Feb

1

One has always felt that the unemployment rate is much more important than the jobs created because the seasonal adjustments so much dwarf the other things that the adjusted jobs created is meaningless. At least with the rate, you get the numerator and denominator adjusted by the same meaningless number so that in a sense the worthless seasonal adjustment cancels out. It is curious how the unemployment rate has now ratcheted up to a politically unfavorable level after the election as have so many other things like the Mideast situation. Everything was on hold until after the fair haired boy won. One is reminded that according to what I read, French equities went up strongly during the French Revolution.

I have never had any good insights into macroeconomic policy and so many people are more sagacious than I about this and other things that at least I know not to base any trades on my macro analysis. Even if the vast majority were not more sagacious than I on this subject, all it takes are a few big ones at the margin to put prices where they should be so that any insights I had on this subject would just contribute to vig and fear as the market moved against me and I had no rudder. One is also reminded that the market could move with you for random reasons when you are lucky. And that would make you twist on a string in the wind also.

The simple post medieval pre-enlightenment man who apparently runs the world's leading technically based fund was a very astute businessman. He bought a system from a colleague mathematician at MIT, It was supposed to generate 50% a year profits… But the Simple person from Harvard said, "look, if it makes much more than 50%, it's not working and you're not entitled to your agreed upon share. Okay?" Fine, the MIT guy said. My goodness, sometimes professors don't have much common sense.

Feb

1

The next meeting of the NYC Junto will be Thursday Feb. 7, 2013 at the Mechanics & Tradesmen Library, 20 West 44th Street, NYC

We will have Ivan Eland, Director, Center on Peace and Liberty, Independent Institute, author of "The Empire has No Clothes: U.S. Foreign Policy Exposed" and "No War for Oil: U.S. Dependency and the Middle East."

We will also celebrate Ayn Rand 's 108th birthday.

Jan

31

There was a time when all big hedge fund managers were bearish. And at the close of a month, they sold in mass, with that ululation that only communality and unlimited funds can match. Where have they gone? Not until the last bear has given up, to say the opposite of what the world's worst forecaster Alan Abelson would say, can we expect those glorious days to come again. One must take sustenance until then with Churchill's guidance: "Twenty to 25. (route 95). Those are the years. Don't be content with things as they are. Don't take no for an answer. Never submit to failure. Do not be fobbed off with mere personal success or acceptance. You will make all kinds of mistakes (the next day especially). But as long as you are generous (to those who need) and true, you cannot hurt the world or even seriously distress her. She was made to be wooed and won by youth. She has lived and thrived only by repeated subjugations". (the drift has subjugated them?).

Jeff Watson writes:

And that's a perfect segue to the idea that has the world in it's grip.

Pitt T. Maner III writes: 

A sentence from a recent column by a surprisingly ebullient forecaster:

"But there's the buoyant stock market, which we've typically found to be in good times and bad a better investment guide than the run-of-the-Street strategist or portfolio pro, and regret not having paid it more heed back in the dark, wintry days of 2009, when it began its long slog back from the depths of the Great Recession."

—Alan Abelson, Saturday, January 26, 2013

 

Jan

30

Have you ever heard the saying, "if half a spoonful will kill you, then why not a whole cup"?

It means that if the Fed were to buy every asset that the banks have, with constantly increasing prices until the banks had trillions additional of profits, that it might be good for the economy as the banks used all this high powered money to make loans to the non- banks.

Vince Fulco writes: 

Reminds one of the Dr. Doolittle story re: the push-me-pull-you but this one may have a very unhappy ending. Monetary pulls in one direction, Fiscal yanking in the other…Everyone can't be right. 

David Hillman writes: 

One might have much more faith that the bankers would instead find creative ways to the additional trillions off the table in the form of bonuses instead of lending to us business chumps. of course, that is good for the economy as they would use it to create jobs by building personal castles and buying stuff from Bulgari…..

Jan

30

There is a zero sum part to trading where what one flexion makes, another high frequency or day trader or poor gambler ruined or lack of margined or viged player uses. The win win aspect is that if you hold for a reas period as almost everyone in market is forced to do, you get the drift of 10000 fold a century, except if you lived in the Iron and played a game with kings moving backwards.

Anatoly Veltman writes:

Ok, I'll say it. Drift prevails over a century. And I had no problem with drift as recently as 4 years ago, when the only true drifter I know, a prince of certain oil, was adding to his C holdings by bidding pennies.

I'm having a problem with over-relying on drift now; because now, four years later, you can only bid pennies for C if you add $42 in front of it. All the while the real economic indicators, as Chair pointed out just today, have not and will not improve much any time soon. Now tell me: why assume that there will be much of a drift effect in the near five, or maybe the near ten years? Do you expect policy improvements, or pray for a budget spiral miracle, or Europe culture unity miracle, or what other miracle?

Jeff Watson writes:

Back in 1932, the DJIA made a new all time low that wiped out 36 years of gain. Likewise, the market didn't totally recover from 1969's highs until 1982, and the market has done a 15 bagger since then. I'll stick with the drift, which is a steady wind. 

Rocky Humbert writes:

There seem to be two sorts of smart-sounding stock market pundits: (1) those who get bearish because prices have risen. (2) those who get bearish because prices have fallen. I am neither smart nor a pundit but my views of the 3-5 year upside from here (small) and current positions (long inexpensive s&p calls) are known to all.

In the face of the current seemingly relentless rise (which has used up a year's drift in 3 weeks)… I confess that I am looking at my new, over 50% combined tax rate, and positing that higher marginal rates disincentive not only my risk-taking, but also my selling (as the taxes discourage my speculative urge to sell now and buy stuff back at hopefully lower prices.)

With this in mind, an academic study might consider whether changes in capital gains tax rates result in more serial correlation (i.e. trending — as I look around three times) SHORTLY AFTER the higher taxes are imposed. And the effect diminishes over time as people become accustomed to the new regime. Obviously I would guess the answer is yes.

Kim Zussman writes:

 Increasing tax regime could be bullish:

1. additional vig against frequent trading (as if there weren't enough already) > 1a. "drift" of holding period toward longer timeframe
2. disincentive to sell = incentive to hold and/or buy (including insiders)
3. restructuring away from dividends toward stock buy-backs

Rocky Humbert writes:

Dr Z may be onto something. Does this mean if Obama raises capital gains taxes to 99%, the stock market will triple over night? 

Anatoly Veltman writes: 

1. I have no problem with counting to include the last few years
2. I have a problem with counting to include anything pre-2007, let alone pre-2001, and even more so pre-1987.

The reason I have a problem with it: historical price analysis, no matter which way analysis is performed, relies on the notion that participants have not largely changed, and that "their" psychology has not changed. This is not the case - if one goes too far back - because financial market mechanism and participant make-up has changed ever increasingly over the past decade.

One of the victims of methamorphosis was "trend-following". I believe that most previosly successful trend-following rules have died in application to regulated electronically executed markets, because most clients are now automatically prevented from over-leveraging. Thus, "surprise follows trend" rule, for example, lost potency. Nowadays, you get preponderance of surprise "against trend". That's a very significant switcharoo, which has put most of famed trendfollowers of yester-year out of biz.

Also, Palindrome was not much off, predicting the other day hedge fund outflows due to old as age "2&20 fee structure". This structure just can't survive the years of ZER environment. Huge chunk of very cerebral participation has been replaced by bank punk punters, gambling public's money for bonuses.

Gary Rogan writes:

The drift seems to be a long-range phenomenon that has existed in different stock markets for a very long time. It is therefore difficult to make predictions of its demise based on any specific factors. One thing is clear: calamities like revolutions end the existence of the market and obviously the drift. Benito Mussolini was very good for the Italian stock market for a long time, and even way into the war it kept up with inflation, but eventually it succumbed to the realities of war (in real, not nominal terms). Granted, Mussolini initially had much better economic policies than Obama, but who would really expect that faschism could coexist with a great stock market? The question still remains: will there be a total wipeout? Short of that the drift is likely to continue.

Il Duce wasn't chosen completely at random, and the question was (just a little bit) tongue-in-cheek.

I could easily make the contention, and a great case, that fascism co-exists with a great stock market right here in the USA.

Ralph Vince writes:

I think we make a huge mistake when we assume that policy affects long term stock prices. Sure, you might have seen events, like a lot of stocks seeing big ex-dates last year, before big tax theft years — but the long term upward drift is a function of evolution. Like our progress has always been — starts and fits.

Sometimes the fits have lasted 950 years! But it always comes around. I like to get up in the morning, put my shoes on, by a few shares of some random something or other. If it goes against me, buy a little more. When it comes around to satisfy my Pythagorean criterion, out she goes.

As I've gotten older, I like to do it with wasting assets, long options.

It makes it more sporting.

Stefan Jovanovich writes:

I wish that we all could agree that prices only count if you can use the money . Zimbabwe's stock market does not have prices for anyone who wants use the money except in Zimbadwe. The Italian stock market was not quite that bad but close enough to make its "performance" entirely fictional from the point of view of anyone wanting to do what people now take for granted - use their dollars to buy/sell "foreign" stocks, close the trades and then take home their winnings - in dollars. That was not possible in Italy after 1922 or in Germany after 1932, for that matter.

As for Mussolini's economic policies, they were far more destructive than the President and Congress' inability to stop writing checks that the Treasury has not collected the money for. In his Battle for the Lira (1926), Mussolini decided that the currency would be fixed at 90 to the pound, even though the price in the foreign exchange market was 55% of that figure. The result was to create an instant bankruptcy for all exporters and those few remaining financial institutions that dealt in international trade. As a result Italy got a head start on the rest of the world; its Depression began in the fall of 1926. But Quota 90 did create a windfall for the Italian industrialists who were Mussolini's supporters; their costs on their imported raw materials were immediately halved. Like the German industrialists after Hitler took power, they saw their order books boom with all the government spending for guns and butter. And look how well that all turned out.

Baldi writes:

Ralph, you write: "As I've gotten older, I like to do it with wasting assets, long options."

Older? You wrote about doing just that in 1992:

"Finally, you must consider this next axiom. If you play a game with unlimited liability, you will go broke with a probability that approaches certainty as the length of the game approaches infinity. Not a very pleasant prospect. The situation can be better understood by saying that if you can only die by being struck by lightning, eventually you will die by being struck by lightning. Simple. If you trade a vehicle with unlimited liability (such as futures), you will eventually experience a loss of such magnitude as to lose everything you have. […]

"There are three possible courses of action you can take. One is to trade only vehicles where the liability is limited (such as long options.) The second is not to trade for an infinitely long period of time. Most traders will die before they see the cataclysmic loss manifest itself (or before they get hit by lightning.) The probability of an enormous winning trade exists, too, and one of the nice things about winning in trading is that you don't have to have the gigantic winning trade. Many smaller wins will suffice. Therefore, if you aren't going to trade in limited liability vehicles and you aren't going to die, make up your mind that you are going to quit trading unlimited liability vehicles altogether if and when your account equity reaches some pre-specified goal. If and when you achieve that goal, get out and don't' ever come back."

Jan

30

My friends Susan and Marc Strausberg, the founders of EDGAR Online, have created a new Internet product that provides instant and specific answers to financial questions via mobile devices; 9W Search.

9W's name comes from the punch line to a vaudeville joke answer to the question "Herr Wagner, does your last name start with the letter V?"

Our web site uses recent disruptive technology in hardware; the latest tablets and smart phones have greater ability to provide remote access to financial information.

9W's granular search results are enabled by the new software technology, XBRL, a financial tagging language that requires that each element in a financial report be given a unique "bar code", assuring that each individual number remains constant throughout the entire financial reporting supply chain.

In time 9W expects that the XBRL standard will become ubiquitous as part of all accounting software packages and for regulatory filings. More government agencies, here and abroad, plan to adopt XBRL in the future to satisfy their need for more efficiency and transparency and, when ready, much more data will be available for inclusion into the 9W platform. (Examples of future 9W sources of data are the EPA, FDA and Department of Energy reports).

* 9W Search can be used by nearly all mobile device users as well as standard PCs.

* 9W is not the best choice for deep analysis but is aimed at a broad underserved market.

* 9W returns SIMPLE FACTUAL ANSWERS to queries -not opinions.

* The primary source of 9W answers is the ocean of SEC filings; our data base contains all of the up-to-the-minute SEC submissions, a entire document history going back five years, and all filings made in XBRL (the new tagging language required by the SEC).

* 9W provides Instant comparisons of single financial metrics and ratios (more than 200 are available in our data base with more to come) for up to three companies at a time.

* All reports can be downloaded into Excel or PDF and shared via email, Linked In, Facebook and Twitter.

* 9W sources of non-SEC information are direct links to other web sites.

* 9W is able to answer queries about highly specific facts, located in "footnotes," "insider sales data," "management changes," and "real time stock prices"

* 9W will work on all operating systems for PC's (Windows 7 & Windows 8, Google Chrome, Firefox and all the rest).

Jan

28

One of the pleasures of visiting the declining city of Chicago (perhaps the next Detroit), is to visit the Seminary Bookstore in their new location, 5727 S. University Avenue, They have a great collection of quasi academic books, i.e. the kind that professors write for popular consumption, and the current text books can be bought a few blocks west at the University Bookstore.

Compared to the old store, it has much more room, much more light and glass windows, and plenty of places to sit and read. And unlike the old store, it's possible to find your way out without being buried by a ton of musty books if you don't get lost in the basement. I am one of those unfortunates who was not educated enough in my college days to have a good grounding in all the disciplines that make up the world of knowledge so I like to update myself periodically in areas that I am weak in or should know much more about, especially for market actualization or knowledge to share with my kids.

Perhaps the list of books I bought might be of interest to some scholars or would be market people. Microeconomics by Besanko and Braeutigan

Industrial Organization by Luis Cabral

Investments Bodie, Kane, Marcus (ninth edition)

Stochastic Modeling Barry Nelson

Scorecasting Moskowitz and Wertheim

The Evolution of Plants Wills and McElwain

Survival by Minelli and Mannuci

Thieves, Deceivers and Killers, Agosta

The Birth of the Modern World 1780-1914

The Lions of Tsavo, Patterson

Modeling Binary Data by David Collett (second edition)

Historical Perspectives on the American Economy, Whaples

Viruses, Plagues, and History, Olstone

Plastic (a toxic love story), Feinkel (for the collab for her new business)

The Power of Plagues, Sherman

Quantitative Ecological Theory, Rose

Think Python, O'Reilly (for my kids who want a job in the future).

Beautiful Evidence by Edward Tufte

All of Nonparametric Statistics by Larry Wasserman

Number Shape and Symmetry by Diane Hermann and Paul Sally

Nonparametri Statistics with Applications to Science and Engineering, Paul Kvam and Brani Vidakovic

Discrete Multivariate Analysis by Yvonne Bishop et al

Modeling with dta by Ben Klemens

Python Essential Reference by David Beaszley

The Origin of Wealth by Eric Beinhocker

America, Empire of Liberty by David Reynolds

The Entrepreneur (classic texts by Joseph Schumpeter) Marcus Becker

A History of Everyday Things: the birth of consumption in France, Daniel Roche

Civilization by Niall Ferguson (the west and the rest)

The Americans (the Colonial Experience) by Daniel Boorstin

Triumph of the City (how our greatest invention makes us richer, smarter, greener, healthier and happier) by Edward Glaeser

The Big Red Book by Coleman Barks (bought by Susan)

The Founders and Finance, Thomas McCraw

A Nation of Deadbeats (an uncommon history of America's financial disasters) by Scott Reynolds Nelson. (this one I have to read immediately)

Rome by Robert Hughes

The American Game: capitalism, decolonization, world domination and baseball by John Kelley ( 173 5 by 8 pages only)

Exploring the city (inquiries toward an urban anthropology ) by Ulf Hannerz

Brokerage and Closure (an intro to social capital), Ronald Burt

All the Fun's in How You Say a Thing (an explanation of meter and versification) by Timothy Steele

The American Songbook by Carl Sandburg (for Aubrey)

The Measure of Civilization (how social development decides the fate of nations) by Ian Morris

Freaks of Fortune ( the emerging world of capitalism and risk in America by Jonathan Levy

The Invention of Enterprise (entrepreneurship, from ancient mesopotamia to Modern times) by David Landes et al
 

I feel like Louis L'amour who gave lists of books he likes to read in The Wandering Man without telling what he got out of them, but I do not have enough erudition to tell based on skimming them how valuable or interesting they are. Any suggestions or augmentations on that front would be appreciated and perhaps helpful to others.

Kim Zussman writes: 

University of Chicago is now ranked #4 by US News — the highest ever. This is a big jump from the era of the low tax predecessor to the former con law professor, and will hopefully have a favorable impact on South side murder rates.

Dan Grossman writes: 

Unintended Consequences by Edward Conard is the best book I have seen on the subprime crisis and current government tax and economic policy.

Jan

28

One doesn't recall seeing so many bullish things in a market recap in many years. It reminds one of the bearish lists that Alan Abelson would come up with in the complete enumeration of his weekly articles from 1956 to 2005 that collab and I read from 1956 to 2005, during a period when the market went up about five fold.

Jim Lackey writes: 

If one was at The weekend meeting…

"Say, look fellas, this mumbo of 1000 point rallies and declines of the same on political mumbo jumbo must stop. We need the public in the game and moving their book to cover the eco system overhead of the US market. Look at Mr White, he had to take a pay cut! Why are we losing our friends when we lost many in the crash. This must stop. Let's agree to keep the declines at a swift 300, a gamber smash 20 day max to minimum in three. Yes and lets keep the news flow all declines are healthy and pauses to refresh. HFT keeps stealing? Lets do to hft what we did to the day trader in 2004. Work the open and close as gentlemen and from1030 to 330 lets agree to play it as tight as possible. If HFT does not have the big orders to front all the have is to catch a retail 100 share order at lunch or best fight each other to the death. All HFT not backed by us making markets will be gone in a year.
Hear here..cheers long live the US markets."

Jan

28

Upon waking up, the verse from Trial by Jury:

"one cannot eat breakfast all day/ nor is it the act of a sinner/ when breakfast is taken away/ to turn his attention to dinner. And it's not in the range of belief/ to look upon him as a glutton who, when he is tired of beef determines to tackle the mutton"

One can't decide or figure out whether this post was prompted by Mr. Grain's good fortune in marriage, or a Niederhoffer alert memorializing my inordinate tendency to be a contrarian sent to me by Miss Perfect. 

Yes, I am a contrarian above 1500 S&P with all that implies about the euro and fixed income. It seems to me like the flexionists and other sinners determine to tackle the mutton after many rounds of breakfast. 

Richard Owen writes: 

It's always interesting to see how the anointed enjoy their lunch and dinners. On a recent visit to Hammersmith, one enjoyed a visit to the beautiful Church cafe — with discounted coffee — and spent an ultra-civilised half hour with button down marmish nannies and housewives. This was prior to an appointment with rare books at St Paul's Girls School, wherein one is greeted by a forest's worth of antiqued Edwardian wood paneling and transported back into a Mary Poppins netherworld. Walking back down the high street, there are plentiful and lavishly staffed cult cafes, ethical butchers, and second hand bookshops to visit.

It seems that with the squeezing out of standardised efficiencies; the disassembling of workforce collective power; the ravaging of the idyll to a barren landscape of unemployed, disenfranchised waitresses, butchers and bookshop owners, that the equity have collected their bounteous share thereof and reconstructed what they disassembled on their doorsteps. Drink down your Starbucks, else who will buy the cottage industrialist's cream teas?

Victor Niederhoffer replies: 

One would inquire of Mr Owen whether any of the button downed nannies and housewives seemed to be of the kind that would administer spankings to the Royal Stock Exchange Members who frequented such clubs in the old days when the President was greeted on the floor with a standing ovation when he was outed for patronizing one.

Jan

28

One recently updated my collection of microeconomics textbooks with Microeconomics by David Besanko and Ronald Braeutigan which is the standard text at the University of Chicago Business School. I still like the Microeconomics text by Pashigian (price theory and applications), Landsburgh "Price Theory and Applications", Cowen "Modern Principles" and Heyne "The Economic Way of Thinking" (12th edition" best.

It was amazing to me how little has changed in the way of intermediate microeconomics since I last took such a course 50 years ago. However, one concept that I had not come across in my previous studies was the Lerner Index of market power. It's the amount above marginal cost that your price is at relative to price. I looked to see if it's been measured for stock market companies but it only seems to have been used in the banking and telephone industry, although it's supposedly the standard used in anti trust cases. It would seem to be 100% correlated with profit margins and the Longman index of price to weight.

One wonders if such empirical indexes are associated with superior stock market performance under certain regimes. As mentioned, I am a great disbeliever in all studies of market performance relative to value versus growth, small versus big, accruals versus non accruals, superior versus inferior past performance, and of course all long versus short strategies (because it loses the drift), because of errors of retrospection, muticollinearity, and changes of regimes. However, I think such a study of profit margins using contemporaneous data only (available in the weekly value lines), would be worthwhile.

Jan

28

It is interesting to compare the runup in stock prices and decline in bond prices to that which precipitated the Oct 19, 1987 catastrophic decline in stocks and increase in bond prices with the present whenever there is a 15 percentage point divergence in favor of stocks in the ratio of stocks to bonds such as in the last month.

A commenter writes:

Revisiting history: In 1987, bond yields were around 7ish % and over the course of the year, they rose through 10%. before the "crash". In 1987, fed funds rose from 6% to 7.5ish%. Before the crash.In 1987, the S&P rose from 240ish to 330ish (37%) in an impulse move, without any correction. Before the crash.In 1987, the S&P p/e ratio rose from 16ish to 24ish. Before the crash. (Are we at 16 yet?)In 1987, inflation was rising and real yields were rocketing higher.Source: all bloomberg data. Disclosure: I sure ain't bullish. But I do own SPX calls because the trend is my friend.

Jan

25

There is nothing like the exuberance of a bull market. All the long keep augmenting their purchasing power. And their colleagues wish to get in on the bullish drive. Sold out bulls rue the day they tried to time it and get out or were forced out like on Dec 26th. The news stories all draw attention to good news. And the President looks "straight" (ahead) from the home shores, and the wives look like Marilyn Monroe. Who would have the courage to go against the last few points to S&P futures 1500 or dow 14000. I often found myself fighting such bull moves when I was at the palindromes near the summer holidays. I'd be the only one fighting the trend in the room and there would be trillions of purchasing power there, all augmented by nubile women from this country and the former Iron. Thank goodness for once, the trillions are not totally against me.

The only thing that would interrupt the Palindrome's chess game was a call from this central or another. "We'd like to share together what we're doing so we could work together". "Fine, I'd be delighted," a palindrome would say. And another trillion would be added against me, all waiting for the weekend to end so that they could augment in force. 

Jan

25

The ease with which Lance was able to maintain his hoax, and the difficulty that others had in breaking it, and the penalties they had to bear, and the great emoluments that were made from it by Lance and his crew should be generalized. What other hoaxes and conspiracies are there in the world? What is the dead weight and direct cost? I have been the victim of several such frauds and conspiracies but was smart enough in the last ones not to take legal action as I knew that my legal and opportunity costs would be many times greater than the possible recovery. I believe several on the list have also been so victimized. How prevalent is it? And how can they be defeated and fought against?

Anatoly Veltman writes:

Not a direct answer by any means, but the first time I heard Carl Lewis respond to a question on how good Ben Johnson was (question was posed way before Ben Johnson got publicly "discovered") — I was quite stunned by Carl's stern reaction. It was like you asked him if he could outrun a Martian in his prime. One might either conclude sour grapes from hints like that, or suspect that there is no smoke without fire. In any case, maybe one of the best ideas is to ask a competitor?

The question raised here, by the way, may be the most important question of the couple of decades. Every single one of you places your livelihood on the line daily in the system which is totally rigged against you in the worst way.

Jim Lackey writes:

I'll guess the opportunity cost of the lengthy background, due diligence to N^th, and flat out distrust of people, most of whom are benevolent and kind, would be something like the a 1,000,000% drift stocks give us per century. I'll flat out call it that being a skeptical, safe person is costly.

If it is too good to be true, it is, and we are not idiots. We all have some street smarts here. A well oiled con? I'll fall for it every time and I usually get the joke. To hell with them. To catch a thief one must be one or a good officer of the law.

David Hillman writes:

Some of the answers we know.

1] always get it in writing, 2] pigs get fat, hogs get slaughtered, 3] know thyself and resist your weaknesses, 4] invest in what you KNOW, 5] there's some business we just don't write, 6] most of us will make more money investing one's self than in someone else, 7] in the Shakespearian spirit…."neither a borrower or lender be", gifts are OK, but don't expect a return, 8] give at the office, 9] don't invest what you aren't willing to lose, 10] don't buy meat off the back of a truck, and 11] never buy anything with "Magic" in the name.

I have almost always found it best to be the "initiator" of an investment, an idea, etc. than to be "initiated upon". Also, when one is in the mud, it's usually better to hint at legal action, then settle rather than sue (The con often has the same legal and opportunity cost as you, at least the same amount of risk of losing and possibly more dire consequences.)

Even if one is optimistic and has faith in humanity, something I share with Lack and the chair, one of the best ways to avoid cons, scams, etc. is just to say "No, thank you" and go on about one's business. Except, of course, when the high school girls soccer team shows up at your door step in short uniform shorts and t-shirts, smiles all around, selling $1 candy bars to raise money. You say, "Sorry, ladies, I don't eat candy, but here…..", then you give them $20 and go on about your business.

Jim Lackey replies: 

David,

First never let little ones have a coke out of kitchen or touch your computer. One of mine must have spilled soda in my key board.

Next I must differentiate a scam from a good con. A scam, as in Fla scams or any mumbo we see on buy it now sites, well, burn me once and the 2nd time I am a fool and we get that joke.

A well oiled Con, do not even try. Do not worry about it. These are men of genius and spend their lives dedicated to stealing. Cops are so silly. It takes the after the fact to catch most cons. Only a genius officer of the law with 100 years experience will catch these guys in the act.

If you ever read or see some of the cons these men come up with… yeah, I guess it's easy to see after the fact, yet I am amazed at the work, the genius the art and science, James Bond movie types.

They seem to prey on our weakness of love and benevolence. Give that up and ………….. well just don't.

I can see why a Mr or others are concerned. We try to warm family for their future. I guess that is what lawyers and trusts are for, to protect the pot.

Trying to prevent the next con is to me like attempting to predict the next tech innovation. We all saw the music deal and the Ipod, but we dissed or didn't get the Iphone's change of the world and laughed at a zillion Ipads later. Now my friends are trying to buy aapl on a pullback at 500. Umm it was 15 or 30 or 50 many baggers ago. Move along.

Anatoly Veltman writes: 

Jim, yours is very good advice on relationships. My grandpa taught me exactly that. But when it comes to today's electronic financial markets, there are a number of caveats. And since you brought up drift again, let me try this: what if today's world heads have no interest in perpetuating the traditional drift? What if we're moving toward a reset, after which today's investors will not regain purchasing power in a generation or so? What statistics can you rely on, if the US has not conducted ZERP in many preceding decades? Nor has it ever experienced the current rate of deficit growth.

Gary Rogan writes: 

To know about a large financial conspiracy for sure you either have to be present during its planning or see overwhelming and pervasive accounting irregularities. How can one ever be confident that some group has conspired for some wide-spread reset? Whose evidence can you trust? If any particular highly-placed person is saying "yes" or "no", or if someone is writing that it should be clear based on this or that, how can you be sure that any of this is a result of a conspiracy and not otherwise-originated processes or actions? 

Anatoly Veltman clarifies: 

 I'm not saying there is conspiracy already in place as defined. There are certainly unusual goings-on:

1. The Fed has never entered the long-term market to this extent before.
2. The banks have never had access to zero-cost funds for this long before.
3. The employment data has never been groomed in particular fashion for this long before.
4. The US deficit has never been in this shape before.
5. The European experiment has not been really tested yet.

There will come a point, when only unprecedented last-moment multi-national "co-operation" will save the humanity. Figure out in which way, and you are golden.

Richard Owen adds: 

I was recently thinking about just this topic and was considering penning something along the lines of "Conspiracy and the Scientific Method" — even if just to try and settle what I think.

My sequence of thoughts about the helicrash in London had made me think of the essays by actuaries about 9/11. How your correct statistical assumption for 9/11 upon first impact was a terror event. One of Goldman prop's guys in London protected his book with Eurodollar to good profit.

Like all complex topics, it is complex. On the one hand, conspiracy or, more often, functionally equivalent structures, are very important in business. On the other hand, I think for the most part "there is no they".

To precis one thought: I think Lance is a good case study: it wasn't an 'illuminati conspiracy': he was widely known to be doping in the right circles. A public charade was maintained by many parties involved. The message was packaged and diluted appropriately for the media. That sort of "widening circles" structure is what differentiates it from the nutty "illuminati" type conspiracy concept.

For a very interesting case study, see Richard Heckmann and China Water. If Heckmann can be taken for a fraud, after huge ground work to avoid so being, so can all of us lesser mortals.

Gary Rogan comments: 

To quote Victor, "Market is pricing in inflation of 1 or 2% a year for the next 10 or 30 years. Yet every repub and every free market person predicts a catastrophic rise in inflation and interest rates. Who knows better?"

I can't agree that all will end well, but my theory of the market is that it doesn't really price what it has no idea about, so they just haven't figured it out. Under such circumstances, for anyone in particular, other than the guys planning it (paging Dr. Palindrome) plus some Free Masons and the Illuminati, it seems like figuring out how and if the unprecedented last-moment multi-national "co-operation" will save the humanity is too computationally intensive.

Jim Lackey writes:

Perhaps Mr. Stefan can overrule me as to when, but one doubts there was ever a time when the elite class wanted to perpetuate anything but the certainty of their own. Unless the rules in the USA go above and beynd the restictions of the EU, China and all, I can't see how anything but good can come out of our future. Less good or not as good as ones past or beliefs is relative. Yet I grew up in the 80s and saw the worst of it all for the good working men. Now we see the recession and depression of finance and perhaps the medical. Let's get the joke no way can the govie medical and finance command such a slice of the economy. It will be shared fairly by free market forces in new buisiness and growth. Construction is back and even oil refineries are being expanded again and never ending job at BP in Whiting IN.

I'll note the huge growth and investment now In Tulsa OK out to Nashville and building plants and things right here in US of A as even the advantage of current energy costs is enough to over come the rise in tax or any other threat. If you do not believe it, the Nordic EU venture boys are in deep buying all they can in Tulsa and kids are running Hass Machines out of their garage as start ups. The innovation is not in Silicon valley and instagram or new social…it's building real for the fracking that may or may not go global.

Tommy Ryan shot me an email back and once I figure out how deep this fracking can go global we shall have better answers to your questions. The DC boys are so far behind the kids. They are busy trying to regulate the white show firms that are already old line banks. From what I can tell, the kids already left for Singapore or some island to trade. I'll never leave the US, but if my kids were not in grade school I'd be Larry's neighbor.

Stefan Jovanovich writes:

There is only one reason to be optimistic about the future of the United States. It is that the country keeps redefining who the 'elites" are. It infuriated Henry Adams that a man with only a technical education could become the 19th century's most popular President. What was even worse was that a jumped up railroad lawyer's son could become the voice of all that Republican hard money. The Zinnistas, who never bother to do any counting, love the idea of the ruling class because that crude parody of Darwin's theory is as wonderfully tautological as the notion that a species' fitness determines its survival. The present Mandarin rule by believers in the pump theory of money spending is truly awful, but it hardly qualifies as a uniquely disastrous deficit ZIRP episode. One can argue that the country's entire history from the 1830s through the Civil War was comparably awful. We are not taught to see it that way because the extravagance, waste and fraud occurred not at the Federal level but among the states, not on Wall Street but among the country banks and state treasuries; but the country's government and official lenders were just as skint as they are now. All of this is now safely forgotten because of the explosion of wealth creation that occurred even in the defeated South in the last third of the 19th century; but no one visiting the U.S. in 1840 or 1850 or 1860 was writing home to tell everyone how marvelous it was. Dicken's sour descriptions were accurate, and Tocqueville's rosy forecasts were already an anachronism by the time they were published. No one was predicting that the Democrats' spoils system would do anything but continue. Yet within 2 decades the dollar had become an international currency and the marvels on display at Philadelphia were putting the Crystal Palace show to shame. We shall simply have to wait and see; the only certainty is that the Times (assuming they can get Mr. Slim to give them the money to survive) will be against whatever the future brings.

Gary Rogan adds:

This is an interesting case of a hoax that refused to die even when exposed, it's illustrative of how no amount of denial will destroy a hoax that is sufficiently implanted prior to the denial.

The Indian rope trick is stage magic said to have been performed in and around India during the 19th century. Sometimes described as "the world’s greatest illusion", it reputedly involved a magician, a length of rope, and one or more boy assistants.

The trick, considered by western magicians as a hoax, was perpetrated in 1890 by John Elbert Wilkie of the Chicago Tribune newspaper. There are no known references to the trick predating 1890, and later stage magic performances of the trick were inspired by Wilkie's account.

 

Jan

24

If cheapskating is going to increase, we might consider whether individual stocks that cater to cheap skates might have inordinate returns. This is the kind of things that my kids might make money with in terms of the category of stock, rather than its financial characteristics. Perhaps. On another front, I believe it is important to be especially cheap after having a good year. I think of Rimm every day with grave loathsomeness.

Art Cooper writes:

It's been a market theme for quite some time to buy stocks like Family Dollar Stores, Dollar General, etc. instead of retail stocks which cater to the middle class. The high-end retail market is a different market, as it responds to different forces. 

Jeff Watson writes:

I'm always accused of being a cheap person and try to not be penny wise and pound foolish. I never pay retail for anything and try to buy only stuff that will hold value. Herb Cohen is a person I look up to. He might look a little seedy, but he makes great sense and teaches sound methods of bargaining. His first $19.95 book I ever bought was probably the best investment I ever made, saving at least a million bucks, by bargaining with some of his techniques over a 30 year period. That's a hell of a return and his techniques work…

Pitt T. Maner III writes: 

Cheapskating is likely to be an increasingly popular topic as hidden inflation and taxes go up. Perhaps there is an opportunity for a "Global Skinflint"!

"Jeff Yeager, dubbed "The Ultimate Cheapskate" by Matt Lauer on NBC's Today show, is a very cheap guy. He re-cants, as opposed to decants, the wine he proudly serves his dinner guests, funneling cheap box wine into premium-label bottles. He believes you should never spend more than USD 1 per pound on food items. And to save time and energy costs, he soft-boils his morning eggs along with the dirty dishes in the dishwasher."

And then there is the TLC show :

"Be aware of what you're using. Victoria Hunt, who retired from her accounting career at 48 has been tracking her expenses and her income on a spreadsheet since 1989. "Every minute of every day has something to do with how I can make a better decisions financially," she points out."

Rocky Humbert writes: 

Mr. Yeager is either wasting money on his super-heated dishwasher or he's stretching the truth about his eggs. Dishwashers (generally) do not heat the water about 140 degrees. See this article on naturalhandyman. To get the egg white solid, it requires about 180 degrees. Even my Miele doesn't get the water to 180 degrees! This does not compute! (That is, he's making his money selling books. Not cooking eggs.) I would suggest that he should instead put his Pop Tarts and morning sausage on his car engine's manifold. By the time he gets to work, he'll have a well-cooked breakfast. (And he can similarly roast hot dogs on his drive home.)

Dr. Johnson writes: 

Ballyhoo? Like any good Spec, one must test, and test I did, the claim that an egg can be cooked in a dishwasher during a normal wash/dry cycle.

Equipment- Miele G5775.

Note: Perhaps not the ideal brand for testing a cheapskate's assertion.

Eggs= Phil's Fresh Farms Free Range Large 42F wrapped in plastic film.

Max Water Temperature Wash5F Max Air Temperature Dry= 185F

Time to complete cycles= 54 min wash & rinse, Dry 22 min.

Results: Egg removed immediately at end of the cycles= Yolk 134F thick and slightly flowing, settles to 1/4 height, white 151F at shell boundary with firm consistency.

Egg removed after 10 Min.= Yolk 141F thick and settles to 1/2 height, white 141F at shell boundary with firm consistency.

Conclusion: Not Ballyhoo! One important consideration for those cheapskates who want to try this method is that egg shells are semipermeable, therefore unless the taste of detergent combined with a menagerie of old food waste is to your liking, sealing the egg in plastic wrap is advisable (also which at +140 F will transmit unwanted substances).

David Hillman writes: 

Yes, let us commend Dr. Johnson both on his testing and on his using Phil's Farm Fresh Free Range eggs, the chicken egg of preference at Casa DGH…..cage-free, no chemicals, natural whole grain feed, laid in nests, and certified humane!

That said, even though my Bosch heats water to 160F and air dries at what seems to be 1200K if one opens the door during the 'sanitize' cycle and is met by a blast of superheated air, this whole business of cooking eggs in a dishwasher seems a bit impractical.

One, it seems like using a sledgehammer to place a pushpin in a cork board. Two, while the dishwasher here is run every 2-3 days, typically in the evening, eggs are a daily breakfast staple. What to do on 'accumulation' days? Three, counting time to heat water or a pan, it takes about 10 minutes to fry, poach, baste, scramble or soft boil eggs on the range. Why wait 76 minutes? Four, dishwasher cooking uses a heck of a lot of water and electricity v. range top cooking, multitasking notwithstanding.

For those who feel the need to multitask in the kitchen, there are what seem to be more practical alternatives to cooking one's breakfast eggs in the dishwasher, though at $90, this might not be thought of as 'cheapskating' …..

Pitt T. Maner III adds:

A few older links, but possibly of interest to those seeking to find ways to ride the money-saving trend and as a possible example of a company that finds quickly (identifying trends) and uses new inventions from private inventors. Khubani the CEO started with ad in National Enquirer.:

1) From 2010: 'A.J. Khubani, the man behind many “As Seen on TV” gadgets such as the PedEgg foot scraper, is making cheapskate gimmicks a priority at his company Telebrands, one of the nation’s top direct-response TV marketing companies.

More than half of Telebrands’ gadgets, sold online and at 90,000 stores, are now focused on helping shoppers be cheap. Khubani, who has been traveling around the country to meet inventors, is speeding up the number of new products he’s launching to every 30 days from every 60 days. “The mood of the country has changed,” said Khubani. “We’ve had tremendous opportunity with this recession.”'

Since 2007, Telebrands’ revenue has doubled to several hundred million dollars, he said.

Read more.

2) The current lineup of brands.

3) From 2012: "For the first time in our company's 29 year history, TeleBrands had 15 products ranked in a single year including our most recent hits like, Slice-O-Matic, Plaque Blast, Slim Away, OrGreenic and Bake Pops," said TeleBrands' CEO/Founder, AJ Khubani. "Each year, we continue to solidify our spot as the largest and most successful marketer of DRTV products aimed at solving everyday problems and reaching mass audiences at affordable prices. In 2011 alone, we rolled-out 12 products — the most in a single year in our company's history."

Read more.

4) On Khubani from 2011:

"The son of Indian immigrants, Khubani started out at 23, spending a few thousand dollars on an ad inNational Enquirer — a move that led to his first big hit. Since then, he's sold hundreds of millions of "As Seen on TV" products, including AmberVision sunglasses, the PedEgg and Doggy Steps. He has bolstered the careers of ubiquitous TV pitchmen, including the late Billy Mays, who enthusiastically hawked products now found on the shelves of more than 100,000 retailers. Today, Khubani is the leader in the $20 billion direct consumer marketing industry, turning out more "low-tech" products than ever before."

read more.

5) Not all have been appreciative of Khubani's methods:

"But will anyone care about dust mites? Khubani wasn’t achieving much traction among his Telebrands staff with his bed-spray idea, when along came a proposal for an anti-dust-mite pillow, from a colleague Khubani mysteriously describes only as “a business associate.” It’s hardly a new concept—there are several such pillows already marketed to allergy sufferers and asthmatics. But so far, nobody has had the brilliance to incite a national panic around flesh-eating creatures that feast on human remains—and lurk in the pillow of every man, woman, and child. “The hum you sometimes hear at night?” Khubani asks eerily. “That’s the sound of 2 million dust mites eating your dead skin.” Or perhaps it’s the sound of one man in Fairfield, New Jersey, homing in on your next anxiety. "

Read more. 

Victor Niederhoffer adds: 

Of course the main virtue about cheapskating is that it prepares you for such activities in your business. As the oil magnate said, "I am not smart enough to act one way in my personal life and another in my business. My margin is 8%, and if I gave away 8% on everything my 200,000 employees would be out of a job. So I make them pay for their telephone calls." Regrettably, the oil magnate was victimized by old man's disease (the same disease as the sage), and he was locked up in England for 20 years, with his retinue preventing him from going back to us for fear that he might change his will, and he was soporifisized by many nubile girls and other attractive women he would meet at museums. 

Funny. More important even then the fine posts with examples and tests of cheapskating is the query I have received from many of the younger hearted on the list. "Where are those museums that the oil magnate frequented?".

Gary Rogan suggests:

I suspect the Getty museum is a good place to start.

Stefan Jovanovich writes:

I hope Gary means the original one in Malibu, the villa whose design Getty himself supervised but never saw. The monstrosity built on top of the landfill by the 405 is absolutely the worst place in LA for the amusements Getty had in mind. If he were alive today and living in SoCal, he would be going to OCMA to appraise the latest generation of lovelies.

Jim Sogi adds:

Eggs can be cooked sous vide at 144 -155 for 20 plus minutes for a wonderfully cooked smooth soft boiled egg with a consistent texture throughout.

Food grade hydrogen peroxide diluted to a 3% solution is an excellent way to sanitize kitchen and utensils and not toxic like chlorine. 

Jan

24

"You could never know when the elephants would come back, but when they did they always traveled the same path" . And the natives (and R. Humbergola) were always waiting for them.

Rocky "Humbergola" Humbert comments: 

Let the record reflect the fact that I have never traded a single share of Apple stock (long or short), however, I told a friend on October 9, 2012 that if I were inclined to trade this elephant, I would have shorted some on the most primitive moving average cross. But I didn't. And so I have nothing to brag about or substantive to say except that I continue to consider AAPL the single most difficult investment possible — a melange of technology, fashion and retail — all of which are well above my pay grade. And I would add that there is compelling (statistical) evidence that a company is biased to underperform the index after a longterm charismatic CEO leaves the helm…market capitalization and valuation not withstanding. As for my belief that the S&P at its current valuation offer a likely return in the very low single digits with a 3-5 year time horizon (which is still better than fed-targeted fixed income right now), I am continuing to sell individual securities but replacing them with S&P calls with single digit volatility as this strategy will ensure that when the ephelumps turn, I will not be left with a steaming pile of dung.

I hear a bunch of people calling tops and looking at the 1962-1982 analogies and so on, but I see very few people who were formerly bullish turning bearish and I see many smart people lagging the index and I've learned that it's better to be right than to be smart and I have demonstrated a utter lack of ability at calling the market in any timeframe relevant to people who sit in front of screens all day; hence I am using the gift of low vix to ensure that when the trend changes it will occur in a way that I will be profitable and wise but only after the fact. One last thing: the SPY historical vol at 30 and 100 days is 13.1 and 12.5. The TLT vol at 30 and 100 days is 12.6 and 13.17. SPY calls at the money cost 10.4% vol; and TLT at the money options cost 12.5%. There is some predictive grist here but the proof and execution are left as an exercise for the reader.

Jan

23

Like a good trading system or profit and loss curve, a champion tennis player (or other great sportsperson), will have maximum allowance for upside, but any downside sees a fast reversion to the mean.

Down 15 -40 on their serve…. ACE ACE, = Deuce… Noticeable by its speed and brutality, they have the means to get back on top or at least equal footing quickly, with any edge that dissipates being quickly regained, or found elsewhere…fast.

Victor Niederhoffer writes: 

Craig's idea about a bull market quickly reversing any losses from tennis results must be tested in the market with numbers. How to define such an ability to bounce back quickly? And is it predictive.

Jan

21

I've watched a fair bit of the Aussie tennis open in week one, and it is amazing to watch the amount of drop shots that are getting played, with the net effect of approximately 30 played and 3 winning points against player 27 in the matches I've watched. Not good odds, some may say.

Is it that players are tired? And going for the easy out, or some 3 dimensional hiccup in the brain, which makes them think that it's a percentage play, with the opponent right down the far end of the court, even if it is rebound ace. Do they just want to mix up their game, knowing they will lose this point but provide unsurety in their opponent for the following points? Or is the RIO trade alive and well, i.e they just can't help themselves to go for the "get out of jail free" shot.

I'm not sure… I wish I knew the answer.

It seems unforced errors is possibly the most major stat to take interest in, along with 1st serve percentage. Winning, doesn't mean a great deal, if one has the same unforced errors, and in this day and age one needs a 70%+ 1st serve in, to give them some space.

If one doesn't following their trading plan suitably and manage risk appropriately, then winning a slam becomes a distant thought.

Victor Niederhoffer writes: 

The same thing about the drop shot being non-percentage could be said about the lob. Both become even more non-percentage as the game wears on. It's almost as bad as trying to take a few ticks out of them near the close of a market. The mouse with one hole is quickly taken. The one thing that could be said is that the weak players don't have coaches who count. And the hard surface makes drop shots even less effective than usual. But of course, it does tire the opponent out, and set him up for when you need a point. And of course it is like the penguins jumping into the whale first in social learning, as the one shot that you hit with non-percentage makes the vast majority of your " colleagues" , the subsequent shots, that much more effective.

Jim Lackey writes: 

One that knows nothing about racquets, sees something similar in dirt bikes. We take the extreme inside line in a tight corner vs. the outside berm rim shot, it's much faster. It's about the line or exit of the corner. If you dive bomb on the inside you can cut off the exit of your opponent. This forces him to either take an inside line or a tighter line on the outside, thus slowing him down.

The wear out your opponent is a funny thing. Everyone that does count knows every single move and limit of the other riders… If towards the end of a race I know a guy gets "arm pump", which is literally your forearms swell up and it's hard to hand on the bikes, we use or force those boys to inside. One needs to stand on the brakes very hard to take the inside line. When you have arm pump it's very difficult to let go of throttle and put a couple fingers on the front brake to slam on. I'll put it another way… like tennis looks, it seems much easier to stand back in one box and hit it as hard as you can when you're exhausted vs. running around and using your touch. Same with MX. It's so much easier to stand on the gas and take the outside and go as fast as you can vs modulate.

I am doing BMX now here, it's a short 400 meter spring and to pedal. It's similar but a different training sport, but the counting goes on. I made a comment off the cuff to a 14 year old expert about changing a gear ratio 0.1-T or we use decimal gearing since it's single speed bikes. IT pinch ratio you can have the same gear ratio in a chart book. IE 41-18 X 24" circumference tire. At the big races towards end of day I would lose power. So I'd go down to a 40.9-t custom gear. It's still a 41T sprocket but the circumference of the gear is small, so it's a lower ration shorter roll out IE I crank revolution 2.277 vs. a 2.72222. t changes it just a tick and its enough to help.

Our friend, an MIT grad and racer, picked up on our questions to why the same gears felt a tick different on other bikes and he'd always say, "it's not same ratio," it's tire diameter or pinch in gear brands. So he invented a new business. Guys ask me if it works and I burst out laughing. I been doing that for 30 years. (Yet dad didn't have CNC machine so we have to mess with combinations IE got from 41-18 to 36-16 but we measured and charted ever, single combination on every race every track every time.)

Bottom line for MX, BMX, or any other sport. I never ran a 4.5 40' and can't run under a 22 minute 5k so I was always stuck in the middle and never a great athlete. The only reason I ever won a national event racing was counting, everything. Yet in baseball or the A pro level of all racing… "everyone does that".

Anatoly Veltman writes: 

Drop shots are akin to those who try to "provide liquidity" against an Elliott Wave impulse (offering against the third wave, or early on against the fifth).

Jeff Watson writes: 

 Just exactly what is an Elliott wave???? Has anyone ever seen one, or do they only exist in hindsight?
 

Jan

21

"Somebody has to remind people that life's pretty wonderful also. I just can't write anything without hope in it." Both men (R and H) always supervised the casting. Rogers spent 4 hours a day giving singing classes. Rogers maintained an open door policy regarding auditions so he could find new young people who will do tomorrow what Merman and Martin do today. No detail escaped their attention. The hem of a costume, or the flower in a vase–nothing was too insignificant to command their interests. A good model to follow.  From The Musical by Richard Kislan.

Jan

20

The book Rational Herds: Economic Models of Social Learning by Christopher Chamley has many stories, models, and algorithms, that are helpful for gaining insight to markets. The stories start with the penguins standing on the edge of the ice, needing to get food but not knowing whether a killer whale or seal is waiting for them underneath. The first penguin to dive in provides much information for all the others. But it's not advantageous for him. The asymmetry between what's in the interest of the individual and the group and the advantages of social learning are readily seen by this example. The solution is for the other penguins to push the unlucky one in. The analogy of running the stops in markets with the first one to do so possibly losing money, but the others all gaining from the information is seen.

Another story is based on yellow cabs being 90% probable in a city. But an accident happening and the observer saying it was a red cab that caused it. Problem is that the observer's is only right 4/5 of the time. Bayesian analysis shows that after the first observation it's 9/13 that the yellow cab hit him. But after two reports the probabilities drop to around 48. The rate of convergence to red versus yellow follows a definite process which leads to all sorts of implications for cascading, herding, randomness, and social learning. Many examples of investment decisions based on following the leader and false decisions making from random events are given.

One wishes that the author would have followed some of the stories that motivated the book and shown how all the formulas would work for the simple examples above. The book is intended mainly for economics, social psychologists, finance people, and statisticians. But it's also relevant for anyone interested in how information travels. It's not easy reading and requires pencil and paper and working out a few examples to get much benefit from it.

I alternated reading it with modern times, and books on plants in my recent visit to Chicago. Glad to be back with you.

Jim Sogi writes: 

Sitting in LA traffic a few days ago got me thinking about individuals in a group. Ants probably think they are pursuing their own individual interests to be fed, to be safe, to have friends. But looking down on them from above shows a different picture. Each car in traffic has their own individual desire and plan but looking down at traffic patterns shows a different picture. Each investor or speculator has their own reason to buy or sell, for ex, personal reasons, business, family, taxes. But looking at the aggregate shows a different picture.

Gary Rogan writes: 

Worker ants can't reproduce and cant think. Their only genetic purpose is to help the colony survive so that the queen propagates her genes by producing a relatively small number of fertile descendents. Human beings can think and reproduce, thus even genetically they have a very different purposes, closer to the ant queen but with thinking abilities. Their natural goals are not those of the collective. 

Leo Jia comments:

I've come to think that perhaps no human can step out of the herd no matter how hard he or she tries. While there are many who realize the disadvantages of herding in a modern society and try to break free, they nevertheless follow another herd, trying to break away from the traditional ones.

I was thinking about this the other day. We understand how cells serve the functioning of our lives. They are alive themselves but work selflessly in ways defined for them to serve the body and mind. Can they be said to be herding?

Are we here to serve some upper life like ants serve the colony? That is a hard question, but if it were true, perhaps herding would be not only inevitable but also necessary. It would ensure we live by the rules, which are the only basis for our lives. By that logic, being selfish would only serve ourselves negatively.

Jan

17

The bond market is pricing in inflation of 1 or 2% a year for the next 10 or 30 years. Yet every repub and every free market person predicts a catastrophic rise in inflation and interest rates. Who knows better? Paul Derose, Bill Gross, and Zachar and the thousands that at the margin adjust prices every day based on the expected future events, and their desire and past ability to make a profit, or the free market groups. What a waste of energy it is to concentrate on this red herring rather than the slavery.

John de Regt comments:

The way I see it, either this massive govt intervention is the new new, or supply and demand will kick in, and interest rates will go up. All the western governments have discovered the magic elixir of QE, and either it will end, or it won't…

Jan

17

The bond market is pricing in inflation of 1 or 2% a year for the next 10 or 30 years. Yet every repub and every free market person predicts a catastrophic rise in inflation and interest rates. Who knows better? Paul Derose, Bill Gross, and Zachar and the thousands that at the margin adjust prices every day based on the expected future events, and their desire and past ability to make a profit, or the free market groups. What a waste of energy it is to concentrate on this red herring rather than the slavery.

John de Regt comments:

The way I see it, either this massive govt intervention is the new new, or supply and demand will kick in, and interest rates will go up. All the western governments have discovered the magic elixir of QE, and either it will end, or it won't…

Jan

16

What have we here. Like an opponent who keeps hitting it to your weak spot over and over again, and beating you, and refusing to give up on a winning day, for the ninth day in a row the market is within a few points close to close for 12 of the last 13 days. And the only day it was up big, it closed just 3 points above the open on 1/10/2013. And we haven't had a decline of more than 3 points since weak longs were wasted out on 12/28/2010. You have to give the mistress credit. One notes that even a 3% decline in the Nikkei yesterday was not enough to overcome the resilience, the indomitable upswing from 1384 to 1457 in 12 trading days of the S&P. What else do we have here. One notes that there has been a run of 12 days without a decline (of a 1/4 of a % or greater than 1/4%). And its only happened like that for 12 days without sustenance for the bears just on 5 occasions since 2007. The expected moves after such hiatuses are neutral to positive for the next 8 days. There was just one occasion where the market went for 21 days without a decline of at least 1/3%. That was followed by a big decline of 1%. Hats off and hold all tickets.

Jan

15

What a field day for robots, market makers, and petty traders. The last 7 days, it was impossible to make a profit by going for a few points from the open. Indeed, the average open to close move has to be about the lowest in years. The market makers love this of course because they can bid a little below and sell a little above and always make a profit. And anyone who tries to sell from fear or buy from greed has to lose by the end of the day. Also, day traders who want to eke out a reasonable profit. It reminds one of the change in speciation when all the nitches in a environment are filled. Nothing will change and the rate of change will be gradual until a major change in the environment is filled. The grains seem to be outside of their nitch as they are unstable. And the nikkei continues to rise relentlessly after 100 years of decline. As does the dollar appear to be unstable in a declining state also. But all things considered it shows the fallacy of the punctilliated equilibrium, egalitarian communitarianism of the Goulds and their fellow travelers by giving an example of how gradualism can continue for ages without a change in the environment and nitches filled. I realize that the only thing I've left out is flexionism and the idea that has the world in its grip. It's that also, but I can't put my finger on it now as the market might have a big move, while I figure it out.

Jan

15

Wonderin, from anonymous

January 15, 2013 | 1 Comment

If the actions speak louder than words and all the rest is talk, Japan has made clear they are buying up to $500 billion in US bonds and notes in short order to add to the $1t they already have. That's good enough for me to believe US debt cap record of 16 for 16 will stay unblemished. At least someone still loves our flawed hero, aka the dollar.

It could all be set to refrain of What's the Use of Wonderin' from Carousel

What's the use of wond'ring

If he's good or if he's bad

Or if you like the way he wears his cap

Oh, what's the use of wond'ring

Is he's good or if he's bad

He's your dollar and you love him

That's all there is to that

Common sense may tell you

That the ending will be sad,

And now's the time to break and run away.

But what's the use of wond'ring

If the ending will be sad?

He's your dollar and you love him,

There's nothing more to say.

Victor Niederhoffer adds:

If all free market people would get off the hobby horse of saying we're going to have hyperinflation and that we have to do someting different and this is the key to their program, and their worries, and concentrate on incentives, and cronyism, and entitlements, and class warfare, and on the growing class of non-productive slaves to the higher powers, the non-American way and how great it would be if people were left free to choose and rise, and the hatred arising from the drones, the world would be a much better place, and their efforts would not be so fruitless and dysfunctional.
 

Jan

14

One concept common in turf handicapping is the speed rating. It's not so much whether the horse wins the race, but what its fastest time was for a given quarter or some such. One wonders what the ideal predictive speed ratings for markets are. If we come up with the answers, we may be able to contribute to the ecology of the system and possibly prevent our losses from being as great as the public.

Gary Rogan asks: 

At first glance, I'm wondering is the history of speed ratings for any markets likely to be as predictive of the future as it is at the track?

Russ Sears writes: 

When someone is starting training for distance running, it is important to understand the maximum heart rate. Then training is geared around this number. The pace you should run to achieve different objectives is a range of percentage of this number. For example a speed workout, you might want to hit 90-95% of this rate. For a recovery run, maybe 60%. As you learn the pace to achieve these objectives you can stop measuring your heart rate and then go off feel.

However, as you get fitter, it becomes more about the recovery time to a base rate. The time it takes for your heart to get close to pre-workout rate will get shorter as your fitness increases. Then as this get shorter, you can increase the pace or shorten the recovery time between faster intervals.

It would be interesting to carry this over to individual stocks with volatility analogous to heart rate. Shocks such as earning numbers analogous to workouts. I hypothesis "fit" companies are ready to take more risk and have higher expected earnings. Whereas those whose long vols are increasing may be more likely to fall apart if they take more risk.

Anatoly Veltman writes: 

I think that Chair is often faced with an exit problem. Statistics prompt justifiable entry– but then one is prone to take profit too quick, or not be sure what to do about a loser, which only looks statistically better and better the more it's losing.

Therein lies the huge difference between binary outcome in most sports/games, and the investment field. I recall one Palindrome saying: "it's not whether you've picked a loser or a winner; it's more important how much you have ON when you're having a real winner".

An avid observer of track and field legends since watching my first Mexico Olympics live on Soviet TV in 1968 (the black power pedestal protest contributed to airing of that broadcast!), I always attempted to grade medal performance against the world records. I can name dozens of great Olympians, who peaked out during certain Games (sometimes 4 years apart, and even 8 years apart!) — and never held a world record in their event; and vise versa…phenomenal record holders, who've failed to taste Olympic success. But most of them did achieve both — which, again, makes statistical sense.

Alston Mabry adds:

A core "speed rating" question is around the effect of news events such as earnings surprises. The nature of earnings surprises has changed over time, as companies have learned to manage earnings more precisely: "Rich Bernstein Explains Why Missing Earnings Estimates These Days Is Such A Disaster". And then there is an assumption that market efficiency means any true surprise will be reflected in the market within minutes. But is this true?

Jan

14

I recently received a letter from an auctioneer stating that "I can see the screen if people are going to bid on the internet. We can see if they have the mouse over the bid button and are thinking about bidding. Like your trading robots, this is quite sophisticated these days for what you can do and see online, bidding from both sides".

Wow. If this is true on auctions that have a volume of 1 million tops, imagine the incentive and effort that could be put into seeing what the latent trades are in our field. I notice often in the bonds when I put my finger on a key, there is a move against me before I have put it down. But I have attributed it more to my paranoia about being front run by robots in the past rather than the type of cheating that apparently was routine in computerized poker games where the adversary was able to see your hand, "merely as a check on the level playing field".

It is hard enough to stay losing at a sustainable pace to the flexions who get info from the circular offices and the marbled steps of the hill, but one has a inimical aversion to having the robots take one to cleaners also. In Waitskin's book he describes how in his wrestling matches he and his Taiwanese opponent would react to each others thoughts and not movements, and I often wonder whether words or extraneous thoughts could have a negative influence on the rate of loss that one is entitled to have in trading. That's why I ban them in office.

Anonymous writes: 

Any trading interface that has the user queue up a trade, say in a popup window like — does, could easily send that fact up the line. The value of such data is obvious.

Jeff Watson writes: 

See, nothing changes. Back in the pit days, when the broker would look at his paper order, I would look at his eyes to see the direction they went which would indicate whether he was buying or selling. If he was buying and I wanted to sell at a little higher price, I might bid against him hoping for him to increase his bid so I could squeeze out an extra quarter cent. I also learned the skill of reading through paper, which was profitable. Detecting mouse moves, or detecting eye movement, it's all the same thing, the inside players always have an edge over everyone else, but as one might say, plus ça change, plus c'est la même chose.

Anatoly Veltman writes:

It reminds me of the good ol' days in the COMEX silver pit, where with the market down 5-10% on the session and the leverage of 30:1, a commission house runner would approach the crowded pit with a stack of tickets near the close. Like any smart local, salivating, I would chuckle "they ain't buy orders to be done…". As a matter of fact, the most famous story of all had a Merrill broker buried with paper yelling "at even!", and the local grabbing him by the collar gasping "what even??", and the broker spitting out "any even you want!!!"

The better approach yet took hold by the early January 1980, when Hunt Brothers and their followers went one way only, day after day: buy, buy, buy. Smart traders hired additional temp arb-clerks, whose only assignment for the day was to monitor the movements well off the trading pit: namely, at the WTC garage! As the floor broker, known to execute for Hunts, was about to roll into his parking spot at the exchange, the news of such a "silver moment" would be relayed upstairs and make waves around the world!

Jan

13

The public has no right to lose as much as they do. It's the system not the public. Antoni losing 6 in a row at LA as he tries to get the Lakers to play speed ball with 100 year old players. The public following a system of buying the crosses in the moving averages or seasonality in the market as they get front run or trying to take out 1/2 a point in stocks in an hour when the high frequency boys are ahead of them in a hundred ways and can afford to lose infinite amounts with their interest free loans from the partners in high places.

Luck is a big factor in results. The skill stays constant (except for the other team keying in on it) but the results are random. The Knicks were guaranteed to lose 10 in a row after Smith, one of the worst eyes in the league won 2 games with non-percentage threes and became their go to man. After a run of success in performance, do expect the subsequent performance not only to revert back to the mean but to go below as the other team plays harder. After a streak of wins in a row, a team is likely to start losing. The Knicks won their first 10 home games, and then lost 3 in a row as they got over confident and got off to down 25 points in the first half in a few games because they weren't hungry enough. After 6 up days in a row in spu's the expectation is for -0.5% the next day.

A team that relies on one player to make it for all is likely to lose. Melo made 30 points 5 or 6 games in a row and the Knicks were able to pull off some lucky wins as a consequence. But as Deng said, "Melo's one of the toughest scorers in the NBA. The shots that he makes are the shots that you want the other team to take but those are shots he makes … Carmelo is the ultimate scorer" the coach Thibodeau said. Note how they encourage the opposing team to continue in their guaranteed to losing ways. The market always leaves enough on the table for the public to lose more, and encourages them to keep in the game until the huge killing day when it gets them all out like the day before Christmas in stocks when it's ready to turn.

It's not the trades its the system. Antoni making his team lose wherever he goes as he tries to force the system on his players and smiles complacently on the sidelines as if it's his players fault rather than his. The market player trying to take out a 1/2 point in 30 minutes because they have to go to work or take care of the business or kid, with a real vig of some 50%.

A one horse team is likely to lose as Kobe and Anthony show. If all markets are going down and one or two are going up, trouble is in the air. Slow and steady wins the race. The thunder make all their recruits become part of the community and memorial before they play. No night life but respect for everyone is their key. They got rid of the bearded high falutin player who wanted too much money for their low media community and have the best record now. The market that goes up with a little volatility is a better reward to risk than the highly volatile high profile one.

Okay. Considering I don't know anything about basketball as my uncle Howie likes to remind me (" you said it "), what should I have said or what biggies have I missed. In my defense the same things are true in racket sports which I do know about and how loathsome it is to see the three worst sports in the game now held in such veneration. Time heals all wounds and in 10 years, I can be expected to receive many "legendary" awards in my field (albeit I was never a bad sport I think).

Anatoly Veltman writes: 

There was a lot in there. But I'm wondering about just one thing: "getting them all out" Xmas…And the reason I'm wondering is that the current actions are "getting them all in"; while the well-forgotten idea was to be getting out on approach to records, once all of the election props go used up. So there goes public again…

"Uncle" Howie Eisenberg writes in: 

Your analogies to the market may be right-on but once again you demonstrate your proclivity for creation of "facts" to support your premises. J.R. Smith's career and 2012/2013 3-point percentage are .368 and .346, respectively. Using the latter, his expected value on a 3-point attempt is .346 X 3 = 1.04 which is equivalent to better than 50% shooting from 2-point range (expected value = 1), a very good percentage. Thus having Smith shoot 3-pointers is not a bad gambit. Of course it would be a lot better for Novak, # 4 in the league in 3 -point percentage to be shooting more of those 3s.

There have been many winning teams that relied on 1 player for the bulk of their offense, e.g., Minneapolis Lakers: Mikan, Phila Warriors:Chamberlain, UCLA: Alcindor. Of course it's best when there are several major options. In the NBA these days, winners usually have 2 superstars. The Lakers have 3, plus Pau Gasol, the acquisition of whom led to the Lakers getting to 3 NBA finals in a row, winning 2. That leads to your point about D'Antoni.

I readily acknowledge that whether it's because of players not getting back for fast breaks off failed 3s as you quoted Felton, or other inadequacies of his coaching, there is no "D" in Antoni despite the correct spelling of his name. You are absolutely correct in noting that D'Antoni is insistent on his teams playing his style no matter what the particular makeup of the team is. Yes, the current Lakers don't fit with the type of running game he espouses. Not only does he not maximize the potential production of each player's talents like Gasol's greatness in the post and superior passing ability, but he insists on using novices with limited ability like Darius Morris because he's fast and leaving 14 year veteran, Jameson, who has a career average of 18+ points a game on the bench. Jim Buss should have listened to your warning when he bypassed the greatest coach or manager who ever lived to save a mere 16 million dollars over 2 years. D'Antoni is the greatest disaster to befall LA since the Northridge earthquake and may even rival LA falling into the sea in Superman I. Christopher Reeves is no longer here to save us and although Jeanie Buss just received a ring from Phil Jackson, unfortunately the Lakers cannot expect a similar gift resultant from Phil's genius. He may be marrying Jim Buss's sister but Jackson is now forever estranged from the Lakers because of Buss's stupidity. Woe is us!

Jan

7

The miserable performance of the text book company in all areas including the nook, and sales of books, and stock price, would seem to raise the question of whether a company that has declining sales might be worse situated to provide customer satisfaction than the companies with increasing sales and profits. Thus a positive feedback loop of sales, profits, and customer satisfaction develops. It would be interesting to look at customer satisfaction as an indicator of future stock performance.

Jeff Watson writes: 

In Florida, there are two main grocers, Publix and Wal-Mart. (Winn Dixie, Whole Foods, and Sweetbay are minor players). Publix charges higher prices, but offers better quality, good variety, better service, quick checkout, better trained employees, an enforced dress code, employees that smile, and bright, cleaner stores. Wal-Mart offers rock bottom pricing, surly employees, poor quality, and long waits at the register.

Here is a chart of Publix's 5 year performance (private yet employee owned).

Here is Wal-Mart's 5 year performance.

Maybe customer satisfaction in the grocery industry isn't reflected in the stock prices, but these are just two samples and Wal-Mart does a lot more than groceries.. My friends at Publix tell me it is an excellent place to work and they regularly receive bonuses every quarter while at Wal-Mart, the full timers are lucky because they might get 32 hours a week. 

Jan

7

One recently waited 15 minutes after making a big purchase at Barnes and Nobles while they held me up because the computer went down and they couldn't take cash, exact payment, credit card. At the end, they sardonically told me that if I had a complaint about the wasted time, effort and treatment, I should talk to their manager. On the other side, I read in John Mackey's new book Conscious Capitalism about how when a hurricane hit a Whole Foods in Conn, the computer broke and a lower level operative without any feedback from headquarters gave everyone in the store free goods for the 1 1/2 hour that the computer was down. They got millions of good will and publicity as an unintended consequence. A study in the book shows that companies that cater to the customer, and employees and suppliers as well as the stockholders have better performance than the average. Panera and The Container Store are examples. I wonder whether this is a real effect and whether these companies will perform better or worse—- and the former will never get my business again and the latter will. What's your experience and view.

Vince Fulco writes:

My wife works in the textile area of Target, I have tried to look at its operations with a jaundiced eye as a financial analyst would. I've always felt welcomed and well treated there without their knowing we were an employee family.

anonymous writes: 

I bumped into a colleague at Costco today who quizzed me about the recent tax changes. Not sure why he thought I would know, but after 5 minutes of listing the various relevant increases I asked, "Do you have time for more of these?" "Not really", he said, adding "You've already depressed me enough". "What are we going to do, raise fees?" he asked.

In the wake of recession we have not raised fees, and in many cases lowered them. It is better to stay busy and build good-will when people need it, and raise later when discretionary demand increases.

Increased taxes ordinarily reduce demand. But for businesses with existing demand, they are inflationary.

Maybe the FED gets what it wants (inflation preferable to deflation), and the agrarian organizers do too.

Rocky Humbert adds:

The chair asks a very important question; and the implications transcend business. With the caveat that I'm rather better at asking difficult questions (than answering them), I'd pose the question this way:

1. To what extent do people and organizations act in their self-interest?

2. If (1) is 100%, then any act of altruism MUST BE motivated by either reciprocal altruism or goodwill. If (1) is less than 100%, then any attempt to answer (1) is hopelessly complicated using a rational/analytical framework. And I won't go there since it's a moral argument.

3. A paradox arises because except for reciprocal altruism (i.e. keeping your counterparty in business so he can buy your goods and continue to service your needs), there is a irrationality that occurs for any action which isn't in one's self interest (for both the seller and the buyer) For example, if the customer is rational and self-interested, then ANY warm and fuzzy feelings towards a vendor are not rational if those warm and fuzzy feelings arise because of a historical and non repeating gesture (giving away goods during a power failure assuming that the goods wouldn't otherwise spoil.) However, in contrast, convenience IS rational and is part of the value proposition. That is, a vendor who doesn't make you wait in line when the cash register breaks has a superior product at the same price for SOME (not all) customers. And ceteris paribus, that should garner more business (for some, not all) customers *IF* he doesn't have to raise prices for a massive fault-tolerant computer system. If he has to raise prices for a massive fault tolerant computer system, then the customer who doesn't care about waiting in line won't shop there anymore. But the lone vendor who tries to gain a lasting competitive advantage by giving away milk and bread during a blackout will fail — since the goodwill generated by this will quickly fade and there's no lasting benefit to the customer.

Every economics question can be solved by recognizing that: 1) Incentives Matter. 2) Resources are limited. And … then it's simply a question of utility curves. BUT BUT BUT if there is a moral aspect to the question, then all of the rational analysis goes out the window. And that is, I think, what Whole Foods was trying to do.

Jeff Watson writes: 

Right before Hurricane Andrew hit South Dade County and went across the state to hit Naples and Collier County, Home Depot was giving away 4×8 sheets of plywood……just had truckload after truckload, bringing it in to offload it to anyone who wanted it for free to board up windows etc.

Their main competitor, Scotty's was gouging, and charging $40 per 4×8 sheets. In the aftermath of the storm, Home Depot kept their prices down while Scotty's jacked them up. Scotty's did the same thing after Hurricane Charley. Much editorial space was spent discussing this in the Miami Herald, El Nuevo Herald, Sun Sentinel etc. Scotty's reputation suffered greatly and eventually went out of business at the end of 2005.

There was lots of bad karma and my builder friends avoided Scotty's like the plague. Scotty's said they closed all their stores because of the hyper-competitive building supplies market…..this was when Florida had the biggest construction upswing in history. Again, real bad karma. Home Depot is still a viable corporation. Because of Scotty's actions(and that of others), Florida passed a non-gouging law in 1993 which Scotty's still ignored in 2004.

Steve Ellison writes:

In Predictably Irrational, Dan Ariely devotes a chapter to "social norms" (the friendly requests people make of one another) vs. "market norms" (you do x, I'll pay you y). People generally see social norms and personal relationships as being on a higher plane than mere market transactions. In one study cited by Professor Ariely, implementing fines for picking up children late at day care centers actually increased the frequency of late pickups. Before the fines, the parents felt bound by social norms and felt guilty for inconveniencing the day care providers if they were late. After the fines were implemented, a late pickup was reduced to a mere market transaction: I want to be late, and I am paying for extra service.

My guess is that companies such as Whole Foods that serve customers beyond the bounds of how customers expect a profit-seeking corporation to behave elevate themselves on the social vs. market scale and thereby gain much customer loyalty.

Russ Sears writes: 

People are cooperative beings, they want to feel they are in a partnership where one looks out for the other. While the individual is the driver of innovation and change, progress is made by the most connected in ideas. Arts, science and technology thrive is these highly cooperative environments such as the big cities. Ideas are one thing that the sum of the parts can become exponentially more.

If the business really is adding value, then they display it by highlighting cooperation with their customers. Because long term the good will makes them more resilient and able to grow.

Whereas if every transaction is a zero sum game, then the signal to the customer and investor is short term thinking. There is a tinge of buyer beware for the customer and an touch of desperation to next quarters results to the investor.

The entrepreneurs I know who are successful only do it because they love the business otherwise the risk the stress and the heartache are not worth the money or the effort.

I believe Jobs showed the world that at some point it is no longer is about the money, it is about making a difference, giving others what they want and of course "beating" your competitors. If you can do these 3 things well it is like having a blank check written by the world.
 

Gary Rogan adds:

Yes, that's another way of looking at the situation. But Jobs is Jobs, and regardless: when confronted with a situation where a person (or an entire business enterprise) who doesn't know you from Adam is particularly accommodating and friendly to you, you have to decide whether (a) that's just how they are (b) they are doing this to get repeat business as a calculated move (c) they are conning you (d) they saw you and really fell in love with you. The thing is, it could be any combination of these or something else. All I'm saying is that a "they are giving stuff away" or some equivalent to "therefore I will make them by business/partner of choice for a long time" isn't always the most rational thing to do. One really should only feel gratitude to people who are doing it for un-selfish reasons while recognizing that a good businessman will often behave "nicely" as opposed to being a jerk.

Clearly almost all expressions of "good will" and cooperative behavior by businesses are self-serving. The rare exceptions are of the nature of some owner or executive clearly touched by the misery of his customers and/or employees and doing something good for them just because. Cooperative, reliable, and resourceful businesses do add value by not wasting their customer's time and money and not aggravating them, so often everybody wins. Sill in many of these situations have to be analyzed carefully because you are typically not dealing with friends or relatives. Otherwise one can become a "victim" of deception, as someone who buys a company's product because its advertising agency made a particularly effective commercial that is often in no way related to the quality of the product. 

Jeff Rollert writes:

I'd like to share a story that happened this weekend.

A number of you know my hobby is racing sailboats. Well, I'm on a number of forums and they have members that range from the grouchy to super nice and helpful.

About six months ago, a fellow I'd never met or spoken to offered to lend me a sail to test an idea I had been struggling with. There was not a request on when to give it back; in fact it was open ended. After dealing day in and day out with the squids of our occupation, the offer seemed too nice. Something worth $200-$500? Just drive over to my house and you can have it. Really? This is Los Angeles!

Well, in a race this weekend we all got to talking about boats we had owned and one of the guys had the same as mine. We started to compare notes, forums, parts suppliers etc.

It turns out he was the guy who made the offer. I was ashamed at how genuine and nice a guy he was, and what I had suspected.

I only bring this up as a probability point…no matter how pissed you can get at humanity, the percentage of genuinely nice folks is always above zero. I'd forgotten that lesson.

You guys often remind me of that lesson too!
 

Jan

7

One of the interesting fallacies that one comes across in markets is the part whole fallacy. If you correlate the whole with a part of the whole + a random number, you come up with amazingly high numbers. For example, the first quarter change in a year or an earnings is correlated about 45% with the whole year change by randomness assuming each quarter has the same variation and there is no correlation between the first quarter and the last 3 quarters. An exact formula is given in Biometry (page 573 on google) by Robert Sokal (no relation to the man framed by his boss). In any case, the relation between Jan and the whole year is mainly a part whole correlation, although it has ceased working in the last 10 years and is in the graveyard except for the oldest seasonarians. However, if the correlation between the first month and the last 11 months is positive, then by a modification of the formula the correlation between the first week and the next 3 weeks must be negative.

Ralph Vince writes: 

Vic,

Doesn't this get to the heart of the matter, that being that good minds get sidetracked into boobey-traps all over the place in our endeavor here?

On a planet where camouflage is the dress code du jour, where predation and it's avoidance often depend on deception, we end up — as cognitive beings, reflexively and relentlessly seeking patterns and relationships — looking for things in prices that ultimately deceive us (or at best, work until they do not, a cruel form of deception, longer-term).

Markets, as man-made constructions, are particularly adept it this. I am again reminded of Nabokov's Lolita, one of the greatest pieces of English literature in this opinion of this amateur critic (second only to his Speak, Memory), as one that most will not consider because it alludes to sex with an adolescent — the common disdain for that, a perverse ruse in itself keeping many from ever enjoying the novel.

In similar fashion, I think one must must must must MUST assume randomness, however unpalatable the idea of trading randomly-generated data may be. In fact, as a strategy, rather, as concern or description of the underlying character of what we are working with, one must craft their strategy under the assumption that randomness belies the data flow, yet, should it go into periods where the data becomes non-random-like, to have that accrue further to our benefit.

It's more difficult to do than it seems at first glance, but, from a personal standpoint, it has been the most beneficial realization in my trading life.

Jan

7

A yield of 3.1 % on the 30 year gov bonds corresponds to what kind of mortgage rate? And what kind of impact on housing?

Michael Cohn writes: 

I am not near terminals, but I would guess that the 30 year rate is set by the marketing department over the appropriate tsy, but every mortgage analysis I see that includes the TBA product uses 2-10 year swaps and treasuries to hedge the production. The option adjusted simulations give mtg durations way far below the stated maturity. Of course this duration extends as rates generally rise–the dreaded Negative convexity….

Victor Niederhoffer adds:

If the 10 year rate is 2% and the 30 year rate is 3.1%, then the average 10 year rate starting in 10 years must be (93 - 20) /20 = 3.6%. Looks like a bust in housing somewhere the far side of the world of 10 years.

Anatoly Veltman comments:

I'm wondering whether this can even be arbitraged away. It's always surprising to me how commodity deliveries are NOT, despite very obvious math, only a month or two, or a year forward.

I'm floored by the chair's ability (or eagerness) to predict any economic development 10 years hence. We've been on unprecedented path ever since ZIRP ensued. Both the political and economic moves should be viewed as completely unpredictable, if not random, that far out.

Richard Owen comments:

Is the perpetual commodities gap down to commercials being a 600lb gorilla? Particularly sovereign-backed commercials? They will smash open a small arb by being price insensitive, thus making the basis too painful to hold as it widens? Or rather, the basis is too uninteresting to hold if you do it in a size that will leave you safe upon arrival of gorillas?

Is the Chair's maths based on a risk-neutral expectation? ie., the current superlong end of the curve is a good estimate of the future long end of the curve? Which often does not work out that way? [I was trying to figure the formula you are using at the end - which one is it?]

Some of the back and forth over past days has had me thinking about science vs. mumbo. Science matters. But if at least one has a grounding in science, does that justify occasional "mumbo"? ie., We can allow the Chair his gut?

Kasparov knew his science cold: his brilliance was knowing when that grounding told him something in his gut, out of his range of proof, and to act upon it: Quoth Gary:

"Oh it [intuiton] does exist! It's the most valuable quality of a human being in my view. […] You have to learn how to trust your intuition. My view is we severely undermine the importance of intuition, because intuition involves taking too much risk. Whether we like it or not we live in a risk averse culture and intuitive decisions very often cannot be explained in the terms that should be required by corporate culture or by other family members. By adding this core of intuition to the decision making process, we can dramatically improve the results."

Or does Taleb apply, and we should all get back into bed, beneath the covers, as anything more impressive achieved during the day is luck?

 

Jan

3

1. All stock timing systems suffer from their inability to get back long after selling.

2. It is impossible to overcome the positive drift of 10% a year with timing systems.

3. Investing in an index fund enables one to capture the drift without being forced out by emotional reasons and news.

4. The moves in just two days, e.g from 1384 to 1458 in two days can be very violent and account for the major portion of profits in a year.

5. The big 27 point decline on 12 24 provided a cathartic unleashing of all weak longs from the market.

6. Any flexions or strong longs who were able to take the opposite side of that trade, i.e. by buying at 1384 would have been well situated especially if their customers were forced to liquidate due to margin or they knew of margin liquidations.

7. There were thousands of articles talking about the big market decline that was inevitable if we fell off the fiscal cliff but hardly a one that talked about the market rise that would occur if we didn't fall off it.

8. The stock market vigilantes forced the politicians to agree on a deal, and at the highest levels that was given as a reason for the necessity of agreeing on a deal.

9. The fixed income market moved to near a 1 year low as the stock market moved to a 1 year high

10. The Mississippi bubble wherein the French Government bought in all its outstanding debt before those of bent posture used their back to allow buying of stocks at the peak seems more analogous to the present situation then the scholarly Chair's studies of what happened during the Depression. What other biggies did I miss.

11. The time to buy stocks is when fear is at the greatest. 

12. The best thing for the investor to read is Dimson, Marsh and Staunton's The Triumph of the Optimists and Fisher and Lorie on returns from buying stocks with different holding periods. But don't be put off by the relatively pessimistic conclusions of the former paper as that is de rigeur for the zeitgeist of Europe.

13. The big up moves both absolute and relative in all other stock markets like Japan and Germany well before the US carried ours along by gravitational force and were predictive. 

Anatoly Veltman writes: 

The Chair's summary is correct indeed and is greatly appreciated. I rush to add that it was the preceding decline of an even greater magnitude than 70 points, that caused the 70 points to be regained in the last two sessions. After all said and done, the stock values will remain roughly the same - as if there was no event on the Hill. And that may qualify as a pointer number 12.

One contention I have is that all of this is not really related to drift. I happen to be edgy not to over-hype the drift as stocks approach record levels. I will not say that any record will stand an eternity; however, I was thinking more positively about the drift, when market was carving out its 2008 and 2009 lows, and C was briefly a penny stock.
 

Jan

2

The difficulty of getting back in once you have sold in stocks is underlined vis a vis the buy and hold strategy, as well as the fate of short selling, as well as timing— by the fast 50 point move in stocks today.

Gary Rogan writes: 

It seems like generally speaking one should either trade, as in being in and out "often" or buy and hold. Buying and holding except for periodically being out or short seems to be what Victor is addressing, and I have always been suspicious of "market timing". All it takes is getting it wrong once, and you are in a hole that's expanding for a long time.

I'm still curious how Victor was so sure there would be a deal.

Anonymous writes: 

What was the effective date of the STOCK Act to ban congressional insider trading, I wonder. As a staffer, one could have slapped the emini around harder the Khan brothers squash ball.

Victor Niederhoffer replies: 

Let us hope that the profits from such activity were sufficient to assuage any such desires for a few days.

Russ Herrold writes:

The dance is a re-run and in prior seasons, the cliff is avoided. Sitcom writers can re-cycle plots endlessly.

Kim Zussman writes: 

It's the binary conundrum of markets:

Buy the rumor / sell the news (or buy the news)
Buy and hold (or sell and sit)
You can't time the market (but some can)
Stocks beat bonds (except for the last decade)
Printing presses lead to disaster (which may not come in our lifetime)

The President of the Old Speculator's Club writes in:

I heard a Congressman speak recently and have to admit it was an enlightening experience. Traditionally, members display a certain amount of restraint when speaking of colleagues with whom they find grievous fault. In a refreshing departure from good manners, this gentleman took the gloves off and bluntly stated that a goodly number of his fellow representatives are less than bright. The word "clown" came up several times and "stupid" might have been slipped in.

Although he artfully avoided specifying individuals or party, I couldn't help but believe that he, like many in the "beltway", had come to the same conclusion: the arrival of the Tea Party contingent has been nothing short of a national disaster.

Unsurprisingly, the congressman's public and scathing view is shared by the current establishment elite. (It's dangerous to out there and speak your mind if what you say is out of step with the conventional wisdom.) His case is provided with added cover by a host of recently published and similarly themed books ("It's Even Worse Than It Looks", Mann, "Do Not Ask What Good We Do", Draper, "Beyond Outrage", Reich, and "The Party is Over", Lofgren).

However, the "fiscal cliff" isn't a maiden making her debut. We've had two relatively recent encounters with her; so her charms, though formidable, are familiar. Her appearances in '91 and '95 were just as awesome and, as expected, so compelling that one of the parties bit into the proffered apple. Unfortunately, the fruit, which is bitter and often fatal, is the produce of the tree of Folly. On this most recent visit, though, she is confronted by a group so naive and simple that her blandishments have gone unrequited.

In any event, it's apparent that the respect (whether real or faked) House members used to show each other, at least in public, has been thrown over for a newer, more aggressive, in-your-face approach. Long gone are the clever and informed debates which provided a rich mix of facts, history, and truth. It seems important to figure out why this has developed and if, in fact, a functioning government is still possible.

If one studies what the House has been in the past and what it has evolved into, it's impossible to overlook that this body has lost, or given up, much of it's power and authority. The growth of the executive branch (the Imperial Presidency) is one factor. Back in '96 the congress and the president worked long and hard to create the first welfare reform package. Contrary to forecast of terrible consequences, the new programs worked well.

Yet, in one day, an Executive Order by the current president re-established the old, failed programs. Another assumed power has been the declaration of war, and the most recent threat: unilaterally raising the ceiling on the debt.

While the Executive Order has been increasingly utilized to usurp powers constitutionally granted to the House (and Senate), the greatest loss of power has been though Congress' voluntary abandonment of authority to "regulatory agencies."

Figuring that some issues were just to tough, complex, or time consuming, the country has had foisted upon itself the EPA, FDA, TSA, USDA (with 20 sub-agencies within it), the Dept.of Commerce (with 17 sub-agencies), Dept. of Defense (with 32 sub-agencies) and the list goes on and on. Each agency is staffed by unelected individuals, many with their own agendas, who dictate new regulations that possess the force of law. It's understandable that so much work has to be delegated, but to give it to agencies that are unanswerable to the body that created them is inexcusable.

Then, of course, there is "party discipline." Sam Rayburn of Texas, Speaker of the House for many, many years, gave each incoming freshman representative of his party one piece of advice: "If you want to get along, go along." And they did. Those that didn't faced many difficulties: in committee assignments, in getting their legislation to the floor, in receiving party re-election funds, and they'd be high on the list of targets should redistricting become an issue.

Unfortunately, this approach worked, and worked well. As a result, many constituents found that the views they wished their representatives to promote in D.C., took a back seat to the views favored by the party leaders - many of them from different parts of the country with substantially different interests and goals. The "house of the people" became a house held hostage. Matters reached a new low in representative government when the other party adopted the same process.

Then 2080 rolled around and enough citizens, aggravated at the apparent unresponsiveness of their representatives, threw them out and ushered in the Tea Party. A delicate balance has been disturbed and the Dysfunctional Couple, used to newcomers adjusting to them, failed to realize that these clowns - these yahoos, actually believed in what they'd declared. Whether they win or lose, prevail or fail, their chances for another re-election are small. But for a brief period they have served as reminders that doing the people's business is serious business and that a promise made is a debt unpaid.

For a brief period this collection of vagabonds has added a dose of virility to a confederacy of eunuchs.

As to the President's actions in the recent negotiations, he did nothing, offered nothing…he arrogantly summoned everyone back to D.C. Most came back assuming he had a proposition - he didn't - even CNBC's John Harwood was a little taken aback at the presumptuous gesture. Some time back I suggested I was all for giving this guy everything he asked for - and then letting him perform as he has suggested he would. He has received almost everything; now it's time to lead. This from a guy who, in his short term in the Illinois senate, voted "present" on over half the bills that went through. He is structurally averse to taking a position - preferring, instead, to demonize his opponents.

So, first time at bat, he (and his faithful followers), are hand-wringing over what roadblocks the GOP will/might place before a debt ceiling deadline is reached. It's time he quit talking and started doing.
 

Dec

30

It is well known here that where two fields intersect, great advances are made from study and reflection. The Knicks beat Phoenix on Thursay Dec 27 by 1 with a wild shot from Smith at the buzzer and lost by 1 to Sacramento on a three at the buzzer the next day. "Karma comes around" said Smith who is a lunatic guaranteed to make the team lose as his eye is one of the worst in the league and he's become the Knicks go to player. "That's the toughest way to lose" Novak said. "you'd rather lose by 40 than to lose on a game winner at the buzzer".

How many times has "ever changing cycles" as Bacon and we call it caused the end of one day to be exactly the opposite of the end of the previous day. (Novak's game winner was a 1 in a thousand shot as he was off balance and almost out of bounds with 0.2 seconds left as was Johnson's 3 pointer who hadn't scored a 3 pointer in the whole season and was 0 in 13 on previous 3 point attempts). In the Phoenix game, Knicks were down by 28 points. They went ahead by 5 and wound up losing by 1. The previous day, Dec 27 in the market, the spu's were down by 17 at 1400 gmt, rallied to up 5 on the day at 1530 gmt and closed down 3 at the close at 1615.

Okay, I say the market moves on Dec 27 and the scoring moves in the Sacramento game on Dec 28 are much too close in swing moves to be just chance. Had the Knicks won, it would have been their greatest comeback in a 2000 + game history. Had the market ended up on Thur, it would have been one of the greatest comeback in history. And the swing from down a lot to up on day to down a little at the end must also have been a 1 in 1000 shot for basketball and a 1 in 250 for the market. The ever changing cycles of a loss by 1 and a win by 1 at the buzzer in a game of 60 jumps of a few points either way with the outcome hinging on a non-percentage outcome by the losing side must also be highly unlikely by chance. I say that the market follows sport and sport follows the market. And the highly non-random outcomes in both spring from common weaknesses in human nature, as most meaningfully limned by Bacon and the people on this list.

Dec

30

Does anyone believe there is a contagion in things like mass shootings, and pushing people onto the tracks in subways, and that it has to do with the Qe's, the tarps, and the singling out of the successful for "takings" by the remaining 99%? I do.

Jeff Watson writes: 

It's just a permutation of the old "madness of crowds" meme.

David Lilienfeld writes: 

There are a few papers published in the New England Journal of Medicine and some other venues over the course of the last decade that illustrate social contagion for behaviors such as obesity, smoking, and so on. I don't know that there's been any efforts, though, for less frequent behaviors.

Dec

28

The market went to great lengths and excursions Thursday to tease out 1.5 million of eminis. 100 billion of trades. Up to 18 down to 96 then up to 18. 44 points of total move. Hats off. 

Alex Castaldo adds:

I believe they call it "giving them a full tour of the court".

Dec

26

This report "Trading With SVMs: Performance" sounds very interesting. The result on trading the S&P500 (without leverage, I think) since 1952 is 32.59% of annualized return while during the same period Buy&Hold is only 15.14%.

Here is Wikipedia's article on SVMs.

I wonder if anyone has used SVMs in real trading. Could you kindly share any experience about it?

Victor Niederhoffer writes: 

One of my very rare strengths counterbalanced by many much more glaring weaknesses is that I can usually look at any paper in statistical finance and find its weaknesses in 30 seconds or less. I looked at support vector machines in that context and could not figure out why it should do better than discriminant analysis or similarity analysis. I was turned off by the statement that armi garch results using the last 5 changes gave similar alluring results, as I don't believe they will work unless they are retrofitted during particular periods. The non-linear features that SVM tries to capture would not be predictable or repeatable I would think nor would it in any case be immune to ever changing cycles. I will look at this much more carefully with the doc before I can render a totally worthless opinion on this. 

Dec

26

Where the interests of signaler and signal receiver diverge, there exist both incentives and opportunity for manipulation by sending misleading information. Deception is the major obstacle to information sharing. And the living world is rife with deception. From the lure that an anglerfish uses to attract prey, to the false alarm that a flycatcher raises to dissuade competitors, from bluegill sunfish males that sneak matings by masquerading as females, to the mimic octopus that can imitate a wide range of poisonous creatures and other underwater objects, from the false mating signals of carnivorous fireflies, to the shame regenerated claw of a fiddler crab, from the chemical mimicry that caterpillars use to invade the nest chamber of ants, to the bluffing threats of a molting stomatopod, organisms deceive one another in every imaginable way in order to attain every conceivable advantage ".

From Carl Bergstrom's Dealing with Deception in Biology

What is needed is a model and practical means for dealing with deception in markets.

Gary Rogan writes: 

Perhaps whats needed first is classifying the different classes of market deception. At the very least there are two very distinct classes: deliberate and evolved. "Deliberate" comes in many flavors, like "flexionic"/insider where some privileged few act on advance information as in the recent "fiscal cliff" related flash crash or "accounting fraud" when a company (or a government agency) puts out deliberately distorted information. It seems like various market patterns that evolve/appear for some internal and often not clearly understood reasons are often not related or only peripherally related to the deliberate types, but still act to draw in the unsuspecting/unduly exposed and provide an energy source to the markets as opposed to benefiting some specific perpetrators.

a commenter writes: 

Good idea, Mr. Rogan. Other categories might be subdivided:

1) company specific deception which affects only a company stock price (HLF)

2) macro-economic deception which affects entire indices (fiscal cliff).

So, in order to beat deception, it is critical for one to fully understand the mentality of the targets (oneself at times when one is the primary target) as well as that of the deceiver.

When we come to model deceptions in markets, modeling the mentality of the crowds is perhaps much less of a challenge than objectively modeling the subjective nature of one's own mentality.

Alston Mabry writes: 

The biggest deception is self-deception: We are much more likely to believe a lie that we *want* to be true. Make a promise, charge a fee. The bigger the promise, the bigger the fee.

Self-deception can apply powerfully to things like chart patterns, or tempting but shadowy cause-and-effect relationships that you can almost tease out of the data. The market displays a pattern. Then displays it a second time. The third time you put a little money on it and score. So the fourth time you go in large, but unfortunately….

Dec

24

The Daily Speculations annual tradition is that we link to Jack Schaefer short story (4,800 words) "Stubby Pringle's Christmas", about the adventures of Stubby Pringle, a young cowboy at Christmas time. We hope you enjoy it and have a Merry Christmas.

Dec

24

1. The move in the 10 minutes before the announcement from 1440 to 1428 was flexionic. Who had the inside information that an announcement that the vote on plan b was canceled and that it would be announced, and who acted on it? Let us hope that the authorities will be as vigilant in uncovering inside trading on this legislative announcement as they are on infractions about corporate events.

2. The move from 1428 to 1390 in 1 minute shows the danger of leaving limit orders on a scale down or up when algo can move 50 points and margin must be maintained at all times. The advice of good chess players to stall is paramount.

3. The other markets like bonds did not catch up until 800 am the next day, showing the tendency to underestimate change, and the cascading effect of one market on the other.

4. What a field day the brokers who can trade against their clients must have had. In the old days it was considered illegal to run the stops of your clients and take positions on the other side in certain markets. Why not today? Give the public the illusion of a level playing field

5. As always, the public will be behind the form. And no one will put in limit orders a few points below or above the market overnight for a while, and that will be the strategy with the highest expectation if you have things set so that you are not susceptible to gamblers ruin or top feeders and institutions who have no capital worries because of ability to borrow from the cb's et al bluffing you out into oblivion.

6. Volume will decrease as all the weak hands lick their wounds, and circle the wagons to preclude it happening again.

7. The moves preceding the flash crash in bonds and gold and the ratios augured the likelihood of such a free fall.

8. The wisdom of acting on the rumor and taking profits on the rumor was underlined. Or as they say in board games, "the threat is worse than the execution."

9. Old man river, the drift in the market, is paramount. And those in index funds, and those who buy and hold, and those who live in stately mansions waiting to take out their canes or specializing in panics were able as always to deposit the overplus in blue chip 5th avenue properties.

10. Will it be a lobogola or a finnegan. I say a lobogola. But it has to be tested.

What did you learn that I have not covered?

p.s.  Note that this little "night squall" (as opposed to "flash crash") had to happen just before a holiday-weekend period when many players would be looking to lighten up anyway, so they can relax and watch the kids open their presents.

Anonymous writes: 

Was there a political reason the flush came just after 8pm (such as timing of the expected vote) or is it not coincidence that the flush occurred just after electronic trading closed in US Equities, leaving participants stuck overnight with positions (not to say there is much liquidity at that time; and if I were running the show I'd have released the information at 19:55 with bids lower across the board just above erroneous trade limitations). Maybe it was a favor. 

Dec

24

This is an interesting article on kayfabiation, negotiated choreographs rehearsed falsity as a substitute for failed reality as a model for deception that occurs in the markets. 

Chris Tucker writes: 

This is a very good discussion of kayfabe on Wikipedia which posits a comparison with the Fourth Wall in theater.

Dec

21

A friend will ask you what you think of gold. "It's below the round number," the personage says. "Well, I doubt anything bad could happen near the end of year you say. Christmas et al," you say. The friend buys, wets his or her beak. News of liquidation of big gold bugs hits. Gold has the biggest drop of the year 50 bucks in two days. You don't look like Marilyn Monroe or Paul Newman in the friend's eye as the case may be.

Allen Gillespie writes:

The big leg down in bonds seems to have been the hammer on all things. On nights and days like this, however, one cannot help but think about Profitable Grain Trading by Ainsworth-- his basic system looked to by the lows of the prior month 7-9 months before final expiration and weekly lows once the time to expiration was 3-4 months. I think his explanation of the economics of discounting futures is conceptually sound. One cannot help but notice that the Aug futures low in gold in Nov was 1680.90 and we just traded through that two days ago.

Vince Fulco writes:

Not bad, an 80 year old book which in reprint still runs around $50. Can't say that about the vast majority of trading tomes.

Easan Katir writes:

It was reviewed on Dailyspec a few years ago by Mr. Sogi.

Dec

21

1. You run a pattern to give you sustenance for a position and you nod approvingly when you see that it gives bullish forecasts. But then you realize you were looking at bonds as the dependent variable rather than stocks, and the actual forecast is disastrous to you.

2. You have a spread on and after giving up the bid asked and the commission, taking into consideration your expected profit, you're giving up more than 100% vig. But then to reduce the certainty of a loss you leg out. And you leg out of the one that was ready to go through the roof in your favor, and the leg you're stuck with plummets to terrible levels ( happened to me today).

3. When your friends hear that you're a speculator, they say "how can you sleep at night".

4. The watched pot never boils. So you step away from the market for one minute, and during that time, the one chance that you had to get in for a profit is dissipated.

5. Anyone who meets you over 50 will greet you with "you know, edspec and reminiscences of a stock speculator are my favorite two books of yours". (Is the Sherry Netherlands lounge still open?).

6. The most frequently asked question you'll be asked is "how can the fibonacci systems be so accurate?"

7. A bank trader will receive a bonus of 10% of his profits on a 1 billion position, and complain that he's getting less than he would if he worked for a hedge fund.

8. Your alma mater will pay its investment team 200 million in bonuses, 10 million each while they lost money in the year on the grounds that they beat their bogey.

9. When the market goes up, more than 100 dow points, all your friends will say to you "the market was way up today. You must have made a fortune" not knowing that you were short.

10. You hold onto a position while it goes violently against you and finally give up at the worst point, at which time it turns around and goes through the roof in what would have been your favor.


11. You make small gain after small gain– over a day, a week– and your confidence and well-being grow. Then it's all wiped by one big loss. 

Easan Katir adds: 

1. One could not find a more appropriate song to listen to than this while waiting for theta to decay.

2. You are called a nerd when you price an option using the Black-Scholes model going through the formula by hand.

3. No one in your family appreciates the genius of RPN.

4. It looks like a done deal so you go long double S&P, which tanks after hours.

5. You read "among the plays which men perform in taking different parts in this magnificent world theatre, the greatest comedy is played at the Exchange. There in inimitable fashion the speculators excel in tricks, they do business and find excuses wherein hiding places, concealment of facts, quarrels, provocations, mockery, idle talk, violent desires, collusions, artful deceptions, betrayals, cheating, and even the tragic end, are to be found" written by de la Vega in 1688, you and realize nothing has changed in four hundred years. 

Dec

17

As far as emotional bloodsports go, there promises to be a bit of athletic theater at MSG in NYC tonight.

Mike D'Antoni and his Ritalin offense, both recently of the Knicks, come to town with his newest victims, the low-ebb Lakers, a roster of all-stars suddenly resembling the cast of a Jerry Springer show in their collective dysfunction.

Carmelo Anthony didn't exactly see eye-to-eye with D'Antoni when they were both here in NY last year so Melo is probably going to try to put on a show to rub it in to his erstwhile nemesis. While on the other hand, Kobe Bryant never likes ceding the spotlight to anybody so he's probably he's going to try light things up as well.

As for D'Antoni, this does not exactly shape up as a MacArthuresque return, as the crowd is probably not going to be very hospitable. There will be nothing genteel about any of this. D'Antoni probably won't need a Kevlar vest but a pocketful of Xanax might be strongly advisable.

Victor Niederhoffer comments: 

This was written before Antoni trash talked the team after his loss and boos. Someone has to say, "coach, it's not the players, it is your system". 

Uncle Howie Eisenberg writes in: 

Agreed. His system obviously doesn't work for the current Laker roster and he keeps trying to shove square pegs into round holes. He is the anti-Jackson who became the greatest coach or manager that ever lived by getting the most out of what every player brought to the table. Case in point: Instead of capitalizing on Pau Gasol's great ability inside which puts him among the top 3 power forwards or centers in the league, he has him on the perimeter where his outside shooting is middling and berates him for not being in shape to run full speed all the time. He (actually) is a Hatfield in need of a McCoy to run him out of town. Unfortunately Jim Buss by his early morning rejection phone call to the Zen Master has forever precluded the return of the guy who could have best exploited the 4 HOFers on the Lakers while enabling the others to transcend themselves.

As far as the defense is concerned I don't know whether it is as Felton said not getting back in time, or the over emphasis of the fast moving offense that causes players to either not put out on defense or maybe not have the energy to do it on both ends of the floor.

Dec

12

My girl has escaped to the Galapagos for a pinch hitters holiday. Last minute, she substitutes for a broken off boyfriend on a mother-daughter romantic cruise. I am left to fend alone back home. This provides the opportunity for a swift beer with a friend to turn into an impromptu night out, clubbing in Shoreditch.

One needs a spright female on hand to perfect the nightclub experience. I love to dance, but my beau is far away and tonight I boogie alone. I content myself with being a wannabe insipid Susan Sontag for the evening and see what market lessons can be pried from a meta state of mind.

Shoreditch is now Chelsea mark II. We pile into one of the McNightclubs that have sprung up, impoverished attempts to replicate the Shoreditch of old. But only the immigrant toilet attendant has stayed the same, swallowing his multi-lingual, degree educated pride to beg pound coins from drunks passing through his urinaled office. The rest is all change.

In five years, all the themes of Global Capitalism have sprung through. Asians and Russians. New money. The true roughneck suburbanites have been pushed out to cheaper Dalston, preparing the cultural groundwork for its inevitable rich-bitch colonisation in ten years time. London spreads its tentacles outwards, a multicultural Tokyo in the making.

Everything must bubble up through the ecosystem. Out in Dalston, they're preparing the cool of tomorrow. That's where the real coke and E, life limiting Epicureans can be found. Venture a little further, be the artists and repertoire man for the market, and you might learn something. When Robert Johnson sized up his Asian shorts, he knew the outcome. That the cracking of the currency band would also break the backs of subsistence Thais. He knew the multi-order effects that would ripple through and was prepared. But most have such a vanity of their profession that they don't want to think through the other side of the trade.

The margins must inform the centre always. Innovation is never from the middle out. Here in Shoreditch, they deceive themselves that they have urban cool to themselves. But the beats of Dalston today cannot be offered up to Shoreditch's dance floors. Social permission must be given first. Schwarzman has whip hand. David Swensen tells you to pile into PE. You do so gladly.

Doorman paid off and inside, I pull off my jumper and roll up my sleeves. I suddenly remember I dressed scruff for a quick beer. Hauling furniture for my father in law has stunk up my shirt. But here's a market lesson: sometimes you can blend into the beta and cover over your current flaws. In the funk of a club, nobody can spot my sub-hygiene; right now I don't need to do better than the crowd. And soon, my own deposit to the toilet attendant wins a spray of Calvin Klein from his collection.

For the youngsters seeking romance, the club is a floor market of old. Position and size is offered in full view of all players. Bargains are transacted; matched orders are paired and moved off to the side. Like the great traders, the great seducers know core principals, but the art can't be reduced to a set of rules.

Look to the DJ. He is a super skilled hauteur, playing all the Mixmag approved material for pop connoisseurs. But he is deeply mistaken. Watch the floor. He has forgotten this is pretend, bought hedonism for urban wealthy. Experian's Mosaic calls them Alpha-As. This crowd wants the cheap, easy beats. The Ibiza classics. They don't know how to dance to this complex, nuanced stuff.

Similarly, to shoot the lights for your clients, you need to pick the right ones. Play in the connoisseur nightclubs only. The right families know to endow the smart boy with his bar mitzvah gift and give him room. But if you're sourcing from the broad crowd, offer 200 over the index only. Play the same tune as everyone else, just execute a handful better.

Switch to later - back home and unwinding briefly in front of the TV as the ringing clears my ears. Bruno Mars shows how the DJ should have worked it. Bruno mixes doo wop and reggae traditions with a sweet voice. He's an ultra-straightforward mix of old time Motown, Jackson, with a hint of Blues Brothers. Nothing he is doing is rocket science; Bruno is just great at it. When suddenly his big band start to dance behind him in syncopation, the crowd goes wild. The moves are so simple, and that's why we instinctively love it. Our need to empathise with the protagonist overwhelms everything else. We could do that! Bruno's reward is scale: best-selling global artist of 2011. Get out of your own way.

The market is alike: it wants to trend to a simple tune and dispose of nuance. Into the election we get a consistent menu from the central bankers, Merkel and Obama. It vibes simply and pleasantly and the market moves accordingly.

On the club dance floor the same can be seen. As soon as the DJ offers the basic beats, the crowd immediately ratchets up and energy spreads across the room. A range breakout has occurred. What's our leading indicator? Certain attendees got to see the DJ's playlist before hand and know when we are set to change tone. The cool-kids roughing with the bouncers and the bar girls. Watch for when they rush to the floor. Don't want to live that lifestyle ourself: hedonism takes its toll. But we can watch for their moves.

Same for the break-ins. When the DJ falls back to his instinctive complexity, uncertainty starts to spread and the floor slowly clears. But not quickly. By being alert, we can get out in front and hit the bar first.

I shift naturally to rhythm whatever it is. Girls look quizzically as to how, and compliment me on my moves as the rest of the floor jars. Similarly, the good trader sticks to his system, but adapts to the nuance of the current tune. I would readily exchange all rhythmic skill for even an ounce of the same in the market.

A Chelsea girl grabs my ass as she shuffles past on the dance floor. When you want to raise capital you can't and when you've got your fill, everyone's interested to add more. I ignore it and self-indoctrinate, thinking to my girl in the Galapagos. Don't be tempted into the cheap, impulsive trades. Don't go on tilt. Remind yourself of your principals and stick to your proven system. Work your long term plan and you'll profit more.

The light must be catching me favourably or my perennial uniform of old chinos and worn out dress shirt must have accidentally intersected with the current whim of Shoreditch fashion. But any false flag cool on the dance floor belies my cardigan wearing, shoe staring tendencies. Do your diligence in the light of the day, not the setting the vendors or advisors have picked. Don't bid the banker's book for an asset. It's the pork not the rouge that matters on the lipstick wearing pig.

A drunk in our party rabbits into my ear. I can't make head nor tale of what they're saying, but I'm sure it makes perfect sense to them. They are intoxicated by the market of the moment and convinced of its internal logic. Tomorrow, a hangover.

Back home. After only a few hours sleep, I pay the penalty, rising too early to return a borrowed car on-time to a friend. I peer brain-dead over the steering wheel onto the icy road and hope for the best. Selling out hard-touch front month options on myself, I get to my destination safe and in favour. We all do it, let's hope the vol isn't mispriced.

Victor Niederhoffer writes: 

Mr. Owen's fine soliloquy is wonderfully poignant and is as good as the soliloquy from Carousel and should be made into a ballet or set piece of a musical.

Dec

10

There is something idempotent with the Knicks performance against Chicago and the 75 page paper by Hou, Xue, and Zhang.

They both start out so hopefully, and end up to me with a wimper. They suffer from look back effects, regression biases, part whole biases, multicomparison problems, and most of all basing a prediction on past results which contain many random factors.

The regression biases are overwhelming. How do the Knicks expect to win relying on a man like Smith whose shooting percentage is south of 30%? Why he did well the previous game, when the three percentage was almost 50%. Don't they realize that when they score that kind of % in a previous game, luck was involved to a large effect, and it is random, or negative serially correlated because the other team tries harder to defend against the threes and the Gallinari types like Smith are over confident.

Similarly in the Zhang studies, don't they realize that of course their results will appear significant if they base it upon already published results showing effects for the periods included in their study. Don't they realize that within a month, all the results of companies with different balance sheet characteristics are highly correlated and clustered, and that by the time they sort by dozens of variables with split after split they are left with few independent observations—certainly not enough to make meaningful significance. The companies in their various sorts don't change much from month to month, so they are measuring the performance of a small number of companies similar in style for say six months in the future…the tests, are certainly not enough to make any sort of meaningful predictions.

There is something to be said for their independent finding of change in assets divided by assets as a measure of past success and similarly for returns on equity. As far as I can see, however, they use a retrospective compustat file rather than the as is file and that makes all their results meaningless as companies with seemingly high returns on equity like Rimm often go from the black to the red and they appear to eliminate such companies from their comparison. Debt is not considered and with a retrospective file like Compustat, the value stocks will look great until they are delisted and not covered because of problems.

The study should have been performed with a given universe of large stocks with prospective data and data covering only the future years for their anomalies that were not already shown to have significant effects in past studies. Watching the Knicks hapless performance so typical of the Antoni led team of the past and reviewing this heroic but flawed study by Hou, Xue, and Zhang leaves relatively contemporaneousy leaves one with a certain sense of displeasure if not revulsion.

Alston Mabry writes:

Are papers like these read and digested and used by finance professionals? Who are these guys? This quote makes me think they are taking their own work quite seriously:

"Our work has important implications for academic research in finance and accounting. The qfactor model can be used as a new workhorse model of expected returns. Any new anomaly variable should be benchmarked against the q-factor model to see if the variable provides any incremental information above and beyond investment and ROE. More important, the vast anomalies literature in empirical finance and capital markets research in accounting should be reevaluated with the new expected-return benchmark provided by the q-factor model. Much work remains to be done."

Dec

10

I read an interesting paper [Hou, Xue, Zhang: Digesting Anomalies] with a new model of cross sectional returns with factors based on return on equity and change in assets divided by previous assets. Apparently it uses retrospective compustat files and with all the data splits would not seem to be any better than the 20 year outdated fama french model it is supposed to replace. But I have not fleshed out all the lacunae and possible ideas of merit yet.

Dec

8

The DMS group has a quote that I can't find but goes something like this: "There are substantial drawdowns to be visited upon those who follow the momentum strategy. In 2009, by buying the winners of 2008, and selling the losers, one would lose 75%, in a year when the market went up 20%. Such a 95% differential would be hard to accept. A similar drawdown occurred in 2004."

One would think that such divergences would be enough to curb the enthusiasm. But no, the band plays on, and numerous studies refer to the momentum anomaly as the most glaring and recurring way of achieving alpha that academics and practitioners have found. One imagines the wrath with which such purveyors will receive this rebuke from a poor speculator like myself.

Dec

7

A key question that amateurs and professionals must always ask is "do the winners perform better than the losers?". The question is of interest to all who like growth or contrary strategies, who like to back the good or the bad, and who have to choose which stocks to buy or sell from a portfolio. It's also of great interest to my colleagues and me as we are trying to relearn from scratch the sources of performance in individual stocks. The academics have performed numerous studies on this. Most of the famous names have looked at it one way or the other. One of the classic studies is by Griffin, Ji, and Martin 2003, Journal of Finance [33 page pdf]. They conclude that the best performers outperform the worst performers for subsequent periods up to a year in every world market. Before this there was Jegadeesh and Titman 1993 [28 page pdf], and a myriad of other studies.

One has been very wary however, of accepting academic findings throughout one's career, especially in an area like this. The problems are legion. Many of the worst performing stocks are very small. Let's say 100,000 in market value. The price could be $ 0.25. The returns in any period are highly variable. Indeed, the bid asked spread in the old days frequently averaged 50% and commissions and rebalancing could easily add another 50%. Another problem is that most academics don't take the trouble to properly take into account survivor bias in all its terrible manifestations. The most apparent one is that the worst performers that continued to perform badly go bankrupt and are not covered in the files. Furthermore the best performers in any continuous period often while great today were unknown yesterday and wouldn't have hit the files on a contemporaneous basis.

While academics sometimes address the problems of survivorship, bid asked spreads, impossibility of implementation, transactions costs, comovements between securities of different styles in a year so that what looks like 1000 independent observations is really one, selected starting and ending points (it's always easy to find a good time to start and end ), non-contemporaneousnous data (Shiller is the poster boy for this), retrospective multi comparison reporting of good results only kinds of problems, they never consider the problem of ever changing cycles.

Thus, it was great eagerness and pleasure that I learned that Dimson, Marsh and Staunton had made a thorough study of momentum. Their work is always of the highest standards. They get original data from the actual contemporaneous newspapers of the time. They examine many years of data, always bringing the results up to date. They present their work in a form suitable for both the academic and the layman to understand. And they always consider the profitability and commercial viability of their work. Between them, they are fully conversant with all literature in the field, they relate their work to every important academic model that has come down the pike. Furthermore, they can always be counted on to add a few embellishments of their own that raise important questions for further research. Their studies of momentum cover many universes of individual stocks from 1897 to 2010 for several English Markets, with updates for the last 55 years for all world markets. What more could you ask.  And yet … (to be continued)…

The naïve speculator starting from scratch has studied the issue for a universe of stocks that is actually big enough to matter and implement. The stocks are the OEX 100.. all the big companies are in there and there is turnover of less than 5% a year. Here are results. Let's consider the performance of companies in 2008 that were the best and worst performers in 2007. Consider the worst 20 performers in 2007 versus the best performers in 2007 and look at their performance in 2008.

   performance in next year

             of best performing 20              of worst performing 20
    year
    2007         -32                                -25
    2008         +10                                +55
    2009          19                                 10
    2010          07                                 09
    2011          25                                 11

The standard deviations are so high to make all these differences totally random except for 2008. 

Momentum Continued:

The Dimson, Marsh, Staunton trio has outdone even their usual superb work in the extensiveness and depth of their momentum study. They study yearly momentum returns from 3 English markets, including all stocks, and the top 100 from 1900. They report international returns from 18 countries from 1950, to 2000, and then update these returns to 2007. They consider all leads and lags and skips in defining momentum, and then regress these returns on the standard though flawed measures of superior performance from the Fama French studies of 20 years ago. Their conclusion is that "momentum has been consistently profitable over the last 108 years, and is not subsumed by other factors. The momentum premium has been substantial across equities as a whole, but also within size and value based partitions".

Some highlights from the 9 figures and 8 tables that appear in their study.

1. A value weighted cumulative return for the winners from 1956 to 2007 us 5200% versus 30% for the losers. The winners beat the losers in38 years and lost in 13 years. An annual value weighted momentum portfolio of the winners from 1900 to 2007 returned 4.25 million % versus 111% for the losers. Of 17 international markets, in all but the US, the winners beat the losers from 1955 -2000 and 2000 to 2007. The average monthly superiority in return was approximately in both the earlier and later periods. DMS define a momentum strategy in terms of the base period for ranking the best and worst, the skip period for waiting to implement the trade, and the forward period. The returns are relatively invariant for all of the 3 parameters, and all breakdowns of where to define the cutoffs for the best and worst, e.g the top 10%, 20% or 30%. We will pass over the regression results showing the dependence of the return on value factors as there seems to be a statistical lapse in the measures of variance accounted for in their results, and the significance is vastly overstated. 

The main problem with the study is a combination of ever changing cycles and enormous losses that the strategy takes after a bad year for the S&P. In 2008, they report a loss of 75% for the best - worst strategy. Similar catastrophic results occurred in year, 2000, 2003, and 1973. Indeed the 2007 result was so horrid that the winners losers strategy did not work in the 2000-2010 period for us stocks. the results could be improved dramatically by taking account of the dependence of the winner -loser results on the market return during the preceding period. There is also an enormous negative serial correlation between the winner - loser returns. 

The second main problem with the study is that when results are widely disseminated they tend to be dissipated. This is the first part of the problem of ever changing cycles which Bacon and I have found so prevalent in all speculative activities. The public shoots down the odds on good systems, so that they aren't as attractive any more. And then regardless of the attractiveness, they perform worse than they should because the bigs can't makes as much by investing in them. It is no wonder that the momentum strategy has not worked in the last 10 years in the US markets. We would predict it would have similar lapses in the other big markets, just until they become big enough to lure big investments from funds and other slow moving participants searching for opportunities of superior performance by following slow moving, easily implemented systems. This is by no means a criticism of the fine work of the DMS trio. They are to be complimented on implementing one of the most thorough tests of an anomaly in the literature.

Momentum in Conclusion: 

In recent days, I have read a number of mopping up studies of momentum including Barroso,  Asness, (he of the no Fed model),  and Choi, and I have received a final note from the DMS trio. All of these papers are highly flawed in that they enter and close and faulty door. They try to improve on momentum, when it doesn't work in the first place. They try to improve it with better definitions of momentum, and multiple comparisons of momentum with the worthless FAMA french model. It is sad to see such wasted effort, dead weight effort. Splits of a series into seemingly alluring returns when the basic regularity is random. How many of us have wasted our time, knocking on a closed door in markets and life?

Dec

4

An archaeologist looking through my house in the future would come across a purple post it stuck on p.322 of Paul Johnson's "A History of the American People". It's over the quote "all serious visitors such as Dickens, Trollope, and Thackeray who intended to write books about their travels visited one or more prisons as well as workhouses, homes for fallen women, and similar dismal but worthy places". Now who would have placed such a post-it. Ha, only one person. The Hobo. And it would lead the archaeologist to conclude that Hobo was living here in the attic in 1997 when the book was published before his trip to Thailand.

The Hobo  (Bo Keely) responds:

u clairvoyant.

Victor Niederhoffer replies:

One wishes it were true.

T.K Marks adds:

To your credit, let it be said that anybody who has never had a hobo living in their attic has led an unfulfilled life.
 

Dec

4

You have been adamant that the Lakers under the new coach will be unbeatable. "We got two of the greatest players in the world" you say. And once Nash comes back he'll find a way". But as I've said about the market many times, it's not the execution, it's the system. The defense and offense must be considered in tandem, connected, comovement wise, the same way euro and stocks, or euro and bonds must be considered in the market. The inexorable defeat that your team will experience, so common to those in New York who watched the Knicks often lose games in the last 5 minutes that they were ahead by 15 points or more in the second half is not a piece of bad luck, but an inevitability. The same say that the market often ends up end on the day after spending a reasonable inexorability down throughout 3 pm.

Howie, the defense keeps getting better, and the motivation to stop those random 7 second shots gets higher and higher as the game gets on, and the laws of regression eviscerate the random good luck from the previous quarters the same way the random bad news that held the market down, is overcome. You should know all this Howie, from our experiences in handball and racket sports. Often a player will get ahead but you and I know that if he gets ahead with drop shots and lobs and non-percentage killers in the early game, it will backfire in the end as we try harder to defend, and the opponent tires. I always loved it when my opponent made a 3 wall boast on me in the early part of the game, and saved a few up for the end. No way was he going to make the point on that as I was going to be up for it, the same way the opponents are up for all the 7 second 30 feet shots of the current coaches collabs.

Believe me, Uncle, rather than bemoaning the loss to the Magic as bad luck, and lack of foul shooting, (which of course is part and parcel of the offense without a rhythm), accept this as the norm. Change your system as we must do in the market when the cycles change. Each of the players on the Nets often touches the ball before a layup is made. Come back to your home town, and save yourself the inevitabiliy of sorrow.]

anonymous writes:

That's a great letter; thanks for forwarding. We've found that one of the best questions to ask a portfolio manager in a hiring interview is to outline, specifically, how he has adapted to changes in markets. The ones that offer detailed, thoughtful responses are the ones with particular promise. It's fairly easy to hire people who have been successful over a several year period; much harder to find people who have what it takes to sustain success over many years. Learning markets is difficult; unlearning and relearning them is what makes the greats.

 

Dec

3

The next meeting of the NYC Junto will be on Thursday December 6, 2012 at 7:30pm. As usual it will be held at the Mechanics & Tradesmen Library, 20 West 44th Street, NYC.  The main speaker will be Wayne Leighton:

How and when does political and economic change happen? Does such change require a crisis? What role do ideas play? And how might those who hope to effect change invest their time, money, and effort?

Wayne Leighton, economics professor at Universidad Francisco Marroquín in Guatemala, will address these questions, drawing on the book he recently co-authored: "Madmen, Intellectuals, and Academic Scribblers " (recently reviewed in Barron's). Wayne will will also discuss the effort he spear-heads, the Antigua Forum, a project sponsored by UFM.
 

Dec

3

Here's an interesting article saying that daylight savings time is bearish because it's disruptive. I believe the study should be generalized to all disruptive events.

Jordan Low asks:

But what about this article saying the opposite? Which article is correct?

Vic Niederhoffer continues:

That's the point. Daylight savings time comes too rarely for a scientific study to be based on it, and there are too many comparable events that occur once or twice a year. Or perhaps I don't get the joke?

Bruno Ombreux writes: 

I cannot think of anything more disruptive than the dreaded EFA calendar in the UK power market. You may want to study its impact on spark spreads and UK-continent spreads.

Also, their days run from 23:00 to 23:00 instead of 24:00 to 24:00 like everywhere else in the World.

Dec

1

It is interesting for me to see that my article with Lorie from 48 years ago showing that insider buying by 3 or more insiders in 1 month leads to superior performance has apparently held up for more than 60 years. Seyhun seems to have made a career of this and there are funds that trade based on this anomaly. And apparently, as we know, insider trading is increasing.  Flexionism is timeless.

Nov

30

It is great to see Antoni (no d), ruining the Lakers by trying to get them to play a running, 9 second game with spacing that makes their big and old men superfluous and liabilities. It's like the player who tries to catch one tick in the market now, against the high frequency people. The vig is about 80% and the adverse selection is another 15%. Antoni should work for the exchange or the track.

The amazing thing was to see his smug grimace of resignation as he was being buried for the Knicks with his aloof "what can you do" expression now transferred to the Lakers where he turned down a thanksgiving dinner with Howard and the boys so that he could perfect his run and gun 9 second free flowing offense. How wonderful to see him ruining the happiness of the west coast rather than the east when we had to watch his sardonicism.

Pitt T. Maner III writes:

Vic,

You should definitely enjoy watching the "Antoni and Anilo" reunion tomorrow night at 830 PM. $9.3 million salary for the "Rooster" in the Mile High City. "Gallinari is the only Nuggets' starter shooting less than 40% from the field for the season, the Denver Post reports. (about 14 hours ago)"

"Gallinari is hitting just 37.2% from the field, including a dismal 23.4% from beyond the arc, thus far in the 2012-13 season. Those numbers are well off his career averages but the 6'10" small forward is confident that he'll regain his touch, sooner rather than later. For the year Gallinari is still averaging 15.1 ppg, 6.0 rpg, 2.4 apg, 0.7 bpg, and 0.5 spg, while only turning the ball over an average of 1.4 times a game."

Nov

29

Rome: an Empire's Story By Greg Woolf gives and excellent review of the reasons and history of the rise and decline of Rome's empire which was kept relatively intact for 1500 years. The rise he attributes to efficiency, trade, and military success. The fall he attributes to weak alliances with neighboring countries to rule the provinces, and lack of incentives to produce from the provinces. I find many parallels to the present. The good news is that it took 1500 years to disintegrate.

Steve Ellison writes: 

I am partway through volume 1 of Gibbon's The Decline and Fall of the Roman Empire. There was little incentive for the emperor to rule for the benefit of his subjects rather than for his own pleasure. Rome became a military kleptocracy after the murder of Commodus in 192. The armies knew they were the source of power and demanded an exorbitant price for their support, beginning with the Praetorian guard's murder of Pertinax and subsequent auction of the throne to the highest bidder. Frequently contending for rival generals to seize the throne, Roman armies put more energy into fighting one another than fighting the enemies on the frontiers.

Stefan Jovanovich writes: 

Details, details:

"Romans imagined [the empire] as a collective effort: Senate and people, Rome and her allies, the men and the gods of the city working together." This continued as Rome passed from the Republic to the Caesars, who were kings "even if [Romans] could never bring themselves to call them by that name." It is "a history of remarkable stability. If it was largely true that (as one historian has put it) 'Emperors don't die in bed,' it was also true that the murders of many individual emperors seem to have done little to shake the system itself."

Since "decline and fall" is the current meme, one should hardly be surprised that publishers and their authors want to cash in on the latest craze. (That is all publishers ever do; and authors, poor things, are usually desperate to oblige.) Professor Woolf should have resisted the impulse. He certainly knows better. The "collective effort" he describes is a complete fairy tale. The Empire never even developed a common language; our "classical" education notions are based entirely on the fact that rich people had too know Greek because that was the commercial language of the eastern provinces — which was where the money was. Latin was for the inscriptions on the public buildings and for the official orations and the school examinations but the "common" people continued to speak their own tongues. Even the Army relied on whistles, drums. and flags for its "commands" when it took to the field. This explains why Latin itself became almost instantly obsolete even south of the Rubicon. No one writing about the Hapsburgs, who did manage to keep their own Empire running for a good long while, would ever have offered up such fictions about "court and people, Vienna and her allies, the men and gods of Vienna working together". But, we have enough information to know that the court spoke French in that Holy Roman empire. The beauty of Roman history is that there are so few actual facts that survive that one can make the story whatever one wants it to be.

Jim Sogi writes:

The key is "1500 years". It's not going to fall apart in the next 100, that's for sure.

Gary Rogan writes:

The difference is that they couldn't do state borrowing in anywhere near the same proportion to their GNP as the US can. It also took less than 100 years from the peak, however defined to really difficult times. And as "mr. grain's" article demonstrates in less than 200 years from the peak free people were volunteering for slavery to avoid taxes, an inflation rate of 15,000% was experienced, free employees were essentially made into slaves at their places of work, and women, children, and parents were physically hauled off and abused to get to the tax evaders. All due to overspending and overtaxation.

Also for whatever reason they limited the free grains to a relatively fixed number of people, and the amount was small for quite a long time. Their modern equivalents today with a much more advance education in economics talk about redistribution with such excitement and such lack of concern for where this is all going that would make Nero proud (I mean the part about fiddling while the Rome burned, except they are not fiddling but setting the fires).

Vince Fulco writes:

I am still trying to understand how a society flourishes with reported median family incomes stagnant or below that of a decade ago? And there is no sign the worker is gaining any bargaining power. Sure the govt can artificially tinker with rates reducing the carrying costs but someday existing debt must be paid; at least at the consumer level. It is debt assumption for non-producing overpriced (after debt service costs are added in) consumer goods which will kill this country.

Tim Melvin writes: 

I agree with that to a large degree…..crony capitalism at the expense of everyone else is a cancer in any society….the problem is not capitalism exploiting the workers. it is the complex and intertwined relationship of business and government that does us the most harm. Eisenhower was right.

Anonymous adds:

Tim,

I think the malignancy has metastasized much deeper than that, and now sits in a kind of acid bath (the pending "fiscal crisis') where all else is peeled away and we see it clearly (in fact, the fact that people seem to NOT see this clearly is evidence of its metastastization) and it is this: Our society — at every level — is characterized by a desire for more rules, and an exception of those rules for ourselves.

Talking different tax rates is a carve out. The argument that the elderly should get a carve out. The birth control carve out. The government worker's salaries untouchability as a carve out.

How about when the White House issues exemptions to Obamacare?

Affirmative action is a carve out. All corporate socialism is a carve out. Every bill passed by Congress does not apply to them. I call that a carve out!

The white lady's sinus-snort lament, "This is RIDICULOUS!" always pertains to her being denied her attempted exception carve-out to the rules.

That's the cancer. The cure would take a lot more than Mitt Romney, and likely cannot be cured by a single individual.

History doesn't exactly repeat, usually, an incident is followed by another incident of similar cause but differing results and often differing in duration. I don't think we're going into a 1,000 year long dark ages. I think we're racing headlong now to something far more sudden and shocking, and bigger than any one man or political party can purge from our psyches.

Jim Sogi writes: 

I used to think the revolution was just around the corner, society was fragile and was about to come apart. Not now. Look at NYC and Sandy: that was an amazing comeback. The recession was bad, but the economy is slowly coming back. Things are not bad now. In the 1940's there was nuclear world war. Japan, Germany, Europe came back. Russia fell apart, but now is back. China killed 10s of millions, but came back strong. People are resilient and social systems are strong. The apocalypse is Hollywood and journalistic bogus hokum ballyhoo.

David Lilienfeld writes: 

The same is true of the US post-Civil War. Nothing before or since has had the social and economic impact that that war had. The US is more adaptable than Rome was. As Peter Drucker often observed, the US genius is political.

One of the signposts that Rome was done was when it was no longer able to rely on client states for security. That isn't the case now with the US.

A better paradigm for guidance might be the Persian Empire.

Gary Rogan writes: 

I keep coming back to the debt issue, the current size, and the ability and desire by "the powers that be" to accumulate more at an astonishing clip. Four years ago I predicted a debt-driven collapse that Rocky chided me for so much, and while the timeframe now seems indeterminate, what IS the way out without a currency collapse and all that follows in those types of situations? The bond vigilantes are not too concerned, and they know all, but what is it that they see? Can they see far into the future or are they playing musical chairs? 

David Lilienfeld adds: 

I'm reminded of the comment by Jim Carville, Bill Clinton's political advisor. In a re-incarnated life, he said, he wanted to come back as the bond market. "It can intimidate anyone it wants to."

Nov

27

We are looking at the Vanguard study that mentions Shiller favorably and it's obviously flawed. The overlap, part whole correlations, and selected starting and ending points, as well as the intrinsic illogic of a 10 year horizon forecasting well but not a 1 year which means that the previous 9 years were much more predictive than the last year, or that the last 5 years are correlated differently from the prior 5 years, comes to mind. But of course, the lack of degrees of freedom with 10 year data with all the overlap, to say nothing of the historical data that Shiller uses, which is retrospective and not reported at the time. But of course one hasn't read it yet, and they purposely make their methodology opaque wherein one could have found the real problems with it.

Kim Zussman writes: 

It would seem that in the face of most long-term historical market conclusions the Japanese stock market must be considered an outlier; in terms upward drift as well as P/E.

Alex Castaldo adds:

The study we are talking about can be found here [20 page pdf].  The problem I see is this.  They evaluate forecasts over a 1 year horizon and over a 10 year horizon.  The one year procedure makes sense to me: You make a forecast, you wait one year to see how it turns out and then you make another forecast. The R**2 is a measure the quality of the forecast, or more precisely it is the percentage of the variance of returns explained by the forecast. The R**2's for one year are small, as one would expect, and nothing to get excited about.  But what is the meaning of R**2 in the 10 year case ? You make a forecast in 1990, invest until 2000 and the go back (how? with a time reversal machine?) to 1991 and make a forecast for 2001? I am not sure the procedure is meaningful from an investment point of view.  And statistically the return for 1991-2001 is going to be very similar to the return for 1990-2000; so if you forecast the latter to some small extent, you will probably forecast the former as well. It seems to me there is a kind of double counting or artificial boosting of the R**2 going on.

When the predicted variable has overlap it is standard to use the Hansen-Hodrick t-statistic which attempts to compensate for the correlation introduced by the overlap.  But because the study only gives an R**2, and not the Hansen-Hodrick t, we don't get any adjustment for overlap.

I am sure that the 10 year R**2 are not comparable to the 1 year R**2, they are apples and oranges. Someone suggested to me that it may still be valid to compare the 10 year R**2 to each other, as a relative measure of forecasting power.  I don't know if that is true or not.

Nov

27

A post purporting to show that buy and hold investing does not work has appeared on our list. It is reprehensible propaganda and total mumbo. They do not take account of the distribution of returns to investing over long periods that have been enumerated by the Dimson group and Fisher and Lorie. It is sad to see this on our site. The arguments against buy and hold seem to be that the professors found that short term investing didn't work so they erroneously concluded that long term investing must be the alternative. Shiller is mentioned and cited with approval.

Alston Mabry writes: 

To explore this issue numerically, I took the monthly data for SPY (1993-present) and compared some simple fixed systems. In each system the investor is getting $1000 per month to invest. If during that month, the SPY falls a set % below the highest price set during a specific lookback period (the 3, 6, 12, 18, 24 or 36 months previous to the current month), then the investor buys SPY with all his current cash (fractional shares allowed). If the SPY does not hit the target buy point this month, then the $1000 is added to cash. Once the investor buys SPY shares, he holds them until the present.

For example, let's say the drop % is 10%, and the lookback period is 12 months. In May of year X, we look at the high for SPY from May, year X-1, thru April, year X, and find that it is 70. We're looking for a 10% drop, so our target price would be 63. If we hit it, then spend all available cash to buy SPY @ 63. Otherwise we add $1000 to cash.

Each combination of % drop and lookback period is a separate fixed system.

Over the time period studied, if the investor just socks away the cash and never buys a share (and earns no interest), he winds up with $239,000. On the other hand, if he never keeps cash but instead buys as much SPY each month as he can for $1000, then he winds up with over $446,000, which amount I use as the buy-and-hold benchmark.

If the investor uses the fixed system described, he winds up with some other amount. The table of results shows how each combination of % drop and lookback period compared to the benchmark $446,000, expressed as a decimal, e.g., 0.78 would that particular combination produced (0.78 * 446000 ) dollars.

Results in this table.

The best system was { 57% drop, 18+ month lookback }, or just to wait from 1993 until March 2009 to buy in. Of course, it's hard to know that 57% ex ante. The next best system was { 7% drop, 3 month lookback } coming in at 0.99.

This study is just food for thought. It leaves out options for investing cash while not in the market. And it sticks with fixed %'s without exploring using standard deviation of realized volatility as a measure. So, there are other ways to play with it.

Charles Pennington comments: 

Thank you — that is a remarkable "nail-in-the-coffin" result.

Nothing beat buy-and-hold except for the ones with the freakish 57% threshold, and it won by a tiny margin, and it must have been dominated by a few rare events–57% declines–and therefore must have a lot of statistical uncertainty..

That's very surprising and very convincing.

(Now some wise-guy is going to ask what happens if you wait until the market is UP x% over the past N months rather than down!)

Kim Zussman writes: 

Here are the mean monthly returns of SPY (93-present) for all months, months after last month was down, and months after last month was up (compared to mean of zero):

 One-Sample T: ALL mo, aft DN mo, aft UP mo

Test of mu = 0 vs not = 0

Variable      N      Mean     StDev   SE Mean  95% CI            T
ALL mo     237  0.0073  0.0437  0.0028  ( 0.0017, 0.0129)  2.58
aft DN mo   90   0.0050  0.0515  0.0054  (-0.0057, 0.0158)  0.92
aft UP mo  146  0.0083  0.0380  0.0031  ( 0.0021, 0.0145)  2.65

 The means of all months and months after up months were significantly different from zero; months after down months were not.

Comparing months after down vs months after up, the difference is N.S.:

Two-sample T for aft DN mo vs aft UP mo

                  N    Mean   StDev  SE Mean
aft DN mo   90  0.0050  0.0515   0.0054   T=-0.53
aft UP mo  146  0.0084  0.0381   0.0032

Bill Rafter writes: 

A few years ago I published a short piece illustrating research on Buy & Hold. It contrasted a perfect knowledge B&H with a variation using less-than-perfect knowledge using more frequent turnover. Here's the method, which can easily be replicated:

Pick a period (say a year) and give yourself perfect look-ahead bias, akin to having the newspaper one year in the future. Identify those stocks (say 100) that perform best over that period, and simulate buying them. Over that year you cannot do better. That's your benchmark.

Then over that same period do the following: Buy those same 100 stocks, but sell them half-way thru the period. Replace them at the 6-month mark with the 100 stocks perfectly forecast over the next 12 months. Again sell them after holding them for just half the period. Thus the return from the stocks that you have owned and rotated are the result of less-than-perfect knowledge. Compare that return to the benchmark.

Do this every day to eliminate start-date bias, and then average all returns. The less-than-perfect knowledge results far exceeded the perfect-knowledge B&H. Actually they blew them away in every time frame. It's really obvious when you do this with monthly and quarterly periods as you have so many of them.

The funny thing about this is the barrage of hate mail that I received from dedicated B&H investment advisors, who somehow felt their future livelihoods were threatened.

If anyone wants that old article, send me a message off the list. We called it "Cassandra" after someone with perfect knowledge that was scorned.

Anton Johnson writes in: 

Here is a link to BR's excellent study "Cassandra", as it lives on in cyberspace.

Nov

27

In a discussion with Janine Wedel, author of The Shadow Elite, we discussed the prevalence of flexionism in other fields besides finance. She pointed out that big pharma has the same revolving door, and intersecting relations between consultants, government employees, university professorships, regulatory oversight, and profit making insider trading that so many of the graduates of my alma mater are so famous for and caused high officials to be fired after the payment of a 29 million fine for a friend. She pointed out that the military industrial complex is replete with such flexionism and pointed to such organizations as the BIA, and the directorships on military firms held by former high ranking generals. The recent spate of insider trading cases for hedge fundists who got information from Drs on the certification committees for drug efficacy, with more than 50 convictions so far shows how rampant this lapse is among Drs.

I immediately asked if romance was always involved in the rise and fall of such flexions and we discussed why pictures of the wife of one of the prime movers in my alma mater's foray into Russia, a hedge fundist, are no longer available on the Internet. And that led to a discussion of Petraeus's downfall and whether there is a invariable relation between flexionism and romance. Rumpole's famous lament "why is it always romance" was discussed. From my reading of economic history, I am currently reading e.g the pc book A New Economic View of American History by J. Atack and Peter Passell, I pointed out that our entire political history from the founding of America is replete with self dealing, flexionism and financial avarice influencing the course of events. We discussed the plight of holders of continental debt, and how relatives of Alexander Hamilton, then Secretary of the Treasury went to the south to buy the debt issued by the continental congresses at 8 cents on the dollar after southerners desperately needed the money for living expenses and were willing to take any amount for their worthless continentals, which Hamilton subsequently convinced Washington to redeem at par.

The history of the two Federal Banks of the United States also was replete with ample opportunities for financiers to profit, and the rise and fall of the Morrises and Biddle in conjunction with the fortunes of these banks, and their role in selling government debt before their fall was discussed.

A discussion of flexionism in Roman times could not be averred, and the self dealing of all the generals who were paid after political careers in the legislature with appointments to govern the provinces where they were expected to rekindle their fortunes with bribes from the merchants in the provinces, as well as the spoils of war was discussed. The Conway Rebellion where the revolutionary war almost ended with the sack of Washington by disgruntled soldiers wanting pay also came into discussion.

The questions arises—- what are the fields and times where flexionism must inevitably arise, and is it good or bad, and how prevalent is it in different economic systems and times.

Gary Rogan writes: 

Discussing the history of the world without self dealing and flexionism is like discussing human physiology without mentioning pathogens and immunity– it would be so incomplete as to not make any sense. Monarchy and aristocracy, the typical situation that humans found themselves in for almost their entire history in centralized societies, are basically codified and/or legalized systems of self dealing. The few attempts at democracy generally degenerated into flexionsims and self dealing with the passage of time. The short recent history of Egyptian democracy (one man, one vote, once) are probably at the short end of the spectrum and the unraveling American democracy is at the other.

It seems like there is no way to avoid self dealing altogether because human nature seems to be irresistibly drawn to it when the opportunity arises, but having a populace that is highly educated, full of enthusiasm and public spirit, and in some sense somewhat uniform in its composition, seems to control it to a degree. There is nobody to police self dealing and flexionism at the top but the population at large. The worst political systems will work better with a quality population, and that's one reason why the history of socialism is so different from one country to another.

Mick Tierney writes: 

On Nov. 19, the chair posted a theory put forward by Umberto Eco and his studies on mass media, culture, and interrupted romance. In respond to this most recent post, addressing flexions, prime movers, romance, etc., I suggest he once again visit Eco and his most recent "fictional" effort: The Prague Cemetery. It's a bear of a book - for the reader must first determine whether the narrators are, in fact, two individual in conflict, or whether it is a single schizophrenic doing battle with himself.

I placed "fictional" in quotes because all the events and participants [except for the narrator(s)] are real - and their exploits really occurred. Since I was to lead a discussion on the book, I spent hours Googling to fact check what seemed to be the familiar ramblings of the conspiracy nut. With the expected exceptions of the conversations, Eco lays out a history that makes it readily apparent that many of the events we once attributed to random occurrence and/or happenstance have been, in fact, orchestrated by individuals whose names you will most likely not find prominently mentioned.

His history covers most of the European countries as well as Russia. In his narrative, there is not a single country, nationality, religious or fraternal organization that does get libeled (although contrary to Russell Baker's contention, he doesn't even address wealthy white, Episcopalian males, much less slander them).

It's a monster book and not an easy read — if you're easily offended ignore it. If you want to witness an interesting account of the real causes behind "inexplicable events," it provides some interesting insights into powers that have always existed and that today's manipulators are, in fact, relatively ham-handed in their machinations.

Nov

26

I am reading the excellent book P.J O'Rourke's On The Wealth of Nations. He gives a general introduction to the wealth and then goes chapter by chapter illuminating the relevance for today of Smith's ideas. Four of the fundamental insights that I find helpful in looking at the present are.

1. Consumption is the sole end and purpose of production. This is a nice thing to keep in mind with all the rebuilding after floods and natural disasters.

2. Self interest is good and natural. Incentives matter. People work harder when pursuing their own interests. In the old days, people had to subject their egos and aspirations but in modern times the breakdown of feudalism has allowed people to pursue happiness.

3. The way to increase wealth is through specialization and division of labor. Eveyone has a comparative advantage at some trade or fancy.

4. Trade creates mutual benefit. Bettering the position of one person in a trade invariably tends to better the position of the other person in the trade. Wealth is not a pizza.

If only those who wish to take from one class like the rich and give to another like the middle class would understand these 4 principles, the world would be a much better place.

Nov

20

Finger off the dike in France at Moody's.

Gary Rogan adds:

If brevity is the soul of wit than this:

Moody's Investors Service on Monday lowered France's sovereign rating by one notch to Aa1, stripping the country of its coveted triple-A rating. "France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labor, goods and service markets," said Moody's in a statement. The ratings agency also expressed concern over France's uncertain fiscal outlook and noted that its resilience to future euro-shock is becoming more difficult to predict. The rating outlook remains negative.

is much less preferable to

"The problem with Socialism is that sooner or later you run out of other people's money".
 

Nov

19

I have often thought that the lyrics of Oscar Hammerstein contained tremendous deep truths of the human spirit, and I always encourage those new to the American song book to listen to Hammerstein rather than Sondheim. Here's how his nephew, eminent author of An Empire of Wealth, put it: "Like all artists whose work endures, Oscar Hammerstein used aspects of his own life to provide a window through which less-gifted people might see more deeply into the human soul and learn better what it is that makes us human". I believe the Hammerstein lyrics are good for market people and we listen to them every day here.

Jeff Watson writes: 

You're right about Hammerstein's lyrics 100%. I listen to Hammerstein once a week, maybe twice (usually a favorite from South Pacific). I play a wide variety of music here. It can be very pleasing to the ear as well to the soul to successfully fit the music to the tone of the market, and it's harder than it looks. A wine steward pairs wines with courses, a successful speculator pairs the markets with music. Sometimes it's Chopin, sometimes it's Tony Bennett, maybe The Brian Jonestown Massacre, could be Frank Zappa, Celtic music, Cajun waltzes, East Texas Swing, and on and on. The grains alone sing a greater variety and styles of songs than all the musicians and songwriters in the world combined. Admittedly, this speculator finds it very hard to match the music with the market, and when I can't get it right, nothing beats the Overture from William Tell or March of the Valkyries to wake things up. 

Nov

19

Umberto Eco, in his studies of mass media and culture, has an essay on popular new devices. His thesis is that they start out by being used by the wealthy and then get used by the common man, and lose much of their value from the law of diminishing marginal returns.

He uses the railroad and cell phones as examples. I have found that many new things like the smart phone have decreased their marginal productivity. Studies show that 30% of users sleep with their smart phone next to their bed. I have not had the displeasure of being interrupted in romance by a smart phone ringing yet and answered, but I am told it is common.

What are the implications of this for market analysis, especially of individual stocks.  I find that my past research which did not use "as is" files and was heavily dependent on compustat is deeply flawed. Indeed my approach seems flawed. I am trying to improve for the future. My kids seem to make money with their stock purchases based strictly on the future growth of popular products among the younger generation. I wonder how to improve.

Thomas Miller writes:

Maybe Peter Lynch was on to something although I don't see how his "method" can be quantified.

Nov

18

There should be a statistic average absolute close to close move divided by high -low and another statistic average absolute open to close move divided by high - low.

Iit would tell how well the strong have done about scaring out the weak during the day only to have them eating crow and wishing they had done nothing during the day, i.e. the importance of sanguinity and gravitas in market play.

Anatoly Veltman writes: 

PIVOT has been widely used for decades = (H+L+C)/3

The most popular use of it is: if the next session is trading above, then PIVOT is a support area. Conversely, if next session is trading below, then PIVOT is resistance area.

PIVOT's strength took considerable leaking with onset of 24-hour sessions, as opposed to prehistoric DAY-ONLY sessions. The reason: of course, every price traded on volume IS more meaningful than every price traded on a few lots.

Over the decades, at least two distinctive intraday set-ups where also developed, for cases of overcoming PIVOT early in the session, and for cases of overcoming PIVOT late in the session.

Also, I found Weekly, Monthly and even Yearly pivots to be useful.

In any case, despite the ease of coding the conditions for algorithmic PIVOT trades, I found that best uses of PIVOT were by layering a second indicator into the mix, and sometimes even a third. I never had the resources to code that myself — but I'm pretty sure it has been accomplished by now; including by a number of shops that I had tutored.

Gary Rogan writes: 

Not knowing any of this stuff myself, I'm curious how something this simple can work when you have quantum physicists programming ever more sophisticated algorithms and I'm sure some of which are of the learning and self-changing variety. Even the simplest control theory is orders of magnitude more complicated than this and so are rudimentary digital filters. Without giving this more than ten seconds of thinking, if I were to code up something like this I would at least do a continuously adjusting filter that would backtest the coefficients for each of the three components to something other than one while still adding up to three, variable time windows for back testing resulting in multiple variable windows rather than some fixed monthly, weekly, yearly periods, and variable coefficients for however many windows I would wind up with.

Nov

16

And thus the stock vigilantes force a harmonious resolution by knocking the stocks below the stone wall of 1350.

Nov

15

One noted a big increase in claims today on Thursday, conveniently not one week, but
two weeks after the election.

"Keep it gradual or else Suzy will let Jack out of the widows walk again".

Nov

13

Like most things the market is worried about, like decreases in economic activity or the inevitable coming decrease in consumer sentiment which follows the stock market like the sage the feigned humility, I wonder if all the Greece news is of a similar color. Would it be good or bad for the market if Greece were more or less austere and the EC, IMF, and other central banks were to buy their bonds at this or that price at the expense of others? The hypothesis that stocks can't go up unless the Greek crisis is settled with buying bonds and austerity is in the meme. When it is broken with a rise, infirmed, a new paradigm of rises related to the fed model will be available. Or at least I think this is a reasonable way of looking at future.

Nov

8

One has found that there is an electronics circuit that almost always retrospectively provides a great description of price action in markets. I wonder if there is an electronics circuit that compresses the voltage output keeping it in a range, sort of like the finger in the dike, but then after the compression is over on the negative side, e.g after the negative feedback is taken away, the voltage doesn't immediately lead to tremendous negative voltage. I seem to remember such a circuit with op amps.

Jon Longtin writes:

There are a variety of electronic circuits that perform such a role, depending on the application. One common application is a voltage regulator, which provides a (nearly) constant voltage, regardless of the load applied to it. The circuit monitors the actual voltage currently being provided and compares to a pre-set reference value. The difference between the actual and desired (setpoint) values is called the error, and is used to adjust the current provided to the circuit to bring the voltage back to the setpoint value. For example if the load increases (more electricity demand) the load voltage will drop and the voltage regulator will provide more current to bring the voltage back up. Same goes for a decrease in load.

There are some limitations and compromises in such a circuit. First is there is a finite amount of current that the power supply/voltage regulator can be provided, and if the error signal requests more than this amount, the output will not be maintained. Also of importance is the time response: a circuit with a very fast time response will respond more quickly to fluctuations in the load, but can also result in so-called parasitic oscillations, in which the output oscillates after a fast change in load is made. By contrast a longer time response provides a slower response to a variation, but tends to damp oscillations. This same behavior, of course, is seen in countless financial indicators, and is part of the art in deciding, e.g., how many prior data points to include in a signal.

A somewhat more complex version of the above, and perhaps more closely aligned with the behavior of a market signal, is an audio "compressor/limiter". This is a device that constantly monitors the volume (magnitude or voltage) of an audio signal and makes adjustments as needed. A limiter is the simpler of the two and simply sets a threshold above which a loud signal will be attenuated. The attenuation is not (usually) a brick-wall however; rather a signal that exceeds the threshold value is gently attenuated to preserve fidelity without overloading the audio or amplifier circuitry. A compressor is a more complicated animal and provides both attenuation for loud signals AND amplification for quieter ones. In essence a HI/LO range or window is established on the unit, and signals exceeding the HI limit are attenuated, while signals below the LO limit are amplified. This resulting output then (generally) falls within the HI/LO range. This is used extensively (too much!) in commercial music. Humans naturally pay attention to louder sounds (ever notice how the volume universally jumps when commercials come on TV? They are trying to grab your attention with the louder volume). Pop music attempts to achieve the same by using aggressive compression to provide the loudest average volume for program material without exceeding the maximum values set by broadcast stations or audio equipment. The result, however is that the music sounds "squished" and doesn't "breath" because the dynamic range of the content has been reduced considerably. With such devices there are a variety of adjustments to determine the thresholds, time before taking action (the attack time) and how gradually or strongly to attenuate (amplify) signals that exceed the envelop range.

Here' s a fairly decent article that describes this in more detail.

Incidentally both of the above are examples of a large branch of engineering called Controls Engineering. The idea, as Vic stated, is to monitor the output by using feedback and make adjustments accordingly. There are countless different algorithms and approaches, as well as very sophisticated mathematical models (people build careers on this) to best do the job. Like most complex things, there is no single approach that works best for every problem, but rather involves a balance of performance, cost, and reliability.

I highly suspect such algorithms have already found their way into many trading strategies, one way or another.

If interested, I can suggest some references for further reading (though I am not a Controls person myself).

Bill Rafter writes: 

 Think of your voltage regulator as a mean-reversion device. If a lot of this is being done, then your trading strategy must morph into simply following the mean.

In light of recent changes in the investment climate we suggest that one should tighten up controls in which one is long a given market. Perhaps that might also or alternatively mean (a la Ralph) tightening the size of the positions. The result will be taking less risk and incurring less return, but taking additional risk would seemingly not be rewarded in the current milieu.

Jim Sogi writes: 

Dr. Longtin's description of compressors and limiters was
fascinating.  A compressor on my guitar signal chain prolongs the
sustain on a signal in addition to smoothing out the volume spikes and has less fade as the signal weakens.  With added volume, one gets a
nice controlled feedback.

Sometimes in the markets one sees a sustained range with the spikes being attenuated reminiscent of a nice guitar sustain.

On a different note, one curious thing is that people cannot  discern differences in absolute volume.  It's very hard to hear the differences
in volume between two signals unless they are placed side by side.

Nov

8

Along comes a series of scholarly studies in The New York Times: "Get What You Pay for? Not Always". They report on studies that through 2008 show that S&P companies that spent more on politicking performed worse than those that spent less. They also point out that the flexionic firm with 3 chief executives at Treasury or Governor spent unwisely this time as they moved from the party that can never lose again to the other side. They point to a study from 1981 to 2004 that showed that companies that contributed to political action groups grew slower than those that did not. Furthermore it didn't matter if they picked the winner or loser. And then the proverbial Harvard professor Coates is quoted that the jump in spending led to a deterioration in market performance. Anecdotal examples are given pointing out that banks are big political contributors but they performed badly. Jamie Dimon says, "he's hardly a democrat any more". And finally they show how AT&T tried to get their merger with T Mobile approved with letters from 76 democrats and 56 million in contributions over the preceding years, and yet it wasn't approved and they paid a 5 billion break up fee.

Well, all these studies are of the kind "your own man". Political contributions are necessary these days as the % of workers and their suppliers and G expenditures as a % of GNP goes up. Also, one would posit that the companies that made the greatest contributions were most in need of it, and would have done much worse had they not greased the wheels of G. Also, one would hypothesize that the relation has changed since 2008 as the idea that has the world in its grip has become more prevalent.

Indeed, some good questions arise. With the increased need of having the forces of the weather gauge at your back with government aiding and abetting you, one would think that the companies that give the most to politics are those that have the most government business. And they would seem to be the ones that the best chances of prospering in this environment. So one would hypothesize that a proper study of political spending controlling for whether it was necessary because your company was in the radar, would be very a propos these days and would show a conclusion that is opposite from the picture that summarizes the article with Jamie Dimon shaking the Presidents hand who "was once one of the Presidents favorites" but is no longer the fair haired boy despite their enormous political contributions.

Jim Sogi writes:

The question whether payola for government contracts or regulatory
largess is or is not beneficial to the specific company making the payola, or to the economy in general is related to the broken window
syndrome.  Government spending, especially with Sandy, is repairing
broken windows.  There is no real benefit to productivity overall, thus no real benefit to the companies seeking this type of work or
largess. This might help explain Chair's hypothesis.

Nov

8

If the market were to go down 200 points right after the election, some liberal analysis 4 years later would say that the market does better during democratic presidentials. They'd start it at the end of November or at the end of December or the beginning of the term depending on what works best, and how much the decline on the news of the election was and then they'd have something like Washington Native American indicator and it could be used as propaganda to keep man small.

Nov

8

My analysis of every announcement until end of year will be in the context of a conman who just stole tremendous money from a mark. And he's on the train with the mark. And he doesn't wish to look too exuberant or spend the money. E.g. the report of claims today. They didn't want to increase it too much, because then the mark would have known they had the finger on the dike for all announcements before the election, i.e. there will be no saluting of the Russian Flag until the inaugural ball where certain groups are known to be very poor at maintaining balance in the presence of non-sweet grapes.

Nov

6

One has to believe that the realization that we will be living with the idea that has the world in its grip from the executive office for another 4 years will become accepted today with the exit polls and that a certain revulsion will take place. Yet stocks are still very low relative to the fed model for all time frames so that the revulsion should not be catastrophic.

Rocky Humbert writes: 

As I have previously demonstrated with regard to the monthly job reports, EVEN IF one can predict the data, it is impossible to consistently predict the terminal market reaction with any statistical significance at a given/terminal moment in time. And making predictions that X price will be hit (when X isn't statistically significantly far away) is an empty statement. Hence I submit that The Chair should acknowledge that his comment below is an illustration of a statement that cannot be wrong. At any given moment in time, there is a high probability of some revulsion. 365 days per year. And the definition of "catastrophic" is a function of leverage, not price. And that stocks are low relative to the fed model is an empty statement unless he believes that bond prices cannot go down. Lastly, the Average True Range of the S&P is currently about 15.5 points. So any statement that predicts a move of up to 15.5 spu points is most likely to true. I'd say that one needs a move of more than 31 spu points to be "revulsion."

But for proof and in the Franklinian spirit — I will send a unique prize of dubious monetary value to any Spec who can predict BOTH the winner of the presidential election AND the closing SPX price for tomorrow (Wednesday) within 3 SPX points. All submissions should be mailed to the speclist.

HOWEVER, I will make a final prediction. IF Romney wins. And IF Wednesdays close is more than 16 points below today's close, then there will be a very substantial decline between now and year end. How substantial? Enough for the Chair to call "catastrophic."

Nov

4

I have recently read several biographies of Caesar including Caesar by Colleen McCullough. I found this brief review on Wikipedia illuminating. While I am not very knowledgeable about military strategy or Roman History, I saw many examples of Caesar's genius that were applicable to trading. I thought it might be helpful to list 10 things that helped him rise to the top and win battles that extended Roman territory to the Rhine and English Channel, and conquered 3 million of enemies, killed or captured more than a million of them, and brought back vast wealth to Rome.

1. High Frequency Execution.

He used high frequency weapons. The soldier's weapons were much shorter and lighter than the enemies. His used the Javelin and a short sword called the Gladus. The enemies used two foot spears. The Romans got to wound the enemy much faster and were able to fight much longer and fresher because they carried lighter weapons.

2. The Roman Logistics.

Legionaires had much better logistics than their enemy. Caesar always paid greater attention to food and living arrangements than his enemy. His men were healthier and stronger for battle and were able to escape quicker when defeat was imminent. The importance of a proper foundation for trading is emphasized. Make sure you have proper equipment, capital, and infrastructure before you start trading.

3. Alliances.

He was a master of making alliances, no matter the virtues of his allies. He formed an alliance with Pompei when it was in his interest, married his daughter to him, established peace with hostile Germanic tribes to defeat the Helvetias and the Gauls.

4. Training in the trenches.

He fought as a common soldier from the age of 20. He lived with the soldiers, ate their food, and battled with them. He was captured by pirates and was able to talk his way out of capture with a ransom and then caught the pirate ship and executed them. He had down to earth habits in his food and living. A trader who wants to succeed can't rise to the top withouot trading himslef, and developing economical habits.

5. Engineering.

Caesar loved nothing more than a complicated engineering problem. When he coudn't pursue the Germans by land he built a bridge over the Rhine. He left enough space on the other side so that he couldn't be captured again. He was able to move his army over the Alps in two days to defeat Pompei in Spain. He was trained as a scientist before becoming a soldier and applied the disparate disciplines of engineering, medicine, and architecture to better prepare for battle. The best training for a trader comes from fields other than finance,— physics, ecology, biology, music.

6. Celerity.

He moved his Legionnaires faster than his enemies. They frequently marched 60 miles in a day. He made decisions quickly and brought his legionnaires into the fray quickly when it was time to rout the enemy.

7. Speculation.

Time and time again he gambled and took bold strokes. If you are going to be a speculator you have to speculate you can't grind like Pompei, a much more experienced commander, did.

8. Incentives.

The legionnaires and he were entitled to a % of captured lands, jewelry and slaves. Each hand had a share of the spoils and this made them fight harder. At the end of their stay in the legionnaires they were promised land for retirement and many remains of their homes and belongings show that they lived relatively as well then as retired military today.

Alston Mabry notes: 

Twenty or 25 miles a day would be a substantial march, especially carrying all the gear they had.

In broad terms, the key to Roman battlefield success was their tactic of fighting in very close formations, even with overlapping shields. Essentially, they had more "swords per yard" at the front of a unit. This was very effective against enemies who fought in loose mobs, like the Gauls.

As for Caesar, an interesting topic of study is the battle of Alesia.

Phil McDonnell writes:

When I attended high school in NJ I had the pleasure of reading some of Caesar's writings in Latin. In particular I was struck by how he opened his account of the Gallic Wars. the opening three sentences were:

Veni. Vidi. Vici.
They translate as: I came. I saw. I conquered.

In many ways it is the height of confidence, even arrogance. Undoubtedly his confidence was one of his greatest aspects but it also lead to his hubris. One imagines that he was truly shocked when they assassinated him in the Senate chambers.

Nov

2

In the parks near Chinatown you can see tables devoted to Go. The players are generally 80 to 95 years old although since all Chinese above 80 look similar, some centenarians might be there. Standing on all sides of the table are dozens of spectators who lean forward in tense poses waiting in perilous animation for the move of the masters.

One is reminded of this as everyone waits for the important number announcement moves like employment. Of course the numbers are distributed on a "need to know basis" to the president, and presumably to be fair to the challenger, and of course to the "central" and presumably their colleagues across the world say in Negara so that their crucial operations in the exchange market might not be disrupted (where is my challenger friend who has a bedroom here when I could interpret his body language). And one can imagine the give and take before the release from the circular office. "No that's too low, we got a lot of flack last time. Suzy might have let Jack out of the attic again. How about a little rise. But keep it below the round".

The centenarians perched precariously smile inwardly.

Nov

2

It's now clear to me that everything Rogan said recently is right. There is a force, probably without memorialization wishing to keep the world state going. That force will do everything it can to keep the market up before the election. Shortly after or in conjunction with the wish fulfillment of the incumbent win, a revulsion will occur.

Please help me with the timeline. It starts with the Roberts decision to allow medicare. Then the German decision to allow redistribution from Germany to Europe, then the GE 4 the cooling of Arab Spring protests so as not to embarrass their fellow traveler in the "circular" office, then the 7.8 % from a temporary head who lunches as agrarian party bashes with her kid.

Let us hope that the adversary does very well in cardinal events such as debates and polls in the interim so that massive European and central bank activities unlimited to support the stock market can be implemented in the remaining few weeks.

Alex Castaldo writes:

The next logical step would be a Nobel prize for Bernanke or one of his ilk.

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