This month's winners:

• $1,000 to Andrew Moe: "Bullish on the Big Easy"
• $500 to Jim Sogi: "Drowning"
• $500 to Phillip J. McDonnell: "Competition"

8/31/2005
From Alan Millhone, Ohio

Hello Mr. Niederhoffer:

Last night I watched the news and how the oil drilling in the Gulf has been interrupted. This morning I leave the house and see gasoline over $3.00 for regular (as I suspected). Food prices will now soar and Winter heating costs will go through the roof.

We had another renter leave and now have 6 vacant out of 31. Most people wanting to rent one of our units cannot come up with the deposit money at present. Times are hard for many persons in the USA. The war is killing our economy and our young men among other things.

I voted for Bush the 2nd. time around, but am disappointed with him to no end. Government imposed price controls ? Probably would create more 'shortages' and you will have long lines at the 'pumps' as we did during the Carter years and the 'fuel emergency' .

I will continue to buy gas as needed and will travel to tournaments as I have been. I don't have the answers ... I will leave that to you and your guru's

Regards:

Alan

8/30/2005
Fed Funds Probabilities, sent in by Bill Konrad

Dear Victor and Laurel:

My recent work has led me to discover methods for determining when the public sentiment is clearly out of line with logic. My endeavours have begun with the Fed Funds Futures and the Eurodollar options.

Using a few 'extraction' techniques, it is possible to determine the implied probability density function (PDF) for various dates in the future regarding interest rate hikes/cuts by the Federal Reserve Board.

Using the binomial model on Fed Funds Futures, we can calculate the probabilities of various hikes quite simply:

TRpost = p(TRL) + (1-p)(TRU)

TRpost: Target Rate Post-FOMC
TRL: Lower bound expectation for Post-FOMC
TRU: Upper bound expectation for Post-FOMC
p: Binomial probability of TRL
1-p: Binomial probability of TRU

We then re-arrange this equation a little bit to get:

p = (ETRpost - TRU) / (TRL - TRU)

Quick example: If the current target rate is 3.5% and the Fed Funds Futures are trading at 3.3%, then:

p = (3.3% - 3.5%) / (3.25% - 3.5%)
p = 0.80, 80%

This is just one method. By using other PDFs derived from Eurodollar options, one can attain a better grasp of the true probabilities out there. Maybe even find a way to arbitrage it, but my research hasn't taken me so far just yet.

In conclusion, I thought I would send this in so the assembled Specs may gain a glimpse into what their peers are thinking out there. By realizing those moments where the doomsday traders and the illogical demon of fear have taken a hold of the market and driven probabilities to where they don't belong, we are able to step up and take a living from the market.

When I discover more, I will write more, but at the present time I am learning some statistics, as I just turned 18 years old and have never had a chance to learn some of the math to take this to the next level.

Thank you for the endless fountain of knowledge your site has provided me with over the past couple of years.

Sincerely,

Bill Konrad

8/23/2005
Leonard Lerer on prediction

Dear Victor

The holy grail of speculation is prediction. Having accepted that there is no way of consistently and profitably predicting, traders are forced to seek ways of optimizing their market interactions/speculation. Here is where reading The Education of a Speculator and Practical Speculation make a real difference (and I am not just saying that to be nice).

I believe that it is possible to predict profitably - that is to be over over 60% correct in deciding whether a commodity price/index will be up or down the next day or next week. When you predict, you literally put your head (or any other organ) on the block, because you have made a clear, irrevocable decision and stated it upfront. Hence there is no back testing or fence-sitting (the domain of experts and analysts).

To predict, we need new tools - mainly borrowed from social sciences, that permit modeling the complex interactions that constitute a market and thereafter "scoring" that market. I believe that this is a new discipline that I call qualitative finance (which has absolutely nothing to do with behavioral finance).

Prediction is pure deconstruction - all that counts is the results and hence I am unashamedly plugging www.forexpredictor.com which is a "predictive community" that gives daily forecasts of the EUR/USD rate. This is a working example of a qualitative finance algorithm in action. Similarly, if you want to see the early results of a foray into predicting the DJIA, oil price and EUR/USD on a daily/weekly basis - take a look at the Performance page of www.marketforecastor.com

Best regards

Len

8/15/2005
Martin Lindkvist writes in, inspired by an article in the Wall Street Journal on how to find a good hedge fund:

I don't usually read business papers, apart from trying to quantify some headlines and such every now and then, but there were two interesting articles in the August 8th issue of Wall Street Journal that I got on the plane when traveling home from the Spec Party.

"Unlike your friends, who you want to be Renaissance men, in a hedge-fund manager you're looking for the guy that doesn't have a personality".

I posit that it for the the average investor is as hard finding predictive indications of which fund will perform well, as actually finding the investment and trading strategies that will perform well.

Another article, "For Kuwaiti Women, A Day at the Market Means Buying Stock", talks about how the amount of women registered to trade stocks as individual investors has tripled since 2003.

I think this is great news for creating equal opportunities between men and women in the region, although I was bit saddened when the article revealed that the women had got their own segregated trading floor.

Next their trading secret was revealed. An exchange official explained: "They don't speculate, they do their homework and study the companies."

Yeeez! Why didn't I think of that!

The exchange official continued: "They're the kind of investor one likes to have around."

Well, I think I have to second that....

Ms Al-Mu'min concluded: "I confess, I can't cook properly when I lose on something. It affects my whole psychology."

Well, let us hope that the market and the researched companies continue to rise, because otherwise the problem might be not of being able to cook properly, but actually having food to cook.

Martin

8/2/2005
A new Muse

As per usual 'Letters to the Editor' have been amongst the most valuable contributions to the site in the recent months. In order to augment this, to enhance reader feedback and encourage the muse of good thinking about the markets, we are instituting a prize of $1000 each month for the best contribution from a reader to 'Letters to the Editor'. The final decision will be made at the end of each month, starting August, by the Chair and the Collab.

Most recently a Reader writes in with some difficulties he's had trading the dollar/yen, and some ideas he has about regularities that seem to appear when there is an acceleration in the rate of change - with a tendency for subsequent mean reversion over and above that which would be a necessary consequence of random numbers based on the regression effect documented by Stigler in the great book Statistics on the Table.

One answers as follows;

I have found that the best way to analyze the dollar/yen, dollar/euro, Southeast Asian currencies, the rand and the other components of the baskets generally used to track the movements of foreign exchange is that whichever way you have a position, the markets will move in an opposite way, as the banks would have that position and the banks at the end of the year must make $50 billion-$75 billion a year on their trades. So every dollar you invest must be dissipated at a proper rate into their firmament whilst leaving you with hope. I could elaborate further concerning the bid-ask spread, the running of stops, and the total irrelevance of which side you take. Vic

8/2/05

Letter from Professor E, regarding the Doomsday Address:

Vic,

You are such a bull that I have a question for you. If investors decide you are correct, can we then anticipate an immediate upward correction in stock prices, followed thereafter by more moderate returns?

Dear Professor E,

If you only would study the results of your work, and not try to denigrate the numbers with gratuitous explanation of why they happened related to dividends and risk preferences, then you'd be able to tread the heroic path to the Elysian fields that you deserve, without recrimination.

Your question to me is hypothetical. There is more negative sentiment now about the market than ever before, and this always happens after a 5 year period where the market is below its previous level. Testing such periods, or any similar ones shows the rate of increase is about 1.5 times the norm that your studies have documented. Such quantifications would be a better use of your good efforts than attempts to chisel down your results by 2 or 3 %, thereby setting a very bad example for the many who follow you that hate the enterprise system; especially those that Schumpeter writes about.

Best Vic

8/2/05
From a Reader-- Regarding the Doomsdayists:

WORD UP VIC!

They cant stand to watch people prosper, and, yes fail on their own accord. They see themselves as a divine shepherd. And, as you can see currently, when they see their number of sheep dwindling - the more fanatical they get. The individual is the most powerful source of energy on this globe - that is why, as you know, they must control it. Thank You Vic. You are but one of many individuals who have taught me that. The list is many and the language, and topics differ, but never the conclusion - free people always prosper.

Chad "wannabe pittsburghphil" Rich Durham, NC

Dear Chad:

Thanks for those kind words. And like the football team down on its last legs having to resort to the Hail Mary pass, or Bill Tilden forced way off the court at the side trying to go for a winner at the base line at such a sharp angle it never cleared the net on the court, the doomsdayists are testy and tense. They point to such things as declining intentions to purchase back to school items, and the reduction in manufacturing activity in Philadelphia in July.

Vic

8/1/05
Bill James and Randomness from Galen Cawley

Dear Vic and Laurel:

There is an interesting article by Bill James of Baseball sabrmetric fame entitled " Underestimating the Fog"

No doubt you are already aware of it in your far-ranging studies, but if not it may be of interest to you. In his essay James revisits with a critical eye some formerly revolutionary conclusions that have now become platitudes, and finds them less than certain.

Here are the salient points:

1.  The use and abuse of statistics to distinguish between persistent and transient phenomena
2.  The dangers of combining unstable statistics to create an unreliable composite indicator
3.  His observation that "randomness is operating on a vastly larger scale than the statistic can accommodate." [gee, where have we heard that before as used against trend followers]
4.  The potential fallacy of assuming that random data is proof of nothingness.

I think it is admirable that James is willing to revise his own opinions, despite (or because) they are now accepted as gospel truth by some of the public. He's a bit of a contrarian.

Dear Galen:

I have read the article by Bill James and sent it to Stigler for comment, but as far as I can see he has no understanding of the variability in statistics and the ways that professional statisticians unravel the regularities from the random components. He notices two sources of variability, one related to differences between means, and another related to the varying weights of skill and luck. Statisticians deal with these problems on an every day basis and have developed a myriad of ways for estimation and confidence, all of them relating to the variability of the observations, and the differences in means relative to the variabilities. He makes no effort to unravel these factors but just throws up his hands and overturns his previous conclusions. Hopefully he does a better job of advising his boss on his futures trading than on the statistics of baseball differences.

Vic

8/1/05
Letter to Doomsdayists

I woke up to a beautiful sunny summer morning in Chicago and the first thing I read was Victor's uplifting and inspiring essay. If the doomsdayists are not swayed by this, all hope is lost for them. We will always have crashes, calamities, etc., but as history shows, man triumphs over adversity. Adversity steels us and makes us stronger and better for the experience. Inspired, I am off to make my Hungarian cucumber salad for a BBQ I will have later for the family. (If the Hungarian doomsdayer were to taste my cuke salad, he would surely abandon all thoughts of woe and doom, and leave the dark side for the side of good and optimism.) Thank you for such an elating and inspiring essay.

Thomas Miller

Letters to the Editor: Archive