Feb

3

To make money in longer term holds, you need several things to work in your favor:

-A market that trends well, and fundamentals that lend themselves to this condition.

i.e. commodities - the time it takes for inventory build up once resources are called upon,

interest rates - the four year business cycle/election period that lends itself to market moves being ongoing once trends change (and certainly lately at least, a federal reserve which promotes transparency that contains volatility which reassures market participants),

equities - the upward drift (taking long trades only), which may be due to many things however if companies do not make money and they don't stay in business; with technology moving forward, and manufacturing becoming cheaper, companies' ability to excel is greatly enhanced (the human desire to better themselves will be ongoing … we are not static creatures)

- With these underlying conditions, the trader slowly moves from a point of disadvantage to a point where he can cope with the cost of the churn … he can make suitable and ongoing decisions whereby he may move into the front seat at the movies.

This allows for greater than 50% of trades to move into the positive camp, and with multiple contracts on board, several escape hatches for the trader present themselves.

Of these 50% winning trades, if even 80% are scratched out against the the loses and only 20% move forward to multiple gains, the account balance should begin to move from the bottom left to the top right of the page

With persistence, consistency, discipline and patience, victory can be ours.

Jan

31

Since 1980, it has only been three years since we have not seen a year (as of '06) where there has been a significant sept. - dec. clear out of longs (using a variety of available weekly trend change indicators). These years are '03, '96 and '93. Of these years, the Dow finished relatively flat for one of them, which was in '93, and the bid for the other two were in '96 and '03.

In particular in '96, after the market had three relatively strong years, it still posted strong gains in '97 without a sept. - dec. sell off.

In all three years, however, the April hoodoo's came through the following year before recovering, maybe not a significantly strong sample, but maybe of interest nevertheless.

As the chair suggests, it may be a case where as the volume attracts volume, strength attracts strength.

J.T. Holley comments: 

So remember, as good as counting is, it ain't gonna change what happens tomorrow. So protect your stack (your portfolio) and never lose your stake (all your net worth and ability to invest). No odds are worth losing everything. You gotta live to play another day. -Sb

There are 52 cards in a deck with four suits.

66 stocks make up the Dow Composite with Industrials, Transports, and Utilities (3 suits). Playing Dow Theory is like playing the classic 21 cards a piece "War," meaning totally random and no strategy involved unless you're a cheater.

If you really want to step back and take in the big picture, there are 3000 stocks (operating or not) roughly on the NYSE and 2000 stocks on the NASDAQ NMS. This is what makes up the deck we call the Willshire 5000. That's it. All you have to do is know how many players are sitting down at the table like American, Fidelity, Vanguard with billion dollar portfolios, and then remember that it's like blackjack with ten decks. Most of the big guys don't take positions with numbers around five's and three's. This means that there is maybe 0.55% or 0.33% of a mutual fund that has 300 stocks in its coffers with one or two reserved for cash. I'm sure if you'd like to do the work, you could form enough hypotheses and tests to come up with something fruitful. I mean it's only 5000 stocks right?

Victor Niederhoffer adds:

These days, there is talk about it's having been 978 days from the last 10% decline, how the maximum is just 1050 et al, and ha ha, the day of reckoning is coming, and things like the decline in oil prices are going to cause the Fed to join the doomsday camp and knock the stock market down by raising rates because things are so good with energy prices going down that they have to act et al. Thus, no matter which way energy goes, it's bad for inflation. There are many statistical errors with the above reasoning that go far beyond the always suspect former Tennessee research outfit that was bearish all through the 90's because stocks were above book value the way they were in the 1929 era. It's a good statistical exercise that we all might profit from considering that it involves conditional expectations and predictions given a certain extreme range of an independent variable without knowing the form of the distribution itself. For others, the statement might better be bruited about among the 150 reasons to be bearish and to go against the drift among the good colleagues of the weekly financial columnist and his fellow performers. For those who would like to shed some light on the line of reasoning itself, what's required is a bit of counting. What is the life expectancy and the expectation given that you have reached a certain number of days without an x% move? Books on survival statistics are a great help here with our favorite being The Statistical Analysis of Failure Time Data by John Kalbfleish (Wiley Series). Not knowing the secrets of Rebecca, pi, or key level analysis, one has counted such expectations. The good news here is that like the crocodile or the oak tree, or Chorus Line, or Shakespeare himself, the longer a stock market goes without a big decline, the greater the expectation of going further once a threshold is reached.

J.T. Holley offers: 

Instead of utilizing survival statistics to attempt to predict the non-randomness of a -1% day or worse, how about looking at the frequency of the 2% up days that are hopefully gaining? We took a long spell of oct. '03 to june of '06 some 682 days in between the last time. Then the latest run is 156 days without one. It's always eyeopening to see how in the trenches, the smaller (quarters or thirds) up days on a histogram are winning the war in the quarterly battles of the war called drift.

Jan

30

The exercise of counting something by hand always teaches much more than can be learned by allowing a computer to do the work, and, even with a computer, I always like to enumerate the observations in order to go over them one by one.I believe that this type of attention to detail is what everyone should do when they are trying to improve or win at anything.

The same type of counting that one uses in cards, to count the number of aces and picture cards that have already been played in a game, is what I was doing last night to look at large daily moves in the S&P. Where have all the big moves gone?

In the following study I defined a large move as a daily percentage change of one or more either way, in S&P futures.

Number of large moves by period:

Jan. - June '03 — 51

June - Dec. '03 — 24

Dec. '03 - June '04 — 24

June - Dec. '04 — 21

Dec. '04 - June '05 — 17

June - Dec. '05 — 13

Dec. '05 - June '06 — 15

June - Dec. '06 — 09

There were an average of eight and a half large daily moves a month in the first half of 2003, and then four a month through to December 2004. There were three a month from the beginning of 2005 to the middle of 2006, and one and a half per month in last six months of 2006. Finally, January and February 2007 have two and one large moves respectively.
During the four years I looked at there were 91 large declines and 85 large rises. With the market going up about two percent a month, the small changes tended to be rises, and the big changes were skewed positively overall.

There was a tendency in the most recent years for the big declines to cluster. The expected number of big declines per month since 2005 has been one and a quarter. If the big declines were independent, the probability of finding one month with four of such is 0.01, and the probability of finding one month with five of such was 0.002 Despite this there were two months with five declines and one month with four.

There was a tendency for the months that had a higher number of large declines to also have a higher number of rises . Starting with 2004 there were four months with four or more large declines, and during these months the average number of large rises was two and a half, versus the regular average of one and a quarter. Such a difference has a twelve percent probability of arising through chance factors alone.

Except for the first six months of my study, when there were seven or more large changes in per month, there was no evidence for serial correlation of the data, with the only three months with a high number of large changes recently being April 2005, and May and June 2006. The former was preceded by a very normal month with just 3 large daily changes.

There have only been three declines of one percent or more since November month end, which occurred on December 12th, January 3rd, and January 25th. Each of these declines was exactly 1.17%, amounting to exactly 16.90 points down. During this two month period since November end, there have been no occasions where there has been a rise of one percent of more.

Since July 2006, there has not been a single month with more than two large day moves, and such a period has only occurred twice before in recent history.

Such are the regularities that emerge from a simple hand and eye study, and one has doubtless missed many more.

Craig Mee quotes an article from the WSJ: 

Is an End in Sight for the Dow's Long Run?

By many yardsticks, stocks are getting stretched. Perhaps the most convincing argument: It has been 978 trading days since the Dow Jones Industrial Average has seen a 10% decline from a high, the second longest such run on record, says Ned Davis Research. The Dow has gone 135 trading days without a 2% decline, the longest stretch since 1958.

The Fed's pause in rate increases last summer helped propel the latest leg of the advance. Why the market has risen for more than four straight years is less clear. A stable economy has clearly contributed, and other factors also seem to be helping.

A big reason for the gains: a strong run of corporate profits. Another key is low interest rates. Since October 2002, when the rally started, the yield on 10-year Treasury notes has averaged 4.3%, well below the daily average of 7.1% since 1962.

But there's reason to wonder whether these drivers might falter. In the latest round of earnings reports, roughly three times more companies in the S&P 500 have issued cautious guidance than on average, says Thomson Financial. Meantime, the yield on the 10-year note is creeping close to 5%. Last spring, when the yield on the 10-year note topped 5%, the Dow gradually fell 8% over two months.

If earnings waver, or if long-term rates keep rising, the Dow's long run could end.

Jan

22

It has been alluded to that during the Tennis Open, when a player is in trouble with injuries, cramps, or dehydration, instead of the opposing player finishing him off (which obviously seems like a great idea) … the match spirals into a seesaw affair. Is this due to the fact that only so many people possess that killer instinct, and people actually feel "sorry" for their opponent? … or does the tempo and hitting of the game change that much that the "fit" opponent loses direction and momentum, and thus finds himself out of sorts?

The parallels to the market, i.e. being able to take advantage of a winning period and putting the foot on the accelerator when able to … or being in a winning position only to observe changes out of left field, effecting normal market cycles, and status quo, are maybe self evident … Do traders go for the kill while maintaining risk parameters when in a good position or has the market mistress blown the minds and the trader's account so that many times before, they are worried where the next serve will land?

O wise humanity, terribly wise humanity! Of thee I sing. How inscrutable is the civilization where men toil and work and worry their hair gray to get a living and forget to play! -Lin Yutang

Victor Niederhoffer comments:

Mr. Mee reminds me of Yvonne Goolagong in that he's such a natural for trading. I only wish I had his ability so that with the hard work I am accustomed to, I could go very far. He writes about the Australian Open and notes that many matches where one side is injured ends up being very close or actually losing to the healthy. Racket sports is the one subject I am truly an expert on so I would like to comment on it. I have often been involved in games where my opponent is injured. One of the National Squash champs of my day had a tendency to faint in the middle of a match, go out cold for half hour and then come back and play much stronger. I knew about this and always redoubled my efforts when the game started, and won because of that. Sports Illustrated had a full page picture memorializing the victory. The market has that same tendency of playing possum, which of course is widespread in the natural world, and is covered in most books on camouflage. Since I'm not an expert I will leave it to one of our naturalists to generalize and model. However, the market of course has encapped this tendency. It frequently pretends to be totally weakened and attenuated. This is a snare and a delusion. The tendency can be quantified in many ways, and were it not for the Minister's ever vigilance, one would do so.

Scott Brooks adds:

In the natural world, it almost always comes down to experience. But before experience can occur, luck comes into play. Here's what I mean.

I have reached a point in hunting where killing a deer is not hard, whereas years ago, it was much more of a challenge. I've written about my first hunting experience and a few experiences thereafter, and the bottom line is that I simply get lucky.

When I'm hunting, I come across game all the time … young inexperienced deer that have never encountered a hunter. Many times, I can tell that they know I'm there … they can just sense something. Since what they sense has never been associated with danger to them, they ignore it. Since I'm not hunting these young inexperienced deer (too easy to kill), I let them go. They live another day because of luck (not because I let them live, but because they got lucky to cross my path and not one of the hunters on my neighbor's property who certainly would have shot them).

When dealing with an older, more experienced animal, it is a whole different ball game (whether buck or doe). These animals have a much higher sense of what danger is. They have learned what to pay attention to. They have almost developed a sixth sense to know when danger is present.

I have watched nice bucks coming into my stand, with the wind in my face (meaning they weren't going to wind me and pick up my scent), and I've been sitting perfectly still and have been completely camouflaged. I know the deer can't hear, see, or smell me, but then he stops. He goes on high alert. It seems as though every nerve in his body is like a highly sensitive radar, searching for whatever it was that alerted him. He may never look at me. He may never cock his ears in my direction … but he knows I'm there. There are a myriad of perfectly logical reasons as to why he senses me. For instance, when I walk in the woods, my pant leg brushes against a small bush, leaving the slightest amount of scent … and the wind (that seemed favorable from where I was sitting) blew that slight amount of scent his way … maybe the smallest number of molecules necessary for his olfactory system to sense it … and that one little molecule triggered a reaction in his brain that said, "Danger!". So he freezes, assesses the situation and slowly, carefully slinks into the brush, moving back the way he came (because there was no danger in that direction), and becomes invisible in a tangle of the wild. He won that battle.

The longer one has been around as a trader, the more likely his sixth sense is more highly developed and attuned to the very subtle nuances of the market … the more likely we are to pick up on the scent of danger … or said another way, because we are more attuned to the scent of danger, we need less molecules of "danger scent" to detect and recognize that danger.

As to camouflage, this is an interesting subject. When I hunt, I am in full camouflage from head to toe. You would think that this is pretty simple … slap on some army greens and go to the woods, but nothing could be further from the truth. Camouflage, proper camouflage is an art … it is literally a detailed process that begins way before going into the woods, continues on the trip out to the woods, all the way through the actual hunt, including the exit.

Simple camouflage is meaningless. Anyone can slap on army greens and go hunting. As a matter of fact, for the most part, the pattern of the camouflage doesn't matter. If I've done my prep work, I could go out into the woods in blue jeans and a shirt with muted colors, such as grey, brown, green, or even blue. As long as I'm sitting very, very still, the deer is not likely to see me. It is my opinion that the color pattern of the camouflage that I'm wearing has less than 20% bearing on the outcome of the hunt (maybe less than 10%).

Deer are basically brown with no real camouflage coloration or patterns, yet they are very hard to see.

On my farm, we keep statistics of deer sightings. Some hunters on my farm simply see more deer than others? Why is that? It is because most hunters are like inexperienced traders. They simply don't know what to look for. You see, most hunters look for "a deer." As a result, when they don't see "a deer" their mind registers nothing … when in reality, there was a deer right in front of them.

When I hunt, I don't look for deer. I look for movement. I look for a glint of sunlight off an antler. I look for a horizontal (the deer's back) in a vertical world (trees, weeds, switch grass, etc.). I look for the flick of a tail. I listen for the slight crunch of a leaf. I study my surroundings, and because of years of experience, I am more likely to figure out where deer will be, or where they will be coming from and/or moving to. Deer don't jump up and say, "here I am."

When you trade, you have to understand that the market never says, "here I am, buy me now" (and if it did, well then it would be too late). You have to look for the nuances in the market. You have to find the "glint of sunlight off the market's antlers" or see market movement, and see it before anyone else (or at least very many people do).

You see, when I go into the woods camouflaged, I am as camouflaged as I know I can be (and hopefully I'll get better over time). I've done my research. I know that scent is the deer's biggest defense, so I will be as scent free as possible. I will wash my clothes in scent free detergent and dry them in a scent free dryer (there is a whole process involved that I won't go into at this time just for this step). I take a scent free shower with scent free soap (what about my towel, was it washed and dried scent free and stored in a scent free plastic bag … another detailed process I'll skip for now).

Getting dressed … I do not want my clothes to touch anything that would give them a scent … and I do not want to sweat either (remember, I'm in my house putting on very warm clothes so sweating can be easy … therefore, I have a system of dressing that will keep me from getting sweaty … again, I'll skip that for now).

What about my breath? That's the biggest scent maker on my body as I have no choice but to breathe. Therefore, I brush my teeth with baking soda and I take four chlorophyll pills everyday (sometimes more) during the whole deer season.

As I go into the woods, I know I'm gonna have to take my time so I don't sweat … but I will perspire, at least a little bit. Therefore, I spray myself down with scent reducing spray.

I know that even though I'm careful, I'll rub against brushes and leaves (it's pitch black in the morning going into the stand and at night coming out … so I will rub against a few). So how do I combat that? I like to find cow patties, the fresher the better, and then I tromp right through them, getting manure all over my boots. Then, using my boots, I rub the manure all over my pant legs to act as a cover scent.

There is far more to this process (I'm even thinking about writing a book on the subject) than I will go into here, but I'll spare you all the details. The key is that I go into the woods prepared. As a result, I see more deer and harvest more big deer.

One must realize that trading/investing/advising is a lot more detailed than just showing up and buying. There are many nuances that one has to learn to recognize. There are many forms of deception that the market mistress employs in order to separate you from your money.

And you have to remember that in the market, not only is the mistress trying to separate you from your money, there are predators everywhere, that are hunting you too.

You must be willing to work hard, study hard and prepare hard, and develop your sixth sense. It takes years of practice, trial and error, a thick skin and a willingness to lose money … to get to the point that you can make money, and make it consistently.

There are many more analogies and correlations to be made. I'll save those for another day … as I said, I could write a book on scent alone … and scent preparation is only a small part of being a great hunter.

Just like _____________________(fill in the blank with whatever "one thing" you want) is only a small part of investing.

GM Nigel Davies offers: 

To the best of my recollection, only Tony Miles was the first to use the injury ploy in chess, with one of his best wins being on a stretcher. In minor form, the same tactic worked for me in St. Vincent 1999 where I was on crutches. It was especially useful that there was much snow and ice around, so I was sliding around looking especially vulnerable. Now in a game not involving legs, this really shouldn't matter, but I'm sure this has an effect on the opponent's primal subconscious. It says 'victim' and he sees red.

You can see a similar effect with the pretty pouting Russian girls sitting at their boards in Washington Square. Female players often seem to try and look vulnerable on purpose. It's also worth noting Stefanova's tendency to wear off the shoulder tops, which alone probably adds some 50 points to her rating.

The other main ruses include getting into time-trouble if your position is bad, though I must say that many people are wise to this one now and know what their opponent is up to. More subtle is the idea that if you are black and have a knight on c6 and want to bring it to d7, ceteris paribus, it's better to go to b8 rather than e5 as optically your position looks much weaker.

Russell Sears offers: 

Basically, the whole point in distance racing is to run your opponents into the ground, and then leave them. You learn to sense your opponents falter by subtle clues. His breathing rhythms change, the turn is not taken as sharp, and the hill is not met.

I once wrote of the poor high school girl that had Indiana's State Cross Country race in the bag, until she looked back and saw she had a big lead with 200 meters left. You saw her pace slow, then her form crumble, and the weight of the race hit her all in a few yards. With 100 meters left, she was staggering and weaving back and forth, and with 50 meters, she was down on the ground.

In the heat of the race, your body is in equilibrium. Once you let up the lactic acids and other poisons hit you, your heart slows. I always try to coach kids by telling them that if you want to hurt less during a race, push yourself harder rather than ease up.

An expert at this was Todd Williams. He would train with 400's at sub 60 second followed by 400's at near 70. In a race against fellow USA guys, he would rip the competition up, as they, knowing he was the one to beat, would try to key off his pace.

But then again I have been in many races where the pace, heat, wind, cold etc. were the real problems, and once one succumbed to the elements, it was like one was finally excusing himself early from a bad dinner party. They all soon follow. The last one standing is often the winner, despite staggering in at the end.

I remember a classic duel between Bob Kennedy and Todd Williams I saw at the Indianapolis US Nationals. Todd was better at the 10,000 meter and Bob at the 5,000 meter. When they met at Bob's hometown at his specialty, they went out running the first six laps of the 12.5 lap 5000 meter in sub 4:00 pace, despite it being in the 90's and the track temperatures in the 100 F. By about 3000 meters, Todd collapsed and Bob continued on and won, but barely hung on at the end.

Basically, if you are not prepared to lead or go into it alone with conviction, they can easily suck you into their vortex, and send you into a death spiral. It matters little if the staggering competitions are real, feigned or imagined.

Jan

22

Read how the Apple iPod index is replacing the BigMac one in Index Trumps the BigMac.
 

Jan

18

EUR/USD, by Craig Mee

January 18, 2007 | 1 Comment

A quick observation …

Since the start of 1995 through 2006, the opening week of the year in eur/usd has been the extreme (HIGH OR LOW) for the year nine out of 12 years … Will ‘07 follow this suit?

Tom Downing comments:

This looks pretty nonrandom to me notwithstanding the arcsine effect.

Define S as the number of years (out of 12) in which the min or max falls within the first week … In 10,000 simulated 12 year periods, here is the distribution of S when price changes follow a standard normal distribution: (mean 0, standard deviation 1):

S       N        Prob       Odds

0     988     0.0988     10.12
1     2504   0.2504      3.99
2     2984   0.2984      3.35
3     2145   0.2145      4.66
4     951     0.0951     10.52
5     324     0.0324     30.86
6     86       0.0086     116.28
7     16       0.0016     625.00
8     1         0.0001    10000.00
9     1         0.0001    10000.00
10   0         0.0000      NA
11   0         0.0000      NA
12   0         0.0000      NA

In only 1 of the 10000 simulations did at least 9 years of the 12 have a min or max within the first week.

If you assume some sort of drift (for example, since 2002 euro/$ mean = 3.3 pips with standard deviation of 68 pips/day), the probability of having at least one first week min or max increases, but the probability rapidly drops off after S=7:

S       N         Prob      Odds

0     579      0.0579    17.27
1     1814    0.1814     5.51
2     2789    0.2789     3.59
3     2460    0.2460     4.07
4     1473    0.1473     6.79
5     628      0.0628    15.92
6     210      0.0210    47.62
7     44       0.0044     227.27
8      3        0.0003    3333.33
9      0        0.0000      NA
10    0        0.0000      NA
11    0        0.0000      NA
12    0        0.0000      NA

Another approach would be to estimate the probability of observing a first week min or max in any given year (conditional on a price change distribution), and then calculate the probability of having at least 9 successes out of 12 trials under binomial distribution.

Vincent Andres adds: 

EUUS_W.DAT : column = OPEN 02/01/1995-25/12/2006

        WEEK_1 WK_MIN WK_MAX   DIFF
1995 1.2040  1.2040   1.3422   0.0000
1996 1.2740  1.2250   1.2837   0.0097
1997 1.2400  1.0556   1.2406   0.0006
1998 1.1091  1.0762   1.2085   0.0329
1999 1.1756  1.0098   1.1830   0.0074
2000 1.0133  0.8352   1.0256   0.0123
2001 0.8956  0.8437   0.9472   0.0516
2002 0.9016  0.8613   1.0100   0.0403
2003 1.0225  1.0225   1.2184   0.0000
2004 1.2352  1.1790   1.3444   0.0562
2005 1.3313  1.1709   1.3576   0.0263
2006 1.1854  1.1834   1.3353   0.0020

Read more here.

Sam Humbert adds: 

I took a quick look at this as a finger-exercise. Below is R code with some user-tweakable parameters, currently set to roughly mimic Tom's work (though I took a clean-room approach; didn't use Tom's code as a base). The idea, as suggested by Tom, is to find the "probability of observing a first week min or max in any given year," which is "Prop" in this R script, and turns out to be .177 (I'm sure Dr. Phil or others could find a closed-form solution) and plug this into the binomial, thus chopping out an order of magnitude of computing. The results I get are almost exactly Tom's, so either his work is correct (as usual) or he/I made the same mistakes.

Days<- 252 # Biz days in a year
Year<- 12 # Number of years
Week<- 5 # Biz days in a week
Sims<- 10000 # Number of sims
Data<- apply(matrix(rnorm(Days*Sims),Days),2,cumsum)
Prop<-sum(pmin(apply(Data,2,which.min),apply(Data,2,which.max))<=Week)/Sims
Prob<- round(diff(pbinom(Year:0,Year,Prop,F)),4); Prob<- c(Prob,1-sum(Prob))
Odds<- round(1/Prob,2)
data.frame(S=Year:0,Prob,Odds)

Days<- 252
Year<- 12
Week<- 5
Sims<- 10000
Data<- apply(matrix(rnorm(Days*Sims),Days),2,cumsum)
Prop<-sum(pmin(apply(Data,2,which.min),apply(Data,2,which.max))<=Week)/Sims
Prob<- round(diff(pbinom(Year:0,Year,Prop,F)),4); Prob<-
c(Prob,1-sum(Prob))
Odds<- round(1/Prob,2)
data.frame(S=Year:0,Prob,Odds) 
     S          Prob      Odds
1      12    0.0000     Inf
2      11    0.0000     Inf
3      10    0.0000     Inf
4      9      0.0000     Inf
5      8      0.0002     5000.00
6      7      0.0016     625.00
7      6      0.0088     113.64
8      5      0.0352     28.41
9      4      0.1023     9.78
10    3      0.2113     4.73
11    2      0.2948     3.39
12    1      0.2492     4.01
13    0      0.0966     10.35

Dec

12

As I left the Singapore trading floor, (as computers took over), I turned to a local Singapore trader and mentioned I might board a plane to Shanghai, and see what riches may behold me, his response “don’t bother, the bid offer spread up there will be totally soaked up. There is no thought process of hey he’s not a bad guy, adding a little bit of value, lets give him 2% of the cut it just doesn’t happen” …. Since the Aussies are in East Timor, go and try and export coffee or cane sugar out of there, you’d have more luck making a dollar”

This has always stood firm in the back of my mind, reinforced by Chinese New Year, in Singapore, when on going to work at 6.30 in the morning their was a group of 100 locals standing outside the UOB Bank at Raffles rubbing the money machine and the outside of the bank for luck and prosperity. I’m with Jim Rogers — the Chinese to all appearances are bigger capitalists than any of us westerners, and the dollar is king.

We had a fine Junto Meeting featuring Wharton Prof. Francis X. Diebold on December 7th. More than 100 were there to hear Diebold and participate in the discussion on market volatility and risk. We enjoyed meeting and chatting with many Daily Speculations readers, and look forward to our next event. Video of the event should be on the site soon.– Vic Niederhoffer and Laurel Kenner

George Gilder, editor of the Gilder Technology Report, will be our Junto guest on Thursday, January 4th. His topic is “Supply Side Investing.” As usual we will meet at the General Society Library, 20 West 44th Street — between 5th & 6th avenues in midtown Manhattan. We will chat, socialize and discuss beginning at 7 pm, and Gilder will start at 8 pm. Admission is free and you can bring as many people as you like. — Vic Niederhoffer and Laurel Kenner

Dec

11

Specs, may have something more to add here, but flat tax certainly seems to be riding the wave. Below is an article from The Global Guru entitled ‘How to Profit From the Flat Tax Revolution.’

Steve Forbes is probably the most public advocate of flat tax regimes around. In his book Flat Tax Revolution, Forbes discusses how simple flat tax regimes cut taxes, spur economic growth, and put a stop to a culture of tax loopholes. Forbes recently discussed his ideas at the London Junto — a monthly gathering of leading London investment professionals that I sponsor.

The philosopher Arthur Schopenhauer observed that: “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” The ‘truth’ of the flat tax is self-evident to every country that has adopted it. It’s ironic that it is most ridiculed in developed Western economies. A recent IMF report dismissed the flat tax as “something of a craze,” adding that “the flat tax has been marked more by rhetoric and assertion than by analysis and evidence.”

That’s just bunk. Countries that have implemented flat tax regimes have seen both tax revenues and economic growth rates explode. They also have been home to some of the best performing stock markets in the world.

In the first half of the 19th century, the flat tax was the norm. The first calls for a “heavy progressive or graduated income tax” came from Karl Marx in his 1848 Communist Manifesto. That the majority of countries that have flat tax regimes today are the former Communist countries probably has Karl Marx turning in his grave in Highgate Cemetery here in London.

The contemporary flat tax movement got its start in the mid-1980s with the publication of the book, Flat Tax, by two Stanford and Hoover Institution economists Alvin Rabushka and Robert Hall — the latter my macroeconomic theory professor at the time. Perhaps no economic policy of the last 20 years offers a better example of John Maynard Keynes’ much quoted observation that:

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly is understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

That the idea of a flat tax could spread from Silicon Valley to Estonia — within a decade, no less — is remarkable. At the time Rabushka and Hall’s book was published, Estonia was still part of the Soviet Union.

“New Europe” has been the pioneer adopting flat taxes. With the exception of Hong Kong, every country in the world adopting the flat tax has come from the fringes of the old continent. Celtic Tiger Ireland was first out of the gates lowering corporate taxes to zero in the 1960s. The result? In less than a generation, Ireland’s per capita GDP now exceeds that of Germany, France and the UK.

The Baltic countries of Estonia, Latvia and Lithuania adopted flat tax regimes in the mid-1990s and have recorded Asian Tiger-like economic growth rates ever since. Russia introduced a flat tax in 2001 and tax revenues doubled. Others like Ukraine followed in 2003, Slovakia in 2004, and Romania in 2005. The tiny Former Yugoslav Republic of Macedonia adopted the flat tax regime only a month ago. The flat tax remains on the agenda in several countries including Costa Rica, the Czech Republic, Mauritius, Mongolia, Poland, Slovenia, Greece and Croatia.

Yet opposition to flat tax regimes in “Old Europe” remains intense. Angela Merkel was forced to back down from her flat tax position to win her post as German Chancellor. Germans associate flat tax regimes with “Amerkanische Verhältnisse” (”American circumstances”) — what they perceive as armies of workers condemned to a life of poorly paid indentured servitude at McDonald’s. In the UK, both the opposition Tories and the Liberal Democrats considered briefly incorporating flat tax policies into their party platforms. Sadly, both have backed away ahead of elections in spring 2007. Ireland’s success raised jealous hackles in the necks of EU bureaucrats. But after the EU forced it to raise taxes in the 1990s, Ireland eventually stood up to EU bullying and cut corporate taxes back to 12.5%.

The bottom line? “Old Europe” will budge only when its hand is forced. When neighboring Slovakia adopted a 19% flat tax in 2003, the Austrian government cut corporate income tax rates first from 50% to 34% and then to 25%. This policy not only kept companies in Austria about to defect across the border, but also attracted new ones. Today, Austria’s economic growth rate is double that of Germany and perhaps explains the presence of 50,000 German guest workers in the country.

But if Slovakia and Austria got it right, neighboring Hungary has gotten it remarkably wrong. Hungary recently raised corporate taxes. The results have been predictable. One entrepreneur I know simply closed his Hungarian company and incorporated in Wyoming over the Internet. If taxes were, say, a flat 19% as in Slovakia, he would not have bothered.

The flat tax is about more than just economic growth. Flat tax countries also have been a terrific place for investors to make money. The Russian stock market has been the best-performing market in the world since it adopted a flat tax of 13%. The Austrian market has been the #1 market in New Europe over the past five years. Turns out making money is about good policy and not geography. I’d invest in “Flat Tax Fund” over an “Asian Tiger Fund” any day. To me, that truth is self-evident.

Nov

27

I propose One of the biggest problems of trading successfully is the in-built work ethnic, that is instilled in “us” at an early age. This may be something which is regional or religious based, but I believe this certainly works against us when looking to apply discipline to allow for a nice gradual equity curve.

Being from the “west” and school’ed, fed and watered from day one in the pursuit to work hard, thus achieve , reproduce and run a successful family, is I believe not conducive to allow the best characteristics and education to become a trader.

To sit for long periods, and hold the gun, during normal working hours, even though you may of been cleaning the gun and burning the midnight oil looking into research , number crunching and the like, and have done the time, still does not prepare the individual for long periods of holding positions without lifting a finger. These positions also, maybe out of the money, in the money, flat for weeks, before a solid explosion in volatility takes off, where unless risk and money management procedures are solidly adhered to, the human conditioning of work work work, starts to take over, and interferes with correct operating procedures to gain the most out of the position. So in reference to discipline I believe this relevance should be centered on, more so because it is what predominantly disables it.

It could be argued regions, where less importance is placed on routine and normal work practices, could produce interesting results , which of course does nothing to take away from the need for a suitable trading plan and approach to trading.

Tony C. adds:

I have often tried to explain to the young uns’ how I can be wrong most of the time and still make money … and that is a problem with trading.

Typically, you go through 16+ years of schooling, where very early on you quickly come to learn that getting anything less than 9 out of 10 right is a sort of mediocre performance, and getting anything less than 7 out of 10 right is failing … and results in an 80 year old practically blind nun, (who inexplicably possess an arm like Koufax’s), nailing you from across the room with a felt eraser …

Which is to say, you become conditioned.

And then you engage in a profession where getting 6 out of 10 right results in great riches, and even getting 4 out of 10 right results in a more than comfortable living [if you gain 61 cents the 40% of the time you’re correct, and only lose 39 cents the 60% of the time you’re wrong, … and you play often enough.]

So, folks that did reasonably well in their main activity in their formative years are fighting 16+ years of conditioning.

“Geez, I’m right only 4 out of 10 times, I must be stupid to be wrong so often … my success is all luck, I’m a fraud”, etc, etc. If only we could all think like baseball players.

Nov

5

Several days ago on this web site there was an article regarding The Melbourne Cup. I had to see it for myself so on Saturday I attended Derby Day. Here are a few thoughts I would like to share:

Happy but Out of Pocket
Before the Carnival, I guessed the services would be overpriced. So I budgeted by placing only one Australian $50 bill in my pocket. I promised myself that I would not place bets on horses as I know nothing about racing. I kept this promise. The price structure of the complementary goods of gambling and alcohol was impressive, or dangerous is probably a better word. Champagne was ridiculously overpriced, while beer was much more affordable. It is my opinion that the beer priced at $6 had two purposes: to get patrons intoxicated so they would gamble more and to squeeze the last coins out of the unlucky pockets of losers. The small plastic bottles of champagne sold for $30 were effective in reclaiming money from any lucky winners.

The Grace Equilibrium
Everyone puts on their most beautiful outfit for the races. For men it’s simple. I only spent a minute donning my olive green Italian suit. Girls on the other hand, have been planning, shopping and using their creativity for weeks to come up with the most gorgeous dresses and graceful hair pieces they can find. I have never seen so many eye-catching combinations of colors, shapes, flowers and feathers. I wonder why hair decorations are so rare in today’s daily society. Since almost no one wears them daily, an individual woman would feel silly sporting one. However, if women wore these decorations daily they would collectively be more graceful. Maybe a small spark (designers, stars, wake up!) is all that’s needed? Tons of money could be made on decorations and designer hats if incorporated into daily fashion.

The Opposite Seasons
We are the first generation that can relatively easily cut down the four seasons in a year to just two. By having one home in each hemisphere, one can have twice as many friends and can experience the magic of spring and comforts of summer twice as often. For business this becomes a problem however. In most industries moving all staff members twice a year would be impractical. But I do see an opportunity here for some firms, especially small firms with young (childless) employees doing online business. Possibly a good way to attract the brightest minds without paying the highest salary? Offering a country swap and endless sun? I think this opportunity exists as long as there is an asymmetry between the number of firms operating this way and the fraction of people who would suit this unique lifestyle.

Craig Mee replies:

Just a quick reminder, Australia’s biggest horse race, “The Melbourne Cup”, is November 7. In 17 of the past 22 (and 11 of the last 11) years the Australian share market has closer high on the day. The average gain has been close to double the average loss. The effect on human emotion and share buying in the midst of one of the happiest days during the year in Australia cannot be under-estimated.

Oct

31

I am attempting to consider the analysis of jokes, e.g. James Lackey’s often stated “…get the joke…” as an aid to market analysis. The work of Arvo Krikman on Contemporary Linguistic Theories of Humour has been helpful. He divides this analysis into:

  1. Incongruence theories; the intersection of two different planes, incongruities, contrasts.
  2. Linguistic theories; those based on similar phonics or normal interpretations.
  3. Freudian theories; those based on the theory of the effect of humor on the recipient in allowing release.

There are many events associated with markets that make one wish to roll on the floor with laughter. The selling out at the exact low, the attempt to make a profit without risk, the guarantees of profit, the attempt to make money the usual tested way that leads to oblivion because the cycles have changed, the assurance that the fund is in great shape the day before it fails, the loss of an estate built up over 60 years with one trade, the failure by one tick to make a good profit with a limit order, the trader that calls you with a seemingly good bid or offer that you trade on right before a number or news event or earnings report terribly against you that its 99% they knew about when making the quote, the change in position based on an economic number that’s completely random, ephemeral, and certain to be revised in your favor as soon as you get out, the market move that occurs way before the news, the constantly one sided analyst who explains every event, no matter how improbable as supporting his view, the forecasters who can’t forecast, the Chinese Wall that supposedly separates the buy and sell side and advisory role of Wall Street, the constant backdrop of explanations for the market moves and reasons to extricate from positions when buy and hold would be so much more appropriate, the shooting stars and falling comets, the attempt to couch a bearish sentiment in bullish terminology, the profits that can come from disaster and the losses from triumph, the inevitable fall from the top of yesterdays superstars, the inevitable results of overconfidence, the tweaking from the recommended 60% weighting in stocks to 58%, the flimsiness of the foundation for many runups or rundowns, the executive of the public company that chisels a hundred bucks on his expense account or dating of options when his salary is $100 million a year, the investments that’s made partly for reasons that make one unpopular in the hallways of the service that you lose your entire stake on, the commentator that’s always bearish who relies on the broken clock to be right once, the fundist who hits the top when his sector finally goes his way and receives great public acclaim for it.

All this humour, and so much more, which I call upon readers to contribute, calls out for a general theory of market humour which is falsifiable and predictive, and helpful to the trading process.

I am more partial to a mathematical theory which strangely I haven’t seen, i.e. most of humor seems to be based on two events in some sort of probabilistic relation to each other- contrasts, collisions, unusual couplings, ambiguities, startling events et al. usually of a pithy nature. That’s it. When an event A given B is highly likely, P(A|B) is near 1 and B occurs and not A occurs or P(A|B) is near 0 and B occurs and A occurs, that’s usually the foundation of humor. Alternately if P(A|B) is much higher then P(A|C) and A occurs, but even though it’s much more likely that B occurred, C really occured, then that’s another Bayesian revision sort of humor. A linguistic aspect of humor typified by the bronchial joke must also be considerd. That’s the joke where a very attractive young man with a bronchial condition knocks on the door of his Dr.’s house and whispers to his very attractive young wife, “Is the doctooor in?”. “No, come right in she says”. That would be typified by P(A|C) is much higher than P(B|C). C occurs and then B occurs but not A.

J.T. Holley responds:

The one that jumps out to me is the old formula that is not defined but given as:

Tragedy + Time = Comedy/Joke

The key being what is the definition of a tragedy and equally important what is the appropriate time elapsed?

Looking at 1819, 1837, 1906, all the “Black Days” in ‘29 - ‘32, Oct. ‘87, 10/27 in ‘97, ‘98 Ruskie, the Internet Debacle ‘00-’02, one would say that we have had our tragedies. Throw in the Hunt Bro’s, Nick Leeson, and now Brian Hunter and you have more to poke at, but is it appropriate? Is the punch line the drift that the Mistress gives? It ain’t funny when you lose, especially money. The further we do get away, time has a wonderful way of healing due to our tenacity to come back. The bear camp doesn’t see the tragedies as lines in the joke; they don’t even get to laugh with giggles of resiliency?

I am so glad that I have the Holley genes that makes me have a love of peanut butter on my pancakes, and a smile on my face. This has always been thrown back at me as a sign of not being serious about life, but I can’t act or see life any other way than as Nock stated “as it is” with that smile.

Jimmy Buffet wrote the line “if we all couldn’t laugh we’d all go insane”.

I was thinking that the opposite of the formula above is also a wonderful joke the market provides if you have a sick sense of humor:

Comedy/Joke + Time = Tragedy

How many think they can trade/speculate but really haven’t any clue and submit their money to the Mistress? They give and as Vic states “lose more than they have any right”. This is the sickest of sickest jokes involving the markets due to the plethora of examples many more times than that of Tragedies listed above. Maybe that’s a key to those that have been Body Snatched? They aren’t aware of the part they play in the joke?

Sushil Kedia adds:

  1. Newspapers : All newspapers that cannot refrain from offering explanations of market moves post-facto. Particularly the electronic screen famous for its dark- back ground-orange text, despite its outstanding analytical tools.
  2. Experts: Columnists, newsletterists, bar-waitresses, friendly cabbies all espouse opinions worth only the size of their exposure to the markets. The world doesn’t want to get the joke because the formal from such ones are the experts who are selling ideas which as though would otherwise still be getting rich on their own.
  3. Margin of Safety : So bad that one holy grail is believed to be truly existent since the wealthiest of the the investors seems to have actually implemented this but nothing else.
  4. Insider trading regulation: the assumption probably supporting such expenditure of effort is that one day they will be able to or willing to put to end from where information on each thing begins! End the beginning? What’d be leftover then?
  5. Free markets: well to put the idea getting my mind for a while on this core issue finally a joke: girl fights up with her boy saying he is being much of an easy flirt. Boy laughs back saying, “Well, you are quite a believer in free sex. Aren’t you?” Girl yells red-eyed, “free sex! My foot” Boy says with a deep cold sigh, “well just tell me then what have you started charging ?”

James Sogi responds:

Humor has the element of surprise, the unexpected. That’s what the market gives, the unexpected. Its never what you might think it is, its always something else, something counterintuitive, not what you expect. And it knows ahead of time what you are going to do and sees you coming. Like the thread on the group mean, the group knows everyone’s secrets, for it is theirs. The market trains you to go the wrong way, feints, always gets you off balance. You need to be a step ahead, look over the horizon, over your shoulder. You can’t be a step behind, reactive, you have to lead and take the initiative. Following is too late. The reflexes are not fast enough to defend in the market, you have to punch first, and let the others in the market defend, and have that split second initiative advantage. On longer terms get that strategic edge moving the troops first,. Like lack says, don’t let the joke be on you. You have to beat it to the punch line. Why do you think its called the “punch” line? Just like a punch, the reaction is always slower. Got to beat the market to the punch, bob and weave, come in low. Keep your distance. Always protect yourself. It really not all that funny except in a self deprecating sort of way.

Tom Larsen replies:

While I was working as a no-advice broker, a Texan who had added several spreads to his option position, told me: “I got myself so I don’t know what I want the stock to do”. Maybe it’s funnier when I say it out loud with a drawl. In any case, it shows how people think they have a simple financial product figured out and then realize that they are in over their head. Some people who hear this are laughing at the guy who seems inferior, but thinking, “this could be me!” Or it could be reminding us to not get too cute with our positions. Don’t take on more complexity than necessary. This is probably just a variant of a common form of joke where we laugh at somebody who gets confused. Superiority humor?

While working as an option market maker in the pit, it was common for traders to deconstruct the trading day in the brokers lounge after the close. During one such conversation another market maker told me that during the day he had been so desperate that he “would have paid anything for those puts. Fortunately no one would sell them to me.” This is very deep for me, and reminds me that sometimes you can be unaware flying full speed toward disaster, and the only thing that saves you is grace. and it reminds me not to panic. This joke is probably funny because of the reversal implied as the speaker is clearly aware of his good luck. It’s like the feeling you get when you tell someone about the near collision you avoided on the freeway. There is a release, relief and relaxation at the end.

James Lackey responds:

Why did god make chartists? To make weather men look good. The mistress of the markets can make traders look so foolish at times, it is much better to laugh than to cry. Your only as good as your last trade. However, your next trade might be your last, make it a good one.

The worst market jokes are those that everyone has known for years. The market makes “you feel” like a child. You start your joke to friends: a priest, Jesse Jackson and Clinton are all on an airplane that is about to crash. Your Dad, the old man immediately chimes in and crushes your joke “only two parachutes get back to work!” They have heard them all before.

The joke is “housing is a disaster, the consumer is all tapped out” the news tape blinks Bulletin: “US Housing lowest level in 30 years.” The market immediately goes to the punch line. The old codgers come in, at the market “take it and bid it.” The time and sales boys say “my limits never get filled all size trades the offer all day, who knew?”

Perma bear brain teaser: Bond prices fall as traders sell bonds to buy relatively cheap US stocks.. .interest rates rise, consumer sentiment falls, bonds rise on slowdown fears, stocks rise due to lower interest rates and future uptick in consumer spending, bonds fall as traders sell bonds to buy stocks. Market rallies 6 weeks in a row on short covering.

We watched Yes Men last night. The movie is a Sundance comedy. A couple of jokers start a website to mock the WTO. To their delight no one actually reads the website and offers them speaking engagements. They mock “free trade” and the “government of, by and for the corporation.” Their last speech they had to regrettably cancel their presentation to Australian accountants. Their reason for a program change was the WTO was to be disbanded. The post interviews with the seminar participants was hilarious. “its great to see an organization admit their faults, scrap the program and restart from scratch.” I was laughing so hard my wife called upstairs to see if I was okay! I said yea this skit is hilarious. Now the sad joke. She says, “that is good Jimmie, that is the first time Ive heard you laugh in 6 weeks” yes Jennifer as you have heard, the markets were strait up for 6 weeks.

About two weeks into the fall rally, the headlines read Ford Motor company might go private. All the talk of how bearish and difficult SBOX is for public companies we thought, wow a double bullish whammy for the indexes. IPOs are far more difficult, the cash flow rich, no growth, dead money stocks are going private, a simple reduction in supply. All that index money must be reinvested in the market. Ill buy the next pull back. What if there is no pullback? Joke is first down move was after a huge “made in China,” bank IPO.

Speaking of Chinese stocks…Is it possible to make an ETF of Chinese stocks that are unregisterable on the NYSE, yet float the ETF as a “Chinese investment”. Oh the joke is an ETF on private equity.

The daytraders joke they are never right, why bother? The funniest joke is everyone can be right if they wait long enough. You might go broke waiting, but eventually you can be right. Funny debate between admitting your wrong or the market is right vs. your right, just too early. Of course we strive to be rich rather than right, until your rich, right?

The worst market joke. Get even post from Mr. Clive. From the Yra Harris interview….Inside the house of Money:

The worst thing you can do in a trade is try to get back to even. I call that the “prayer trade.” I can spot guys on the floor who have it on because they shake back and forth, basically in prayer, mumbling, “oh, please God, just let it come back to me. Let me break even.” What is that? Break even? That’s a loser. I’m not in this business to break even. There’s always opportunity in the markets, so forget breaking even. If breaking even is your goal, you’re not trading anymore.

Rick Foust on traders:

Here is a short one that reminds me of some trades/traders.

Question: What is an Ohno bird?

Answer: A bird with 5 inch balls and 3 inch legs. When he comes in for a landing…

Quick followup.

I have this placard on the instrument panel of my Cessna.

“TAKEOFFS ARE OPTIONAL. LANDINGS ARE MANDATORY.”

Craig M. shares a market truism:

The best joke of all is that the market allows you to think you actually know what you’re doing at times, and while you may profit during these times you never ‘make enough’ and when you lose it seems even worse. The actuality is that you never really knew anything in the first place.

Oct

18

For those interested in the recent move up in agricultural products like wheat and corn, you may enjoy this read by Jim Sloman. Here is an extract:

The Great Plains of the United States is the world’s bread basket. Half of all the grain exported in the entire world comes from the U.S. Great Plains.

Beneath the Great Plains is a vast underground reservoir of water called the Ogallala Aquifer, laid down through eons of geological time. Water drawn from this aquifer through millions of wells has helped to greatly increase grain yields in the last half century because the water can irrigate crops whenever and wherever desired.

Similarly, there are vast underground aquifers beneath the farmlands of China and India-who along with the U.S. account for half the grain grown on the planet-as well as in many other countries around the world.

The experience in the United States is being replicated in these other countries. That is, water from these gigantic aquifers has been tapped in the last 50 years to greatly increase crop yields worldwide, particularly on lands that are dry or somewhat dry.

However, there’s a catch. The increased use of electric and diesel pumps since 1950 has hugely increased the amount of water that can be brought to the surface, but in doing so the amount of water in these deep aquifers has been dropping.

I certainly know that things here in Australia (the drought) haven’t been this bad for a very very long time, from the West to East Coasts almost all areas — cotton, wheat, and fruit crop lands –are in dire straits and most have had only one decent season in six years. And the weather and rainfall are worst than ever. (Sydney has just had its hottest October ever with consecutive days of 35C)

Prof. Gordon Haave replies:

This story is a little bit alarmist, at least as far as the U.S. goes. The U.S. has been harvesting its aquifers for a long time now, and the decline has been slow (although I suppose that is a relative term). What is obvious, although not mentioned in the article, is of course that aquifers are replenished over time. Now, we might be taking water out faster than it is being replenished, but it’s not like one day the water runs out and there is no more. The required cutback might be rather small.

The real problem, of course, is simple economics. Scarcity dictates that the sum of wants for any particular good that is free is greater than the supply. Property rights, the free market, and the rule of law overcome the scarcity problem.

However, property rights have not really been extended to aquifers in any meaningful sense. Extending property rights in some form or another will solve the aquifer problem, but of course those who get something for free have a strong interest to lobby the government to keep it that way.

J. T. Holley replies:

I would definitely like to say that the “invisible hand” of Smith shall take care of overage of price and the underage of water. Latin America is slowly and rather quickly in other aspects becoming the “bread basket” of the World. In the “Global Economy” in which we all chip in, food is Latin America’s contribution. Need I mention most U.S. restaurants in the last five years having “Chilean Sea Bass” on their menu’s? Also, Julian Simon if alive might make a bet with you concerning the upswing in prices of corn, wheat and such? I certainly will sell you some long term calls if you’d like? Desalination will most certainly be a technological breakthrough in years to come with entrepreneurs flooding (no pun intended) the space in my opinion. If we can produce “grass seed” for my yard to make “drought resistant seed” then I assure you that corn and wheat can be accomplished in the same manner.

Oct

10

Could markets' price action be directly related to their nations' overriding mindset? For example, German markets might be influenced by a society which:

1. Performs duties meticulously but can go overboard.

2. Has a degree of arrogance.

3. Suffers somewhat from melancholy.

Could we have a set of adjectives which describe major countries e.g.. US, UK, Germany and Japan, and have them directly related to the distribution which occurs during a trading day. For example, could the German mindset above represent efficiency but a tendency of pushing markets to extremes?

Oct

10

Lately, I've been contemplating the lessons that I've learned in my life, with special emphasis on the things that I learned, believed, and found out later were wrong.

I wonder what I don't know now that is hurting me as a father, businessman, husband, etc.

For instance, I never bothered with counting. I relied solely on technical analysis and my ability (or what I perceived as my ability) to recognize patterns and tendencies. If this list has taught me anything (besides the necessity of counting), it is to test my premises and try to falsify.

Let me give you an example of something that happened to me over the 4th of July weekend.

My family went down to our lake house for the week. We went over to the Current River to sit on the shore and let the kids swim.

I absolutely hate doing that. I hate the intense heat coupled with the bugs. I hate sitting on a gravel beach. I hate getting grit in my swim trunks (it always seems to find its way into uncomfortable areas).

But what I hate most are the types of people that are there. Now before you judge me for what I'm about to say, please hear my confession to the end and my followup request for forgiveness.

I didn't like the people that frequent those gravel beaches. I don't like the way they act, the things they do and they way they behave. I don't like their lifestyle. I simply don't like much about them. Basically, they were the epitome of white trash.

I was sitting on the gravel beach, next to my dad, step mom, and 4 year old. My wife and older 3 kids went downstream about 200 yards to play on a rope swing (swing out from shore over the river and let go…lots of fun, if you're a kid).

The people on the upstream side of me were listening to some country music that I didn't like, were guzzling beer, and chain smoking (I hate the smell of smoke). The people on the down stream side of me were smoking and guzzling beer, and listening to some weird bluesy thing that I didn't like (please note, all these people drive their cars right to the shore line and turn on their stereos). The people on the sandbar behind me were listening to Lynrd Skynrd which I do enjoy, but couldn't hear too well because of the other idiots' loud music…but that didn't matter because the Skynrd crew was directly upwind of me, so I got to smell their smoke.

The conversations that were occurring around me were enough to make me want to jump and strangle them all. "My stupid boss was b!+ching at me again, for being late. But I was only 1 minute late, so I wanted to tell him to #$%#^$$ off" Basically I was surrounded by the inane conversations of low IQ, low personal drive, low self esteem, lazy, under educated, union mentality, entitlement mentality, tattoo adorned, chain smoking, alcoholic wife beaters, who's lifetime highlight was when they were on COPS! Yes, typical white trash.

At least that's what I was thinking. I know that's harsh. But it's what I was thinking.

I guess I'll confess right here that I have a hard spot in my heart for white trash because I grew up with them, played with them, fought with them (read: got my butt whupped), got stabbed by them 3 times, and was bored with their inane idiotic low IQ conversations.

Anyway, back to the story.

I decided to walk down stream to watch the kids swing.

As I got within 100 yards of the rope, I watched my 7 year old son, Hunter, take his turn for a swing. He walked way up the hill with the rope, ran down, kicked his legs up and started his swing out over the river. Unfortunately, he held the rope to low, so when the rope snapped taut, Hunter went crashing into the water right at the edge of the shore.

I watched him climb out of the water with a pained look on his face and could see him mouthing the words, "ouch, ouch", and holding his leg.

My 11 year old son David walked over to Hunter to see what was wrong. David's eye's got real big and he started screaming to his mom, "Mom, get over here, Hunter is hurt". At first Gwen didn't know what was going on, but when David yelled, "Mom, Hunter is cut bad, I can see his bone", Gwen sprang into action. She turned to yell for me to come over and help as she was running out in the water to get to the other side of the river (the rope swing was on the opposite from where we were).

I turned to one of the one of the people that I had classified as white trash and handed them my hat and sunglasses and asked them to "hold this". They did so without hesitation. As I ran out into the river, I was contemplating how to get Hunter back across. I saw a "white trash lady" with an inner tube. I was going to ask her for the inner tube, but I didn't have a chance to ask as, she was already running towards me with the tube saying, "Take this across to get the boy".

As I was swimming across, I noticed another man was ahead of me almost to the other side already. He ran up on the other shore where my wife, Gwen was already with Hunter. He ran up and said, "I'm an off duty police officer, let me help".

Now as a rule of thumb, when someone is hurt, you're supposed to stay calm and let them know everything is going to be ok. This "white trash off duty police officer" took one look at Hunter's leg, and dropped the F- Bomb, "Holy F###". But even with that faux pas, he took charge. He grabbed Hunter's leg, and applied pressure, got a wrap around it.

I finally made it to the shore, and saw that things were as under control as they could be with Hunter, so I started to strategize how to get him across the river.

At that moment, a group of "white trash canoeists" were coming across the river. A whole group of them!!!

The first one to make said, "Put him in here, put him in here, we'll get him across". So I picked up Hunter, cradling him in my arms, with the "white trash off duty cop" still applying pressure to his leg and waded out into the current.

When I got to the canoe, the "white trash lady" in the front jumped out and said, "get in here", helped us in, got Hunter and me situated so I could apply pressure to his leg, and her husband started paddling us across. I have no idea what happened to her, except that I could hear her yelling at her husband, "Paddle faster, paddle faster".

It was then that I noticed, as I'm paddling with my right hand, and holding Hunter's leg with my left hand what was happening in front of me, upstream.

A whole group of canoeist were coming downstream, but in front of them, blocking the way, was a whole bunch of "white trash people". They were directing them to the shore and out of our way. I heard several other "white trash people" yelling upstream to another group of WTP to bring down their power boat to get us upstream (actually it was the group of WTP that was smoking, beer guzzling, and listening to some weird bluesy music right next to where I was just sitting 5 minutes ago) that had the powerboat. They started coming down stream to help.

By this time, we were in shallow water (maybe thigh deep). All of a sudden, WTP started running out into the water, getting on both sides of the canoe, grabbing it, and pushing it up stream.

I was yelling up to my father, "Bring the Ranger down, Dad, unhook the dogs and bring the Ranger down" (we had my Polaris Ranger with us at the Gravel Beach). Unfortunately, my dad didn't hear me. However, that didn't matter. Some WTP ran up to him, told him what was happening while another WTP was unhooking the dogs from the Ranger.

My dad jumped into the Ranger and started coming towards us. As he's driving down the gravel beach, WTP are moving their chairs and coolers out of the way so he could get by.

When I saw him coming, I told everyone pushing the canoe upstream to get us to the shore, which they did. I jumped out and grabbed Hunter and started running up the gravel beach.

Just as my dad and I met, and I was putting Hunter into the Ranger, handing him to his mother (I have no idea how she got there), a WTP ran up to me and said, "Here you go buddy, good luck with the boy, the nearest hospital is in Ellington". The reason he said "here you go" was because he was running toward me to give me back my hat and glasses.

I have no idea what happened to that inner tube that fine lady shared with me. I have no idea what happened to that canoe, that off duty cop, the person who gave me my hat back, the people who pushed the canoe, the people who directed the canoe's toward the shore, the guy in the power boat who tried to get to us…I have no idea whatsoever. I don't think I would recognize any of those people if they walked up to me and said hello.

All I know is that the same people that I was just looking down upon as white trash with just short of disdain were the ones who had, without question, jumped up and helped me rescue my son from his precarious situation. They had given of themselves and helped me and my family!

I wonder, how many more blind spots do I have in my life? How could I have let myself get so blind so as to not see the goodness within people? How many other areas of my life am I missing out on opportunity because of preconceived erroneous notions?

How does this effect my trading? Where am I lacking wisdom, or worse yet, where am I ignorant and don't know that I'm ignorant?

I am on a mission to find those blind spots. I want to then falsify and remove them from my life.

In the meantime, I owe all those wonderful human beings on that gravel beach an apology.

Craig Mee replies:

I offer that, being in situations you are used to, (ie WTP having probably most holidays and weekend breaks in the same areas ) breeds familiarity and confidence and thus a solid framework, for moving into top gear and showing a professional evaluation of the circumstances when needed. Though bring others in with no knowledge of local condition ie, depths, drop offs, road access, and the like, and they will fail miserably , no matter how good the intentions. > > Maybe the old adage of , trade markets you know, and in a crisis where, most downside will be, you will surprise yourself, by how well you dealt with it.

The President of the Old Speculators' Club responds:

A friend of mine who reads this column asked me why I was writing a three-part series about "rednecks" when there are so many other things going on right now that are worth writing about. It's a worthy question. And there are many reasons why I consider the discussion of "redneck" America timely. Here are just a few:

1. The slow transition of our economy from one fundamentally based on domestic manufacturing and production to one based on technology and services — that imports its hard goods from other countries. This has implications for the future of such typical "redneck" (and largely unionized) vocations as factory work, trucking, mining, auto assembly, etc.

2. The cultural shift that's challenging (some would say marginalizing) such historically mainstream American institutions as the practice of religion, heteros-xuality, opposite-s-x marriage, military service, citizenship, firearm ownership, private property rights — and scholastic, athletic, or workplace achievement through competition. Many of these things are staples of "redneck" life.

3. The fact that America is currently at war (or at least militarily engaged) on multiple foreign fronts. As you've just learned, this has major "redneck" ramifications.

Basically, my overarching point in devoting so much ink to "redneck" America is to show just how integral to the American fabric (and economy) these people are — no matter how distasteful that fact may be to many who are now front and center in the mainstream media. And indeed, many Whiskey & Gunpowder readers who rendered feedback on the first two parts of this series wrote in with their own positive anecdotes and affirmations about the shunned, yet vital majority these pundits call "rednecks." But a few criticized me for not painting the whole picture of this huge segment of Americana.

Oct

4

Interesting that in Sydney's property market, the last area of housing to increase in price was from the socio-economically disadvantaged, and these guys were still buying when the richer suburbs had pulled up stumps. Now they are left with massive drawdowns and problems on a number of fronts, i.e. employment and servicing loans.

This seems to be a classic example of what to look for when analyzing where a market is in its cycle of price discovery — the least educated and responsive are last in.

It also reminds me of working on broking desks for years and dealing with major banks over significant U.S. figure releases. I surmised that there was a four tier response in price action over these numbers:

1. Locals with their own screens hitting bids and offers as these figures came out.

2. Bank Dealers on telephones (as it was overnight in Australia) being told what the numbers were, and dealing accordingly.

3. Bank Dealers asking to be rung after the numbers, and subsequently placing bets.

4. Retail customers calling in , and believing they where on the pulse as they only called five minutes after the numbers were released.

In reference to No.1, a bank dealer (who had recently seen some locals in action) said to me "I will never ever trade over a number again, after seeing the execution skills of those Locals, I am just too far off the pace!"

Sep

21

I have  read a couple references to the Equinox and just too many cases to not to at least be respectful.

Legendary trader WD Gann claimed that more than any other day Sept 22 marks a turning point in capital + commodity markets. September 22nd (Friday) as a cycle date is Autumnal Equinox. The window includes the day before and after.

Could it be Natural Gas? Amaranth's long positions are probably squared now. Finally gas can rise? Could it be oil? Arbor's DSI Matrix shows oil's bullish sentiment at record lows as the price hits 9 month lows.

Could it be stocks? The Dow is just 200 points from an all time high. S&P trades are at a high for the year and the highest since February 2001, but in yearly resist 1301/1338.

Could it be bonds? The US 10 year is at a 6 month low yield.

It could be that the Autumnal Equinox passes without hitch, however it is worth noting that the few days around September 22nd have in the past marked major highs/lows and markets are trading at extremes.

Dr. Kim Zussman responds:

This looks like a testable question, so for a quick look I used SPY daily closes (yes, with dividends, including effects of deletions, additions, etc) since 1993 in the following scheme:

At the turn of each month, I noted the high close of a period of 7 days centered around the 22nd of each month. Then I compared this high with the high of a 40 trading day period centered on the same day. If there is a match, then the high close around the 22nd is a "major high" (not to be confused by anyone growing up in the 60's), and then note the month. Thus, if highs occurring around the 22nd of each month are major highs, and these are more common around the autumnal equinox, we would expect September (month 9) to dominate. BUT here is the list of months when highs around the 22nd corresponded with centered 40 day highs:

1
2
3,3
4
5,5,5
6,6
7,7
8,8
10

OK, no Septembers. Nor Novembers or Decembers.

My bet on margin is that equinoxes correlate best with calendar dates when the sun spends nearly equal time above and below the horizon.

Sep

19

Does fear in sport , as in the market put your opponent in the drivers seat? or does it depend on the personality of the warrior / trader, as to how this will effect the final outcome? I forward to you an article from Buenos Aries:

We hate Hewitt, says Nalbandian — From correspondents in Buenos Aires. September 20, 2006.

FORMER Wimbledon finalist David Nalbandian stirred the seeds of animosity ahead of the Davis Cup semi-final clash between Argentina and Australia by claiming his teammates don't like Lleyton Hewitt.

Hewitt has been at the centre of several spats with Argentina over the past few years and the ill feeling has grown to such an extent that he has reportedly employed two Australian bodyguards for the trip to Buenos Aires this week.

"No-one is friends with Hewitt and he does not worry me at all," Nalbandian, who was beaten convincingly by Hewitt in the 2002 final at the All England Club, said.

"We won last year over there (4-1 in Sydney) and now we will win here."

There had been talk that Hewitt would pull out over security fears but Nalbandian thinks his presence in the team will make little difference.

"With Hewitt, this tie will be a little more difficult but that doesn't change much really," added the world No.4.

"Whichever team comes here to play knows that at home, we are very strong, and now we have a great chance to make the final."

Argentina captain Alberto Mancini echoed Nalbandian's sentiments, claiming the circus surrounding Hewitt's appearance would not distract his team.

"The issue of Hewitt and his security (which includes six local security personnel) is something that everyone is talking about but it's not something our team is worrying about," he said.

"We respect Hewitt but my players can beat him."

Earlier, Argentina's Jose Acasuso blasted Hewitt for overreacting to the perceived animosity he will encounter.

"Hewitt seems to think that he's come to Iraq, that they are going to plant a bomb," Acasuso said.

"But we're not bothered because this is the circus that he wanted to set up. Nothing's going to happen and we shouldn't pay any attention to it.

"We're just worried about Argentina. Whether Hewitt has one bodyguard or 500 bodyguards, that's up to him."

Former world No.1 Hewitt, who was named alongside Mark Philippoussis and doubles specialists Wayne Arthurs and Paul Hanley for the tie, had previously expressed reservations about playing in the tie because of security concerns.

The bad blood between Hewitt and Argentina began at last year's Australian Open when Juan Ignacio Chela took exception to the Australian's histrionics and spat at him as they changed ends in their third round match, copping a fine for unsportsmanlike conduct as a result.

John O'Sullivan answers:

Yes and no, if we take cricket as the sport in case. There are few more exciting sporting spectacles than a contest between a hostile fast bowler and an aggressive batsman in international test cricket. A truly fast bowler is capable of delivering the 5 1/2 oz hard leather ball at speeds approaching 100mph. Over a 22 yd pitch that takes just over 0.5 seconds to arrive at the batsman. The batsman must select and execute his shot in that very short interval. Remember that in cricket, it is perfectly legitimate for a fast bowler to deliver a "bouncer": a short pitched delivery aimed at the batsman's chest, throat or head. Obviously, the aim is to intimidate and unsettle the batsman. Often a simple, straight ball aimed at the wicket will follow. This is a classic fast bowling sucker punch - a scared batsman will fluff the shot, and get bowled out.

From personal experience I know that no other sporting experience produces an adrenaline surge like going in to bat against a really fast bowler. The ball may be traveling so quickly that you can barely see it. In the amateur game the pitch may well be uneven, leading to dangerously unpredictable bounce. As a batsman you know that when the bowler releases the ball it may well be flying toward your face or ribs at 90mph half a second later. If you get your shot wrong, you'll get hit, and it will hurt like heck.

The fear causes a massive adrenaline rush. As a batsman you must harness that rush, as it sharpens your perception and quickens reactions. You must concentrate totally and absolutely on the ball in the bowler's hand as he runs up. And you must try to play freely and naturally.

When an aggressive batsman faces a hostile fast bowler, they will seek to dominate each other. The bowler will bowl bouncers to intimate the batsman. The batsman may "hook" those bouncers. The hook shot requires tremendous nerve and skill. The batsman doesn't attempt to duck or swerve the ball, but stands in line, allowing it to approach his face. He then plays a cross bat shot hitting the ball high, behind and to the right ("to leg") just as the ball comes on to his face. If he can execute this shot correctly he will score heavily, and dominate the bowler. If not, the bowler dominates, and the batsman may be hit in the face.

All batsmen where padded gloves, pads on the legs and a "box" to protect the groin. In recent years helmets have become common place. Less confident batsmen may add arm guards, thigh pads and chest guards.

The more heavily padded a batsman is, the less free his movement. Helmets can hinder vision. So the more protection a batsman has, the less able he is to apply technique to deal with the threat.

If a batsman is confident in his own abilities, he won't hinder his movement with too much protective padding. Market analogy: confident traders will not use stops.

A great batsman must have natural ability: eagle eyesight, quick reflexes, strength and nerves. Market analogy: a great trader must be a quick & confident thinker and have iron nerves.

A great batsman must practice endlessly. He must have a complete array of shots that he can select instantly and instinctively in response to the bowler. One can only learn by doing over and over again. Market analogy: a great trader's instinctive reactions can only be honed by being in the market in all conditions.

Cricket is a team sport, but a lopsided one: the batsman is on his own against the 11 men of the fielding side - the bowler, the fielding captain, and the fielder are all conspiring to get him out. The batsman stays alive and prospers by wit, skill and judgment. Market analogy: the trader relies on his wits to survive against the combined force of the market.

One mistake, and the batsman is a failure. To be a success, he must get it right over and over again. One error, and the batsman gives a catch to the fielding side, or he is run out. Or he is bowled out. To build a big innings, to score heavily, maybe a century, he must get it right over and over again. He might face hundreds of deliveries from several bowlers over the course of several hours, with the fielding side constantly conspiring against him, in order to build a big score. His concentration must be unremitting, and application of technique fluent and correct. One error and he is gone. Market analogy: the successful trader must constantly make correct judgments on placing, pulling and sizing orders and positions. One mistake and he is underwater, maybe even wiped out.

Craig Mee responds:

I believe the great Vivian Richards who averaged 50 runs every time he walking out onto the pitch with bat in hand, and faced some of the fastest bowlers ever to play the game, never wore a helmet in international cricket. Maybe the answer lies here, in this one individual, though I believe he may have been two standard deviations away from the mean, as the downside of getting hit, well for us mere mortals, is 'there goes the account.!'

Adi Schnytzer comments:

Although, to be fair, the nastiest fast bowlers in Richard's era were on his team! Donald Bradman, the greatest batsman that ever lived, and by a fair stretch, claimed in an interview that he was only ever hit once on the body by a ball! He wore no body protection to speak of and evidently needed none. Even the fast bowlers were scared of him! I once saw Richards make 200 in a Test match at the MCG and watching that innings I could not help wondering how anybody could ever make 300 in a Test in one day (Bradman at Leeds way before my time). Watching his interviews, one gets the feeling that the man had no need for adrenalin at all.

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