Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner


to the Editors

September '05


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Letters to the Editor Competition

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.

This month, we had more than one winner:

A Letter on Monitors for Trading, by Laurence Glazier

It's almost 8 months ago, but many thanks to the Speculators - Mr E, Steve, James, George, Bruno and Jeff who advised me on a suitable display setup for trading. On reflection, my vision changed to a four screen system. I finally bought ViewSonic VX910's powered by a Colorgraphic Xentera GT4 AGP, and am using Virtual Desktop with it. I'm reliably informed it is expandable to 8 screens.

A Letter on International Equities, from Yuri

Dr. Chair, Could international equities currently be cheaper relative to their bond yields then US stocks? I have trouble getting forward estimates for international indices, but I notice many countries currently have lower 10-yr yields then US. How else would you explain the recent laggard performance of US equities? Yuri

A Letter on the Memes of Public Opinions, by George Zachar

Pamela Van Giessen wrote:

"The anti-real estate/real estate bubble commentary gives me the uneasy feeling of the elite objecting to the hoi polloi increasing their wealth and lifting themselves up, determined to do their part to knock these people down to size."

Most folks, who are not specialists in the field, or deep thinkers about such matters, are simply parroting back the material that they see in the popular press, which is totally saturated with these ideas.

It's like the "Bush screwed up on the hurricanes" meme...it's a big lie, or a big meme, that becomes common wisdom simply by repetition.

I don't blame the people who are not specialists for being at the mercy of "opinion makers". I blame the "opinion makers" for choosing to promote pernicious ideas.

Yes, there are alternate realities available online and elsewhere, but as we all know, many many people lack the time or inclination to aggressively educate themselves about matters that aren't central to their day-to-day lives.

A parallel closer to our financial world would be the Adoration Of The Sage, whose flagship enterprise hasn't done much in years, and who's been noisily on the wrong side of the dollar. The press and the man-in-the-street still reflexively label him as THE GREATEST INVESTOR OF ALL TIME.

Some arguably pernicious cultural trends - the lurid sexualization pushed by MTV - are clearly driven by the profit motive. Sex "does" sell.

And apparently, so does fear.

A letter on Risk Conversion, from Martin Lindkvist

Dear Editor,

Risk is something unavoidable when it comes to trading, in fact, without risk there would be no opportunity for profit.

So we want to take on risk. But at the same time, risk, per the definition of variance from a straight growth line, can be hard to stomach for investors. This of course mostly concerns drawdowns, but also an upside, in the sense that this can get investors to expect the same performance in the future.

But what if we could convert risk, as in variance from a straight line, into being risk of total loss. This is not as visible day to day, and also would make high leverage possible from the investors viewpoint (until it all falls down of course).

What on earth do I mean? Well consider this as the general idea:

Long only approach, to take advantage of the upwards of 6-8% negative take that the stock market track is giving us an average year. Buying weakness, and selling on strength (in a framework of tested patterns of course). Everyday balancing our portfolios by selling put options so that we win as close to the same amount each day - creating as near as possible a straight growth line, or 'riskless' investment. If the market goes down, and the patterns are still bullish, we buy more futures to average our price and sell more puts for income. Everyday enough put selling so that we have our same win. When the market goes up, we sell our futures with a profit and we perhaps buy back some of the puts, which now have lost time value, to see to that our daily profit is the same as before.

The gist of the strategy would in any case be to convert as much as possible of the risk as defined variance from a straight growth line, into risk as a chance of total loss only, which will occur if we do not have the staying power to keep buying as the market falls. We could of course have some kind of catastrophic stop loss for such an occasion, ala the Senator, but that would in a sense defeat the purpose of the approach in that it just invokes/realises the drawdown earlier.

And now for the part where you tell me that I am an useless idiot and ask if I have lost my mind.....

Best Regards,


A Thank-You for Practical Speculation

Dear Victor,

Your books changed my entire trading life. Thanks to you, I am a tester! Because of you I have come up with a system for trading the markets that uses changes in the yield on 10 year bonds and equals the rate of return on the market while being in the market only about 30% of the time. What provoked me to start testing changes in rates was the correlation of monthly moves in US bonds/stocks on page 270 of Practical Speculation (the greatest investment book ever written). Anyway, I started testing and testing and found amazing correlations! I am not a doctor of statistics. In fact, I dropped out of college years ago and I now work with retarded people. I can tell that my conclusions are not by coincidence even though I do not know really rigorous statistical testing methods. They would most certainly pass any test for randomness. I have taught myself how to construct and to read scatter diagrams and my tests have extremely strong correlations. I am short term bearish and extraordinarily medium/long term bullish. Anyway, thank you! You are the greatest. It is my dream to correspond with you some time.

Carl Sievers

Music and Colors

To the editor:

(I am sure that you are surprised that I am writing to you, but I looked at the site the other day and saw an interesting discussion of music and colors -- whatever we may disagree on, I could not hesitate to invite myself to  comment.)

There is a human condition called "synaesthesia" (or synesthesia) in which the person can visualize letters, numbers or musical notes as colored (an "A" will be consistently red, a "3" blue, etc.). Rachmaninoff was a synesthete. So were many poets/aesthetic prose writers like Rimbaud, Nabokov -- and many more who did not say so explicitly. Some people claim that synesthetes are over-represented in the artistic community, but I have not seen any serious empirical study.

Why am I interested in synesthesia? Because of the synesthete's ability to identify patterns that other persons cannot detect. Some people with prodigious memory were synesthetes. They can see associations in an additional dimension. By attaching a color or physical location to concepts, you can increase your mnemonic ability (something as old as the Greeks, called the "method of the loci") -- and memory works best by patterns.

Indeed, while I believe that we humans are fooled by false patterns in random things, I also believe in the converse: many things are thought to be random, all the while having patterns. Our statistical methods are not powerful enough to detect them.

One of the best literary-scientific books I know is by A. L. Luria on the prodigious memory of a synesthete. The best discussion is in Ramachandran's book in which he explains that the birth of metaphor ("dark" moods, "luminous" mind, etc.) comes from a weak form of synesthesia in all of us humans. Synesthesia is cross-wiring in the V4 visual cortex --we are all cross-wired to an extent.

It is also true that synesthetes only discover their "condition" accidentally, late in life. I have been puzzled by the condition as I am obsessed with the notion of pattern detection.

Nassim Nicholas Taleb

Victor Niederhoffer responds

You could be receiving a check for best letter at the end of the month.

Mark Mills responds:

Ramachandran's book A Brief Tour of Human Consciousness: From Impostor Poodles to Purple Numbers, goes into some detail about tests for specific synesthesia. For example, imagine a rectangle filled with what appears to be random numbers. Actually, the numbers are carefully selected for the synesthete who sees the number '8' as red. (Yes, their brains automatically color the number. My choice of color and number is arbitrary.) In the box, there are 15 examples of the character '8' and they form a triangle. The synesthete will instantly see the triangle. A mathematician might see it after an hour of study. The average person will never see the triangle unless they literally 'connect the dots' with a pencil.

Think about this in terms of identifying price patterns instead of making sense of a jumble of numbers in a box. The ability is the by product of unusual neural connections, generally thought to be caused by successful neural bridges between the canonic loci of 'linguistic' and 'color' cognition. Though these loci seem 'intellectually' distant, they are physically only a few centimeters away from each other on the surface of the brain.

>Synesthesia is cross-wiring in the V4 visual cortex -- we are all cross-wired to an extent.

The most important blending of canonic cognitive loci is the movement of most 'mouth' neuro-motor primitives to the human hand. In other words, most of what a dog will do with its mouth, we do with our hands. It may not be as visually interesting as seeing the number 8 as red, but probably far more important for human evolution. Try tying your shoes with your mouth.

For a neurological understanding of how this works, read about 'mirror neurons.' A good introductory book is Mirror Neurons and the Evolution of Brain and Language.

The Grandmaster responds:

This 'condition' may be far more widespread than suggested in the coffee-colored email.

Our culture is full of associations between mood and color that wouldn't exist if they had no meaning to people:

As music also appeals to our emotions, we then have a two-stage link between sound and color. So it's not surprising to hear that some people may be adept at skipping the link, though I'm not sure this means they are seeing patterns in a new way.

Meanwhile I'm toying with the idea of annotating chess moves by color: green for developing (growing) moves, yellow for brilliance (sunshine), red for brutality, grey for dull etc. Taking this one stage further one might describe an attractive young woman as being truly 'Sicilian Najdorf' or her dodgy friend as being 'Czech Benoni.'

Ah, the world of the chess Grandmaster...

Kim Zussman responds

I am not qualified to speak to urbane generalship, but I would agree as far as his idea that pattern recognition is a gift. I doubt very much that any amount of study could have made a Beethoven, Einstein, or Federer out of me, and he seem to know this as well.

Cons, by Rip Mackenzie

I began researching cons about a month ago and developed a fascination for deciphering profiles not of con men, but of marks. I believe the study of marks might lead to some valuable insights about predicting bubbles. (It takes two to dance.)

Your site had a discussion on big cons several months ago that mentioned the adage, "You can't  cheat an honest man." I discovered that the original quote lends more understanding to the motivations of marks and the characteristics of bubbles:

I never cheated an honest man, only rascals. They wanted something for nothing. I gave them nothing for something. -- Joseph "Yellow Kid" Weil


Rip Mackenzie

Briefly Speaking, from Paul Marino

Hi Vic& Laurel-
Love the site's ongoing progress, if I can say it plainly, it is really good stuff.

Regarding today's briefly speaking, especially the Martin Anderson ref, I cam across this abstract while searching for similar problems which may happen in China and other developing nations. This seems worth reading:

Journal of Planning Education and Research, Vol. 23, No. 3, 286-298 (2004)
DOI: 10.1177/0739456X03261287 (c) 2004 Association of Collegiate Schools of Planning

Is History Repeating Itself? From Urban Renewal in the United States to Inner-City Redevelopment in China. Yan Zhang, Ke Fang

This study compares urban renewal in the United States in the 1950s and 1960s with inner-city redevelopment in China since the late 1980s. It finds that both programs use government authority and subsidies to make large-scale private or quasi-private investment attractive in the name of ameliorating living conditions. Cautiously applying Logan and Molotch's "growth coalition" concept to China, the authors assert that a "growth machine" has formed during China's economic decentralization processes. Despite the similarities, America's urban renewal was an ill-fated federal program in which the local government and downtown business interests cooperated to boost declining inner-cities that were competing with burgeoning suburbs. In contrast, China's redevelopment has been propelled by emerging local elites using decentralized state power to pursue fast growth in rising real estate markets. Greater insights into urban redevelopment can be gleaned through this comparative analysis.

Key Words: urban renewal * redevelopment * growth machine * growth coalition

The Wisdom of Crowds

Dear Ms Kenner and Mr. Niederhoffer,

I greatly enjoyed reading your articles on MSN Money as well as your book "Practical Speculation". As a potentially useful tool for you and your readers I wanted to bring a website to your attention.

Inspired by James Surowiecki's book, "The Wisdom of Crowds", some colleagues and I set up a website to find out whether the many are indeed smarter than the few when it comes to the financial markets.

The result is www.consensusView.com, a website that allows participants in the stock, FX and futures markets to forecast the daily direction of the markets and in return see the aggregate, or consensus view, of where a given market will finish that day. I hope that you have a look at our website and perhaps mention it to your readers if you think that it might be of interest to them.

Of course we would greatly welcome any comments that you might have.

Thank you and best regards,

Stephan Bisse

Remarkable aspects of Barcelona, from Javier Benites

Dear Speculators

I was reading the piece Summer 2005 Travel Notes (Nobody Asked Me, But...) by Laurel Kenner and I was surprised that among the many remarkable aspects of Barcelona mentioned, Barcelona FC or their stadium, the Nou Camp are not?

Barcelona FC is a football club, soccer for Americans, and is one of the most popular football clubs around the world. I know that Americans don't follow the sport, but to talk about Barcelona and not even mention the club or the stadium is just not right! To give you an example of the team's importance to Cataluņa, during the Franco regime the Nou Camp was the only place where Catalan was allowed to be spoken by law.

Next time you are there don't forget to visit the stadium and see a Barca game.


Weston Reader Defends Don Quixote

Dear Spec Duo. ; It is rare that I disagree with anything one of you has said (such disagreement mite be very costly) but when you say that the best thing in Barcelona is the Maritime Museum, why that's just so discourteous, untruthful and unchivalrous to the Don Quixote museum that is part of the City Museum of B that I must overcome, protest, and insist that you extol the uniqueness, greatness , and beauty of this exhibit. It is based on the well-known fact that Barcelona is the only modern city that Cervantes and Sid Hamdedas mention in Don. and the exhibit describes, illustrates, and records in multilevels, multiple languages and multimedia the Barcelona of those days.

It starts with Don telling Sancho as he did in chapter 60 that he should not be frightened by the feet that are touching his head while he sleeps as that must mean that he is near Barcelona where there are so many robbers around that the city fathers hand them on trees forthwith en masse. Narratives, documentation, and paintings of the path to Barcelona accompany this audio at the entrance, Indeed, a complete blowup of all the points that the Don visited in Spain with indexing to the chapters of the book accompanies this.

Next, we receive a lesson in Barcelona trade and how it relates to the Robin Hood like Roque and the discipline and management style of legendary robbers of that day (one notes at every point by the similarity to the trading life, albeit it is not emphasized directly in the Museum's narrative). Next, a picture of the Head that can answer all questions, the guru that has a system, and the fraudulent exposure of the mountebanks of that time which is so similar to the mumbo that reaches us in our daily life from the media and the floor, that it's like the Head is speaking to us directly today.

I could go on but you get the point the Museum creates a tapestry, poem, and story of the uplifting nature of the Don's quest to rite the wrongs, redress the grievances, protect damsels, relive the golden days, and above all to hold to ridicule the literature and deeds of the false heroes of that day and this in knight erranty and our own field that is timeless and immensely profitable. Vic

Laurel responds:

The writer is correct, as he is 99 percent of the time, and I yield at once with humble mien.

A Question On Bid-Ask Spreads From Reader Aaron Koral

Dear Mr. Niederhoffer:

I was wondering if I could ask about bid-ask spreads and their role in determining futures prices. The reason I ask is because I just came across a web site called Hedge Street

The site works like a futures market and is regulated by the CFTC. In your opinion, do bid-ask spreads play any role in the price discovery of futures?

I was wondering whether spreads are a factor in traders taking advantage of rising or declining prices for future events.

I would greatly appreciate your help - thanks.

Chair responds

I would doubt that the bid asked spread as you mean it, like the size at each price, does much as there are too many other factors like substitutes and returns relative to risk that are directly responsive over more than the merest short term period. The short term moves can only be captured economically by the market makers anyway. There is even considerable debate as to whether a book of big limits on one side or the other is bullish or bearish. Justin Mamis is very good on this.


From Adi Shnytzer

As an outsider looking in, I cannot help but wonder why this storm has caused suffering about the same away as similar storms in places like Bangladesh. Of what use is wealth and development if thousands (One truly hopes this is an exaggeration) can die and thousands can be left trapped without food or water in a developed city? So that the cameras can quickly get there to cover the event? Watching FOX coverage, I was disgusted by the well-fed gent who was interviewing hungry folk and then pointing out that there would be no food or water for them. What about him? Ah, but he has a helicopter! Were he in Bangladesh or Somalia, we would understand that he is perhaps risking his life to go in there and bring the suffering to our attention. But in the US of A? Sad. And who sane builds cities inside bath tubs that have no plug, anyway? All the best. Adi


Letters to the Editor: Archive