Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner


to the Editors

 April  2006

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Notice from the Editors: Competition for Contributions

Daily Speculations is dedicated to the scientific method, free markets, ballyhoo deflation, value creation and laughter. The material on this Web site is provided free by us and our readers. Because incentives work better than no incentives, each month we reward the best contribution or letter to the editor with $1,000 to encourage good thinking about the market and augment the mutual benefits of participating in the Daily Speculations forum. Prizes are awarded at the end of each month by the Chair and the Collab.

Past winners

MSFT and Counting 101 Extra Credit, from Steve Leslie

Keep away from people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great. -- Mark Twain

I want to make a few quick bullet points here.

Microsoft the company is a great cash machine. The cash they spin out is unreal. It has also been a terrible stock to be an investor in for the last six years. For what ever reason.

Big company, great company in many ways, lousy place to invest your money.

I don't know if it's a good price to buy here, it may or may not be.

If an investor or spec. finds something that works then I say stick with it. Some believe in T.A., some are strict fundamental players, and some are feel players. Always play to your strengths.

Emerson said "To a hammer everything looks like a nail."

Vic likes to trade without his shoes on. Pete Maravich wore the same socks in the pros that he wore in high school as did Larry Bird. Jerry Rice had an "exact" way to dress before a game. Golfers use the exact same setup before every shot they take. So do baseball players. Michael Jordan had the exact same routine before every game. Tiger Woods wears a red shirt on Sunday. Does it make a difference in their results. In their mind it does and that is all that matters.

The point I am making is. If you think it works then use it. Then back test it for the results, and keep records!!!!!!!!!

Everything works and nothing works. And things that once worked don't seem to work and vice versa.

If it were easy then everybody would do it and everybody would be rich. Wrong if it were easy then there would be no value to be exploited.

In the end it is your results that count not anybody else's. Focus on you. Maximize your energy.

Res ipsa loquitor -- the facts speak for themselves. Bill Parcells was more blunt. He said your record is what it is. I had a coach who once said "talk less and perform more."

Happy hunting.

An Unexpected Outcome of the Education, by Sushil Kedia

In the 9th standard of my schooling, it was ingrained on my mind that a man's best friend are indeed books by Dr. A.K.Roy who used to teach our class Mathematics. Since, then one has carried with oneself most of the good books one owned ever in life. Amongst these books that I often get back into with some pride stands The Education of a Speculator.

I had started reading the book with the expectations of becoming a better speculator. However, in the few years since first reading this book my parents have felt I have become a better son. Hardly one realized through the grown up years that there is more to being a son than what one has been. One lived in assumptions of having a lot of love for one's parents and had an all-imbuing sense of total gratitude and happiness for having my parents as my parents. But, all along in between the lines of The Education of a Speculator there is an all the more important education to be a better son. Mildly yet certainly it was getting clearer in the first reading where was I lacking.

The specifics of changes appearing in my relationship with my parents over recent years may have been subtle to enlist, but I know when they say you are an ever-improving son it means a lot more, since the quality of voice coming from the other side of the phone when mom and dad are on the line from Kolkata tells me more than what words can.

I write this on the list to share a situation that has made my family happier, ever more satisfied and harmonious. My father who has had been a sixth generation speculator himself has been reading the Ed Spec slowly each day a copy of which I sent him recently. When I was fourteen he taught me how to read the stock quotations pages. Says he is enjoying what I sent him recently.

Let Us Count our Stagflationary Ways, by Kevin Eilian

I think back to when free trade and a strong dollar were the hallmarks of none other than trader Bob Rubin who knew that you needed foreign price pressures (depending on proximity to potential GDP) to restrain emerging inflation...now look what we have...

  1. Nobody is talking about a strong dollar. If anything, we are trying to weaken it against China and others.
  2. The current "war" against the oil companies is a travesty. To hide the confiscation (i.e. massive change in incentives), they are talking about doing away with LIFO/FIFO accounting which serves to lower the "cost of goods sold" on the income statement- only problem, it would hit machinery companies, textile companies, drugs companies and others (not to mention that it would decrease the incentive to find new reserves). Does anyone ever talk about how increasing the cost (decreasing the incentives) of corporation benefit consumers in the long run?)
  3. Taking a wholesale whack on immigration as labor markets are tight and inflation emerging.
  4. Potshots at Wal-mart and other main bastions against inflation.
  5. The increased talk of our trade deficit, without mentioning that it is still (even with huge energy component) less than nominal GDP growth or even if a positive "deficit" is a desirable thing (Japan?).

All this talk is also crowding out the most meaningful of anti-inflation possibilities- a massive tax overhaul which raises the long term economic "speed limit." The war on terror, war on oil, war on immigration has now overtaken this possibility.  Unfortunately the administration went for social security first before tax reform but that's for another post...

The Only Man in America, from Tyler McClellan

I suppose I am the only man in America, cause for great introspective concern, who values Bush as a great president, increasing in nobility throughout the duration of his term. Perhaps it is because he is the first president since Woodrow Wilson not only to believe in liberalism, but to fight for it at the cost of many American lives. Men older and wiser than I might say Bush is operating at the level of a child, but even so I must admit that as a young idealist I am constantly forced into the position of saying, yes but Mr. Bush's position is so heroic so American. To believe that one country can be an explicit and active force for good in the world day after day, is perhaps so myopic, but is it not also so admirable?

I for one, cannot imagine the countries of Europe rallying themselves to great casualties for an idealistic cause that they have long since abandoned. I can't imagine Mr. Wolfowitz or Mr. Victor Davis Hanson being a leading intellectual in other countries, and I think they are much the worse for it because Mr. Wolfowitz taught here at Yale and was widely regarded as the most intelligent faculty member, and Mr. Hanson has spoken here when I have been in the audience and the erudition with which he embarrassed his more liberal opponents was eye opening not only to the conservatives in the room but also to all present.

In sum I am inclined to the opinion that Bush is too dumb by half, certainly the enviable position when one compares that to being too smart by half.

The President of the Old Speculator's Club responds:

This thread reminds me of 1964 when something like 1,700 psychiatrists, who had never even met the man, judged Goldwater to be nuts. Currently, all sorts of legislation and bureaucratic pronouncements are being foisted upon us (specifically regarding global warming and second-hand smoke) based on "junk science". Speculation on Bush and his alcohol problems (or lack of them) makes interesting parlor talk, but it, too, is junk science. When it comes to his high opinion of Bush, I'm with Tyler on his stance regarding Iraq, Iran, and terrorism. He is the right man at the right time. Anyone who hasn't read Bat Ye'or's "Eurabia: The Euro-Arab Axis," can't appreciate how important it is to refuse to concede a single inch to the Islamofacists. On other issues, especially those with constitutional implications, I place him right next to FDR in the pantheon of The Great Usurpers of Rights.

Coauthor Wanted for Econometrics Paper, from Adi Schnytzer

I'm looking for a coauthor to write a paper which presents a new estimation technique which is a cross of some kind between ordinal logit regression and conditional logit regression (ologit and clogit in Stata). He/she will need to know how to derive the relevant likelihood function and thereby the estimation technique, preferably as an ado file in Stata, but anywhere that works will do.

Its a Small FREE World, by J. T. Holley

I had the opportunity over the past two months to have something happen that is rather unique and rare, at least in my life that is. I had an appointment with a client in the Roslyn section of Arlington, VA. I randomly walked to grab a cup of Joe and stumbled upon Freedom Park currently being refurbished. Amongst the various things were large sections of the Berlin Wall and biographies of the artists and stories of the men and women killed trying to go from east to west. I cried standing alone there in the rain knowing the pain felt by the loved ones who found out that their brave family members didn't make it. Then ironically while rushing to make reservations visiting a fellow speculator at a Madison & 53rd Ave restaurant came square upside another section of the Berlin Wall. It's like it purposefully stared me down upon first glance. How many pieces are here in the U.S.? I sat alone during dinner, observing the people around me and thinking of that one section of wall and what it represented and why it stood now in a courtyard. Leaving, I felt compelled to touch the concrete and say a short prayer. I know that during '89 when it came down I was a clueless freshman in college that had no idea of what it meant at the time. Probably didn't even catch the headline? Today I see what importance and the symbolism that such beautiful destruction represented. Freedom is such a powerful thing. The other hard thing to believe is that both viewings and being able to touch the "concrete" of the different sections of the Berlin Wall were followed by having dinner either directly with a fellow speculator or sitting down at their establishment. Thanks Roger and Tony! These sites are deeper than even "teaching someone to fish for a lifetime" if you can believe it.

Jeff Sasmor reflects on a trip through the region:

This brings to mind something that happened to me in 1972. I had just graduated from college and my father gave me a round-trip ticket to Europe, a backpack, and $1K and I spent the summer hosteling around much of Europe: England, Italy, Switzerland, Germany, Denmark, France, Spain, and Portugal.

One of the most interesting places I went to was East Berlin. I met up with my girlfriend and we went thru Checkpoint Charlie in W. Berlin.

It really was like being in another world. Bombed-out buildings all over; I had never seen anything like it. People were strange - lethargic, almost. We got lost a bit and found ourselves back on the 'wrong' side of the wall. We approached a guard tower but noticed that machine guns were being pointed at us. We backtracked!

My girlfriend spoke some German so she asked someone how to get to Checkpoint Charlie. The fellow barked something back at her. She looked a bit stunned; she told me that the guy told her to f##k off.

We finally managed to get out of there! We found W. Berlin to be a really nice place, though.

A day or so later we took the night sleeper train to Denmark. The compartments had pull-out seats that we could turn into bunks - fairly comfortable.

Unbeknownst to me, this train went thru East Germany. In the middle of the night the train was stopped. Into our compartment burst something out of an old movie: a gruff female officer flanked by two guards with machine guns.

They searched under the seats and carefully examined our backpacks. I couldn't figure out why. It was only later that I found out that people in E. Germany we imploring tourists to smuggle out their babies inside backpacks.

Been a long time since I've thought of that night.

John P. de Regt recalls the same country from another vantage point:

In 1973, I was an officer on a US destroyer, and that summer, we made a port call to Lubeck, Germany. Lubeck is one of the oldest port cities in Germany and lies up the Travemunde River, which was then the border between East and West Germany. East Germany was to our left, or port side, and it was quite revealing to us that the vast majority of the guns, lights, and fortifications were pointed inward, or to the East.

Quite revealing.

How Brain Cells Work as a Team, from John Lamberg

Thought this would be good fodder for minglings at the water cooler.

...The evidence pointed us to a more startling discovery, which is that buried in the apparent randomness there are subtle relationships between pairs in the group, and you can actually determine what the group's decision will be, based solely on an awareness of these relationships between pairs,... -- Science Daily

Full Article

A Letter From Orson Terrill in Honor of Arthur and Elaine Niederhoffer

I trade now. I take risks in markets. Tomorrow I'm leveraged in stocks, tonight my forex broker is against me, but they will lose again; You inspired me more than any other single person to lay my mind on the line, and follow with my money, granted opportunities are presented. Your writings expound how influential your parents were towards your many successes. I have discussed how impressive your parents are, when discussing Education of a Speculator, more than I do the astounding "The Old Trader and the Yen." I have even directed my own mother to observe the example set by your parents, to better guide her in raising my younger brother.

It sounds absurd, but I just closed my position early to ensure a profitable one, in honor of your parents. (I just learned of your mother's departure minutes ago) I will retire for the night to reflect how people we have never exchanged a word with can impact the entire course of our lives. May mankind flourish exponentially because of such fine souls.

Godspeed to Arthur and Elaine Niederhoffer! May we all ripple in our distant waters!

The Flynn Effect, IQ and the Wealth of Nations, from GM Nigel Davies

Do nation's IQs change over time, and are these related to GDP? There's some interesting research in this area with the highest average IQ coming in East Asia, some 5 points ahead of the average American. It makes one wonder if the US's past slave trade could be scuppering its future?

Gasoline Prices and Lobster, from Alan Millhone

At supper last night, my brother and I discussed this topic as we had the first time my Brother ordered Lobster years ago. After a bit of discussion I made the suggestion that the gasoline stations could do the same thing as some fine restaurants -- instead of showing prices on their billboards, simply list "MARKET PRICE" for their gasolines! This would eliminate the constant necessity of going out and raising prices every day. All of us have to have gasoline and the price will not deter us, so why list it? My Brother also spoke with a friend in the L.A. area yesterday who indicated he has seen $4.00 per gallon gas in his area.

Thoughts on Crude, from Bruno Ombreux

Every change in fuel grade requires a change in the "set up" of the refinery similar to what printers and metal fabricators have to go through each time they shift to a new production "run". The cost of the downtime for changeovers is more important than any temporary fluctuations in the spot market... -- Stefan Jovanovich

You're right in the sense that some refineries are geared to using sour crude and other refineries are geared to using sweet crude. And that US refineries are geared to producing more gasoline than gas oil/heating oil (that's why they have cokers). Whereas Euro refineries are designed to produce more gas oil/heat than gasoline (cokers are few, visbreakers are plenty).

So, what you say is true for long-term decisions, involving investments in conversion units, for instance, that can turn a sour refinery into a sweet refinery.

But in the short term and at the margin, I don't agree. Most refineries can adjust pretty fast to changing market conditions. You can change cuts in a distillation unit within one day. You can also choose to run sourer grades, producing for instance more heavy fuel oil, that you can export to countries that need it, assuming you're not landlocked. You can play with blending, for instance you can blend kero into gas oil, if the jet/gas oil spread is too low. You can switch off a cat cracker if upgrading margins are too low relative to conversion margins (a rare phenomenon in the USA, but not unknown elsewhere in the world).

Actually, the essence of a crude oil supply trader's job, is to determine constantly which crude is best value given the value of it transformed products for a given refinery.

All crudes trade at a differential to the marker crudes, WTI, Brent, and to a much lesser extent Dubai, based on their quality relative to those grades. Arbitrage from crude oil traders ensures that spreads always reflect value differentials for the marginal buyer. That's what the physical oil market is, a big spread market, relative to benchmark crudes. No one care about the flat price.

It is like the bond market. Bonds trade at spreads to reference government bonds. You only need one future contract per geographic area, which is what we have with crude, just like bonds. That way you get very liquid futures markets, where you can hedge at low cost. Too many futures markets and you lose liquidity, which is bad for trading costs.

Brief Questions on Investment Philosophy, by Isaac Mehary

"I don't ever believe in selling the stock market short." -- Victor Niederhoffer: The Biggest Stock Market Cons (Interview)

It is 100 A.D. Project the future of Roman civilization. Would you still hold the above belief?

If you use only one empirically adequate theory, how will you be able to imagine alternative accounts of reality?

Thoughts on the Trade Deficit, by Vijay Rajamani

I have read your numerous thoughts posted on the website on America's trade deficit. This morning's New York Times contains an editorial (subscription required) by Paul Krugman who paints a much more bearish picture on America's trade deficit. Would you care to comment?

It seems to me that if indeed your hypothesis is true that during times of strong economic growth here in the US foreigners need dollars to invest in our assets here, then it seems to me that we have a much bigger problem with our trade deficit if our engine of growth somehow comes to a halt. It is this vicious cycle that has resulted in presenting as favorable an investment climate here in the US as possible - which explains the lower taxes being pushed by the current administration in spite of no way to pay for them.

Psychohistory, from Mark Goulston

Great recommendation and while we are on the subject of recommendations regarding "psycho" anything, I would like to recommend you check out this site. It's the creation of England based David Straker, who I think would be a great addition to the list. Here is his bio.

President of the Old Speculator's Club comments on Saudi Outcry over Market Crash

Saudis go online to vent anger over stock crash.

At first I was surprised that the Saudi investing public would let their unhappiness be known so publicly. But I recall reading that the Saudi market, like others in the Mid East, are not opened to all, but strictly limited. If this is the case, the market would be short the ideal number of greater fools...and perhaps those that sold at the top are the vultures (not to mention the dealers suspended for market manipulation earlier this month). I imagine animal spirits would be real strong if the game you're playing is the only one in town and fixed. I'd also guess that most markets that appreciate 600% in three years might be considered overvalued.

Silver and Trend Followers by Jason Shapiro

I am no fan of trend followers, so much so that the majority of my trading process is to fade them when they are at maximum position, but I have to point out that I think you err in this silver play. You see, silver has not trended in 25 or so years, so trend following programs very rarely trade this metal. In fact on just about every trend following system I have tested, silver is consistently the worst performer. Of course this causes any self respecting trend follower to throw this market out of the model so it won't ruin back tested returns, or at the very least weight this market the lightest as compared to the great past trending markets, such as the yen (does this one even move anymore?) I would also venture to bet that those who do trade silver take exit points using some kind of mean reverting thing based on past movements. It is all these things that have caused the very rare situation where spec long positions have actually shrunk in the past 4 months as the trend has accelerated. Funny how the talk in the silver market today was how open interest only dropped by 3k contracts yesterday. I will argue that this is because there aren't any longs out there, merely those who want to be price contrarians and after being stopped out 20 times this month finally decided to wait for weakness to pounce. No, what will hurt the most people, even more now then when I last said so in January, is if silver just continues up. On a similar note, I took a survey today of 10 people saying without looking, how much is gold off its new high close? Average answer is 18 points with range from 12 to 25. of course the correct answer is 4 points.

Rogue Waves and the Markets Revisited, by Michel Olagnon

Dear Victor & Laurel,

I have very much appreciated your interest (and the prize) for my letter to the editor about rogue waves that I sent last February. I enclose for your attention the proceedings of the Rogue Waves 2004 Workshop. I am not sure that you will find much use in the main bulk of presentations, but I suspect you will enjoy the four last papers: they who have been facing extreme phenomena seem to show more insight that those who only try to find mathematical models for them.

Vic asked about my believing or non-believing in Sornette's work. As far as I can understand, Sornette states that market crashes are outliers with respect to the random walk model, and that some phenomenon comes out of nowhere some time ahead of the crash to create it. A number of rogue wave experts also state that rogue waves come from exogenous causes, that they are outliers with respect to statistics of linear waves because "they happen much more frequently than expected." Very similar views indeed.

Yet, Agnes Robin and myself showed in 1991 that when considering the total number of waves that were measured at Frigg field in the North Sea, there are no more extreme waves than the linear model predicts. Our rogue wave scientists have thus expectations that are way too low. The expectations may be wrong because they only consider a short time window about each extreme wave and neglect the long hours when nothing noteworthy happens and/or because they use a biased definition of a rogue wave. Typically, they turn a 1:3,000 probability that a wave will exceed twice the prevailing significant wave-height into a 96% confidence that such a threshold is valid for the maximum over any 20-minute (120 waves) observation. Then, they claim that observing as many as 4 rogue waves in a single 36-hour storm definitely shows that the linear model that we were 96% sure of is fourfold crap when it comes to rogue waves. Another model should thus be developed for those, and they offer to do the job for a small fee. As you may have already guessed, I don't like very much people with low expectations…

I believe that Sornette uses a similar trick to put the blame on the Dispenser of Crashes rather than on his own using an oversimplified model to determine normal extreme expectations. I am pretty sure that the random walk model exhibits significant type II (epistemic) uncertainties, already for "business as usual" conditions, so it would be rather easy to discard Occam's razor, add a few more parameters, and fit some bright novel complex model to a few crashes without actually checking its predictive power and false alarm rate.

On the opposite, as we showed in 1991 and verified later again, the models we have for waves exhibit only very small type II uncertainties. As a consequence, it is a hard but appropriate problem to find a correlation with some previous elements that would tell us when and where a rogue wave is more prone to happen. Of course, such correlations might exist, but might also not. After publishing several papers with negative conclusions, I think that correlations may be too many and each of them too weak, and related to phenomena too difficult to digitize or not represented as such in conventional models (for instance meteorological fronts displacements), for us to rely on computer calculated "instability indices" and the like.

We hope that trained meteorologists can someday be the alternative solution. We can provide them with powerful software to help them, but they will have to use human wits to extract intelligence from nature and come to a decision. At a time when meteorological offices try to get rid of humans in the making of forecasts, it is a rather contrarian attitude. Will mariners accept it, relying on good human brains rather than on costly software and computers?

I wish you to find useful features and as much enjoyment as myself in the markets/rogue waves analogy.

The Gambling Men Indicator, by Barry Gitarts

It has been helpful knowing a few chaps who are belligerent gamblers. These folks have a knack for picking stocks which become worthless and avoiding the big winners. When a group of these folks become very excited and put their money behind an issue I own, I often lose money.

Donut Testimony from a Single Woman, from Debra Moon

Dear Victor,

I have been doing my own personal donut analysis. Up until the last couple of weeks I have had a chocolate glazed donut each morning since January 21st. Something prompted my kicking the habit. My guess is that the swift return to caloric reality had something to do with daylight savings time, temperature increases, the impending threat of bikini season. I have also noticed that the past two weeks have been the dream of most single women. Simply put, it's been raining men.

I felt inspired by your challenge to identify trends and share from my personal patterns and experience. I'm a huge fan of patterns. My work involves the painstaking analysis of patterns to effect change. Family, marital, all relationship systems for that matter, repeat themselves ad nausea um. The key is to crack the code. Patterns in families have been quantified. Simple example, Aunt Mildred complains of her indigestion, Mom frowns, Johnny hits his sibling, Dad enters the room. More on this in the Pragmatics of Human Communication.( I can get you the author) Once a family formula has been identified the system can be entered. It might be fun to take note of your particular sequence at your next family engagement. I assure you'll be fascinated by the predictability. But I digress.

Relaxation increases the risk of ambush, no doubt. As a single women, ambush can be quite positive when interest is requited. Your analysis led me to think back on my experience with male overture. In the past two weeks I have been approached by three men. I have noticed periods of drought followed by periods of heavy male rain. What are the factors that create the pour, even to the point of aberrance. As a single woman, ambush can be quite positive when interest is requited. Ambush can also be quite negative when the energy turns lascivious as in the benign case of cat calls (which as I age I find embarrassingly flattering), public improprieties as males exposing themselves at beaches, flashers, even public masturbation.

When the market is bullish I have a hunch that women start less relationally. If one assumes, as I do, that women on a fundamental level want to be taken care of (and if they say they don't, they are lying) then I believe their patterns shift when the market is bullish. Feminist theory aside, women are essentially feminine beings and our patterns are inspired by our essential feminine essence.

I have noticed that in the last few weeks I have been feeling a little more sleek, could be the absence of donuts, a little more relaxed, a little more feline. Showing more skin perhaps. I've been feeling a state of abundance financially, almost, God forbid, like I don't need a man to take care of me. I have spent some money sprucing up the warm weather wardrobe and dusting off the perfume bottles. I think when a woman feels good she is much more fundamentally attractive to men. We start fanning our feathers, primping more, doing her own version of the seductive sarabande perhaps without even being aware of it. Now is this because she notices that men are in hunting mode because they are feeling rich and confident? Or is this due to her own feeling of self-reliance. I'll let you market analysts decide.

All I know is that I am approached more when there is a feeling of abundance in the air and most typically at Stop and Shop in the "produce" or paper goods aisle. Both departments interesting metaphors I'd say when it comes to "market symbolism". Each time I was not walking in my usual fast clip. Strutting my stuff, In a word, approachable. Easy prey to ambush-minded men relaxed and feeling parallel confidence generated from perhaps a different place. That's the good news. Once the siege has occurred, romantic risks taken, business cards offered, dates requested, that is when I would imagine the market is at greatest risk. I hold the cards literally and figuratively. Men are overexposed, vulnerable, naked. The power has shifted. The chips will fall where they may, so to speak. In reality, two cards were tossed, one kept. Bottom line, women have and always will control the market. LOL

My advice to male investors, when you feel most distracted by alluring energy you might be better attending to and courting your investments. The ambush energy may backfire.

My advice to females: if you need a date, add toilet paper and a tomato to your grocery list.

Isaac Mehary on Risk

Is RISK part of our conceptual and emotional map or a feature of reality itself?

On the Da Vinci Code, by Shane James

The The Da Vinci Code contains two quotes that the author, Dan Brown, attributes to Leonardo Da Vinci's notebook on polemics and speculation:

"Many have made a trade of delusions and false miracles, deceiving the stupid multitude", and:

"Blinding ignorance does mislead us. O! Wretched mortals, open your eyes!"

Without being dragged down into hidden meanings/did he didn't he say it/context etc. I think these 'quotes' can give us all a moment of pause to ask of our speculations:

  1.  What are my specific advantages over every other participant in trading the way I do
  2.  Do I really believe these techniques have an edge

My area of speculation is high frequency data (inputs) Foreign Exchange. I think we can agree a harder game than most.

What I know is this:

  1. No 'Edge' is sustainable if any of your 'indicators' are pre-programmed on any publicly available software.
  2. Nothing that one reads, directly, translates into sustainable profit.
  3. The 'not made here' syndrome is probably an excellent filter. i.e. if you didn't create your methods yourself then, please, forget speculation.

The most relevant example are the Doctor's books, Ed Spec and Prac Spec in which suggestion is more powerful than verse. Everything that I have applied from many readings of those tomes has been significantly different (approaching, at the asymptote, the opposite) of the words on paper. This reinforces point 2. , above.

And dare I play devils advocate, other than the wisdom available from books like Bacon's turf betting extravaganza...the lessons contained within are so elementary as to be completely useless in the premier leagues of speculative activity.

Darwin in the AMNH, from J.P. Highland

After attending the Darwin exhibit in the American Museum of Natural History one realizes the tough task that has represented the scientific advance of the human species.

It took twenty years to Charles Darwin to find the courage to publish his work, what was stopping him? Fear, Darwin was fearful that his work could offend many people and certain religious beliefs, as long as I know Britain was not among the nations that battled scientific advancement, but Darwin was afraid of being ridiculed.

I recently reread Carl Sagan's "Cosmos", and the same conclusion came to me, the human race has advanced thanks to a bunch of few good men. It is thanks to men like Darwin, Newton, Galileo, Copernicus, Einstein, Huygens, Kepler, Leonardo, Pasteur and the Greeks (sorry for not naming more but I spent most of my youth playing 9-Ball) that we don't live in caves. These men exposed their lives for our advancement, they defied conventional wisdom, ideas based on superstition and a mad crowd armed with pitchforks willing to protect their belief or favorite prophet. Many died in this quest and it scares me to think that many preferred to bury their findings in order to protect themselves and their families. Lot of knowledge could be awaiting in caves to be found.

For a dummy like me who is trying to evolve from a trilobite to a more advanced form in this complicated business of financial speculation the path is not easy. Most authors publish books with "successful" methods that have been touched by the force of the ever-changing cycles or are nothing but self-promoters that present methods that don't survive the scientific method. Not many authors have had the courage (balls) to test and expose those myths and superstitions that unfortunately make the common speculator lose his grubstake in the markets. I hope that these authors find in this life the recognition they deserve.

"...those explorations required skepticism and imagination both. Imagination will often carry us to worlds that never were. But without it, we go nowhere. Skepticism enables us to distinguish fancy from fact, to test our speculations. The Cosmos is rich beyond measure in elegant facts, in exquisite interrelationships, in the subtle machinery of awe."
(Carl Sagan)

Henry Gifford responds:

Whatever Darwin feared or didn't fear, the exhibit currently at the museum was the first one in modern times to find zero corporate sponsors, and was financed by passing the hat among brave individuals.

A Strange Sensation, from J.P. Highland

Last Tuesday afternoon HDI was slumping as the rest of the market but suddenly the stock started moving, a lot of buy appeared in the last 15 minutes making the stock move one dollar. I was aware that HDI would post their earnings the morning after, so I wrongly assumed that this move was the product of some information that leaked; so I decided to buy, hold overnight and dump the stock at the opening bell.

As soon as got filled I felt a strange sensation, as Herr Doktor Steenbarger would say, my body was anticipating something bad. I looked on the Internet for some some news and I entered a panic when I found that HDI is among the list of the Motley Fool's darlings. My panic was confirmed when S&P expressed their confidence in the upcoming earnings. The bar was set too high.

Gamblers die broke, no doubt, Artie was absolutely right, but it is hard to learn from other people's experience.

J.P. Highland comments on Trend Following

You realize that something is wrong with trend following systems when the book you see the most in a day-trading firm (hell's waiting room) is Michael Covel's "Trend Following".

Other authors that rank high in the hit parade are James Cramer, Steve Nison and Toni Turner.

A Tribute to James Sogi, from Sushil Kedia

As I perceive, Mr. Sogi, you have turned out to be the most inspiring learner on this list, clearly noticing an ever-strengthening trend in the intensity of your posts over the past couple of years. For the benefit of newer learners, consider enumerating a list of steps of reading you went through, the steps of practice you went through.

With a lot of other things already at hand, including the market, family and other vocations it inspires awe among other amazing emotions on how rapidly you have progressed. The information overload, the abundance of material and directions of knowledge that emanate from the list being if I may say fairly heavy it would indeed be a great learning sharing from you on how to eat the giant meal in the correct sequence of the courses.

A classification coming from you that helps in knowing what is for soup, what is for starters and having patience with not starting nibbling the later courses earlier and certainly waiting to have the dessert last will certainly help the existing and future eager neophyte diners become better coparceners in the nearly sinful indulgence at this ever-lasting dinner party.

A Couple of Links to Commodity Return Attribution Studies, by Dr. Zussman

Here is kissin' cousin study attributing commodity returns to backwardation. And this one about hogs and others out of the Yale Penn.

Livermore, and Six Degrees of Separation, from Martin Lindkvist

From "Life and Times of Jesse Livermore: Worlds Greatest Trader" by Richard Smitten.

"Edward Bradley, a well known gambler who would later go on to have his horses win four Kentucky Derbies. Bradley was quiet and secretive like Livermore, but he had a checkered past that stretched all the way out to the Wild West, where he knew Billy the Kid and Wyatt Earp. He was an army scout in the Apache wars and was credited with aiding in the capture of Geronimo."

And Livermore knew Martin Niederhoffer, who of course knew his grandson, who we by coincidence have have the pleasure of knowing. Let's see, 2, 3, 4, 5, and there we have Geronimo, Billy the Kid and Wyatt Earp. There's a nice slant to put on the bed time cowboy stories. I guess there is something to the six degrees of separation after all.

It's the Great Minds Vote of 2006, from Roy Miller

Who is the "Greatest Business Mind" in your city? That's the question Tina Ferguson of Dallas was asking. She figured the best answers come from those actively engaged in the marketplace. So, she's decided to find out, starting with Dallas, and moving toward other communities.

Tell your visitors to vote their chosen Great Mind. They can vote online and potentially win a pretty cool prize or two. Deadline for nominations is April 24 !!!

Tina's personal conviction is that every marketplace has those people who are Great Minds. Who are they? What are they? What does a Great Mind mean? Are these community "leaders" just workaholics, focused on bottom-line increases, commissions and business development, or are Great Minds something more -- a person balanced in life and work, principled and profitable? These are the gist behind the contest and Tina's "Great Minds get-away" for executives in May.

Comments on Chess, Checkers and Bobby Fischer, from Alan Millhone

Hello Mr. Niederhoffer:

I just now read GM Davies fine article. Last night I watched a segment on cable concerning the rise and fall of GM at Chess Bobby Fischer. It was interesting and sad to see how he became so introverted as he grew older. He finally developed a hatred of Jews. His Mother was Jewish and it was later discovered that his real Father was Jewish. It was sad to watch the show and see how he began as a child prodigy in Chess and finally ended up living along in an apt. on an island in Iceland and became an Icelandic Citizen as the authorities have a warrant for him in the USA. Mr. Fischer dropped out of school and became obsessed with Chess. He was not comfortable being around anyone educated as his focus was on one thing and nothing else. Education makes you more well rounded and better able to communicate and deal with any situation in life.

Personally I love the game of Checkers and do all I can to promote it to youth and to promote the ACF. Checkers is not my life though and I enjoy friends and family and recently was elected the Board President for our local Habitat For Humanity Chapter. There is much more to life than to become fixated on one thing only. Education opens many doors.

The Learning Curve: Java and R, from Philip J. McDonnell

As software savvy readers of the site may know there is a Java to R language interface package. It allows Java programs to make calls to R. One can take advantage of the rich Java libraries for text analysis and web page parsing to capture data for back end R analysis.

Sun sells its flagship Java Studio Enterprise 8 for $1,895. It is a full blown drag and drop GUI designer and Integrated Development Environment (IDE). However, for now the product is available for free. You do have to give them your name and email but no money. It can be downloaded here.

I recommend it highly. It allows a rapid and seamless source edit, GUI design edit and run cycle all from the main console window. It also has a good debugger.

Questions for the musical , from Kim Zussman

  1. While playing with a small orchestra on a cruise ship, what effect would obsessive attention to subtle harmony and synchrony have on your ability to hear the strains of creaking ice outside?
  2. In a risk-compensation sense, who earns greater incentive; orchestra members, the conductor, or the ship's captain?

Stefan Jovanovich on Counting in American History

Henry Gifford says below:

"What I can't understand is why people who actually count and use science don't have a bigger advantage over the rest of humanity."

One could argue that Americans' distinction, if any, in business and science is that they "count". Watching the statistical debates and discussions from the Kindleberger seats, I remain in awe of the near obsession that the people have for finding precise, mathematical answers. It is a passion that runs throughout our history. When Washington was at Valley Forge, he spent his time struggling with getting accurate "returns" - accountings of men and supplies. Counting was so important to Washington that he made Nathaniel Greene - the greatest field commander on either side of the Revolutionary War - his head of commissary. It was the obvious evidence of such labor - the daily counting of food, medicines, bandages, forage - that Washington and Greene personally supervised - and not any brave speeches that persuaded the officers and men of the Continental Army to persevere.

On matters that do not "count" people may well believe in complex theories just as they treasure conspiracy stories as pocketbook fiction for airplane rides. But, they usually end up following the people whose numbers actually add up.

The Negative Return of Gambling, by Dan Grossman

When I took Skinner's coarse in behavioral psychology, the pigeons invested their time and energy by pecking at a button which (sometimes) triggered the reward of a pellet of food.

The pattern of reward was varied by the experimenter, for example:

  1. Constant
  2. Not constant but regular
  3. Random

Random reward, which is the closest to a game of chance, caused pigeons to play the longest and most energetically. It is the random reward, including as Martin says the possibility of a large payoff, that is equally exciting to humans, especially those that like to play games of chance and games of mixed chance and skill.

Henry Gifford responds:

Dan's post explains why gamblers are not rewarded for taking risk: they don't take risks. They put money on things that are certain to lose, when odds and vig are figured in.

There was a study where two groups of people were asked to view slides of human cell cultures and decide which ones were sick and which ones were healthy, and come up with a set of rules for making such decisions. After each viewing and decision, each group was told "right" or "wrong" about their decision. One group was given accurate information, the other was given random answers - they were trying to make order out of chaos. The group that was given correct information soon came up with an accurate set of rules, the other group came up with a much more complicated (read: sophisticated) set of rules, which were worthless. After the tests were completed, the two groups were asked to compare their sets of rules and decide whose was better. All the people in the random group and most of the people in the group that received accurate information agreed that the more complicated set of rules was more accurate.

This is a similar and interesting insight into human nature, which I find helpful for filtering explanations of anything from investments to boiler efficiency. What I can't understand is why people who actually count and use science don't have a bigger advantage over the rest of humanity.

Gold at $600, by Tom Ryan

Could it be that gold touching $600 is the pilot fish for wage inflation in china and a subsequent revaluation in a certain currency? Just a random thought of a lonesome sunbaked spec on a watching paint dry day with a few prices near big round numbers.

Lessons Learned from The Chair, from Henrik Andersson

Here is my interpretation on some of the Chair's rules for speculation. This is all from memory, so please correct me should I be mistaken.

Strategic Thinking:

Risk Management

Operational Strategy

I'd like to end by adding a couple of my own:

A word on Immigration, from Marion Dreyfus

Immigrants and their past contribution/cost to the ambient society:

The waves of immigrants that landed on our shores were absorbed because they were known and accounted for. They were not an anomalous, floating googolplex of shady individuals with maybe wives and somehow children that supped on the societal teat when no one was looking. Moreover, the social services being rendered (in both senses, by the way, as this to me resembles the fatted spoils of rich irresponsible 'children' who give their adult earners the Nyaah Nyaah whenever they are expected to be counted in ways other than siphoning money from our coffers to the ingrate southern neighbor who, disgusting, eats at our foundations gleefully, forgetting that the foundation can be eroded just so long before the superstructure crashes on the heads of the rodents gnawing away, meanwhile raising the dust and dread level for all the inhabitants of the fallen structure...) today are far in excess over those returned to citizens 100 years ago. The advanced bankruptcy and near-collapse of our healthcare institutions catering to these miscreant-unfortunates-pirates-suck-offs is becoming such as normal citizens are being deprived of their services. The schools are sated with those at a huge remove from their legal cohort. The result? Teaching breaks down--the educator must attend to the entire cohort as to the least/lowest common denominator. So all children in the impacted areas are being under-taught and yet overextended. The services are many multiples more than they were when legal immigrants came in by orderly yearly increments. So the rape of our infrastructure is many times the former usage of these nonexistent or neonatal services years ago.

Stefan Jovanovich responds:

I recently spent some time with my mother, and we got around to talking about our family's immigrant past. Her family - the Davis and Evelyn clans - can lay claim to having been among the founding families of Alabama - other than the Cherokees, of course. That, as Mom puts it, is the well-varnished myth, and it fits the comfortable facts. Among the uncomfortable ones is that the lineage includes a Hessian deserter who abandoned the British Army when they left Philadelphia to march to Sandy Hook in 1779. There is even evidence that suggests Corporal Davisch took a bounty being offered by Maryland to encourage enlistments in the militia and then decided he would rather go south to warmer climes than spend the winter freezing in Morristown. By 1830 the Davisch descendants and others had become Davises and owned enough timberland to be able to go into the "pine spirits" (turpentine) business and begin acquiring slaves. By 1863 several of them had put their immigrant pasts far enough behind them to join some other Southern tourists visiting Gettysburg. By the rurn of the century they were fully assimilated enough to join Woodrow Wilson and other high-minded Democrats in expressing concern about "the German problem." (By then there were so many other, more recently arrived German-speakers in the United States that New York and every large city in the Mid-west had a German language newspaper.)

There is much more to the story, but I will save that for the next posting.

Laurel Kenner responds:

Albert Jay Nock said there are two ways to make a living: the economic means, where one works, and the political means, where one siphons off the efforts of others.

In America, the political means is fashionable nowadays. Politicians find it expedient to guarantee free education and health services for all, and those in a position to benefit find it expedient to accept the offers.

But most people prefer not to steal. Achievement and independence are what makes the heart sing.

Nock had no hope at all that his insights were applicable to govenrment. That is why he entitled his wonderful autobiography "Memoirs of a Superfluous Man." Yet he didn't feel himself to be so superfluous that he neglected to write down his ideas. "Our Enemy, the State" is particularly brilliant.

I dislike the stereotyping associated with the immigration discourse. It's unseemly to be angry with an entire class of people. Obviously, we Americans are all from somewhere else, and we all received help as we climbed up the stairs. I recommend "Our Enemy, the State" to anyone who would like to see the situation from a different vantage.

A word, or two, from The President of the Old Speculator's Club:

I believe too much weight is being given to the argument that the current unrest over Hispanic immigration is merely a re-run of previous battles and that, as in the past, we will be better off for it.

Today's immigration policies and goals bear no resemblance to those of earlier eras. The national origin quotas established in 1924 pretty much reflected the thinking that preceded their establishment as law. A given number of aliens from different countries would be admitted yearly. However, admission carried no guarantees that additional family members would be among future admittees.

Those who came before and after 1924 were a fairly hearty breed who understood there were no guarantees and no give-aways. They represented a self-selected elite who possessed the courage to risk it all in a faraway land. Although there were undoubtedly some wealthy individuals among them, most had to work hard and long to scrape passage money together; and chances of coming up with the return fare were slim.

In 1965, however, under the benevolent guidance of Landslide Lyndon, the law was amended and emphasis was now on family reunification - one in , all in. This was a godsend for many foreigners - for many in Mexico it was a "Get the Family Out of Jail Free" card. And, despite the "coyotes" who help many cross illegally, the American border is neither that far away nor that difficult to cross. Many have done it numerous times.

However, the major problem remains that the granting of citizenship to one can quite conceivably open the doors to an extended family of many. This is called "chain migration." Europe has recently had a wake-up call as European women have, on average, produced about 1.4 children. European women of Muslim heritage have averaged 3.4. There is a demographic dynamic in place that will not be denied. Am i worried about a similar occurrence here. No...except for "reconquista."

Few have heard of it, even fewer write about it, and it will never make our mainstream news. There exists Mexicans an organization known as "MEChA" - short for Movimiento Estudiantil Chicano de Aztlan - Chicano Student Movement of Aztlan. And they have a catchy slogan: "For the Race, everything. For those outside the Race, nothing." It sounds horrendous and if David Duke used it, he'd be jailed. For a softer, gentler interpretation you can look it up on Wikipedia.

Although I haven't looked it up, Wikipedia more than likely has a softer, gentler definition for "Jihad" also. But no ideology, regardless of its nobility or heinousness, can achieve any stature without the participation of key community members. In Calfiornia's recent recall election, Schwarzenegger, the Austrian interloper, had only one serious competitor: Cruz Bustamante. A member of MEChA as a youth, he refused to disavow the organization. In fact, about the only journalist who wrote the issue was Michele Malkin. Going a little further we find another member, Antonio Villaraigosa, one time Speaker of the California State Assembly.

What does MEChA hope to achieve? Merely repatriation of most all of Texas, New Mexico, Arizona, California, Nevada, and Utah. Each was part of Mexico until the Texan War of Independence (1835-1836) and the Mexican-American War (1846 -1848). Now I know my grandfather became hell- ben on taking and keeping Chicago's City Hall. Krisrock's grandfather most likely felt the same way about New York. But neither had any intention of transforming either place into Little Limmerick or bringing in the Lord Mayor of Dublin to establish policy.

And if we examine the two most recent presidencies of Mexico we find that MEChA is not struggling unaided. Ernesto Zedillo in Chicago in '97: "I have proudly affirmed that the Mexican nation extends beyond the territory enclosed by its borders and that Mexican migrants are an important --- a very important part --- of this."

Vicente Fox calls the areas mentioned previously as the "Northern Territory." Those, like myself, who are opposed to this new experiment are lumped together by Fox as part of “minority, xenophobic, discriminatory groups.” He told Sean Hannity that “They are not illegals. They are people that come there to work, to look for a better opportunity.” And, finally, this beauty, which would more than likely send me to jail, his people “take work that not even blacks want to do.” Bet he never used that line while running Coca Cola.

Samuel Huntington, In Clash of Civilizations, also notes a difference we never before encountered:

"No other immigrant group in U.S. history has asserted or could assert a historical claim to U.S. territory...History shows that serious potential for conflicts exists when people in one country begin referring to territory in a neighboring country in proprietary terms and to assert special rights and claims to that territory."

MEChA cannot be underestimated or ignored. The group is well represented on American campuses and in the not-too-distant future these individuals will not be picking grapes in California, working in nurseries in Tennessee, or pouring concrete driveways in Illinois. They will be in politics, they will be in law enforcement, they will be in the judiciary, and, yes, they will be organizing marches.

But still this would mean nothing if the rank and file Mexican immigrant was content with getting his shot at the brass ring. But the Pew Hispanic Center found (in 2002) that 55% American citizens of Mexican descent identified themselves as Mexicans FIRST. 25% felt primarily Latino or Hispanics, and only 18% said "I'm an American. A 2004 Zogby poll showed that 82% of America-residing Hispanics felt that all illegal aliens should be given citizenship.

So throw aside the arguments about jobs and economics. If these people wish to be Americans and embrace all the problems and responsibilities that entails then, fine, let's talk. But if this is just a convenient and economically desirable stopping place, or worse, the initial step in an expansionist Mexican foreign policy, than to hell with them.

A Note from William Haynes


I am flattered and amazed that you so thoroughly reported on me and my activities, but I suppose almost anyone can enjoy such attention these days. Permit me to update the report and make a small correction.

I am no longer associated with the ongoing Wright Flyer Project of the Los Angeles Chapter of the American Institute of Aeronautics and Astronautics (AIAA), as the Project Manager fired me last year. The goal of the project is to construct and fly a modified version of the original Wright Flyer that is a "stand off" replica; meaning that to anyone except an expert, it will appear to be authentic. But it incorporates a number of improvements that should allow it to be flown safely. These include a modern airfoil, a Revmaster engine instead of a Wright engine replica, and improvements in the pilot's controls.

My termination resulted from basic disagreements with the Chief Engineer, a Cal Tech Professor, on methods and design. I wish them success and safe flight. Also, the picture of me is not in the Replica, but in a T-Bird II Ultralight kit aircraft that I have constructed as a hobby and to continue recreational flying.

Thank you for your attention. Bill Haynes


Pleasure Reading on Vacation, By Lawrence Glazier

We have recently returned from the Dead Sea area of Israel. In the absence of internet cafes, this was largely a rest from trading (week 1 of options cycle), and an opportunity, perchance, to read. It is a rare pleasure to relax and enjoy novels which are all too predictable.

Departing from Stansted Airport "near" London, one goes to the airport bookshops for reading fodder. A curious thing, these bookshops have large travel sections full of guides to likely destination countries, guess which country is missing? For these bookshops it appears Israel does not exist, perhaps they were all sold out but I felt in my bones there was more to it. Unfortunately I had to purchase from such an establishment, Digital Fortress by one Dan Brown, famous for the Da Vinci Code.

Despite the fact that one learns that Dan Brown's work follows a predictable pattern, and is not Shakespeare, they are enjoyable in the same way as James Bond movies, and film will be a natural medium for him. Perhaps his first film (out in May, court action aside) will be followed by others. The first page always depicts a gruesome murder, the hero and heroine are introduced to the story, there are countdowns, codes, all the flannel of a Bond film except for the casino scene. Digital Fortress, while having a major logical flaw, is of interest to prime number aficionados. Ulam's spiral, and creative research, may find easier ways to factorize large numbers which would undermine the basis of popular cryptographic methods, I myself have long favored alternative techniques using iterative fractal algorithms which I used long ago to encode the password of customers of Fractal Music.

On finishing Dan Brown, one may continue with The Traveler by John Twelve Hawks. Interesting, especially for us as psychologically we may stand outside the norms of society, this book is about the dangers of pervasive monitoring of the public, and it made me recall that when I returned to London in 1984, I was unsettled by the new cameras that had been installed in the tube stations, the first of thousands. Cleverly he has merged the narrative with reality, he keeps his identity unknown, his lead characters have their own blogs to which the public have unwittingly added comments, sometimes of concern for the blogger's desperate plight. A good, spunky heroine. I enjoyed it.

Finally, The Spiritual Tourist by Mick Brown, a fascinating account of new age history in Britain and India, this other Brown has friends among famed musicians and gurus, and raises questions about the nature of reality following fairly convincing accounts of the abilities of said gurus.


A Potential Novel Use for Gold, by Dr. Janice Dorn

Tiny particles of gold could soon be helping to spot viruses, bacteria and toxins used by bio-terrorists. Researchers in the UK have found that gold nanoparticles are very effective detectors of biological toxins. The particles reveal the presence of poisons far faster than existing techniques which often involve shipping samples back to a lab. The aim is to integrate the technology in a portable device that could give instant answers at crime scenes.

More can be found at the following external link

Probability and The Galton Ball Machine, by Steve Ellison

Because prices are not random but are auto-correlated, a better model than the Sultan's Daughter problem is the Galton Ball (or Bean) Machine, one of which is at the Museum of Science in Boston. If the ball makes a "new low" by bouncing left three times in a row, it has a 50% probability of making a lower low on the next bounce.

I used a Galton ball model to estimate the probability of the low of the month occurring on any particular day. The model was simply that an up day was +1, and a down day was -1, each with 50% probability. For a 21-day month, the probability of the low of the month occurring on a particular trading day was:

1 0.123
2 0.063
3 0.051
4 0.043
5 0.039
6 0.036
20 0.063
21 0.123

Because of this U-shaped distribution, the Sultan's Daughter problem does not result in N/e being a favorable point at which to look for entry. Indeed, if I modify the Sultan's Daughter solution to account for the differing probabilities, I conclude that the best chance of buying on the lowest day of the month is to wait until the last day and buy if a new low occurs.

Philip J. McDonnell comments:

Mr. Ellison has presented an excellent example of the arc sine distribution. The u shaped distribution from 1 through 21 has its highest probability on day 1 and on day 21.

However, I would argue that the Sultan's Daughter problem is different from the arc sine. The essential difference is that each realization of the dowry is quite independent of the others. In the market, the price levels viewed as a sequential series are dependent upon the previous level. Thus the arc sine distribution rules. However, price changes are only slightly correlated and generally the correlation is negative. So, while levels of the market are dependent upon each other the dowries of the Sultan's Daughter problem are presumed independent. Thus I believe the original solution is the correct one for the Sultan's Daughter problem.

The Depths of a River, from Retha Roux

Duncan wrote:

"The idea of flow relates to other activities when you are completely engaged and performing well and in time with the environment around you... The rest doesn't matter. You have already caught a trophy rainbow, served an ace, made a birdie, sunk a three pointer or taken in the overplus on a nice trade. The end is just the beginning."

It has been said that to have gained wisdom is to arrive where you've started and to know the place for the first time.

Racing drivers describe a flow state or presence that they enter where time seems to become somewhat elastic and pliable and does not appear to pass in the manner we normally experience, enabling them to perform many maneuvers and to process countless thoughts and deductions with ease in a split second. Do they really reason "faster" or does being "in time" afford them the ability to more effectively recognize and adapt to the patterns that are playing out around them?

In the Chinese Book of Wisdom the whole of hexagram number 29 is water: "If you are sincere, you have success in your heart, and whatever you do succeeds."    

Caution now - "danger ahead", "science upheld", ice?

When the British Anthropological Society asked Richard Wilhelm how it was that so highly intelligent a people as the Chinese had produced no science, he replied that this must be an optical illusion, since the Chinese did have a science whose standard text-book was the I Ching, but that the principle of this science, was not based on the causality principle but on the synchronistic principle. (Do you buy that? How many mind tools exist? How many scientific methods? Define science.)

Interestingly enough, regarding hexagram 29, Wilhelm remarks as follows: "... man finds himself in danger, like water in the depths of an abyss. The water shows him how to behave: it flows on without piling up anywhere, and even in dangerous places it does not lose its dependable character. In this way a danger is overcome... In the heart the divine nature is locked within the natural inclinations and tendencies, and is thus in danger of being engulfed by desires and passions. ...danger serves a protective measure... But it is never an end in itself. Therefore it is said: 'the effects of a time of danger are great.'"

Like all great teachers, markets and rivers do not always teach us new behavior. A descent into a vortex often reminds us of what man may have forgotten and makes us aware of new exciting opportunities.

Wilhelm continues: "Water is constant in its flow; thus the superior man is constant in his virtue... And just as water flows on and on, so he makes use of practice and repetition in the business of teaching."

Would the Chair object if we referred to him as the River?

Shakespeare and the Markets, from Peter Krause

"And oftentimes, to win us to our harm, The instruments of darkness tell us truths, Win us with honest trifles, to betray 's In deepest consequence." (MacBeth 1.3.132)

The marvelous thing about Shakespeare is that his language combines absolute specificity with universal abstraction. Can an algorithmic trader read Banquo's words without thinking about the distribution of returns? Why do so many trades, on a limited data set, have a lopsided number of thirty bip winners, suddenly offset, in the tail of the distribution with a three thousand bip loser? The CBOT colloquialism encapsulates the same sentiment in a slightly different way, "I thought I was a genius, just picking up quarters on an empty freeway, and then, out of nowhere, I was flattened by a Mack truck."

Taking a longer view, maybe those tails are an essential part of nature -- like the boom-bust cycles in fruit fly populations. The pull towards mean reversion is almost an absolute in nature. Or maybe it goes back to Keynes' point about the wave and and the bubble -- a persistent anomaly in the data will be located simultaneously by any number of market participants who then massively overcompensate and invert the anomaly.

But Richard Simons probably has a systematic technique to detect the rumbles of an approaching truck. What would that look like? How does one immunize strategies against those pesky tails?

How Smart is the Market? by Henrik Andersson

In many games, such as poker, chess or in the old decision making game "rock, paper, scissors", you have to anticipate what the other player is thinking. Often you need to think many steps ahead; I think he is thinking that I think etc. If you apply the same logic to the market you can ask yourself, how smart is the market?

Let's take the last 6 trading days in Google as a case example.

S&P announced after close on Thursday  March 23, that the company would be included in the S&P 500 index at the close of the trading day Friday  March 31. The close-to-close percentage changes in the stock price after the announcement was made were:

 24-Mar-06 7.0%
 27-Mar-06 1.1%
 28-Mar-06 2.0%
 29-Mar-06 4.7%

That's a 16% increase in market cap over four trading days. Everyone was expecting such an announcement to come; it was just a matter of time. So the question is, if everyone was expecting the inclusion why did the stock soar 16%? The conclusion must be that everyone thought everyone saw this coming, so few bought ahead. People were thinking two steps ahead it seems like. On Wednesday, the company announced that they would sell an additional 5.3 million shares. This was clearly out of the blue sky, the following day the stock was down 1.7% (yes, I know such a move is probably perfectly consistent with randomness). On Friday the 31st, the share was going to be included at the close. For those who watched CNBC that day, you know how they kept going on about how the stock would fall the last 15 minutes of trading as the hedge funds probably had bought too many shares and needed to dump them at the close. They pointed to Yahoo, and how the stock topped out the day it was included, to give extra weight to their view.

What happened was, as you might expect, the stock soared towards the end of the trading day and ended at an even $390.00, up 0.4% for the close from the day before. So, if you had expected that people would think that the hedge funds had bought too many shares, you could have been a winner. Again the market was thinking two steps ahead it seems. If we know how smart the market is, we can get ahead in the game. So the question is, how many steps ahead do we need to think?

Letters to the Editors: Archive