Don't forget our "Letters to the Editor" section, which includes many thoughts and ideas submitted by our readers. Recent posts include: statistical correlations, tales from the desert, previson, markets and wives, and many others of interest and insight. Remember, prizes are given each month for the top posts submitted to the letters section.

3-March-2006
Footwork, by James Sogi

Footwork is critical to effective fighting and sparring and many other sports. One important aspect of footwork is going backwards. There are numerous techniques, shuffle back (right and left) cross step back, and back step. It takes practice and uses different muscles to avoid falling on your butt. The back step is used to gain space, change timing, rhythm, distance and defense. The specific technique to focus on tonight is hitting while back stepping.

Probably the best example is the Ali vs. Frazier fight, the "Thrilla' in Manilla" where Smokin' Joe keeps charging in, head down, swinging. Ali is back stepping around the ring, leading Frazier, and as Ali back steps, he shoots off punches that catch Frazier coming in. When Ali can sense Frazier is stung, he reverses forward and flurries with a combination. Ali is always just a step away. Our coach always told us to change up the rhythm. Don't step, punch step, punch mechanically, like Frazier. Soon the charging bear gets exhausted, and the back stepper can move in for the knockout, and has scored points all during the defensive phase. This type of tactic can work when entering a position and when you don't quite get the bottom tick like some traders I know.

3-March-2006
Ducks vs. Gulls, by GM Nigel Davies

During the last couple of years I've had much opportunity to watch the feeding practices of ducks and gulls, which share the same habitat at the local park. Under normal circumstances the gulls are more than a match for the ducks, being highly aggressive when bread is thrown and able to intercept it in flight. But this morning, with freezing conditions, there was a change in the normal status quo. The ducks became much more aggressive.

It reminded me of the situation of chess players in Hungary before the Berlin Wall came down. Although there weren't 'professionals' as such (the authorities wanted to avoid this kind of nomenclature), most of the Hungarian players only went into work to collect their salaries, spending the rest of the time 'relaxing' (OK, they were 'supposed' to be studying chess in order to crush Westerners, but very few saw a pressing need for such squishing).

Of course, things are very different today and relaxation is a thing of the past. Many play in tournaments designed to provide title norm opportunities to Westerners, these 'businesses' having offshoots such as female 'tour guides' (with the optimal pay off being to marry some naive Western chess anorak and get the hell out of Budapest). Others have become 'coaches' and still others have left 'professional chess' altogether. But they learned to be competitive with the gulls when the chips were down.

02-March-2006
Thoughts Inspired by an Unsatisfactory Day, by Victor Niederhoffer

I am one of those people who, although having traded continuously for some 10,000 consecutive days, has never had a satisfactory one. Yesterday was no exception. Among other things I did not get out of all the positions I wanted to at the close, I allocated much too much of my capital to a certain search engine stock powered by executives too smart by 4/5ths, and I suffered from faintheartedness the previous day when I should have taken out the cane on 82nd Street, but instead merely used a walker.

As punishment for my gaps, at the end of the day I bought "The National Enquirer," Clocker Lawton's
"Handicap Selections," and "The Gold Sheet." Lawton has been clocking for some 60 years, and I used his sheet regularly when I bet on races in the 1950s. Strangely, he has not aged, and he still maintains a staff of clockers and other researchers in New York who are "salaried employees and [those] other from him [from] whom he buys services." His selections are sold at most leading newsstands near OTB parlors, although I was disappointed to note that they do not seem to be available at the gate of the track the way they were in my youth. The key to his selections are the early morning workouts that the ponies take and his crack team of operatives, who can tell how fast the ponies are and how hard they're trying despite the efforts of the boys to disguise their true strength.

It reminds me of a certain gold broker who handled the Hunt's trades and had a tendency to come up the elevator to the fifth floor of the World Trade Center and buy thousands of contracts of gold after lunch. Counterparts of Clocker Lawton on the floor paid early warning sentries hundreds of dollars to signal ahead when the broker pressed the button to go up so they could buy in advance. Why take the risk of having a position open for a hour or two, when you could just have exposure for the one-minute ride up to the fifth floor before front-running? The idea of finding out when executives are holding their annual meetings, directors' meetings, or meetings before analysts' societies, and monitoring the flow of pizzas and coffees being ordered by the operatives at the federal agencies would seem to be a variation of the Clocker's techniques.

On my Wednesday, March 1, sheet, the Clocker has successfully handicapped 8 top winners in 11 races and 9 winners, 8 on top, at the Meadowlands the previous Sunday, doubles, exactas, a picke 3 a trifecta gold, a most preferred play, a cut losses maneuver, and Preferred Play Vince the man won and paid 5.60.

It would be good if market commentators were to post their record, even if it were not as good as the Clocker's, and also, if they had a cut-losses maneuver and various parlays.

As for the "Gold Sheet," the level of analysis was so far superior to anything I've seen in markets there's no comparison. The sheet starts out with a lengthy article on the psychology of conference tournaments that could be a model for psychological investigations of incentives in markets. Of course the coaches want to get on a winning note for the big one, but they do not want to show too much of their good stuff. The author concluded, "The teams most likely to try the hardest are members of major conferences who find themselves on the proverbial bubble for the NCAA tournament and teams from mid-major conferences who know that the only way for them to make the NCAA field is by going the distance in their conference affair." If only there were a way for analysts to tell when companies were going to devote all their efforts to winning for their stockholders with such fine distinctions.

I would recommend that some major brokerage hire the "Gold Sheet" analysts for an analysis of motivation and sharp testable conclusions that would give its customers a unique edge. The hoop ratings and point spread records for all basketball teams contained in the "Gold Sheet" is so far advanced over anything I've seen in the market that I want to throw in the towel on my own research efforts and just hire them to do a comparable thing for markets and retire to Acapulco. Such things as average points scored away and at home, for and against, the home court value, the current power rating (a combo of some kind), the percentage that they beat the point spread, the straight up record at home and away, the record of beating the point spread when they were favorite and dog, all broken down by home and away. There is much further quantitative analysis, much of it is too small for me to read, but I can say it's so far in excess of anything I've ever seen vis-a-vis individual stock analysis that there's no comparison. The qualitative analysis they give of each game includes teams to beat, top contenders for each day and each game in the future and this is very similar to what one sees on the street.

After being inspired by the extent and quality of research in these two related fields, one's displeasure with oneself is somewhat allayed and one is much more ready to join the fray the next day.

Stefan Jovanovich comments:

Your note reminded me of what Teddy Roosevelt wrote about the man in the arena. They -- both Roosevelt and the man in the arena -- never had a satisfactory day either.

I understand why you, as someone trading every day, find valuation methods suspect. Most of them are. They rely on an unproven and unprovable correlations based on past events. They do not measure the heat of the present moment, (The reason that I am not a fan of Money Ball is that the statistics can tell you how to win the regular season games but they do not measure heart. That is why, under Billy Beane, the Oakland A's have consistently failed in the post season.) But, those of us in the Kindleberger seats are not entirely spectators. Like Clocker Lawton we enjoy studying the morning workouts, and our old-fashioned calculations of value work better than chance. We do have our own capital at risk. We are not playing with some institution's money, but we are not at the plate or on the mound, either. At best, we are in the dugout watching like the bench coach and making the occasional remark about the tendencies of the next hitter or pitcher.

In the end the race remains in the hands of the jockeys just the way the market remains in the hands of the traders. Enjoy day 10,001 as best you can.

Dr. Goulston adds:

Perfection is an ideal to aspire to; once you make it the standard to live by, you're doomed to be dissatisfied, if not downright unhappy.

I did house calls on a dying iconic composer some years ago who felt miserable beyond the fact he was dying. I asked him what that was about and he replied:

"I've been successful in the eyes of the world for more than 40 years, but there have only been five times when the music in my head matched the music I composed and played. Knowing it was possible caused me to try to do it every day, and every day other than those five occasions come up short."

I told him he had blown it (in our relationship he appreciated my direct/bluntness vs. the many sycophants he had.) To know utter perfection at his level five times in a lifetime was something almost no one experienced. He had foolishly treated an ideal as his standard for daily living and he should stop it already.

On another note, we experts don't always practice what we preach. For instance , I suffer from a similar malady, where when I accomplish something, it doesn't make me happy (because I too chase the elusive carrot of: "I could have always done better"), but when don't accomplish something, it makes me miserable. I have however used this distorted mind set to deal better with mistakes or disappointment, by saying to myself: "Hey, even if it went perfectly, you still wouldn't be happy. So just let it go." It sometimes works.

Kim Zussman notes:

Isn't the discrepancy because people want to represent trading/investing/speculating as loftier than gambling?

In Bodie Merton finance text, the chapter on futures explains their use for hedging (especially agricultural commodities). It goes on to describe financial futures speculating, and adds that critics claim it has no social value (to borrow a phrase from old anti-skinflick cases). The book counters with the oft heard arguments that speculation improves price accuracy and provides liquidity.

Besides futures contracts, what are some other products that have no social value?

1. Tennis rackets
2. Skis
3. Contraceptives
4. Fiction (which includes non-fiction)
5. Dogs and cats
6. Las Vegas
7. California
8. Alimony futures

Steve Ellison comments:

Extending these ideas to business, no company I have worked for has ever said that it would be OK to ease up a bit this quarter. However, organizational culture and structure may unintentionally provide motivations to employees to let up at times. For example, Oracle has a very expensive product that may require a long period of intense persuasion to make a sale. The sales force has incentives based on Oracle's fiscal year. Thus the sales reps work around the clock as fiscal year end approaches to close deals and beat their quotas. It may not take any additional prompting for "the boys" in the sales force to decide that the weeks after fiscal year end are a time to attend to neglected families, relax, and begin working on new sales prospects that will take months to close. Oracle often shocks Wall Street with poor first quarter earnings.

Just as champions can become complacent, a long period of success may sap an organization's motivation. For example, Nike has attempted to replace Phil Knight three times. The board and Knight himself believe the company needs change to stop rapidly rising costs and rethink the company's growth strategy. Yet when recently fired CEO William Perez began making changes, the employees rebelled and said that the proposed changes were not compatible with the company culture. Knight is unable to resist stepping back in when one of his successors is not doing something the way he would have done it. After Nike's decades of success, it may take a catastrophic event to shake the employees out of their complacency (a former CEO of a company I am familiar with who is often mocked on this lists' website had a similar thankless task)

A reader shares:

Reminds me of my naive first days as a clerk in the silver pit back in 1983 when one my more worldly colleagues would curiously categorize a tiny sliver of the floor population as either a former "elevator kid", who had previously plied his trade hanging out in the lobby pending some guy's arrival, or a member of a more established and decidedly more flush genus, known as a "bathroom guy."

Regarding the latter, there was an infamous Comex board meeting back in January 1980 during which the ruling powers decided on a "liquidation only" rule to thwart the Hunts' silver play. According to legend, it seemed that as the discussions began to take an apparent and obviously consequential direction there was an unusual number of people in the room who seemingly took turns excusing themselves to use the men's room. The way I understood it, either there was a fat tail of impatient bladders not ordinarily found in a normal urological distribution, or there was a series of surreptitious phone calls to Rouse Woodstock and the other after-hours bullion desks around at the time.

All made by those cagily if suddenly bearish.

02-March-2006
BBQ Tell, from Big Al

I was driving down route 21 towards Austin, and it was about lunch time. I was wondering where I should stop. There was a place that had a sign up for "deli sandwiches", but my experience with little country stores and "deli" sandwiches has never been very positive - soggy wonderbread, tasteless "cheese", etc. Then I saw it: the Texas state trooper cruiser pulled in at Bullseye Bar-B-Q in Caldwell. You gotta figure that a state trooper, who covers a big area with a lot of lunch possibilities, would know where to eat. So I pulled in to Bullseye, too. Smokey was having the ribs, and that sounded good to me. It was a wise decision.

1-March-2006
Poisons and Markets, by Victor Niederhoffer

The book "The Elements of Murder: A History of Poison" is the kind of book that tries to relate all aspects of history and criminology to poison. It promises to show the inside details of poison and the history of civilization, the fall of Rome, and the British Empire, the inside details of the deaths of every famous person you know including Mozart, Handel, and Beethoven, King Charles, Napoleon, and all the Roman Emperors. It fails miserably in each of these attempts, as each seems so far fetched that even the author doesn't seem to believe in the extension that apparently some misguided editor advised him to make.

What the book does contain is a discussion of the prevalence, the isotopes that cause death, the main murders committed, and the antidotes for the three elements that are most commonly used as poisons: mercury, arsenic, and thallium. Also, there is some commentary on other harmful elements such as lead, nickel, beryllium, fluoride, and selenium thrown in as a roundup. But, there are no principles discussed and you end up with a hodge-podge of random facts.

The best chapter by far is the "Poisonous Elements of Alchemy". Chemistry started with alchemy's quest for the three unobtainable goals: a philosopher's stone that could change base metals into gold, the elixir of life that could eliminate death, and the Alkahest, the universal solvent. The main elements used by the alchemists were poisons, mercury, and arsenic, and it is likely that constant use of these elements by such famous alchemists as Boyle, Newton, and Brandt (the discoverer of phosphorus) contributed to their death or madness. One of the interesting aspects of alchemists is that often they were gifted scientists, well respected in their fields, and the luster from their true contributions led to the unjust acceptance and waste of time involved in alchemic pursuits.

One of the pleasant things about poisons is that they are used less and less as a method of crime because chemists and labs have developed techniques that can detect even the most minute concentrations of most poisons. The correspondence between the alchemists and the chartists, and the chronics in our own field and the physical and financial poisons they administer is quite clear to me. There's also a direct correspondence between prominent hedge fundists, and investment savants and writers who espouse the alchemical methods in our field and thereby give it undue luster. Regrettably, while chemistry has replaced alchemy in the field of substances, and great labs and techniques exist for identifying the poisons in the real world of biology and physical science, no such improvement in knowledge and techniques, appears in our field. Even more regrettable, there are no experts that regularly testify as to the likely path, time, and modality of administration of poisons in our own field the way it is commonly practiced in the court room or the criminal investigation.

If I had to identify the main poisons in the financial field, I could do no better than the list that I identify as causing me nightmares at the beginning of  Prac. Spec. There is the canard that growth is bad, that earnings woes are the key to market declines, that any trace of optimism is bad for stocks, than any uncertainty or gilding of the lily by companies is bad, and the whole host of technical things about moving averages and new highs and lows, and stochastics being predictive of future market movements. The worst, immediate, deadly poison similar to arsenic's effects would seem to me, to be the drastic, double-digit decline that often occurs when a company announces an earnings shortfall. The worst, long lasting effect similar to mercury is the malaise that accompanies fears about the economy slowing down, or the brake that the Fed will mistakenly put on the economy if employment is too strong. Fortunately, there are some market poisons that are expelled from the system quickly like antimony. I would hope that the message, that it's good to wait for stocks to fall to a level where you can buy companies for less than cash on hand, the cigar butt kind of investing espoused and practiced so unsuccessfully by Graham, and now espoused by the Sage, would be considered in that category.

PS. The best thing about reading the poison book was that it elicited some great insights on poisons in markets by my colleagues on the list and I will attempt to distill their insights in the near future. Please pardon the somewhat didactic and unfinished approach here as I am have many strings pulling at me these days.

More Poisons, from Peter Gardiner

1. That there is a 'philosophers' stone' which can transmute the dross of one's confusion and uncertainty into gold in one's pocket.
2. That the assiduous cultivation of arcane, technical, abstruse, and generally unpronounceable knowledge will provide the means of eliminating uncertainty in markets, and if not, at least impressing your betters.
3. That the happy or unhappy coincidence of one particular datum or item of news with some imagined or perceived market event is therefore proof of a causal relation between them.
4. That competence in some other field will somehow, as if by the magic of one's will or the superior powers of one's analysis and synthesis, be immediately, profitably, and predictably relevant to making money in the markets.
5. That there is a 'priesthood' into which one must be inducted in order to learn the 'secrets' of making money.
6. That profitability in trading varies directly with the product of brain power and time spent in its application.
7. That 'randomness' doesn't really mean that at all if you are 'really good'.
8. That the field of speculation can be mastered as long as one is willing to put in the time and effort, or has at least has the right professional or personal associations.
9. That one can learn how to trade by preaching to others, rather than quietly observing what the hell actually seems to be going on.

George Zachar adds:

One of the "big lies" that poisons our financial discourse is that Americans don't save, and that by a chain of inevitabilities, we're economically doomed.

A new Fed study, above, titled "Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances", offers the following antidotes:

                 1995     2004
% of families
who saved        55.2%    56.1%

net worth of all families in
thousands of 2004 $

                 1995     2004

median           $70.8   $93.1
mean            $260.8  $448.2

Gregory Van Kipnis adds:

To make any translation to the Fed Family Finances data from the National Income Accounts means the journalist also has to understand the difference between Net Income (if positive it is savings) and New Worth, on a mark-to-market basis, which takes into account relative value changes in asset and liability values as well as net income increments.

Not likely!

Peter Earle offers:

With respect to drawing parallels between poisons and market-derived death, I note the following general categories of deadly ingestants:

1. Corrosives - mercury falls into this category, as do acids, alkalis, and the "salts"; disability and death via these come by severe burning and inflammation of exposed tissues in the mouth, throat, and gastrointestinal tract.

2. Irritants - arsenic is the prime mover in this category, which includes lead, copper, zinc, and other metallic compounds; injury and expiration here arrive via burning, nausea, vomiting, and at times rupture/burning of organs.

3. Neurotics/psychoactants - strychnine, opium derivatives, and the like fall into this category; seizure, convulsions, and general neurological/central nervous system shut-down occurs from ingesting these in excessive quantities.

...traveling, variously, in solid, liquid, and gas states.

I'd add, as a natural philosopher at work and with an eye extended toward market applications, that these are good qualitative groups into which poisons might be divided. However, that knowing as we do of allergies and "reactions" - from hives and rashes to vomiting and, tragically, sometimes death - that an *effective* definition, or categorization, of poison is far from simple. Indeed, "aquagenous urticaria" describes a rare but documented condition in which individuals experience toxicological effects from ingesting or coming in contact with water, plain old H2O. One man's sustenance - volatility harvesting, catching bounces, trend following, or what you have you - is another's discomfort or demise.

Other poison topics for exploration, where markets are concerned, may include:

1. Treatment of poison - in particular, by means of other poisons.
2. Developing immunity by means of ingesting poisons in small amounts, over time.
3. Poisons in nature (venoms, bacteria/viruses) versus man-made poisons (mercury powders, dioxin, et al).
4. Stages in "a" poisoning: ingestion; immediate, acute reactions; target organ/system exposure; longer-term (i.e, 5/10 minute) action; fully exposed state. Perhaps long term effects, if death is not indicated: carcinogenic, "flashback", etc.

James Sogi contributes:

Hate, greed and fear poison the mind and lead to physical manifestations. Compassion, and its manifestation in Hawaii, as the spirit of Aloha, are the universal solvent and antidote. This is not the airline version of aloha with which you may be familiar. Though briefly stated here, the truth of the foregoing is profound, and is not limited to its attendant social benefits, but to the workings of one's own well being.

These poisons can spread on social scale into memes and infect cultures, businesses and families. These poisons can contaminate your trading room, and your living room, and wreak havoc on the bottom line. The universal solvent does not seem like it is critical to trading, but as an antidote to the poison, it can help the bottom line.

Poisons, have their means of insinuating themselves. In processed foods, in radio, TV, magazines, in schools, poisons are spread and build up in the system. It can creep in slowly, and paralyze the trader.

Chemists now are working on the electro magnetic communication between molecules, and the competition between various chemicals for reaction with others. Though not life, they exhibit remarkable lifelike properties. For example, Carbon monoxide beats oxygen to the blood platelets. Viruses that Dr. Dorn mentioned, sneak into healthy beings, weaken the host, and turn the victims into pod victims (even though Dr. Zachar points out that core inflation is steady and Americans DO save.)

For more posts on Poison ...

1-March-2006
A Slice of Life and the Pizza Indicator, by Henry Gifford

I once started a file where I saved various definitions of "inflation" I saw reported in my (rare) newspaper and magazine reading. It soon grew to encompass so many different definitions that the exercise seemed pointless, and I abandoned it.

I was attempting to count how many times "inflation" was used in the narrow sense I use it, which is to describe a lowering of the value of money, which I learned when I was 4 years old (1964) and spent evenings with my siblings helping my father separate silver dimes and quarters from the others. My mother reports that at the time (or a few years earlier) my father predicted that inflation would effect every aspect of life, especially people's attitudes toward savings and their long vs. short term attitudes toward everything. Perhaps he meant this to include attitudes toward health too. Anyhow, my mother said she disagreed with nothing he said, since despite being college educated she had never heard the word "inflation."

The mention of the changing supply/demand ratio for hip replacements, and the resulting change in price, makes it clear that price changes alone cannot be used to measure the changing value of money. Nor does a particular standard of living remain standard as such things continue to be invented. The resulting confusion seems to be used to the advantage of the political class.

My favorite way to measure inflation is by the price of a slice of pizza, because it takes into account many factors such as real estate, taxes, increased efficiency of supply distribution and shipping, decreased influence of the mafia, wages, energy, etc. The man who sold me pizza for 25 cents a slice in the 1960's is still there, but doesn't remember the exact years he changed his prices. Any accurate data anyone could provide would be appreciated.

Steve Wisdom responds:

Yes, all true. But pizza is non-scalable (labor-intensive) and inflexible, a recipe for above-normal "inflation." The methodology of baking pizzas is about the same as 1, 2, 3 generations ago. And a NYC pizzeria can't move to avoid the NYC tax/regulatory climate, America's worst, since its customers are walk-ins.

Longtime Spec-listers will recall my post a while back comparing the relative price change in beer (scalable) and theatre-tickets (labor-intensive) since the time of Shakespeare. The relative cost of beer has gone way down.

George Zachar salivates; and adds:

There's only so long I can ignore a thread about pizza.

According to the Cleveland Fed's "Inflation Central" page, 25 cents in 1960 was equal to $1.62 in 2005.

Until recently, a slice of pizza and a subway ride traded at rough parity. The last bump in real estate costs broke that, with slices now running in the $2.50 to $2.75 area, while a ride on the D out to Coney Island costs $2.00.