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March 2006 Letter and Contribution Awards
Daily Speculations is a benevolent forum to encourage good thinking about the market. Material is provided free by us and our readers. Because incentives work, and to augment the mutual benefits of participating in the forum, we offer awards each month for top contributions or letters to the editor. For March, we honor two award winners:
The winning posts appear in full below.
-- Victor Niederhoffer and Laurel Kenner
28-March-2006
Another Lesson Learned, by Rodger Bastien
As I toed the imaginary rubber I leaned in to examine the batter, my son. The stern determination on his face belied the gentleness in his 11-year-old soul as before me stood my little boy, tickling the underside of manhood. This was the first batting practice session of the spring but this was a winter where Carter had taken several large leaps through childhood instead of the baby steps I had grown accustomed to. There was something different about him, from the subtle deepening of his voice to the faint hint of swagger as he wiggled his bat toward me, imploring me to throw one down the middle.
I was not too sure about what kind of Dad I would be to my sons. I was almost relieved when my first two offspring were girls, as I feared I would morph into my father -- uncompromising in a quest to relive and fulfill my own unfinished dream. Aren't we the sum of our parental influence, after all? Funny thing, the lessons that prevailed upon me long after my dreams had disappeared were lessons not taught but absorbed through my less than perfect upbringing. These include:
"C'mon old man, throw one down the middle," Carter laughed, further stretching his transitional legs from child to adolescent.
As I wound up, I felt a tug of what to do versus what must be done and I threw the pitch a little harder but no less direct, plunking him lightly in his none too fleshy rib. Immediately, he glared at me with a look of both surprise and indignation. But then, just as quickly, it gave way to his little boy smirk and he stepped back into the box, another lesson learned.
29-March-2006
Easter Menu, from Tyler McClellan
To start, we get fresh bread from the baker and slowly boil chickpeas to make Crostini alla Toscana.
I follow this up with my all time favorite dish. Freshly purchased farmers market artichokes prepared alla romana, where we cut out the choke and the outer leaves and then trim the stem and dice it finely. Then you reinsert the chopped stem into the area vacated by the choke and cook slowly over low heat the artichokes in olive oil and water. If anyone has been to the eternal city where they eat carciofi alla romana by the dozen then he will know the true joy of this dish.
We go on to make homemade egg pasta immediately after returning from Easter service and cut it into a variety of shapes, usually orecchiete to go with the Sardignian pesto we make fresh in a mortar and pestle just before serving.
The star of the show is the baby lamb we purchase from Lobel's meat shop in New York City. We usually go for around a twenty-pounder. We then quarter it and let rest for twenty-four hours in garden rosemary oregano and olive oil. Early on Easter morning we build the fire and let it burn down for a couple hours before we introduce the lamb, which we roast very slowly and take off just prior to serving.
For the contorni, or side dish I'm going to make a croute of asparagus. I take garden onions and slowly carmelize them over very low heat for a long time. Then I place fresh cherry tomatoes and farmers market asparagus over the onion in a flame proof casserole. I then insert whole bulbs of garlic into the casserole (to be eaten by squeezing the cloves out of the head and onto bread with the crostini) and drizzle the whole thing with olive oil and lemon juice/zest. A topping of pecorino romano and breadcrumbs covers the whole mixture, and then into the oven at low heat for an hour and a half or so.
For dessert we make fresh lemon tart with almond pastry and fresh berry gelato. Truly a great Easter meal from the south of Italy. Oh and to complement, a case of Aglianico del Vulture from the volcanic soil of Basilicata.
28-March-2006
Benevolence and Thoughts from Faulkner, by Tyler McClellan
It has been a long while since Victor has posted on the general guiding spirit, which directs us in our interactions with each other on this list. The spirit of Franklinian discourse where one assumes that he has much to learn from conversation with those who also wish to prosper. In fact, many of our cherished ideas are shaped by, although often criticized, this benevolent interaction: chief amongst these being a belief in the tremendous positive return to the financing of human creativity and ambition. In many ways the stock market itself is informed by a similar sense of benevolence for all the protestations to the contrary. For what would exist but for the generally positive return to the financing of our fellow humans' ideas?
One is always reminded of the maxim that ideas can and do become tangible wealth. And one does well to think about the great lengths of time in human history when wealth was solely that, a measure of the physical quantities capable of producing output. How much more important now is the human mind in its transformation of input into output, and how much more wealthy is the city of New York than the farms of Iowa. All thoughts for the day about what it means to be a pillar for the construction of a certain edifice. And, I would hope that each of us would be one of those pillars and that the edifice we build collectively through the list would be a testament to the possibility and promise of human beings. Not to wax philosophical, but for the real purpose that this spirit of optimism and respect should hopefully inform all of our contributions.
For this list is a clash of prejudices and prescriptions. Those very prejudices give rise to the diverse hypothesis we seek to nullify through Popperian falsification. But this task is made possible by the realization that it is the hypothesis we reject, not the hypothesizers, and that we have faith in this process for the very real reason that we respect the creativity and autonomy of each list member. I again request the list's patience and post William Faulkner's speech upon acceptance of the Nobel prize. For me it is always necessary to strive after the pillars instead of the wrecking balls.
I feel that this award was not made to me as a man, but to my work--a life's work in the agony and sweat of the human spirit, not for glory and least of all for profit, but to create out of the materials of the human spirit something which did not exist before. So this award is only mine in trust. It will not be difficult to find a dedication for the money part of it commensurate with the purpose and significance of its origin. But I would like to do the same with the acclaim too, by using this moment as a pinnacle from which I might be listened to by the young men and women already dedicated to the same anguish and travail, among whom is already that one who will some day stand where I am standing.
Our tragedy today is a general and universal physical fear so long sustained by now that we can even bear it. There are no longer problems of the spirit. There is only one question: When will I be blown up? Because of this, the young man or woman writing today has forgotten the problems of the human heart in conflict with itself which alone can make good writing because only that is worth writing about, worth the agony and the sweat. He must learn them again. He must teach himself that the basest of all things is to be afraid: and, teaching himself that, forget it forever, leaving no room in his workshop for anything but the old verities and truths of the heart, the universal truths lacking which any story is ephemeral and doomed -- love and honor and pity and pride and compassion and sacrifice. Until he does so, he labors under a curse. He writes not of love but of lust, of defeats in which nobody loses anything of value, and victories without hope and worst of all, without pity or compassion. His griefs grieve on no universal bones, leaving no scars. He writes not of the heart but of the glands.
Until he learns these things, he will write as though he stood among and watched the end of man. I decline to accept the end of man. It is easy enough to say that man is immortal because he will endure: that when the last ding-dong of doom has clanged and faded from the last worthless rock hanging tideless in the last red and dying evening, that even then there will still be one more sound: that of his puny inexhaustible voice, still talking. I refuse to accept this. I believe that man will not merely endure: he will prevail. He is immortal, not because he alone among creatures has an inexhaustible voice, but because he has a soul, a spirit capable of compassion and sacrifice and endurance. The poet's, the writer's, duty is to write about these things. It is his privilege to help man endure by lifting his heart, by reminding him of the courage and honor and hope and pride and compassion and pity and sacrifice which have been the glory of his past. The poet's voice need not merely be the record of man, it can be one of the props, the pillars to help him endure and prevail.
19-March-2006
Avalanches, from
Tyler McClellan
This year has been one of the deadliest on record with regard to avalanches throughout Europe. As an avid backcountry skier, a thorough knowledge of avalanches is necessary for survival. There are in fact many similarities between avalanches and the market, and a return from two weeks in Switzerland and a close call or two, starts the wheels spinning.
First it is helpful to categorize the variables involved in avalanche forecasting. Two variables are always and everywhere acting the same and three are highly dynamic. As in the markets most of our focus will be on the dynamic processes.
The quantity of snowfall is obviously highly correlated with the incidence of avalanches but in and of itself this is an uninteresting dynamic. It is the equivalent of saying the market over time moves upwards. Certainly important to know but not helpful with regards to the specifics of forecasting. The second static variable is the steepness of the slope in question, namely the steeper the slope, the greater the effects of gravity and thus greater the force capable of causing slides.
The three dynamic variables then are length of time between snow falls, temperature variation, and wind speed and direction. A season with very heavy cumulative snowfall is not more likely to have serious avalanches than a season with low cumulative snowfall. The duration between snowfalls is much more important. If six inches of snow fell every day for a month, all else being equal, the avalanche risk would be substantially less than if 18 inches of snow fell every two weeks. Thus, though the total snowfall in the first scenario being 84 inches per two week span or more than four times the total snowfall in the second scenario, the latter is substantially riskier. An obvious hypothesis for markets would be that the probability of a dramatic move is not related to the total magnitude of price change over a period, but rather to the amount of time between moves of a given magnitude. I forgot to mention that the cause of this phenomenon is the lack of bonding between snow layers from spread out snowfalls. The ability of snow to form a stable bond is most directly related to the amount of time between contact.
The second dynamic variable is temperature variation. This variable actually works in conjunction with the first. Temperature variability allows the water content in the snow to change over time, as snow melts in the sun of the day and then refreezes over night. This refreezing overtime creates slabs that are very difficult for new snow to bind to. If the temperature always remained constant then the time between snowfalls would be irrelevant, but since temperature and the effects of the sun vary widely the snow changes dramatically over time. Anyone who has skied on un-groomed a couple days after a fresh snow can attest to this phenomenon, as what once was rippable powder has become agonizing crud. The relation of temperature variability to price variability, namely volatility is quite similar. Both by definition explain the likelihood of an extreme event occurring.
The third dynamic variable is wind. Both wind speed and direction are probably the most difficult but necessary forecasting variables. As the wind blows from a given direction at a given speed it picks up the snow on the windward slope and deposits it on the leeward slope where all sorts of dangers form. Cornices, ridges, etc.. are all under the umbrella of wind-loading. Wind loading is the process by which snow is moved from its natural equilibrium to dramatic disequilibrium determined by exposure. The conclusion of this phenomenon is an avalanche. The snow collapses under the pressure and weight of the new snow the wind deposits. The relations to the market here are perhaps the most interesting. One could generate many a hypothesis about how the duration and magnitude of a move in one market (wind) might increase the tendency of a dramatic move in another market (avalanche). If we could identify the market that acts like the wind to another market and the direction of this effect we might find a meal for a lifetime. One thinks of the obvious example of the oft-repeated claim that the equity markets are sailing into the headwinds of rising interest rates.
This analysis of avalanches has been simplistic and there are many other relevant forecasting variables (altitude, surface, humidity, etc..) but hopefully other mountaineers can comment and perhaps generate more interesting questions.
Duncan Coker adds:
To add to Tyler's interesting post about avalanches, I too have had some experience in this area having lived in the West for six years and skiing often in the backcountry. Avalanches, like the markets, are somewhat predictable, can be measured, are affected by specified variables, and have probabilities of occurrence based on history. In market practice, avoiding those 50 point avalanche down moves in the S&P could add a lot to P/L.
Avalanches need four main components; a slab which is the block of snow itself, a grade which gives it velocity to move, a lubricant or separation of layers in the snow pack, and finally a trigger to set it all in motion. They often occur within 24 hours of a recent snow fall, and when temperature is varying above and below freezing level. The ideal grade for them is 30-45 degrees of slope. This means that in very steep and cold places like Alaska, where many extreme skiers are often filmed, they are less likely though they still occur.
There are some interesting trade offs when it comes to avalanches. Skiers want to get fresh tracks in the backcountry right after a big storm but are tempered by not wanting to get caught in a slide. It is better to start the day early when it is colder, but that means rising well before dawn. The grade too is interesting. The really steep grades above 50 degrees are actually more stable as the weak snow layers slide off more gradually. But a 50 degree grade is basically a blind run, meaning you can only see about two turns ahead, so quite an adventure. Before you ski in avalanche terrain one always looks at the run out or escape route. Couloirs and drainages are the most dangerous, but often the most challenging and attractive for adventurous types.
In the markets one could make some trading rules to perhaps avoid getting caught:
Past Winners of the Letters to the Editor Competition