is like our broker whom we would have to call to put down any tracks at all (and remember that the studios of the seventies cost a pretty penny). Our trading station software gives us the advantage of recording many instruments (simultaneously or one at a time) and now we can monitor many currency pairs at a glance. We can adjust the volume for each instrument, however, in currencies we have to substitute volume for relative strength. Oscilloscopic waves give us the best view of our sounds. We can automate changes in the mix as the song progresses. If the volume gets a little hot we can back off incrementally or automate a mute for a particular track. On each instrument we have various effects that help us to understand the music in different ways. Compression is very much like a moving average. Multi-band compression is like multiple exponential overlays. Sibilance removers enable us to hear a track without being distracted by an occasional high frequency smear in an otherwise fine vocal performance. EQ is like a very specific support or resistance level. We have cut off EQ for a stop out and we have EQ sweeps for a trailing stop. We have many other tools to help us finesse our mix such as reverb, flange and phase shift. Also a limiter on each track.

A producer has to take into account the motivation of the Market Maker, in this case, the program director of the radio station. Payola is insider trading. Timing is everything. You have to select the proper release date and know when to pull a song and go with the next single.

In the end I'm not sure whether trading is helping me with my mixes or visa versa. One thing is for sure-the software is almost identical. I only wish I could rewind the market to record a better performance but if I do my homework and practice every day I can nail the solo on the first take more than fifty percent of the time.

Sincerely,

David H. Tracy Jr. aka "Todd"

10-Jul-2006
Momentum in Tennis Matches, from Craig Mee

I just heard a stat that in tennis,in a 5 set match when one guy wins the first two sets , ie trend begins, 85% of the time after losing the next two he will go on to win the match, even tho momentum you would think is with the other guy, interesting maybe when people get back to scratch they switch off.

09-Jul-2006
Missing the World Cup Final, by Paolo Pezzutti

Believe it or not, I'll miss the World cup final vs. France. I'll be in flight on Sunday during the match. I could not imagine the team would go so far when I arranged the trip. For an Italian, this is very bad! The team is doing really fine. If I can dare a comparison between football and trading, I would say that the first rule for a trader is learning not to lose. Italy kept risk at lowest level. That's the main quality of the team. The goalkeeper has been beaten only once in 6 games. Unluckily by a team mate! This type of tactic has always been a characteristic of the Italian football. But this time we have also many unpredictable forward players who make life very difficult for adversaries. The match vs. France will be tough. They are traditional rivals in Europe. Many French players have played in the Italian league. Tomorrow they will play with pride and motivation sustained also by motivations probably connected to the outrageous football scandal that has involved the main teams of the league. Motivation is leverage. In any quest. Besides technical skills, you need motivation and determination to reach the most ambitious objectives. In football, in the markets, in life. Forza Italia!

06-Jul-2006
Counting Inflation, by J.T. Holley

I have become an overly observant man since joining this dinner party and make my wife sick on the stomach counting a lot of off the wall stuff. I usually don't take notice with something until there exists three that stick out. These things have come to my attention in the near past:

• Garbage man raised rate two bucks per month twice in the last six months
• Progressive raised the cost of my car insurance 4 bucks a month
• Obviously the raising of fuel prices
• This one is the kicker for me being the "Tot Lot Chairman" of our neighborhood home owner association, Raising Home Owners Association dues 20 bucks annually.

The only reason they could give me for passing this vote was that "costs were rising". I asked what "costs"? They said "everything Mr. Holley". I asked "What's everything". They said "gas, insurance, landscaping, and most everything we need to keep this neighborhood clean"? I let them know that most of this stuff could be done by volunteers internally and we could save money or at least not raise dues. "They replied that they would put it into the suggestion box". The sad part was I was the only one who voted not to increase the annual dues. Who brainwashes these people?

Also, while on the topic, what numbnut came up with the "original idea" that you can slow down inflation with high interest rates? I know I'm not a Economist but isn't it insane to try to attempt to have interest rates dominate commodities? Can you make anything better but banks rich by raising rates? When we raise our rates all the other countries just follow suit, it's a financial lie it seems to say that we raise our rates to remain Globally competitive? Come on. When we raise ours they simply raise theirs? Aren't we simply the lending source for the World? That means we lower our rates they lower theirs? Am I missing something here? Can someone educate this hillbilly? Supply and Demand do a good job on their own without intervention it seems.

Alan Millhone replies:

I read with much interest Mr. Holley's article and have a recent item to add from my area of the USA. I live in Belpre,Ohio which is in Southern Ohio and right along the Ohio River and just across the bridge from Parkersburg, W.Va.

This morning's The Parkersburg Newsfeatured a front page article about Worker's Compensation costs hitting area homebuilders that operate in West Virginia. The article in brief stated that area homebuilders had been paying $7.47 per $100.00 of payroll for their workman's comp. coverage and it has now risen to $13.65 per the same $100.00 of payroll, an increase of 83 percent !! In the end the consumer will suffer the most with higher construction costs for new homes, room additions, etc.

Sincerely: Alan Millhone
Belpre,Ohio

05-Jul-2006
Baby Sign, from James Sogi

The son of a friend of mine is barely a year old and at that age lacks vocal chords and mouth muscles to speak English. However, his mother is teaching the infant American sign language. The infant can signal what he wants: I am hungry, I want to get down. Communication at that age. Imagine that. The infant has learned a number of signs and can communicate.

01-Jul-2006
Anyone for a Shrug?, by GM Nigel Davies

A colleague called me today to ask if I can take the book prizes to our next seminar. It turned out he'd been banned from driving for 6 months, no doubt due to the excess of speed cameras (always positioned on nice open roads with a 30mph limit) in Blair's Britain. Well, I suppose they've got to do something about those bastard capitalist 'polluters' who support support the oil industry, pay road tax etc.

The funny thing is that it turned out to have been quite a personal boon as my friend reported that cycling to his chess engagements had increased his personal fitness. And because there were less of them he was feeling very relaxed.

Well, there we have it, it seems that socialism can be very relaxing for those who contribute to the nation's GDP. And could there be a general law for the libertarians and capitalists amongst us?. That if we're feeling stressed and exploited we should simply shrug? Or even threaten to shrug?

I can well imagine life on jacket potatoes, cycling and playing correspondence tournaments via the local library's free internet access. Why make an effort?

01-Jul-206
On Currency Funds, by Mr. W.

From what I can see there are two threads in FX. Their are the classic trend following CTAs who after about 1 week all seem to have same positions and the corporate finance anomaly model that understands that forwards are very imperfect predictors of future spot and therefore carry trade profitable.

I guess I need to modify this as there is a very large intraday clientele.

I would be surprised if you boys could not find profits in here.

Bonds are difficult I fear because of all the cross currents in spread assets. FX is pure. A euro trades at the same spread as all other euros. By the way, this was pointed out to me by the new CEO of G##dman S#chs in 1988.

Vic had a great call on the S&P with his study on large movements between Fed meetings. I confirmed the Minister's lack of confidence in correlation coefficient, but I could not let a small sample size stand in way equaling my own record of 1 out of 1.

Suicide notes trading freely over here circa June 13th or so but could not find a floor high enough in a two story building and mistress breathed enough life back in to get us to wager again in July.

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