May

1

I have reviewed the HBR forthcoming study, predicting the next big thing. The data it uses are based on data from mid 2002 to mid 2005. In an era where markets can move 10% in a minute or two, with high speed computers and printers avaiable to even the most non-computer person, it is amzing to see results based on just 3 years of data 10 years old. Certainly the question emerges as to why they didn't use more current data or more than 3 years. The query relating to selective starting and throwing out negative results arises.

The measure used to test their thesis is an amazing one that one has never seen before even though I worked with Zarnowitz on many of his forecasting studies and have kept up with subsequent work in the field: "(they) calculated for each forecaster, the proportion of forecasts that were more than 20% above or below the average prediction… When the average outcome was more than 20% above or below the average prediction". ?????? Huh? They find that the correlation between this measure and the average forecast error was 0.53. Naturally by chance, when the proportion of above average relative to actual is high, then the average outcome for these forecasters is going to be bad.

There are also several contrived experiments that the authors carry out to set a foundation for their empirical study and a few appeals to Bayes rule for standard forecasting that are contained in the opening pages. However, in view of the statistical biases in their results, the short and untimely period of their data collection, and the consonance of their results with the idea that has the world in its grip— that egalitarianism is the goal, and that all variations in outcome are due to luck and unfair initial endowments, we can see why  Harvard would find such a study propitious.

Apr

30

"Those well-known experts who had pulled off a big windfall by going against the tide and winning were, over the long term, the worst at forecasting."

That sounds understandable to me, and there is a research to prove it.

The original article on Harvard Business Review requires registration.

Victor Niederhoffer writes:

This article provides confirmation of the idea that has the world in its grip. Egalitarianism prevails. Especially at Harvard. I will have to read the article to see all its biases. But it was guaranteed to be published in the HBR.

Rudolf Hauser writes: 

Not having read the HBR article, I cannot comment on that particular study. But I would note that the nature of the forecast and time frame are important considerations. The news article did note that the study only looked at three years of data. If the forecast related to only quarterly trends the conclusion that it might have just been a fluke forecast could be valid. But say someone had predicted the financial collapse we saw in 2008 with valid reasoning but was off in timing. In that case his or her forecast would be wrong for part of the time but someone who acted on it might have had some years of underperformance but avoided the debacle that was to come. That forecaster might be someone to listen to in the future. But even being right once for the right reasons does not mean that the person will be correct all the time on such major calls or even that they will ever be right again. In the end, one should listen to the reasoning but make one's own decisions.

Apr

29

1. Never try to make money the same way twice in a row.

2. Don't trade inactive markets.

3. Don't assume that the relation between your two favorite markets will stay the same from year to year.

4. Be alert to big minimums on Monday as they tend to reverse.

5. Try not to sell markets that have big drifts upwards like stocks.

6. Try to go with with the central banks.

7. Be one with the idea that has the world in its grip and be on the side of the market that will further that grip.

8. Never go for small profits as the vig is too great relative to your gain as a %.

9. Don't trade when a loved one is very sick.

10. Round numbers will be broken.

11. Play the yen to break 100 and the S&P to break 16000 and Apple to swing from below 400, e.g.

12. Gold has been a store of value for a long time. When it gets hit hard, think of all the people in the world and the institutions that use it for insurance.

13. Don't sell premium in the grains as they move explosively.

14. Never trade so that you exceed your margin. (You will have to get out at the close unless it moves in your favor and that makes you weak).

15. Don't listen to tips or try to follow fast moving operators as you won't know when they are going to change positions and how strong and on what basis their views are made.

16. Let your profits run after you have a big loss and get back to even sell to the sleeping point.

17. Don't take positions that you plan to extricate from in inactive trading hours.

18. After or just before a major announcement don't use limits.

19. Only buy the worst markets or stocks at the end of a quarter or year.

20. Never trade when you're out of the office or on vacation or on a whim.

21. Beware of trading when the market is going to be closed and you will not be able to extricate from your position like European markets when they close for a month around Christmas.

22. Don't short big up opens.

Okay, that's a start. Hopefully, I am more adept at this kind of thing a trader should know than I am at the things a man should know.

Apr

25

There has been a run of exactly 5 up opens (i.e. a rise from yesterday's close to today open) in the S&P [see price sheet below]. This has been bestowed upon us 15 times in the last 4 years. Strangely this is not unduly bearish at all for subsequent periods (exactly 6 up opens in a row occurred 9 times). The number of runs is consistent with randomness. Does this have anything to do with the news that central banks all over the world are increasing their stock to bond ratios on their balance sheets (i.e. they're buying stocks as well as bonds with the money they print?). What is the long term outlook for such a shift?

John de Regt writes: 

Hard to say, but the bond and stock purchases might one day be unwound, which would cause markets to fall. That said, the Fed might very well hold their debt securities to maturity, and never sell off.

Apr

24

I found the paper, Stochastic Hydrology, lecture 24 to be the best discussion of extreme values very useful in finance I've found. It uses the time between successive maximum events as a base to calculate the probability that a maximum will be exceeded by simple and relatively understandable and useful things that a person can calculate and count with pencil and paper. It ends a rather time consuming search for such a method.

Apr

23

I have been considering whether there is any evidence that socially responsible businesses are better investments than profit maximizing ones. Most of the research points out that it is hard to define profit maximization because short term and long term maximum paths might differ. The concept of risk and return is also relevant with higher return often decreasing the chances of surviving. The duty of a company and its directors to its shareholders, and their incentive to do better for themselves and their shareholders by increasing earnings also plays a part. The concept of dead weight cost is also relevant which is minimized when marginal cost equals marginal revenue and the pricing is such that the demand curve intersects the supply curve at the profit maximizing price. I found this article on going for fourth downs refreshing and provocative in this area.

Rocky Humbert writes: 

I think this is an important subject to consider and the current academic literature does a comparatively poor job. For starters, there is no satisfactory definition nor rubrics of "socially responsible businesses." The monikers of "sustainability" and "green" and "sensitive to communities" are difficult to quantify to say the least. And frustrating to understand in many cases. A chemical plant that dumps its toxic waste into the backyard (while poisoning its workers and neighbors) is?? clearly maximizing short term profits at the expense of long term profits. And it's clearly socially irresponsible. And it will eventually fail. In contrast, my office landlord just installed infrared soap and hand towel dispensers in the bathrooms (presumably to be green), but will they have a good ROE on this? I have no idea. Will they attract new tenants because this is a "green" building? If the rent is the same, I suspect yes because some # of customers get incremental utility from transacting with socially responsible businesses. In contrast, no one (reasonably) gets incremental utility from transacting with socially irresponsible businesses.

The "duty of a company and its directors to its shareholders" is a decidedly American concept. The reality is that torts and taxes and regulation mean that the actual implementation of this duty may in fact include social responsibility. Things have changed over the past 100 years (for better or for worse). So — the answer to the chair's question must be: if the cost of being socially responsible is small, then socially responsible businesses MUST BE better investments. If the cost of being socially responsible is large, then it's less clear — and there is the free-rider problem.

Rishi Singh writes: 

I had the benefit of hearing the current owners of the Empire State building give a talk on going green and increasing revenue a few years back. Their synopsis was that going green for the sake of going green was too expensive for the marginal benefit (e.g. solar panels). Instead, by gutting office space, adding insulation, different windows, and light sensors to turn off lights, they improved the quality of the offices and significantly reduced utility costs at a reasonable cost. By adding these features they could charge higher rent while also improving their green footprint and returning to profitability. An example of market forces awarding the cheapest implementation of reduced energy usage.

Susan Niederhoffer writes:

Some thoughts:

1. His point about short term vs. long term is very important … because long term you see/pay for your short term decisions. Conscious Capitalism companies are long term focused. We have used as proxy for good companies, 100 best companies to work for, or some other third party list.

2. Your heading reveals a trade-off mentality, that it's either or. That's not what we've found. It's possible to keep looking for solutions that make ALL stakeholders better off (and most CC companies include the earth as a stakeholder to avoid those nasty externalities). Even if it costs in the short run, doing the right thing will pay off over time. Patagonia is a good example.

3. CSR is often the crony capitalist trying to tack on a beneficial marketing strategy to get on the green bandwagon (his landlord). You have to dig deeper to sort out which companies really mean it.

4. Transparency is getting harder to avoid. Companies that delay finding out about the negative impact they have in their supply chains and fixing them will pay when their customers discover and put it on twitter. Brand loyalty is hard to buy.

5. You will have fun debating these with John at Junto. Keep up the research…but better read the book too.

Russ Sears comments: 

The problem also is there are many "socially responsible" businesses that are not to be believed. The customer wants to do business with a business that is on the loyal side of the prisoners dilemma. It signals that they value repeat business, and this one transaction will not be be maximized at the customer's expense. In other words, a properly designed social response shows that the business considers itself to be in an infinite set of transactions. It will take less now so that the great great grand kids can make up for the small cut they give back to society. Like Zacheus the tax collector, if they miscalculated and took more than their share, they will return it 4 X what they took.

The problem however, is that often a social responsible business is really doing a slay of hands. Like Capone gifts to the Opera, or LiveStrong gift to healthy living.

Also sincerity is terrible difficult to measure, but it's something many individuals think they are better at than they are. Like ants, they are to be trusted because they give off the scent that they are from the same "tribe".

Apr

23

I feel like Pitt looking through the current issue of Nature which has a million ideological articles about biology, including a purchase for 60 million of a 2 million Mendeley company, a start up that involves 2 million users sharing and using research papers, an article about Gosling who used paper clips to take the photo of DNA that Watson and Crick used without mentioning to discover DNA. A non-ideological thing from Nature of relevance: "Discoveries take ego, genius, conflict, inspiration, and fierce ambition. But they also need, the hard graft of PhD students who beaver away late into the night and improvise with what they find in the stationery cupboard." Of course articles on how trawling is depleting our fishing stocks, how Greek science is being depleted because we don't give it enough money, and paeans to Obama for funding based science and his budgeted increases in research spending, (but a slight slap for not funding more basic science), and a strident denunciation of those who would wish for deficit decreases, the new secretary of the interior who will "oversee" 200 million hectares of public land and 700 million of land offshore, Sally Jewell (a personage good to know), an article on how we shouldn't use synthetic science to destroy the rain forests, an article on an unsung pioneer of classification who showed that structure and uniqueness is more important than DNA in classification, 2.3 million paid for Nobel prize medal of Francis Crick, and how coelacanths' genes can tell us how we got from the water to the land. Much going on in biology, and much has the idea that consumes our world to make man small in it. 

Apr

23

One of the most beautiful things I've ever read is the biography of Marie Curie by Eve Curie, Madam Curie. It shows true scientists at work. It's the portrait of one of finest marriages ever. It is a model of what a good biography should be. It provides a great depiction of emigre life in Paris in the 19th century. It shows the force of an indomitable will to discover. It makes you cry when Pierre Curie is killed by onrushing horses on a crowded Paris street. It shows how chemists had to work when they needed to weigh, and touch and bottle and see everything in order to make discoveries. It shows how two new elements plutonium and radium were discovered. It shows the ossification of science in France. It amazes one as everyone connected with the Curies won Nobel Prizes or became Presidents of Poland even though they were the most self effacing scientists that ever lived, refusing all awards (she got two Nobels, and she deserved it, not like Linus Pauling.) I keep going back to it to see what a loving scientific family should be like. The father read literature to them every Saturday and spoke 11 languages.

Apr

23

There is always something new to someone with many gaps in knowledge like mine. And the minimum spanning tree which I saw in an astronomy article "bootstrap, data permuting and extreme value distributions" by Suketo Bhavsar (which I couldn't understand but sent to Dr. Z  as he could and Mr. Grain who could also understand it and it seems like a very good thing for technical analysis. But I will have to study it when not losing in market (all too rare). 

Kim Zussman adds: 

The article is unfortunately significantly beyond my boundaries. Observationally I would worry also about what we can see vs what is obscured by interstellar dust, but presumably they adjust by using infared (which penetrates dust better).

But I see your point vis traded price path:

"The Minimal Spanning Tree or MST (Zahn 1971) is a remarkably successful filament tracing algorithm that identifies filaments in galaxy maps (BBS; Ung 1987; BL I). The technique, derived from graph theory, constructs N - 1 straight lines (edges) to connect the N points of a distribution so as to minimize the sum total length of the edges. This network of edges uniquely connects all (spans) N data paints, in a minimal way, without forming any closed circuits (a tree). In order to distil the dominant features of the MST from the noise, the operation of "pruning" is performed. A tree is pruned to level p when all branches with k galaxies, where k < p, have been removed. Pruning effectively removes noise and keeps prominent features."

Victor Niederhoffer writes: 

But it's descriptive right? I don't see anything about how to use it as predictive?

Kim Zussman replies: 

They seem to be trying to lift signal (filaments) from background noise. Do you think some market moves are signal and others noise?

Victor Niederhoffer responds: 

Yes. Like when bonds and stocks are both up on the day. The green on our chart or a break of a round number. Like an orgasm. But I can't understand the astronomy of the Indian paper so can't unravel it. 

Apr

19

One of Tom's favorite proverbs was "it's good to have a system even if it's a bad system". I made some very rare profits the last two days with the theory that the Boston situation was a cover up of Mideast activity and was able to profit from a few news announcements and reactions thereto with that theory but the theory was wrong and I was wrong and (one is seeing the Mikado tonight). At least having a system prevents you from being oscillated out by stops or excessive vig or ephemeral things unrelated to the theory which are wrong too, I think. 

Apr

19

It strikes one as wrong that governor Deval Patrick said "there will be no vengeance but accountability." I had the displeasure of hearing him speak at a Milton commencement of my daughter when he was a mere student out a few years with a hateful message that at least saved me from ever contributing to Milton again.

Anonymous writes:

The reason they picked the wrong place to terrorize is that there will be tremenous amount of vengence.

Because, marathoning, is only for those in great shape. And Boston, with its qualifying standards, is only for the elite of the elite.

The best and only true vengence is success. They have just unleashed an enormous amount of motivation in every runner's strong and true heart.

Apr

18

It is good to know from the Blodget interview that 142 people including bank and public relations people get Fed releases 1 day in advance on an "embargoed basis". As Willie Sutton said when the Dodgers lost to the Giants, "makes you want to turn yourself in to headquarters". No wonder the market tends to go up the day before favorable employment releases et al.

Craig Mee writes: 

"Embargoed basis"… looks like the medicos do it too. So much room for shenanigans:

"In the case of a trial that I already know I probably want to cover, I will often ask the PR person if I can get access to the slides beforehand, and I assure them that I fully intend to respect the embargo. In most cases my request is turned down, for any number of good reasons: the company doesn't have the slides, the investigator is terrified of an embargo break, etc. But often enough the request works and I'm able to save a lot of time and effort during a busy meeting by preparing some of the work beforehand."

And from the tech stock crowd (from June 2011):

"And there's one more big problem with embargoes: newsmakers haven't been holding up their half of the bargain. Part of the gentlemen's agreement is that if a reporter or a news organization deliberately breaks an embargo, there will retribution. The company or PR firm whose embargo got flouted is supposed to exclude the offending reporter or organization from future embargo offers and pre-briefings. But I don't see that happening any more. TechCrunch, in particular, breaks embargoes with total impunity. Like codependent spouses, companies and their PR reps always seem to rationalize away the breach and go back to Arrington's crew with the next confidential story.

You can't fix the embargo system with more embargoes. It's time—for me, at least—to walk away from the whole bankrupt system."

Apr

17

There are some traders who make money based on news events. Please tell me how an analysis of the recent news could have been beneficial to traders who analyze news. The first reaction was a drop of 1 % in the last hour in S&P and a rise of a corresponding amount in gold. The reaction overnight was the opposite. Why was this news so bullish overnight? Is all news just an opportunity to do the opposite of the initial reaction? What do you think? Is there a systematic way to profit from news announcements? The 9-11 was not a temporary thing. Was that the clue?

Steve Ellison writes: 

I would hypothesize that any market reaction to a news event that triggers strong emotions should be faded because of the availability heuristic (people tend to give too much weight to dramatic but rare events).

I would also hypothesize that any market reaction to government statistics should be faded, since they have margins of error and are often significantly revised later. However, when I tested this proposition using the government report that routinely provokes strong market reactions, the monthly US unemployment report, it was not clear there was any edge to trading in the opposite direction of the S&P 500's move on the report day.

Jeff Watson writes: 

I generally don't fade USDA crop reports after they come out and grains are offered limit down. However, I've been known to buy wheat right at the top just before the report and have it go limit down on me. I hate that feeling as the noose tightens when the trapdoor opens. In fact that just happened to me on the last go-around.

Alston Mabry writes:

How do you test news events? First, you have to immediately and accurately evaluate what effect the event "should" have, ex ante. And then at some future point in time, compare the predicted to the actual effect the event "did" have, ex post. As there is no objective measure to use for the first step, you wind up simply testing whether or not you're any good at predicting the effects ex ante.

Steve Ellison writes: 

I tested using the following logic. If the absolute value of the change from Thursday's close to Friday's close on an unemployment reporting day was greater than the median of the absolute value of the daily change in the previous month, I assumed the market was reacting to the unemployment report and selected that day. For all the selected days, I backtested a one day trade entering at Friday's close and exiting at the next trading day's close, positioned in the opposite direction as Friday's net change. That is, if the net change on Friday was positive, the hypothetical trade was a short. The results were consistent with randomness.

Sushil Kedia writes: 

News is a rare commodity in today's world. We are inundated with broadcasts today. Any media missives that bring by a communication of fact and those amongst the fact-set that are beyond the expected may still have some market moving value. The durability of that fact or how out of line of anticipations it was may perhaps have some effect on how much and for how long the prevailing state of prices will be affected. Those broadcasts that provoke emotion are likely that are worth inspecting a fading trade. Whether news of war, crop-failures or any such genre' of information flows that produce an instant or moment of endocrinal rush.

The fine art of speculations rests on anticipations. Broadcasting media would never report what is coming to happen tomorrow, but only what may have (no guarantee that the broadcast is totally factual, since we have more "viewspapers" today than newspapers) already happened. Those who rely more on figuring out what they ought to anticipate on such resources are often the food for those who would rely on these broadcasts to figure out where the likely dead bodies will be buried. Price may not have all the information of what keeps happening every moment, but does have more information than any other resources of what is expected to happen.

Event Study Method may be a decent tool to evaluate the statistical behaviour of specific kind of events that occur repetitively with varying outcomes and of studying the repetitive actions of specific mouth-pieces than of studying erratic and randomly occurring news.

In a highly inter-connected markets' world and where the risk-free rate itself has a volatility the comforts of isolating non-random abnormal returns' evidence too is fraught with risks of playing on a frail advantage that keeps fluctuating in its expected value with ever-changing cycles if not fading away. Thus, it seems fair to me rather than an over-simplification that the most important factor for the next price is the price at this instant or any distant instant is the price at this moment and in the prior moments.

Rocky Humbert writes: 

I have one secret on this subject that I will share. Well, actually it was explained by Soros and Druck as the "Busted Thesis Rule." I think I've written about this previously on the Dailyspec.

If there is a news event that SHOULD BE unequivocal in it's meaning (i.e. bullish or bearish), and the market after a bit of time starts going in the opposite direction to the consensus meaning, then it's a wonderful opportunity to throw your beliefs out the window and go with the short-term direction. Many important big moves start this way. For example, XYZ is bullish news, yet the market after a little pop starts going down, down, down, …. don't fight it. Rather, "Sell Mortimer Sell!" P.S. I learned this lesson the hard way when Bell Atlantic made its ultimately ill-fated bid for TCOMA and Bell Atlantic's stock when straight up instead of what it "should" have done … which was go straight down. I won't describe the censure I received by my legendary boss at the time. Amusingly, neither of these companies still exist. Bell Atlantic became Nynex which became Verizon. And if memory serves me, TCOMA was bought by AT&T when they got into the cable tv business…

Gary Rogan writes: 

In a similar type of episode, when 3Com spun off 5% of Palm thus giving it a market valuation, and the resultant value of Palm significantly exceeded the value of 3Com that still owned 95% of Palm, this marked the end of the dotcom era.

Apr

17

Okay, the 142 bank pres and public relations people have the minutes already to be released to public in 10 minutes. Bonds are up and stocks are down. Germany is getting killed. Which way will the release to the non-flexions affect bonds stocks and gold. I've been buying gold whenever it drops as I believe that the bank deposit confiscation has to be bullish for gold as are the trend followers short.

Anatoly Veltman writes: 

Rocky is patient at $1390, getting ready to pull trigger on test of $1320.

Victor Niederhoffer writes: 

Rocky a lot more astute than me perhaps because he has a bit of the idea that has the world in its grip in him from his days at the 'Bank' and his love of trend following. One passed their headquarters near the scene of the crime yesterday evening and it was replete with canine k9 4 footed operatives.

anonymous writes: 

One can imagine the scene:

Fed: Honey, I would love to be with you but we have to lay low a few days after the press got pictures of us together.

Banker responds: If that is the case, you and the D. C. boys have fun by yourselves. Give me the checkbook and I will go home to L.A. to shop. Call me when you decide you need the markets to go up again.

Rocky Humbert writes: 

For the record: I am flat gold. If Cyprus (or any other country) could cure their ills simply by selling gold, there would be no ills. My recollection is that the Korean housewives were selling their gold wedding bands to support the Won … during the 1997 financial crisis over there. Korean bonds were yielding 15% at the time. And I bought a few as an investment. That worked out ok. I am not buying the bonds of Cyprus, Greece or those other places. The wealth of a nation is in its land, its laws, and its work ethic. Everything else is a speculation.

Gary Rogan writes: 

"The wealth of a nation is in its land, its laws, and its work ethic."

Brilliant! I would add "respect for its just laws" to the list. May those who want to reward millions of those who broke the laws of this country by giving them the very object of their law-breaking and by making them a part of this nation give this some thought.

George Parkanyi writes: 

This is not scientific, but my feeling on gold is that given government interventions (manipulation is such a strong word) in markets these days, they can't exactly let that turn into a complete rout either. Fear is fear. Gold was supposed to be the haven of last resort. If people see that collapsing then there is the sense that there's nowhere to hide. The panic could transfer to other markets. It's not behaving as it "should" under the circumstances, which further calls into question in people's minds what the hell IS going on? And what is this action discounting - massive deflation? Governments sure want that idea to spread. This is one of the reasons I'm still holding fast to the core position - though I've taken stop-outs on portions. Not large enough portions to avoid a big hit. But it is what it is. The gold stocks are really getting creamed as well. Solid producers trading like penny stocks. Unless deflation IS ultimately our lot, I'm smelling blood in the streets (some of which is mine) and screaming bargains.

I think the odds are good for a sharp reversal rally. If things go really bad in other markets, that's where they'll be looking to cash out rather really pounded down precious metals. And gold is an international commodity - still highly valued in many cultures. This crowded-trade unwinding behaviour I think could reverse very quickly, very soon.

A commenter adds: 

Was the fall in Gold the result of some bigger thing that I am unaware of, and did someone smell a canary that has been dead for a few months and was the first to find out triggering the selling?

David Lilienfeld writes: 

Let's take a look at what's known:

1. Europe was weak going into 2013, but the dimensions of that weakness are becoming evident. The collapse of auto sales in the EU, the episode with the Cypriot banks (which I still don't understand why the Cypriot government didn't say, "Fine, Germany, we're leaving the euro, we have all these euros in our banks, our new exchange rate is X, and now you have a big mess on your hands, much as we do on ours; don't like that? Fund us!), the coming episode with Slovenia, followed by Spain, Italy (if it can figure out who is the government) and France. Then there's the farce previously known as DC. There's the leader of North Korea trying to demonstrate that there is testosterone flowing throughout his veins. The dimensions of many of these has become evident recently. The degree to which China is slowing down and the degree to which the US housing "recovery" might slow down have also started to clarify recently. I won't get into the potential for a repeat of a SARS-like outbreak in East Asia.

I don't think the canary's been dead for a few months as much as it had a massive stroke, followed by resuscitation from cardiac arrest a few times (OK, OK, it was many times), and it's now brain dead and being maintained by artificial life support, ie, it's dead but it doesn't know it. Or the canary's been dead for much longer than a few months.

There's a lot of bad stuff that's gone on the last few months, and the extent to which the market in the US is near its all-time highs is a wonderful gauge of nothing so much as the power of denial. How there could be as much complacency as there's been (a topic of recent interest on this list) is something I don't understand.

Craig Mee writes:

If you haven't noticed, the first stop for gold was the width of the consolidation. I bring you information on laying of track to take into account expansion and contraction. We must work out what size volatility or influences allows for temperature rises and falls.

EXPANSION AND CONTRACTION.


1611. In laying track, provision must be made for expansion and contraction of the rails, due to changes of temperature. As the temperature rises the rail lengthens, and unless sufficient space is left between the ends of the rails to allow for the expansion, the ends of the rails abut one against another with such force as to cause the rails to kink or buckle, marring the appearance of the track and rendering it unsafe for trains, especially those running at high speeds. If, on the other hand, too much space is left between the rails, the contraction or shortening of the rails due to severe cold may do equally great harm by shearing off the bolts from the splice bars, leaving the joints loose and unprotected. The coefficient of expansion, i.e., the amount of the change in the length of an iron bar due to an increase or decrease of 1 degree F. is taken at .00000686 per degree per unit of length. 

Apr

17

Vis a vis the impossibility of threading the needle. There is a great short story by Sholem Alechem called "The Competitors". The gist is that two fruit sellers enter the bus always at the same time. She in the front, he in the back. They fight like cats and dogs. They curse at each other. "He has the rotten fruit. All the highest prices, the unhealthy ones" "She is a crook and beats her children. She takes all the money and runs around with it. Her stuff has molds and she doesn't keep it refrigerated. She was ordered to stop by the commisar and that's why she's here". Eventually he trips her and kicks her down the stairs and all her fruit goes tumbling. A good Russian helps her pick it up. "Why do you always do it on the same bus. Why do you have to fight with him?" "Who, my husband?".

Apr

17

I should add that many people mistakenly come to me to ask for advice on trading. At the junta, where I turned over the moderation to Gene Epstein, he likes to refer to me as a philanthropist. So at the end of each junta, about 20 people crowd around me asking me for philanthropy to them. Another 20 request a meeting with me to get my advice. But I don't have good advice. And I don't have a minute in the week where I'm not trading or parenting with my 7 kids. If one had a minute, it would be nice to say hello to the significant other, especially when one doesn't have a losing position. However, that's so rare that it's not worth talking about.

Many mistakenly see that on occasion I luckily beat the odds and make a small profit and come to me for a little guidance as to how to take out a little profit from the market. It seems so easy and the hourly wage is so great relative to what they make. I note that my average swing from day to day is often greater than my father's total earnings in his life time. That's a terrible lure to many people. But you can't make a profit nor have I ever seen one who could unless you buy and hold, unless you have a tremendous quantified and updated date taking account of all sorts of statistics and randomness and ever changing cycles. Then you have to be there 24/7 to implement it because the swings that are good only last for seconds and if you have job or like to have lunch or dinner, that's incompatible.

Of course other than buy and hold you can always invest with a hedge fund. But… but… but… . By the time, an operator pays his sales force, and his administration, he has to charge 20- and 2. Okay, suppose he can overcome 1- % a year vig, and make 2 % more than the market's 10%. That gives you 12 % before fees and 10% before vig. What's left for you the investor? I reiterate, one feels like telling those who wish to join the fray, come with me to Rockaway or the Hamptons to the ocean. And I'll hold up my hands like King Canute and say, "I am as incapable of helping you, and you are as incapable of making a profit other than buy and hold as I am to stop the waves".

Jeff Watson writes: 

I tell people they are better off going to Vegas then trying to trade. At least if you blow a couple hundred grand, the pit boss will give you some comped meals, a couple of shows, a room, hooker etc. The market mistress doesn't even give you a kiss before or after she "takes advantage of you", and you certainly don't get comped. 

David Hillman writes:

When people ask me how I make a good living out of my business and appear to work so little at it, I say "If you have 35 years to listen, I will tell you every detail of my career and if you can figure out how to make that work for you, maybe you can do the same." Thankfully, I get no takers.

When people used to ask for investment advice during the salad days when a monkey with a computer could make 30%+ with 'buy and forget', I would say "Oh, here's what I'm doing." I stopped with that and started saying, "Sorry, I don't give anyone investment advice anymore." Now, I say exactly what Blodget says in this piece [forget Task, he's the straight man]. It is nothing really new or different from what many advise, but it cuts to the chase, lays it out and makes the case in a very impactful way. If you have 5 minutes, it's worth a look….I wish every investor could see this.

Peter St. Andre writes: 

I don't see that Blodget's conclusion follows from his premises. Yes, the short-term trading game is rigged, but that doesn't necessarily mean that index funds are the right approach for individual investors — maybe long-term / dividend investing is best, maybe permanent portfolio, maybe other things (depending on the investor's mindset, patience, discipline, intelligence, etc.).

David Hillman writes: 

I won't debate this, because I'm not here to try to convince anyone of my correctness nor of Blodget's, nor do I care what anyone else thinks, but I will comment.

I don't think it's BS at all. While I can't put the stats on the table, I'd bet something close to the 80/20 rule applies to whom he's speaking when he talks about the "average individual investor" and those who could be investors.

The suggested alternatives, stock picking, dividend investing, etc. require, if not a lot, at least some knowledge and sophistication. Most have little to none of either.

Unlike the astute types here on the list, there's Billy Joe Tireiron, who has an 8th grade education, works second shift at the plant and picks up a few shifts a week at the 7-11 in order to sock a little away. He's not a dummy and may know a little about saving, but knows a nothing about investing.

And, there's the systems engineer who is highly educated, brilliant at his job and spends 80 hours a week at it, but knows nothing about investing and has no time to learn.

There are plenty of individuals like those out there who are smart and good at what they do for a living, they may know about wine, sports, history, art, whatever, but are clueless about investing. I'm sure we all know a ton of them personally, I do.

So, when do these guys have the time to learn about stock picking and/or dividends, and where're they to go to get good advice that is in their best interest? What the heck do they know about investment strategy, short or long term?

When the chair and I first met 11 years ago, I told him the story of a family member, a well-educated person with a master's degree and whose well-educated engineer husband handles their investments, who said to me "We made $1,000 in the market today." I told her they only 'made' $1000 if they sold and took their money off the table. These are very bright people and somewhat market knowledgeable, but still didn't realize there is an important difference between paper money and cash.

Or take a guy who knows very little. He hears dividends are the way to go. So, he buys 100 shares of a commercial REIT at $10/share that's been consistently throwing off a dividend of $1.20 for years. He thinks "well, this is a consistent 12% return, it looks safe, and it's better than the index fund that averages 9%. When the share price falls to $8.00 and the dividend remains $1.20, his yield rises to 15% and he thinks "wow, my dividend is up 25%", but then fails to consider his depreciation of 20% which gives him a net negative total return.

What are the alternatives available to the average guy, one of the 80-percenters, who wants to invest? They can buy into the marketing hype of online brokerages that tell them 'we'll give you all the tools you need', but still have no time to learn and understands half or less of what they're reading. They dive in nonetheless and lose.

Or, they buy some hot stocks or funds because some personality screams a recommendation at them on TV or they read about them in a financial rag a few months after the fact when they're no longer hot. Or, they're sold an annuity by a bank which benefits more than the client from that option, or a whole life insurance policy by an insurer as an 'investment', which we know it is not.

Or perhaps they go to a commission-based financial planner who takes their 6% off the top and they're upside down from the get-go on every dollar they invest. That may be better than the others or not being in the market at all, but why start out upside down? Instead, they can, as Blodget advises, invest in a low-cost index fund, paying 1/30 the 6% entry fee and taking advantage of the long term drift.

Blodget may be generalizing, which is all one can do in a 5 minute webcast, but he does quite clearly make the distinction between the disadvantages of short term trading and the advantages of long term investing for a pretty broad audience. He's making the same case the chair was and has been has made for years.

If one doesn't buy into the drift, fine. But, it's not 'big bad wolfing' nor bad advice to say "hey, average guy……don't swim in a shark tank, don't buy into the hype, instead, play it safer, minimize your costs and go with the drift." Besides, there are some morons out there who should be scared into caution rather than gamble their family's future.

If we want to nitpick, Blodget may fail in saying "the ONLY way for the average guy to make money in the market long term is low cost index funds" rather than to say "there are other reasonable long term strategies that may work for some, but if you have no idea what you're doing and have no time nor inclination to learn, going with low-cost index funds is the best bet to maximize your return over the long term."

And, he probably also should have said "this advice does not apply to the Spec-List where everyone is brilliant and knows what they're doing and many will think this is BS." ;-)

Apr

17

Many of the markets that one trades have an unerring capacity to avoid giving one a profit. If you hold a position over night, they move so much that you can't hold them without staying up the whole night, for two days in a row, which for most people is impossible.

Other markets only let you get out of a position when it's going to go in your original direction by a fast 1 or 2% like the S&P over night today. If they won't let you out then they are ready to go down 150 bucks like gold yesterday.

When you try to trade them in normal hours they go back and forth so that your vig on a small sized position taking account of the back and forth is inordinately large to be unprofitable.

When I trade gold, I find that it likes to move a fast 10 bucks in 2 minutes every now and then so you can't leave limit orders profitably to catch the reversal. If your position is too large, it will move so far against you that you will be margined out, especially over night when you don't have data to provide a buffer as to which way it's going. If you happen to have a position in the right direction and it moves a fast 10 bucks in your favor, why then it's impossible to get out. Within 1 1/2 bucks because only 1 or two contracts is bid or offered within 30 cents, and by giving up that much of an edge to trade a reasonable number of contracts, you lose your expectancy. If you trade with a small size, then the hourly wage from doing all the work is less than a construction worker.

Worst of all are the markets where just a few hardened members on the rules committee make the markets. Many of the options markets are like this. They will maneuver the prices and the rules against you so that it's impossible to make a profit at the settlement or hold the position through it because of marks and margins against you.

If you trade for small gains and losses, that's worst of all because the high frequency people are ahead of you on each tick, so by the time you pay the bid asked and take account of the fact that you never get your limits until it's way against you like in the old pit days, you're giving up infinitely more vig than at Vegas.

The book on baseball betting says that you only pay 2 1/2 % vig on baseball betting, much less than any other market or our market. However, you have to live in Vegas to speculate there, and they treat you like a persona non-grata there and the chances for being comped or otherwise ennobled are close to zero.

Gary Rogan writes:

This just tells me one more time that being a long-term investor, specifically in stocks is the thing to do for all but the very best. Yesterday was a bad today, today is a pretty good day, but do I care? Not really, other than it's more pleasant to see a lot of green than a lot of read. I do care that there is nothing good to buy, but can I do anything about it? No. Like in fishing, I just hope that sooner or later the situation changes, in the mean time watching the drift with noise superimposed on it is like watching paint dry, but a special kind of paint that doesn't dry in a monotonic fashion. So the "mistress" to me is nothing but paint that dries in an unusual fashion.

Apr

17

It is interesting to speculate whether there is a seasonal tendency to go down on the due date for the service and whether there is a corresponding seasonal for the subsequent days. One noted a revulsion in the air on those days in the past. One notes 3 April 15 and 4 April 16 literally that were down and a not insubstantial move the next day with 7 of 7 up a not insubstantial amount. 

Apr

11

1. There are some days that it is good to play at net with a short backswing and some days to play a full court game with big backswings and tremendous top.

2. The feeling of elation from recovering from a loss is much greater than any other gain of similar magnitude, i.e. it feels much better to go from 1 million down to 0.5 million down, then to go from 1 million up to zero.

3. Many of the markets are close to unchanged at the open, i.e. stocks, bonds and gold after tremendous moves yesterday.

4. The yen is at 99.70 yen per dollar and will have to top 100.00 for a cycle to be requited.

5. The sports betters and the market betters do not update their statistics enough to take account of ever changing cycles.

6. Woodson is a great coach who could teach all heads of firms a lot. It is such a contrast to see him trying to proactively assist and support his players on the sideline than the horrible image of Antoni with his smug smile of defeat as he holds his breath and keeps a stiff upper lip pacing on the sidelines as his team is murdered because of some bias he developed from 20 years ago playing in Sicily not taking account of the changing nature of the game.

7. Since the corn sold at a premium of 15 cents to wheat versus its normal 50% level to wheat, wheat has recovered by about 100 cents relative to corn.

8. The Nikkei is now 1000 points below the Dow, and a year or two ago it was 4000 below and 15 years ago it was 20,000 or so above. Does that spread move in trends?

9. It was kind of the f(lex)eds at the central banks to relieve all bearish news about bonds before the auction so that their clients would not even be temporarily discommed this time by the auction. Presumably this is necessary to maintain the 2 trillion or so foreign holdings of us bonds?

10. The VIX hovers about 12 and all who sold premium over the last 5 years have made a fortune, and it will be interesting and terrible to see how they give back all their profits as Sandor mentioned everyone in the pits has done so since the beginning of time. When will The Sage's holdings suffer the same fate as almost every other conglomerate in history.

11. The ratio of DAX to S&P, now at 4.96 having fallen from 5.5 is close to achieving it's 5.0 homeostatic level, thereby showing the forces of consilience between European agrarian policies and our own.

12. It is interesting to contemplate the swings of gold between 1600 and 1550 as it moves inversely with stock markets showing its abhorrence at the 1550 level of egalitarian policies or fear of them at the other. The increase in stock market wealth should cascade into other markets like the metals and oil and wheat.

13. The Knicks have won 14 in a row but they rely on the 3 rs and Melo, and such one dimensional reliance generally and statistically loses in the playoffs as one dimensional activities tend to lose in all other sports and life.

Apr

9

I admitted I was powerless over my affliction to taking small profits.

I made a decision to turn myself over to the care of those who affably might help me as God has helped others.

I made a searching inventory of all the losses I have taken.

I admitted to other human beings especially the spec list the nature of my wrongs.

I am ready and willing, but perhaps not able, to remove these defects.

I humbly ask all my supporters and friends to help me remove them.

I have enumerated the many millions that I have lost and beg forgiveness from those I could have helped had I not had this affliction. My family would be a very wealthy family and would not have to worry about such things as homes and educating their kids had I not succumbed.

I promise that I will make amends to them except when doing so might lead me closer to the grave and a nondescript and economical old age home.

I will continue to take an inventory of my lost profits and exacerbated losses, and when I transgress I will admit it. Readily.

When I jog, and have a peaceful moment, I will meditate on my past transgressions.

I will share the awakening of my profits, if any, with my colleagues so that others afflicted with this ailment can practice the principles necessary to correct.

And I will count. If this affliction manifests itself in day of week effects, than when the two day move is down seriously and the one day move is up, there should be a rise the next periods. I find of the 152 most similar events in the new millennium, the average decline the next days is -0.05 %. When the two day move is up seriously but the one day move is down, there should be a decline. I find the average move the next day of 132 such events is 0.03 %. I find similar random results for intra day manifestations of this terrible affliction. So I will meditate and count some more. 

Russ Sears writes:

An integral part of the 12 steps is accountability. You don't slip off the wagon because you don't want to have to admit it to the group and your accountability partner. Further, you recognize the triggers and you call the accountability partner to talk you down from the ledge.

In October in Canada, I attended an Enterprise Risk Management Conference where several heads of large Risk Management Departments talked to the group. It appears the regulators have adopted a system of 3 level of "challenges". That is they document times risk rules were broken and mistakes were made, either unintentionally or by bad processes at 3 different levels.

The first level was self or departmental reporting. The second level was outside department but internal to company (either internal controls or internal customers) and the 3rd level was external auditors. Each level was expected to have some "challenges" and write up how to improve them, and give a degree to how material or risky the error was. The right number of challenges and the degree of rogue risk was determined. Too little challenges or no serious violations were considered not taking risk management seriously.

The problem is, however, that this only prevents errors or rogue risk happening at the lower levels because it is a top down approach. But most companies fail because of strategic risk. Often in hindsight it is clear the strategy was guaranteed to make money short term in exchange for taking on crippling unavoidable long term risk.

This became clear to me when the Citi Risk Manager talked…The preamble to the "dance while the music is playing" quote played in my head.

They knew the housing market was a bubble ready to burst… But they also knew there was massive bonuses to be made before it struck and destroyed most of their company's equity.Nobody at the lower level was allowed to "challenge" their strategy, no matter how clear the fraud was to these lower level people.

In short, there are some risk rules that should never be broken, no matter how high you get. These may change as the circumstances dictate but they should always be defined. Allowing everyone to hold you accountable should be part of the any trader's 12 steps.

Chris Tucker adds: 

Is there a twelve step program for traders that habitually get out too soon?

(20 minutes to close): "Daddy will you play with me?"

"Umm, give me a couple minutes honey" says he. "Let me sell this first."

He groans but dutifully closes all positions. "What are you selling?" He makes a half-hearted attempt at explanation. Then heads outside for frisbee and badminton.

Then comes in an hour later and berates himself in disgust.

He never called his sponsor so there was no one there to say "Just hold it 'til the close bud, you can do it!"

He makes dinner all the while promising that he'll do better tomorrow. That he'll call his sponsor. That he'll keep at least one contract open, even if it kills him.

And he wonders, deep down, if he really can. Or is it going to go on like this forever.

Rocky Humbert writes: 

Mr. Tucker's whimsy is actually a profound question which is not easy tested:

Over a trading career, which is better: Exiting too early or exiting too late? Over a trading career, which is better: Buying too early or buying too late? (for a long only investor)

I would argue that for most fundamentally-oriented investors, the true killer is buying too early. I believe there are mathematical underpinnings to this. Perhaps other have a rigorous analysis of this problem. I've never seen this debated on the Dailyspec.

Ralph Vince writes: 

I think it depends on how you size your way in. I find I am infinitely better to be too early — on exits as well as entries. But I scale in, gingerly, one toe into the kiddie pool at a time. But this is, essentially, entering and entering on limit orders, whereas to be late at both ends, is essentially entering and exiting on stops.

I'm very interested in your thought process as to why that would be more advantageous.

Apr

8

Nice run of 12 reversals in a row in SP. Reminds me of how Irving Redel would always call up Susan after the market went down 5 days in a row —- "Is Victor okay?".

Alex Castaldo adds:

Today [2013/04/08] the S&P was up! The run of reversals continues!

Apr

8

Aubrey Niederhoffer has an excellent singing voice. He likes to sing "Those Were the Good Old Days" from Damn Yankees. The Bad One sings about how he enjoyed it when "the rack was in fashion. The plagues were my passion". When he gets to the part "like the hopes that were dashed when the stock market crashed" he always looks around three times and turns to me with a sheepish smile.

Apr

8

It is amazing how much more sophisticated the analysis of sporting events and things like sabermetrics are then the rudimentary kinds of analysis that are used day to day by practitioners and—-(one looks around three times to see if any woman's sensibilities might be offended)–sits in our field. 

Apr

8

The stool pigeon was often tied up to a stool to attract other pigeons to be shot. Perhaps the President has seen such used as a decoy in his duck hunting forays. Are there activities in our markets that attract us to our death. I remember during Oct 19, 1987, I noticed a 0.25 move from the open at 11 am in stocks and bought massively based on what turned out to be an erroneous print. Often since then I have seen markets hit new lows like bonds the preceding 2 months to this, and then rise to astronomic heights. Similarly for the grains last year that took a temporary bit of change from Mr. Grain at the corn 5 buck level before doubling in one of the greatest bull moves in history. Recently it was gold that plummeted below 1542 before rising a fast 40 bucks in the next two days. Are these general quantitative tendencies? It would seem asymmetric as a rise tends to peter out much more gently than a decline. Does it relate to the necessity of abandoning all hope before rebirth can occur, as in Isiah's Job. How does it relate to romance and markets per se? Inquiring minds find it interesting.

The thoughts are engendered by a reading of the excellent book Six Sources of Collapse by Charles Hadlock. The book contains a mathematical practitioners insights into dealing with collapse as a consultant for Arthur D Little for over 25 years. It contains chapters on the futility of predicting unpredictable things, crowd and herds, evolution and collapse, instability, chaos, non-linearity and networks. Great diagrams and easily accessible mathematical examples provide a framework for each chapter. It's everything that a good accessible mathematical treatise on a important problem should be.

The one weakness is that it is a bit naïve about markets, but much less so than the ponderous and impractical and self aggrandizing treatments that have come down the lakes from the derivatives expert. Hadlock has the excuse of not being a practitioner in markets, and it's counterbalanced by his truly systematic hands on knowledge about environmental disasters and waste disposal. The kind of book that every young mathematician interested in applications should have. Highly recommended.

Apr

8

The book Applied Longitudinal Data Analysis for Epidemiology by Joseph Twisk is a useful and accessible review for everyone who studies series that have repeated measurements of a subject, person, stock prices, earnings, or markets over time. The methods discussed take account that high values in one period are not likely to be followed by random high or low value in subsequent periods, i.e. the observations are not independent. Such studies are usually found in the medical field where patients are given some treatment and the effects are measured over time. A good example would be how do the various components of diet affect health for a group over time.

There are numerous examples in our field that spring to mind. How do the fortunes of companies devolve over time based on their earnings? How do the fortunes of different markets develop over time? What are the factors that influence the standings and consistency of performance of baseball teams across a season? The book contains methods that are accessible to anyone who has had a basic statistics course and is interested in time series. It starts each chapter with several easily understood examples of longitudinal studies with a few measurements of an outcome like weight gain for each subject. It then shows how to analyze the data assuming the outcome is continuous, dichotomous, dependent on time, dependent on other predictor variables, spaced equally or unequally. It gives a graphical example of each technique used, then shows the model used to analyze the data, then gives statistical output from standard software program that are the results of the analysis, then gives an explanation of the results.

The techniques used are almost always simple extensions of regression using three or four basic computations—- the sum of squares within a subject, the sum of squares between subjects, the sum of squares between groups of subjects at different time periods, and the simple linear regression of how the variations between the above are related to other variables.

There is a very accessible notation used with hardly any nested subscripts or unusual Greek letters used.

Chapters and sections on the design of experiments,nonparametric analysis of the observations, relations with other variables, how to define change and ferret out causality, dealing with missing data, tracking the observations over time, calculating proper sample size to come up with a reasonable likelihood of finding a significant difference appear. The techniques used are generally those that appeal to ones' common sense. They are simple extensions of the t test for measurements between a few groups, and the stability or time dependence of the subjects over time. Rank correlations of the Spearman and Kendall kind are frequently used.

The way to do all these analyses with the software packages Stata, Spss, Spida, and MLwin are shown for all examples. There is a nice discussion of how to use two relatively new techniques GEE and random coefficients. Both of these techniques take account of different slopes and intercepts that might apply to the subjects under study.

I found the book very educational as a review of how to use simple statistical techniques for the study of change over time. The analyses are very different than those used for survival studies. They have great applicability to the kinds of things we study in markets or psychology but are rarely used. All of the techniques and analyses could also be carried out with repeated random samplings from the data. I highly recommend the book as a learning tool for students of change, and a model for teaching modern and accessible methods of statistical analysis. 

Apr

3

Many bearish things about gold lately. That it doesn't go up with no inflation, that we're in recession. That the dollar is going up. That there is great overhand of stocks. I am reminded of a question that I always ask when we hear rumblings that we are going into recession and someone suggests that it is bearish for stocks. I always ask, "what does that have to do with the likely outcome of the stock market? Will the drift be lower or higher?" Oh, I haven't tested that is the unspoken answer. Same for gold. I have not been averse to considering speculative buying of it on all the dips and one is not averse to upholding the spirit of Gavekal idea that it is good to consider things of that nature when caught in Africa by natives, or in large deposits by flexions. One notes a 20 day minimum and is not averse to considering expectations thereafter even before Dr. Zussman runs it on small tab.

Kim Zussman writes:

Using ETF "GLD" daily closes (12/04-present), new instances of 20 day lows were defined as the first 20 day minimum in 20 days. For these new 20 day lows, the return for the next 5 day interval was positive but N.S.:

One-Sample T: next 5D

Test of mu = 0 vs not = 0

Variable   N   Mean    StDev   SE Mean          95% CI            T      P
next 5D   32  0.0012  0.0317  0.0056  (-0.0102, 0.0126)  0.22  0.828

However 7 of the last 10 instances of new 20D lows have been followed by 5 day periods which were down: 

Date next 5D

02/11/13 -0.027

12/04/12 0.007

10/15/12 -0.005

06/28/12 0.018

05/08/12 -0.040

02/29/12 -0.004

11/21/11 0.021

09/22/11 -0.067

06/24/11 -0.009

01/07/11 -0.007

07/01/10 0.011

03/24/10 0.025

01/27/10 0.020

12/11/09 -0.003

06/22/09 0.017

03/10/09 0.022

01/12/09 0.047

10/16/08 -0.109

07/30/08 -0.032

03/20/08 0.022

08/16/07 0.010

05/10/07 -0.014

03/02/07 0.008

12/15/06 0.011

08/17/06 0.012

06/01/06 -0.026

02/13/06 0.026

12/20/05 0.050

10/20/05 0.026

08/30/05 0.031

07/06/05 0.002

03/22/05 -0.001 

Anatoly Veltman writes: 

Fantastic work, as always. Now, I will ask a few skeptical questions:

1. So you test a historical period which saw the price move from $400 to $1600. Wouldn't you expect bullish historical results of a purchase made just about any random day?

2. So we're having a market in 2013, bouncing around on any piece of planted news from Cyprus, from EU, from Putin, from Japan, from Fed, from WH, from investment banks, from fund characters (the ilk of the upside-down), etc. How will one adjust one's timing of statistically catching the falling knife - given that the timing of such leaks (releases) has significantly changed from the test years?

3. Also, the market mechanism has changed in those 8 years, on two fronts:

-the increased weight of ETFs vs. bullion/futures
-the increased prolifiration of HFT exploratory orders

My gist: it's good to have a study, but there are plenty of caveats that call for increased amount of discretion.

In fact, here is my idea: I've observed this to work at an increasing rate  since the transfer of investment capital from public into the coffers of the banks and funds has been initiated by the Central authority.

So Gold drops too quickly from $1600 to $1563, which rightfully piqued the Chair's interest in the wee hours. So this is what investment banks, playing with unending public capital, do (for a 24-hour play): they buy momentary cheap Gold and sell Oil against it (got to get the quantity mix right). Oil could not be considered cheap following last week's straight rise. Works plenty of times. And when it doesn't (really, once in a blue moon), a short term spread position becomes a longer term hedge, then the books may get cooked, then a rogue trader is disclosed, etc. who knows…But a good statistical trade to be sure. I like it.

Jason Ruspini adds:

If it seems like HFT is degrading certain strategies over time, there might be testable differences between different futures exchanges that support different order types. For example CME supports stop-limits without any additional software, but Eurex and TSE do not. ICE natively supports ice-berging, most don't. HKFE and SFE only support limit orders natively. Does the performance of benchmark momentum or reversion systems on equity contracts differ between these exchanges (without applying slippage assumptions)? They aren't apples-to-apples of course but if HFT has polluted the microstructure for certain strategies, it seems like something should show-up here, even if many participants have ways to create the other order types.

CQG Order Types Supported by Exchange

Ralph Vince writes: 

Interesting points Jason. Timely too, I believe.

When market meltdowns occur, the technologie du jour is the scapegoat. In 1929, it was margin accounts. In 1987, program trading. Tomorrow, HFT.

Not that HFT caused the meltdown, but the fact that they stepped aside and enormous air pockets formed in the faveolate theatre of perceived liquidity.

Apr

2

One notes a 10% drop in corn in 2 days and wonders what the impact of that on various markets is.

Jeff Watson writes: 

Since 2007-08, farmers have been upgrading their operations due to higher grain prices. Farmers have increased storage to the point where they are more likely to store their grain than pay storage at the local elevator. In general many have made capital improvements like crazy due to high grain prices, cheap money, and increased value of land. The benefit of the lower grain prices is that the consumer will have more money to be able to buy more pick-up trucks, etc. The cattle operator will also benefit with lower feed prices (which will increase his margins), which will be passed along to the consumer. This has been a very historic bull market in grains in it's longevity.

Mar

29

One queries whether Passover, Yom Kipper, or Rasha Shauna is bearish for stocks and will say a prayer of atonement and share a torte if it turns out not so.

Anatoly Veltman writes: 

You mean Sell Rosha Shana Buy Yomkippur did out-perform Buy&Hold?

Ralph Vince queries: 

But what about Passover? What about the full moon and a shorting a (very) quiet market?

Jeff Watson writes: 

Back in the pit days, during a quiet market, locals would start selling the market down to where it would trade and order flow would start coming in.

Anatoly Veltman writes: 

Can this be a way of creating "real world" demand?

Jeff Watson adds: 

Sure, the grain companies use this same concept in the reverse to bid up the front month to get farmers to kick out some of their stored grain into the market. Right now look at may corn/wheat spread. It is treacherous and the big grain companies are slugging it out with that spread. I'm avoiding it like the plague, just like I avoided that gold/platinum inversion 1.5 years ago that went out to $150. Too rich for my blood. Very rarely does corn trade premium to wheat. Vic even asked me about doing the trade when corn was 2 cents premium to wheat(where wheat usually commands a 50% premium to corn). I told him I wouldn't touch that trade with a 10 foot pole. In my case, fundamentals and gut instinct kept me from stepping on that land mine. It's been fighting for a week, and I just prefer to be long a little May wheat and have some other months and exchanges spread. I hate risk, and also hate gambling unless I'm the house.

Anatoly Veltman writes: 

The gold-platinum, of course, was entirely different as no Gold is ever consumed. It went out to at least $225 (we should ask Rocky if he knows the high tick, and how long the price was available). To my recollection, the spread double-topped in unusually brisk manner, i.e. the record prints didn't last more than overnight.

Richard Owen adds: 

What is it about spread trades that make them so treacherous? Gold/plat, corn/wheat, the Volkswagen stub, etc.

Is it because the mis-pricing is so "obvious" that people get greedy? Because it's a matched trade, they allow too much for a positive hedging effect? And because they want to trade the spread, they focus too much on maintaining the relative basis, rather than using risk-management appropriate to a gapping short, even if it screws up the net position?

Rocky Humbert writes: 

IMHO the reason the spread trades are dangerous can be attributed to several phenomena:

1) Price Anchoring and false assumption bias. People believe that just because the spread between X and Y has been bounded previously means that this is a law. In the case of stocks, in the fullness of time, it's a good bet that every stock must eventually either merge, get taken over, divest or go backrupt. Otherwise, one stock would take over the world. This means that if you are long GM and short Ford (because it always traded within X bucks), you will eventually blowup. And because GM/F is a mean reversion trade, it has the typical person adding as it goes against you. Can you trade around it and get out at a profit? Sure. But that is intellectually dishonest versus the original motivation. I suspect trading around the position is, in reality, what most profitable spread traders do. They don't put it on, add to it and wait for total reversion. In the case of commodities, there are short-term supply and delivery issues, so even if you are conceptually right, if the convergence doesn't occur before the contract expires, you will incur a permanent loss since the mis pricing doesn't exist in the next contract. That's the case with C / Wheat right now. Corn is at a premium to Wheat in May. But at a discount in all of the other months. So you need to get the price and the timing right. Or you will lose money.

2) Difference versus percentage. I find that people look at the spread as X minus Y. They often ignore X / Y. As prices rise and decline sharply, the ratio becomes more important. But it's not how most people's minds work. For example, a 2 cent mispricing when corn is at 250 is quite different from a 2 cent mispricing when corn is at 736. Oops make that 695 (limit down)

3) False Volatility Assumptions. Assume the price of X0 and the price of Y™ and you are trading X versus Y. And assume that the spread moves up and down $1. People mistakenly think in terms of $1 on 100 … and that's not a big move. In reality, you are trading the spread of $1 and so when it moves to $2 , that's a 100% change — no different from Apple going from $444 to $888 . Don't laugh. I can't tell you how many people fall into this intellectual trap.

4) Butterfly traders. Before interest rates were pegged, I used to chuckle at the 2/5/10 butterfly traders in the bond market — who would do the trade in MASSIVE size. And they'd talk about how the 2 was cheap to the 5. Or the 5 was cheap to the 10. Deconstructing the butterfly trade revealed that (almost all of the time) the P&L of this popular duration neutral curve trade moved with the direction of the 5 year. So it really was a bet on the 5 year rising and falling. And everything was dwarfed by that.

When I was worked with Kovner, he always hated spreads. He would say that it's hard enough to get one trade right. Why add to the aggravation and try to get two or three trades right?

Mar

27

Lives there not one spec here                                                 
whose profits have caused all hope to disappear                                 
who's meager talents and frailty                                               
would not qualify him for disability

Here are some good definitions on the 54 million American with disability.

David Lilienfeld writes: 

That's an ADL-based definition, and includes persons with Alzheimers, Parkinsons, and several other conditions–including osteoarthritis, which is prevalent among those of us over 50.

Scott Brooks writes:

Still, that's 17.25% of the population. That's 1 in 5.8 people on disability. That number should give even an ardent liberal like David pause.

We have over 15% of American's on food stamps (of which many are both on disability and food stamps).

We have 40 million on SS.

How many taking Section 8 housing? How many others "entitlements" are we paying out?

TBTF bailouts.

How many government programs can even an ardent liberal find in the budget and say, "the government shouldn't be doing that"? I'll bet there's more than a few.

Let's start a contest and all throw $100 into a pot. The winner is the person who correctly identifies the "straw that broke the camels back".

Stefan Jovanovich writes: 

David's liberalism is to be treasured. Liberals have been the people who — throughout American history — got the rest of us to admit that the country had a problem. The difficulty is with their command and control solutions — public education, for example. Penitentiaries (thx friends), planning for land use, minimum wage and child labor laws, drug laws — the list of foolish solutions is endless. (I am not saying these are David's). The "welfare" problem is real — there are tens of millions of adults who are too slow sick or stupid to be profitably employed. That is the problem; what we constitutionalists have to do is find a solution. Offering up the market is a good way to begin the diagnosis but by itself it is the same kind of malpractice that had doctors blaming ulcers on their patients behaviors.

Russ Sears writes: 

Rather than disability a better definition would be unrecoverability. What spec still here has not had their dreams shattered more than once and has not, after some soul searching, found the strength to get up and learn from it.

Frankly, hope is fickle, fleeting, but it only appears to be extinguished. After a few hard runs in the woods and a few days time, hope has always reappeared and shown a path to turning the pain into greater future strength. Not that the path shown is ever easy or sure, but it has always reappeared, sometimes 360 degrees from the path I thought was the way previously.

Running has taught me that training is mastering recovery. 

Jeff Watson writes: 

And right away, getting back up on the horse after he's bucked you and cracked a couple of ribs is very important. Or, when you are surfing in huge waves, wipe out, break your board, and suffer a three wave hold down and nearly die, grab another board and paddle right back out….who knows you might get the ride of your life.

Mar

27

Review of Trading Bases, a story of Wall Street, Gambling, and Baseball by Joe Peta

A timely book here just ahead of opening day, http://tradingbases.squarespace.com/. Peta relates a lifelong love of baseball and statistics, his experiences as an equity desk trader for Lehman Bros. (15 years) and his subsequent battle back from a horrifying injury sustained by being run over in the streets of NY by an ambulance –as if his Lehman experience wasn't enough to endure. He suffered a "Theisman grotesque" leg break that left him depressed and basically rehabbing alone in his NY apartment with wife and family living on the west coast.

His passion for trading snuffed by not being able to work, hopped up on pain meds, and trapped in the apartment leads to him to watching more sports than ever before. A baseball lover at heart and a statistical junkie, Peta finds a reason to wake up in the mornings. He decides to try his hand at making a statistical model that would identify edges for baseball team wins and losses that would provide him with a betting edge over the Vegas Line.

Peta eventually creates a hedge fund that bets baseball games that returns 41% in 2011 with similar daily volatility as the S&P 500. The book outlines Joe's views on gambling. Baseball is his preferred niche since the juice/spread is the smallest in comparison to other sports, the ability to use statistics to get an edge is available, and the natural alignment between the better and the team– rooting for your team to win versus the convolution of winning and beating a point spread.

Joe explains his model with care, logic, and facts–backing up his assertions with anecdotes, experiences and back testing in terms of the body of baseball evidence from the historical stat stockpile. He builds on the pioneer work of Sabermetrics, Bill James, and Nate Silver. In general his system uses time tested relationships of team win/loss records, runs allowed/runs scored, starting pitching assumptions, WAR/PECOTA analysis, and more. He relates his journey on a monthly basis showing his results, the breakdowns of what went right and what went wrong, his acceptance of a "lumpy" higher return than a smooth more accepted rate of return by clinging to the belief that reversion to the mean will occur–eventually. He uses a concept called "cluster luck" to identify "lucky or unlucky" pockets in team's prior records that should be ignored and removed from overall estimates. This is a key to his being able to form an opinion against the betting line of under or over valuation. His model then picks matchups that should be bet on and he uses a very systematic approach to determining the amount of the fund to bet on any one game–essentially using fund manager skill sets.

One notable opinion of his describes his fondness for "skill sets displayed" versus the recording of errors (mistakes committed and sometimes unfairly attributed). He uses SIERA (skill-interactive ERA) for pitcher evaluation and special modeling for playoffs and interleague games. He also walks the reader through his decision making process for when to tweak the model or when to stand pat—. Over tweaking will result in removing the natural capture of mean reversion. Joe has a friendly writing style and comes across as genuine, interesting and likeable.

I think any spec would like this quick reading book–you will learn something here about baseball stats and baseball betting theory; you may well enjoy the woven storyline of his trading career experiences as these snippets and stories move betwixt his model outlining. It is written for an above average mind, but its not too heavy to put someone off who doesn't deal with wall street or modeling on a daily basis. I read ever page, every micro-print footnote, and every end note.

Ken Drees adds: 

I could not find a section or passage by memory or a reference from the index to overall management influence on single game outcomes or win expectations. One chapter deals with playing from behind and how "small ball" played to cut a two run lead to a one run game is a bad practice–playing not to lose instead of playing to win–giving away your upside to get a better feeling that you are "doing something"–almost like a job justification strategy–manufacturing a run, playing to tie instead of win. Peta backs this up with data –pages 204-206. Obviously management is taken into account when overall seasonal expectations are determined. But the managers don't play on the field so they are not highly considered in Peta's analysis. I would think possibly it may come up as a side data point in the playoffs –having more of a weighting than regular season. It may be that widely popular managers may in fact swell a line up for a team and thus give you a better opportunity to make money against–like the NY Yankees as Peta points out are a marquee club who usually get premium priced in certain situations regardless of true odds.

Interestingly –he bets both national and American league games–turns down activity during interleague play since data is less deep for those occasions and also scales back during the playoffs.

In the chapter, "Focusing on the Wrong Data", Peta parts company with "a total lack of regard for management/soft skills mentality" that some of the sabermetric followers employ. He cites a player's manager, Ron Washington of the Rangers who is loved by his players and who makes a critical decision in game 3 of the world series tied one game a piece. He Gives veteran Torrealba –a 2011 95 game starter at catcher, a "deserved" start over the much better performing player at that time during the season, Mike Napoli. He juggled the line-up and in Peta's opinion weakened his team in two ways in order to give one player a "deserved" start over giving the other 24 players there best chance for a world series game 3 victory and series lead.

So maybe Peta does give some weightings in his model –maybe when playoffs and world series are in the prime-time spotlight managers can be exploited by bettors for their traits–both good and bad.

Victor Niederhoffer writes: 

I agree with the excellence of Trading Bases. The author is very brilliant, and very likable. And his discussion of what went wrong at Lehman is the best as well as his college essay on the central funding department, which almost got him fired, and his well deserved hatred of the boxing head at that firm, who gave him a one sentence interview before hiring him.

He assumes you know a reasonable amount about baseball trivia and it's helpful if you read the annual issues of the baseball prospects and are familiar with the pythagorean theorem of Bill James. The author was a star trader of tech stocks at several firms before being hit by a ambulance and turning to his first love after being fired by the Japanese and carried out in his wheel chair. A great book. I second what Mr. Drees said about it. 

Mar

25

To expiate for one of my greatest sins, the tendency to refrain from holding a position with a profit, I have been reading many articles on Loss Aversion, in marketing, law, and psychology. Here is a simple one [18 page pdf]  that covers many of the basics. 

How can one's decisions be less harmful and more rational? When you're given a good, you often will sell it at at least twice the price that you would buy it for. This explains so many things like bid asked spreads and free trial offers. I would like your input on how to reduce the harmful effects of loss aversion. How does it relate to risk aversion for example?

A commenter writes:

If managing money, will it work to objectively identify clients with those biases? (Larger sample size to train on.) Then one day see yourself as a client.

David Lililenfeld writes: 

Changing behavior is one of the hardest things one can do, but as most successful marketers will tell you, it can be done in almost any circumstance. There are apps for the iPhone (I can't speak for Android) which have succeeded in getting people to exercise or lose weight. Perhaps you might adapt one of them to suit your need.

a commenter writes:

Creating a graphic representation of the effects of loss aversion manifested by repeated failure to properly execute a specific trading system, especially holding onto the inevitable losers for the duration while grabbing profits on positive MTM positions before they fully develop, should drive the point home.

Viewing the terrible transformation of the equity curve should be enough to cure the speculator of the detrimental affliction.

Richard Owen adds: 

The simulations of St. Petersburg's bet are explained according to a computation of concave utility or an asymmetric loss reaction plus max payout. It seems that rational expectations man creeps into even psychological bias literature and perhaps indicates the sometimes impractical nature of academic analysis. Why is the most likely explanation not someone being offered the bet, thinking "I don't know what you're talking about, but I'll wager anyhow for fun", and thus their average wager was some median of $5, $10, $20, $50, people's intuitive level for mouth bets.

Victor Niederhoffer adds: 

Yes. If loss aversion is pervasive, then it should show up in regularities relating to price moves. The situation is complicated in futures where one person's long profit when price goes up is the short's loss. The endowment effect which is caused by loss aversion or the tendency to connect with what you own, could lead to holding something too long. The reference point effect, which is that people base their decisions on where they are, a variant of holding onto the status quo is also a factor. When there is a profit, a different type of endowment effect plays then when there is a loss. Especially when there has been a big loss and it turns into a profit, the loss aversion effect is greatest I believe. I have been trying to quantify various regularities relating to these sometimes conflicting and ever changing effects in the market, and perhaps it will not be a total loss. Thanks for the suggestions that my confession has elicited, and I apologize to all of you for my transgressions in this regard in the past. Had I not made such transgressions so often in the past I believe I would be a wealthy man. I am also open to the stages of confession of a sin from alcoholics anonymous, and perhaps I am at one of the stages by confessing my sins to a support group hopefully of ones who have conquered this terrible tendency.

Jeff Watson adds: 

When I get in a trade, I look at the size of what I have on, what the market looks like, is the market going to have the wind at my back, and then I pre-determine where I will take a profit, add more position, or at what specific price will I take a quick hit and get on with it. I do not deviate from that loss plan, ever. I might get getting nickeled, dimed and vigged to death, but the slow torture the market gives me is much preferable to trading by the seat of my pants, being consistent leaker, or blowing out spectacularly like I've seen so many do.. Taking my first loss quickly is the only rule in the book I don't break. It allows me to sleep well, and sleeping is important to me. That being said, whenever I'm in any marker, I always pay too much for it or sell it too cheaply. It's worse whenever I make a foray outside the grains, since other markets are outside my comfort zone, trading in them for me is strictly gambling, and I'm not very good at gambling.

Ralph Vince writes: 

The St Petersburg Paradox is a false argument, one that assumes that rational human beings arrive at conclusions based on mathematically "correct" asymptotic answers. But we do not operate this way, rather, in an amazing an beautiful twist, our minds operate based on a notion of horizon, a finite period in which to operate.

This is the reason you will board an airplane to get to your destination (bet case) even though you know it could crash (worst case). The mathematical expectation for such (the same formulated expectation used in assessing the St Petersburg Paradox — the sum of the outcomes times their probability) would assign an outcome so infinitely negative to the prospect of death, that even though the probability were so minute, the expectation would still be so negative that you would never board that plane.

Yet, in order for that minute expectation to manifest would require X trials, X flights, and X is a VERY large number relative to how many flights you will take in your lifetime — even for a commercial pilot.

And we innately know this! This is the very decision-making mechanism that allowed our early ancestors to descend from the high branches and onto the savanna at the outset of our long journey. Asymptotically, it was a bad bet. To innate human reasoning, it was a god bet.

So especially if we are talking about someone "betting for fun" or participating for the hell of it, we can not look at things through a lens focused on the infinite asymptote, but must focus on a finite horizon. The St Petersburg Paradox itself now solves readily.

Christopher Tucker writes: 

For my part, I find that on the frequent occasions that I kill a position to early, it is because I am paying attention to the wrong data. I am either paying too much attention to either:

- the profit or loss - focusing on the number of dollars or the percentage of capital
- the wrong time frame

The time frame is a huge one for me - I enter trades using criterion in a longer frame and then drill down to look for an opportune moment in a shorter time frame to pull the trigger. The problem for me is that I tend to remain looking at the shorter time frame and exit too soon or with a stop that is too tight. It is very much akin to missing the forest for the trees.

Much the same can be said in my main business of air traffic control. Rookies tend to pay attention strictly to proximity, which is critical, but tend to not pay attention to speeds, vertical speeds or properly anticipated speeds based on a solid knowledge of aircraft types or the current terrain. A Boeing 747-800 may fly at a reduced speed while climbing to get above an area of turbulence, but the moment he is above it or levels off, you can bet heavily that he will accelerate and very quickly at that. By the same token, high performance business jets like Gulfstreams and Learjets can be counted upon to climb rapidly (sometimes extremely so), especially if they have been in level flight for a while and are itching to get higher.

The key for me is paying attention to the right things. Profit and loss are important, time frames are important, but they may not be the best indicators of the overriding theme.

Steve Ellison writes: 

We have many times discussed path dependency. As the paper says, "[R]eceipts are naturally encoded, and responded to, as gains and losses from a reference point. So a pauper who wins $10 million in a lottery may be ecstatic with her staggering $10 million in net worth, while a dot-com tycoon whose $100 million paper fortune shrinks to only $10 million in a week may kill himself, distraught over having only a pathetic $10 million in net worth."

As an example from a different field, consider a baseball pennant race. If team B was 7 games behind team A in August, but has pulled into a tie by late September, what are the teams' psychological states? Team A's clubhouse has the atmosphere of a funeral, while team B is brimming with excitement and confidence. I have not put pencil to paper, but I grew up a fan of the Boston Red Sox, who were usually team A, and it seemed that team B nearly always prevailed in such situations. Logically, the recent past should count for nothing because the teams have exactly the same records, and only the future games will determine the winner.

Gary Rogan writes:

Why isn't this a choice between two diametrically opposed systems: either a buy and hold, where there is no special characteristics attached to the winner or the losers, or a mathematical system that has some predetermined dispositions at any time for a winner and a loser based on some quantitative criteria. When it's something in between, that ambiguous choice and regret enter the picture.

Dan Grossman writes:

Probably not many here, but there are those of us who at times own securities until they are long-term, and sometimes refrain from taking profits early because of the pressure to wait for long-term gain tax treatment.

Perhaps a retrospective study of such an investor's stock purchases that are significantly up after (say) three months, comparing annualized return of those stocks sold after one year, compared to those sold short-term.

Sushil Kedia comments:

Loss Aversion emanates from the desire to enjoy profits without having to respond to losses. It is a manifestation of an ill that returns can be generated without undergoing adverse excursions. Loss Aversion is placed within a fantasy that the majority suffers much more frequently.

Risk Aversion respects the law of diminishing marginal utility of risk. It acknowledges well that returns are feasible only upon a readiness to respond to adverse excursions.

The unwillingness to respond to adverse excursions results in all of the sins that traders can eventually end up doing, including losing more than what they are entitled to on any one adventure or set of adventures in the markets. Killing a position too soon is also a manifestation of loss aversion only, with a variant that one is averse to losing the profits away. I would surmise the opposite of this sinful loss aversion is not loss seeking behaviour, but merely loss acknowledging behaviour.

Risk aversion seeks to undertake an additional unit of risk only if a larger unit of return can be added. A relationship similar in nature to diminishing marginal utility thus makes for a maxima that is likely to be the optimal level of risk for a method, strategy, approach, history, future or portfolio. Loss aversion however is not only playing against the odds, but is rather an exponentially growing risk relationship. For an example if a 20% loss needs to be evened without being closed a 25% favourable move is required and so on and so forth [x loss needs x/(1-x) gain immediately to get even]. There is no optimal point possible in this relationship and the approach can and does take the indulgent down to zero.

For now, I would say Loss Aversion is driven by ego as to what the market should do, whereas Risk Aversion is driven by humility as to what the market may do.

a commenter writes: 

Continuing to hold a profitable position (long or short) is trend following: the expectation of movement in the same (profitable) direction.

To the extent there is aversion to losing profits (and closing out too soon), this risk should be compensated and may in part explain profitable trends.

Craig Mee writes: 

I think it's hard to naturally run trades when mean reversion is so frequent and we can't guarantee when the trend will change and the law of ever-changing cycles kicks in. So to counter that, it makes sense to trade in multiplies. Take half risk off almost straight away on the first push, bringing the chance of a scratch trade at worst, rather than a loss higher on the curve… though if the market does run, particularly in fx or higher range markets, subsequent setups can present opportunities for adding further. So a case of give and take I suppose, when from the outset nothing is guaranteed.

Phil McDonnell writes: 

We have had numerous discussions on this venue regarding stop losses. Part of the surprise from those discussions is that using a stop loss will double your odds of having a loss in the amount of the stop loss.

However the same is true for a profit target. Using a profit target will double your probability of having a gain equal to the target gain. The reason for both phenomena is that in a random walk half of all such trades will get reversed after hitting the target or the stop. The fancy name for this is the Reflection Principle.

Jeff Rollert responds to Jeff Watson: 

I have to tell you, having the wind at your back is not the fastest point of sail on a boat, nor the least risky if the waves are coming from your stern. Please google and study canoe sterns for a discussion. I bring this up only in context of its use.

I find many sailing "descriptions" along with those in climbing mountains to be misapplied. In both cases the getting into the trade is over weighted vs the exit.

As Hillary implied, he point of climbing is to live after coming down the mountain. That math would overweight the sell decisions.

I tip my hat to Lowe passing recently. Like Hillary and Norgay, he had balls and lived to tell the story. I highly recommend "Touching My Fathers Soul" in that spirit…who unlike Mallory was ill prepared and long of ego.

Gambling in climbing, is being unable to leave the mountain without summiting. Sailing has its parallels. So do the Marines.

Mar

20

One notes that a little counting is always good.

Since 1996 

………………….Expectation next

………..Number…1 day…10 days

new lows  249     2.8       9

new highs 538 -1.0        1.3

No need for Mr. Zussman on this. And put Faber in a box with Spencer.

One defined a new high as any 40 day high based on closing prices and a new low based on any 40 day low based on closing prices. One notes that the Faber study quoting some colleague was on pre 2007 data. But one doubts that their results would have been different had they bothered to count rather than talk about the data base back to 1790.

Mar

20

The following (copied from Mebane Faber) is so counterintuitive that it's worth considering. I don't think in these terms, and there could be outliers that explain the phenomenon. But (if they did the arithmetic correctly), it is what it is….

Source:

Should You Buy at New Lows? Or New Highs?

So we tested which strategy works better: Buying near 52-week lows… or buying at 52-week highs. We looked at nearly 100 years of weekly data on the S&P 500 Index, not counting dividends. You might be surprised at what we found… After the stock market hits a 52-week high, the compound annual gain over the next year is 9.6%.

That is a phenomenal outperformance over the long-term “buy and hold” return, which was 5.6% a year. On the flip side, buying when the stock market is at or near new lows leads to terrible performance over the next 12 months… Specifically, buying anytime stocks are within 6% of their 52-week lows leads to compound annual gain of 0%. That’s correct, no gain at all 12 months later. Using monthly data, our True Wealth Systems databases go back to 1791.

The results are similar… Buying at a 12-month high and holding for 12 months beats the return of buy-and-hold. And buying at a 12-month low and holding for a year does worse than buy-and-hold. Take a look… 1791 to 2012 All periods 4.3% New Highs 5.5% New Lows 0.9% The same holds true for a more recent time period, this time starting in 1950… 1950 to 2012 All periods 7.2% New Highs 8.5% New Lows 6.0% History’s verdict is clear… You’re much better off buying at new highs than at new lows. You might not agree with it… but it’s true.

Victor Niederhoffer writes: 

That's a shocking result. Heavily weighted one might think to the depression period and the 2008 period, and probably not taking into account durations from hitting the new lows. i.e. the 1st new low in a period or the tenth. Probably even more copacetic to the trend followers with individual stocks.this is how Rocky and I first met, but I don't think he remembered it. A loss of mine was reported in the papers and Rocky wrote to me to memorialize what a woeful idiot I am. I wrote back saying "You seem to take great pleasure in my losses et al". But as you know, you can never win a dispute with Rocky. Now we're friends again.

Scott Brooks writes: 

I have been privileged to buy the low and sell the high on multiple occasions. It's all those other darn trades in between that drag down my return.

I had a friend tell me once that there are 50 perfect days in a year….. a bluebird sky, cool temperature, perfect humidity, occasional slight breeze (you know the kind of day I'm referring too).

Most people make the mistake of living for those perfect days. The key to a great life is to make the best of the perfect days when they arrive. And the way you make the best out of those perfect days is to make the best of the other 315 less than perfect days per year.

It's about having a good positive attitude so you can make the best out of whatever you get. And they way you do that is through practice…..you practice and practice and practice…..until a positive attitude and making the best of things becomes habit.

So make the best out of our less than perfect trades, for they are the ones that are ultimately going to define you as a person and a professional.

Jim Sogi writes: 

Amen to what Scott says. In surfing you got to go on the crappy days so you are in good shape when the big waves come. You can't just wait, like many do, for those rare perfect days. Then they are so out of shape they can't make the drop and have no legs.

Alston Mabry writes: 

I'll assume the data for 1791-1950 is more troublesome, so let's just consider this result:

1950 to 2012

All periods 7.2%

New Highs 8.5%

New Lows 6.0%

The obvious question is: When do you sell?

Jordan Low writes: 

It seems that there is never a good time to sell. You can beat 6% by say investing in short term bonds. It has to be short enough for the turnover of the strategy, so say duration of less than 1Y.

Also, the new high strategy has not really worked since 2000 with the market risk-on/risk-off, so are we in a new "regime"? Or do I keep to the strategy and pray that I will end up ahead 60 years from now — i.e. not a repeated game, you get one dice roll!

Ed Stewart writes: 

I have noted that including historic t-bill rates or alternative short term rate benchmarks as an estimate for return while in cash dramatically alters the return of long term timing models. However, I am not sure if t-bill or similar has been a fair estimate of cash holding returns - I am sure others no much better than I do.

With regard to the article idea, It does seem to be the logic of a simple trend model - something like Long on first close in top X% of range 52 week range, Flat when close in bottom X% of 52 week range. A bunch of rule sets similar to this (some type of very long term trend indicator or look-back) seem to give similar results - and like was mentioned much of the benefit comes from missing a small number of significant market declines.

In other periods (like the 90's) the models can trigger whip-saws that would likely have frustrated many "believers" at that time into giving up on them - which of course means they would have missed the benefits that accrued since 2000.

In thinking about timing models, one real benefit is that they provide a framework for the panic instinct while including a signal to get back in. The problem with the public is that they can panic, become traumatized, then never get back in until years have passed (if ever). In other words, even if one is skeptical about the future performance of timing models, such models might be a useful tool if the realistic alternative is very poor money-weighted returns with a near certainty (rather than the theoretical return of buy and hold).

A commenter writes: 

 I take the view that when any sign is known to the market, it will start to disappear; and when it is no longer a sign, it will start to reappear.

I would think it applies to this case as well. The advantage of buying at market high is not news. When was it first exploited? Were the turtles first known to the public for doing this? In the 90'es?

But anyhow, I think a plot of the returns across the time span is more meaningful (and clearly more revealing) than the average. With that, I presume that we will see the advantage of buying at market high is diminishing in the recent decade. More meaningful I think would be how much it has diminished so that we can anticipate the future when it returns.

Russ Sears writes: 

I suspected that the results depended on the period looked at. Kim gave the 250 day period results. But what happens in other periods. I looked at the S&P index from 1950-2013, with cut-off dates determined by period's length. I defined it a "first new high" if there were X day high within X days. and looked at the next X days log normal returns.

5 day period
avg     0.14%    Stdev    2.18%
         count  avg next period      T
new low  1006   0.06%                (1.24)
New high 1004   0.29%                 2.14

25 day period
avg      0.71%   Stdev    4.77%
         count  avg next period      T
new low   208    0.99%                 0.85
New high  179    0.86%                 0.44

50 day period  
avg     1.40%   Stdev     6.75%
        count   avg next period      T
new low  100     1.16%                (0.36)
New high  96     0.87%                (0.78)

100 day period  
avg      2.78%  Stdev     9.67%
        count   avg next period      T
new low  44      3.69%               0.63
New high 35      4.51%               1.06

500 day period  
avg     13.42%  Stdev    21.96%
        count avg next period      T
new low    8      8.33%              (0.66)
New high   7      7.24%              (0.74)

Mar

19

Robert Shiller, the oft-quoted Yale professor with a valuation approach that is bullish for a few hours once every decade (or so), appeared on my Bloomberg terminal late yesterday:

BN 03/18 *SHILLER SAYS STOCK MARKET IS 'OK INVESTMENT' STORY TO FOLLOW. –KARA WETZEL-0- Mar/18/2013 14:27 GMT

BN 03/18 *'I'M SAYING GO FOR IT,' SHILLER SAYS OF STOCK MARKET STORY TO FOLLOW.–KARA WETZEL-0- Mar/18/2013 14:27 GMT

BN 03/18 SHILLER SEES NO EVIDENCE OF A TURNING POINT IN HOUSING (Video)-0- Mar/18/2013 15:09 GMT

One ponders the definition of an "OK" investment from this celebrated professor? As to a "turning point":

turning point 1. a moment when the course of events is changed the turning point of his career

2. a point at which there is a change in direction or motion

3. (Mathematics) Maths a stationary point at which the first derivative of a function changes sign, so that typically its graph does not cross a horizontal tangent

4. (Mathematics & Measurements / Surveying) Surveying a point to which a foresight and a backsight are taken in levelling; change point

Victor Niederhoffer writes: 

One has had the displeasure of going one on one with the Professor while he rode his stationery bike. I got him to admit that his topsy turvy 10 year correlations were absurd as they show negative correlation with future price changes for previous years, but positive correlations for current years. I also pointed out the retrospective nature and part whole nature of his data from past years on which the basis of his work was done. He held up the possibility for a while that certain pareto processes or stochastic integrals had this tendency and then indicated that his work on p/e was not very significant and had not been updated. He did not consider me an important personage at that time, (I believe Lowenstein was there to add insult to injury), and at lunch which I paid for, he showed his contempt for me (probably justified) by directing all his attention and talk to the profs at the table. Subsequently I believe he realized that he had devoted quite a few pages of one of his bearish book showing that values were crazy because the dividend model would not have been as volatile as actual prices to some of my work on world events. To add further insult to injury Prof Lo had a similar experience with him when Lo was not as respected as today.

Mar

19

One is reading The Six Sources of Collapse by Charles Hadlock. It's a mixture of very sophisticated teaching for the common man of statistics like the extreme value distribution with naïve examples relating to markets. It's everything that the experts work is not. A man trying to teach and learn rather than hold up his own greatness and everyone else's weaknesses. A nice discussion of herd behavior and the usual stuff about the game of life and complexity from New Mexico. 

Mar

18

(NYT) "Clippers 93, Knicks 80: Clippers Overpower Knicks as Their Skid Reaches 4 Games"

It's pathetic and funny to hear Smith as the go to man and spokesman for the Knicks as he is the cause of all their misery being the world's worst and not equal to any opposing counterpart. By relying on him, they're guaranteed to lose. On that vein, before game, Kidd was receiving some lessons in shooting threes from the Clippers shooting coach. The Clippers were so confident of winning, they showed sympathy and gave lessons to their adversaries. Okay. What's the relevance. It's like a technician explaining why he missed a call, and why his range forecast which just missed by 1 or two points before it went the other way by 30 points was off by a little. When one played doubles, it was always wonderful to have an opponent taking 80% of the court when he couldn't compete with us. That's the way the other teams must feel when they play the Knicks and Smith is their go to man.

Mar

18

What do you think of the new way of serving a la Kane where they serve from the right, leaning all the way to the right side wall, and then move the left foot to the middle like a dance step and get the torque from the lateral motion as well as the hips?

Bo Keely replies: 

Of course a righty does it from the left side, but the purpose I think is two: lateral movement confuses the receiver because the eyes are moving side to side and suddenly the ball comes at a straight on. And, from the server´s standpoint, when he starts the move he begins the second law that an object in motion tends to stay in motion, and moving across the service box allows a longer travel before the hit compared to stepping toward the front service line. An analogy is the high jump technique of trotting parallel to the bar for a few steps and suddenly springing 90-degrees at it to leap. These laws of motion work all the time. I just came from bodyguarding a mug victim at the waterfront. We needed backup a few minutes ago, so I called a friend. He showed up with a syringe and vial of dessicated diamondback rattlesnake venom that was "enough to kill everyone in iquitos". What´s this for, I asked. In a move quicker than my eye could follow, his hand raised vertically 6¨ and whipped around horizontally to strike my left jugular, but fortunately he didn't load the syringe. I told him, that would kill the guy– instead load it with frog sappo to paralyze him, and he´ll lay in the gutter as an example where he robbed the victim with a sign on his chest, that I just printed out from the computer, ´Do not molest the tourists!´- the lone ranger´. 

Mar

15

I got a rook who sits behind me. And occasionally in the heat of the moment when getting oneself out of a trade I mistakenly close the whole position out and his gets closed out also. And if it goes in his favor after I hear him sighing and shaking his head and frowning and holding up his hands in Yiddish disgust, and rocking back in his old squeaky chair. I am reminded of when I played squash doubles with Vic Elmaleh who was 40 years my senior. Whenever I missed a shot, he acted exactly the same. Would hold up his hands in disgust and mutter imprecations under his breath. "It was yours. Why weren't you there". (One reason was that I was covering 75% of the court.) We won the national doubles 43 years ago (losing more points than we won in the process. Every match a 5 gamer). I still hear him complaining.

Mar

14

Written in honour of all splitters, rookies and lookbackers:

A common pursuit in decision making is to compare data of many kinds and find the best way of separating the observations into different classes.

For example you mite be considering what are the factors that contribute to long life. Weight, height, mid range of parents age , % of meat consumed , exercise mite be the variables. You mite find that when parents mid range was above 140, and meat eaten less than 2 times week, and exercise more than 5 hours a day, the longevity is 10 years higher than the average.

Trees are usually used to separate the groups. An example picture of such a tree is here: [pic ] Lots of good pictures of such trees and a discussion of a typical tree sort is in An Introduction to Classification and Regression Tree (cart) by Roger Lewis. And programs like CART and AID and many modern variants are widely used in medicine and markets. In fact all market people systematically or implicitly consider such problems. When does the market go up? When gold is down more than 10, when bonds are up more than 100, and the previous 5 day sp move is between -1% and 0 %? The problem is that there are many variables to consider, and many levels at which one would reasonably split the data.

A good starting point in considering such problems is to note that when there are two mutually exclusive groups X and Y the variance of the difference between means is the sum of the variances of the means. The variance of a mean is the variance of an individual observation divided by the number of observations. For example, consider the average move in sp during a day has a sd of 10 and variance of 100. If you take two independent samples of 10 from such a distribution , the variance of one mean will be 100/10= 10 and the variance of the difference between means is 20. The standard dev of the difference is 4.4 What does this mean in practice? One will round. A 50% confidence interval in which 50% of the observation range is 0.65 x 4.4 = 3 points on either side of the difference between means which we'll assume to be 0. That means that by chance half of all the observations will show a difference in means ranging from -3 to +3. To find a region where 95% of the observations lie, ie. A 95% confidence interval we'd multiply 2 x 4.4 =8.8. In other words to find a difference that has less than a 5% chance of occurring thru randomness we would have to find a difference between means of 8.8 on any binary split.

But of course that's not all. Normally we look at 2, or 3 or 4 different splits to find the one that gives the greatest difference. It turns out that if we look at the highest of two differences, the average difference is 1.5 times as high as for one difference. In other words by randomness , the standard deviation for the highest of 2 difference between means is 1.5 x 4.4 = 6 a 50% confidence interval assuming randomness for the highest of 2 differences is 0.65 x 6 or from -4 to + 4. A 95% confidence interval would be between 2×6 and -2 x 6 i.e. between -12 and +12.

Now there were several assumptions made in this analysis. We assumed normality. And we didn't take account that there is sampling without replacement for one. And there are two cases: you look at the algebraic difference (2 tailed test, as above) or you try to maximize the *magnitude* of the difference (the 1 tailed approach). To get a good handle on it, Doc and I simulated what would happen if we divided up 20 random observations from a distribution that had a mean of 0 and a standard deviation of 10. This corresponds to the most frequent and typical thing one does when dividing up stock market changes in points (S&P rises or falls by about 10 full points a day). We then took two random subsamples of 10 each and calculated the mean of each of the two groups of 10. We then looked at the absolute value of the average difference between means when we repeated the process 1000 times. It turns out that the average absolute difference between means is 3.5 for a single split (this 3.5 absolute difference is in line with the std dev of 4.4 previously estimated)), 5 for the highest of two splits, and about 6 for the highest of 3 splits. This leads to incredibly high differences that you must be aware of when you split data to have anything more than a 50% chance that the difference occurred thru luck alone. To be 95% sure that you have something departing from luck for the highest of 3 splits you'd need a difference between the groups of 10. As the numbers in the group get less than 10 ,i.e. for a second or third split, the numbers would get increasingly large. This is a warning to all who search for regularities in data using methods that are implicitly or explicitly like tree sorts. By vic and doc.

Here is a more extensive table of simulation results

Table 1
Col A: number of observations being split
Col B: number of splits considered, best one is chosen
——-
Col C: mean absolute difference generated by best split (in S&P points)
Col D: standard deviation of absolute difference
Col E: lower 5% confidence interval
Col F: upper 95% confidence interval

20 1 | 3.56 2.66 0.27 8.65
20 2 | 4.97 2.67 1.24 9.81
20 3 | 5.84 2.64 2.07 10.55
20 4 | 6.45 2.55 2.84 11.05
48 1 | 2.26 1.72 0.18 5.63
48 2 | 3.25 1.71 0.90 6.40
48 3 | 3.75 1.66 1.36 6.78
48 4 | 4.20 1.68 1.79 7.24

Table 2 same as above but
Col C: average (algebraic) difference between means (in S&P points)
Col D: standard deviation of difference between means

20 1 | -0.06 4.61
20 2 | -0.13 5.62
20 3 | 0.01 6.42
20 4 | -0.07 6.88

Let's try to apply this to a typical example.

The 30 year bonds each day have a move of about 80 points.i.e a move from 142 exactly to 142 and 26 /31. Call that the stand dev . Let's say you have 100 observations of bonds in your sample. And you split it into two equal halves based on whether gold is up the previous day or down. The variance of any mean difference would be 6400 x2 /50 =256 . That gives a stand dev of 16.

Turn to the prob that a standard normal deviate will be between -z and + z. the prob is 50% that a normal deviate will be etween -0.65 and + 0.65, the prob is 90% that a stand norm dev will be betweeen -1.6 andd +1.6. Thus if you find a difference that's less than 0.6 x 16 = 10 its 50% chance, and its 90% chance to be 1.6 x 16

Mar

14

There's a rather direct and rather readily understandable paper that's the standard for non-statisticians trying to asses the difference between such things as test-retest correlations, difference between means of binary splits, and agreement of two successive measurement of individuals. Completely related and very similar to the binary split cart essay of Doc and me. But no consideration of sampling without replacement, small number of observations requiring a t distribution, simulation of actual distributions of differences, or adjustments for highest of n differences. Bland statistical methods for assessing agreement. Lancet 1986.

Fabrice Rouah writes:

Another great resource in this area is the textbook by Joseph Fleiss, Statistical Methods for Rates and Proportions, now in its 3rd edition.

Mar

14

"Super duped" about an old professor who thought he was going to find romance with a beautiful model who he met on the Internet. Instead he carried her suitcase of a white drug. Apparently he confided to her, and what must have been the beautiful reporter that interviewed him, that because of his co-authorship with many who won the Nobel prize, it was a 50% chance that he would win the Nobel also. Anyway, he's in prison now in Buenos Aires. And the prison guards always greet him with "hey Professor, have you won the Nobel yet?

Couldn't realize the resonance of that until I remembered from edspec… the letter my grandfather sent to the football coach. "When you have an all American like Artie Niederhoffer on the team, how could you give the ball to anyone else or let anyone else make the tackle". The coach read the letter in the locker room. And from that time on, my dad had a new nickname. " All American". We met one of the team at Lundi's 20 years later. "Hey, All American, how's it going. Caught any more touchdown passes lately?".

Mar

13

It was kind of the fixed income boys to give a little rise today (3/13/13)  in their markets, after 6 days of unremitting decline cover 3 big points (144 to 140 1/2 in the bonds rather than making those poor longs wait for the 10 year and 30 year auctions Wed and Thurs. Why were they so kind? Could it be that they wished to preclude them from participating in these upcoming tests of the strong? 

Mar

13

One was reading today again, Frederick Forsyth's The Day of the Jackal, and as you recall, the search of the French and the English to find the potential assassin from the Dominican Republic which involved such things as examining all passports issued in a 1 year period, all stolen passports, all hotel reservations, all dead letter passports issued, all gun makers, all disguise artists, surveillance on the Italian consulate, torture by electric shock, use of escorts and truth serum to unravel the extent of the plot and many more things that I am too unfamiliar with intelligence to understand,—-okay, the type of effort that was mustered here is far beyond what we undertake to find the regularities in the markets and the profits thereof. The same would go for the efforts to test and hold constant the various hypotheses in scorecasting. We should be very humble in connection with our limited efforts in our fields compared to others, and redouble our efforts to get on some kind of level playing field. Recall that the favored bailed out institutions are hiring space and manning their redoubts with the best and brightest they can find, who one competes against. Perhaps they do not work the long hours of those in The Day of the Jackal or examine millions of pitches like the scorecasters, but they have the advantage of unlimited capital to back their positions, the abstinence from fear of margin calls, apparently the ability to hide their losses in many cases from their superiors, and asymmetric bonuses if they make compared to the very mild raised eyebrow if they don't feather the nest. 

Mar

12

After one made a bad move in checkers, putting oneself in a hole and finding oneself in a most untenable position, Tom Wiswell, would look at one, somewhat sadly, nodding his head with a frown, "Now you're thinking". (why didn't you think a few moves ago). Okay. The bonds have gone down 6 days in a row and the stocks up 7 days in a row. A nice six percentage point divergence to another new high in the bond stock ratio. Today, I sought to sell bonds after they went up a little. I can hear Tom saying "Now, you're selling". I bought a little stocks overnight. And I hear Tom saying with reluctant disapproval "now you're buying".

Mar

12

One of the most valuable things I learned from the Chair is how not to do a study.

Let us summarize how to do a study. First define a pattern or event of some type. Then calculate the expected return subsequent to that event when the event happened. Then compare that return to the returns for all other non-event time periods. Do a t-test to establish significance at the 95% level.

That said the real problem is how can we insure ourselves against the possibility of biasing our study or otherwise completely messing up. the first thing that comes to mind is to never include data in your decision process that was not known at the time. For example Enron went bankrupt and then several years later after an audit the financial results were released showing that the original releases had been fraudulent. You cannot use the adjusted data based on the argument that it is the best data. Only the original data was known at the time so you must use that.

The same thing goes for price data. You have to use the prices that were known at the close if you are doing a buy at the close study. You cannot use retrospectively adjusted prices when the data is adjusted later than the supposed decision was made.

Always use tradeables. For example the S&P 500 index does not trade as an index. The S&P futures do and SPY does as well so one would use either of them as data for your study. The reason is that individual stocks can have stale quotes. Some of the smaller stocks in an index do not trade nearly as often as the larger caps. Thus the index can be behind the true position of the market. The tradeables trade and thus are subject to arbitrage that tends to keep them in line with the real market level.

This is a short list of things not to do. However it is representative of the fact that it is harder to learn what not to do than what to do. Other contributions would be welcome.

Victor Niederhoffer adds:

Always simulate what the chances were that your observed results were due to pure luck and take into account the path that your results would take and what that would have required of money management.

Consider the impact of retrospection on your results. The human mind is capable of ascertaining many regularities that occurred in the past, and is good at uncovering them in a study after the events occurred, but not very good at uncovering predictions based on new data that they are not already privy too. Never use range forecasts as they don't tell you whether you would have made or lost. Be aware of the difference between description and prediction, and statistical significance versus predictive distributions.

Never be overconfident. Do take account of the drift in your data, and the shape of the distributions you are drawing from. Mr. T, is not very good if only 2 or 3 observations removed from your sample would change the results.

To what extent are the regularities you believe you have uncovered been extant in the literature or the knowledge of shrewd fast moving traders. That changes things. What is the extent of regression bias in your results? 

Alston Mabry comments:

Something else, basically another riff on the Chair's comments: I find that statistics like means and correlations are, of course, useful, but they almost always hide important, idiosyncratic structure in the underlying data. In a sense, summary statistics are "intended" to do that, but I find it useful to unpack them and examine the structure in the data series, how the summary stats change over time, etc.

Anton Johnson writes: 

A couple of important things to consider.

Large changes in outcome resulting from small adjustments of a parameter is a sign of over-fitting and usually bodes badly for real-time results. Sometimes eliminating or finding a suitable replacement for the sensitive parameter will result in a more robust and usable model.

As a general rule, the number of parameters used in a study should be FAR fewer than the number of resulting trade signals.

Ken Drees adds:

Coach Bob Knight's new book The Power of Negative Thinking mentions "NO" being safer than yes. You can always more easily change a "no" into a "yes" versus the opposite–deciding to change your mind from positive to negative.

The gist of the book is to tamp down the uber positive thinking crowd–no, you can't do anything you want, no, you can't magically power your way to a fine end. PONT, Power of Negative Thinking is how Knight coached. He explains it that you must limit faults, limit mistakes–if we don't do these things then we have a chance to win. He keys on dealing with negatives to achieve a positive. He must have come across a lot of less disciplined approaches to coaching in order to come up with an against the grain type philosophy (PONT).

A lot of his points are probably already in the quiver of the sharpened spec. His hyper worried routines, careful study of the opponent, downplaying of good fortune and constant moving of yesterday's win into the rearview mirror broadens out into that persona you conjure when you think of him–that brooding face, those searching eyes–never smiling. The idea of "can't do it" was probably the most different from what we hear today–most are afraid to say "can't–that it means "I won't". Knight loves the honesty of a player saying I can't understand that assignment, or I can't push myself any farther. I would not recommend the book to cross over into speculation, but it's a quick read and there are more than some items to enjoy.

During it, I thought about player health in relation to speculating. I am my own coach. It's a luxury to have someone call your number and sit you down for a breather, to know you may need rest over more drill. How do I know that I am playing/ trading fatigued—only after a poor result? Knight seems to have the keen memory still in gear. There are some interesting stories about his games and Big 10 accomplishments.

Coach Knight will definitely tell you "No".  

Leo Jia writes: 

Very interesting, Ken. Thank you for sharing.

There seems to be some rationale in being positive. As I understand it, when one says "yes, I can do it" and envisions the actual doing, he actually plants a seed in his subconscious brain. The subconscious brain can be more powerful in many ways than the conscious. So planting a seed there is to use the additional powers of the brain, which are not accessible by the conscious mind normally, and thus increase one's chance of achieving a goal.

Mar

10

As usual the reports of employment with all the adjustments to the economic numbers, coming from the government employees at the department chaired by the leader who likes her kids to sing the iron anthem, are designed to increase the importance of the department of the interior and redistribution and vote buying as Nock and Tollison and the public choice people said. First, the revised number from last month (which are 100,000 or so lower than previously reported) + the current number are very poor. And the total is about in line with the past dismal figures. (when will all these revisions be taken into account so that there is not such a big opportunity for the public to do the wrong thing).

The decrease in the unemployment rate comes from all the people who are not looking for jobs because they are on disability or given up hope. Third, the numbers are designed to show that when the rate goes up, they can attribute it to the fact that the survey was taken before sequestration (the economics chair has said this and important pro spending leaders of all sexes have it in her or his talking points already), so that when they report worse numbers in the future they can say it was because of the dreaded effect of reducing gov expenditures over 10 years by 800 billion rather than the fact that the numbers themselves are random.

Kim Zussman writes: 

"What is then the connection between these numbers and the market?"

1. If unemployment and GDP numbers continue to improve, Oval Occupier takes credit and proving that higher taxes are pro-growth
2. If it worsens, it can only be due to House Republicans protecting the rich
3. If unemployment and GDP numbers continue to improve in a world without investment alternatives, stocks go up
4. If it worsens, time for more QE - which is now well known to be extremely bullish for stocks

Paving Wall St for Hillary (sorry Ross).

Richard Owen adds: 

Always get long a fraud short you think is going to print above consensus. Men with gold filings and lucky silver dollars like their trading sardines.

Also, the disenfranchised pipe welder is the new fifties housewife. Instead of the little woman adding her own egg to the betty crocker brownie mix, the oxy acetelene operator adds his own self pity to a bottle of Jack Daniels. Growth in the fifties was still pretty good.

When Kruschev met Nixon and fulminated that Russia would outpace the US inside of seven years, it is easy to look back and laugh. At the time, much harder to be sure Russia wouldn't win out.

Mar

10

Scorecasting: The Hidden Influences Behind How Sports Are Played and Games Are Won by Tobias Moskowitz and Jon Wertheim is one of the best books for market professionals to read. The authors categorize all kinds of situations in sports and show how they effect the outcome. There are main themes on the endowment effect, value of blocked shots, rounding errors, bias by class and race, home advantages, officials giving the home team the advantage, importance of superstars, value in draft picks, importance of overtime advantage, influence of drugs by race, pressure and length of time away as a determinant of accuracy, the hot hand myth, and others. Each chapter starts with an anecdote about a game, and then shows how to quantify how factors covered in the anecdote can systematically be quantified.

It's a model of how market people should consider the markets. All factors that might influence the results are counted and controlled for. It suggests a million hypotheses about what affects the market. The path that leads up to the outcome is highly relevant in all sports, as it is in markets. It's not just where you are relative to the start but how you got there, coming from behind or being ahead. The home court advantage is consistent in all sports over all time periods, in all geographic areas. Suprisingly it has little to do with travel weariness, or the enthusiasm of the fans, or the idiosyncrasies of the park. I can hear all the sports fans saying, "but, but, but". However, the authors test all likely hypotheses to see what is really happening.

They attribute it to officiating bias. The officials don't wish to be berated, and wish to give the home team the edge on disputed calls.

The statistics on baseball are particularly interesting since they have the exact trajectory and outcome of each pitch, and can see when the umpires made bad calls, and the batters and pitchers made accurate pitches or swings.

It leads directly to such tests as whether back to back wins are more common over weekends or during the week, or during holidays. That's the kind of thing the authors routinely study. They have a nice page or two on how these factors affect markets.

In particular they talk about undervalued and overvalued stocks the same way, the general manager thinks about overvalued and undervalued players. Their discussions of market factors are regrettably shallow, as they talk about earnings misses and earnings surpasses and exact hits without testing the effect or its changes. As always, the people in one field present very interesting hypotheses that should be extended and quantified in our field without the expertise to apply them accurately in other fields. But their ideas are very suggestive and opens up a wide canvass for all who have the desire and persistence to apply the tests accurately, taking into account the principle of ever changing cycles.

The chapters on going for it, particularly the endowment bias of hating to lose what you've gained much more than loving to win are particularly telling and poignant and should be read over and over by market people with a view to eliminating this pervasive bias from their activities. Overall the authors have done a great job, and I would add this book along with Horse Trading, and The Principles of Professional Turf Betting, and Monte Walsh and Atlas Shrugged as 4 of the 10 best books for market people to read.

Mar

10

It's an ill wind that blows no good. The enclosed article on the size and growth of government by Thomas Garrett and Russell Rhine contains an excellent discussion of why government grows by 350% per capita per 50 years or so. see figure 1. It shows that the sources come from the recipients of lump sum payouts, and the monopoly status of governments.

One wonders what a comparable discussion of why the Fed's balance sheet and powers would grow. Part of it comes from those that directly receive the aid, the banks, failed companies, and flexions who receive the most valuable thing of all, the heads up and information on what they're going to. The other part comes from the constant accretion of power, money, and perks that goes with increasing one's activity. But how could this best be memorialized and related?

Mar

10

A recent talk by Brink Lindsay at the Junto was a perfect example of what should not happen at a talk. It consisted of a sophistic proof that Krugman's thesis that some post war years were much more golden than some more recent years because of more government regulation and greater equality is mispecified.

There were so many things wrong with the talk. The audience was totally inappropriate for the talk. It was a spread sheet, power point presentation where none of the audience could see it, understand the data points, or check the veracity. Even if the premises had been worth discussing, it would have been totally wasteful. No wonder so many people fell asleep, left the talk, vowed never to come back to the Junto, and were completely silent.

However, worse yet, the premises themselves of the talk were completely off base. The basic idea rested on two premises. That some 25 year period after World War II had higher growth, and that it was caused by more intrusive government. How in the world someone could say that gov. was more intrusive in that period than now is ridiculous. There are hundreds of measures of government intervention that could be used, and almost all of them would show that gov. is more intrusive today. Take government as a share of the economy, or the extent of the federal register, or the tax revenues taken as a share of income, or the extent of entitlements and unfunded debt, or the share of cronyism.

Second, the talk was filled with selection bias and data bias. Of course you can take a measure like productivity or pre tax income and find 4 points, a starting point, an ending point x year later, another starting point a few years after that and another ending point, where based on some opaque measure of income, there was a small differential in the growth rates. It has to be true with random numbers.

Hopefully, I will never subject the valuable time and efforts of the Junto attendees to anther talk like this, and that Brink who is a reasonable scholar and has written many good books will not waste the time of audiences in the future with sophistic and inappropriate talks like this in the future.

Here's a good discussion of government intervention which it would have been useful to use as a foundation and base, and would have given the audience something useful to take home with them. I see tables on federal spending per cpta, cabinet departments, human resources, a breakdown of federal expenditures by sector showing that physical resources shares has increased, state and local government expenditures, vote trading, bundling, and government size, and many other valuable topics. It's a model of what a talk to a general audience should have covered. 

Brink Lindsey responds: 

Dear Vic,

Thanks for writing — I appreciate the opportunity for follow-up discussion. And thanks for sending along the article from the St. Louis Fed — it is very interesting and I had not seen it before.

I do not believe, though, that the article in question supports your objections to my analysis. Yes, real government spending, both overall and per capita, has been on a steadily upward trend. But if we are looking at the effect of government spending on growth — and it was the effect of government policy on growth that I was addressing in my talk — then the proper measure is government spending as a percentage of GDP. The only relevant figure in the article is Figure 3, which shows only federal spending as a percentage of GDP, and it shows that federal spending fluctuated fairly stably between 15 and 20 percent of GDP through both the Golden Age and the Long Boom. No increase at all till the Great Recession. The composition of spending changed signficantly — from heavy on defense to heavy on entitlement spending — but the implications of that composition shift for growth are unclear.

For total government spending as a percentage of GDP, see this useful website.

Total government spending was somewhat higher in the Long Boom than in the Golden Age — around 35 percent of GDP on average as compared to around 30 percent. That rise is mostly due to a big increase in state and local spending on education.

But surely this isn't the answer to the puzzle. However you want to measure overall economic performance — the growth rate of GDP per capita, labor productivity (GDP per worker hour), or total factor productivity (GDP per unit of labor and capital) — the Golden Age beat the Long Boom hands down. The slides I presented didn't satisfy you on this front, but I challenge you to find any measure of overall economic performance that shows the Long Boom outperformed the Golden Age. Here, for example, is a chart on labor productivity.

Not even in the period of fastest productivity growth during the Long Boom (2000-2007) did growth equal the average productivity growth rate during the Golden Age. And I can't even imagine an argument which ascribes all or most of the fall in performance to rising state and local government spending.

Government spending on its own can negatively impact growth by supplanting private activity in an area — e.g., crowding out private schools with government schools. But in general, providing free stuff to people doesn't darken their economic prospects; the real problem lies in having to pay for all that stuff with taxes. However, if we compare the tax regimes of the Golden Age and the Long Boom, I think Golden Age tax policy, with its confiscatory high marginal rates, was more distortive and anti-growth than tax policy since the 1981 Reagan tax cuts. I don't even know what the argument would be for the other side.

So if you are correct and overall government policy in the Long Boom really was much more anti-growth than in the Golden Age, the main culprits must be found on in regulatory policy, not spending levels. I'm afraid that all attempts to quantify the burden of regulation are more or less problematic, and all rest ultimately on qualitative judgments about the effects of this or that regulatory policy. What we can say for sure is that there was a significant shift in the composition of regulation since the 1970s — a dramatic reduction in old-style "economic" regulation of prices and entry, counteracted by a big increase in "social" regulation of health, safety, and the environment. Old-style regulation directly restricted or prohibited entrepreneurial entry and blocked the transmission of market price signals; by contrast, social regulation merely burdens competition with extra costs. Add the fact that health, safety, and environmental regulation's main brunt is borne by economic sectors that are shrinking in importance for other reasons (specifically, manufacturing), and I believe the balance of evidence clearly favors the conclusion that the overall regulatory environment of the Long Boom was less hostile to growth than was the overall regulatory environment of the Golden Age.

So, as I read the evidence, the puzzle still remains. Thus my search for non-policy reasons why the Golden Age outperformed the Long Boom. Perhaps you still find all of this utterly unconvincing, but at least I hope you understand a little better where I'm coming from.

Thanks again for inviting me to speak at the New York City Junto.

All the best,

Brink

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Mar

7

An amazing day (3/6/2013). Volume of 150 billion in futures. And a close exactly equal to open and 1 o'clock. Total range 8 points on day. Just 1/ 2% from low to high. Like a great athlete who wins but never moves or a tree that always araranges each branch so that the leaves get the maximum of sunlight. A day that the mistress can collect from everyone without having to in any way discommode herself. A magnificent courtesan. 

Mar

7

One of the dangers of having a rookie on your team is that the rookies like to find regularities based on looking at every interval, every magnitude, every market, every combination thereof of x variables, and every time period. It's truly a search of implicitly hundreds of thousands of possibilities to come up with a regularity, fifteen on say 40 observations that has about a 5% chance of consistency with randomness assuming it was the only 1 selected. The problem is that they seem so good in isolation before you realize it was the fruit of a tremendous number of look backs, complexities, and multiple comparisons. I strive to tell them "Simplicity." Read Zellner. Another good thing to do is see all the biases from using cart or regressions trees of automatic interaction detector, and all the safeguards built into those methods, —- and of course they overfit, and multiple classify and are only recommended as preliminary by the authors. But …. but…. how destructive it is to receive one of these regularities during the middle of the day… especially when you have a position on the opposite side from the rookies. Proffer. What lessons can we derive from coaches that treat the rookies with grave skepticism like Woodson who calls Shumpert "Rook" and all the players that haze the rooks endlessly to prevent them from interfering with the natural order of things.

Jeff Watson adds: 

I have a rookie close to me and he tends to over-think things and makes grandiose predictions. I keep sending him back to the drawing board because he's not scientific and usually wrong. I love when he says if A is happening then B must happen down the road…..but then again it's not his capital at risk. Rookies, if they are lucky, are taught rational thinking, but sadly aren't taught that the world and the markets are very irrational. I think in the future that every assistant I hire in the future will list "Phone Clerk for a bookie" on his resume.

Richard Owen writes:

I found this article very applicable. 


PLOS Medicine: Why Most Published Research Findings Are False 

Mar

7

One has a subscription to Nature magazine. A weekly. And it's very scientific. Has about 15 "letters" each week, with an average of 42 authors for each letter. Titles like "specialized appendages in furzanhuliirids and the head organization of early eurathropods". (link ). You would think that with articles like this that each article would not be propaganda for more funding and egalitarianism. But I've found that in order to get into the publication, it has to have a conclusion like exact quote: "Evolutionary rescue from extinction is contingent on a lower rate of environmental change". 6 authors. They had a great pitt article on influence of rain on agricultural productivity with 100 authors in the last issue, and it showed that no matter how much rain there was, the productivity was about the same. The conclusion of the authors was not that the ecosystem adjusts and is very adaptable, but that in the horrible conditions of drought that are predicted and caused by the greenhouse gases, that because the efficiency is the same, we are in dire need of more government funding and transparency. One wants to cry. 

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Mar

4

Herbert Spencer was known for his many unusual hypotheses, all of them untested except for his automatic stair climber. Galton remarked that Spencer was subject to more terrible moments than any as many of his hypotheses were tested by members of The Royal Society and confronted with facts that disproved them. I felt the same way recently with a hypothesis based on trying to capture the vig. If only one could make money by capturing the vig rather than paying it. Well, of course, one of our own, and many others have concluded that selling the etf's short would do the trick. They must pay fortunes in disguised big asked spreads, commissions, churning, sales costs, management fees, assets held in abeyance, and general sluggishness relative to prices paid at the end of days. Well, I decided to test it to see exactly which ones and how to do it. I was ably assisted by 5 or 7 of the best minds and researchers that I know. They did a great job. And one came up with the best methods of doing it, when, and where, and how to rebalance. Finally the only stone left unturned— how much it would cost to do it. The fact that the hypothesis turned on. Regrettably, turns out that borrowing is very costly, so costly in fact that it ruins the profitability. One knows what Herbert Spencer felt like when the Members gave him their sympathies, and raised their eyebrows at the Athenium as they passed him in the Reading Room.

A commenter writes: 

Thanks for breaking this down. A successful HFT once quizzed me on ETFs, without revealing the purpose. I now hazard a guess that their purpose was indeed on the flip side of what I first suspected After all, they may not be forced to borrow. The interview also included the intricacy of what I had capitalized on for decades: the obligatory decay of certain contracts, primarily Wednesday nights, due to two-day banking settlements. I suspect they have eventually figured out how to arbitrage both.

Steve Stigler writes: 

Very nice. You of course recall the passage from Galton's "Memories". Here is a paragraph from a paper of mine in 2007 where I used it:

In the 1860s a small group of young English intellectuals formed what they called the X Club. The name was taken as the mathematical symbol for the unknown, and the plan was to meet for dinner once a month and let the conversation take them where chance would have it. The group included the Darwinian biologist Thomas Henry Huxley and the social philosopher-scientist Herbert Spencer. One evening about 1870 they met for dinner at the Athenaeum Club in London, and that evening included one exchange that so struck those present that it was repeated on several occasions. Francis Galton was not present at the dinner, but he heard separate accounts from three men who were, and he recorded it in his own memoirs. As Galton reported it, during a pause in the conversation Herbert Spencer said, ³You would little think it, but I once wrote a tragedy.² Huxley answered promptly, ³I know the catastrophe.² Spencer declared it was impossible, for he had never spoken about it before then. Huxley insisted. Spencer asked what it was. Huxley replied, ³A beautiful theory, killed by a nasty, ugly little fact.² (Galton, 1908, p. 258)

Gary Rogan writes: 

These days what seems to be popular is for inconvenient facts to be killed by theories, and for the arguments to be about whether the theory is beautiful or ugly. 

Mar

4

There are numerous books on Survival Statistics. Here's a good one. And this one that covers trials that end before all patients have the disease. The hazard rate is the failure rate, and it's the key opposite of the success rate. It has simple statistics to determine it's departure from randomness and estimated confidence intervals. I don't like to use cox regression as it's a mixed bag of log, and multiple comparisons that isn't meant for the distributions we deal with. Nor does it do anything but add another 3 names to the 30 average names in all medical papers these days. It obscures the expected life expectancy from the treatment which should always be the end point rather than the phony stuff about succumbing to disease or not. Similarly the expected duration from failure to success which is in the program that so many on this list have relieved from me, is not a very good measure either as who cares how long if the expectations don't jive.

Mar

4

In honor of Pitt.

Smithsonian has an interesting article on Darwin's house that might be of interest to specs: "The House Where Darwin Lived". 

Darwin lived there with his 10 kids and wife for 40 years, and the home adapted to his research and family. Here are 10 things that we might learn from Darwin's house about speculation.

1. Bear in mind at the outset that when Darwin was asked by Galton to fill out a questionnaire concerning his main talents in the 1850s, Darwin said his main talent was speculating in the consols.

2. Darwin established a routine. Every day was mapped out the same way for 40 years. Walk before breakfast, work until 11 am. Walk the dog. Listen to wife Emma read the family letters. Lunch. Read the newspapers (to check on his holdings and plan future speculative undertakings and to see what important flexions he could get on his side. Take a nap. Work from 4:30 to 6:30. Small dinner. Play backgammon or billiards. Listen to wife play piano. Such a routine enables you to speculate when you are prepared and not to let emotions interfere.

3. He listened to music every day. The wife played very well. An interlude to take the mind off the fray of the day, and to enjoy another language, gives one insight into the battle for investment survival.

4. Play some backgammon with the kids. Important to stay young at heart or else you'll be unable to adjust to the new things and ever changing cycles.

5. He had a secret mirror to warn of the approach of uninvited guests so he could absent hide and pretend not to be home. (Gino Paoloochi had a similar trick, although he often supplemented it by always wearing a hat so he could say "of glad to see you. Sorry I am just going out.")

6. Darwin always studied his worms, and beetles each day. We are part of a community with nature, and the same principles that govern nature apply to speculation. Trollope's maid who worked as a governess for Darwin confided to him that she felt very sorry for Darwin as he was so bored that he spent hours at a time just sitting on his sand path, with his looking glass studying worms.

7. Plant a seed properly and a strong oak will grow. "It may be doubted whether there are many other animals which have played so important a part in the history of the human race than these lowly organized creatures".

8. Keep good records. He kept notebooks with all his observations including the play of his children. He watched them play and laugh and cry, keeping notebooks of the human animals they were.

9. Live near the exchange. Darwin lived only 15 miles from London so he would be able to attend the important meetings of the societies, flexionize, and keep in touch with his brokers, and solicitors.

10. Always be ready to change. He was constantly building new paths and extensions to the house as he had to keep up with the change in his circumstances.

In closing the story about the Down House in Kent which is open to the public, the author cites some poetry by Darwin which is timeless and bracing for all speculators.

It is interesting to contemplate an entangled bank, clothed with many plants of many kinds, with birds singing in the bushes, and various insects flitting about, and with worms crawling through the damp earth, and to reflect that these elaborately constructed forms, have all been produced by laws acting upon us. Thus, from the war of nature, from famine and death, the most exalted objects which we are capable of seeing, namely the production of the higher animals directly follows. From so simple a beginning, endless forms most beautiful and most wonderful have been and are being evolved.

Mar

1

Conservation of energy moved from stocks to gold around 8am with gold going up fast 20 bucks. Now one will see if stocks imitates the gold like the spider the caterpillar.

This chart shows rise in S&P that began at 9:40 as well as rapid rise in gold that occurred about 8:00.

sp (yellow) and gold (white) on same chart.

Mar

1

The technical advice of the exchange reminds one that soon baseball bats will be shaped as ketchup bottles with ads on them, and the bases will be ads and shaped as pizzas.

Feb

27

A man with an IQ of 185 recently started overwhelming me with his range forecasts. "The range today should be x to y." I told him these were worthless forecasts. But he doesn't understand. Today he came up with a nice touch. "It's pure trouble if the Dow goes below 13 870."  When the Dow did so, he sends me a self congratulatory note that I didn't read as I don't like to lose my temper during market or other times, (and I rarely do, although every day is a struggle for me, and as mentioned I have never had a satisfactory day, especially when a flexion is going bankrupt, and there is insider trading overnight). But, there is something so delphic, so self fulfilling about such forecasts. Of course it's pure trouble if the market goes below any number and by the time it does, depending on how long you wait, the chances of it being pure trouble below any day that it purely troubled to go below is terrible to contemplate. I had a dream that the pure trouble person was watching one of my kids play soccer, (he was on the Olympic Water Polo team of one country or another ((as many people who solicit ones business claim to be ), and I tried to explain that such forecasts are part of a genera that have to be true, by randomness, and my kid frowned and then headed the ball.

Feb

27

The ratio of stocks to bonds has very quietly lost 2 percentage points this month. Thank goodness that those that the Fed buys the mortgages and bonds from have profited as planned so that the trillions on the Fed balance sheet can be converted to bonuses and wine and the unmentionable.

Feb

27

"Introducing the Crony Capitalist Index"

Russ Sears adds:

One of the big lessons from the crisis was how correlated those in crony capitalism can be. Because the deception and corruption runs deep within all those in the same crony businesses.

AAA and highly rated corporations meant little. Their conjoined downfall was never within the realm of possibilities in all the models.It is interesting that those that did best were those able to see the fraud within or at least the log in their neighbors eye: versus those that, to the end thought their prior outperforming was due to their own brilliance and not undetected fraud and deception.

anonymous writes:

As high as is the ROI on crony capitalism (and I'm sure it's VERY high), it's probably even higher in other avenues of endeavor, such as for unions. Payoffs to unions under the current Administration have been phenomenal. It was also very high during the 1930s.

Feb

27

The web mistress, as you doubtless know, has a very good sense of humor and her pictures are often very funny. I asked her if she could find a picture of a young kid "heading the ball" in soccer to go along with what I just wrote about the man. And it will be interesting to see if she does.

T.K Marks writes:

I've always found the selection of the photos that accompany any given DailySpec article to be a delightful adjunct and sometimes so mischievously ironic as to be sublime in and of themselves. A cornerstone of my personal philosophy is the highest forms of truth oftenmost are found in the irony. As such those photos generally resonate well with my sensibilities.

So some years ago I started wondering just exactly how those photos somehow came to be matched up with their articles. To do so I had to get inside the head of the website's art editor, someone whose identity and background I did not know. So I would play a little exercise with myself: Read the article and then try to cull the exact terms or themes from such that when entered into Google image search would yield the photo.

You might want to try this little bit of forensics with Aubrey at some point as doing so would probably help further develop astute acumen in his bright young head. I can hear you now, "Aubrey, find me the provenance of this photo in the next 5 minutes and you have permission to stay up a half-hour later this evening."

Feb

21

James Wynne, my college roommate of 4 years, won the Russ Prize given every 3 years for invention of use of excimer laser surgery. The invention led to modern refractive surgery including PRK and Lasik. More than 25 million people have received Lasik therapy. Another winner of the Draper prize was a team of 5 who were the key to inventing the cell phone. The winners were Martin Cooper, Joel Engel, Richard Frenkiel, Thomas Haug and Yoshihissa Okumura. More then 6 billion people now have cell phones.

The occasion was the National Academy of Engineering awards. On the trip to the awards, $500,000 each, I passed the BLS, and the Fed and the Service in succession. Much wailing in the paper was headlined over the coming sequestration and the terrible layoffs and reductions in budgeted salary increases. Who is to blame, the front page Post headline proclaimed. You could hardly pass a block in Washington where cranes were not aloft building new structures. What a contract of pride and revulsion I felt.

We stayed on embassy row, and the loathsome spectacle of zombies wearing necklaces holding their name tags, and multimillion dollar mansions containing every embassy under the sun, was broken in part by the sight of George Washington University students dining at Le Pain Quotidian and walking down Mass avenue as if they had not been already snatched.

Feb

18

Call it a cascade or call it the conservation of energy, or call it signaling or money outflows—- But the decline of 60 bucks of gold in a week to below 1600 intra day sends the storm signals up. It could happen while one was long. I looked at the effect of gold down 60 bucks in a week as of a Friday. And it's happened 18 times in last 13 years. It seems to have no inordinate effects statisticlly– being bearish for the stocks and oil and bullish for the dollar and bonds and gold in the next few days and someewhat bullish for the stocks on a 2 week basis.

Anatoly Veltman writes: 

Ok, so you did derive those slight biases you mention. But how is "60 bucks", and exactly Fri-to-Fri supposed to be a determinant? 60 bucks 13 years ago would be 20% depreciation; while today it's less than 4%. A few mega-funds like Pimco, Bridgewater, Paulson were not in gold until a few years ago. China, Russia were not significant players until a few years ago. EU was not in liquidity crisis until a few years ago. Cash gold was not above Comex gold. The dollar/gold relationship has waffled between negative and positive corellation last few years. There were no QE-infinity until a few years ago, no ZIRP. What if the entire this week's slide was due to China market holiday? There are just too many cross-currents for this kind of 13-year statistical sampling. Unless significantly fine-tuned, the conclusions will inevitably be of little use.

Feb

18

Does anyone know anything about housing values in Detroit? Of particular interest are empty lots.

Victor Niederhoffer writes: 

30 bucks will get you a good abandoned big home without the copper. Reason has a very good video on the bargains among the abandoned and its causes from excessive service rates and unionization. Chicago is the next Detroit I'm told.

David Lilienfeld writes:

I ask because a good friend of mine, a little older, is an ophthalmologist who bought four adjacent lots off of Woodward (?) near the center of town. The cost was practically nothing. Two of the lots are empty, the other two have abandoned homes (he compared them to Ridgely's Delight (in Baltimore) in the 1960s–that area of the city was in pretty poor shape at that time. The lots themselves are "big". Marty's thinking of when he can turn his practice over to his son and retire. (I can't picture Marty retired. The man runs on adrenaline and his great rapport with his patients. He would have gone into cardiology, but he thought ophthalmologists were paid more and didn't have to work as hard–leaving him time for his woodworking and a bunch of other hobbies.) He hopes to build a "large" house on the property sometime in the next 5-10 years as a summer home. I think he's crazy, but given his investing record, which is pretty good, I have to wonder if he's just really early, nuts, or onto something. Hence, my question.

GM and Ford do seem to be on the rebound, though. What's on the rebound in Chicago, except for gun sales?

Ralph Vince writes: 

I imagine it is much like Cleveland, where you can buy property for the back taxes owed. Young people not taking advantage of this are silly.

The mineral rights under most of these places, eventually, exceeds the cost

Feb

18

It was surprising to hear that in the new book about being smart (and a world traveler), he talks about losses, as I have never heard him acknowledge a loss before, and he seems the most insecure and least humble of men. The loss must have been of the kind that Harry Brown writes about "we said gold would go to 950 from its then current level of 450, but we were wrong as it only fell to 450 before rising to the specified level". The false humility of it all. Similar to the Palindrome. "Well, my. This man is so honest and so good. If he calls it a mistake to just miss it by 10 bucks, imagine what he must make when he's right. I'll invest with him immediately". The perfect lie often starts with a false admission of wrongness to throw the victim off the track. Cole Porter was a master of this, i.e. his admission that he was a captain in the french legion "only because they wanted to have an American in the force". Of course, he never got near the French legion and was there to evade the draft and of course the other thing he liked to do at night. img.imageResizerActiveClass{cursor:nw-resize !important;outline:1px dashed black !important;} img.imageResizerChangedClass{z-index:300 !important;max-width:none !important;max-height:none !important;} img.imageResizerBoxClass{margin:auto; z-index:99999 !important; position:fixed; top:0; left:0; right:0; bottom:0; border:1px solid white; outline:1px solid black;}

Feb

18

An interesting aspect of the asymmetry between big mimina and big maxima in stocks is that given that the last 20 day minimum occurred from 5 to 100 days ago, the expected duration to the next minimum is 30 days whereas the comparable for 20 day maxima is 15 days.

Feb

18

Weekly, one looks at Israel's market for benchmarks and guidance as they read our mail and are so much more scholarly than we. And to do it, I often scroll through 100 returns for every world market. In looking at these, one notes that about 90 of the markets are performing significantly worse year to date than the US. Canada and Europe are up 2% on the year to unchanged versus our up 6% are typical. Only Japan is up 10% and a few Arab countries are in our ball park. In conjunction with the run 20 percentage point increase in stocks relative to bonds, and the duration of 75 days since bonds set a big max, and the dissipation of wealth in the long precious metals, and the incredible run of max after max in US stocks, and the little woman's (who is very sagacious and always gives me good advice about the market) waving of the sceptre each morning over the head "but dear, yes. You're making, but what happens when it goes down 100 points 5 days in a row. Don't give it all back", one is somewhat less exuberant than one would be without all these Cassandra like warnings. If all my kids start calling me saying that they notice they have a few bucks in money markets receiving 0% interest, and should they invest in stocks, like they did at the height of 6000 nasdaq in 2000, then I'll know it's time to join Maturin in leaning over the boat and noting the behavior of the flying fish. Hopefully, I will take my shoes off if I fall in the water.

Rocky Humbert writes: 

Well put. Alas, the wife of the man who is long S&P calls because he sees little if any value in stocks (or bonds either for that matter, but accepts that the market is always right and he doesn't fight the fed or fight his wife) is already asking, "after the market goes down 100 points 5 days in a row, is that time to sell or time to buy?" The trendfollower replies, "depends on your timeframe."

Feb

14

One sees that he has called for an increase in the minimum wage. It will be interesting to see the annual economic report that usually accompanies The State of the Union and see how economists can show that raising a cost like this will not lead to decreased employment and layoffs for the unskilled. Economists are no better than the aforementioned counselors who tortured and ruined the Biker's whistleblowers it would seem. Indeed, as Rabelais would say, almost all of our professions are as laughable and flawed but wonderful as well as the economists and counselors.

anonymous writes: 

I only listened to a part of the speech but from what I understand he, and the rebuttals that will/did follow will all try to outbid each other about calling the illegals "immigrants" who are welcome like the high achievers that they are. As Milton Friedman said, you can you can have open borders or you can have the welfare state, but you cannot have both. When 10-20 million are legalized and are finished bringing in the 50 million with family reunification and 30 million of the total will go on welfare with five kids per couple this will dwarf all the other nonsense. This is clearly not sustainable.

Stefan Jovanovich replies: 

Apologies to anonymous for this mini-rant. The United States never had "open borders" any more than it had "free trade". What it did have in the 19th and early 20th centuries were very straigntforward rules about what people and goods had to do to cross the border. People had to pass physical health inspections (1 out of 5 did not), and goods had to pay a tariff. If you did not have tuberculosis or syphilis, you got in; if your importer paid the duties, your goods could be sold here. There was no presumption that having the right to live in the United States entitled someone to vote; that required the same citizenship examination that people now have to pass and a period of residency without being found guilty of a criminal offense (the definition included the non-payment of taxes). To be eligible for what the Constitution calls "Naturalization" a person also had to have no criminal record and avoid being placed on the attorney general's blacklist. Neither of my paternal grandparents ever became a citizen. My grandfather did not because he had been on the blacklist for being an anarchist. He was one; like Bakunin he thought that nothing could justify oppression, whether it was in the name of country (vide the Russians keeping down the Poles) or in the name of the revolution (Nechayev and Marx's authoritarian socialism). Grandmother's explanation was simpler; she never learned to read English or Polish, for that matter. (She suffered from severe dyslexia.)

My grandfather never thought he had been oppressed by the government for their failure to allow him to vote. He never considered the United States his homeland; but it was his children's, and he thought that he had an obligation to defend their country so, in December 1941, after they were all grown adults, he tried to join the Marine Corps. They turned him down (he was 52); but the Navy Department did accept the enlistments of all 3 of his children. He would have laughed at the notion that the United States had an obligation to allow people who broke the law - both by coming to the United States illegally and by committing crimes after they were here - to become citizens. If the country decided that these people could stay, that was up to the decision of the citizens; but he would have considered it a grave insult if other people had been allowed to become citizens after breaking the law or being illiterate in English. As a peaceful revolutionary (the very kind all the Marxists love to despise), he believed that "if you won't do the time, you don't have the character for crime". Surely, the same rule should apply to all current illegals.
 

Feb

11

While most of you don't play racketball, I believe the hobo's history of racketball on site was very educational for those with kids who wish to play it or anyone who plays any racket sport. The torque and the backswings on the backhand and the bends in the pictures are most enlightening. One notes that there have been 4 champions who ruled the racketball world for about 5 years each, winning almost every tournament. I noted the same thing in squash, and tennis isn't too far away in that area also.

One wonders if a similar phenomenon relates to markets. e.g. is there one stock that can outclass all the others in performance for a certain number of years, like Hogan, Swan, and Kane. Eventually those champions receded due to age, competition, or injury. Is there a predictable turning point?

Alston Mabry writes: 

Obviously, AAPL is the current version of this. And looking at AAPL, one sees an example of a company that stumbles as it fails to effectively deploy the very capital it accumulates due to its success. 

A commenter writes: 

This is the measure of how good a CEO Jobs was. He may have been a great innovator and manager, but he may not have been that strong of a CEO. A good CEO assures succession, and it isn't clear that Jobs was successful in this regard. The same was true of RCA and David Sarnoff, By comparison, Alfred P. Sloan accomplished this task for GM, Adolph Ochs for the NY Times, Hershey with Hershey Foods, and the Mars family with the Mars candy business. That hasn't been the case with Apple, at least not yet. Any guesses on how long the Board waits until Cook is replaced?

David Lillienfeld writes: 

There will always be outliers.

There are also companies at the other tail with managements performing more for "enjoyment" (like me athletically–I suck at racketball but I very much enjoy playing it and when I've had access to a court, done so for 3+ hours a week). Are there stocks in which management is in it for fun rather than shareholder value "enhancement"? Sure. It isn't hard to identify underperforming companies.

As for a predictable turning point, there should to be tells in each industry, but that doesn't address your question about one sentinel stock. I don't think there is a sentinel today the way GM was in the 1950s and 1960s. (Some might argue that Johns-Manville was a better sentinel. Either way, there was a single stock.) You've got a globalized market and no one company occupies a dominant position in a sentinel industry (such as autos in the 1950s and 1960s). Of course, implicit in this uninformed comment is that a connection exists between stock performance and corporate performance.

Or have I misunderstood your question?

Alston Mabry writes: 

Just to do a little bit of counting, here are the 48 non-financial US-based cos with cash of $5B or more, with LT investments added in. The amounts are in billions of dollars, and the list is sorted by the Total column.

total cash: 729.4
total LT inv: 337.7
cash + LTinv: 1067.1

Ticker/TotalCash/LTinv/Total

AAPL   39.8  97.3  137.1
MSFT   68.1  9.8  77.9
GOOG   48.1  1.5  49.6
CSCO   45.0  3.7  48.7

XOM   13.1  35.1  48.2
CVX   21.6  26.5  48.1

GM   31.9  14.4  46.3
WLP   20.6  22.1  42.7
PFE   23.0  13.4  36.4
ORCL   33.7  0.0  33.7
QCOM   13.3  15.1  28.4
KO   18.1  10.2  28.2
IBM   11.1  15.8  26.9
F   24.1  2.7  26.8
AMGN   24.1  0.0  24.1
MRK   18.1  5.6  23.7
INTC   18.2  4.4  22.6
HPQ   11.3  10.6  21.9
JNJ   19.8  0.0  19.8
BA   13.6  5.2  18.8
CMCSA   10.3  6.0  16.3
DELL   11.3  4.3  15.5
UNH   11.4  2.6  14.1
NWSA   7.8  5.2  13.0
EBAY   9.4  3.0  12.5
LLY   6.9  5.2  12.1
ABT   11.5  0.4  11.9
AMZN   11.4  0.0  11.4

GLW   6.1  5.2  11.3
EMC   6.2  5.1  11.3

HUM   9.3  1.0  10.3
FB   9.6  0.0  9.6
UPS   9.0  0.3  9.3
WMT   8.6  0.0  8.6
SLB   6.3  1.7  8.0
DVN   7.5  0.0  7.5
S   6.3  1.1  7.5
PEP   5.7  1.6  7.3

PG   7.0  0.0  7.0
UAL   6.7  0.0  6.7

HON   5.3  1.3  6.5
DISH   6.4  0.1  6.5
RIG   6.0  0.0  6.0
ACN   5.7  0.0  5.7

COST   5.6  0.0  5.6
NTAP   5.6  0.0  5.6

DE   5.0  0.2  5.2

Richard Owen adds: 

This is a brilliant list with many lessons.

- 80/20 rule: $2tr of surplus cash is bandied about as the figure for US corporations. Here are 50 covering over half of that sum.

- The 1% have an internal dissonance. Here is their accumulated share of National Product, all stored up and failed to be reinvested. The 1% neither wish to reinvest their cash, to reduce their share of Product, nor to have GDP decline, nor to run deficits. This is in aggregate impossible.

- By giving you will receive. By being cowardly, you will realise your fear. Tim Cook is hoarding his cash out of fear. Nobody has EVER put that kind of cash to work successfully. Not even Warren Buffett could do it on his best day. If Apple attempts to do so, they will end up hanging themselves. David Einhorn is so on the point with his analysis. And for once an activist is helping make management's jobs more secure, not less. They just need to listen. Take some options, recap the stock, make yourself heroes. Don't think you can use that cash to buy another magic wand. You will end up buying a pup. The most recent example of what might happen to Tim Cook if he doesn't see the light is the CEO of Man Group. They totally feared that AHL would stop working. They grasped at their cash looking for any credible diversification. They bought GLG at totally the wrong multiple. And then it all fell apart. All totally well intended, all well thought through. But if they had just recapped the stock - "coulda been heroes". Get out of your own way.

Steve Ellison writes: 

A couple of theories:

The crossover point from innovator to mature company occurs when revenue from continuing product lines becomes large enough that it dwarfs revenue that could realistically be expected from starting up a new product line in a new niche, was the theory in the innovation class I took in business school. Let's say that a company might develop a completely new line of business. If it were successful, it would be doing very well to get to $1 billion per year of sales of the new line within 5 years. If the company already had $20 billion per year in revenue, management would probably devote more attention to nurturing and further developing the cash cows that bring in the $20 billion than to a risky venture that might, if all goes well, add 5% to existing revenue. One might test this proposition by setting an arbitrary sales per year threshold and checking stock price movements of companies after they move past this level.

Adoption of new technologies follows an S curve pattern, driven by a small number of early adopters followed by more cautious but herdlike technology managers at large businesses, was the theory advanced by Geoffrey Moore in Crossing the Chasm. One might test this theory by looking for companies whose sales growth decelerated to less than 20% of the maximum growth rate of the past 5 years.

Feb

11

It is interesting to contemplate the role of overfitting versus simplicity with respect to the number of variables used to fit a model, and the predictive accuracy of same in the future. Concepts from information theory are sometimes useful as discussed in this rather technical article by Sprenger who notes "got rejected by Journals but helped him write another paper under review".

Feb

8

On Thursday, February 6th, at the Junto, Ivan Eland delivered a talk about the misplaced fears about oil shortages and how it has led to bad economic and political positions and interventions. He talked about 11 myths taken from his book "no war for oil".

1. no viable market exists for oil
2. Big oil colludes with OPEC to stick consumers with high prices.
3. Global oil production has peaked and the world is running out of oil
4. Oil is a special product of great strategic importance.
5. A strategic petroleum reserve is needed in case of emergency.
6. The us should become independent of oil, foreign oil or overseas energy
7. Oil price spikes cause economic catastrophes.
8. Us policy is to maintain the flow of oil at the lowest possible price.
9. Possession of oil means economic and political power.
10. The US must defend autocratic Saudi Arabia because of oil
11. Dependence of Europe on Russian energy is a threat to us security.

The gist of the argument was that high prices lead to increased supply and substitution of cheaper fuels and more drilling activity. And that oil producers were often the beneficiary of us policies which were designed to help them rather than the consumer. I believed that the talk was sadly needy of some scholars who knew something about oil that could have presented counter arguments or facts to the debunking of the myths that Eland presented. It was the kind of talk that needed some energy experts in the audience to present the opposite case if there was any. And I felt that the arguments made would not have persuaded anyone, except the vast majority that believed in the myths already. I wonder if any of the people knowledgeable about energy on this site could comment on the veracity and verisimilitude of these myths.

David Lillienfeld writes: 

Was any reference made to the West African oil fields or the Eastern Med fields (they may be as big as the Qatari natural gas fields) or even the new North Sea fields? (I won't get into the Brazilian or Mexican oil activities (Pemex is supposedly shedding some of the featherbedded/political spoils jobs it has), though they may be significant in the future.) Few analyses seem to factor these sources into the discussion, and while there are lots of geopolitical issues in play (Israel-Turkey-Cypress is but one potential flashpoint), the economic ones haven't been pushed to the side (witness some of the political stability emerging in West Africa (relatively speaking, of course)).

I don't know the book, but from these 11 points, it sounds remarkably US-centric. I gather no mention was made that the agreement between FDR and the Saudis was as much about the US-UK rivalry as it was about access to oil (which the US didn't need at that point–and didn't think it would need for some time to come. If I recall correctly, much if not most of the Allied effort in WW2 ran off of US oil. (One of Churchill's major accomplishments as First Lord of the Admiralty was moving the HRH Navy off of coal. The result was faster, more maneuverable ships able to stay at sea longer. But to do that change, the British needed a secure source of oil, which it had in the Persian Gulf. That's one of the reasons that Britain's 1970 decision to withdraw its troops from bases in Kuwait was significant.)

Stefan Jovanovich writes:

In 1904 - 7 and a half years before Churchill was appointed First Lord of the Admiralty - the Journal of the American Society of Naval Engineers was publishing the Report of the Liquid Fuel Board of the U.S. Navy. (You can find the Journal as an eBook in Google Books - search Journal of the American Society of Naval Engineers, Inc, Volume 16.) The conversion from coal to oil was already taken for granted. What people were struggling with were the very real technical challenges that had to be met in dealing with a liquid fuel that burned much hotter than coal - the shapes of the boilers themselves, the design and metallurgy of the boiler tubes, the advantages and problems of the super-heated steam that oil could produce, etc. What the same volume of the Naval Engineers journal also has a is a brief note detailing how many problems the British were having in their fleet exercises with the conversion and how many of those problems could be attributed to the inferiority of their metallurgical skills. The business about Churchill would be a bad joke if it were not representative of how much "history" has now become the endless copying of self-promoting gossip and rewritten press releases from the newspapers of the period. (It does, however, remind one of why it was around this time that Mencken decided he had had enough with newspapers and looked for somewhere else to write the truth.) .

This is not a rip on David. It is, however, another of Stefan's rants about the corruption of historical scholarship in modern academia. When a profession becomes nothing but an endless retelling of secondary sources, it develops the idiocy that medicine had when it was only practiced by reference to what Aristotle and Galen wrote. Churchill's taking and receiving credit for converting the British Navy from coal to oil is absolute nonsense. It is nonsense that is dutifully repeated in all the current discussions on the topic of oil, and it is a pure example of the peer-reviewed lie.

David Lilienfeld responds: 

Since the Royal Navy didn't function off of its subs and destroyers, I don't think one could use the use of oil in those ships as a proxy for the navy overall.

The problems the British were having with their metallurgy around 1920 (+/- 5 years or so) had impact beyond the Royal Navy. Wasn't there the suggestion that the brittleness of the rivets in the Titanic's hull when the Titanic struck the iceberg rather than a long gash in the hull that was responsible for its sinking?

Stefan Jovanovich replies: 

No Navy in the world had finished abandoning coal for oil before WW I because they had not worked out the problems. What I questioned was the assertion that Churchill or Fisher, for that matter, had somehow shaken the Admiralty out of its lethargy; that is part of the Churchill myth, and it is complete and utter crap.

The British submarines were not oil-fired; they ran on what the Brits called petrol (our name for it would be diesel). It was the same technology in basic design now used on every modern railroad locomotive -diesel to electricity to motive power.

It was not beyond the metallurgical skills of Harland and Wolff to have used different rivets. The alternatives were well-understood by them and by the Board of Trade. Tim Foecke's analysis is that "the builders used stronger steel rivets where they expected the greatest stress and weaker iron rivets for the stern and the bow, where they thought there would be less pressure, he said. But it was the ship's bow that struck the iceberg."

The questions about the rivets have nothing at all to do with the metallurgical problems everyone faced with the conversion from coal to oil.

Pitt T. Maner III writes: 

Taking on one of the myths.

On #3. Global oil production has peaked and the world is running out of oil

1)  from (a nice overview report) the BP Energy Outlook 2030 (January 2013)

"The world has ample proved reserves of oil and natural gas to meet expected future demand growth. At the end of 2011, global proved reserves of oil were sufficient to meet 54 years of current (2011) production; for natural gas that figure is 64 years."

2) The USGS has a good page on the latest publications related to ever changing assessments.

3) A slide presentation with interesting graphs showing how predictions were made and have varied over time. Basic idea:

"The conventional (or static) approach to exploration is rapidly changing to the dynamic (petroleum system) approach, and this transformation is the most profound shift in the petroleum business in a century. "

Henry Gifford writes:

I do know a little about oil and boilers. Some of what I've been hearing makes little sense, which could be one clue to how much to believe other things someone says on a topic.

I have never heard of a metallurgical challenge to burning oil vs. coal in a boiler. When heated they both (and natural gas and gasoline and wood) pyrolyse into a soup of Hydrogen and Carbon molecules, which then combine with Oxygen in the air. Same as any hydrocarbon. They also contain a little Sulfur, which produces Sulfuric acid which eats the boiler if it is cooled below the dewpoint temperature, which is about 400F. Same problem with modern fuels and modern boilers or furnaces or water heaters, as found in most basements today.

The story that oil burns hotter than coal is nonsense. All Hydrocarbons produce a soup of Hydrogen and Carbon which produce a fixed quantity of heat when burned. The temperature is a function of how quickly that process takes place in how small an area. You can today pay $15 at Home Depot for a propane torch or $60 for a propane torch. The $60 torch makes a hotter flame from the same fuel by mixing it with air better. Same fuel, very different temperature, same amount of heat of course from a given quantity of fuel. Ships burning oil make less smoke, and because the machinery and fuel and handling equipment take up less space, can go further and faster.

The story that oil is necessary to produce superheated steam is also not accurate. "Superheated" means heated to a temperature higher than the boiling temperature at that pressure. The Freon returning from the cold side of your air conditioner is "superheated," despite being very cold at that point. The old steam locomotives superheated the steam, as do steam engines powering turbines, this to prevent liquid steam impinging on the turbine blades.

As for oil being strategic, I think access to Middle Eastern oil had a lot to do with WW1. The German navy adopted oil sooner than the British did, both on the eve of WW1, both gradually with many dual-fueled ships built. The British had to import oil by tanker, the Germans started building a pipeline. A straight line on a map from Berlin to Baghdad goes through all the countries that fought on the German side, except one in the Balkans, where one day a prince was shot, soon there was an unbroken chain of allied or occupied countries stretching from Baghdad to Berlin.

As for WW2, Roosevelt was quoted on the cover of the NY Times as saying the US embargo of oil to Japan "was tantamount to a declaration of war" 6 months before the surprise at Pearl Harbor. The fighting in Burma was not over access to coconuts. The German invasion of Russia had a Southern thrust aimed at oilfields, and there were very heavy allied attacks on the German controlled oil fields in Romania. In the middle of the war US and German fighter pilots both went into battle with about 300 hours of training (except the Tuskegee Airmen, who were black, therefore considered mentally inferior, thus returned for additional training, twice, or maybe nobody wanted them to fight, and so they ended up the best trained pilots around, which helped very much with survival rates and proficiency), soon the German hours were dropping because of fuel shortages, and ended up well under 100
hours with the classroom ratio constantly increasing, while the US training
hours increased for the rest of the war. The Germans fought with the ME-262, a very real and very practical jet fighter, and reportedly towed it to the runway with horses to save fuel. But, I think the horse story is not true. I heard the air force used cows because the army had all the horses. The Japanese built the largest battleships in history, and sent them out without enough fuel for a return trip (but with thousands of young men on board).

Or parents' and grandparents' generation came to control the world through, in significant part, access to oil.

Do I think oil is a strategic material?

I don't think the US military is in the middle east for a shortage of falafels or for women's rights.

The reports that there is 50something or 60something years of supply so we don't have to worry sound to me like good reason to worry, if true. Toward the end, or even near the end, things will get very expensive, and probably scarce - those numbers are for today's production, with a constantly increasing population and with more and more people buying cars and air conditioners.

The US military runs on one fuel: diesel. Also called jet fuel or #2 fuel oil. The difference between diesel and #2 fuel oil is taxes, and a dye -thus the clear plastic fuel tube on every diesel car. The same stuff, or virtually the same stuff, drives all tanks, planes, jeeps, ships (other than large nuclear ships and subs), subs, trucks, etc. There are reasons for this.

Oil of one sort or another (gasoline or diesel) has a Watt-Density far in excess of anything else by either weight or volume. Compressed Hydrogen has only 1/5 the Watt-Density of diesel by volume even after being compressed to 300 atmospheres (4,400 PSI), which of course requires a spherical tank, which won't conveniently fit into an airplane wing or between the muffler and tailpipe of a car. Far in excess of batteries or anything else. Batteries can power a car for a while, but that volume and weight of gasoline or diesel would power a vehicle much, much further. And forget planes with batteries. And the military is not giving up planes. Nor tanks or other vehicles, and they want them to travel far and fast - they will burn diesel until or unless something with more power is discovered.

Is oil scarce? How much is left? I have no idea, but I don't think BP was drilling 5 miles deep in the gulf of mexico because it was easy.

The President of the Old Speculator's Club writes:

This thread reminded me of a book I read years and years ago and which became a classic of sorts. The book is "Delilah" and the author, Marcus Goodrich. It's a huge book, a lengthy and, at times, a difficult read as it goes into minute detail on the men and operations of a pre-WWI destroyer…coal devouring monsters that make some of Aubrey's accommodations look luxurious.

The book was published in 1941 and was the first of two that were to complete the story. Over the next 50 years (until his death in '91) Goodrich labored over the second book - sometimes spending an entire day "perfecting" a single sentence. The second manuscript, reportedly incomplete has never been made available to the public.

How big a deal was it back in '41. Goodrich became a minor celebrity, and good enough and popular enough to write the original "treatment" for "It's a Wonderful Life." He later married Olivia DeHavilland. Little was heard from him after that - he once stated that if he couldn't finish the second book he'd "probably burn it."

Carder Dimitroff writes: 

I'll give it a shot. You can write a book on any one of these statements

*1 no viable market exists for oil*

This is a partially true statement. There are several markets for oil. There are two major markets (WTI and Brent) and several dozen regional markets. Most are not pure markets. Some are manipulated markets.

Complicating the issue is the fact that crude oil is not a physically fungible commodity. There are attempts to address physical inconsistencies using normalizing techniques to achieve a financially fungible commodity.

The challenge is refineries. Refineries are designed to process specific types of crude oil. For example, many refineries cannot accept some of the heavier oils. As such, the refineries often set their own bid for a specific type of oil delivered to their facilities, but they will not bid other oils. This complicates markets' handling of basis differentials.

Under these circumstances, the so-called market price is only a broad indicator.

*2. Big oil colludes with OPEC to stick consumers with high prices.*

This is an inflammatory comment that misdirects issue. The comment assumes there is only one market for oil. It assumes producers are only interested in the public good. It also assumes OPEC producers have a lot of flexibility in setting prices. These are all incorrect assumptions

Of course, producers want higher prices. It's a business. But if OPEC and the majors collude (with other producers) and force significantly higher prices, demand will decline and revenues could be compromised.

*3. Global oil production has peaked and the world is running out of oil*

This is a tricky question. First, there has to be consensus on the definition of oil. It may surprise consumers to learn oil production figures often slip in production for ethanol and natural gas liquids. It's not a dirty trick. Petroleum is used primarily for transportation fuels. Ethanol is also used for transportation fuel. Some, but not all natural gas liquids are used for transportation (and that is why their price is often indexed to oil, not natural has).

It's a tricky because the question links two unrelated issues. The question suggests production has peaked because the world is running out of oil.

It's also a tricky question because it assumes production is currently limited by drilling constraints.

It is true new production can take time to respond to market signals. It is not true that the world is close to running out of oil.

*4. Oil is a special product of great strategic importance.*

In general, this statement appears to be true. But adding context would be helpful.

*5. A strategic petroleum reserve is needed in case of emergency.*

In general, this statement appears to be true.

*6. The US should become independent of oil, foreign oil or overseas energy*

Again, this statement is packed with three, mutually exclusive ideas. It is true, the US and all other nations should become independent of oil. So far, no practical substitute has been found.

It is true that the US should become independent of foreign [crude] oil. Assuming this independence includes Canada and Mexico, there is no practical option for the US to go it alone.

With respect to other primary fuels, the US is already energy independent, or almost energy independent. We are completely independent when it comes to renewable energy (hydroelectric, ethanol, biomass, wind, solar and others). We are energy independent when it comes to energy efficiency. We are net exporter of coal. We are virtually energy independent with respect to natural gas.

We import over 90 percent of our nuclear fuels. We can and should produce our own. But market forces favor international sourcing.

*7. Oil price spikes cause economic catastrophes.*

This may or may not be true. By definition, a spike is a short term event. As such, it may have greater political consequences than economic impact.

*8. US policy is to maintain the flow of oil at the lowest possible price.*

This is both true and false. US domestic policy is generally indifferent towards flow or price. Military policy is to assure unimpeded flow in vital areas (Middle East and Indonesia). Federal energy policy seems generally indifferent towards world crude oil prices.

From time to time, administrations do respond to political pressure to reduce prices. The fact is their options are limited.

*9. Possession of oil means economic and political power.*

Untrue

*10. The US must defend autocratic Saudi Arabia because of oil*

True. But it does not matter if they are autocratic or not.

*11. Dependence of Europe on Russian energy is a threat to US security.*
*
*

True

Finally, there is a fundamental element of the crude oil business that many cannot seem understand. Sometimes I think they don't want to understand.

The simple concept is that oil wells deplete. This idea seems elusive to many. Further, in order to replace depleting wells, market forces will motivate producers to (or should) seek the next marginal well. The next marginal well usually has higher production costs than the production costs associated with exiting wells. But decisions from sovereign producers are not always economic.

Production costs mean levelized costs, not lifting costs. It includes transportation costs to get product to market. It also includes market adjustments needed to financially normalize oil quality.

When you put it all together, the world is not running out of oil. The world is running out of cheap oil.

These are two important points:

Point 1: U.S. MILITARY PRESENCE IN THE PERSIAN GULF OR SAUDI ARABIA MERELY CONTRIBUTES TO ISLAMIST ANGER AT THE SAUDI GOVERNMENT FOR COLLUSION WITH THE U.S. AND ENDANGERS THE OIL.

Point 2: ALSO, ANY THREAT TO ANY OIL IN ANY ONE COUNTRY WILL MERELY RAISE THE WORLD OIL PRICE. INDUSTRIAL ECONOMIES, CONTRARY TO POPULAR BELIEF ARE RESILIENT TO OIL PRICE SPIKES (EVIDENCE IS PROVIDED IN THE BOOK).

With respect to Point 1, there has been significant volumes of credible work by intelligence analysts to confirm this statement. Yet politically, our leaders don't seem to believe the fact-based evidence. Most intelligence analysts will argue that that the Islamists don't hate us for who we are, they hate us for what we do. Yet you hear the opposite story on capital Hill.
 

Feb

8

It is interesting to contemplate the ecology of the grind, the vig, the infrastructure, as the market mistress each day is content with a 12 or 15 point range and 1. 78 million contracts of volume. Apparently this is enough to feed the eagles, hyenas, worms, and detritovores.

Jeff Watson writes: 

Better add slippage, market friction, and outright mistakes to the kettle.

Feb

7

It is interesting and useful to measure the tendency to continuation or reversal in a series. It's particularly useful for markets because many traders like to go with or against in a period. And some measure of whether this works or not, and how it's changing provides a rudder.

The usual methods of measuring it rely on the serial correlation coefficient, but this tends to be disrupted by extreme or missing observations and doesn't have stable properties for many non-normal distributions. Non-parametric measures that rely on ranks, runs, or moves above and below the median, or curve fitting for consecutive observations have often been used. Cowles started the whole subject for stock prices by looking at sequences and reversals in consecutive prices.

A measure that I have been working with that is relatively new and has many advantages is to consider the concordances and discordances in a series. This method is based on work done by Kendall in rank correlations with his statistic, Kendall's Tau. A key article in this area that provides an excellent foundation is Ferguson, Genet and Hallin, "Kendall's tau for serial dependence" and "Bandt Ordinal Time series analysis".

The method of concordances and discordances starts with looking at 3 consecutive observations in a series. Let's call them p1, p2, and p3. If p2 > 1 and P3 > p2, that's a positive concordance. If p2< 1 and P3 < p2, that's a negative concordance. All the other rises followed by declines, or declines followed by rises are discordances. (Note that there are 6 permutations of the 3 numbers and only 2 yield concordances.)

To make it more tangible consider the levels in stocks from Friday 1/4/2013 to  Friday 1/11/2013                                  
                                              

day        Date                  Level       change    rank of change                            
         

Fri           1/4/2013         1458                                      
                
Mon          1/7/2013       1456       -2          2              
                        
Tues         1/8/2013        1452       -4         1      
                                  
Wed          1/9/2013       1456        4         4                                      
Thurs        1/10/2013      1467        11        5                                     
Fri            1/11/2013      1467      0         3

To measure the momentum in the series of changes, one must compute all the consecutive one day discordances, + the number of consecutive 2 day discordances + the number of 3 day discordances. It is best to focus on the ranks. If the consecutive pairs of ranks reverse there is a discordance. If they are in the same direction, there is a concordance.

Comparing Mon to Tue and Tue to Wed, one notes a discordance.

Comparing Tues to Wed, and Wed to Thur, there is a concordance.

Comparing Wed to Thurs, and Thurs to Friday, there is a discordance.

Now start with ranks 2 days apart.

Mon and Wed and Tue and Thur are in concord.

Tues and Thur and Wed and Friday are in discord as Thur rank is higher than Tues and Friday's rank is lower than Wed.

There is one 3 day comparison. Mon and Thur, and Tuesday to Friday are in concordance. Thus, there were 3 discordances and 3 concordances. It turns out that the expected number of discordances for a time series is ( n-2) ( 3n-1 ) / 12. since n is 5 , the expected number of discordances is 3.5. An exact calculation is possible and shows that 3 or less discordances has a prob of 20%.

How can this measure be used? First, it provides a nice estimate of the degree of correlation between the consecutive values of a series. The question then arises, how can one predict subsequent momentum based on past momentum. It turns out that that there is a tendency in the series that we have looked at , for periods with high concordances to be followed by periods with high discordances, i.e. momentum changes from period to period. This would have to be quantified with the period one is interested in, a week, a month etc.

I will report further work on this in future. I would like to thank Doc Castaldo and Mike Chuprin for their kind assistance on this project.

Fabrice Rouah writes: 

Very good point. Non-parametric methods are definitely preferable for financial time series that rarely meet the normality or linearity assumptions required of many parametric methods. Another example of parametric methods are t-tests and ANOVA. To compare returns between different groups one is better off using their non-parametric counterparts, namely the tests of Wilcoxon, Mann-Whitney, Kruskal-Wallis and many others.

Feb

4

The professor once performed a beautiful study to see if all the turning points that one could retrospectively select

to be short and long a la birinyi who shows almost 5 times the market drift by getting in and out of the bear and bull markets with 20% being a fuzzy base line , —– and he found it completely consistent with randomness. It was a model of what a good study should be. Perhaps he will share it with us again, or at least tell us the drift. 

Richard Owen writes: 

That would be great to see. It is definitely one of the most mumbocentrically diverse areas of asset analysis and a firm and incestuous friend of the buy and hold debate. The more important corollary to the depressing corollary would therefore be that successful investing is almost entirely about the quality of your liabilities? Would a Japanese salaryman wealth manager with the Professor's report in hand have been able to maintain a career? If not, would he have been right to get a copy of Taleb out to console himself?

Charles "the professor" Pennington writes: 

I have kind of forgotten how that went, but I will see if I can find it.

There was a study of something kind of along those lines from Big Al and/or Kim Zussman not so long ago that was very compelling, covering dozens of possible trading strategies, but only one or two could thread the needle and do better than random.

Russ Sears writes: 

Not as rigorous as the Professor's, but I did a back of envelope study of the Dow from 1900 to 12/31/2012. Not including dividends, just the index.

There were 20 beginning of the years where the Dow was less than it began 10 years (of course these have overlapping decades).

What do do if you retrospectively find yourself in a "Secular Bear Market"?

The next year change in the dow average +14.35% min - 23.5% max 59.6% stdev of 21.1%. Whereas the overall was 4.7% and stdev of 20.9%.

Likewise the next ten years change based on roughly 20% steps of prior 10 years (again overlap) This only covered 1910 to year end 2012 since I needed 10 year periods before and after. There were 2 years 2008 and 2009 that the decade prior was negative, both had positive next years. But we do not know what it will be in 2018 and 2019 so they were not included. Here the overlap does matter since the next 10 year periods are not independent. 

Count  group avg Range for Group    Next 10 years  Range for group 

19     -16.8%     -49.7%       1.4%     108.5%      -3.6%     271.7%
19      16.9%       2.0%      33.0%      82.0%     -39.0%     238.8%
19      60.2%      35.4%      98.1%      95.8%     -15.1%     240.1%
19     137.9%      98.5%     169.4%      75.2%     -39.8%     323.4%
18     240.9%     172.7%     323.4%      96.8%     -49.7%     317.6%

Richard Owen writes: 

Very kind and thoughtful work! Apologies to be very dumb: what periods do the five groupings of 19 counts represent? And group avg [col 2] (I would have thought trailing? But the premise is those periods were negative?) The "excluding divs" heuristic so common for stock analysis is, I guess, one reason why we need King Dimson so badly.

Russ Sears writes: 

The period in the five groupings in the next decade. Hence, may double, triple or more count some years. It takes some time for the "past decade" to move into another grouping.

A Warning that Engendered the Discussion from Victor Niederhoffer: 

Please don't write more as you have threatened about "secular bull markets" or "secular bear markets" that can only be described in retrospect and have no predictive significance, and are mumbo jumbo and depend on random selected starting and ending points and would only lead our fine readers to wallow in absurd, unhelpful charlatanism.

Feb

4

One notes that after the 6 negative Januaries, the average change the next 11 months was + 7%. After the 4 positive Januaries, the average change was 3%. Thus, another speculative canard bites the dust as was guaranteed to happen. Only a Shiller or a writer of musicals based on the elephant man would continue to love such a barometer. And it would be a good caution to keep in mind for other seasonarian ideas, where out of date correlations, originally found by retrospective and multiple classifications, are shown to be overcome by ever-changing cycles and randomness at the outset.

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