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March 2006
 

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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

31-March-2006
A Market Puzzle by Alston Mabry

At least, it's a puzzle to me: Radware (RDWR - disclosure: no position in stock, but is on "watch list") dropped $2.56 (or 12.68%) today on no news that I can find. Nor can I find any news on any related company or customer. The only news item is the drop itself with RDWR passing through its 200-day simple moving average. Today's volume was +2MM against average daily volume of 180K. Looking at the chart, RDWR probably hit its average daily volume by 1:30 pm and dropped a point and a half in the process. Then the real volume came in and took the extra dollar off. Crappy execution by a big holder who wanted out? Shorts looking to break the stock down late in the day, but it didn't really work?

31-March-2006
Under the "Memes That Baffle" department by an anonymous spec

A long Bloomberg News puff piece on Barton Biggs today has him saying: US stocks are going up "20%" this year...equity rally in Japan to "continue"... oil going to $100 "in four years"...yadda yadda...

From an NPR interview with Barton Biggs earlier this year: "Biggs won't give precise figures on how his fund is doing."

Why on Earth does anyone care what Barton Biggs thinks about the markets? He's a longtime Wall St. desk monkey, who, it's generally agreed, was a fair-to-poor prognosticator, who now runs a hedge fund lacking "precise figures" and just published a worthless book.

I'm reminded of Hollywood celebrities holding forth on public policy. "I'm not a Congressman, but I once played one in a movie."

31-March-2006
Continuing the theme by a second anonymous spec

I believe (Barton) Biggs is himself second generation old money, and has the deep social network to sustain his "career" regardless of pedestrian and petty concerns of "performance".

The press loves a glib, glamorous quote machine, and he clearly knows how to stroke the journalists.

It's striking that at this stage in his life, he feels compelled to continue playing both the money game and the publicity game.

31-March-2006
J.T. Holley runs into a meme himself today...

This meme I had a front row seat witnessing. Today I took a break and grabbed a few slabs of pizza at Christian's on the Downtown mall in C-ville. There is a plethora of bookstores that have more than the average share of Civil War, Jefferson, Virginia, and Grisham books. I was in the back looking for old copies of books on heroes, villains, and pirates when low and behold the "Bookmaster" brought back a lady and started chatting in the hobby section. The following was the dialogue:

Bookmaster: "If I have any fabric, quilting or fabric pattern books, they'll be right here..."

Lady: "I'm retired and I've given up on the stock market.  I'm getting really cheap silk and other fabric from China. They will make me any kind of print I want so I need some fresh ideas."

Bookmaster: "So do you follow the markets?"

Lady: "Not anymore I am just diversified and in a little bit of everything...It is kinda on autopilot."

Bookmaster: "The reason I ask is that I have a group of friends that talk about the markets and I've been emailing them that I feel this market is at a top...I mean oil, sugar, gold, silver at such highs it is going to be terrible what's ahead for the stock markets."

Lady: "Well that's why I'm starting a fabric business and getting out...I will always have a little bit in I suppose...China is selling silk so cheap"

Bookmaster: "Well I feel the markets have to go down from here."

Lady: "They have been raising those interest rates high and you know what happens when they get that way."

Bookmaster: "Let me know if I can help you with the markets as well."

I interrupt right there and ask "Do you have a copy of Nock's Jefferson?" Bookmaster tells me that if he does its over in the Jefferson section and points me to the front of the store. After glancing through about 100 or so books on Jefferson, not seeing Nock's, I gladly tell him "thanks a bunch" and walk outside smiling ear to ear.

I know now not to trust Bookmasters.

31-March-2006
Henrik Andersson on staying fit in the markets...

It isn't easy to keep an exercising regime that requires you to exercise everyday. And when you been at it for a while, it is easy to become lazy. In the markets, after a good run, it is easy to play it safe. The cure is to listen to our own Dr. Niederhoffer; he prescribes a 2% dose of risk everyday. If you can't take it, well maybe you have to try harder.

31-March-2006
Yishen Kuik puts theory to the test...

I rigged up a simple MS Excel model based on the "The Mathematics of Disease" paper the Chairman mentioned a number of days ago.

The sinusoidal results does seem supportive of market cycles, especially if one thinks of bullishness as a disease, contact rate as the media meme factory and the recovered as those sworn off the market having lost money.

30-March-2006
Competition, from Mark Mahorney

In the 60 Minutes interview Tiger Woods had this to say:

"I love to compete. That's the essence of who I am."
"I love to compete, whatever it is. We could be, you and I could be playing cards right now, and I just want to kick your butt."
"You'd want to win."
"No, I want to kick your butt. There's a difference."

It seems he is focused on a goal that is independent of his competition. Golf is an independent game. You have to beat the other players final scores, but there's no interaction between players during the game other than mental. The player is really always playing to improve his own score. What the other player does, shouldn't impact your own play, except from an information standpoint, gauging wind, lie, etc... How he comes out against the other players only matters in the end, but has nothing to do with the play.

Steve Ellison remarks:

A very different attitude was expressed by a public school teacher in a "20/20" segment hosted by John Stossel a few months ago called "Stupid in America". Stossel suggested that the quality of education would improve if public schools were subject to competitive forces, for example, if public school funds went to students who would be free to choose a school rather than to the schools themselves. The teacher replied, "Competition is not for children. Competition is not for human beings."

On the topic of education, I share a personal note about an outstanding educational opportunity in the hope that it may benefit some other spec. My children will be attending the Davidson Academy of Nevada in the fall. The Davidson Academy will be dedicated to providing profoundly gifted students in grades 6-12 all the academic challenge they can handle. The Academy will be located on the campus of the University of Nevada, which will allow easy access to university classes for students who master high school material quickly.

30-March-2006
J.T. Holley compliments the Swiss

Not only do the Swiss have Federer but they have mountains that they live in and can easily defend the Passes/Gaps/Hollows that their land makes up with massive amounts of artillery. After WWII they had a Soviet threat and almost created "The Bomb", as has been revealed recently. They had "rock aflauged" caves that had artillery hidden beyond the U.S., Russia, or Europe's detection.

Machiavelli wrote "The Swiss are heavily armed and enjoy great freedom". He even knew in the 1500's that those Mountains would be very very hard to overcome. How come nobody mentioned the mountains as a source of prosperity? As Frost wrote "good fences make good neighbors", he must have been thinking of the Swiss and their mountains. Geographically very few weak spots and efficient to defend. Makes for a lot of time to make cheese, chocolate, and knives?

Alan Gillespie remarks:

One must remember that Switzerland was established as a defensive confederation, and military success has traditionally depended on many factors but one of the primary ones has always been geography/topography. The primary German strategy was to Blitzkrieg which depends on speed, surprise, and panic which are difficult if not impossible where the landscape changes quickly, the population is organized and in the habit of anticipating future events (which is what makes successful speculators), and the mountains leave you to going uphill.

30-March-2006
The Kelly Criterion, from Henrik Andersson

If you have read the very entertaining book Bringing Down the House, you know they use a formula to estimate the optimal ratio of the bankroll to bet when playing black jack. They need to assess the approximate number of cards left in the deck among other things. As a counting speculator I guess you could use something like the Kelly Criterion. Of course not all the parameters are known in this equation, do you still find it worthwhile? I feel the general investment debate too seldom focuses on this issue; how much of the bankroll to bet?

29-March-2006
The Difference is all in the Attitude, from Yishen Kuik

Within walking distance of where I live are many fast food restaurants. The local Burger King is manned by young African-Americans no older than 25 I would guess. They move slowly to the counter, seem disinterested in and dissatisfied by their work. Their eyes are flat and dull, like those of dead fish. Clearly the work does not meet their expectations.

The local Dunkin Doughnuts is manned by a team of Mestizo men, possibly from Central or South America, in their late 20s or maybe 30s. They don't speak much English, but there is an urgency in their step as they move to fill customer orders. Their movements are crisp and alert. Clearly this work is their livelihood and they take it seriously. The work is much the same, as I would imagine, is the pay. But the expectations and attitude of the workcrew is worlds apart from Burger King, and that makes all the difference to the customer experience.

The difference in life is sometimes all about attitude.

29-March-2006
Henry Carstens on Money Management

Philip J. McDonnell wrote:

Knowing where the maximum f is and then reducing investment size to half or 1/4th of "f" depending upon your risk tolerance is highly recommended.

Nigel Davies wrote:

 I take my hat off to anyone with a stop loss AND an edge.

My first trading system was based on some very simple counting, an ORB entry pulled from one of Larry Williams's books, a stop loss and optimal f money management.

Three observations:

  1. That original system worked better w/ the stop loss and the stop loss also allowed me to use higher leverage - a double win. The market is a big and changing place that chews up and spits out 'never' on a regular basis.
  2. Just to keep Dr. McDonnell and I somewhat out of step on our 2 plus years running money management discussion, I think everyone should trade optimal f at some point in their professional trading career - it's great fun and it will help you find the psychological limits which are more likely to be the true limiting factors in real life money management. (But maybe best to test on a small side account than w/ your life savings.)
  3. Optimal f and Dr. McDonnell's calculations provide a quick and valuable risk-of-ruin check against trading size (Mr. Sogi asks "Why trading systems vs. discretion?" One answer is that optimal f type calculations are more easily applied to systems and provide a quick over-trading and risk-of-ruin check.)

My original system succumbed long ago to ever-changing-cycles.  I miss it...but maybe not so much.

29-March-2006
Dr.Alfonso Sammassimo a.k.a. "Il dentista" on Ivan Lendl

I couldn't help but comment on my favorite tennis player of all time, and the subject of many a late night heated debate with friends and fellow players.

The record speaks for itself, but those who watched him over his career might better appreciate that although his game appeared mechanical (the media tabbed him the IceMan), his strategy adapted beautifully to each opponent. I remember taking my seat with anticipation (at what was then 'Flinders Park') for the 1989 Australian Open final between Lendl vs. Mecir. It had the ingredients of an exciting match between two in-form and very different opponents. But in just over an hour Lendl destroyed Mecir 6-4 6-2 6-0 in what most spectators claimed to be the most boring final ever. Lendl apologized to the crowd in his acceptance speech, explaining that he and Tony had decided the best approach against Mecir was to hit the majority of shots straight and deep, providing Mecir with very few of the angles he needed to deliver his own sublime magic. For me, it was a brilliant example of planning and execution to defeat a wily and talented opponent.

I molded my game on Ivan because I knew at the junior level that while I wasn't as talented as the other players, I worked harder and was smarter. It got me as far as my talent and injury riddled body could take me. I trade now the same way I played tennis. Adapt your strategy for each new opponent, and execute coldly.

29-March-2006
Mark Candon comments on Speculating

Your wonderful paragraph today on speculating just about says it all. Except it made me think about:

28-March-2006
Profiling a Report on Impediments to Adequate Medical Care by Vic Niederhoffer and Vince Fulco

In our ongoing focus of how government restricts medical innovation and access to life sustaining drugs and services, we wanted to briefly mention a new publication entitled Civil Society Report on Intellectual Property, Innovation and Health. Written by an international consortium of independent, non-partisan civil society researchers, the piece delves into numerous structural impediments found in the developing markets; namely Africa and Asia, which restrict adequate health care delivery. These include the heavy burden of taxes & tariffs, unnecessarily complicated and costly registration requirements, lack of adequate health insurance, price controls, ineffective intellectual property protection, poor working conditions and chronically low pay in government run hospitals.

The timing of the release is an attempt to supersede a soon to be published World Health Organization (WHO) report which is expected to be less confrontational with member nations regarding their public health policies due to political reasons. As the Civil Society policy paper makes clear, the seemingly intractable issues mentioned above, if addressed directly, would have a long lasting impact on the world’s least fortunate citizens. Moreover, the importance of often stated arguments such as the existence of predatory pricing by multinational pharmaceutical companies pales in comparison to solutions that individual governments have at their disposal today. Not least of which is the basic tenet that all countries should cultivate economic freedom including the protection of property rights, adherence to the rule of law, and the enforcement of contracts. The report does an effective job of moving the discussion forward by debunking current policy practices and offering a number of novel and immediately implementable ideas.

28-March-2006
Trade of the Year, from Jason Humbert

My best trade this year:

Given my teenage daughter's love of basketball, I felt the obligation to take her to the Women's NCAA Regional games in Bridgeport this week. While I was staring down 2 last row seats behind the basket at the box office, I was approached by a likeable fellow who offered me center court seats for both the semi-finals on Sunday and the finals on Tuesday for the princely sum of $225. I took the seats figuring I could sell the Tuesday night game seats and get some of my investment back since we cannot attend that night.

I called a local ticket broker who wasn't willing to take the seats until the Sunday games were over, since the local favorite UConn was playing and the difference in ticket prices for the final would be vast depending on if they made the game. Fortunately, I placed the following hedge:

I bet $100 against UConn in the semi-final game figuring if they lost, my Tuesday tickets would be worth the face value of $70 for the pair, thus my total out of pocket would be $50. Should UConn win, I was told the tickets would be worth $125 each, so my out of pocket would be $125. Either way not bad for 2 games on Sunday and a day with my teenager that could actually be enjoyable.

Lo and Behold, the impossible happened...UConn won the game, but didn't cover the spread, so I get the higher price for the tickets and collect the $100 on the bet. I made $125 on the deal and saw some good games with a thankful daughter.

This got me thinking how I could place such a bet in our market casino. Best I can figure, I was long the underlying and had some options positions, although being a futures trader would love to hear what these options positions were.

28-March-2006
Rodger Bastien reacts to "How to Raise a Spec Investor"

I was playing baseball with my sons last night and found myself reflecting on our relationship. You see, my Dad and I were connected by baseball, I was his creation, borne of his own failed dream. Unfortunately, his greatest legacy to me was to teach me what NOT to do as a Father raising a man. My sons (10 and 8) as yet have not demonstrated prowess in any sport and I find myself strangely indifferent about it. My sons ARE great students, good friends and solid citizens and beginning to exhibit some athletic skills. To me, this is the proper order of life. I'll mention that reading about your relationship with your father inspired and encouraged me. It's my opinion that many great athletes spring from complex familial relationships. Though surely I lack many of the attributes of Artie, you are proof that a good loving father can help develop a well rounded man who also excels athletically.

Victor Niederhoffer responds:

This is very kind. I found what you wrote so beautiful about playing catch. And some how the name Mike Bastain, it all came together. I regrettably am not as good as you say, but I will strive to get there with the new one. Definitely much playing catch and going to minor league games with a score card (once I learn how to score it properly).

28-March-2006
World Wide Market Declines, from Victor Niederhoffer

There has been much talk in the media these days about declines in world wide markets, especially that the Arab ones might spill over into ours. I took the liberty of looking at the some 350 (depending on how you account for overlapping indexes on the same market) stock markets followed by Bloomberg in Asia, Europe, Africa, Middle East, and North and Latin America. I find that 340 of them are up year to date, with the average of about 8%. Here are the downs, Slovenia, Estonia, Latvia, Nigeria, Kuwait (-12%), Bahrain , Jordan, Qatar, United Arab Emirates, (-35%), Taiwan (-1%), South Korea ( -1.5%), Jamaica. I query to what extent a good first quarter all around is predictive of other quarters, and whether there are any gravitational effects around. and to what extent this backdrop is factored into the public consciousness.

28-March-2006
Benevolence and Thought, by Ken Smith

Tyler, an excellent writer, wrote of Faulkner:

In part,

"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."

Faulkner, writer, died of the complications of alcoholism. Truman Capote, writer, died of the complications of alcoholism. Richard Burton, actor, died of the complications of alcoholism. Eugene O'Neil, writer, died of the complications of alcoholism. F. Scott Fitzgerald, writer, died of the complications of alcoholism. Dylan Thomas, poet, died of the complications of alcoholism. Edgar Allan Poe died of the complications of alcoholism.

A long list of alcholism's geniuses could be complied. I am in good company as a recovered alcoholic. My neighbors, however, are not aware of the distinguished company I am among and disparage my character at every opportunity.

27-March-2006
A Review Request From the Jungle, by Nic Chalmers (Johannesburg)

Thank you for your daily platter of food for thought that keeps me humble and reminds me how much I still do not know after my thirteen years of learning the markets.

I have just completed finished reading Fooled By Randomness by Nassim Nicholas Taleb, and was curious if this book had ever been reviewed by anybody at Daily Speculations? If not, I found the book to be insightful, thought provoking and very relative to what we all do, and request that it is reviewed by yourselves so that it may be possible to have Taleb's claims vigorously tested and challenged.

27-March-2006
Katrina Roger's Invisible Rope

With respect to the outsourcing debate I would just like to comment that Adam Smith's Invisible Hand delivers Lenin's rope as efficiently as any other product.

26-March-2006
Prices in London, from Dan Grossman

When I was in London last week the press reported that the number of Brits with 5 million pounds of "liquid net assets" (mostly marketable securities I assume) had doubled in the last ten years to 9000.

This fairly modest number didn't seem to jibe at all with visible lifestyle and prices. Dinner with wine at a Zagat high rated restaurant averaged about 100 pounds or $175 a person. I asked for brochures at some leading hotels and rooms seemed to cost the equivalent of $800-$1000 (450 pounds for a standard double plus 17% VAT and in some cases 5% service). Cars, food and clothing seemed to be priced in pounds what they would cost in dollars in the US (ie, a $50,000 car in the US is 50,000 pounds or $87,500 in Britain).

And yet the better neighborhoods in London were filled with Mercedes and Porsches as well as half a million dollar plus Bentleys and Maseratis. The restaurants were filled and even difficult to reserve at. To eat at one leading restaurant at 7:00, I was made to promise more than once that I would vacate my table no later than 9:00. While I realize that there are many tourists and foreigners in London, even in March, at the restaurants Brits certainly seemed to dominate. And this doesn't take into account all the private dining clubs which I did not get into and which I assume are even more expensive.

So the visible wealth seemed far in excess of the statistics. The only things I could think of were:

  1. That expense accounts must be very generous and many of the expensive cars and meals were being charged to one's employer.
  2. That at the highest Bentley levels, these were British tax residents of Monaco, the Isle of Mann, etc., who were "just visiting" their London flats.

Can anyone offer fuller or better explanation to this naif?

25-March-2006
Gunsmoke, Westerns, Strong and Weak and Markets, by Victor Niederhoffer

Recently I have been inspired by the friendship of Chester Proudfoot and Matt Dillon in Gunsmoke, and by every one of the classic western radio shows that I have been listening to, and by the most beautiful relations in all the literature of Jack Aubrey and Stephen Maturin. I have been thinking about "strong and weak" relations in markets. So far my study has taken me to "strong and weak" relations in acids, the nuclear, verbs, rhythms, and logical relations. I would appreciate any ideas my colleagues and readers have on this expansive subject as it relates to their own particular interests or markets.

Kim Zussman adds:

Academics like to refer to strong and weak efficient market hypothesis. Strong claims asset price reflects all available impacts and price movement is a random walk, whereas weak concedes some non-randomness.

Here, for example, is a paper showing that one of the contributors to weak EMH (post-earnings announcement drift) is for the most part an artefact of illiquidity and little if any profit is available trading such in the real world.

It might also be weak to base trading strategies on published academic research; if one only stops to think of the utility functions of the authors who use flawed databases to test unimportant anomalies so they can be subjected to a sexiness rating by co-eds.

GM Nigel Davies comments:

There are many subtle relationships between the pieces in chess which might be of interest. Consider, for example, the role of the humble pawn when it has no opposing pawns either in front of it or one rank on either side. Such a pawn is referred to as 'passed' and its relationships with the other pieces can often have a decisive influence on the game.

The aim of the side with the 'passed pawn' is to either push it through to victory or use it to distract enemy forces in preparation for an attack being made elsewhere. The side playing against the pawn will aim to frustrate its ambitions by blockading it, preferably with a minor piece (knights derive great strength from this role, by virtue of the opposing pawn defending them from frontal attack).

If such a blockade is achieved, the passed pawn can poison the position of its possessor by inhibiting the activity of all the pieces engaged in its defence. A simple example might involve White having rooks on d1 and d2, a knight on c3, a bishop on b3 and a passed pawn on d5. If Black were to have just a knight on d6, all of White's pieces would be stymied.

Nimzovitsch wrote extensively on this subject, his best known phrase was when referring to the passed pawn's 'lust to expand'. Lasker stated the idea in more general form: 'What is immobile must suffer violence'.

This seems analogous with many relationships in life, perhaps most notably a parent's relationship with their children. Parents who foster their kids' 'lust to expand' will have their family succeed in the game of life. Those who only make sure they are 'well protected' may create a cycle of dependence which can be highly damaging.

Steve Leslie responds:

Nigel I bow to the Buddha nature in you. Your concept here is fascinating, introspective and extremely well articulated.

I am captured with your comment on immobility, it reminds me of the Maginot Line that your allies, the French, constructed after WWI to defend themselves from the Germans to the West. A line that due to its anachronistic design was easily passed in an end run by the Germans in WWII, thus allowing them to take Paris with no shots fired.

Patton remarked how foolish the French were to put so much faith in an immobile fortress to begin with. Yet as usual they were intransigent.

Had the French studied history, they would have met Hannibal. as their greatest military leader Napoleon remarked "He who does not study history is destined to repeat it":

The Carthaginian general Hannibal (247-182 BCE) was one of the greatest military leaders in history. His most famous campaign took place during the Second Punic War (218-202), when he caught the Romans off guard by crossing the Alps.

Steve Leslie argues:

Actually, the Maginot Line did its job. The Germans were not able to penetrate its defenses. They attacked through the Ardennes, where there were no fortifications. Sometimes fortifications work, sometimes they do not.

Patton is not to be trusted on questions of military history. He is a wonderful character but a lousy source. He grossly exaggerated the effectiveness of tanks in WW II on both sides. The blitzkrieg's success was dependent on combined arms and the use of tactical radio to coordinate close air support. The defeat of the Germans on the Western front was due not to Patton's tanks but to the allies' overwhelming air superiority and the proximity fuse for airburst artillery barrages (by the time of the Battle of the Bulge the Wehrmacht was having to threaten soldiers with firing squads because they were refusing to patrol). The Shermans by themselves would have been decimated. The Nazis called them "Tommy Cookers".

Henry Gifford adds:

History reads better with the end run being the only game, but the Germans actually did attack and defeat the fixed defenses of the Maginot line, with some paratroopers landing on the forts and placing shaped charges on them, tossing some grenades down air shafts, etc. Why they did not exploit this (if they did not) was not recorded in the histories I have read.

They also developed a very long, skinny artillery shell with a delayed fuse that could penetrate various layers of bunker ceilings before exploding in the floor of the bunker, but Hitler ordered the army to not use this for fear of his enemies getting their hands on it and making them too.

The biggest lesson to me here is how frequently it is reported that the Germans did not try to attack the line, and the number of conclusions based on that story. People hear the parts of history they want to hear and report them over and over again....

Stefan Jovanovich asks:

The French built the Maginot line in order to free up their mobile forces and to give them a chance to fight on equal terms against the numerically superior Germans. That strategy worked. The problem was that they and the British both assumed that the Germans would attack only through Belgium. Guderian's success in breaching the Ardennes was a near-run thing. They met opposition from French tanks - which were better; and if the British had devoted a fraction of the effort to bombing the Germans supply lines that they did to dropping leaflets over Berlin, we would not be having this discussion.

Henry: If you can give me a model for the "long, thin artillery shell" I would appreciate it. The only one that I know of for the period of blitzkrieg is the 8.8-cm Flak41, and that had barely come into service in 1941.

I believe your reference to the paratroopers "landing" onto the fortifications refers to the assault on the Eben Emael fortress in Belgium, and that assault was carried about by glider, not parachute drop. The Belgians, unlike the French, did not have their fortresses interconnected or supported by infantry. They believed that the canals would be sufficient deterrent. (One of the Germans' relatively unappreciated skills was their ability to conduct rapid bridging operations Some people have even suggested that the ease with which they crossed the Meuse and other water obstacles led the Wehrmacht high command to plan the invasion of Britain as if the English Channel were just a wider river.)

Jim Sogi mentions:

This is a good example of using technological advantage to create surprise and confusion for a tactical and strategic advantage. A handful of paratroopers/gliders attacked at night and overcame a much larger force. They used technological advantage to create a tactical advantage of surprise and confusion, to take control of a fort which had been unassailable before, and therefore command a key point. This has many parallels to speculation.

J.T.Holley comments:

For what its worth the golf grip uses these very same words "strong" and "weak" to describe a grip of a club and its adverse effects from being either of them. The proper grip (textbook) should be one that is neutral neither weak nor strong. The bottom edge of the clubface should be straight towards the tartget line in order for the ball to fly straight toward the pin. If your grip is too weak then your hands are usually rotated towards the left too much and vice versus if they are rotated towards the right then you have a strong grip. If you over compensate and have too much of either then when your clubface meets the ball at impact it will be off line causing you to slice or hook. Yes, Tiger has a very near perfect neutral grip! The V's (thumb and forefinger) line to chin and shoulder.

Tip: (Although I am no pro) Something that causes a non-neutral grip is to grip your club while the clubface is on the ground, grip it in the air horizontal to your body to get a nice grip. The funny thing is that most people think weak or strong means the actual pressure with which you grip the club!

27-March-2006
Henry Gifford on Strong and Weak Apartment Temperatures

In the field of energy efficiency it can be said that all the rooms in a one-room building will always be at the same temperature, therefore the only way to reduce the amount of heating and cooling energy that needs to be delivered to such a building is to improve the "shell" (windows, walls, roof, etc.).

However, different rooms in larger buildings are exposed to widely varying solar gain, wind driven air leakage, internal gains from electricity use, etc., and larger mechanical systems get more complicated, so in larger buildings overheating and overcooling are rampant, as anyone who has lived in an apartment house and controlled the wintertime temperature with the windows will attest to.

From the above it is fair to generalize that replacing double pane windows with triple pane windows in a small building will save energy, while in most large buildings they will save nothing, merely being opened further to offset their increased insulating characteristics.

It is probably also fair to say that many buildings are overheated or overcooled to merely satisfy the most underserved room, therefore the amount of overheating/cooling is proportional to the unevenness of delivery of heating and cooling energy.

Counting fuel used by apartment houses in NYC divided into old law tenements, new law tenements, pre-war, post-war, and post 1974 oil embargo categories showed little variation in the average use for each category, but a 700%+ spread within each category, a spread which dwarfs possible boiler efficiency differences (10 - 15% Max), supporting the conclusion that fuel use is largely determined by the difference in delivered heat to the coldest and hottest apartments, or the "weakest" and "strongest" if you will.

This flies in the face of conventional "wisdom" about what makes a building efficient, but I tested it by getting a building built with accurate and even heat delivery (less than one degree F +/- at most times measured) and exceptionally poor walls, insulation, etc. The fuel use was less than 22% of the NYC average, showing the relative uselessness of shell improvements in a large building, and the relative importance of evening out the "weak" and "strong" apartments so the overall use could come down.

A tidbit from one of the 4 or 5 people working on energy efficiency in the US today who are not supported by your taxes.

Russell Sears adds:

Confession of a 98 pound weakling.

It is common western folklore that the weak died. I would suggest that in real life, the weak adapt. It is wound that does not recover and die.

Training or trying is not enough. Training is a given for the competitor, training hard. The recovery is what separates strengthening from simply tearing apart. For a runner, the first signs of overtraining are higher resting heart rate, loss of sleep/restless sleep, sudden weight loss, loss of sex drive, and mood swings. Counting this is more important than keeping a log of your training. The log of training is simply to motivate you. The counting/observation of your recovery is science in training.

Alcoholics and addicts never recover, hence the high death rate of strong minds, and creative genius. Yet, it is the alcoholic that adapts, such as Ken, that can still be a strong mind.

I think of my friends a deaf married couple. One deaf by damaging disease of specific nerves, has adapted to a great cook. The other has adapted to a great photographer.

But weakness does not always search for a path to strength. Bluffing, cheating, and con-men are on display this week in the Enron courts.

The strong have a much harder path to adaptation.

Besides large/bureaucratic and small/adaptable stocks. What are the signs that a company is focusing on adaptation rather than bluffing or simply giving up?

25-March-2006
Some Stimulating Simulating concerning Tim Horton's IPO, from Gabe Carbone

Lost in all the hype up here in Canada surrounding the Tim Horton's IPO today is the fact that I have not won a single free coffee or free donut (let alone a new car) in 3 weeks of playing their "Roll Up the Rim to Win" game.

The fact that not one of my daily coffees has been a winner has been slightly annoying, especially given the fact that I "traded up" from my usual small coffee to a medium-size, since the small cups don't have any prizes.

In fact, I figured that I would probably do ok on an expected value basis: Given that a medium costs $0.10 more than a small, and the cheapest prize is a donut, at about $0.85, I figured that with their claimed 1/9 chance of winning would put me at only a small disadvantage. And hey, I could win an SUV.

The probability of my not winning anything can be given by the binomial distribution, asking the question, "What is the chance of drawing 15 losers when the probability of wining is 1/9?" To answer the question, I typed in "binopdf(0,15,1/9)" in MATLAB, and found that the chance is pretty good, namely 17.09%. Note that 3 weeks here is only 15 days, or the 5-day work week.

A slightly more interesting way to answer the question is through simulation. To do this, I simulated 3 weeks of buying Tim Horton's coffees, running this 5000 times. This can be accomplished in MATLAB using the following code, and I imagine it is also quite simply done in R, or any language for that matter.


streak=0; %initialize losing streak counter at zero
for i=1:5000 %execute 5,000 trials
  coffees=binornd(15,1/9); %prob. of win is 1/9, buy 15 coffees
  if coffees==0 %check if 0 wins in 15 coffees
      streak=streak+1; %counter for number of losing streaks
  end
end

SimulatedLosingStreakPercent=streak/5000 %take percentage

ComputedBinomialValue=binopdf(0,15,1/9) %theoretical value

The above shows the simulation value to be quite close to the theoretical, which I guess is not very surprising. While this may have little other than entertainment value, it has made me feel a bit better about my losses. And, it makes up for the fact the the lineup for free Tim Horton's coffee (as part of the IPO festivities) in front of the Toronto Stock Exchange this morning was too long for me to wait in.

24-March-2006
Thoughts on Racetrack Betting, from Kevin Depew

Nobody asked me, but if I understand this paper from the Japan Racing Association correctly (definitely not a sure thing since it involved math and reading), instead of the public simply overestimating the chances of the horse whose odds are lowest, or betting on the horse whose reward is maximum relative to his strength of winning, bettors instead bet on the horse whose chance of winning is greatest without regard for the reward.

At the track this is called the "thrill of cashing." Simply put, people seem to prefer cashing a lot of tickets over cashing only a few tickets, even if the reward for cashing just a few tickets is far greater than the reward for cashing a lot of tickets. You can't catch that fact by taking a survey at the track's Final Furlong Bar. (In financial markets how many of us prefer to cash tickets over maximizing reward versus risk?)

People consistently say, perhaps even believe, that the reason they bet on horses (or stocks) is to make money. But then people consistently behave in a manner that proves otherwise, such as betting on the horse most likely to win the race no matter the reward. What to make of this?

Well, losing is a hell of a thing. People don't like losing and many will do most anything to avoid facing it. At the racetrack, people will, apparently, gladly pay a small sum to disguise losing in the short-term even if that guarantees they will lose over the long run.

There's an immediacy involved in losing money at the track. In most cases, as a loser, you will hand physical currency to a person protected by glass or even bars, who will then remain sitting in that same place for the duration of your stay at the track whether you win or lose; implacable, unmoving... no, not unmoving, unmoved. See that person there? Yes, you willingly gave your money to her, and now it is gone from you. And yet, there she she is, right now, counting your money along with the bills given her by all the other hopeless losers, but there is no way for you to get it back... at least no way that will not inevitably result in violence or imprisonment, maybe both. If that doesn't hurt, emotionally, you're not betting enough.

One way to avoid that bit of psychodrama is to try and pick winners. Well, that sounds very reasonable, doesn't it? Many, many books have been written about picking winners. In fact, there is even a book about picking winners called, conveniently enough, "Picking Winners." But picking winners has nothing to do with making money.

When you go to the track the two most popular questions you will hear are:
1) Who do you like? (Translation - Whom do you think will win this race?)
2) Did you have it? (Translation - Did you bet on the winner of that race?)

This is very fortunate for the business of being a racetrack. Seeing that the racetrack gets to skim about 18% from the reward they pay to everyone who picked a winner, you can begin to see why a racetrack would like very much to keep people picking winners; the tellers don't get robbed as much and the bettors are happier in the short-term.

Until the most popular question at the track is "Did you demand value?", I doubt folks will need to worry too much about the racetrack market becoming too efficient.

J.T. Holley comments:

Same darn lady behind the counter at the convenience store when you buy lottery tickets! Its irrevocable, permanent, fleeting and desperate every time you purchase those scratch 'ems or lotto's with false hopes and dreams. You might even make her feel good by telling her that you'll share some of it with her when you win! "Yeah right" she says "If you win", as she licks her fingers to count your bucks. She might even be working two jobs, one at the Track/OTB during the day and weekends and nights at the Gas station. Maybe Galt could produce a movie on the topic if we write it Kevin? We could give it a Hendrix type name called Electric Lady Land! Kinda' like Clerks but with gamblin' and the lottery and a Lynch Blue Velvet twist?

Oh yeah, one way to avoid the Lottery psychodrama is to try to pick winners or learn to scratch better! Yeah, that's funny. Use the numbers that haven't been drawn lately? Pick the higher numbers that everyone avoids so you don't have to share the pot? Scratch your tickets from right to left, bottom to top? Use a half dollar that was minted on the same year of your birth when scratchin'? Save the gray shavings in a pile and then toss them over your right shoulder of losing tickets before you scratch your next one.

"Have you ever been (have you ever been) to Electric Ladyland?
The magic carpet waits for you so don't you be late
Oh, (I wanna show you) the different emotions
(I wanna run to) the sounds and motions
Electric woman waits for you and me
So it's time we take a ride, we can cast all of your hang-ups over
the seaside
While we fly right over the love filled sea
Look up ahead, I see the loveland, soon you'll understand."  

John Lamberg adds:

After sitting at a few blackjack tables, one of the phrases you will often hear from the dealer is, "I want you to win." This is an interesting statement. If a dealer dumps the tray enough times, the House is going to keep an eye on him/her. And even if there is no foul play involved, the dealer that dumps the casino's money on a consistent basis will soon be looking for another job. The bottom line is that the dealer can not want you to win because the House can not allow you to win. Of course the House wants you to win occasionally. Without those occasional wins there would be no hope. No hope, no players.

But what to make of the dealer that says, "I want you to win?" The last time a dealer said that, I turned to the player next to me and said, "The House trains their dealers to lie." The dealer took offense and I had to back peddle a bit because the last thing I want is an angry dealer. But it seems to me, that even if the dealer sincerely wants you to win, the mere act of saying it instills false hope in the player and provides the house with a substitute for those occasional winning hands or sessions that keep the players coming back. And on the way out, there is always the polite, "Thank you for playing sir!" Yes indeed, the dealers are well-trained.

23-March-2006
Steve Leslie responds to "Forward and Back"

Your ruminations remind me of Sisyphus of Greek Mythology. Although he promoted navigation and commerce he was avaricious and deceitful, killing travelers and guests alike.

As a punishment from the gods for his trickery, Sisyphus was compelled to roll a huge rock up a steep hill, but before he reached the top of the hill the rock always escaped him and he had to begin again. Seems appropriate punishment for many politicians today. For more on Sisyphus read Camus' essay.

Incidentally, one of the most curious if not infamous Secretaries of the Interior was James G. Watt,1981-1983 conservative Christian and ideologue who infuriated environmentalists with his sale of government land and leases during his brief but explosive tenure. He was later indicted in 1995 on 18 counts of felony, perjury and obstruction of justice by a federal grand jury. The indictments were due to false statements made to a grand jury investigating influence peddling at the Department of Housing and Urban Development, which he had lobbied in the mid to late 1980s.

23-March-2006
UK Traffic Junctions Phenomenon, from GM Nigel Davies

I've recently noticed a curious phenomenon at UK traffic junctions. At many of these there is a red square with a white bicycle just before the lights with a further area painted red reaching further back along the sidewalk. The meaning is that these areas are forbidden to bicycles because they'd get in the way of the traffic. But more often than not the motorists are the ones who leave the red squares vacant whilst the cyclists happily occupy them.

It is truly remarkable that the logic of these markings should be escapable on such a wide scale, which makes me wonder why. I can only think that ideas about pollution etc have sunk so deep into the public consciousness that motorists somehow wish to punish themselves for being evil polluters, despite paying road tax and supporting the oil and car industries. The cyclists, on the other hand, appear convinced that that their 'ecologically sound' vehicles should have right of way, despite the fact they don't have to pass a test and don't pay a penny to keep the roads running.

This is so annoying that I must admit to have been fantasizing about starting a kind of counter-revolution - having a cattle scoop fitted to the front of my car and stickers of cyclists on the sides. Not that I'd REALLY use such a scoop, but as Nimzovitch once said, 'the threat is stronger than the execution'.

22-March-2006
Jan-Petter Janssen theorizes on how the brain works...

A bit simplified, this is how I believe the brain works: The brain exists of billions of neurons, with each neuron having the possibility of sending electrical impulses to thousands of other neurons. Every day a large number of new paths are tested out. Somehow the most efficient paths are saved and the less efficient ones disappear. I guess hormones (don't know the exact chemistry, but let's say endorphins) in a way decide which paths should be chosen. For example we instinctively save neural paths that make us walk on two legs, speak, and later we learn to emit endorphins when we please other people, and so on making the brain evolve into greater and greater complexity.

23-March-2006
Steve Ellison counters with some insightful reference material...

Actually, the way the brain works is that shortly before birth, the brain neurons begin trying to communicate with one another. In doing so, they create paths called synapses. From age 0 to 3 trillions of these synapses are created. After age 3, few new synapses are created; indeed, about half the existing synapses deteriorate and become non-functional because of lack of use. However, connections that are used frequently become stronger and stronger. The pattern of these powerful connections is unique to each individual and is the basis of natural talent (Buckingham & Clifton, 2001). I was thinking of the uniqueness of each person's strengths when I recently mentioned that everybody can be a star.

It is extremely difficult for the brain to develop any new paths after age 16. My organizational behavior teacher was very enthusiastic about a technique called neuro-linguistic programming to try to blaze new pathways in the brain. The most dramatic success stories in this regard have been among amputees who had to relearn many basic body functions (Buckingham & Clifton, 2001). For most of us, however, it is simply not worth the tremendous energy required to develop new paths. Applying the same amount of energy to developing the natural strengths we already have would pay off much better.

Reference: Buckingham, M., & Clifton, D. O. (2001). Now, discover your strengths. New York: The Free Press.

23-March-2006
Jan-Petter Janssen clarifies...

My references to neural paths seem wrong (after reading 'How the Brain Works, from Steve Ellison'). I know very little about neuroscience, so please excuse my ignorance, but what I meant were the paths where electrical signals are transferred within a brain. If it takes a person half a second to react on something, and electrical signals are transmitted with the speed of light, the electrical impulses must go trough a tremendous amount of neutrons. When I referred to a neural path, this was what I really meant.

Still, I believe the simple principles of an evolution where some random changes are constantly being accepted or destroyed during our entire lifetime make up the extremely complex human brain.

21-March-2006
Cesar "Bud" Labitan connects three seemingly dissimilar theories

As a student of Behavioral Finance, it occurred to me that Charlie Munger's Lollapalooza Effect is very similar to George Soros' Theory of Reflexivity and Malcom Gladwell's idea of a "Tipping Point."

Charles Munger highlighted "Standard Causes of Human Misjudgment," and gave numerous examples of how these mental weaknesses can combine to create "lollapalooza" effects, which can be very positive -- as in the case of Alcoholics Anonymous -- or frighteningly negative, such as experiments in which average people end up brutalizing others.

http://www.fool.com/news/foth/2002/foth020821.htm

http://www.geocities.com/ecocorner/intelarea/gs1.html

http://www.gladwell.com/tippingpoint/index.html

Multiple variables converging to a point of threshold of catalytic change...Malcom Gladwell's idea of a "Tipping Point." Example: Elaine Garzarelli gained fame as one of the few analysts that predicted Black Monday in 1987, while a little known analyst at Shearson. After her S&P 500 mutual fund lagged over a seven year period at Shearson, she left for Lehman Brothers. Lehman fired her in the fall of 1994. In 1995, she set up her own successful capital management firm, Garzarelli Capital Co.

This would be an interesting idea to discuss, and I wonder if these three fellows have ever met each other. If not, someone could try to get these three together to discuss their ideas. Just a little mental dessert for you and your readers to contemplate and add to.

22-March-2006
Income Inequality, by Vic Niederhoffer

It is interesting to see the Washington Post editorial (sign-in required) "Joining the Inequality Debate"  on income inequality. It raises a few points to me. Do we really find it so attractive to start people off in a race, and then take back the winners' medals and share it with the losers? Would the same such method applied to grades and testing for our kids in school lead to greater or worse performance by the good and bad?

Is the striving for victory, and the penalties for failure, an uplifting force that is partly responsible for our material well being and mobility?

Are the various individuals who achieve the winning and the losing quite transitory, with studies such as the hundreds that show that 50% of the highest 10% in income bracket today were in the middle bracket or below a quarter a generation ago (adjusted for adulthood) still applicable.

Has the Gini coefficient described in my favorite book on economic time series; The Analysis of Economic Time Series by Harold Thayer Davis, circa 1927 and developed by Pareto, the % of wealth or income held by the top x% compared to the bottom x%, lost its relative constancy over time and in all societies or is this just another agrarian dodge by the reformers to make man seem small, and the good appear to be bad. Who is John Galt?

Alston Mabry responds:

The Post article states, "Between 1980 and 2003, the top fifth of households increased their share of national income by six percentage points." But is the Post being perhaps a little selective about the statistics it decides to emphasize?


The Post article states, "Between 1980 and 2003, the top fifth of households increased their share of national income by six percentage points."  But is the Post being perhaps a little selective about the statistics it decides to emphasize?

National income itself rose dramatically in that time frame:

National income:
1980:   2439.3B
2003:   9707.8B
+298%

or:  GDP in chained 2000 dollars:
1980:   5161.7B
2003:  10320.6B
+100%

Population increased much more slowly than GDP:

US Population:
1980:  226M
2003:  291M
+29%

Thus, per-capita, constant-dollar GDP increased by 55%, 1980-2003.

Would it be better, then, to go back to 1980, just so that the income distribution would be more "fair"? Were the people at the bottom of the income distribution better off in 1980 than they are now?

Also, for year 2000:

Top 10.2% (by income level) of taxpayers paid 66.8% of all federal income taxes, or 19.6% of their total income. Bottom 56.6% (by income level) of taxpayers paid 1.9% of all federal income taxes, or 3.2% of their total income. (source pdf ).

This does not take into account state income taxes, luxury taxes and property taxes, all of which fall disproportionately on the high-income and brackets.

Gary Rogan comments:

For an interesting study of primate coalitions and violence it's worth checking out  Demonic Males : Apes and the Origins of Human Violence by Dale Peterson and Richard Wrangham.

22-March-2006
George Zachar on No Good News...

All popular discourse on society and economics follows the maxim NO GOOD NEWS.

If stocks are rising, that means the rich are getting richer relative to the poor, so that's bad.

If stocks are falling, it means the economy is at risk, and that's bad.

If interest rates are rising, it will slow the economy, and that's bad.

If interest rates are falling, it means investors anticipate a slowing economy, and that's bad.

If a city's population is growing, it means more stress on the environment, higher housing costs, and a greater strain on public services, which means higher taxes.

If a city's population is falling, it means those left behind must fund the city's infrastructure, which means higher taxes.

If a free market economy is growing, by definition the most productive citizens' wealth grows faster than that of others. Naturally, inequality is always touted as a "grave and worsening social problem" at this point in the cycle.

If the economy is shrinking, of course, the argument is that redistributive policies are "needed more than ever" to help those "at the bottom" during "this crisis".

One can make the case that passing vogues in political discourse are a coincident/lagging economic indicator.

22-March-2006
J.P. Highland reminisces about a visit to a non-capitalist country

Capitalism and free markets are under fire in this country. Being rich is no longer a reason to be admired, to be successful like Wal-Mart is considered bad, George Steinbrenner's desire of having a winning team is widely criticized, CEOs are attacked for making too much money. The socialistic meme is spreading.

To have socialistic ideas is acceptable when you are 18 years old, but I changed my mind when I visited La Habana, Cuba in my early 20s and got into a deep depression after watching Socialism through my own eyes. Since then I've embraced the ideals of Capitalism and free markets.

22-March-2006
Kim Zussman draws parallels to affirmative action

To me it is a Lackian joke: In order for politicians to burnish their own aspirations, they must cater to the largest common denominator of voters, which doesn't mean the top 1% income, IQ, etc. Which is not that unfair if one believes that the top has more ability to fend for itself despite stronger headwinds. This goes immediately to affirmative action, which had I a bit more color in my blood all Ivies would be wide open to me children. UCLA law school had a large such program, and it was ironic that one of the hardest to get into law schools had a poor pass rate on the bar. But for those who got in fair and square, the exam was easy and they are out there successfully taking money. So far Molly got into USC, UCLA, UCSB, UCSD, and this month we hear from all the rest including back east. UCLA letter said highest # of applicants in their history, and top in the nation 47,000.

22-March-2006
Mr. Krisrock illuminates the economics of placing PPE abroad...

Intel built a $375 million dollar brand new plant in Vietnam and the wages were $3 million dollars. The profit margin is unbelievable. A STAR Intel Financial VP manager is paid millions to do this but in the end what is the economic benefit to this country?

We're not some small country like Switzerland or Norway where the total income is spread over a small population...but rather over $300 million and a nation that once had a vibrant middle class that offered upward mobility to all...not just the stars.

I have long argued that the arithmetic of free trade don't add up ...That is COUNTING TOO.

22-March-2006
Professor Donald Boudreaux of George Mason University counters an earlier argument...

One good source for wisdom on why Mr. Krisrock's analysis is off-base is the following article by Arnold Kling. Note especially the section entitled "Equilibrium Conditions."

23-March-2006
Allen Gillespie gets to the Truth of the Success of Free Markets.

The problems highlighted are common points in labor economic discussions, sticky wage demand (unwillingness of workers to accept less than their prior pay) and immobility (unwillingness of workers to move). Traditionally, the sticky wage problem has been solved by inflation, but immobility is always a problem. The answers, however, are not simple because the chip plant moves the currency and creates the need for additional jobs like longshoremen, translators, lawyers, and additional transportation people, however, the location of the jobs may not be ideal if you are in Norman. When governments interject themselves even more greatly into an already complex transaction via currency manipulations, tax break, etc. the real picture which is fuzzy at best becomes quit distorted.

The one thing that is never distorted, though it may be hidden for awhile, is Truth. The truth is that in many cultures view cunning as a virtue because it means you outwitted you opponent, where as Americans with our puritan roots work from a concept of fair play. This concept, I believe, has been economically successful because business depends on dual trust of parties to perform their obligations, the right to property, predictability, and the enforceability of contracts, which while they may seem to exist for a time overseas, have a long history of breaking down.

22-March-2006
J.T. Holley illuminates the emerging witch hunt against hedge funds

Yet another "agrarian dodge by the reformers to make man seem small"! The "dog eat dog" laws are being drafted right now in regards to hedge funds and hybrids there of. I would love to place the million tiny url examples on this as proof but there are so many to list it would take up to much memory and space. From Bloomberg, Albourne Village, Wall St. Journal, and my Dad calling me it seems Congress, the masses of individual investors, to those feeling left out are grabbing pitch forks and lighting torches to seek and hunt out the culprits who control so much.

Some examples from the Financial Times:

"The F. T. reports that a Senate Banking panel is gearing up to hold hearings as early as next week into hedge funds and how their explosive growth is influencing the markets." Wednesday 22 Mar 2006 07:26 GMT

"Portfolio International reports that the top 50 hedge fund firms now control 40 per cent of the global market, with the top 200 managing 90 per cent, according to a report by Morgan Stanley." Wednesday 22 Mar 2006 07:50 GMT

22-March-2006
James Sogi observes...

Capitalism presents a dichotomy between the system and the individual. The good of the system is paramount and often leads to hardship for subsets of individuals, but overall leads to the betterment for all in the long run. The legal system is a good example of this dichotomy. The system is designed for competitive forces to reach closest to the truth. It is effective in that the growth of capitalism and business around the world would not be possible without a body of law to create capital structures, and a dispute resolution system to solve conflict without resort to violence. Individual participants often only see their individual interests and wish to use the system for their personal gain, resulting in dissatisfaction, but it is the needs of the system that must prevail for the success of the whole. Democracy presents the same clash between the individual and the majority. Trading profits accrue to the few. In neither forum is there a call to remove such advantages. Both are self regulating, and the failure to recognize the self regulating nature of capitalism is at the core of the cry to remove competition.

The liberal and conservative ideologies stress opposite sides of the equation, the needs and rights of the individual versus the requirements of a robust and self sustaining capital system of business and growth. The dividing line is not bright. The liberal myth has been that the needs of the individual must prevail over the needs of the system, but as we saw in the communist countries, this only leads to systemic failure. Capitalists of the 19th century ignored the needs of the individual, which lead to a cycle of regulation. Competitive forces lead to systemic improvement. Over-regulation, and overprotection of the incompetent lead to a dulling of the competitive edge. Everyone is entitled to equal opportunity, but equal results cannot be guaranteed. People have different capacities and as a society only a minimum safety need is affordable without dragging down the system. A robust middle class can only exist in a competitive capitalistic system. So like ants, there is a path to success and one to extinction.

22-March-2006
Mr. Krisrock extends earlier comments...

The issue of free trade is therefore the fulcrum of rationality...There is no way an American worker's playing field is level when another country; where the rights of individuals are trumped by immature legal, social and political systems and wages, can compete and gain employment on that basis alone...And when the political leaders of the American democracy refuse to recognize the mismatch, the only place where American companies can compete on a level playing field is in countries that have similar economic schemes and cultures. Interstate competition is as good a way to examine this issue.

Rudy Hauser on Income Inequality

The concerns raised include the alleged increase in the income gap between the richest and the middle class and poorer parts of society, the right to be able to win in the income race of life, preference for Americans over those from poorer countries with their less restrictive social legislation, the fairness of the playing field, etc.

Science is discovering that some of our behavior is wired into our genes as subconscious tendencies which are often then augmented and explained by our reasoning ability and which if recognized can be overridden by our use of reason. I speculate that one of those tendencies is to favor members of one's group over other groups. We even see this in other primates, where deadly battles between troops of chimpanzees take place. One of the challenges of civilization has been in increasing the size of who belongs to one's groups from the small family linked groups of our hunter/gatherer days in which all knew one another to the large impersonal groups of nations today. But reason teaches us that we are all humans with certain inalienable rights. As such we should value the ability of all to transact honestly and freely with one another to our mutual advantage as something that is sacred that should be upheld when it is not to undermine the legitimate rights of a third party and all parties agreeing are competent to do so. (Honesty means no fraudulent practices are permissible.) That should be the case whether they are foreign or of one's own group. The poor increase they living standards when they are free to sell what they have to offer in labor, skills and resources to the highest bidders. When those bidders are precluded from trading, both the seller and potential buyer suffer. When we restrict foreign imports, our consumers suffer and are deprived of their freedom to trade. Freedom and progress entails the ability to change those with whom we transact to allow for the change in tastes and taking advantages of improving productivity. That means that those who lag the economics or fads fall behind. They either find something else to do that rewards them more favorably or they suffer a loss of relative incomes and wealth. The alternative is to keep the poor poor to allow the favored at some point in time to maintain that privilege position by the use of force, i.e. governmentally enforced private protection.

Krisrock argues that we have social costs that others do not have and as a result the playing field is unfair and that modestly better ROE's of investing abroad do not adequately take into account the risk of them losing properties as a result of governmental caused or sanctioned actions abroad. He is correct about the latter risk, but that is what corporations take into account when they invest, and if they do not do so adequately their companies will suffer. But bad management as opposed to corrupt management is not something for governments to involve themselves in but rather for the boards of directors and shareholders to concern themselves with. As to the other arguments, legislation and regulation more oppressive to free enterprise in many such countries. The corruption on the part of bureaucrats, inefficient infrastructure, cultural and language differences, etc. all provide disadvantages on the part of those foreign countries relative to the U.S. To the extent we have better worker standards, etc. that is all part of the compensation package and if it is too high in total we suffer. What form it takes is less relevant. If we price too high we will be outbid. But as I explained in more detail in my remarks referred to at the start, when the overall gap becomes too great and we import too much relative to what we export, the dollar will decline to change to balance to one the market finds more acceptable.

As to the question of the growing wealth and income at the very top, there are some real issues here. I have not looked at the current statistics to the extent we even have them but it does seem highly likely that there has been an increase in recent years. I believe it is important to consider how such are achieved. When you have an entrepreneur who creates new products, finds new markets, improves productivity, etc. and is rewarded by the marketplace, he or she deserves what they earn. They have benefited humanity by their action as evidenced by the factor that they found buyers for what they were selling. When someone anticipates trends correctly and buys early to seller higher later they speed up the adjustment process and as such deserve to benefit also. But that is not where all the wealth is coming from these days. Often it seems to be earned by managers of existing companies with established products who are no more than agents appointed by existing agents who are elected by shareholders who have small stakes in the companies and little real ability to have much of an intelligent choice in the selection of their agents. The boards of directors consist in large part of managers of companies--that is they are part of the same privilege class. The great success of some sports stars and entrepreneurs like Bill Gates, along with the well placed social emphasis or meritocracy, has created a great cultural emphasis finding the best--the star--and paying him highly on the assumption that he or she contribute skills that create the extra wealth.

But agents of existing companies are not the same as entrepreneurs, and they may well be overvalued relative to others in their enterprises. Naturally, each board believes it should get the best and to do so they want to pay top dollar. And each CEO wants to be highly paid to show he or she is the best. So you end up with a ratcheting up process of getting ahead of the rivals determined by others who are in the same positions in other companies and so see nothing unusual about multi-million dollar compensation packages, which they also hope to attain if they do not have them already. As long as the stock price keeps going up most shareholders could not care much and when it falls there is not much they can do about it. When stock prices where soaring in the 1990's all this was fine, but it is less compelling in the years since. This is a problem. But for government to try to do something about it would undoubtedly create more harm than good. This is something for shareholders to take care of, particularly institutional shareholders who have more clout. It is one of the problems of large agent run companies. But it is not an overwhelming problem, nor the main cause of our concerns.

22-March-2006
Peter Gardiner reflects on news following price

In the afternoon, especially in NQ, succeeded by the after close announcement of MSFT, is just an absolute classic in the chapter on how news so often follows the price, as a 'discovery' is made and later announced. What do you make of it for the morrow? I am bullish but very wary.

21-March-2006
J. Lamberg gives an example of femme fatale

Short visit to the House of Hope last night...Guy sits down with a stack of blacks and starts losing. Lady on 1st says to him, "Instead of giving your money to the House, why don't you give it to me? Besides, I'm a lot prettier!"...

22-March-2006
Gary Rogan adds...

Having a Stop Loss is giving power to crazy people to shake you out if they are crazy enough. Diversify and suffer angst for your beliefs. If you're sufficiently diversified and all your positions are going to zero, it's World War III so don't worry.

22-March-2006
Andrea Ravano clarifies his point on stops...

I think we agree on most parts of the problem. But, communicating is a very difficult exercise indeed! More complex than placing a stop loss order perhaps...I merely wanted to point out that one should view such an order as an option strategy and value it on that basis. As I pointed out in one of my first posts on the list, a stop loss is a pain you must endure much like in sharp shooting. The most difficult task when aiming your pistol at a 50 meter target is to lower the weapon if you are not sure of yourself (e.g. the trade). If you force the shot, the nerve that moves all your fingers will contract and deviate your gun away from the target. In the end the hard part is to admit that you are wrong and that it's about time you start the effort anew.

22-March-2006
Shui Mitsuda responds with more detail...

My point is a stop loss is a MUST HAVE in all trades.

Why stop loss is necessary is perhaps because financial market behavior is mathematically imperfect. I once had a respectful but long argument with my lecturer at London School of Economics over his mathematical economics lecture. I eventually received the lowest mark from him but I am happy about it now.

No matter how much winning odds percentage I have, the last thing that will protect me from a big loss is a stop loss. Mathematical probability won't protect me.

For example...the most up to date example can be seen in cotton. It seems cotton's long entry point is pretty near (in a few weeks time perhaps?) but, even if I enter long, a stop loss must be set because even though the odds are in my favor on the trade, the downtrend may go on longer than expected. That's when the savior "Stop Loss" comes ensuring my survival.

If I get stopped out, I just have to wait till the next long entry point. It is just as simple as that I suppose.

22-March-2006
Andrea Ravano asks a follow up open question regarding stop loss as option strategy

I'm pretty sure that Specs more mathematically inclined than me can better answer the question, but isn't a stop loss equivalent to pricing an option strategy in your portfolio? In other words, a stop loss is just insurance you are buying to protect your position. The stop loss is no good in so far as your entire strategy may not make sense.

22-March-2006
Shui Mitsuda draws a parallel between Stop Loss and a Piece of  Machinery

Having a stop loss set in trades is like having a gear that rotates only in one direction in a machine. (picture attached.)

22-March-2006
Vinh Tu comments on Trimming Risk When Hit by Bad Luck

Another use of stops might be as a rough way of trimming risk when one's portfolio is reduced by bad luck. For example, if you follow a Kelly-type formula, or rather one of its generalized forms, a loss should cause you to scale down in order to maintain an optimal ratio of risk to portfolio size. This scaling down could be implemented as a series of stops, each of which closes out a part of the position. On the other hand, one has several positions going, the question is which position should be reduced to maintain optimal expected returns as well as optimal risk to portfolio size. The losing position may still be promising, and perhaps one could reduce risk by trimming some other position. And as always there's the issue of the vig, as well as the rough granularity of scaling down in chunks, which is particularly an issue for those of us trading with relatively small portfolio compared to contract size.

21-March-2006
Steve Ellison reflects on Two Lines of Thought Re: Stops

An appropriate study would include at least two lines of inquiry. One possibility would be to identify multiple independent sources of alpha so that one could mitigate the risk of a large decline through diversification rather than stops. I have yet to find any data that indicates that stop losses would improve profitability as a general rule at any level of statistical significance. Stop loss rules I have tested have more often than not reduced profitability.

However, a second line of inquiry is the possibility that stop losses short-circuit self-destructive behavior and hence have benefits that do not appear in quantitative studies. Evolutionary psychologists have found that humans generally prefer to avoid risk. When risk aversion failed, early humans resorted to panic and mad scrambling. While this behavior may have been quite effective for survival in ages past, today it is likely to lead to a natural inclination to sell stocks that rise slightly (risk aversion), but stay with and even double down on stocks that decline steeply (panic and mad scrambling).

21-March-2006
Andrew Moe has an Epiphany on Using Stops

In the study of stops, my epiphany came when I realized that any successful stop loss strategy is implicitly a stand alone short term trading strategy itself. In other words, if you find that stopping out after a 5 point move in the SP is profitable, you have also found that waiting for a 5 point move, then entering for a reversal is profitable. Otherwise, stops degrade performance by introducing noise, as many discussions here have shown.

21-March-2006
J.T. Holley on Risk and Reward

It is amazing to see the path of least resistance in work doing its mojo on the masses. I know better than anyone else and have fallen victim to many facets in my life. I have recently taken risks that I failed in and am placed in a start over position. I ironically had to liquidate my Davis New York Fund months ago to survive! I'll gladly take risks and be rewarded over and over.

Risk and Reward have a wonderful relationship together. The more you take the more you receive, the less you take the less you receive. No one likes the Risk but they like the Reward, what a paradox? No better showing of this, and Vic's study of high risk high variant stocks soon to out perform low risk low variant (quality) over the coming months and years, than 1 Samuel 17:1-58.

David (High Risk/High Reward) the lowly shepherd boy grabbed up five stones, went into the valley and slew the 9ft giant Goliath (Quality), while his fellow (Quality) Israelites sat on the sidelines. For forty days no one would go down into the valley to battle Goliath, but once David arrived and heard tell, and saw the challenge he immediately had to "beg" the King to try convincing him that warding off fierce animals had prepared him for this day. Everyone else took the path of least resistance and remained on the sidelines. David stood up took the challenge because he knew the reward! He was going to be revered and favored by his fellow Israelites, and it was ironically a turning point in him becoming King, versus Saul.

Why don't more portfolio managers take on more risk instead of less in proportion to their needs? Do they value their boring jobs and want to protect their white shoes? Do they concoct stories such as "Quality" to justify their diplomas? No one wants to be heroic and be on the winning side of this upward drift, everyone focuses on the downtrodden and the losing path? They aspire to be the tall ant marching. I just don't understand sometimes.

One of my favorite parts (though there are many) in Ed Spec is of Uncle Howie taking Vic's box of cards and losing them except two, playing 'closest to the wall.' He explains that a man's value at that young age was based on the value of the heroes whose faces were on those cards in the box. Witnessing them go down to two, only to see them go back up to near break even. Pressing when your back is against the wall and you've got everything to lose. That's me! A survivor, a fighter in all aspects and I don't do without.

21-March-2006
Ken Smith gets his ... socks off

I did not lose a sock. I lost a pair of shorts. A one-night stand in my youth ended with me walking out of the hotel minus my wallet and my shorts.

She arose early, and left while I slept. When I got up to dress my shorts and wallet were missing.

She left a note:

Tell your wife you crapped your britches and you threw them away. And its costing you a full wallet for my unmet expectations.

21-March-2006
Still-Galloping Horses, A Letter from Don Boudreaux to the Christian Science Monitor

To the Editor: Christian Science Monitor

Several errors infect David Francis's Selling Furniture to Pay the Laundry Bill (March 20), I mention only the deepest: the false assumption that the world's stock of capital is fixed. Most obviously, foreign direct investment -- totaling $117 billion here in 2005 -- routinely creates in the United States, factories, warehouses, and commercial establishments that would not otherwise exist, just as it frequently funds R&D that would not otherwise take place. America's capital stock grows. While such investments raise the U.S. current-account deficit, they do not necessarily entail Americans selling off capital. To overlook this important fact is to elevate fear-mongering over truth.

21-March-2006
Egoistical is Good, by Martin Lindkvist

When the pupil is ready the teacher appears, it is said. Well, I have had this particular teacher in my pile of unread books for a year or so, always getting the back seat from other, for the moment more important, (or so it seemed) books to read. So while I read away in the Bacon and the Biederman, the Damodaran and Snedecor, the Dimson and the Fosback, etc, I managed to not read this book for all this time. And that in spite of the fact that Victor says its the most important book one will ever read! I guess I just was not ready.

Yes, I am talking about Atlas Shrugged, which I finally read while on vacation last week. Wow! Can one say anything else? It put language on so many things I already knew, and taught me a whole lot more. But it especially put the spotlight on so many things going on in the world today, and what wrongs are being done to the people who have ideas and create things, done by those who do not have ideas but for some reason believe that they have the same right to these ideas as the creators. These looters extort more and more taxes from the producers while they take progress for granted. Everything becomes a question of distribution, so that they with less ability will have as good life as the others we hear, as if there will be anything left to distribute when they are through with their looting, as if anyone will have a good life after they are through, as if anyone will have a life at all...

I come from a country with high tax rates. I asked myself when I read the book how it comes that we have not gone down the abyss yet. I came to the conclusion that it must be that property rights have been, and are still, rather strong considering that the country for most of the last 70 years has been ruled by the socialist party. Of course, this is merely a chimera, since all the profits that are produced through that which is "owned" is so heavily taxed. And then you are taxed again when you spend, or whatever else you do, not even death will spare you from their extortion. So smart are the looters ways that people do not even know that they are scammed. "I own this house" - yeah right, try not paying the property tax and you will see who thinks they own it too. Although taxes are at different levels in different countries, the workings of the looters are the same. As for my country, we might as well be on the way into the abyss. I gasped as I saw a headline the other day about a new party here, called the Pirate Party, trying to abolish intellectual property rights. If this is not the road to serfdom, please tell me what is.

How come people have fallen for it? Atlas Shrugged gives three absolute virtues that man should have to prevent it from happening: Reason, Purpose and Self Esteem. In my view there is still a lot of reason in the world. As for purpose, I do not think the main vice is there either. Instead, I think it has to do with self esteem. We are taught that we first should look out for the people in need, and that egoistical thinking is bad. This way of thinking risks permanently shutting down the creative powers that arises when men and women strive for excellence and are left to keep the gains there from; the new innovations, the new factories, the new jobs, everything that actually comes to the help of the people in need, but is created not by looking out for them first, but through looking out for yourself first and letting others do the same. Egoistical is good.

19-March-2006
Trading with Moroccan Salesmen, from Martin Lindkvist

I just came home from a trip to Morocco, having stayed mostly in Agadir, a tourist town by the Atlantic Ocean, but also a couple of days in Marrakech, a thousand year old town at the foot of the Atlas Mountains. I saw no sign of any bad feelings against Scandinavians for the Mohammad drawings, instead very friendly people happy to see us and trade their merchandise, sun chairs, camel riding tours, et al, for our monies. They are excellent business men and negotiators, and in the end they always seem to come out on top. But with some street smarts one can perhaps lessen their advantage (possible market application within parenthesis).

  1. Do not make any purchase until you have compared the price offered with what you would get in a fixed price store to know what is high and what is low (Where are prices compared to the twenty day range).
  2. Do not be afraid to start with a bid as low as 20 % of what you have been quoted, and work your way from there. (Put in a limit order a point or two under the market).
  3. Sometimes you are put under time pressure with the salesman claiming that you will get a special price but you have to buy now! Its seldom true and odds are that you get a better price by being cool and waiting (Breakouts gives the feeling of losing out if you do not buy now, but instead you might lose your shirt).
  4. In some cultures the first sale of the day is very important and may even by the sales man be considered giving luck to the whole business, and you might get a better deal (A lower morning gap can be caused by some traders trying to get lucky by getting out of the market, thereby setting up an opportunity for a cheap buy).
  5. Do not exclaim "I want that!!" -- there is no bargaining after that! (Do not buy at the market).
  6. Your best way of getting a bargain is to walk away and mean it. If you are going to get a good price it will come at this point, "Mr for you not 100 Dirhams but only 30 Dirhams!" (Do not be afraid to stay out of a position altogether until the market comes to you with that very best offer).

19-March-2006
Laurence Glazier on Roulette Patterns

I know a chap, and I believe him, who maintains he is able to beat the house in casinos.

He has analysed enormous tables of spin results looking for patterns, though I think he regards them not as defects in the wheel, but rather as how that particular casino is cheating, adjusting the wheel in favor of the house. He only wins very small sums, does not wish to attract attention, but no doubt does. I think he plans to write about it, though this may be unwise.

Another possibility is that he wins in spite of his system (like some traders), being a little psychic - but win he appears to do.

19-March-2006
What is Freakonomics telling us? By Kim Zussman

Steve Levitt (Freakonomist at the University of Chicago, who is widely read by high schoolers) claims that PhD programs are so competitive now that he could not make it into most.

Could it be that the anti-capitalist stigma of the 1960's has ended (hurried along by re-birth of filthy Roubles), and 'doctor', which used to mean med school, now means FOMC chair?

Over the past 25 years on the west coast, most of the aerospace engineers who were promised the moon now sell real estate or broker mortgages, (Lots of them brokered stocks before, but that was last millennium). What will all the Econ PhD's be doing in 25 years?

17-Mar-2006
Point Shaving in NCAA Games, by Professor Gordon Haave

An economist claims to uncover statistical proof of point shaving. Among his findings:

Overall, the favorite covers the spread 50.01% of the time, which is consistent with an efficient market.

However, strong favorites only cover the spread 48.37% of the time. Yet, there is no systematic mis-pricing of who ought to win the game because strong favorites don't lose any more than they are predicted to.

17-March-2006
Response to "A Sixty Second Introduction to Reliability", from Gary Rogan

The article "A Sixty Second Introduction to Reliability" states that "Paradoxically, developments in semiconductors solved the reliability problem more directly and made these issues less important, at least for computing." Actually the issue became of paramount importance in manufacturing semiconductors. Today, practically all large semiconductor chips incorporating memory blocks require multiply redundant design with many sub-blocks placed on the chip to be swapped in during the manufacturing process. Due to large increases in complexity that overtook the decreases in defect density it has become impossible to manufacture sufficiently large semiconductor chips without redundancy. In communications having redundancy to guarantee availability has never stopped being the state of the art. The Internet has been, and continues to be, designed from the ground up to deal with circuit failures without interrupting service. A lot of the methods to deal with failures have moved to software.

17-March-2006
Empirical Look at the Long Term Drift, by Kim Zussman

How do empirical daily returns compare with simulations? Over the period 1950-2006, the daily return of SP500 index was:

mean 0.03482 % with
stdev 0.89388 %

I used a random number generator to produce 14000 "daily returns" which were normally distributed with the above mean and stdev for a graphical study.

Then I applied a "cumulative Z" approach. This counted back from today, with cumulative mean, stdev, and n to give z as a function of look-back period. This graph shows cumulative z with real SP500 data (pink) and simulation (blue): 

Significance of daily drift is of course a function of increasing n, though the simulation did not suffer from the irregularity caused by the recent bear market.

This raises the question of whether bear markets are possible manifestations of randomness, or are they only expressions of human emotion? The same series of SP500 and its sim sister were graphically analyzed as follows. SP500 in 1950 was 16, so this was set as the beginning simulation price. Starting with day 1, the sim price was multiplied by the return for each successive day, and thus compounded to produce a daily price. The log daily prices of both series were plotted together (thru 2005). Can you pick out the real SP500? 

Yup, it's the blue line, with all the numerous victories and defeats along the way. The simulation has many similar "bulls" and "bears", seems generally more log-linear, and certainly didn't show anything like the 00-03 sell-off. The real market out-performed the sim in the 50's-60's, but after the poor market of the early 70's the sim stays ahead. A similar penalty might be in progress since 2000 as well.

16-March-2006
An FDA Challenge, by Victor Niederhoffer

In an interesting discussion last night with Drs. Chang and Taleb I was challenged to briefly review all the harm that the FDA causes, and in a very sociable way, as this is challenging to all, I reeled off the standard reasons:

  1. The cost of bringing out a drug is about a billion dollars and it takes 15 years from molecule to on the markets, which causes an infinite reduction of the amount of life-saving drugs and procedures, as documented by Peltzman and his followers over the past 30 years.
  2. Innovation is stopped, and creators with brilliant life-saving ideas go into other fields like computers, engineering and software, where they can make a fast buck.
  3. Products that cannot pass the $1 billion and 15-year hurdles do not come out. Companies do not bring out products that they know would bankrupt them, or anything that may have a limited market which could not justify the expense, or a product that cannot pass the FDA's muster.
  4. Old molecules that cannot be patented are not moved forward. Something like, for example, aspirin or tetracycline, could never be marketed today.
  5. People (the public) stop trying to save their own lives because they become accustomed to taking the word of the higher authorities. Thus, the active striving to benefit oneself that is at the core of improvement everywhere else does not work here.
  6. The FDA's standards of accepting a drug are so obscure that they have nothing to do with proper decision-making under uncertainty. If you were to make decisions with a double-blind controlled study, with specific subgroups willing to enter such a study, in any other field, you would decrease knowledge by 10 years a century as the study has nothing to do with how patients actually take drugs, or what does and does not work.

After challenging all my numbers and repeating the usual folderol about people not being smart enough to go by word of mouth and certification and competition in this field, the dangers of charlatans and the selfish profit interests of drug companies if unregulated, the two doctors threw out to me, "Ha ha, nothing you say makes sense because any country is free to be just as unrestrictive as they want to be, and patients can go there if they don't like the restrictions." As an aside, a nice soft shoe on similar lines is contained in PracSpec, where Roger Longman and I go at it with similar results.

The Drs. and I also had an excellent discussion of how the standard chemotherapy, 5-FU, is available as a pill and is much more effective as such, but U.S. doctors will not prescribe it as their clinics would not be reimbursed for administering the injections.

These challenges reflected the extent to which laymen and doctors alike have been brainwashed. The status quo trains patients not to do anything to improve themselves if they do not get a third party to pay any more, and doctors cannot ever recommend that a patient go elsewhere for reasons of liability, licensing, training, etc. Worst of all, most people do not realize that when you are very sick, even if a panacea was available in Tijuana or (I look around five times) Thailand, no one would go there because they would be away from their families and the care and attention they provide in times of illness and death.

George Zachar adds:

I took my daughter to a very senior pediatric endocrinologist yesterday for a follow-up visit on a non-life threatening matter. The doctor, clearly a bright, experienced and empathetic woman, navigated a maze of "what's approved," "what's now OK"  and "what they'll pay for" en route to "what's best."

The entire mental architecture of the diagnostic/therapeutic decision-making process is now shaped by government standards and insurance payment schemes -- from the molecule in the laboratory, all the way down to the tip of the tongue depressor.

And, relative to Canada/Britain, etc., we do not have nationalized health care (yet).

Chris Cooper comments:

As an example illustrating the Chair's reasoning, take ALT-711. This anti-aging drug is not FDA-approved, but some more ambitious people, such as myself, who don't respect the FDA's "safety net," find ways to take it anyway. From Aubrey de Grey:

The scandalous thing is that Alteon are having real trouble getting ALT-711 through clinical trials, not because of any doubts about its efficacy but because it (or its suspected active site) is so simple a chemical that big pharmaceutical companies reckon its patent is not worth much (i.e. someone could probably rather easily create a similar chemical that worked the same way but evaded the patent), so they will not put in the required capital. I have the above from a senior scientist at one of the several big pharmaceutical firms which have looked at ALT-711, who was personally involved in his firm's decision not to fund it; he sees no effective way out for them.

For more information on ALT-711 ...

Tim Melvin writes

I am somewhat sensitive to this issue as I fly drugs in from New Zealand for my daughters gasteopareisis. It's not approved here as the market is sufficiently small that they could not sell enough to even begin to cover the cost of an FDA application, let alone review process.

The drug works, it works well. We spent over a year looking for a solution to the problem, a year of hospitals and ambulances, until the chair helped us locate a doctor open minded and focused enough on solutions to put us onto the drug.

No approval? No insurance.

Scott Brooks adds:

The biggest problem that being dependent on a higher authority breeds, ... is dependence. Most people do not posses the strength of character to overcome or stand up to a higher authority. Most people spend their lives either directly kowtowing to a higher authority like the FDA, or even Modern Portfolio Theory, or indirectly kowtowing by saying something like, "Well, you know they say..." -- referring of course to the omnipotent, all-knowing, yet nebulous, "they."

A great example of this is what recently happened in New Orleans. A whole group of people bred to behave like cattle, waited to be taken care of, and many of them died in the process.

If anyone is offended by my cattle reference, please spend some time on a cattle farm and watch the farmer/cattle (government/welfare recipient) relationship. Its similarities are striking.

Ken Smith comments:

In relation to this I have met people who think they are higher authorities. They are not higher in authority, they are merely opined they are higher.

We are taught in early schooling that teachers are higher authorities. This teaching is a difficult obstacle to overcome. Especially so when this teaching has been reinforced by the parenting we received, which also taught us about higher authority.

It takes a long time and is a difficult transition before we are able to question higher authority. That is the purpose of a college education, to learn to think. Lucky are those who attend college and have professors who lead them to critical thinking.

When I was an impudent student in the lower grades I was usually in trouble because early on I would question the teacher. They tend to take umbrage at questioning whether they are right. I think the stupidity of my teachers caused me to rebel and be involved in petty crime early on.

16-March-2006
Three Letters on Probability, Markets and Decision Making, beginning with Katherine Taggart

Thank you for your article on probability. I started playing No-limit Hold Em poker about 6 months ago and have begun to study probability to improve my game. The math can be somewhat intimidating and knowing when to call, check, raise or fold can become a difficult decision sometimes. The math has made some of these decisions more mechanical for me, thus removing some of the emotion in the decision making process. Furthermore, when I get a bad beat and lose to a two-outer after getting my chips in with the best hand, I no longer go on tilt like I used to. I know I played the hand correctly and in the long run I will win these hands more often than lose them. If I were to be put in the same situation I would again make the same decision. Thank you for citing your sources as I will most likely add these to my book list and I thoroughly enjoy your website.

Laurence Glazier adds:

This was a very interesting study, and counter-intuitive for one like me who is new to applying probability rigorously. Another interesting proposition that has been on trading blogs recently is that the first or last hour of trading usually contains either the day's high or low. Easy to test with R, but if in fact it has some truth it suggests one can make an educated guess where a price is heading in the afternoon in certain chart shapes -- i.e. if it is already clear the first hour has no min/max and we are near to the min/max thus far reached.

Phillip J McDonnell comments:

Mr. Glazier suggests that there is a tendency for markets to make their highs and lows in the first hour or last hour. To which I would add that markets tend to make their weekly extrema on Monday or Friday. Furthermore I would add that markets make their annual extrema during January or December inordinately often. However that information is unlikely to make anyone any money except your broker.

A well known phenomenon of random walks is that they tend to hit their extremes early in a given sequence or late. Given that you know this fact can you beat a random walk? The answer is a simple emphatic no!! It is still random - meaning that the next tick up or down cannot be predicted. Thus you cannot make money.

I will be the first to admit that markets do not always follow perfect random walks. However just because they hit extemes early or late in a given time period does not mean you have found a market inefficiency. For those who would like to try to discover any anomalies based on this I suggest the following. Take the months and calculate how many annual highs and lows (with full hindsight) are hit in Jan. and Dec. Then arbitrarily decree the year to begin on July 1. Now see how many "annual" highs and lows occur in July and June using your new July through June calendar year with perfect hindsight. If you find that they are about the same then the arc sine law rules. If significantly different it may be worth exploring further.

In theory one could try the same thing with hourly and daily data as well but there are issues. For hourly data during the day there is a clear U shaped distribution. There is more volume at the opening and near the close. Presumably this can create higher volatility and thus the dreaded heteroskedasticity. Assuming for the sake of argument that opens and closes showed more extremes than say noon to noon, how could we separate out the U shaped volume effect and overnight jump effect from the arc sine law effect. It seems hopeless to me.

The same thing goes for weekly data. Both Monday and Friday may have extrema related to the arc sine law predictions. But we also know that there is more volatility over the weekend simply because there is more time for news to develop. So we would have to separate out both effects and then determine whether the number of extrema on Monday and Friday is unusual or just what we could expect by chance.

For my time and money I do not think this particular exercise is worth it.

16-March-2006
Hall of Fame and Cerveza, from David Higgs

Whilst in Monterrey, Mexico this past weekend, our select baseball team (under 12s) was treated to a private tour of the Mexican baseball hall of fame, next to Cooperstown, the second largest in the world ... Yeah, yeah, I know some of you will bark back ... "Kansas City, Kansas City", but lets not rain on their parade -- they were so proud and frankly it's very nice. The largest beer maker in Mexico pays for it all, and one of their breweries is next door, that being a museum in itself, too.

Monterrey is the fastest growing city in Mexico with 10 million now, and the construction there, you say bubble ... "no senor!!" Lots of young fair beautiful Mexicans soaking up the nightlife, and you think New York has traffic problems going across the George Washington Bridge? Ha! Getting across the Mexican border, you best pack a breakfast and lunch. I have never seen so many 18 wheelers in my life. Any word of a recession ... stick that meme in you ear with lots of chilli sauce!

Back to cerveza, one has to question where would so much be without the backing of of these mega companies, liquor, fast cars and fast women, what deal makers!

Oh we went 1 in 4 this weekend and that's another story in of itself!

15-March-2006
Fishing and The Markets, by J.T. Holley

I was brushing up on my Smallmouth Bass textbooks in the closet lately getting ready for the Spring and came across a passage that I feel is a wonderful synonym to the markets especially with the topics of drift, slippage, and "should I short the market". The passage came with a picture of three guys in a small bass boat on a river. Hopefully the words paint a more than enough clear picture to visualize:

"This photo illustrates what the basics of slipping are all about. ARROW #1 symbolizes the force of the downstream current. ARROW #2 is the speed of the motor. Note that the motor's forward thrust is less than the force of the current. This means that although the boat is facing the current and the motor is running in forward, the boat is actually losing ground. ARROW #3 is the difference between the current and the thrust of the motor. With a little practice you can hold a boat virtually motionless by balancing the forward speed of the motor with the downstream speed of the current. Slipping results when the forward speed is reduced to a point where the forward thrust of the motor cannot overtake the speed of the current. But be careful! Once you begin to slip, when you start casting, your lure will travel much faster than the amount of the slip (ARROW #4), so your lure will come back to you faster than you are slipping. You must always keep a tight line to maintain proper "feel". Steadily retrieve and keep a high rod tip to reduce slack and bows in your line. This is very important, because with too much bow, the current will tend to lift your lure off bottom. In a nutshell, this is the secret to slipping. Note that the motor is in forward gear. This approach generally works best with small outboards (less than 10 hp) which lack the power to back up in reverse gear against the current. With larger outboards, however, you may find it easier to work in reverse gear. The choice is yours."
Bass Smallmouth: A Handbook of Strategies by Lindner, Csanda, Ripley, Stange, Sura, and Dahlberg 1984

Wow, it's utterly amazing to see the perfect description of the force of nature the market is in trying to short it without the proper amount of "horsepower". We constantly throw our lures (trades) into the market and must always take into consideration the tightness of our lines, horsepower of the boat, and the power of the currents we are fishing (trading). It takes a special person/firm/situation to be able to have the ability to short a market with regularity and be successful. Though some might feel they have the engine and boat to do so I don't think they have enough fuel to keep it up. I know I am a small boat with less than 10 hp, furthermore I know that I can't deal with the slippage that the market river presents. To be able to have that point and maintain where I am going against the market and have that perfect speed where slippage doesn't occur almost seems impossible! I'll stick to trying to do it on the river instead of the markets.

The world record for Smallies is in Dale Hollow, Tennessee and it is 11lbs. and 15 oz. I have caught a many five-pounders and one eight-pounder but have yet to crack double digits. I highly recommend for the bigger smallies' use live bait such as minnows or helgamites. Lures are fine and should replicate leeches or crawdaddy's.

The formula that the above book cranked out in summation in its several chapters was:

(F) Fish + (L) Location + (P) Presentation = (S) Success.

14-March-2006
Death in the Nest, by Dean Parisian

On the way home this morning from taking my youngest son to school and dropping off a basket for our spring carnival I noticed a pile of feathers on the shoulder of the road near my neighborhood. I had been on the road last night about 9:15 pm and hadn't noticed the feathers and curiosity got the best of me so I turned around and went back to see what type of bird was the owner of said feathers.

I knew immediately when you see feathers on a birds legs all the way down to the talons. For years Great-horned owls have been a fixture in our neighborhood. Often waking me up. Often watching their silent flight at early dawn moving back into a 22 acre of woods across the street that they have called home for years. The bird was probably low in flight and was hit by a car last night.

Great-horned owls are the first birds to breed in the calendar year. Something to do with having great feather protection to ward off late winter cold as well as having an ample food supply for their young while the spring vegetation is not thick and provides better hunting opportunity for the birds to feed their young. The dead owl this morning surely had young in the nest. The lonely hooting which subsides during the early days of raising their young may not be heard for a while. I hope the remaining adult bird can feed the young birds and get them into adulthood.

Death comes to predators as well. Even great predators.

14-March-2006
Lawyers, Cops and Robbers, by James Lackey

There are so many brilliant lawyers on this August list. I am certain they will reply with erudite prose on how new laws must be challenged or worked to benefit their clients. The lawyer joke is everyone hates lawyers but loves their own.

All criminals are innocent. For arguments sake lets say you were falsely accused of a crime and taken downtown. You are an idiot if you talk to the cops with out a lawyer present. Cops for all their passions are human and the law of least effort is always in effect. You can look quite guilty yet after explaining a perfect alibi "I was in NY when the crime was committed in LA so obviously I am innocent" Just opens the doors for the 57 other questions they will ask you. If by some random chance you are related or know the perp you can/will be charged with 25 crimes in order for you to testify against your own kin. All you had to do was keep your mouth shut, call your lawyer and he can keep you off "jury duty".

"All lawyers rack up as much billable hours to pad their accounts, therefore all lawyers are "unethical" Sounds like a high school level debate team argument that is silly. A good lawyer will cut through the legal mumbo as quickly as possible to lower the costs to client for repeat referral business. That is a law of businesses or incentive.

A good lawyer, a good accountant a good trader all will save you zillions in other costs, risks there fore you can profit. I have seen more often than not the prepaid legal forms, cheapest accountant low cost brokers for trading cost much more in the end due to Errors.

In medicine we always look for a second opinion. A surgeon wants to cut, the radiologist wants to radiate, the primary care wants to CYA and run all tests. It is very difficult for a Medical doc to say whether or not some tests are really needed, for the patient, to cover his own liability and lastly will insurance, medicare or the patient pay for it?

Who here is in favor of paying for a full body scan? Paying a great Lawyer to set up and help manage his businesses? I have met a few guys at spec parties that have shown all of these things can be "life saving".

14-March-2006
QOTD on Environmentalism, by J. Klein

The news posted on fouled rivers is exciting. I hope it is true. I hope the public ignores it. Man is the stupidest beast G_d created; he fouls his own living space.--Ken Smith

Sorry Ken, but there is no reason for excitement. Some rivers may be no more, but the water is still there. It is development. For example in Israel we have no more rivers strictu sensu. All the water is being used for agricultural irrigation, for industry and domestic supply. What is flowing is treated wastewater of almost drinking water quality. Since treated wastewater is also in demand for irrigation, a central water authority is being established and 10% of all the available water will be allocated to a customer called "Nature", meaning eco reserves, rivers and other recreational uses. In that sense, "Nature" has become not more natural than a zoo.

Just to give you an idea how little natural nature remains, the Dead Sea is almost dead, dry and no more. It has been mined by for potash fertilizer and other minerals. So it will be restored by a pipeline from the Red Sea.

Water management is not an Israeli invention, even if we had to carry it to its extreme. Each drop in the Rhine goes through seven cycles of use and treatment before it reaches the sea. The Thames at London, ten recyclings.

The United States is a big country but it is being rapidly populated and its vast water resources - managed. I mean captured, used and recycled back to "Nature". Man is not fouling its environment. Man is managing its environment and getting better at it with each passing year. In a word, it is too late for you to retire to "Nature". You may retire to a well managed (if totally artificial) nature reserve.

14-March-2006
Thoughts on Dull Markets, from M. Cekin

Since I mentioned it last week, I got to thinking about the wisdom of: "Never short a dull market." How would one define dullness from a testing viewpoint? As far as I am concerned, pretty much any day from July 4th through Labor Day is rather dull.

What about days with low volume and small price moves? This would include most days in advance of key economic releases and Fed meetings.

13-March-2006
A Wall Street Quote, found by Janice Dorn

"When you stop to think of it, you will see that it is impossible for all securities to have equal value and prospects. Therefore, some must be better than others, To be able to select the few which are absolutely the best requires a very broad knowledge and great statistical and analytical training and capability. The possession of such qualities, however, enables one to go cross lots toward his goal of sound investments and money making." -- Richard D. Wyckoff from The Magazine Of Wall Street, 1924

And here we are...82 years later.

13-March-2006
An Almost Perfect Weekend, by Tim Melvin

The first almost perfect weekend of the spring has come and gone. The weather in the Mid-Atlantic was spectacular. One saw the first sign of life in the marinas that had been moribund and empty since late October. As I made my traditional stop by Castle Marina on Saturday morning to check on the boat, there was the sound of activity, rigging being checked, motors flushed, shrink wrapping being removed in anticipation of the Chesapeake bay summer that was tasted on the spring like breezes that floated across the island. Golf courses were jammed as the fair weather players once again joined their heartier brethren who played on through the winter any time the temperature was above 30. The whole island began to climb out from under the heavy weight of winter. Although I am sure that there will be some of those nasty cold blustery days in the weeks ahead, spring has been foretold and we are all feeling the tinglings of anticipation for unfurled sails, growling engines, dock bars, bikini clad beauties, swimming in hidden coves along the Wye River, Red Eye Sunday afternoons at Jellyfish Joels, The Crab Claw and all the pleasures of summer along the Chesapeake bay.

It was incredible to be out again at the dock bars in shirt sleeves, drinking cold beer with hot shrimp, catching up with people we haven't seen since the first frost. The jetty was like a magnet for Kent Islanders on Friday evening. To stand out in the sun with friends watching the sunlight dance across the narrows and feel the breeze off the bay, no longer hawkish and bitter, but carrying instead salt laced aroma that foretells of good weather, grand adventures and great friends ahead was semi-spectacular. It would have been criminal not to be there for that Friday Happy Hour.

Combine the weather with the other events of the weekend and it was just a great weekend. Watching the ACC tournament outside it is an unusual occurrence and one all local fans seem to have taken advantage. All the outside joints were jammed by tip off all weekend. As usual the tournament did not disappoint. Maryland was, as predicted out early, Wake Forest almost cinderella-ed, Boston College showed that they are in fact, more than ready to be a full fledged member of the toughest conference in college hoops, knocking off the Tarheels on their way to a final against the $%^&*&^% Dukies. I would love to be able to disparage Duke basketball but it is in fact, not possible. They are well coached, they are talented and they play smart-every year. The faces change as players graduate, and, by the way, their graduation rate is one of the best in college basketball, or leave for the NBA. But every year Duke is right there, a constant threat to win the ACC as well as the NCAA Championship. Of course, it doesn't  hurt that this year JJ Reddick has come into his own in a spectacular fashion. He makes shots that he just should not be able to make. He sinks 40 ft three-pointers like they were lay-ups. Every time Duke was pressed this weekend, here came JJ sinking a series of bombs, finding Williams or McRoberts wide open underneath, making plays and shots the crushed Miami, Wake and then BC for Dukes record setting 16th ACC Championship. Reddick is the Niederhoffer of college hoops, routinely doing things that are thought to be improbable, if not impossible. Warm Weather, cold beer, and ACC Championship basketball. A great way spend a weekend in March.

I would be remiss if I did not mention here the Colonial Players of Annapolis production of Enter the Guardsman, a rendition of Fernec Monlars play The guardsman. Like many small theatre companies, Colonial Players production can be hit or miss. This one is a solid hit. The comedic tale of love, fidelity and the lack thereof is well done, the musical adaptation sparkles and the cast hits the right notes of comedy and drama. Renowned sailing instructor Duncan Hood is spectacular in the Machiavellian roll of the playwright who so carefully orchestrates the birth and death and rebirth of the actress, actors and guardsman's love triangle. He plays the role right on the verge of over the top as it should be played. The production runs through April 8th and if you are in the area, you could do worse for an evening's entertainment.

So with thoughts of warm days, great nights and exciting college hoops, I return to the office and the land of no volatility markets. Although I am sure the footstep of winter is not completely off the land, its weight has lessened. And, I am also aware the market can continue to drift like this for long periods of time, I take heart in the there are still a few decent liquidations and option selling opportunities available to keep food on the table and the bar fully stocked. I am certain that summer will return to the Chesapeake Bay and we will have a string of weekends like the one past, and eventually the stock market will give the type of trading opportunities we have had in months and years past. Until then, we savor the anticipation created by this past weekend.

A Challenge concerning government, from Denis Vako

The purpose of government is not anti growth and anti life. In fact the government is suppose to enhance life and protect our liberties. The problem arises that the politicians who control government have forgotten the true principles upon which the government was founded (life, liberty, & the pursuit of happiness).

Public interest groups have the politicians in their back pockets and the average individual is not able to compete with them.

If one went back to the federalist papers and studied them one would see that Hamilton, Madison and Jay even though favoring a strong central government never wanted to do away with the individual's rights in fact the bill of rights was added to the constitution to guarantee the individuals rights.

A strong military according to Hamilton, is for the purpose of protecting our rights from those who would take them away; not a means to force others to take our point of view. Unfortunately the current administration wishes to fight terrorism as if it was a visible enemy which can be conquered rather than an idea.

Our government has gotten out of control and needs to be brought back to the principles upon which it was founded by people such as Hamilton, Washington, & Jay who would abhor what this government has become.

12-March-2006
Scott Brooks responds to Winning Ugly

Winning ugly is what most of us have to do. Unless we're a truly gifted athlete at an elite level, we have to win in some in other manner. Maybe we're persistent like the tortoise in his race with the hare. For me, a recent experience in this ties back to trading.

Recently, I've gotten back into playing basketball. I haven't really played a game since I was 30 and not played seriously since I was 21 (I'm 42).

The hard fact of the matter is that I'm not as good as I used to be. I would put the same moves on the guy guarding me that I used to put on, clearing the way to the basket for an easy layout, or maybe even a dunk. Now, when I put those same moves on him, instead of seeing a clear lane to the basket, I see a defender standing in front of me looking like he's been waiting there for me to get done putting on my pathetically slow move for around 5 minutes. Okay, so I have to adjust my game.

Here's what I've done. I play with great abandon using a lot of elbows and pushing. Since this is pick up basketball, fouls are rarely called unless there is blood involved. I do NOT let anyone block me out. I push harder with my body than they are used to. I use my elbows early and often to let them know the price they will pay for coming close to me.

If they push back or elbow me back, I up the stakes and push harder or elbow harder. I know some of them are bigger and stronger than me, but I never back down. So, as a result, I win the war of wills. I am willing to push harder, be elbowed harder and put up with more pain than they are. So defensively and under the basket, I more than hold my own.

However, that doesn't help my team on the offensive side. Since I'm considerable slower than I used to be (and slower than 75% of the guys on the floor), I have to compensate. I crash the boards win my teammates shoot and grab more than my share of rebounds. When I get the ball, I patiently wait for one of my teammates to get open and then try and make a good pass. Mostly I work hard to set picks to free up one of my teammates to shot, then roll in to crash the boards in case they miss.

Then on top of that, I still have to score. I get my share of points grabbing rebounds. But I still have to the keep the guy guarding me honest. Usually they have their worst player guarding me. I can usually handle this guy (because he's slow like me). I can drive on him and score. If I can't then I pull up and shot a jumper. What I've been really working on is re-developing my fade away jumper. As a result, I score my fair share of points.

As a result of this, when a new game is being started and teams are being picked, I find that instead of sitting there hoping I'll get picked, these younger much better players are actually picking the 42 year old goofy looking bald white guy to be on their team.

This applies to my trading. I am not as smart as most of you on this list. My eyes glaze over on most the posts that involve deep calculations that to many of you are pretty simple. I don't have the depth of knowledge of R or quant that many of you do. So I have to make up for it in other ways.

I watch and read many of your posts carefully, trying to glean knowledge and information that could benefit me and my clients. I pay attention to what my strengths are. Technical analysis, which many of you consider simple and beneath you, has worked well for me and my clients. I don't get the big hits like many of you traders/speculators do, but then again, I don't take the big hits either. When it comes to my portfolio's, I am the Tortoise. I just plod along, with a low beta, high alpha and try and stay a point or two ahead of the market.

I have gotten many off list comments about how I should be going for the big hits and the home runs. Sorry, I'm just not quick enough. The market blocks my path to the basket. So I'll just pass it off, being satisfied with an assist or an occasional fade away jumper. In the mean time, when you're working hard to pick up your homerun or thundering slam dunk of a trade, and you feel the pain of an elbow in your rib cage or someone pushing you hard out of the lane, that's me. Just a slow goofy looking white guy from the mid-west, plodding along, cleaning up the rebounds of your failed 3 pointers, and tipping them in.

10-March-2006
A Note on Ben Franklin and Checkers, from Alan Millhone

Hello Mr. Niederhoffer:

I notice on your site tonight an article on Ben Franklin. Then you might find this article interesting if you have not seen it before. The article also attests to the ancient history of Checkers/Draughts.

9-March-2006
Unselfishness for the survival of your own genes, from Jan-Petter Janssen

I've been a frequent reader of your website for quite a time now, and I really appreciate the work of you and the contributors. I will also thank you for writing your books which have helped me become a profitable trader.

Despite neither being a biologist or as experienced trader as the contributors on your website, my thoughts on "Social Insects and Stocks" may have some value:

Many successful traders sharing their wisdom seem to me at first glance to be a paradox. Websites like this one and books like EdSpec have educated me into becoming a better trader. Thus, upcoming traders are more skilled and the competition harder than it otherwise would have been. I bet a crappy book about "how to get rich in 30 days" or something would have made just as much money, so I salute you Mr. Niederhoffer for your quality product. A salute also goes to the other contributors of this website.

The factors contributing to you sharing your wisdom, I think, are the same as why drone bees sacrifice themselves for the cube. Firstly, if you contribute in making the markets a bit more efficient it boosts growth a bit, making life a bit better for your children, your children's children and so on. Secondly, I guess the readers and contributors of Daily Speculations have more genes in common than with the average man, because we are all curious and truth-seeking versus the average Joe's mumbo jumbo approach in explaining life. As a result you are helping people similar to yourself to become successful and therefore indirectly spreading genes similar to yours. Thirdly, by trying to extend mankind's understanding of markets, you are doing one piece in the big puzzle of making our race grow and survive for generations to come.

Put short, evolution has made us behave in a way that maximizes the survival of our own genes, and in many cases the best effort is unselfish because we share many of the same genes. However, whether the force is strong enough to make people sacrifice their career, self esteem and wealth for the rise of eBay and Google, is a question I'll leave open.

Sincerely,
Jan-Petter Janssen,
Norway

Vic replies:

A beautiful sentiment. I cannot say that I am truly altruistic as my actions give me a chance to display prowess, and sharpen my competitive instincts. The book was also a deal to trade a love story about my father for a few titbits of lasting value and thus to spread his idea gene memes to subsequent generations.

Strangely, I have been widely reviled for the Ed Spec type writing because it does not teach anyone how to make money. I feel like one of the bees that has an improper genotype, different from the drones and queens, and is therefore immediately killed by the soldiers. I am convinced that if I were to do something like lower the fees I charge my customers, an act which I think would start a most benevolent chain of events for the consumer, I would immediately find a lynch mob at my door, with coercive assistance from the beltway.

Thus all I dare do to date on this front is point out the dangers of friction and vigorous. Vic

8-March-2006
A note on Central Planning, from J. Klein

This "Central Planning" argument has been debunked infinite times. Eliminate the intermediaries, etc. seems good on paper, but it does not work. And letting two identical products - say soaps - compete for the same consumer is a waste and forces the consumer to pay more for the same soap. It is amazing that this delusion never dies and keeps popping up from the most unexpected of all places.

8-March-2006
A Thought on Freedom from Laurence Glazier

In response to Dr. Steenbarger's piece:

I think of freedom in terms of political rights. Most people regard political freedom as having the vote, but I view having the right to buy and sell shares in freely formed companies an equally important freedom. Freedoms are hard won and easily lost and I feel it a responsibility to vote at each election, always a moving event in England. Likewise I feel similarly geared to participate in the market, another freedom which is sorely under pressure and about which I received zero education at school (a manifestation of that pressure). What better example of democratic structure then a company with a board elected by shareholders? When I click Transmit on my workstation, along with all the other joys of trading, it is an expression of personal freedom.

8-March-2006
A Note from a February Letter Winner

Ms. Kenner, Mr. Niederhoffer,

Sorry for the delay in replying -- health issues prevented such hitherto. Thank you for picking my letter as one of your also ran winners. I didn't think my rant was deserving, but it sounded much better after your edits!

Nonetheless, thank you. I would like to suggest however that you donate the prize to a charity that is supporting the South Asian earthquake victims & education in Pakistan. Is that acceptable to you as judges and prize givers? I'll send you details if acceptable.

Both my wife and father now think I should take up writing. Haven't won any prizes for managing money yet, so they may still be right.
 

8-March-2006
Baseball Q&A, between Victor Niederhoffer and Rodger Bastien

Victor asks:

I think all writing and coaching needs someone who really plays the game. did you find it that way in your own illustrious baseball career?

Rodger's reply:

An interesting question. As I am sure you know, some of baseball's greatest managers (Sparky Anderson, Leo Durocher, Casey Stengel...) had very pedestrian playing careers while many of the truly great players (Ted Williams, Ty Cobb, Pete Rose...) never were very good managers. It seems that in TEAM sports each players importance is magnified and the average player seems to have seen the entire picture more than the superstar, fostering the ability to manage a more unified and effective TEAM should he become a coach or manager. Successful coaches who never played are a rarity these days, with Charlie Weis of Notre Dame (football) being the most outstanding exception to the rule.

When we write, we want our constituents to feel what we feel, don't we? A successful writer conveys that to his readers. To be a great writer you must be a perceptive and voracious reader, just as the great manager was most likely a perceptive and diligent ballplayer, don't you think?

8-March-2006
Vince Fulco Looks at Reports of a New and Better Battery

EEStor claims to have used some exotic materials blended into ceramics to isolate the best properties of a capacitor and a battery, to create something they call an Electrical Energy Storage Unit (EESU). The product promises to have the following improvements over current technology:

  1. Radical increase in voltage and throughput; ability to provide a quick power burst.
  2. Improved and more efficient storage.
  3. Reliable, can be charged/discharged many times.

Initial applications are directed at large scale applications such as hybrid vehicles.

The company is in super stealth mode w/o a website nor more than a couple of energy oriented blogs commenting on the few scraps on company and industry material. It is not unheard of to keep oneself under the radar screen but still it seems strange for a company which claims to have developed its first prototype in 1991, can produce in batch quantities today and should have a full production line ready next year. The catalyst for any public discussion was a $3MM capital infusion from Kleiner Perkins back in Sept. 2005 which Businessweek detailed at that time. While this looks sizable on the face of it, if one considers the VC approach towards building portfolios and seeding bleeding edge technology, $3MM is a pittance for a firm like KPCB. Additionally, in a bout of complete rumour mongering and hearsay, at a conference in January, John Doerr claimed his firm was involved in one of its highest risk/highest reward ventures with a next generation battery company. The company was not specifically named but web content contributors and the Toronto Star make the leap that it is probably EEStor. The TS article was generated by what I believe was a call into them by another Canadian based seed investor/licensee of the company's technology for all vehicle applications under about a Honda Civic's current weight class, (I do not have the exact kilo limit). The licensee paid $2.5MM for the privilege.

The TS article itself does a good job of profiling the thoughts of Prof. Andrew Burke of UC-Davis who is named as an ultracapacitor expert with 17 years experience. He states "there is no shortage of groundbreaking claims but no backup of the claims with hard data or experiments outside the lab." Think the ghost of cold fusion. He points to both the EEStor claims and recent breakthrough announcements made by researchers at MIT as examples. Again, he says "many of these claims, such as MIT's, are based on calculations and assumptions, not hard material." As for EEStor, "Nonsense, let's see the data."

I have done an extensive but by no means exhaustive search of the US Patent office's database and can find no filings or published patents for the technology in question for the period from 2001 to present. If you want a 100% certainty on the existence of a US patent filing for this item, I can spend more time there, (19K filings with some relevance). I did find a Canadian patent application (short form) which is still pending with a simplistic drawing and description filed in 2003 and I have copies of those documents if you require them. Assuming I am correct that there is only a Canadian patent, it begs the question why Canada when the company resides in Austin, Texas?

8-March-2006
Freedom by Ken Smith

I just returned from a visit to the desert area where the famous squash man lives, the world foot walker. His little abode is an approach to freedom. Every building on the 10 acres was constructed by the owner with his own saw and hammer, shovel and pipe wrench. His place is the most sophisticated in that valley of ghosts. Quite unique. A video has been made of his industry. I would suggest he make copies and sell them on eBay.

Steve Keely does not worry about property because no one wants it. People do not even dare the road which leads 50 miles into the desert where he lives. The government charges him $35 per year for property tax and is thinking about paying him $50 a year to stay there instead of coming to town. He is a menace to society. Government feels that if every one gets on to Keely's idea then the jig is up for them.

Keely is not a wage slave. He works only when he is near to broke. He eats in the local free food kitchen. Sleeps in his car when not at his ranch, has special no-rent locations in desert haunts outside the town of Blythe, California. He uses the college library for internet, which is free.

Now there isn't freedom in America like the pioneers knew. We can't shoot to kill our enemies, like they did in wiping out Indians. As I was just telling lieutenant colonel Keely, a psychiatrist asked me what I would want if I could have it and I told him "Impunity." With impunity I would do what the hell I pleased and the first thing would be kill my enemies. That would be freedom.

Also like the still makers in Kentucky, making moonshine, I would run the government revenuers off my land. With impunity, that is. My G_d what a man could do with impunity. However, as it is, America has more people in prison than any other country, per capita. They have a law against passing wind on Chicago street corners - I think. Anyway, I've heard a lot about wind in Chicago.

Nope. Crime does not pay; unless you are a corporate executive, politican, lobbyist, a monopolist, or have a seat on an exchange. Even those guys have been having trouble with law lately.

The problem began when the mandarians of the planet got together and decided to have world trade, globalization. The goal is to subjugate all, including the wealthy who have less than the mandarians. We will have a globalized socialistic code of behavior and equality will be forced on us. As time slips away before my eyes I will live to see the possibility of achieving inequality disappear.

Say goodbye to freedom. Go gently into the night, for we cannot fight the rising of the sun, the setting of the moon.

*In America achieving inequality is the purpose of life (Syncreticus).

7-March-2006
A Philadelphia Barbeque Review, from Nick Procyk

Rib Rack
The place is nothing special, but the food is, especially the bbq sauce. It's my favorite bbq sauce --- enough zest without being too spicy. I usually order the bbq chicken and rib platter to go (the place is small, dimly lit, smoky, and usually packed). The quality of the bbq ribs, chicken, and sauce has been consistently high.

Famous Dave's
I tried this place out for the first time this past Saturday (Springfield, PA location). They offered 2 sauces: "rich and sassy" and "devil's spit". The "rich and sassy" was mild but nonetheless very tasty. "Devil's spit" is spicy but still edible. The ribs, corn bread, and beans were all delicious. The restaurant was hospitable and busy.

Sweet Lucy's
I had the bbq pulled chicked sandwich, which was tasty but light on sauce. Next time I'll have to get the ribs. Friends have recommended the Texas Beef Brisket.

I recommend all 3 places.

7-March-2006
Steve Leslie asks about the health of the market

I would like to toss this question back to the chair for insight into this market. I for one would appreciate comments from others who wish to chime in.

How would you diagnose the psychological health of this stock market?

I get the feeling that it is neither hot or cold but lukewarm at best.

I suspect this is due to big money sitting around waiting for something to happen. They don't want to commit to the stock market until it makes a definitive break to the upside and they are reluctant to commit to bonds until the fed stops raising rates. So right now, they are just moving their chips around the table as we say in poker until the cards get sorted out. Until then we stay range bound and for the long side investor and speculator isn't cash the comfortable zone to be in?

Steve Ellison replies:

If data tested to be predictive are giving little insight into the likely direction of stock prices, it seems to my feeble brain that the fallback prediction is for 9% annual upward drift, and that therefore the best position while waiting to see what happens next is 100% long.

6-March-2006
An Article on how Hurricanes are similar to large hostile companies, found by John Lamberg

Hurricanes, Other Vortices Seize Energy Via 'Hostile Takeovers'

For decades, scientists who study hurricanes, whirlpools and other large fluid vortices have puzzled over precisely how these vast swirling masses of gas or liquid sustain themselves. How do they acquire the energy to keep moving? The most common theory sounded like it was lifted from Wall Street: The large vortices collect power as smaller vortices merge and combine their assets, in the same way that small companies join forces to create a mega-corporation.

Johns Hopkins researchers used these banks of computer servers to produce simulations for their research into how large fluid vortices, such as hurricanes, acquire energy to sustain themselves. But researchers from The Johns Hopkins University and Los Alamos National Laboratory now believe the better model is a much different business tactic: the hostile takeover

6-March-2006
A reader offers a kind word

Mr. Niederhoffer,

I wanted to drop you a quick note to let you know that I find your writing to be profound and at time colloquially and sarcastically side-splitting. I am the former head of thematic strategy at NIM and although biased, I find your approach to the markets to be distinct and return generative. Good luck in the markets.

Kindly yours,
M

6-March-2006
How to Compute Bad Answers, from Vince Fulco

I found an article on Financial Engineering News called How to Develop/Compute Bad Answers, which I thought might be of interest to the more quant inclined specs. It was written by Dr. Thomas Coleman, who up until a few months ago was running Cornell's Theory Center (CTC), which marries research on valuation techniques of CB and exotic options with computing clusters.

6-March-2006
The End is Nigh, Will they Ever Learn? From Tim Hewson

They have been talking about it since last autumn. Data releases have been scrutinised, Japanese officials' comments have been sliced and diced, confirmed, denied and corrected... what started as a whisper morphed into a clarion call.

Yes, the much heralded end of so called quantitative easing in Japan, which is an important step for the Bank of Japan towards raising interest rates sometime in the future after years of a zero interest rate policy.

Participants hang on every piece of news... so much so that it was rumoured a few traders in New York sold Yen last Wednesday when the headline "PM Kosumi resigns" flashed across the screen (Kosumi was the Albanian PM, not Japanese PM Koizumi).

All eyes were on the CPI release out in Japan overnight on Friday. The market was looking for a +0.4% y/y print. Should this be achieved, then chances were the Bank of Japan would move to end QE at its meeting on Tue/Wed coming.

In the preceding week and a half usd/jpy had been sold down from 119.00 to as low as 115.40 (i.e. Yen strengthens) despite the 4.5% negative carry. It hovered at 115.80 in the run up to the data.

On Thursday night London/ Friday morning Tokyo: Japanese CPI comes in at 0.5% y/y, stronger than expected. The usd/jpy lurches 30 ticks lower to usd/jpy 115.50 and then domestic banks jump in and buy dollars, pushing the rate above 115.80, 116.00 all the way to 116.65, a whole 1% in an hour, squeezing the Dollar shorts/Yen longs without mercy.

The squeeze continued in London & NYC on Friday and into Asia and London again today, setting a high of usd/jpy 117.29. Next the Japanese PM warns the Bank of Japan not to rush into any decision.

Why shouldn't this be surprising? For over a week there was constant fixation on the outcome of this event, and the market reflected this through the price action i.e. the purchase of Yen. The fact the number was stronger than expected and the Yen weakened shows how overdiscounted the outcome was.

It reminds me of the biggest non-story of last year: the Chinese Yuan revaluation, which everyone and his dog predicted would benefit the Japanese currency but instead Dollar shorts got skinned alive into year end.

What do both these events have in common? The news follows the price, and safety in numbers by going with the crowd is not always a given. You probably need a bigger edge to go with the flow than against it sometimes. There are no easy trades out there: will they ever learn?

6-March-2006
Riz Din on the Pizza Indicator

A potential rival to the Economist's Big Mac Index?

George Zachar notes that a slice of pizza costs $2.50 to $2.75. In central Leicester Square, London, you can get a slice for £1.50. At today's exchange rate (spot 1.7580) that's $2.64; extremely close to the mid-point of George's range!

6-March-2006
Get the Boot, from James Sogi

Venables and Ripley recommend A. C. Davison, D. V. Hinkley, Bootstrap Methods and their Application Series: Cambridge Series in Statistical and Probabilistic Mathematics (No. 1).

R functions are available at and accompany the book. I will review when it comes in. These Cambridge Series books seem to be the best on statistics so far and are clearly written with good practical applications, and R script, best of all.

5-March-2006
Ten reasons people don't sell stocks, from Steve Leslie

It is often said that it is far easier to buy a stock than sell it. With respect to this I have resubmitted my top ten reasons why people don't sell stocks:

I know that no self respecting investor or speculator has ever succumbed to the following, but for the wild, the innocent, and/or the less well informed here is my list:

  1. I am a buy and hold person. Be sure what you are buying and holding, CSCO has gone nowhere in 6 years. Eastman Kodak. Especially destructive thinking when buying cyclical stocks or retail.
  2. I will have to pay taxes on the gains. Duh, isn't that why we bought it in the first place. The natural follow up:
  3. I am going to wait until it goes long term. Ask your self how long will that be.
  4. It is going higher or it might go higher. Where do you buy tomorrow's paper around here? . Natural follow up:
  5. Let's say the stock is at 48, I am going to sell it WHEN it hits 50 or 55 or whatever. Where did you get those numbers. Corollary:
  6. It is down now and I am going to wait until it goes back up. Did you buy a stock or a yo-yo.
  7. I am going to leave it for my kids or my estate or my whatever. What do you think they are going to do with it?
  8. I don't have any use for the money right now. It ain't your money till you sell it. Now it is just a piece of paper. Or a number on a statement. Give me the money I have use for it.
  9. You never sell a good stock. And, why is that Mr. Wizard? Or how long is never, or are you both registered at Tiffany's.
  10. Finally, the number one reason why people don't sell a stock: I am afraid to make a decision. Actually this one is an adequate replacement for the others.

3-March-2006
Gates Interview, from Riz Din

Just in case it's slipped you by, here is a recent interview with Bill Gates re Google, taken from Forbes Europe. As much as I adore Google, I also have a strong admiration for Microsoft's capacity to endure (Xbox, Internet Explorer). Whatever happens, the consumer will surely win.

2-March-2006
Barron's: Survival of the Non-fittest, from Chairman of the Old Speculator's Assoc.

I was wondering the other day how a publication like Barron's could have survived all these years despite being reliably so wrong on the market.

The obvious answer is that to be successful a publication doesn't have to appeal to everyone. All it needs is enough readers to get by. Similarly a creature doesn't have to be omnivorous. It just needs some steady diet that works for it. Barron's diet is presumably young readers who haven't yet figured them out, plus the small but steady percentage of people who see life through the same bearish lens as Barron's. You don't have to be the fittest to survive, you just have to get by.

2-March-2006
Predictive Power, from Yucheng Pan

It is not difficult from studying historical data to come up with some trading strategies that were very successful, but their successfulness almost inevitably diminishes practically to nil once applied to future data. We know that we only have the normal 50% chance of getting  heads when throwing a coin the eleventh time even if we've gotten nothing but  heads the first ten times. My troubling question is: does this analogy apply to the stock market? If so, it seems we can only use random processes to predict future. Does a random process could possibly have any predicting power?

I did much testing based on the historical data of about 2000 stocks (with survivors' bias). I found many wonderful trading strategies, many statistically significant, but most came to no good in the real world. My findings are in very much agreement with PRACTICAL SPECULATOR.

2-March-2006
Young Mistakes, (A Reply)

Hello Mr. Niederhoffer:

Tomorrow morning I leave for Lebanon, Tennessee (500 miles each way) for the yearly Checker tournament held there and will take along my almost 21 year old Grandson David. He will turn 21 on Friday the 3rd. He does not drive yet ! He has had his permit a couple of times (expired) and he has a nice car that sits in my garage that he starts up on occasion. He loves Chess and has a fleeting interest in Checkers and is planning on attending a 2 year college and take computer courses after this Winter. During our trip together this week-end I will chat with him on being a defensive driver and now that he is 21 the dangers of alcohol while driving. The youth of today have a lot of extra pressures placed upon them that I honestly did not have when I was growing up to adulthood. I did some drinking in the Army, but that was a long time ago. To be honest I worry about him driving and the dangers of being on the road today. I was saddened to read the recent story of the young people killed recently on your letters to Ed. section. Adults need to set a proper example and be ever diligent as best we can to educate our youth in being responsible. I will also caution David about the dangers of underage youth approaching him to buy alcohol for them.

Sincerely:
Alan Millhone

1-March-2006
Google: Too Smart for Their Own Good? by Victor Niederhoffer

During the course of my career at Harvard, Chicago, and Berkeley, and then selling hundreds of entrepreneurial businesses, and then hiring and competing against the best and brightest of wall street, I have met with many individuals infinitely smarter than I from an IQ standpoint; and fortunately I have had three partners in my 44 years in business and each is in that category.

However, one thing I've noticed (not with my last two partners, because, except for the first, we've always given the other the benefit of the doubt on all matters, but with the outsiders) is that you can be too smart for your own good. Such I believe is the case with Google. They seem to feel that they are so superior that they can lord it over us, and we won't get it. Thus, the meme they send out that they couldn't possibly grow any more and the law of large numbers, whatever they think that is, somehow applies. So much of what they say, their advertisements on billboards that just spell out an expansion of E, their IQ tests in the puff book, their disdain for calling each other by last names, their motto about evil is explainable in that context. But, they don't get that we know they're smarter but they should just treat us as competent anyway.

But, by far the most sagacious of all of them is Eric Schmidt their reluctant CEO, who parlayed a 1 million dollar preferred investment into 5% interest in the company. If only they would let him speak at analyst's day, the results would be so much better. Such advice would be good for all who pride themselves on being too smart for their counterparts. You see, we eventually realize how brilliant they are, and that they always get the edge on us in all transactions, and take defensive measures in a slow, tortoise-like way.

President of Old Speculator's Club comments:

If the Chair enjoys $400 stocks and combat with opponents who "always get the edge on us in all transactions" he should feel far more comfortable with an old friend rather than GOOG. I speak of CME which features a chart that's slightly less volatile than GOOG but just as profitable. Performance aside, it seems one would prefer owning a piece of a rigged casino that has little competition than a smidgen of the world's largest lending library that will face some heavy challenges from some real heavyweights in the near future. Plus, the CME ownership demonstrates no indication of intellectual superiority, it just rakes its percentage out of each pot and let's the Quixotes tilt with each other.

Dr. Mark Goulston says:

Google sounds like another case of a company being bright and smart, but not wise enough to keep from outsmarting themselves. It's only a matter of time where they (like all of us) reach an event where as right as they thought they were is as wrong as they turned out to be. I Agree with Vic about listening to Eric Schmidt, reminds me of what happened at Disney when the wise man, Frank Wells, died and the "Lord of Flies" crew of Eisner, Katzenberg, et al outsmarted each other and themselves. If this interests you, you might check out the piece I wrote for Fast Company entitled: "Mickey Mouse Management".

Steve Wisdom adds:

Those among us who've programmed automated/electronic trading mechanisms would pause before suggesting that CME's electronic product technologies demonstrate no intellectual capability. As I've asked many times, if electronic market making (or providing electronic liquidity as an exchange) is so easy, and the fat juicy vig so easy to earn, why doesn't everyone get into the business? And why have many, many capable and well-funded firms dropped out?

1-March-2006
Questions on Markets and Wives, from Steve Leslie

Here are some open questions that have perplexed me for years. Some of these have evolved from the tried and true maxim "buy on the rumor, sell on the news". Some live on in perpetuity. Some just fade away like old generals only to rise out of the illusory ashes of disaster or the seemingly insurmountable after effects of hurricanes. Kind of like the Clinton's or Rocky VI.

Why is it a sound strategy to buy a stock on the way up, but also a good strategy to sell a stock on the way up?

What makes an old wife so wise, and why does she tell so many tales or know so many in the first place? Where does one find said old wives and what clutch church group or synagogue are they members of? Has an old wife been described scientifically, or are they more like the Loch Ness Monster, or the Yeti, or worse yet, Piltdown Man Have they actually been classified as to kingdom, phylum, class, order, family, genus and species by a Linnaean subject? Has anyone ever thought of that?

Is there a statistical, technical or mechanical (i.e. market maker-driven reason) for a stock to fall a certain amount after serving up a great quarter? Why do stocks seemingly and magically drop 30 percent in one day but take nine months to climb 30 percent? Why does the Dow drop 100 points because the economy is slowing, but also drop 100 points because the economy is accelerating? Or, why does the market go down because oil is going up, but also go down because oil was down on the day? Did anyone notice that natural gas hit a four-month low recently? Is that good or bad?

Why does the market go down when interest rates go up, but also go down when interest rates go down?

Why is it a good idea to raise taxes on individuals so as to expand the economy, but it is also a good idea to lower taxes to expand the economy?

Why does everyone, especially the stalwart intelligentsia, seemingly know that Google cannot grow at 50% a year forever (that trees do not grow to the sky) yet give the stock a $30 haircut when said company public announces that they are going to have to come up with better and more creative ways to generate revenue and profits for the future?

I must humbly state that I have no answers to these questions. In fact, after such ruminations my brain has begun to swell and I may have to take a corticosteroid. Yet, I just read somewhere that it is actually a bad thing to prescribe corticosteroids for head injury.

Letters to the Editors: Archive