Jan

24

http://online.wsj.com/article/SB10001424052748704307404576080222812076888.html

Jan

17

VIX closed <16 Friday. Also did so briefly 12/10 ("2"), and April 2010 prior to Euro-region fears ("3"). Before that, have to go all the way back to the days of innocence, ca 7/07 ("4").

Isn't it economically irrational to insure against dreams?

Jan

14

If you are looking for a good book, try The Shadow Elite by Janine Wedel. She coined and documented the flexions of all stripes. Also very good is The Short Stories of Jack Schaefer, and Mathematics Unlimited, 2001 and Beyond by Engquist, Schmid et al

John Tierney writes:

OK, if you are looking for non-fiction try The Invisible Hook: The Hidden Economics of Pirates

Kim Zussman recommends: 

"This Time is Different" by Reinhart and Rogoff

(Spoiler hint: the common ploy of sovereign debt default via confiscation and hyperinflation appears not to apply to U$)

Scott Brooks writes: 

We've talked about it on the list before and I I found it very good: Amity Shlaes "The Forgotten Man"

Easan Katir writes: 

To the Last Penny is an excellent but little-known Edwin Lefevre work, which, thanks to Google books, one can read online.

Bud Conrad writes: 

How about my book, which explains how the economy works from the view of an engineer looking at the total system. It also gives investment recommendations in the second half. It is titled Profiting from the World's Economic Crisis and published by John Wiley. Amazon has reviews and some sample pages. It is number one in one category on interest rates. 

Craig Mee adds:

I recommend the Book on Games of Chance. A few of you may be no doubt already connected with it. Here is an interesting excerpt about it:

Cardano was an illegitimate child whose mother had tried to abort him. His father was a mathematically gifted lawyer and friend of Leonardo da Vinci. Cardano studied medicine at the University of Pavia, but his eccentricity and low birth earned him few friends. Eventually, he became the first to describe typhoid fever, a not inconsiderable achievement in itself, but today, he is best known for his love affair with algebra. He published the solutions to the cubic and quartic equations in his 1545 book Ars Magna, but Cardano was notoriously short of money, and had to keep himself solvent by gambling and playing chess. His book Liber de ludo aleae ("*Book on Games of Chance*") written in 1526, but not published until 1663, contains the first systematic treatment of probability, as well as a section on cheating methods. I told you he was bad.

Vince Fulco adds:

A little late to this thread but "Panic" by Andrew Redleaf and Richard Vigilante is proving to be a good read. Redleaf is a convert arb manager out in my neck of the woods who runs Whitebox Advisors. He is in print in his Dec 2006 letter stating, "Here is a flat out prediction for the New Year. Sometime in the next 12-18 months there is going to be a panic in credit markets. Spreads which now hover at an extremely tight 300 bps or so, will gap to more than 1,000. To put it another way, prices of HY securities will drop by something like 20 percent with some weak paper plunging even deeper"

A few powerful paragraphs from the first chapter:

The ideology of modern finance tears capitalism in two, then abandons the half beyond the ken of bureaucrats and the professors. Capitalism demands free markets because it needs free minds. Modern investment theory says efficient markets can moot the minds entirely. The entrepreneur cherishes freedom including the freedom to fail. The bureaucrat of capital dreams of a world in which failure is impossible. Confronted with demons of uncertainty, the entrepreneur wrestles with them till dawn. The bureaucrat of capital crafts idols of ignorance and worships in the dark.

Prevailing in Washington as on Wall St. were the most vile and self-destructive assumptions of anti-capitalists everywhere who imagined they could wield capital while abandoning the principles that created it; that systems could substitute for the moral standards they once embodied; or that men who lost trillions of dollars of other people's money might somehow recover it if only the govt gave them trillions more. Crony capitalists on the right and socialists on the left united as always behind their most fundamental belief, that wealth is to be captured by power and pull rather than created in the minds of men.

Jan

7

Attached is ratio SPY/TLT (weekly, 2002-present). The current 1.4 is highest since late 2008, but lower than any time during the four year bull market of 7/03-8/08. The trend of consensus lately seems to be stocks up and bonds down, which is supported by prospects of growing economy, no deflation, and the housing market remaining other people's problem.

Jan

7

Statistically significant ESP in a refereed journal. 

Vince Fulco writes:

Not exactly ESP, but I've been re-reading Kasparov's How Life Imitates Chess in the New Year.

On Intuition (p. 176):

This example is not intended to encourage you to blindly follow your gut instinct, or to rely indiscriminately on simple first impressions. As we've seen over and over again, diligent study and the gathering of knowledge about what came before in chess is essential to becoming a successful competitor. What I want to illustrate is the power of concentration and instinct. The biggest mistake I see among people who want to excel in chess–and in business and in life in general–is not trusting these instincts enough. Too often they rely on having all the information, which then force them to a conclusion. This effective reduces them to the role of a microprocessor and guarantees that their intuition will remain dormant.

Nigel Davies comments:

Kasparov was even one of the more intense and 'concrete' of champions. More relaxed players trust their intuition far more.

Jan

4

A study from Birinyi shows that IPO's made 20% last year, and it supports my point that all these IPO's in hard times must show an expected a priori return of 40% a year compounded for 5 years to get made these days, and all risky assets must be priced off of this benchmark. I claim that in 2008 for an IPO to be made, the underwriters would have had to tell the company people, that their investors need an a priori return of 80% a year, and IPO's would have been priced accordingly.

Kim Zussman shares: 

Check out the latest update to the famous academic study of IPOs by Prof. Jay Riiter of the University of Florida. [34 page PDF].  

Rocky Humbert replies:

Thanks Kim, perfect…. actually a bit more dramatic than my foggy memory recalled.

See Page 24: Average 3 year buy&hold over 28 year history returns show -19.8% market-adjusted returns; and -7.1% style-adjusted returns. Additionally, Figure 5 (page 33) shows that the average first day returns in 2008-2010 were in line with previous (non-bubble) years.

Perhaps Vic can take a few minutes respite from skewering the Yale professor to elaborate on his comment in light of these numbers… ?

There is an excellent bloomberg function called IPO <go> which allows one to analyze historical IPO performance by region, industry, time frame etc. A quick look shows results suggestive that (in general) buying every IPO at the first public trade price and holding for five years will, (over time) under perform the S&P500. (SEC rules bar Hedge Fund managers from participating in IPO'S until they start trading publicly.)

Bloomberg subscribers can run their own numbers and adjust for the many variables.This is consistent with some studies I recall (?kim?) that shorting EVERY IPO and hedging with futures is a winning strategy.

Mr. Albert writes: 

For me it's first pass kind of thing.

I know from experience that I under perform the dart throwing monkeys on a stock picking basis. And although I can classify stocks in kind of a factor model way, and say this is growth, this is value and if I had done this then this, in practice, I cannot tell when to switch regimes etc.

I have no a priori way of screening IPO's to test if they go up or down and if I shorted them when the underwriters can lend etc and so I wonder about all of them first, then I may try to 'curve fit'.

But then again, I'm not very successful and perhaps this is an illustration of why that is.

Gary Rogan adds:

From my experience, if you restrict yourself to the few ones that have a significant operating history and "good" (cheap in the value sense) financials, and low debt, you will invariably make money. Could take days, could take a couple of years. Many of these are mispriced spinoffs, that seem rare these days but used to be more abundant.

The only one I bought last year, about a month ago, was "BODY', after it has been trading for a few weeks. It wasn't obviously mispriced, but it had a very high sales growth rate for a reasonably priced retailer. It was a scary ride, since it started falling as soon as I bought it, but in strange twist I managed to set an all-time low for it with my last limit buy and then it went up. I sold it way too soon only to watch it soar, but at least I came out ahead. In years past, after I got over tech IPOs in 2000 that pretty much all lost money, I bought maybe 30 of them on the open market over a seven year period and held EVERY SINGLE ONE to the point where it was higher than the price paid. You just have to have patience and a strong stomach, and be extremely selective.

Rocky Humbert retorts: 

Mr. Rogan starts out with a promising value-oriented approach; but then veers off the rails– touting in the worst possible way– that one will "invariably make money."

Whether Mr. Rogan is demonstrating patience or several simultaneous foibles of behavioral finance (prospect theory; loss aversion; status quo bias; gambler's fallacy; money illusion; cognitive framing; mental accounting; price anchoring) is something only his hairdresser knows for sure.

What I know for sure is that IPO's, as a group, underperform the market; and if Mr. Rogan is gifted-enough to buck these odds (and outperform the index) and find gems, he is a gifted stock picker.

Such people really do exist– however, it's really annoying to meet them at cocktail parties– where they invariably say things like "EVERY SINGLE ONE" of their stock picks made money.

Perhaps even more annoying is, while they proclaim their genius and long term investment confidence, they write things like:

" A complete worldwide economic collapse has become unavoidable. There is no way out, there are no realistic scenarios that avoid this outcome. The sooner there is a consensus that playing with shifting debt around is not going to solve the problem, the less dramatic this collapse will be. There may not always be an England" [January 23, 2009. S&P level = 831.95].

One must conclude that Mr. Rogan doesn't like the English IPO market. Hmmm. 

Dec

31

UPDATE 1/31/2011:

Contestants Summary:

- 31 Spec-listers contributed to the 2011 Investment Contest with "specific" recommendations.

- Average 4 recommendations per person (mean of 4.2, median and mode of 4) came in.

- 6 contestants gave only 1 recommendation, 3 gave only 2 and thus 9 out of the total 31 have NOT given the minimum 3 recommendations needed as per the Rules clarified by Ken Drees.

- The Hall of Fame entry for the largest number of ideas (did someone say diversification?) is from Tim Melvin, close on whose heels are J. T. Holley with 11 and Ken Drees with 10.

- The most creatively expressed entry of course has come from Rocky Humbert.

- At this moment 17 out of 31 contestants are in positive performance territory, 14 are in negative performance territory.

- Barring a major outlier of a 112.90% loss on the Option Strategy of Phil McDonnell (not accounting for the margin required for short options, but just taking the ratio of initial cash inflow to outflow):

- Average of all Individual contestant returns is -2.54% and the Standard Deviation of returns achieved by all contestants is 5.39.

- Biggest Gainer at this point is Jared Albert (with his all in single stock bet on REFR) with a 22.87% gain. The only contestant a Z score greater than 2 ( His is actually 4.72 !!)

- Biggest Loser at this point (barring the Giga-leveraged position of Mr. McDonnell) is Ken Drees at -10.36% with a Z Score that is at -1.45.

- Wildcards have not been accounted for as at this point, with wide
deviations of recommendations from the rules specified by most. While 9
participants have less than 3 recommendations, those with more than 4
include several who have not chosen to specify which 3 are their primary recommends. Without clarity on a universal measurability wildcard accounting is on hold. Those making more than 1 recommendations would find that their aggregate average return is derived by taking a sum of returns of individual positions divided by the number of recommends. Unless specified by any person that positions are taken in a specific ratio its equal sums invested approach.

Contracts Summary:

- A total of 109 contracts are utilized by the contestants across bonds, equity indices (Nikkei, Kenyan Stocks included too!), commodities, currencies and individual stock positions.

- The ratio of Shorts to Longs across all recommendations, irrespective of the type of contract (call, put, bearish ETF etc.) is 4 SELL orders Vs 9 Buy Orders. Not inferring that this list is more used to pressing the Buy Button. Just an occurence on this instance.

- The Average Return, so far, on the 109 contracts utilized is -1.26% with a Standard Deviation of 12.42%. Median Return is 0.39% and the mode of Returns of all contracts used is 0.

- The Highest Return is on MICRON TECH at 28.09, if one does not account for the July 2011 Put 25 strike on SLV utilized by Phil McDonnell.

- The Lowest Return is on IPTV at -50%, if one does not account for the Jan 2012 Call 40 Strike on SLV utilized by Phil McDonnell.

- Only Two contracts are having a greater than 2 z score and only 3 contracts are having a less than -2 Z score.

Victor Niederhoffer wrote:

One is constantly amazed at the sagacity in their fields of our fellow specs. My goodness, there's hardly a field that one of us doesn't know about from my own hard ball squash rackets to the space advertising or our President, from surfing to astronomy. We certainly have a wide range.

May I suggest without violating our mandate that we consider our best sagacities as to the best ways to make a profit in the next year of 2011.

My best trades always start with assuming that whatever didn't work the most last year will work the best this year, and whatever worked the best last year will work the worst this year. I'd be bullish on bonds and bearish on stocks, bullish on Japan and bearish on US stocks.

I'd bet against the banks because Ron Paul is going to be watching them and the cronies in the institutions will not be able to transfer as much resources as they've given them in the past 2 years which has to be much greater in value than their total market value.

I keep wondering what investments I should make based on the hobo's visit and I guess it has to be generic drugs and foods.

What ideas do you have for 2011 that might be profitable? To make it interesting I'll give a prize of 2500 to the best forecast, based on results as of the end of 2011.

David Hillman writes: 

"I do know that a sagging Market keeps my units from being full."

One would suggest it is a sagging 'economy' contributing to vacancy, not a sagging 'market'. There is a difference. 

Ken Drees, appointed moderator of the contest, clearly states the new rules of the game:

1. Submissions for contest entries must be made on the last two days of 2010, December 30th or 31st.
2. Entries need to be labeled in subject line as "2011 contest investment prediction picks" or something very close so that we know this is your official entry.
3. Entries need 3 predictions and 1 wildcard trade prediction (anything goes on the wildcard).

4. Extra predictions may be submitted and will be judged as extra credit. This will not detract from the main predictions and may or may not be judged at all.

5. Extra predictions will be looked on as bravado– if you've got it then flaunt it. It may pay off or you may give the judge a sour palate.

The desire to have entries coming in at years end is to ensure that you have the best data as to year end 2010 and that you don't ignite someone else to your wisdom.

Market direction picks are wanted:

Examples: 30 year treasury yield will fall to 3% in 2011, S&P 500 will hit "x" by June, and then by "y" by December 2011.

The more exact your prediction is, the more weight will be given. The more exact your prediction, the more weight you will receive if right and thus the more weight you will receive if wrong. If you predict that copper will hit 5.00 dollars in 2011 and it does you will be given a great score, if you say that copper will hit 5.00 dollars in march and then it will decline to4.35 and so forth you will be judged all along that prediction and will receive extra weight good or bad. You decide on how detailed your submission is structured.

Will you try to be precise (maybe foolhardy) and go for the glory? Or will you play it safe and not stand out from the crowd? It is a doubled edged sword so its best to be the one handed market prognosticator and make your best predictions. Pretend these predictions are some pearls that you would give to a close friend or relative. You may actually help a speclister to make some money by giving up a pearl, if that speclister so desires to act upon a contest–G-d help him or her.

Markets can be currency, stocks, bonds, commodities, etc. Single stock picks can be given for the one wildcard trade prediction. If you give multiple stock picks for the wildcard then they will all be judged and in the spirit of giving a friend a pearl–lets make it "the best of the best, not one of six".

All judgments are the Chair's. The Chair will make final determination of the winner. Entries received with less than 3 market predictions will not be considered. Entries received without a wildcard will be considered.The spirit of the contest is "Give us something we can use".

Bill Rafter adds: 

Suggestion for contest:

"Static" entry: A collection of up to 10 assets which will be entered on the initial date (say 12/31/2010) and will be unaltered until the end data (i.e. 12/31/2011). The assets could be a compilation of longs and shorts, or could have the 10 slots entirely filled with one asset (e.g. gold). The assets could also be a yield and a fixed rate; that is one could go long the 10-year yield and short a fixed yield such as 3 percent. This latter item will accommodate those who want to enter a prediction but are unsure which asset to enter as many are unfamiliar with the various bond coupons.

"Rebalanced" entry: A collection of up to 10 assets which will be rebalanced on the last trading day of each month. Although the assets will remain unchanged, their percentage of the portfolio will change. This is to accommodate those risk-averse entrants employing a mean-reversion strategy.

Both Static and Rebalanced entries will be judged on a reward-to-risk basis. That is, the return achieved at the end of the year, divided by the maximum drawdown (percentage) one had to endure to achieve that return.

Not sure how to handle other prognostications such as "Famous female singer revealed to be man." But I doubt such entries have financial benefits.

I'm willing to be an arbiter who would do the rebalancing if necessary. I am not willing to prove or disprove the alleged cross-dressers.

Ralph Vince writes:

A very low volume bar on the weekly (likely, the first of two consecutive) after a respectable run-up, the backdrop of rates having risen in recent weeks, breadth having topped out and receding - and a lunar eclipse on the very night of the Winter Solstice.

If I were a Roman General I would take that as a sign to sit for next few months and do nothing.

I'm going to sit and do nothing.

Sounds like an interim top in an otherwise bullish, long-term backdrop.

Gordon Haave writes: 

My three predictions:

Gold/ silver ratio falls below 25 Kenyan stock market outperforms US by more than 10%

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010.

The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures.

Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do.

The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143.

The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028.

In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of
0.050.

Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier.

Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52.

Factor                  Prediction      t       N    R sq
US Treasury yield curve      1.162    2.17      30   0.143
30-year change               1.052   -2.28      52   0.094
Trailing 5-year E/P          1.104    0.92      18   0.050
US unemployment rate         1.153    0.90      30   0.028

Weighted total               1.118
SPY 12/30/10               125.72
Predicted SPY 12/30/11     140.52

Jan-Petter Janssen writes: 

PREDICTION I - The Inconvenient Truth The poorest one or two billion on this planet have had enough of increasing food prices. Riots and civil unrest force governments to ban exports, and they start importing at any cost. World trade collapses. Manufacturers of farm equipment will do extremely well. Buy the most undervalued producer you can find. My bet is
* Kverneland (Yahoo: KVE.OL). NOK 6.50 per share today. At least NOK 30 on Dec 31th 2011.

PREDICTION II - The Ultimate Bubble The US and many EU nations hold enormous gold reserves. E.g. both Italy and France hold the equivalent of the annual world production. The gold meme changes from an inflation hedge / return to the gold standard to (a potential) over-supply from the selling of indebted nations. I don't see the bubble bursting quite yet, but
* Short gold if it hits $2,000 per ounce and buy back at $400.

PREDICTION III - The Status Quo Asia's ace is cheap labor. The US' recent winning card is cheap energy through natural gas. This will not change in 2011. Henry Hub Feb 2011 currently trades at $4.34 per MMBtu. Feb 2012 is at $5.14. I would
* Short the Feb 2012 contract and buy back on the last trading day of 2011.

Vince Fulco predicts:

This is strictly an old school, fundamental equity call as my crystal ball for the indices 12 months out is necessarily foggy. My recommendation is BP equity primarily for the reasons I gave earlier in the year on June 5th (stock closed Friday, June 4th @ $37.16, currently $43.53). It faced a hellish downdraft post my mention for consideration, primarily due to the intensification of news flow and legal unknowns (Rocky articulated these well). Also although the capital structure arb boys savaged the equity (to 28ish!), it is up nicely to year's end if one held on and averaged in with wide scales given the heightened vol.

Additional points/guesstimates are:

1) If 2010 was annus horribilis, 2011 with be annus recuperato. A chastened mgmt who have articulated they'll run things more conservatively will have a lot to prove to stakeholders.

2) Dividend to be re-instated to some level probably by the end of the second quarter. I am guessing $1.00 annualized per ADS as a start (or
2.29%), this should bring in the index hugging funds with mandates for only holding dividend payers. There is a small chance for a 1x special dividend later in the year.

3) Crude continues to be in a state of significant profitability for the majors in the short term. It would appear finding costs are creeping however.

4) The lawsuits and additional recoveries to be extracted from the settlement fund and company directly have very long tails, on the order of 10 years.

5) The company seems fully committed to sloughing off tertiary assets to build up its liquid balance sheet. Debt to total capital remains relatively low and manageable.

6) The stock remains at a significant discount to its better-of breed peers (EV/normalized EBITDA, Cash Flow, etc) and rightly so but I am betting the discount should narrow back to near historical levels.

Potential negatives:

1) The company and govt have been vastly understating the remaining fuel amounts and effects. Release of independent data intensifies demands for a much larger payout by the company closer to the highest end estimates of $50-80B.

2) It experiences another similar event of smaller magnitude which continues to sully the company's weakened reputation.

3) China admits to and begins to fear rampant inflation, puts the kabosh to the (global) economy and crude has a meaningful decline the likes of which we haven't seen in a few years.

4) Congress freaks at a >$100-120 price for crude and actually institutes an "excess profits" tax. Less likely with the GOP coming in.

A buy at this level would be for an unleveraged, diversified, longer term acct which I have it in. However, I am willing to hold the full year or +30% total return (including special dividend) from the closing price of $43.53 @ 12/30/10, whichever comes first. Like a good sellside recommendation, I believe the stock has downside of around 20% (don't they all when recommended!?!) where I would consider another long entry depending on circumstances (not pertinent to the contest).

Mr. Albert enters: 

Single pick stock ticker is REFR

The only way this gold chain wearing day trader has a chance against all the right tail brain power on the list is with one high risk/high reward put it all on red kind of micro cap.

Basic story is this company owns all the patents to what will become the standard for switchable glazings (SPD smart glass). It's taken roughly 50 years of development to get a commercialized product, and next year Mercedes will almost without doubt use SPD in the 2012 SLK (press launch 1/29/11 public launch at the Geneva auto show in march 2011).

Once MB validate the tech, mass adoption and revenues will follow etc and this 'show me' stock will rocket to the moon.

Dan Grossman writes:

Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:

1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least

2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least $8.

3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year.

For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.)

Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.

Best to all for the New Year,

Dan 

Gary Rogan writes:

1. S&P 500 will rise 3% by April and then fall 12% from the peak by the end of the year.
2. 30 year treasury yields will rise to 5% by March and 6% by year end.
3. Gold will hit 1450 by April, will fall to 1100 by September and rise to 1550 by year end.

Wildcard: Short Netflix.

Jack Tierney, President of the Old Speculator's Club, writes: 

Equal Amounts in:

TBT (short long bonds)
YCS (short Yen)
GRU (Long Grains - heavy on wheat)
CHK (Long NG - takeover)

(Wild Card)
BONXF.PK or BTR.V (Long junior gold)

12/30 closing prices (in order):
37.84
15.83
7.20
25.97

.451

Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

For Returns: Long XIV January 21st through year end

For Return/Risk: Long XIV*.30 and Long VXZ*.70 from close today

I hope everyone has enjoyed a very merry holiday season, and to all I wish a wonderful New Year.

Warmest,

William

Ken Drees writes:

Yes, they have been going up, but I am going contrary contrary here and going with the trends.

1. Silver: buy day 1 of trading at any price via the following vehicles: paas, slw, exk, hl –25% each for 100% When silver hits 39/ounce, sell 10% of holdings, when silver hits 44/ounce sell 30% of holdings, when silver hits 49 sell 60%–hold rest (divide into 4 parts) and sell each tranche every 5 dollars up till gone–54/oz, 59, 64, 69.

2. Buy GDXJ day 1 (junior gold miner etf)—rotation down from majors to juniors with a positive gold backdrop. HOLD ALL YEAR.

3. USO. Buy day 1 then do—sell 25% at 119/bbl oil, sell 80% at 148/bbl, sell whats left at 179/bbl or 139/bbl (whichever comes first after 148)

wildcard: AMEX URANUIM STOCKS. UEC, URRE, URZ, DNN. 25% EACH, buy day 1 then do SELL 70% OF EVERYTHING AT 96$LB u http://www.uxc.com/ FOR PRICING, AND HOLD REST FOR YEAR END.

Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

My forecast for the S&P 500 for the year ending Dec 31, 2011;

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

EDZ Short moc 1-21-2011, buy to cover at 50% gain, or moc 12/30/2011

VXX Short moc 1-21-2011, buy to cover moc 12/30/2011

UBT Short moo 1-3-2011, buy to cover moc 12/30/2011

Scott Brooks picks: 

 RTP
TSO
SLV
LVS

Evenly between the 4 (25% each)

Sushil Kedia predicts:

 Short:

1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

(There was no mention nor requirement that my 2011 prediction had to be in English. Here is my submission.) … Happy New Year, Rocky

Sa aking mahal na kaibigan: Sa haba ng 2010, ako na ibinigay ng ilang mga ideya trading na nagtrabaho sa labas magnificently, at ng ilang mga ideya na hindi na kaya malaki. May ay wala nakapagtataka tungkol sa isang hula taon dulo, at kung ikaw ay maaaring isalin ito talata, ikaw ay malamang na gawin ang mas mahusay na paggawa ng iyong sariling pananaliksik kaysa sa pakikinig sa mga kalokohan na ako at ang iba pa ay magbigay. Ang susi sa tagumpay sa 2011 ay ang parehong bilang ito ay palaging (tulad ng ipinaliwanag sa pamamagitan ng G. Ed Seykota), sa makatuwid: 1) Trade sa mga kalakaran. 2) Ride winners at losers hiwa. 3) Pamahalaan ang panganib. 4) Panatilihin ang isip at diwa malinaw. Upang kung saan gusto ko idagdag, fundamentals talaga bagay, at kung ito ay hindi magkaroon ng kahulugan, ito ay hindi magkaroon ng kahulugan, at diyan ay wala lalo na pinakinabangang tungkol sa pagiging isang contrarian bilang ang pinagkasunduan ay karaniwang karapatan maliban sa paggawa sa mga puntos. (Tandaan na ito ay pinagkasunduan na ang araw ay babangon na bukas, na quote Seth Klarman!) Pagbati para sa isang malusog na masaya at pinakinabangang 2011, at siguraduhin na basahin www.rockyhumbert.com kung saan ako magsulat sa Ingles ngunit ang aking mga saloobin ay walang malinaw kaysa talata na ito, ngunit inaasahan namin na ito ay mas kapaki-pakinabang.

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

After a worthy challenge, Mr. Rogan is now also a master of Google Translate, and a discoverer of an exciting fact that Google Translate calls Tagalog "Filipino". This was a difficult obstacle for Mr. Rogan to overcome, but he persevered and here's Rocky's prediction in English (sort of):

My dear friend: Over the course of 2010, I provided some trading ideas worked out magnificently, and some ideas that are not so great. There is nothing magical about a forecast year end, and if you can translate this paragraph, you will probably do better doing your own research rather than listening to the nonsense that I and others will give. The key to success in 2011 is the same as it always has (as explained by Mr. Ed Seykota), namely: 1) Trade with the trend.

2) Ride cut winners and losers. 3) Manage risk. 4) Keep the mind and spirit clear. To which I would add, fundamentals really matter, and if it does not make sense, it does not make sense, and there is nothing particularly profitable about being a contrarian as the consensus is usually right but turning points. (Note that it is agreed that the sun will rise tomorrow, to quote Seth Klarman) Best wishes for a happy healthy and profitable 2011, and be sure to read www.rockyhumbert.com which I write in English but my attitude is nothing clearer than this paragraph, but hopefully it is more useful.

Tim Melvin writes:

Ah the years end prediction exercise. It is of course a mostly useless exercise since not a one of us can predict what shocks, positive or negative, the world and the markets could see in 2011. I find it crack up laugh out loud funny that some pundits come out and offer up earnings estimates, GDP growth assumptions and interest rate guesses to give a precise level for the year end S&P 500 price. You might as well numbers out of a bag and rearrange them by lottery to come up with a year end number. In a world where we are fighting two wars, a hostile government holds the majority of our debt and several sovereign nations continually teeter on the edge of oblivion it's pretty much ridiculous to assume what could happen in the year ahead. Having said that, as my son's favorite WWE wrestler when he was a little guy used to say "It's time to play the game!"

Ill start with bonds. I have owned puts on the long term treasury market for two years now. I gave some back in 2010 after a huge gain in 2009 but am still slightly ahead. Ill roll the position forward and buy January 2012 puts and stay short. When I look at bods I hear some folks talking about rising basic commodity prices and worrying about inflation. They are of course correct. This is happening. I hear some other really smart folks talking of weak real estate, high jobless rates and the potential for falling back into recession. Naturally, they are also exactly correct. So I will predict the one thing no one else is. We are on the verge of good old fashioned 1970s style stagflation. Commodity and basic needs prices will accelerate as QE2 has at least stimulated demand form emerging markets by allowing these wonderful credits to borrow money cheaper than a school teacher with a 750 FICO score. Binds go lower as rates spike. Our economy and balance sheet are a mess and we have governments run by men in tin hats lecturing us on fiscal responsibility. How low will they go Tim? How the hell do I know? I just think they go lower by enough for me to profit.

Nor can I tell you where the stock market will go this year. I suspect we have had it too good for too long for no reason so I think we get at least one spectacular gut wrenching, vomit inducing sell off during the year. Much as lower than expected profits exposed the silly valuations of the new paradigm stocks I think that the darling group, retail , will spark a sell-off in the stock market this year. Sales will be up a little bit but except for Tiffany's (TIF) and that ilk margins are horrific. Discounting started early this holiday and grew from there. They will get steeper now that that Santa Claus has given back my credit card and returned to the great white north. The earnings season will see a lot of missed estimates and lowered forecasts and that could well pop the bubble. Once it starts the HFT boys and girls should make sure it goes lower than anyone expects.

Here's the thing about my prediction. It is no better than anyone else's. In other words I am talking my book and predicting what I hope will happen. Having learned this lesson over the years I have learned that when it comes to market timing and market direction I am probably the dumbest guy in the room. Because of that I have trained myself to always buy the stuff that's too cheap not to own and hold it regardless. After the rally since September truly cheap stuff is a little scarce on the ground but I have found enough to be about 40% long going into the year. I have a watch list as long as a taller persons right arm but most of it hover above truly cheap.

Here is what I own going into the year and think is still cheap enough to buy. I like Winn Dixie (WINN). The grocery business sucks right now. Wal mart has crushed margins industry wide. That aside WINN trades at 60% of tangible book value and at some point their 514 stores in the Southeast will attract attention from investors. A takeover here would be less than shocking. I will add Presidential Life (PLFE) to the list. This stock is also at 60% of tangible book and I expect to see a lot of M&A activity in the insurance sector this year and this should raise valuations across the board. I like Miller Petroleum (MILL) with their drilling presence in Alaska and the shale field soft Tennessee. This one trades at 70% of tangible book. Ill add Imperial Sugar (IPSU), Syms (SYMS) and Micron tech (MU) and Avatar Holdings (AVTR) to my list of cheapies and move on for now.

I am going to start building my small bank portfolio this year. Eventually this group becomes the F-you walk away money trade of the decade. As real estate losses work through the balance sheet and some measure of stability returns to the financial system, perhaps toward the end of the year the small baileys savings and loan type banks should start to recover. We will also see a mind blowing M&A wave as larger banks look to gain not just market share but healthy assets to put on the books. Right now these names trade at a fraction of tangible book value. They will reach a multiple of that in a recovery or takeover scenario. Right now I own shares of Shore Bancshares (SHBI), a local bank trading at 80% of book value and a reasonably healthy loan portfolio. I have some other mini microcap banks as well that shall remain my little secret and not used to figure how my predictions work out. I mention them because if you have a mini micro bank in your community you should go meet then bankers, review the books and consider investing if it trades below the magical tangible book value and has excess capital. Flagstar Bancorp(FBC) is my super long shot undated call option n the economy and real estate markets.

I will also play the thrift conversion game heavily this year. With the elimination of the Office of Thrift Services under the new financial regulation many of the benefits of being a private or mutual thrift are going away. There are a ton of mutual savings banks that will now convert to publicly traded banks. A lot of these deals will be priced below the pro forma book value that is created by adding all that lovely IPO cash to the balance sheet without a corresponding increase in the shares outstanding. Right now I have Fox Chase Bancorp (FXCB) and Capital Federal Financial(CFFN). There will be more. Deals are happening every day right now and again I would keep an eye out for local deals that you can take advantage of in the next few months.

I also think that 2011 will be the year of the activist investor. These folks took a beating since 2007 but this should be their year. There is a ton of cash on corporate balance sheets but lots of underperformance in the current economic environment. We will see activist drive takeovers, restructures, and special dividends this year in my opinion. Recent filings of interest include strong activist positions in Surmodics(SRDX), SeaChange International (SEAC), and Energy Solutions. Tracking activist portfolios and 13D filings should be a very profitable activity in 2011.

I have been looking at some interesting new stuff with options as well I am not going to give most of it away just yet but I ll give you one stimulated by a recent list discussion. H and R Black is highly likely to go into a private equity portfolio next year. Management has made every mistake you can make and the loss of RALs is a big problem for the company. However the brand has real value. I do not want town the stock just yet but I like the idea of selling the January 2012 at $.70 to $.75. If you cash secure the put it's a 10% or so return if the stock stays above the strike. If it falls below I' ll be happy to own the stock with a 6 handle net. Back in 2008 everyone anticipated a huge default wave to hit the high yield market. Thanks to federal stimulus money pumping programs it did not happen. However in the spirit of sell the dog food the dog will eat a given moment the hedge fund world raised an enormous amount od distressed debt money. Thanks to this high yield spreads are far too low. CCC paper in particular is priced at absurd levels. These things trade like money good paper and much of it is not. Extend and pretend has helped but if the economy stays weak and interest rates rise rolling over the tsunami f paper due over the next few years becomes nigh onto impossible. I am going take small position in puts on the various high yield ETFs. If I am right they will explode when that market implodes. Continuing to talk my book I hope this happens. Among my nightly prayers is "Please God just one more two year period of asset rich companies with current payments having bonds trade below recovery value and I promise not to piss the money away this time. Amen.

PS. If you add in risk arbitrage spreads of 30% annualized returns along with this I would not object. Love, Tim.

I can't tell you what the markets will do. I do know that I want to own some safe and cheap stocks, some well capitalized small banks trading below book and participate in activist situation. I will be under invested in equities going into the year hoping my watch list becomes my buy list in market stumble. I will have put positions on long T-Bonds and high yield hoping for a large asymmetrical payoff.

Other than that I am clueless.

Kim Zussman comments: 

Does anyone else think this year is harder than usual to forecast? Is it better now to forecast based on market fundamentals or mass psychology? We are at a two year high in stocks, after a huge rally off the '09 bottom that followed through this year. One can make compelling arguments for next year to decline (best case scenarios already discounted, prior big declines followed by others, volatility low, house prices still too high, FED out of tools, gov debt/gdp, Roubini says so, benefits to wall st not main st, persistent high unemployment, Year-to-year there is no significant relationship, but there is a weak down tendency after two consecutive up years. ). And compelling arguments for up as well (crash-fears cooling, short MA's > long MA's, retail investors and much cash still on sidelines, tax-cut extended, employee social security lowered, earnings increasing, GDP increasing, Tepper and Goldman say so, FED herding into risk assets, benefits to wall st not main st, employment starting to increase).

Is the level of government market-intervention effective, sustainable, or really that unusual? The FED looks to be avoiding Japan-style deflation at all costs, and has a better tool in the dollar. A bond yields decline would help growth and reduce deflation risk. Increasing yields would be expected with increasing inflation; bad for growth but welcomed by retiring boomers looking for fixed income. Will Obamacare be challenged or defanged by states or in the supreme court? Will 2011 be the year of the muni-bubble pop?

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

long CMF (Cali muni bond fund; fears over-wrought, investors still need tax-free yield)

short GLD (looks like a bubble and who needs gold anyway)

short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than vigilantism)

Alan Millhone writes:

Hello everyone,

I note discussion over the rules etc. Then you have a fellow like myself who has never bought or sold through the Market a single share.

For myself I will stick with what I know a little something. No, not Checkers —

Rental property. I have some empty units and beginning to rent one or two of late to increase my bottom line.

I will not venture into areas I know little or nothing and will stay the course in 2011 with what I am comfortable.

Happy New Year and good health,

Regards,

Alan

Jay Pasch predicts: 

2010 will close below SP futures 1255.

Buy-and-holders will be sorely disappointed as 2011 presents itself as a whip-saw year.

99% of the bullish prognosticators will eat crow except for the few lonely that called for a tempered intra-year high of ~ SPX 1300.

SPX will test 1130 by April 15 with a new recovery high as high as 1300 by the end of July.

SPX 1300 will fail with new 2011 low of 1050 before ending the year right about where it started.

The Midwest will continue to supply the country with good-natured humble stock, relatively speaking.

Chris Tucker enters: 

Buy and Hold

POT
MS
CME

Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

Mr. Ed Seykota once outlined for me the four essential rules of trading:

1) The trend is your friend (till it bends when it ends.)

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.

Cheers,

Gibbons

John Floyd writes:

In no particular order with target prices to be reached at some point in 2011:

1) Short the Australian Dollar:current 1.0220, target price .8000

2) Short the Euro: current 1.3375, target price 1.00

3) Short European Bank Stocks, can use BEBANKS index: current 107.40, target 70

A Mr. Krisrock predicts: 

1…housing will continue to lag…no matter what can be done…and with it unemployment will remain

2…bonds will outperform as republicans will make cutting spending the first attack they make…QE 2 will be replaced by QE3

3…with every economist in the world bullish, stocks will underperform…

4…commodities are peaking ….

Laurel Kenner predicts: 

After having made monkeys of those luminaries who shorted Treasuries last year, the market in 2011 has had its laugh and will finally carry out the long-anticipated plunge in bond prices.

Short the 30-year bond futures and cover at 80.

Pete Earle writes:

All picks are for 'all year' (open first trading day/close last trading day).

1. Long EUR/USD
2. Short gold (GLD)

Short:
MMR (McMoran Exploration Corp)
HDIX (Home Diagnostics Inc)
TUES (Tuesday Morning Corp)

Long:
PBP (Powershares S&P500 Buy-Write ETF)
NIB (iPath DJ-UBS Cocoa ETF)
KG (King Pharmaceuticals)

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

- bearish on S&P: 900 in dec
- crisis in Europe will bring EURUSD down to 1.15
- gold will remain a safe have haven: up to 1500
- big winner: natural gas to 8

J.T Holley contributes: 

Financials:

The Market Mistress so eloquently must come first and foremost. Just as daily historical stats point to betting on the "unchanged" so is my S&P 500 trade for calendar year 2011. Straddle the Mistress Day 1. My choice for own reasons with whatever leverage is suitable for pain thresholds is a quasi straddle. 100% Long and 50% Short in whatever instrument you choose. If instrument allows more leverage, first take away 50% of the 50% Short at suitable time and add to the depreciated/hopefully still less than 100% Long. Feel free to add to the Long at this discretionary point if it suits you. At the next occasion that is discretionary take away remaining Short side of Quasi Straddle, buckle up, and go Long whatever % Long that your instrument or brokerage allows till the end of 2011. Take note and use the historical annual standard deviation of the S&P 500 as a rudder or North Star, and throw in the quarterly standard deviation for testing. I think the ambiguity of the current situation will make the next 200-300 trading days of data collection highly important, more so than prior, but will probably yield results that produce just the same results whatever the Power Magnification of the Microscope.

Long the U.S. Dollar. Don't bother with the rest of the world and concern yourself with which of the few other Socialist-minded Country currencies to short. Just Long the U.S. Dollar on Day 1 of 2011. Keep it simple and specialize in only the Long of the U.S. Dollar. Cataclysmic Economic Nuclear Winter ain't gonna happen. When the Pastor preaches only on the Armageddon and passes the plate while at the pulpit there is only one thing that happens eventually - the Parish dwindles and the plate stops getting filled. The Dollar will bend as has, but won't break or at least I ain't bettin' on such.

Ala Mr. Melvin, Short any investment vehicle you like that contains the words or numerals "perpetual maturity", "zero coupon" and "20-30yr maturity" in their respective regulated descriptions, that were issued in times of yore. Unfortunately it doesn't work like a light switch with the timing, remember it's more like air going into a balloon or a slow motion see-saw. We always want profits initially and now and it just doesn't work that way it seems in speculation. Also, a side hedge is to start initially looking at any financial institution that begins, dabbles, originates and gains high margin fees from 50-100 year home loans or Zero-Coupon Home Loans if such start to make their way Stateside. The Gummit is done with this infusion and cheer leading. They are in protection mode, their profit was made. Now the savy financial engineers that are left or upcoming will continue to find ways to get the masses to think they "Own" homes while actually renting them. Think Car Industry '90-'06 with. Japan did it with their Notes and I'm sure some like-minded MBA's are baiting/pushing the envelopes now in board rooms across the U.S. with their profitability and ROI models, probably have ditched the Projector and have all around the cherry table with IPads watching their presentation. This will ultimately I feel humbly be the end of the Mortgage Interest Deduction as it will be dwindled down to a moot point and won't any longer be the leading tax deduction that it was created to so-called help.

Metals:

Short Gold, Short it, Short it more. Take all of your emotions and historical supply and demand factors out of the equation, just look at the historical standard deviation and how far right it is and think of Buzz Lightyear in Toy Story and when he thought he was actually flying and the look on his face at apex realization. That plus continue doing a study on Google Searches and the number of hits on "stolen gold", "stolen jewelery", and Google Google side Ads for "We buy Gold". I don't own gold jewelery, and have surrendered the only gold piece that I ever wore, but if I was still wearing it I'd be mighty weary of those that would be willing to chop a finger off to obtain. That ain't my fear, that's more their greed.

Long lithium related or raw if such. Technology demands such going forward.

Energy:

Long Natural Gas. Trading Day 1 till last trading day of the year. The historic "cheap" price in the minds of wannabe's will cause it to be leveraged long and oft with increasing volume regardless of the supply. Demand will follow, Pickens sowed the seeds and paid the price workin' the mule while plowin'. De-regulation on the supply side of commercial business statements is still in its infancy and will continue, politics will not beat out free markets going into the future.

Long Crude and look to see the round 150 broken in years to come while China invents, perfects, and sees the utility in the Nuclear fueled tanker.

Long LED, solar, and wind generation related with tiny % positions. Green makes since, its here to stay and become high margined profitable businesses.

Agriculture:

Short Sugar. Sorry Mr. Bow Tie. Monsanto has you Beet! That being stated, the substitute has arrived and genetically altered "Roundup Ready" is here to stay no matter what the Legislative Luddite Agrarians try, deny, or attempt. With that said, Long MON. It is way more than a seed company. It is more a pharmaceutical engineer and will bring down the obesity ridden words Corn Syrup eventually as well. Russia and Ireland will make sure of this with their attitudes of profit legally or illegally.

Prepare to long in late 2011 the commercialized marijuana and its manufacturing, distribution companies that need to expand profitability from its declining tobacco. Altria can't wait, neither can Monsanto. It isn't a moral issue any longer, it's a financial profit one. We get the joke, or choke? If the Gummit doesn't see what substitutes that K2 are doing and the legal hassles of such and what is going on in Lisbon then they need to have an economic lesson or two. It will be a compromise between the Commercial Adjective Definition Agrarians and Gummit for tax purposes with the Green theme continuing and lobbying.

Short Coffee, but just the 1st Qtr of 2011. Sorry Seattle. I will also state that there will exist a higher profit margin substitute for the gas combustible engine than a substitute for caffeine laden coffee.

Sex and Speculation:

Look to see www.fyretv.com go public in 2011 with whatever investment bank that does such trying their best to be anonymous. Are their any investment banks around? This Boxxx will make Red Box blush and Apple TV's box envious. IPTV and all related should be a category that should be Longed in 2011 it is here to stay and is in it's infancy. Way too many puns could be developed from this statement. Yes, I know fellas the fyre boxxx is 6"'s X 7"'s.

Music:

This is one category to always go Long. I have vastly improved my guitar playin' in '10 and will do so in '11. AAPL still has the edge and few rivals are even gaining market share and its still a buy on dips, sell on highs empirically counted. They finally realized that .99 cents wasn't cutting it and .69 cents was more appropriate for those that have bought Led Zeppelin IV songs on LP, 8-track, cassette, and CD over the course of their lives. Also, I believe technology has a better shot at profitably bringing music back into public schools than the Federal or State Gummits ever will.

Other:

Long - Your mind. Double down on this Day 1 of 2011. It's the most capable, profitable thing you have going for you. I just learned this after the last 36 months.

Long - Counting, you need it now more than ever. It's as important as capitalism.

Long - Being humble, it's intangible but if quantified has a STD of 4 if not higher.

Long - Common Sense.

Long - Our Children. The media is starting to question if their education is priceless, when it is, but not in their context or jam.

Short - Politics. It isn't a spectator sport and it has been made to be such.

Short - Fear, it is way way been played out. Test anything out there if you like. I have. It is prevalent still and disbelief is rampant.

Long - Greed, but don't be greedy just profitable. Wall Street: Money Never Sleeps was the pilot fish.

I had to end on a Long note.

Happy New Year's Specs. Thanks to all for support over the last four years. I finally realized that it ain't about being right or wrong, just profitable in all endeavors. Too many losses led to this, pain felt after lookin' within, and countin' ones character results with pen/paper.

Russ Sears writes:

For my entry to the contest, I will stick with the stocks ETF, and the index markets and avoid individual stocks, and the bonds and interest rates. This entry was thrown together rather quickly, not at all an acceptable level if it was real money. This entry is meant to show my personal biases and familiarity, rather than my investment regiment. I am largely talking my personal book.

Therefore, in the spirit of the contest , as well as the rules I will expose my line of thinking but only put numbers on actual entry predictions. Finally, if my caveats are not warning enough, I will comment on how a prediction or contest entry differs from any real investment. I would make or have made.

The USA number one new product export will continue to be the exportation of inflation. The printing of dollars will continue to have unintended consequences than its intended effect on the national economy but have an effect on the global economy.. Such monetary policy will hit areas with the most potential for growth: the emerging markets of China and India. In these economies, that spends over half their income on food, food will continue to rise. This appears to be a position opposite the Chairs starting point prediction of reversal of last year's trends.

Likewise, the demand for precious metals such as gold and silver will not wane as these are the poor man's hedge against food cost. It may be overkill for the advanced economies to horde the necessities and load up on precious metals Yet, unlike the 70's the US/ European economy no longer controls gold and silver a paradigm shift in thinking that perhaps the simple statistician that uses weighted averages and the geocentric economist have missed. So I believe those entries shorting gold or silver will be largely disappointed. However in a nod to the chair's wisdom, I will not pick metals directly as an entry. Last year's surprise is seldom this year's media darling. However, the trend can continue and gold could have a good year. The exception to the reversal rule seems to be with bubbles which gain a momentum of their own, apart from the fundamentals. The media has a natural sympathy in suggesting a return to the drama of he 70's, the stagflation dilemma, ,and propelling an indicator of doom. With the media's and the Fed's befuddled backing perhaps the "exception" is to be expected. But I certainly don't see metal's impending collapse nor its continued performance.

The stability or even elevated food prices will have some big effects on the heartland.

1. For my trend is your friend pick: Rather than buy directly into a agriculture commodity based index like DBA, I am suggesting you buy an equity agriculture based ETF like CRBA year end price at 77.50. I am suggesting that this ETF do not need to have commodities produce a stellar year, but simply need more confirmation that commodity price have established a higher long term floor. Individually I own several of these stocks and my wife family are farmers and landowners (for full disclosure purposes not to suggest I know anything about the agriculture business) Price of farmland is raising, due to low rates, GSE available credit, high grain prices due to high demand from China/India, ethanol substitution of oil A more direct investment in agriculture stability would be farmland. Farmers are buying tractors, best seeds and fertilizers of course, but will this accelerate. Being wrong on my core theme of stable to rising food/commodity price will ruin this trade. Therefore any real trade would do due diligence on individual stocks, and put a trailing floor. And be sensitive to higher volatility in commodities as well as a appropriate entry and exit level.

2. For the long term negative alpha, short term strength trade: I am going with airlines and FAA at 49.42 at year end. There seems to be finally some ability to pass cost through to the consumer, will it hold?

3. For the comeback of the year trade XHB: (the homebuilders ETF), bounces back with 25% return. While the overbuilding and vacancy rates in many high population density areas will continue to drag the home makes down, the new demand from the heartland for high end houses will rise that is this is I am suggesting that the homebuilders index is a good play for housing regionally decoupling from the national index. And much of what was said about the trading of agriculture ETF, also apply to this ETF. However, while I consider this a "surprise", the surprise is that this ETF does not have a negative alpha or slightly positive. This is in-line with my S&P 500 prediction below. Therefore unless you want volatility, simply buying the S&P Vanguard fund would probably be wiser. Or simply hold these inline to the index.

4. For the S&P Index itself I would go with the Vanguard 500 Fund as my vehicle VFINXF, and predict it will end 2011 at $145.03, this is 25% + the dividend. This is largely due to how I believe the economy will react this year. 

5. For my wild card regional banks EFT, greater than IAT > 37.50 by end 2011…

Yanki Onen writes:

I would like to thank all for sharing their insights and wisdom. As we all know and reminded time to time, how unforgiven could the market Mistress be. We also know how nurturing and giving it could be. Time to time i had my share of falls and rises. Everytime I fall, I pick your book turn couple of pages to get my fix then scroll through articles in DSpecs seeking wisdom and a flash of light. It never fails, before you know, back to the races. I have all of you to thank for that.

Now the ideas;

-This year's lagger next year's winner CSCO

Go long Jan 2012 20 Puts @ 2.63 Go long CSCO @ 19.55 Being long the put gives you the leverage and protection for a whole year, to give the stock time to make a move.

You could own 100,000 shares for $263K with portfolio margin ! Sooner the stock moves the more you make (time decay)

-Sell contango Buy backwardation

You could never go wrong if you accept the truth, Index funds always roll and specs dont take physical delivery. This cant be more true in Cotton.

Right before Index roll dates (it is widely published) sell front month buy back month especially when it is giving you almost -30 to do so Sell March CT Buy July CT pyramid this trade untill the roll date (sometime at the end of Jan or begining of Feb) when they are almost done rolling(watch the shift in open interest) close out and Buy May CT sell July CT wait patiently for it to play it out again untill the next roll.

- Leveraged ETFs suckers play!

Two ways to play this one out if you could borrow and sell short, short both FAZ and FAS equal $ amounts since the trade is neutral, execute this trade almost free of margin. One thing is for sure to stay even long after we are gone is volatility and triple leveraged products melt under volatility!

If you cant borrow the shares execute the trade using Jan 12 options to open synthetic short positions. This trade works with time and patience!

Vic, thanks again for providing a platform to listen and to be heard.

Sincerely,

Yanki Onen

Phil McDonnell writes: 

When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.

With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.

SLV closed at 30.18 on Friday.

Buy Jan 2013 40 call for 3.45.
Sell Jan 2012 40 call at 1.80.
Sell Jul 25 put at 1.15.

Net debit is .50.

Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 2/31/2011 at the close.

George Parkanyi entered:

For what it's worth, the Great White North weighs in ….
3 Markets equally weighted - 3 stages each (if rules allow) - all trades front months
3 JAN 2011
BUY NAT GAS at open

BUY SILVER at open

BUY CORN at open
28 FEB 2011 (Reverse Positions)
SELL and then SHORT NAT GAS at open

SELL and then SHORT SILVER at open

SELL and then SHORT CORN at open
1 AUG 2011 (Reverse Positions)
COVER and then BUY NAT GAS at open

COVER and then BUY SILVER at open

COVER and then BUY CORN at open
Hold all positions to the end of the year

WILD CARD
3 JAN BUY PLATINUM and hold to end of year.

RATIONALE:

. Markets to unexpectedly carry through in New Year despite correction fears.

. Spain/Ireland debt roll issues - Europe/Euro in general- will be in the news in Q1/Q2

- markets will correct sharply in late Q1 through Q2 (interest rates will be rising)

. Markets will kick in again in Q3 & Q4 with strong finish on more/earlier QE in both Europe and US - hard assets will remain in favour; corn & platinum shortages; cooling trend & economic recovery to favour nat gas

. Also assuming seasonals will perform more or less according to stats

If rules do not allow directional changes; then go long NAT GAS, SILVER, and CORN on 1 AUG 2011 (cash until then); wild card trade the same.

Gratuitous/pointless prediction: At least two European countries will drop out of Euro in 2011 (at least announce it) and go back to their own currency. 

Marlowe Cassetti enters:

Buy:
FXE - Currency Shares Euro Trust

XLE - Energy Select

BAL - iPath Dow Jones-AIG Cotton Total Return Sub-Index

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:

Buy:

VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still
need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than
vigilantism)

Dec

29

We've all seen too many black swans over the past decade. But why must all the black swans be negative? Why can't we have a black swan on the positive side?

This is NOT my prediction– but it's worth contemplating the following from Jan Hatzius (GS). In a nutshell, he alleges that much of the recent economic sluggishness is attributable to deleveraging in the private sector. And he suggests that this is coming to an end.

As a thought experiment, I'm analyzing how Hatzius' outlier prediction of 6% or 7% growth in 2011 might affect my portfolios. I routinely fret about double dips, and triple dips, European crises, and $30 oil/$200 oil, but I haven't spent much time fretting about 7% growth…but I probably should! Is it possible that we'll look back at QE2 with the same funds that we look back at the final Fed rate cut during the summer of 1993? (It's left as an exercise for the reader to see how stocks, bonds, and commodities behaved in 1994.)

And, why is Hatzius' prediction any wackier than Mr. Roubini's repeated predictions in 2005 and 2006 and 2007?

(Oh, and by the way, the US commercial truck fleet age is now the oldest that it's even been!)

From the FT:

Jan Hatzius, chief US economist of Goldman Sachs, is one who has become more positive. "There's been a clear improvement in underlying final demand," he says. "My explanation is that we're seeing a slowdown in the pace of deleveraging in the private sector." Deleveraging is the fundamental reason why the economic recovery since 2009 has been so slow. It explains why unemployment remains stuck at 9.8 per cent.

The call on consumption is contentious because debt levels in the US remain high by historical levels. Household debt, at about 90 per cent of GDP, is back to levels seen in 2005 but it would take years of deleveraging to return to the 80 per cent seen in 2002-03. Consumers do not need to stop saving, however. They just need to stop increasing the rate at which they save for the economy to grow.

If the US populace really does begin to catch up on consumption after three miserable years then growth could hit 6 per cent or even 7 per cent in 2011. The chances of that remain modest – but if it happens then the boost to confidence may feed on itself and the nastiest US downturn in decades might truly start to feel as if it is over…

Mr. Albert writes:

For what it's worth, Prof Roubini just bought a Manhattan condo…

Kim Zussman writes: 

Which begs the question where did the energy of the housing bubble (and related lending/spending) go, and is it now durably irrelevant?

The attached charts Shiller real home price index, which shows the 2006 bubble dwarfing any prior local maxima/minima for the last 120 years. Real home prices are now near where they were in 2004– which is still above all prior levels.

The FED over-rules the law of post-bubble over correction?

Ken Drees comments: 

1. this is a warm and fuzzy outlook (especially after 2 years of up market)
2. this is good to think about because its the white swan
3. if growth were to hit 6% it must do it in three quarters because it will take 1 quarter to pay off fourth quarter frugal fatique binge
4. if growth hit 6% it would ramp up quickly in a 3rd and 4th quarter burst
5. the ben factor about putting on the breaks would be argued down–can't hurt the president's reelection chances with a rate hike
6. Inflation would be running probably higher than 2% (fed measured) and no doubt inflation factors would be influencing growth–tainting real growth
7. Market would surge–second half after it wakes up to the fact of growth without a fed bummer.
8. banks would start to lend more in second half.
9. Real estate would firm some and so forth–growth begets growth.
10. Fed would leave it alone and overheat in 2012 would be a risk.

Jobs and job outlook in the spring 2011 would be key to overcoming recession inertia. I don't know if we are there yet–3 dollar gas with some predicting 5 next year will not help the prospect of saving less. Gas prices need to be 2.50 or less to give this scenario a fighting chance. 5 dollar gas would be an inflation goose (swan).

Bill Rafter writes:

I would agree that Hatzius is certainly correct in that a lot of the economic malaise can be attributed to deleveraging. It is evident in the Fed series TOTBKCR, CIBOARD and TOTALSL, bank credit, commercial and industrial loans and consumer credit respectively. You can also look at the monetary aggregates (going nowhere) and make calculations of the velocity of money (so low as to be underneath the outhouse).
What I cannot justify is the prediction of a turnaround. Admittedly at some point those who wish to deleverage have nothing else to deleverage. But that only manifests itself in a mean reversion of the rate of decline. It does not necessarily manifest itself in increased leveraging activity, presumably a result of economic growth. Thus we believe that those who see a decline in deleveraging as evidence of upcoming economic growth are extrapolating way beyond what is reasonable.

Many of the indicators we follow are extremely bullish, and yet others scare the daylights out of us. This is a time of mixed signals. The speculator must make certain that he goes into his activity without preconceived ideas, for if he perceives things to be bullish he will certainly find indicators which reflect that belief. But here's the rub: it's the same with the bear.

It may simply be too soon for the unequivocal good things to happen or be evident. I believe there is evidence that decision makers do not act on anticipated tax relief, but wait for it to actually take effect. Also, the recent tax legislation was not a drop in costs, but the suspension of an increase, which is not the same. Other than taxes, entrepreneurs tend to find a way to cope and then a way to eke out profit. No one is sitting around just waiting for the deus ex machina. To some that means outsourcing (perhaps overseas) and being maligned for doing so. There have been some private equity deals lately. All of that repositioning is good eventually. Maybe we just need to wait for the fog to clear a bit.

Fred Crossman writes:

Rocky, there could be a black swan event next year, but probably not in GDP growth. The last time we had over 7% growth was in 1984. This past recovery in 2002-2008 only had one year of GDP growth over 3%. That period had very low rates and benefited from tremendous credit expansion with huge housing growth, a construction boom, massive home equity withdrawal, etc. only 2003 had a GDP over 3%. It was 3.8%.

If hatzius believes in 6%- 7% GDP growth for 2011 or 2102, (basically the 2002-2008 recovery replicated next year at over twice that past period's 3% GDP rate growth) in a current environment of high unemployment, negative home equity and facing city and state layoffs, then he would be worthy of more than the black swan award.

Dec

22

Today the US census reported slower growth in population. Over the past few years, Japan has experienced flat or declining population growth.

Here is a regression of contemporaneous annual return in Nikkei (1944-2009) and annual population change:

Regression Analysis: nik chg versus pop chg

The regression equation is
nik chg = 0.0801 + 6.22 pop chg

Predictor     Coef  SE Coef     T      P
Constant    0.080    0.0489  1.64  0.107
pop chg      6.223    3.863   1.61  0.112

S = 0.296056   R-Sq = 4.0%   R-Sq(adj) = 2.4%

The slope coefficient is not significant, but there is a positive correlation between stock prices and population growth (as shown by the loose correlation plot).

This may not be the correct lag to check: why would population change and stock returns correlate in the same year (except for wives the following year in Connecticut)? Birthrate should decline as a population ages, and to the extent that assets are sold more to finance the consumption of pensioners than new parents.

 

Dec

22

The other day, I was forced to attend an amateur showing of Dickens "A Christmas Carol." The production was well executed, the stagecraft was excellent, and the scenery was first rate. I've seen the Dickens classic so many times, I either just nod off, daydream, or try to improve my mind. During the show, I started to think of how the author, Charles Dickens, really hated capitalists and was a socialist at heart. He portrayed Ebeneezer Scrooge as the prototypical capitalist of the day, but his real "sin" was that he was a miser, only interested in his self, mistreating everyone. The fact that Scrooge had a bad attitude and dour personality did not work in his favor and was a great device used by Dickens to generate hatred for capitalists and the rich in general.

This got me thinking on many levels. For one thing, Scrooge was a businessman who earned his money fair and square. He cheated nobody and expected his contracts and debts to be paid as per any previous agreements, Scrooge ran a tight ship, to the point of being called miserly. He was a demanding employer of his clerk Mr. Cratchit, who accepted the employment contract with Mr. Scrooge with good cheer. Much has been said and written about the evil Mr Scrooge, his name has become part of the lexicon of the definition of an evil capitalist. Even the people in the neighborhood made disparaging remarks about Scrooge, and this mistreatment and lack of respect added to his dour personality. There was no evil to Mr Scrooge, and his unfavorable treatment was a literary device, a populist reaction by the left, the socialists who portray all rich as greedy, evil people who allow people to suffer while they live rich, extravagant lives. 

As I said before, Mr Scrooge had an employment contract with his clerk, Mr. Cratchit who was a man of good cheer. Cratchit's wife constantly complained that Scrooge was an old miser with a flinty heart of stone. She neglected to mention that Mr. Cratchit was free to seek employment elsewhere if his working conditions were so bad, but this aspect and so many others were left out by Dickens. As for Scrooge's miserly description, some would call his miserliness thrift, which is an esteemed Franklinian virtue.

Scrooge's refusal to participate in a festive dinner with his nephew and wife was his business and he certainly didn't deserve the ridicule heaped upon him by the women folk, nor was he required to offer an explanation or apology. He was merely exercising his freedom to do what he wanted, and if he chose not to celebrate Christmas, that was his natural, god given right. During Scrooge's pre ghost phase, he was a hard nosed flinty business man, albeit a bit ill mannered. There is no law against being ill mannered, dour, mean, or miserly. Scrooge was free to do whatever he wanted, with no worries what society would think as long as he behaved within the law and remaining scandal free.

Every good story likes to make a case of human redemption, a change from self interest to the interest and service of the collective. In popular culture, rich are inherently evil, their gains ill gotten off the backs of workers, and the poor always triumph over the rich. Dickens masterfully pulled this off when he had three ghosts visit Scrooge on Christmas Eve to scare the hell out of him and change his evil ways. His powerful scare tactics caused Mr Scrooge to abandon his own self interest, abandon his personal freedom for the good of society, destroy the profitability of his business, and spend his hard earned wealth on charity to repent for his earlier miserliness.

The messages Dickens made in a Christmas Carol were very clear. Productive people must give to the more deserving poor to be considered worthy, rich people are not happy due to guilt, producers must abandon self interest in order to satisfy the needs of others in a society who don't work as hard, businessmen must run their personal business for the sole benefit of their employees, conversely to the detriment of the stockholders. And finally one must give exorbitant sums to the poor, provide medical care for the employees, and give retroactive raises to allegedly underpaid employees. Benevolence is not a virtue in this world, it is a requirement. Scrooge was manipulated into this transformation by the three ghosts creating immense guilt and fear, and by the end of the story Mr Scrooge was more concerned with what people thought of him, his personal image, than the real work of creating profits, creating jobs, growing a business, and contributing to the general business climate.

At the end of the story Mr. Scrooge was a transformed man. He was happy, benevolent, highly thought of, giving,almost giddy, much like a person who has had a drink or ten. A good case could be made that he was a better man, but w hat he lost was the real tragedy. Scrooge lost his independence, his freedom, became dependent not on profits, but on the opinions of others. He was required to give money away, raised expectations of others, and caused economic imbalance by changing the market pay scale of employees in his business. In a way, Scrooge's new found largesse probably was bad for the economy as a whole a la the theories of Hazlitt. On another note, happiness tends to be fleeting much like health and I suspect that with Mr Scrooge, old habits die hard.

When the curtain closed, everyone was cheering. I felt a bit of sadness, as here's another story of poverty trumps wealth, rich is evil while poor is good, and being a second hander is more important than being a real, virtuous free man. In the end, Mr. Scrooge was the real loser and the real story was the transformation of a rich, productive man into a welfare state.

Rocky Humbert comments:

Dear Jeff:

Considering "A Christmas Carol" to be an indictment of Victorian Capitalism is not a novel idea, yet I still find your words and spirit to be sad, indeed.

While you are free to intrepret Dickens however you see fit, you have no such freedom with respect to core Judeo-Christian values, which parts of Dickens' play embodies. The principles which you lament are the core principles of Judaism and Christianity.

What you find lamentable, I find laudable. When you find trivial, I find grand. In short, I celebrate the charity and goodness toward man that Christmas celebrates, while you mock it as political correctness.

I wish you a happy holiday, and hope that you someday discover what Scrooged learned– that there is no greater joy than bringing happiness to others.

Scott Brooks adds:

Let's not confuse charity with force of threat.

Scrooge offered a fair deal at a fair price. The way we can infer that this is the case is that people came to him, and willingly signed a contract. Scrooge performed his half of the contract by loaning them money. What is wrong with him expecting that they honor their portion of the contract?

And, let's not confuse what Scrooge did for charity. Giving to other under threat of force…..i.e. the spirits (under the direction of Dickens) threatened him with the threat of eternal damnation if he didn't commit business suicide.

Another problem with "A Christmas Carol" was that the story ended on December 25th. Let's flash forward to the "The Week After Christmas":

Bob Cratchit shows up at work on the 26th only to find that he doesn't have a job. Why? Because Scrooge, in his "fit of charity to bring happiness and joy to others" tore up all the debts owed to him and there was no more accounting work for Cratchit to do.

Later that day, and throughout the next week, a bunch of former Scrooge customers come to the office to borrow more money, only to find it closed because Scrooge has no more money to lend out. If he did, it would be evil (under Rocky's view of the world) to unfairly loan out money. And he couldn't just keep the money, he would have to give it away to atone for his supposed sins.

Therefore, the vital role that Scrooge played in the community…i.e. loaning money to people that had need of a loan for whatever purpose they felt they needed a loan for (and that Scrooge deemed as a good "loan risk")….that vital role was no longer available in the community.

And what happens when credit dries up in a society….well, I think we can all agree that that's not a good thing.

Sorry Rocky, but you're wrong in your assessment. This is not charity or Christian/Judeo ethics. This is a story by a man who didn't like Capitalism, that slams capitalism. It could have been written by most any journalist or university professor in today's society.

David Hillman writes:

And then, there's the contrarian point of view…

….which makes as much sense as does the interpretation of A Christmas Carol as an indictment of Victorian Capitalism [which, by the way, was far different from what we generally think of as 20th Century capitalism, i.e., the kinder, gentler Fordist model or the so-called millennial capitalism that has been evolving since the 1980s.]

I don't know much, but two things I know, 1) what Dickens' meaning and intent in A Christmas Carol was is about as clear as what the founding fathers intended in the Constitution, or as clear as whether the origin of the universe was a God or a Big Bang, and 2) we don't see things as they are, we see things as we are.

That said, I would posit that one's interpretation of A Christmas Carol, or just about anything else for that matter, tells us far more about the interpreter than it does of Dickens. 

Gary Rogan writes:

It's interesting that with all of his supposedly anti-capitalist novels, Dickens undertook two trips to America mostly to lobby for copyright enforcement. He also blamed his bankruptcy and later health and financial problems close to his death on being deprived of his rightful royalty stream. Somehow various American software companies and their hyper-liberal billionaire founders fighting intellectual property theft in China come to mind, although they are all in decidedly better financial shape.

Kim Zussman chimes in:

It's not every day you see Jewish pro-Christmas arguments against Mormons; a market top indicator?

The 1938 Christmas Carol is a great film, and if you don't tear up your trading accounts are definitely too flush.

Scrooge's encounters with ghostly futures cause us to ask what is really important. It is difficult to balance the race for money with taking time for things and people who will too soon be grown, old, or gone.

Stefan Jovanovich writes:

"A Christmas Carol" is far less about what our List calls "capitalism" - i.e. pricing by competition - and far more about Dickens' wanting the world to have a universal catcher in the rye and not be like the America he saw in 1842. He was appalled by our slavery and by our insane "push". He was also upset by the fact that, like the East Asians today, Americans were notorious copyright pirates. We were also the source of his growing wealth by being the best customers for his books. During his visit to New York his American publisher and his admirers (Washington Irving, William Cullen Bryant) held a gala in his honor, with 3000 people attending.

Dickens knew almost nothing about business by 1843 (the date of A Christmas Carol's publication) from direct experience or observation. His father had worked in the Navy Pay office and lived on a family inheritance. Dickens' only job in any "dark, satanic mill" was a few months sticking labels on bottles of shoe polish. He then went back to school. After school he worked in a law office as a clerk, taught himself the new short-hand and became a court reporter through a family connection. That led to political journalism. Sketches by Boz - his first book published in 1836 - is a collection of his political pieces for the Morning Chronicle, covering the Parliamentary elections.

The socialism Jeff finds in the story is there; it is the same socialism you find in Thoreau. It came from the same source - Unitarianism - which Dickens became interested in while visiting the U.S. And, capitalism in its modern forms was still in its infancy. It would be another decade and more before limited liability was formally recognized in Britain in the legislation of 1855-1856.

Gibbons Burke writes:

A Christmas Carol is not anti-Capitalist as such. But it makes a case strongly against Capitalism run by capitalists who serve Mammon rather than God. Scrooge, who initially perfectly represents that anti-human form of Capitalism at its worst soul-less excess, is the perfect picture of a seemingly-self-satisfied soul roasting in a Hell on Earth of his own devising, and he seems certainly destined for the eternal flame pit until his heart is converted later in the book. At that moment he becomes filled with the Joy that is the gigantic secret of the Christian (according to Chesterton).

Here is Dickens' initial description of old Scrooge - which seems to have plenty of editorial voltage:

Oh! But he was a tight-fisted hand at the grindstone, Scrooge! a squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner! Hard and sharp as flint, from which no steel had ever struck out generous fire; secret, and self-contained, and solitary as an oyster. The cold within him froze his old features, nipped his pointed nose, shrivelled his cheek, stiffened his gait; made his eyes red, his thin lips blue; and spoke out shrewdly in his grating voice. A frosty rime was on his head, and on his eyebrows, and his wiry chin. He carried his own low temperature always about with him; he iced his office in the dog-days; and didn't thaw it one degree at Christmas.

External heat and cold had little influence on Scrooge. No warmth could warm, no wintry weather chill him. No wind that blew was bitterer than he, no falling snow was more intent upon its purpose, no pelting rain less open to entreaty. Foul weather didn't know where to have him. The heaviest rain, and snow, and hail, and sleet, could boast of the advantage over him in only one respect. They often "came down" handsomely, and Scrooge never did.

Nobody ever stopped him in the street to say, with gladsome looks, "My dear Scrooge, how are you? When will you come to see me?" No beggars implored him to bestow a trifle, no children asked him what it was o'clock, no man or woman ever once in all his life inquired the way to such and such a place, of Scrooge. Even the blind men's dogs appeared to know him; and when they saw him coming on, would tug their owners into doorways and up courts; and then would wag their tails as though they said, "No eye at all is better than an evil eye, dark master!"

But what did Scrooge care! It was the very thing he liked. To edge his way along the crowded paths of life, warning all human sympathy to keep its distance, was what the knowing ones call "nuts" to Scrooge.

The book is available in several illustrated editions for free on Project Gutenberg.

Jeff Watson responds: 

So, in other words, while Scrooge was unpopular, he enjoyed total freedom. That sounds pretty good to me. At least If I had his rep, I wouldn't have to say no to 30 requests for donations a day. Can you imagine how refreshing it would be to perform an essential service, perform admirably in business, deliver superior service, and not give a damn what people thought of you? That would make Hank Reardon proud. It is not a crime to be disagreeable, a skinflint, self serving or any other eccentricity. If we punished men for their eccentricities, Henry Ford would have never created and revolutionized the automobile business, J.P. Morgan would never have risen beyond the level of margin clerk, the old Commodore Vanderbilt would have probably died in a house of ill repute, Barney Frank would have been hanging out on…, and Bill Clinton would probably be in an Arkansas … for a very youthful indiscretion. 

John Tierney writes:

In 1899 Elbert Hubbard viewed the "Scrooges" thusly:

We have recently been hearing much maudlin sympathy expressed for the "downtrodden denizen of the sweat-shop" and the "homeless wanderer searching for honest employment," & with it all often go many hard words for the men in power.

Nothing is said about the employer who grows old before his time in a vain attempt to get frowsy ne'er-do-wells to do intelligent work; and his long patient striving with "help" that does nothing but loaf when his back is turned. In every store and factory there is a constant weeding-out process going on. The employer is constantly sending away "help" that have shown their incapacity to further the interests of the business, and others are being taken on. No matter how good times are, this sorting continues, only if times are hard and work is scarce, the sorting is done finer- but out and forever out, the incompetent and unworthy go.

It is the survival of the fittest. Self-interest prompts every employer to keep the best- those who can carry a message to Garcia.

I know one man of really brilliant parts who has not the ability to manage a business of his own, and yet who is absolutely worthless to any one else, because he carries with him constantly the insane suspicion that his employer is oppressing, or intending to oppress him. He cannot give orders; and he will not receive them. Should a message be given him to take to Garcia, his answer would probably be, "Take it yourself."

Tonight this man walks the streets looking for work, the wind whistling through his threadbare coat. No one who knows him dare employ him, for he is a regular fire-brand of discontent. He is impervious to reason, and the only thing that can impress him is the toe of a thick-soled No. 9 boot.

Tim Melvin comments:

The question of scrooge and how we view him is one that men of business have wrestled with since the damn story was published. The thing is that Dickens does not paint Scrooge as the example of every businessman. We tend to take much of the Scrooge story out of context, I think. Business itself is not painted as evil or wrong. Was not Fezziwig the owner of a prosperous and successful business when young Ebenezer was employed there in his youth. Judging by the Christmas party it was prosperous business indeed. Yet Fezziwig was a generous soul to his employees who treated then well and asked for a fair days work for a fair day's pay and got it it cheerfully from those in his employ. Scrooge described his time employed there and his boss thusly, "The happiness he gives, is quite as great as if it cost a fortune ."

In contrast Scrooge underpaid Bob Cratchitt and treated him poorly. To say that Mr. Cratchitt could simply look for other employment is as ridiculous a statement as it is heartless. With a large family and a sick child he would be foolish to change what employment he did have by seeking other employ. Given the hours he toiled when would he had the time anyway?

Scrooge is indicted not for being a man of business but for being a man who shuts out the world and pursues only business in a mean spirited way. I greet my lender when I see him on the street. Scrooge was harsh man who was probably the lender of last resort and treated his customers poorly. Good business is a win win were the partied walk away feeling that both have scored a victory in my experience. To have your neighbors ignore you in the street and cackle over yor corpse does not paint the idea that he did business fairly in my mind. To be sure we all have probably made some enemies along the way, but we have made friends as well who would mourn our passing/ not so in this case.

Scrooge is indicted of closing his heart to all of humanity. He chooses commerce over the love of a woman and the potential for a life and a family. He helps no one with a kind word, a gentle lesson or a shared idea. The concept of charity is unique to us all. But hard asses as all of us are, as libertarian and objectivist rooted as we are, would we hesitate to assist a friend, relative or even employee who had an ill child if we had the resources to do so? Which of us would not give our nephew, our only family a visit on a holiday eve or at least a kind word, a lesson in the ways of the world that might help them succeed in life?

Scrooge was not indicted and sentenced to haunting for being a business man. He was convicted of living without love. The love of a child, of a woman, of humanity. He hated himself as much as he hated the rest of the world. Scrooge's crime was not being a business man but for failing to appreciate the wonder that life actually can be. I like so many other readers of this site detest the corporate charities, and I say no quickly and clearly in my best bah humbug fashion. But just like everyone else here there are charities and causes I believe in and donate my time and money. I do not buy the in the give to all philosophy or faceless giving anymore than the rest of you. I do believe in libraries, special olympics and a few other causes and I give. So do you whether it's a church, a cause, a philosophy of a friend in need so quit pretending your are an objectivist hardass who helps no one. Not only is that so much BS, it's a heartless life that would create a scrooge like existence and so far I have met no spec who fits that description.

Scrooge's crime was not business. It was living with love, without the touch and hear of another, without a child's smile, a lover kiss or the hand of a friend. By Dickens account he denied himself all the makes life special. There is no account given of good food, or beautiful music or even good books. Scrooge's crime was not one of business. He was guilty of crimes against life itself. 

Jeff Watson responds: 

(While I agree with much of Tim's premise, I'd like to see the statutes Scrooge violated regarding the aforementioned crimes). If those are indeed crimes that Scrooge committed, I fear the state is on the road to becoming more totalitarian if they feel the necessity to regulate those areas of normal but eccentric human behavior. Again, it's not against the law to be a total dick, nor should the government concern itself with forbidding person to be rude, self absorbed, cheap, hated, or mean spirited. I certainly can't find anything in the constitution addressing this issue. 

Stefan Jovanovich writes:

Dickens wanted women to stay in the kitchen; Hubbard wanted them to own the restaurant.

His company - Larkin Soap - gave Frank Lloyd Wright his first big commission. The friezes on open galleries of the building had these mottoes: GENEROSITY ALTRUISM SACRIFICE, INTEGRITY LOYALTY FIDELITY, IMAGINATION JUDGMENT INITIATIVE, INTELLIGENCE ENTHUSIASM CONTROL, CO-OPERATION ECONOMY INDUSTRY.

Here is Hubbard's story of how he started the Philistine magazine and the Roycroft shops. Begins at page 309

Dec

20

Keynes was interested in markets, and did pretty well. What about Hayek?:

"Keynes was another Kelly-type bettor. His record running Kings College Cambridges Chest Fund is shown in Figure 2 versus the British market index for 1927 to 1945, data from Chua and Woodward (1983). Notice how much Keynes lost the first few years; obviously his academic brilliance and the recognition that he was facing a rather tough market kept him in this job. In total his geometric mean return beat the index by 10.01 per cent. Keynes was an aggressive investor with a beta of 1.78 versus the bench- mark United Kingdom market return, a Sharpe ratio of 0.385, geometric mean returns of 9.12 per cent per year versus Ð0.89 per cent for the benchmark. Keynes had a yearly standard deviation of 29.28 per cent versus 12.55 per cent for the benchmark. These returns do not include Keynes (or the benchmarks) dividends and interest, which he used to pay the college expenses. These were 3 per cent per year. Kelly cowboys have their great returns and losses and embarrassments. Not covering a grain contract in time led to Keynes taking delivery and filling up the famous chapel. Fortunately it was big enough to fit in the grain and store it safely until it could be sold. Keynes emphasized three principles of successful investments in his 1933 report:

1. A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time; 2. A steadfast holding of these in fairly large units through thick and thin, perhaps for several years until either they have fulfilled their promise or it is evident that they were purchased on a mistake; and 3. A balanced investment position, i.e., a variety of risks in spite of individual holdings being large, and if possible, opposed risks.

Jeff Watson writes:

I could not find much about Hayek's investment performance and speculate that his work in getting a Nobel Prize and publishing seminal works probably attenuated any desire to actively play in the market. Granted, Keynes was a genius……completely wrong about everything, but a genius nonetheless. I notice no comment from his fans on the left about his legendary Anti-semitism, his frequent use of the N-word when describing American Blacks, and his dismissive attitude towards Russians, and other Eastern Europeans who he thought to be the unwashed masses and very ignorant. Still, in his complete wrongness, he provided a very bright beacon for those of us who wish to pursue the correct course. Keynes is our own perfect fade factor, a Douglas "Wrong Way" Corrigan of economics.

Larry Williams writes: 

What an article on this that does not mention Ralph Vince. Oh, I get it…much of his comments are lifted from Ralph, so why let people know he exists? Trade kelly and you are doomed to die.

Ralph Vince responds:

Thank YOU Larry. A couple of things on this.

1. Whenever people start talking "half Kelly," or other ad-hoc locations on a dynamic curve (with respect to the number of plays) I realize they don;t know what they are talking about. It doesn't mean they aren't good mathematicians, they just don;t understand their material well enough. Ziemba has been doing that for years.

How can a man look at the curve and not begin to discern the nature of it beyond that???

2. The "Kelly" Criterion answer is NOT what any of these guys thought it was. It is NOT the optimal fraction to invest. It is a leverage factor — a number not bound between 0 and 1 but 0 and + infinity. Thus, if you treat it as a fraction, you will inadvertently be using a fraction that is way beyond optimal in trading.

3. Once you discern what the real optimal fraction is to invest (and you won't get there with the Kelly Criterion) then you can make intelligent decisions on what value to use as a prediction of where the optimal fraction will be in the forthcoming periods.

All of that if you want to be growth optimal. Go ahead, have at it slugger. The REAL benefit to understanding the nature of the curve of the optimal fraction (not to be confused with Kelly's misguided criterion) is that you can use it to satisfy OTHER objectives aside from the incredibly aggressive growth optimal one.

I don't claim to be the mathematician any of these guys are. But I know I understand this material better than all of them combined.

And I have the real-time track record to prove it.
 

Dec

18

The attached chart shows this year's (1/5/10-12/16/10) compounded growth of SPY: "day" = o-c, "night" = c-o.

Both equity curves have converged toward the end of the year, but at various points there were divergences. From April to July, cpd day returns dropped from +6% to -9%, while overnights ended relatively flat. From July to present, day has risen steadily - now around +4%. Overnights dropped over the month of August, from +3% to -4 % - in the lead up to the QE2 announcement in late August.

It's hard to guess who figures into difference between intra-day and overnight returns, but to the extent that YTD returns are similar, the much smaller peak/valley of overnight suggests they were more accurate.

Two-sample T for c-o vs o-c

      N     Mean    StDev  SE Mean
c-o  241  0.00026  0.00702  0.00045 T=0.08
o-c  241  0.00020  0.00883  0.00057

>> statistically not different, but different volatility:

Test for Equal Variances: c-o, o-c

95% Bonferroni confidence intervals for standard deviations

      N      Lower      StDev      Upper
c-o  241  0.0063668  0.0070199  0.0078160
o-c  241  0.0080116  0.0088334  0.0098353

F-Test (normal distribution)
Test statistic = 0.63, p-value = 0.000

Levene's Test (any continuous distribution)
Test statistic = 10.10, p-value = 0.002

 

Dec

16

My gym features a fair proportion of middle-aged single women, who show three clinical diagnostic signs: big hair, thin body, and friendly eyes. Recently while on the pec-machine, I noticed one such lady kneeling over a weight bench; facing downward, using one arm to support herself while the other worked a barbell.

She was wearing the usual tight-fitting gym attire, and had remarkably large breasts given her slim physique; bent over as she was they almost reached the weight bench. When she stood up, they went from vertical to horizontal - a telltale sign: implants!

As a longtime fan of the unadulterated female form, these got me thinking globally. In the absence of cancer reconstruction, what is the allure of a bag of water (or silicone)? If you had one on the desk in front of you, it would be interesting but probably not arousing. Would it be as intriguing if implanted in your dog, or on top of your neighbor's head? No. Implanted beneath the female breast it intensifies the male>female sexual diamorphic attraction. But still…it is fake.

What about the unadulterated breast? Those who have studied and dissected them can tell you they are little mounds of mostly adipose tissue (fat), and milk glands, held together by a mesh of connective tissue (Cooper's ligament), with a pigmented exit nozzle. Analyzing these contents removed from their fanciful context elicits a different reaction than the familiar self-induced diversion to spiritual eternity.

This recalls the "suspension of disbelief" one performs when starting to read a work of fiction or watch a movie: You know it isn't real, but subconsciously tell yourself "in the interest of pleasure - just for now pretend it is real". Much of what we do contains such illusion, in order to create emotions of joy, romance, nostalgia, and love.

Toward the end of my work-out, I bumped into a guy I know in front of the women's locker room and joked "stay out of there!". I pointed at the big "W" on the door, "That means WARNING! Bright fluorescents and no illusion!".

In a round about way, breasts got me wondering about the phenomenal stock market rally since the near destruction of the financial system. How much of the recovery is due to the human desire to see goodness, hope, and eternal joy, even in handfuls of non-specific fat?

Dec

15

Just looking at the muni index funds can be a little misleading. The actual funds are bid down today a lot more than their NAV. Also munis seem to be a lot more affected today on the longer end of the curve (2021+)… though there are debatable interpretations of that.

Everyone seemed to react frantically to the Fed in early afternoon, even though it seemed to me to be exactly what one should expect at this point… "likely to warrant exceptionally low levels for the federal funds rate for an extended period." Did this really catch people by surprise?

Kim Zussman writes:

Here is updated ratio of California muni etf / Treasury etf (fairly well matched in duration, symbols CMF/IEF).

Still above the November low, but since then both munis and treasuries have falled down in price.

 

Ken Drees adds: 

I found this good article on this topic: 

QE 3 ?

Reasons for the Muni Selloff

1. Unwinding of the "sure-thing" Quantitative Easing trade
2. Selloff in bonds in general because of budget and inflation concerns
3. End of the Build America Bond program (BABs)
4. Increasing default risk

Of the above reasons, 3 and 4 are the most important on intermediate and ongoing basis.

BABs was excluded from Obama's compromise tax proposal. Hopefully it stays that way. I discussed why in Time to Kill Build America Bonds (BABs)

The short version is "Taxpayers are already on the hook for hundreds of billions of dollars of Fannie Mae and Freddie Mac debt. We should not extend the insanity to government guarantees of municipal bonds"

However, now that the government guarantee is gone, yields are poised to rise, especially with increased default risk rising.

Here are several examples of rising default risk:

a.. Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City; Expect Bankruptcy, Massive Municipal Bond Turmoil in 2011

b.. Miami Commissioner Says Bankruptcy is City's Best Hope; Chris Christie Says New Jersey Careens Towards Becoming Greece

c.. Oakland California Bankrupt - Councilwoman Pat Kernighan Calls Rest of Council "Crazy and Irresponsible"

d.. L.A. Controller Says City Could Run Out of Cash by May 5

e.. Chicago's Mayor Daley Discusses Bankruptcy For City Pensions

All it takes is one brave municipality to lead the way and others will follow. When that happens, the baby will likely be thrown out with then bathwater. There is no reason to like Munis here.

By the way, bankruptcies are a very deflationary event.

Mike "Mish" Shedlock

Dec

13

The Government won't request more service revenues from Wall St. because the service code prohibits government entities from generating service revenues from themselves.

Stefan Jovanovich writes:

John Steele Gordon has a story about a friend who preferred "fairness" above all. He concludes it with these remarks:

We have lowered the marginal rates on high incomes four times since the inception of the income tax - in the 1920s, the 1960s, the 1980s, and the 2000s. In each case, the result was a much more prosperous national economy, lower unemployment, and higher tax revenues for the government. If you do A (lower marginal rates) four times, and four times, despite differing economic circumstances, B (increased prosperity) happens, a rational person might conclude, at least tentatively, that B is the result of A. Not liberals. As I said, high tax rates on the rich is a religious principle with the left. If the poor have to suffer because of it, so be it.

Gary Rogan writes:

I think it's important to remember that the socialist enemies of freedom have very clever strategies, some of which go back decades. That these socialist enemies are paying off their crony capitalist paymasters, who should not even exist as a matter of "fairness", and who in turn reward whoever they chose with their ill-gotten gains, should not be confused with the fairness of normal corporations paying whatever bonuses they wish without undue government interference or populist anger. The marriage of the socialists and their capitalist cronies is one of convenience because they have different end goals, and the socialists are happy to play up the righteous populist anger against their paymasters to promote anger against all capitalists. It's probably wise not to side with either of the two evil "spouses" in this marriage.
 

Dec

11

Thanks to rallying stocks (and no thanks to housing), net worth of Americans is approaching pre-crisis levels.

Using Prof. Shiller's housing price data, constructed a ratio of SP500 to house price index 1950-August 2010 (attached). His data is annual through 2006, and (approximately) quarterly after that, as seen in the attached chart.

The ratio of SP500 to housing hit a many year bottom ca 1981, then rose phenomenally to the peak of the tech bubble in 2000. The ratio crashed after that; bottoming around early 2003, and since then has remained fairly stable except for a drop in early 2009.

Recent government efforts to reflate assets appears to have been more successful with stocks than house prices. This may continue as QE2 has not been having the desired effect, and mortgage rates shot up from many-year lows recently.

Should QE fail to reflate the real estate market, there is a risk of further decline in house prices, more loan delinquency and foreclosures - a kind of positive feedback loop. To avoid this (and keep people happy– the same ones who are unhappy with the recent tax deal), the government could force lenders to write off mortgage principal on distressed properties– moving losses from mortgagees and the real estate market to lenders, and of course upper income taxpayers in future years.

 

Alston Mabry adds:

Attached is a chart of the gold price divided by the Case-Shiller nominal housing price index.

Dec

10

"managed futures" or mismanaged
"hedge fund" not always
"mutual fund"  for whom?
"real estate" how quaint
"metals" and then some
"softs" unless down hard
"stocks" if the government says so
"bonds" till death do you part
"Federal Reserve" indeed
"inflation" of faux determinism
"deflation" after 60
"taxes"  and taxes

Dec

8

When you reach your limit

And surely had your fill

Stop at the market

And stock up on some swill

Dec

6

Retiring boomers (as well as non-retiring boomers) may one day be interested in selling stocks and consuming the proceeds. Buying power depends both on market price and current inflation. The attached is monthly closes of the DJIA (1928-oct2010), adjusted by monthly CPI (BLS data: "Consumer Price Index - All Urban Consumers" 19670).

Besides the lost decades of the great depression, there were other major moves in the CPI adjusted DOW. Over the low-inflation rising market of 1948-1965 (point "1" - "2"), there was an inflation-adjusted gain from 2.45 to 10: a four-fold increase in buying power. The flat/choppy market which followed (1965-1982, point "2" - "3") occurred during periods of high inflation, dragging the buying power of the DOW down from 10 to 2.9: a 3.4X reduction.

The biggest move occurred during the low inflation bull market of 1982-2000: DOW buying power rose from 2.9 to 22.8 - an almost 8-fold gain in buying power (and the reason Jeremy Siegel got famous).

Currently the CPI DOW is about 17: those holding since 2000 have seen their buying power drop about 25%.

Preservation of stock buying power over the next 20 years could entail a flat market with no inflation or a rising market with low inflation. A flat or down market with significant inflation, while possibly benefiting boomer's children (who could buy discounted stocks with inflated earnings), is not something boomers themselves want to entertain.

Nov

30

It must be difficult to model the growth of seeds into trees when the seeds of future trees are now barely visible.

Go back 10-20 years before each development, and estimate the economic impact of what ultimately became the automobile, radio, telephone, nuclear weapons, television, personal computer, internet, etc.

There are a few things happening now which will change the world, and several companies which will be the next Microsoft. Spin the wheel, pay the man, take your chances.

Nov

30

Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this "Hauser's Law." W. Kurt Hauser.

The IRS provides historical tax data, which (along with a source for real per-capita GDP) was used to construct the attached chart.

The blue line is the ratio (total income tax paid) / (total income), 1945-2005, which ranged from about 9% in 1949 to 16% in 1981 (total income includes salary and wages, dividends and interest, business net income, net capital gains, and all other income). The red line is real per-capita GDP adjusted to fit on the same chart ( /100,000).

Real per-capita GDP has risen in a nearly linear fashion in the post war period, while the fraction of total income taxes has remained basically flat (but variable). To the eyeball, the fluctuation in income taxation did not seem to effect GDP growth; which calls for some statistical testing:

Real per-capita GDP yearly change was calculated and regressed first against contemporaneous income tax / income:

Regression Analysis: PCGDP rate versus total (tax/income)

The regression equation is PCGDP rate = 0.0043 + 0.108 total (tax/income)

Predictor               Coef      SE Coef     T      P
Constant               0.0043   0.0370  0.12  0.909
total (tax/income)   0.1084   0.2761  0.39  0.696

S = 0.0301101   R-Sq = 0.3%   R-Sq(adj) = 0.0%

No significant relationship. But it is possible that last year's tax rate effected this years GDP growth, so here is the same regression lagged by one year (This year's real per-capita GDP yearly change regressed against prior year's income tax / income):

Regression Analysis: PCGDP rate L1 versus tax/inc lag1

The regression equation is
PCGDP rate L1 = 0.0735 - 0.410 tax/inc lag1

Predictor        Coef  SE Coef      T      P
Constant       0.0735  0.0363   2.02  0.048
tax/inc lag1  -0.4096   0.2705  -1.51  0.135

S = 0.0295713   R-Sq = 3.8%   R-Sq(adj) = 2.1%
 

Still not significant, but more of an effect than contemporaneous. And the negative slope coefficient suggests that higher taxes last year were associated with lower per-capita GDP growth this year.

Nov

29

This recalls arguments against ending the draft in the 1970s; to the effect that an all-volunteer military won't cut it. 35 years and a few skirmishes later, it is hard to argue the US military is worse than before the draft was abolished.

One possible explanation is incentives: military pay, training, experience, and status can make sense for young people without such opportunities as well as those with opportunity (military academies are academic powerhouses).

Why not incentivize voluntary payment of extra taxes?

1. Option to pick the branch of government (military, education, NSF, CIA, etc), or level of government (fed, state, muni, etc)
2. Extra services for extra payment? Enhanced postal service, concierge police or fire department, 911 hotline, parties with officials, easier state college admissions.

Of course we already have taxation with benefits: political donation and lobbying

Nov

21

Capitalism rests in an energetic sense on one and only one assumption: that the total useful energy surplus keeps going up for a fixed amount of input (either energetic or monetary). This hasn't been true now for a while.

Kim Zussman adds:

To Tyler's point, the attached chart plots annual change in hourly output (blue), and annual change in unit labor cost (red), 1970-2009. Recession-era peak/valley years are noted adjacent to their respective peaks and valleys.

Over the past 40 years, the general trend has been a lower rate of increase in cost of labor and increasing hourly output, with a marked transformation after about 1982 (coinciding with the inception of the great bull market in stocks). Another change was the nature of recessions: The recessions of 74, 80, and 82 were associated with large jumps in labor costs and declines in hourly output. 1990 exhibited this pattern as well, though with much smaller magnitude. However the recessions of 02 and (thus far) 09 go the opposite direction; decline in labor costs and increase in hourly output.

Perhaps some of this change is due to decreased unionization of labor.

Tyler McClellan replies: 

Wel,l basic economic theory, Marxist, Hayekian, Ricardian, are all in agreement that rich countries should benefit from explosive growth in poorer countries even if they are becoming relatively poorer due to comparative advantage. And in that vain all list members can rest assured that global energy use ( of exclusively fossil fuels even) has been going up very evenly per capita even as the population has exploded. 

Nov

15

Alternatively, muni's sold off with bonds: The attached plot of MUB/TLT (national muni bond etf / 20+yr treasuries) shows munis holding up better than taxable.

 

Nov

12

"The stock market is the type of beauty contest [apparently common in England at the time] in which you choose the girl that most others will find most beautiful, not the girl you find most beautiful." –Keynes

Not sure about Maynard's proclivities, but those afflicted with affinity for the opposite sex may find such judgements most difficult.

Rudolf Hauser writes:

This points to a key difference between long-term investing using fundamental analysis and trading. In essence the trader/speculator skill's lies in seeing how others will view events and makes his bets accordingly. This is the case even if someone with an intermediate term horizon relies on fundamentals in their analysis. In contrast the long-term investor (horizon measured in next few years) implicitly trusts not in his or her ability to anticipate how others will react but assumes superior knowledge in anticipating the future fundamentals of a company will enfold and considers if the security is likely to provide a superior return over that longer horizon given how the market usually perceives such a future state on the assumption that the usual influences on a stock short-term will at some point reflect the future values perceived by such an investor. To the extent that the market is driven by the former, opportunities can occur. For example, in a market downturn long-term opportunities may arise but the market could continue falling because of a near-term focus of most market participants. Accumulating a position over time would allow one to avoid buying the possibility of buying at even better future prices while avoiding the possibility of not taking advantage of current prices entirely should the market have reached bottom. Naturally a long-term investor has to be prepared to hold (avoid leveraging) his or her position and for periods of low or negative returns. Naturally that same fundamental investor will improve his or her performance to the extent that he or she can predict how traders will react and impact near to intermediate term price movements to time their own transactions.

Nov

11

What has being liberal, libertarian, vegetarian or whatever got to do with being a good speculator? In my mind a speculator needs to explore and understand how the world is, rather than how he wishes it to be. If the world if full of bleeding-heart blood-sucking socialists, then figure out how to speculate successfully under those conditions. Or if it's full of profit-at-all costs exploitive blood-sucking capitalists, figure out how to speculate through that. Who cares (as a speculator) if paper currency is going to become an environmental problem. Should one be buying gold? And/or timberlands? Speculation is little more than a game really. You're dealt a hand– figure out how to put it to best use. Influence the game if you can. If someone else isn't playing by the rules– adapt. Be creative, resourceful.

Everyone should of course nurture and grow a life philosophy and be able to freely pursue it (although I personally don't agree with anyone trying to impose theirs on others, including parents). This of course can influence why and how you speculate, but I think its the individual's application of intellect and effort rather than the philosophy itself that determines the success.

Just my two cents. No– four cents. Is it four yet? (Where the hell is gold trading now? … Haha. )

Kim Zussman writes: 

It is the rare person who can bet and profit from the opposite of their own belief system. Imagine going against your own G-d, your people, your family, your children– because intellectually you believe they will lose and you will pay any price to be on the profitable side of the bet.

Faustian abitrage

Nov

9

The attached chart plots two ratios from Jan 2010 to present: high-yield bond etf (HYG) / long-treasury bonds (TLT), and SP500 (SPY) / TLT.

From a "risk free" (free at last!) rate of return standpoint, neither junk nor stocks have gained YTD. Both dipped prior to Ben(ding) Over, with stocks showing more risk free volatility (higher high and lower low) than junk.

Nov

8

Trend is the basis of profits; no trend, no profits.

Trend is a function of time. 3-5 hours does not allow for trend moves of any real magnitude; day traders play with a stacked deck. The dream of daytrading is in fact a nightmare for most everyone. It can be done, but not for massive profits.

Nick White writes:

There is an excellent discussion of the dynamics of this point in the gentleman from Amioun's first book.

I quote / summarize / paraphrase at length:

Take a regular dentist. A priori, we know he is an excellent investor and has an expected annual return of 15% over t-bills with a vol of 10%. Dentist builds a trading room in his attic, deciding to spend every day watching the market and drink cappuccino. He buys a bloomberg and lots of expensive PC's to automate his trading etc etc. His 15% return with 10% vol per yr translates to a 93% probability of success in a given year. But seen at a narrow time scale, this translates into a mere 50.02% probability of success over any given second. OVER THE VERY NARROW TIME INCREMENT, THE OBSERVATION WILL REVEAL CLOSE TO NOTHING,. Yet the dentist's heart will not tell him that. Being emotional, he feels a pang with every loss, as it shows red on his screen.At the end of each day, the dentist is knackered and emotionally drained Minute by minute examination shows that each day (given 8hrs / day) he will have 241 pleasurable minutes against 239 unpleasant ones. These amount to 60,688 and 60721 per year. Given that an unpleasurable minute is worse in reverse pleasure than the pleasurable minute is in pleasure terms, then the dentist incurs a large defecit when EXAMINING HIS PERFORMANCE AT HIGH FREQUENCY. In contradistinction, imagine the situation where the dentist examines his portfolio only upon receiving the monthly account from the brokerage house….67% of the months will be positive, he gets only four negative pangs of pain per year, and eight uplifting ones. THe efffect is magnified at the annual level where, for the next 19/20 years, he will have a pleasant experience looking at his annual statements.
Scale Probability
1yr 93%

1 qtr 77%

1 mth 67%

1 day 54%

1 hr
51.30%

1 minute
50.17%

1 second
50.02%

The net net of all this is as follows:

If we look at the ratio of noise to non-noise then you get the following. Over one year we gets .7 parts noise for every part of performance. Over one month we get 2.32 parts noise per part of performance Over one hour, 30 parts noise for every part performance Over one second. 1796 parts noise per part of performance. Therefore:

Over short time increments, one observes the variability of the portfolio, not the returns…you just see variance and little else. This is emotionally difficult to parse…even though at any moment you see a combination of both variance and return, your brain can't tell the difference. This explains the burn-out rate amongst people who constantly expose themselves to randomness (especially given greater effect of negative experiences than positive experiences).

Kim Zussman writes: 

The analysis is flawed:

1. A regular dentist should not day trade because of opportunity cost and squandering what he paid for his profession's barrier to entry
2. One can only know their returns ex post. If you could know them ex ante there would be no psychological issues - fear comes from uncertainty.
3. Irregular dentists are another story

Rocky Humbert writes:

Kim writes: "If you could know them ex ante there would be no psychological issues– fear comes from uncertainty."

This is not correct.

Fear is a pre-wired response in most people, and can have little to do with the rational analysis of a situation or uncertainty.

Example 1: While waiting to mount an extreme amusement park ride (roller coaster etc), the symptoms of fear (sweating, elevated pulse, etc.) are a genuine physiological response regardless of the fact that the odds of injury on the ride are miniscule.

Example 2: If you are engrossed while watching a horror movie, your limbic system kicks in … just as if you were being chased by the Blair Witch.

Example 3: Phobias are real, and irrational. A person who is afraid of flying is not interested in the fact that his plane will almost certainly not crash. Yet, people are not afraid of driving to work — even though the odds of dying during a commute are much higher than on a cross-country flight.

The emotional fear/greed response to P&L mark-to-market are real– and I believe genetically pre-disposed. They are analogous to phobias and obsessive-compulsive disorders. Hence, I believe Nick's post about timeframes is extraordinarly profound and accurate.
 

Nov

7

The leading historian says that he'll buy me a $ 8 cup of coffee under certain considerations. And I don't know much about coffee. But I've had occasion to have coffee at Stumptown Coffee, an Oregon firm with branches in New York now, and it's far and away the best coffee i've ever had. Next in line is the coffee at Kaffe that Mr. Florida surfer has recommended. The web mistress is a vegan, and I don't pay her that much to do all the editing and picturing so she usually doesn't put our stuff on barbecue up unless I get her mother on the case, which isn't that effective since she doesn't believe in coercion. Let us expand our mandate from bar b que to good beverages like coffee and tea.

Vince Fulco comments:

I wouldn't say THE top tier but for solid, day-in, day-out coffee, a NYC mail order institution which we order from is portorico. It's been around for over 100 years and we especially like their couple times a year sale with numerous versions of beans $5.99-7.99/lb, a veritable bargain when retail goes for similar prices for 10 ounces. They also have a weekly sale of one kind or another.

Jeff Sasmor writes:

For NJ suburbanites, the local roasting of primo beans and a nice college town quasi-hipster atmosphere is provided by Small World Coffee in Princeton. In spite of a Starbucks opening around the corner, Small World has actually grown larger.

David Hillman writes:

Stumptown is among best ever drunk here, too. We have a pound or two shipped in regularly. They ship the same day they roast and deliver in about 2-3 days, so coffee is very fresh. Currently in the cabinet is Indonesia Sulawsi Toarco and the African's are exceptional this year. An admirable direct trade business model worthy of support.

Also, when in Portland, breakfast at Mother's. They serve Stumptown varieties in a french press at the table. That and the wild salmon hash is more than worth the long weekend a.m. waits.

Boom Bros. in Milwaukee is also happily recommended. Excellent roastmaster, their Velvet Hammer is the 'every morning' coffee at Cafe DGH.

Another favorite is this coffee from the D.R. Very cheap, very good. Best drunk in a cafe on the beach in Sosua. Maybe there's a Caribbean store of some sort in NYC?, but if not, there's always Bonanza:

"…..Always the most fresh production guaranteed! Manufacturer send my orders 3 times a week…..Thanks for looking!!!"

Chris Cooper writes:

Coincidentally, I have recently embarked on a quest to brew (consistently) the best cup of coffee. I have started roasting my own beans, and now it is evolving to importing my own green beans. Next month on the container arrives 300 kg of single-origin green beans from Indonesia from five farms. We call them Bali Kintamani, Java Jampit, Aceh Gayo, Sumatra Lintong, and Torajah Kalosi. I guess this may become more than just a hobby.

While Mr. Surfer and family visited not so long ago, we served some Kopi Luwak, famous due to the journey of the fresh beans through the digestive tract of a civet. It turns out that there are various grades of Kopi Luwak, and since that time I've found a verifiably authentic version, which is rarer because often the growers will mix in other beans. I may try to import that as well, but it's very, very expensive, and I can probably only get 10 kg per year. The taste is really different, much earthier.
 

Larry Williams comments:

My cup runneth over with coffee from these guys, but thanks for the tips. I will begin my journey again for greatest java.

By the way, Overstock.com seems to have the best deals on espresso machine.

T.K Marks writes:

All this talk of coffee has gotten me nostalgic for one of my life's more squandered opportunities.

There was this little coffee spot on the Upper West Side, just a stone's throw from Lincoln Center, called Cafe Mozart. I used to spend much time there.

I would get a pot of coffee. Once even this thick Turkish stuff that perhaps made one look of Left Bank sensibilities, but tasted like tar. Would while away the hours there with reading, backgammon, or chess. It was a peaceful place.

So one night I'm sitting alone at my table reading when walks in and approaches, a woman.

A woman with a very fetching smile.

Bob?…she asked hesitatingly, as one would when meeting a blind date.

I stood up politely, smiled at her for a few seconds, and, No, was all I said.

Till this day I regret not lying through my teeth.

Had nothing to lose.

Jeff Watson writes:

Many of my friends are coffee experts but I am sadly lacking in that department. One thing I do know is how to make is one of the better pots of coffee on the planet. The following recipe will even make even the most mediocre coffee taste good, and good coffee taste……delicious.

1. Wash an egg then break it into the bottom of an old fashioned metal campfire coffee pot, beating the egg slightly, leaving egg, shells and all in bottom of the pot..

2. Add a cup of very cold water to the pot, covering the egg and then add a pinch of salt.

3. Pour in a whole cup of course ground coffee to the water and egg mixture, and stir it up.

4. Pour enough boiling water over the coffee, egg, mixture to almost fill the pot up, and stir until mixed.

5. Cover the pot and plug the spout with a dish towel.

6. Put the coffee pot over a fire, heat it up to a gentle boil, back off, then let it simmer for a couple of minutes.

7. Take the pot off of the fire, let the coffee settle for a couple of minutes then add a cup of very cold water to precipitate the coffee grounds/egg mixture. Let the coffee settle for another minute, then serve.

My grandfather was taught to make coffee this way from some real cowboys when he went to the Arizona Territory for a trip sometime before 1910. He taught me how to make coffee when I was around 7 or 8, and put me in charge of the coffee every time there was a family picnic or outing. The secret to wonderful coffee is the egg, the pinch of salt, and good water. Coffee prepared in this manner evokes many good memories, and the good smell alone will attract any friends or neighbors in the near vicinity. Once in a great while, I will make this coffee on the stove and it's almost as good as on a campfire.

I have often wondered what a Kona coffee would taste like if prepared in this manner.

J.T Holley writes:

I'm not a professional roaster or barista, but the keys that I learned in the 8-9 years that I mentored to roast, grind, and brew coffee are the following:

1) The time between roast and grind needs to be minimal (oils of the roast and storage important)

2) Method of brewing important to your individual tastes (percolate, press, or electric drip)

3) Water is 99% of a cup of coffee! Good tasting waters need to be used and free of chlorines, flourides, and impurities

4) Filtration choice and cleanliness of the brewer of choice imperative for consistent cups of good flavor

5) Once pot is brewed then stirring the pot and stirring the cup is important regardless of cream and sugar for consistency of coffee.

That's the basics!

All good shops should know this regardless if its a private house, private shop, franchise or friend.

Kim Zussman queries: 

How can coffee gourmets taste fluoride but not civet excrement?

Jim Sogi writes:

Chris's special Java java was distinctive and earthy. A treat especially in the palatial surroundings.

The key to brewing good coffee from whatever origin, is:

1. Be sure the parchment is sun dried, not machine dried. It has a much mellower smooth flavor.

2. Roast your own coffee. My favorite roast is 462 degrees, 11 minutes give or take based on humidity and ambient. Roast until the oil just starts to show, but is not oily. The oily roast is more for show. Roast only what you can use in 3 days.

3. Grind your own fresh roast. This is the most important of all. Don't try to freeze coffee beans.

When brewing in filter, only pour a little, not boiling, water through at a time.

Oh yes, Kona Coffee is without doubt the best in the world.
 

Nov

2

If you compare SP500 monthly returns for Novembers (1950-09) for mid-term election years ("1") or non-mid term election years ("0"), election Novembers were higher but not significantly so:

Two-sample T for ret

mid
terms   N    Mean   StDev  SE Mean
0         45  0.0117  0.0452   0.0067
1         15  0.0284  0.0418    0.011  T=1.32
 

However factoring in years with Democrat executive and congress, years with zero FED rate, years after housing bubble, and years with QE(X) on tap, N goes down significantly. 

Nov

1

Market Tricks and Treats:

Thackray's 2011 Investor's Guide refers to the effect as "Super Seven Days": The last four days of the month and the first three days of the following month typically yield higher returns than other periods during the month. Reasons for strength are month end "window dressing" by institutional investors and new monthly fund inflows into pensions and mutual funds that subsequently are invested into equity markets.

The month-end trade phenomenon is notable around Halloween. Gains are not related to sales of candy and spooky costumes.

Kim Zussman responds:

Checked this with SPY (2000-2010) by comparing returns of super seven days to the seven days just before (paired t-test):

Paired T for super - presuper

                 N       Mean     StDev   SE Mean
super         129   0.006008  0.031161  0.002744  T=2.43
presuper    129  -0.003947  0.030088  0.002649
Difference  129   0.009955  0.046565  0.004100 

Definitely worked in the whole period. However dividing data into 2005-10 and 2000-05 shows the effect was mainly from the older period and recently faded out:

Paired T for 2005-2010 - 2005-2010pre

 N       Mean     StDev   SE Mean
2005-2010       63   0.006552  0.034890  0.004396  T=1.4
2005-2010pre  63  -0.002733  0.032691  0.004119
Difference       63   0.009285  0.051677  0.006511

Paired T for 2000-2005 - 2000-2005pre

                    N       Mean     StDev   SE Mean
2000-2005      66   0.005489  0.027395  0.003372  T=2.1
2000-2005pre  66  -0.005104  0.027578  0.003395
Difference       66   0.010594  0.041495  0.005108

Oct

31

One often reads that many successful investors are often "too early"; buying and selling too soon. Certainly looking at screens frequently (or never not looking at them) is an impetus for action, even if waiting would have been better.

It should be possible to check your timing by going back and moving the timing of your trades forward and backward to see if P/L would have been different, and a consistent lag or lead found. The amount of shift would correspond to the timescale of the trade, possibly some fraction of the holding period.

Of course identifying such a trend would be easier than correcting it. For example if you are on average 15% early, you could decide to purposely delay entry or exit by this amount of time. But this thought could Heisenberg you, and change the way you identify timing signals.

Alternatively there may be a psychological element at play. Given that the pain of losses are about 2.5X higher than the pleasure of gain, and that most trades entail some pain, it is possible we mistakenly emphasize the memory of this pain and heuristically conclude "too early". The memories of missing the pain of early trades outweigh memories of early profits. Most likely the distribution of early/late is random for most traders.

Relatedly, some men have other problems with prematurity; one treatment for which is SSRI antidepressant therapy. Another way to study early birds would be to separately analyze traders who take SSRI's vs those who do not, and look for a difference in timing skill.

Speaking of elections, conspiracy advocates wonder whether there is anything funny about the timing of the Yemen packages. The next Michael Moore show?

Oct

28

The 40 Year Food Outlook:

   • World population will grow 2.3 billion by 2050, to over 9 billion
   • Nearly all this growth will come in developing countries
   • This population growth will require a 70% increase in global food production
   • In developing countries, production will need to nearly double
   • Making this happen will require annual investment averaging $209 billion.

Jeff Watson writes:

With our productivity in agriculture, the population increase will be great for our exports and great for business. With science being applied to agriculture, yields/acre have been steadily increasing for the past 300 years. There's no need to think we've hit the maximum in production either. 40 years ago, Erlich, in The Population Bomb sounded alarms about the population doubling by 2010 and he laid out a doomsday scenario. We're here and none of Erlich's predictions have been realized. 

Michael Ott writes:

Jeff makes great points. Additionally, yields for commodity crops are surging and seed companies are investing in growing crops in suboptimal soil.

This year's decline in yields is an aberration due to late season flooding. Farmers that I have talked to are getting 190-200 bushels of corn per acre or 120 if they were flooded. It's netting out to an average of 168 or so with a leptokurtotic distribution. I expect next year to average 180+, given reasonable weather. Combined with new crops designed to grow in arid and sandy soil, we should be swimming in excess.

Seed companies are scrambling to find uses for extra corn, so famine and starvation not an issue for those who are actually paid to grow the food.

George Zachar writes:

It's wealth, not religion, that governs birth rates.

Alternatively wealth is caused by (low) birthrate.

Kim Zussman comments:

GZ's excellent link sheds light on a prior study sent to the list, showing high positive correlation between national per capita GDP and distance from the equator ( abs (latitude) ). Fertility rate is generally higher in countries closer to the equator, which on average are poorer.

1. It is warmer and women wear less

2. There is little work and more idle time

3. Indoors + outdoors vs just indoors

4. Mountain movement necessitates more Mohammeds

Oct

27

The attached plot is the Case-Shiller house price index, Jan 2000- Aug2010. The 20-city US composite is plotted in blue, Los Angeles in yellow, and Washington DC area in red. All three indices are normalized to 100 on Jan 2000, so it is possible to directly compare them.

LA's bubbly party was bigger than DC's, and both were much bigger than the 20 city composite. From 2000 to peak in 2006, LA increased 2.74X and DC 2.51X. To the extent that risk and reward are related, one would anticipate that LA would decline more than DC. Indeed this was the case: From 2006 peak to 2009 trough, LA declined 42% and DC dropped 34%.

Following the same logic, the reflation 2009-present should have been larger for LA than DC, but it is not: LA increased 11% and DC increased 18%.

Rocky Humbert writes: 

Instead of thinking about price as the independent variable, perhaps we should think in terms of supply as an independent variable?

The housing stock of the nation needs to grow– broadly in line with population growth.

Ralph Vince writes:

Rocky,

You are onto an interesting thread of thought.

I have been thinking that "Units per capita/average family size" may be the ONLY thing to eventually pull this market back from the brink. I think the notion of actually owning the dirt — the earth, and all it's rights from your feet to the center of the earth — the unique sovereignity of that, expressed as a certain intrinsic value, has been (as I have said in the past) diminished to a big bag of smoke.

We are property-taxed to death (at least in Ohio and Florida, where I own properties). Essentially, property values need to rise a GEOMETRIC average 5% per year just to keep pace with property. Additionally, the rights to our property have been all but relinquished to the municipalities, the death blow coming in USOC's KELO decision in mid '05 (corresponding most interestingly on the chart of home prices). (This cuts both ways incidentally. In one corruption-prone community I own property in, which abuts a large park system, where there is a 3 1/2 min acre per home, the village council, in an act of abject corruption, granting 130 variances to allow a developer to violate all of these rules and build "cluster housing" abutting the park, I have managed to get those elected officials tossed out and I am managing to garner enough local leverage it appears to take that as-yet undeveloped property via eminent domain).

I am wondering if the only thing to salvage property values is, in fact, an historic mismatch in the ration expressed earlier in this message.

Nigel Davies comments:

I'm totally unconvinced by this line of reasoning. If you look back in history, even one small century, there were often 20 or more people sharing houses which today would be occupied by 4 or less. And this is still the situation in many parts of the world today.

To me this means there is plenty of room for contraction in demand in which case supply stats become meaningless.

Oct

26

SPY since last week in Aug low:

Friday    Monday

Up            dn (aug)
Up            dn (mon was holiday- tuesday sept 7th treated as first trading day after friday)

Up            Up

Dn            Up
Up            dn
Up            dn (10/1 - 10/4)
Up            Up
Up            Up
Up            Up (10/22 - 10/25)
 

Fridays have been all up since low (one time only down) and since the QE has been backed up by no fed against QE, its been Fridays and Mondays up giving the market a feel of power. Best monthly September in years and now a full blown pretty darn good October.

This should be a Happy Halloween indeed for all– except Nat gas people, of course. 

Kim Zussman writes:

Another phun phact: Since 1950, if you bought the SP500 index at the
close of any calendar week, you could have bought it for less at the
close of at least one of the following 50 weeks 83% of the time.

(2601 of 3123 weeks were followed by 50 week periods with at least one week which closed lower)

Also encouraging for skeptics who miss asinine rallies.

Rallies are usually characterized by a higher % of up days (rather than just larger gains per up day), so you would expect more up-runs regardless day-of-week.
 

Oct

21

Variation in US historical CPI has not been stable over the past 100 years. Using BLS data (1913-2010), compared mean monthly change in CPI for months prior to one's birth spasm (4/55) and after. Here is the comparison of mean monthly change in CPI before one (BK "0") and after one (AK "1")

Two-sample T for CPI:

BK AK    N   Mean  StDev  SE Mean
0           507  0.203  0.933    0.041     T=-2.58
1           665  0.315  0.354    0.014

Inflation has been significantly higher since one's random aggregation, consistent with the central bank's anti-deflationary bent and one's corpulent dint.

In addition, volatility of monthly CPI has been severely curtailed in the inflationary era:

Test for Equal Variances: CPI versus BK AK

95% Bonferroni confidence intervals for standard deviations

BK AK    N    Lower     StDev    Upper
         0  507  0.8714  0.9329  1.003
         1  665  0.3337  0.3543  0.377

F-Test (normal distribution)
Test statistic = 6.93, p-value = 0.000

Levene's Test (any continuous distribution)
Test statistic = 167.58, p-value = 0.000


 

Oct

19

Let's not forget the existence of many other distinct possibilities when dealing with microcap, possibly shell stock issues; the two currently being discussed here– simply 'going to zero'' vs. 'shooting up to $100/share'– are not, by any means, the only two possibilities, and in my experience traipsing about the world of Bulletin Board, Pink Sheet and letter/Restricted stock trading, I'd actually deem those the least likely outcomes. Adding to those:

Possibility #3: "The Yawn of Death". Company trades sideways for years - literally years - within a one or two cent range from the current price. (#3A: This, but periodically mgmt issues a few million/hundred million shares, expanding the float and ensuring little or no movement in the price other than possibly slipping agonizingly down towards 'bid wanted'.)

Possibility #4: "The Roach Motel". Company rises from, say, 4 cent per share present price to trading @ 10, even 15 cents per share (or drops to, say, 2 cents per share) - then volume drops to nothing and the bid/offered spread explodes; in former scenario, to 3 bid/20 offered or in latter 1 bid/5 offered, with only a scant bit trading daily.

Possibility #5: "The Long Goodbye". Company rises to, say, 15 cents per share (or $4 per share, for that matter), is suddenly and unexpectedly halted by a regulatory body, and either (#5A) never reopens for trading, leaving you with your sole 'return' reading regulatory proceedings concerning your dead money, or (#5B) reopens to trade 0.0001 bid, offered at 0.0003 for years.

Possibility #6: "The Shapeshifter". Company, with nary a hint of warning, issues a Press Release one day saying it is changing its business from stem cell research to researching and eventually opening the world's first chain of cold-fusion powered laundromats.

The world of corporate finance fairly bristles with avenues and options for locating and funding good ideas and talented entrepreneurs. Scant few - none, that I can recall - have ever come through the drillbit equity markets.

Jeff Watson writes:

Speaking of penny stocks…..are there any good studies out there comparing the vig in penny stocks vs regular exchange listed and NASDAQ stocks? Although beyond the scope of my limited intelligence, I would suspect the vig in penny stocks to be the highest of them all, as high or higher than a game of keno.

Kim Zussman adds:

It is hard enough to find something to buy which will one day go up. But after you buy at 0.05, what will you do when:

1. It doubles? (On the way to 10X or 0?)

2. Stays at 0.04-0.06 for 5 years– giving you plenty of time to get discouraged and sell– only you check back at year 7 and it is now trading over $1?3. You have enough guts to hold until 10X, and realizing this was a miracle, sell. Only to find it was the next MSFT

All hugely successful long-term investments will, along the way, ask what you are made of. For most of us this information is carefully concealed and thus the path is non-navigable.
 

Vince Fulco comments:

Moreover I would argue the energy required to follow the situation will exhaust the h-ll out of you and absorb the precious time you can use to find vastly more profitable situations. In the mid-2000s, way past the Net burst, a colleague who should know better bot converts and common in a new age company (prefer not to mention the industry to protect the innocent), participating with a top tier Greenwich HF in financing rounds. For the HF, the position was de minimis but whose participation was a great selling point to other investors. The technology underlying the company was patented but time was wasting on it and it faced much bigger competitors. It took only a few days of fact checking and looking through the SEC filings by me to realize something wasn't right. While the company surrounded itself with all the buzzwords of the day and had a great marketing effort, its cash burn was always way too high relative to its size and it was obvious existing shareholders would be diluted ad nauseum if the company were ever to gather sufficient resources to really grow. Deals booked were always tiny relative to the market potential and industry installed base. Bottom line: the red flags were all over the place but you had to be willing to listen and not drink the kool-aid. The majority of penny stocks are simply fool's gold surrounded by a sub-culture whose sole purpose is to tout by any means necessary. Suffice it to say, my Pal is still nursing this POS (piece of %^&*) as we call it in the industry. 

George Parkanyi writes:

Back in 1980-82 I was a stockbroker. One of the guys in the office, Paul C, connected with some guys out in Vancouver who were promoting/pumping a junior coal company. Paul had his clients buying the stock, and some of the guys in the office, including myself bought a little as well. I had about 5 or 6 people in it– some friends and relatives, and for a few weeks it rose nicely and I averaged up the positions.From what I heard of Paul's end of the conversations, you could tell these Vancouver guys had a certain amount of money they were using to work the stock, and the rise was carefully choreographed with orders placed just so and press release this and press release that timed just so. I wasn't paying a lot of attention, but Paul was constantly on the line with the promoters and with his clients. At some point, I forget the reason, my mother wanted to sell her position, so thinking nothing of it, I sold her out at the market at a good profit somewhere in the $5 or $6 range. Not 30 seconds later, some guy is on the phone chewing out Paul about "market orders coming in from his office". Paul looked really uncomfortable and came over to talk to me about it. I remember saying to him, "Are you *^&%$# serious? My mother's rinky-dink order is "messing up their market"? I'm outta here, and you should be too." So as quickly as I could call everyone in the stock, I blew out all the positions– at the market. Within days the whole thing collapsed. I personally got out already on the way down, only because I had to get all my clients out first. Paul and his clients never got out. I can still picture him sitting leaning back in his chair, staring out the window with that blown-up look, absentmindedly swinging his telephone around in circles beside his chair. He took it like a man though, and never held any of it against me.

As a general rule, unless you REALLY know something, never get into these things on the buy side. You need to assume that they are all pump-and-dump operations, no matter what the story. In fact, I remember doing a study at the time and concluded that a great strategy would be take a pool of money and short every Vancouver stock that popped its head over $5. When these things go, they collapse like a house of cards. Sure, a couple would have burned you, but if you did them all you would have made a killing.

Oct

13

The attached chart compares log Nikkei 225 and SP500, adjusted in time such that the SP500 high in 2000 aligns with the NIK high in 1989. For comparison purposes, log SPX was also scaled by 1.44X, so that the peak values of both indices are the same value.

The first decade of Japan's lost decade was characterized by more high-frequency volatility in stock returns than the first decade of our lost decade. Japan lost ground over their first lost decade, while we have held up pretty well. Compared to the Nikkei, the SP500 rose faster to its 2000 peak, then experienced two large peaks and two deep dips. This shows that our central bank is better than theirs, if the goal for investors is lower frequency and greater amplitude.

The next lost decade of our lost decade is still to be determined, but for the sake of our entitled youth hopefully the path will differ from Japan's.

Oct

12

The psychology of time in trading/investing may attribute in part to
the fact that money is more fungible than time; lost money can be made
back but not lost time. Similarly, is time lost attending to markets
compensated adequately? :

"The results of five field and laboratory experiments reveal a "time versus money effect" whereby activating time (vs. money) leads to a favorable shift in product attitudes and decisions. Because time increases focus on product experience, activating time (vs. money) augments one's personal connection with the product, thereby boosting attitudes and decisions. However, because money increases the focus on product possession, the reverse effect can occur in cases where merely owning the product reflects the self (i.e., for prestige possessions or for highly materialistic consumers). The time versus money effect proves robust across implicit and explicit methods of construct activation."

For example, which wine is more appealing:

"The greatest wine Quiot has ever made in my opinion, this wine shows a dense ruby/purple color and a gorgeous nose of camphor, blackberry, kirsch, some roast beef and Provencal herbs. Full-bodied with great intensity, beautiful purity, a multi-dimensional mouthfeel, and a spectacular finish of close to a minute, this is a fabulous effort from Quiot and should drink well for close to two decades" (Robert Parker)

or

"An expensive French wine at a reasonable price"

(Domaine Du Vieux Lazaret Chateauneuf du Pape Cuvee Exceptionnelle 2005)

Oct

11

Every weekend I read through some classic papers from another era. With inflation expectations percolating, this weekend's reading were the many papers which pondered the failure of stocks to perform according to common sense during the inflation of the last secular cycle. (One suspects that the bear market of 2000- ? will give rise to a crop of similar articles that will provide amusement comparable to reading a Sears Roebuck catalog from the 1930s ….)

The Alpine Knock-About Fedora Hat for $0.69 and the silk ladies Clever Collar for $.29 reminds one of: R. Geske & R. Roll (J. Finance, March 1983) "The Fiscal and Monetary Linkager between Stock Returns and Inflation"

Abstract:

Contrary to economic theory and common sense, stock returns are negatively related to both expected and unexpected inflation. We argue that this puzzling empirical phenomenon does not indicate causality. Instead, stock returns are negatively related to contemporaneous changes in expected inflation because they signal a chain of events which results in a higher rate of monetary expansion. Exogenous shocks in real output, signaled by the stock market, induce changes in tax revenue, in the deficit, in Treasury borrowing and in Federal Reserve "monetization" of the increased debt. Rational bond and stock market investors realize this will happen. They adjust prices (and interest rates) accordingly and without delay.

Although expected inflation seems to have a negative effect on subsequent stock returns, this could be an empirical illusion, since a spurious causality is induced by a combination of (a) reversed adaptive inflation expectations model and (b) a reversed money growth/stock returns model. If the real interest rate is not a constant, using nominal interest proxies for expected inflation is dangerous, since small changes in real rates can cause large and opposite percentage changes in stock prices.

Finally, one notes that the real interest rate is currently -0.81% for cash, and 1.40% for the ten-year. Both are at 2-sigma lows. Where can they go but up? And is this bullish or bearish for stocks and bonds? Hmmm.

Vince Fulco writes: 

One notes the newspaper boy hat has been creeping into Minneapolis clothing trends for the last 6 months. Some guys even wearing them in the height of summer. I guess what comes next is "a chicken in every pot" meme…

Kim Zussman writes:

Checked this using BLS monthly CPI data and SP500 returns. Here is regression of stock returns vs contemporaneous CPI change:

Regression Analysis: mo ret versus chg cpi

The regression equation is mo ret = 0.00935 - 0.00906 chg cpi

Predictor Coef SE Coef T P
Constant 0.009345 0.002033 4.60 0.000
chg cpi -0.009058 0.004278 -2.12 0.035

S = 0.0419261 R-Sq = 0.6% R-Sq(adj) = 0.5%

As they say, the correlation is significant and negative (though RSQ is small and thus CPI explains little of monthly stock return).

Checked also whether this month's change in CPI predicts next month in stocks (with the usual answer, no):

Regression Analysis: M ret versus M-1 cpi chg

The regression equation is M ret = 0.00811 - 0.00503 M-1 cpi chg

Predictor Coef SE Coef T P
Constant 0.008108 0.002040 3.97 0.000
M-1 cpi chg -0.005026 0.004291 -1.17 0.242

S = 0.0420445 R-Sq = 0.2% R-Sq(adj) = 0.1%

To see how this has evolved over time, checked correlation between chg cpi and SP500 ret for non-overlapping 60-month periods:

Year corr 60 avg cpi
2010 0.12 0.18
2005 -0.17 0.22
2000 -0.04 0.20
1995 -0.25 0.24
1990 -0.15 0.33
1985 -0.22 0.44
1980 -0.12 0.71
1975 -0.32 0.55
1970 -0.18 0.35
1965 -0.07 0.10
1960 0.25 0.17
1955 0.02 0.17

As shown on the attached graph of data above, most of the negative correlation between cpi and stocks occurred in the good old days of high-cpi (70's-80's), when certain parties where whipping inflation now.

What will they whip next?

Oct

11

With S&P, Crude, Naz, Dow, Euro, Bund, gold, Yen, Dax, Estox, Silver, corn, wheat, soybeans, oats, and hundreds of individual stocks at 1 month highs, it is interesting to reflect how long a bull move can last and how far it can go, when fueled by all the wealth that other bulls have and helped along by expansionary policies by the central banks.

Ken Drees comments: 

Since QE is the direct stock and bond market impetus at the moment through indirect likely promises of a recent fed statement and made very pseudo real by the never interviewed but very smart and successful David Tepper on CNBC who basically spelled it out for everyone that the markets are indeed going higher, I say that this rally lasts at least into election day and into the fed meeting where rumor/fact becomes real. All other momo markets are induced as well to grow since the QE feeds them too as collateral liquidity buckets.

As long as I read and hear topaganda I lean bullish.

Gary Rogan writes:

Wow, that was an interesting thought. On Friday I bought something for the first time in 1.5 years, and the first thing ever that wasn't a stock, and that was UNG. I just figured the risks over the next year which is the shortest period of time I intend to hold it are not that high. And for somebody who only buys at 52 week lows the chart looked like the most beautiful thing in the world.

Jeff Sasmor comments: 

Just be aware of how UNG has to roll the underlying position once a month. I happen to be in this one too– but it can grind lower and lower on you. And once a month it's gamed when it rolls to the next month. The effect has been discussed to death in many venues. So it's tricky to hold it for a long time if it stays in a range.

Craig Mee adds:

Certainly might drive the speculators out, (or clobber them if they fade it), as runaway markets present less and less opportunities if one isn't in and sitting tight.

Kim Zussman writes: 

About the only asset class that hasn't been goosed limit up is real estate. A big up-move in house prices would be very useful, driving LTV down, reducing foreclosures, and re-priming the dual wealth effects of McMansion braggadocio and cash-out refinancing. Not to mention fulfilling the campaign promise of re-establishment of the American Dream.

Oct

8

To the tune of Roy Orbison's Crying: 

I was all right…for a while,
I could smile…for a while
But your central bank put me in the tank
Can you not debase me….so
Oh, you wished me well, but you couldn't tell
That I've been dying over you, dying over you
And you said, so long
Left me on my own
Alone and dying, dying, dying
It's hard to understand that just one sentence can
Start me dying

Thought that we were through
Helicopter view
Even faster than before
But what can I do
For you don't love me and I'll forever be
Dying 'cause of you, dying 'cause of you

Dying…dying….dying

Oct

7

Ever since the big S&P bear market low of 666 [on 2009/03/06] (hit precisely at the end of  long voyage from 1586 top), traders seem to have found a religion. Gold bumped  into 1266, and couldn't overcome it all summer long! And finally 1366 this morning. Once a staunch atheist, I'm a believer myself now– I think.

Kim Zussman comments:

This is an example of the hypo-arcsine law: X6666 is always 2/3rds of something, which is itself is an artifact of the hubristic categorization of the universe in base 10.For example in tennis, every shot has to cross the 2/3 point between players before the ball can be returned. 

Oct

6

If you think you've lost the American dream and are searching to find it again, look no further than reality TV. Yup, you heard me right– reality TV. There is a show that plays on the home and garden channels called Extreme Home Makeover, where the show picks families where the parents are wonderful, giving to people in some fashion, but are under extreme duress because of health and/or financial issues. It sends them to Disney World for a week, and in that one week tears down their barely functional, problematic and sometimes dangerous existing home, and builds them a beautiful, brand new home.

They engage the local community– volunteer contractors, ordinary people, local businesses etc.– who all band together to complete these magnificent projects. Often, the sponsors help in other ways like paying off medical debts.

For example on this evening's show, they picked a couple from Toledo, a fireman and his social worker wife, who had three kids of their own, and then adopted 8 more, 5 from Haiti and 3 from inner-city Toledo. They were all living in this tiny house in pretty serious disrepair for lack of funds, and the woman was recovering from a medical condition that had already almost killed her and they were all trying to get by on his one salary and also coping with medical bills.

The wonderful thing about this show is how it changes people's lives, especially those of people that are unquestionably deserving of a leg-up. It gives a fresh start and new hope to the receiving family, and wonderfully energizes the community. Literally hundreds of people participate. That's what I think the true American dream really is abou– unbridled can-do optimism and hope. At least from the perspective of this Canadian.

Watch the show some time. I'd wager that you'll find it quite uplifting.

Kim Zussman plays the Devil's Advocate:

This may seem heartless, but this clips down to current political-hollywood rhetoric:

Lost American dream (what is it anyway?)

Searching to find it (whatever)

Families –where the parents are wonderful (and need help, but not with birth control) giving people (who wind up taking) under extreme duress (get in line) health and/or financial issues (get in line), sends them to Disney World (where else. What about going to work?) barely functional, problematic and sometimes dangerous existing home (you should see the ones in China where kids study linear algebra) and builds them a beautiful, brand new home (take a mortgage and go back to disney). They engage the local community (you knew that was coming), volunteer contractors, ordinary people, local businesses etc. – who all band together (but evidently don't need to feed their own families) to complete these magnificent projects (the ones they charge for are capitalist, evil, and taxable) paying off medical debts (because medical care is a right that hollywood will pay for to sell soap). Why not instead inspire the nascent dependency with Horatio Alger ?

Oct

3

The attached plots the ratio of VIX (daily close) to SPY daily range, defined as (H-L)/{(H+L)/2}.

There is an obvious down-spike which occurred on 5/6/10 - now known as flash crash day.

Deleting that day and comparing VIX/SPYRANGE for the 102 days prior and before flashcrash:

Two-sample T for vix/range vs vix/range pre

          SE
                  N  Mean  StDev  Mean
vix/range       102  1867    615    61 T=-2.03
vix/range pre  102  2081    870    86

>> VIX/SPYRANGE is significantly lower since flashcrash.  Interestingly both VIX and SPYRANGE are lower since flashcrash:

Two-sample T for vix vs vix pre

            N   Mean  StDev  SE Mean
vix        102  26.95   4.93     0.49 T=12.57
vix pre  102  19.83   2.91     0.29

Two-sample T for SPY rge vs SPY rge pre

                    N     Mean    StDev  SE Mean
SPY rge        102  0.01639  0.00715  0.00071 T=5.9
SPY rge pre  102  0.01126  0.00512  0.00051

Oct

3

The mutual aggression model.

Host(h) and parasite(p) are taking part in an evolution arms race. The prudent parasite model. Selection in the p is always for characteristics that limit the damage done to the host. A de-escalating arms race (rabbits and myxomitosis in austral) incipient mutualism co-evolution is actively cooperative with both evoluting attributes so as to promote the continued presence of the other. A p that kills its host before it can transmit itself to other hosts doesn't get any genes into the next generation. The costs and benefits of a particular strategy determine the type of interaction that will occur. (From lecture 17 co-evolution and host parasite interactions): "it is important to contemplate an entangled bank clothed with many plants of many kinds, with birds singing on the bushes, with various insects flitting about, and with worms crawling through the damp earth, and to reflect that these elaborately constructed forms, so different from each other, and dependent on each other in so complex a manner, have all been produced by the laws acting upon us." Darwin, 1859. Okay, my query is how do the sponsor, the palindrome, the sage, the flexions–indeed the whole ball of Was– fit into this structure, and what predictivity can be drawn from it?

Gary Rogan writes:

The prediction would be that they will stop the nonsense before they let the economy disintegrate into complete chaos. However, there is a difference between genetic evolution and a single case. The evolution rolls the dice millions of times and the parasites that procreate are tautologically the ones that make it into the nth generation. Each particular parasite doesn't "know" whether it's killing the host. And with the flexionic complex we have just one roll of the dice so the results seem hard predict. They are supposedly sentient beings so that can be substituted for evolution, but what if they all individually have totally incorrect beliefs? What if they really don't care about killing the host? What if some of them are so close to the end of their lives that that's not even a consideration? What if some of them only care about the pinnacle of political power for however long they have as the most important concern? What if they have enough assets outside the system so that they don't have to worry? What if they don't have complete freedom to act anyway?

Overall, I don't believe they are actions can be analyzed as if they will preserve the system when push comes to shove. I can't even answer the question whether Ben Bernanke has any idea about what he is doing, and if so to what degree. I don't know what his ultimate goal is nor whether he can be self-critical to any degree. I hope others are able to make predictions.

Kim Zussman writes:

Another hypothesis is that government actions in the wake of the crisis reflects human nature with respect to pain. It is normal to avoid pain, and if given a choice between extreme pain of short duration and moderate pain which lasts a long time, many would choose the latter - even if "total pain" (something like level of discomfort * time) is greater.

The analogy may extend to the use of multiple drugs to lower immediate pain; it is hard to know how they will interact, and what unintended long term effects may develop, including addiction or death. Inexperienced doctors are sometimes overconfident in their ability to manage disease, but with time learn to carefully observe signs of normal healing, reassure the patient, and let the powerful mechanisms of natural repair work on their own.

Marion Dreyfus writes: 

Speaking for someone who has this past fortnight endured pretty sever immediate pain, which has subsided into a moderate constant ache–I would much rather endure the latter, over a longer period, than the former. I trust nature will expunge the dull ache and pain I have now, eventually.

Sep

30

This is Feynman's parting wish to Caltech class of '74:

"I have no more time so I have just one wish for you– the good luck to be somewhere where you are free to maintain the kind of integrity I have described (ed: intellectual honesty), and where you do not feel forced by a need to maintain your position in the organization, or financial support, or so on, to lose your integrity. May you have that freedom."

He is less describing freedom than courage.

Mark Schuetz comments:

It seems to me still to be more like freedom than courage. There are plenty of people with jobs in both academia and industry where dissenting from the organization will likely entail the loss of a job, despite most academics' claims for the search for truth and absolute devotion to intellectual integrity. This probably stuck out to Feynman so much because the nature of his personality was to question and rethink even trivially "solved" issues (I will never forget the story of how he spent an entire day away from physics and instead experimented with ants that were carrying crumbs around in his room). Similarly, in most industries, I've heard of very few firms where open disagreement is genuinely valued… often, the bigger the firm the worse the problem. In these cases, I suppose if you have the "courage" to lose your job, then you are right.

Sep

28

Another interpretation of income inequality is compensation for risk. From updated Saez data, note that top 1% does better in good times, and much worse in recessions:

                                    Real Annual Growth     Top 1% Income RAG      Bottom 99% RAG

Full period             1993-2008    1.30%                       3.94%                        0.75%

Clinton Expansion  1993-2000    4.0%                          10.3%                         2.7% 

2001 Recession     2000-2002    -6.0%                        -16.8%                       -3.3%

Bush Expansion    2002-2007     3.0%                          10.1%                         1.3%

Great Recession   2007-2008     -9.9%                       -19.7%                          -6.9%

Tyler McLellan writes:

I did some work on this a few years ago and determined that the compounding over long periods of time dominates the skew, to be clear compounding of capital and the flow of income there from in any given year.

There is also a very good intuitive reason therefore why income inequality has historically fallen only during calamity, when the actual capital stock is destroyed/seized or more commonly the connection btwn financial assets and real assets is forcefully separated.

Sep

28

The distribution of income is bounded on the low end by zero, but unbounded on the high end. This resembles the distribution of stock returns, and is better described by log-normal distribution.

Presumably humans evolved to anticipate something like normal distributions bounded by zero and bounded on the high end; height or weight for example. If heights were distributed like income, most of the time you would encounter normal-looking people, but occasional 20 footers. Of course tribes of average folk would to try hard to befriend the big guys.

Phil McDonnell writes:

I think there is a statistical quirk. Namely the quintiles are reconstructed every year with new individual members. Thus the 2009 top quintile contains different people than the 2010 top quintile. To understand how this creates a bias we need to look at how new people enter and leave the top quintile and what that process does to the 'average' of the quintile. To enter the top quintile the individual can only come from below. Thus he lowers the average of the quintile below and possibly raises the one above. No one can leave the top quintile by rising out of it. Thus there is an upward bias in the sense that they are retained no matter how high they go. On the other hand they are eliminated if they fall in income.

In the bottom quintile the reverse is true You cannot leave by going to zero, you are still in the bottom quintile. But if you make too much you will move up to the next quintile and thus reduce the average in the bottom quintile.

The middle three quintiles have less bias in this sense because individuals who leave can either go up or down to the next quintile resulting in more of a wash. In the same fashion new entrants to a given quintile can come either from above or below again resulting in more a a net wash effect.

The comparison of the top quintile to the bottom inevitably results in a biased and distorted comparison because of this effect. It would be better if they compared the second from the top and second from the bottom quintiles to reduce the bias. Reducing the bias is probably not the goal of those who calculate such statistics.

Rudy Hauser comments:

This is a different question that relates to what the statistics represent and will be used for. What Phil writes is certainly correct. What the quintiles show is the income distribution at any one point in time. It does not tell you anything about lifetime income or the ability to better one's self over time, that is upward mobility in the quintiles, or the fact that some of the well off become less so over time. For that you would need other measures. The movements between the groups will create the biases described. But to say that the bottom fifth only earn so much over time x and the top fifth earn so much need not have an upward bias to what these statistics actually measure as such movement happens all the time to varying degrees over time and by country. The top fifth are still the best off and the bottom fifth the worst off. Were they stand an any one time is what it is and that is all this statistical approach shows. There is no need to correct this bias but one does have to develop other measures to answer the sort of questions that seem to concern those who point to bias. There is no statistical reason why the growth rates have to favor the top group. That tendency to the extent it exists is due to political economic factors, cultural factors, social factors, etc.

 

Sep

20

1. Everywhere one looks there is building going on in Washington DC. No vacancies and for rent signs appear on each block the way they do in every other city. The trains going to and from are full at every hour of the day including the 2 am arrival in New York, and all the restaurants are bustling with activity. Scaffolds and cranes seem to surround all the monuments, executive buildings, and lobbying areas. They said that 25% of all the world's cranes were being used in Dubai 3 years ago, but now they must all have moved to D. C. But this boom can be predicted to last.

2. A tremendous number of restaurants that were marginal in other big cities are moving into D.C. with great alacrity and success. I ate in the magnificent, opulent quarters, built with special private rooms for the three branches of Carmines and Kellari, both New York operations doing a land office business there after just a year, and note that Ducasse after his dubious starts in New York has found a can't miss operation there also.

3. A trip to the American Museum reveals the idea that has the world in its grip in every exhibit. As Dr. Voss says "It was sad to see the outrageous leftist propaganda at the Museum denigrating our country's achievements in every sphere of human endeavor. I recall seeing similar exhibits about the U.S. in Moscow in the 1980s." We visit a childrens play scientific exhibit and of course they have a demonstration to show that by turning a magnet around a coil very quickly you can generate electricity which goes by two paths to an old fashioned light bulb and a newfangled compact fluorescent bulb. The bulbs are set up to show that your energy lights up the fluorescent bulb, but not the incandescent. Fluor. bulb - - generator - - - incan. bulb. No consideration is taken of the cost, light quality, life span, disposal problem or human lives lost due to the mercury manufacturing or disposal process. The idea is to show that the old fashioned bulb takes so much more energy to light. But Dr. Voss and I switch the bulbs between the two forks, and find that when you switch the old fashioned bulb lights up. The idea of using this propaganda on kids would be something you would expect in the agrarian reform countries not here, if the entire museum was not filled with apologies for industry, and paeans to class struggle in every exhibit. A typical exhibit shows a sewing factory with 600 employees in Bridgeport that according to observers along with the telegraph and the steam engine were the key inventions of the century but then goes on to point the guilty finger at the classes of wealthy and poor that were created by the factory and the product. No consideration is given to whether the workers in these factories went to work there voluntarily with the idea that their life would be improving.

4. The ecology of the city is very clearly shown by a visit to the White House. Motorcade after motorcade comes there with 5 limos, an ambulance and a bus as visiting dignitaries from the various districts are escorted for tours. The helicopters are reserved to the President. A feverish level of activity emerges as the visitors from the new executive offices, all with windows that don't open, spills over. Outside a protestor against business has been conducting a 30 year, 24 hour a day vigil. Next to the white house, an office of the Bank of America in a neo classical building bigger than the Hoover Dam stands proudly just across from the Treasury. And in a forlorn gesture of Zacharian token opposition a flag waves from the chamber of commerce: Free Enterprise Creates Jobs.

5. New museums grow like Topsy in every corner not already occupied by the offices of the lobbyists and suppliers. One very reprehensible one is the Newseum which has a big exhibit on the coverage of Katrina as if such coverage and expense did not in some way violate the spirit of the separation of the Press and the branches of government.

6. Over the last two years, the number of employees in the Federal Government has increased by 15% while the private sector growth has been -5%. From the brouhaha of actvitity and building in all areas of DC, one gets the impression that they all are compressed and contracted into this one little town. When one considers the multiplier that each job causes with lobbyists, suppliers, family members, spending on local products, administrative staff necessary to support and create the jobs, it is no wonder. But a reverse multiplier is hidden as all the jobs created are extracted from the spending and savings of non-government employees. The negative multiplier is greater than the positive multiplier so total jobs had decreased . But the output situation is much flummoxed by the kinds of things that the money would have been spent on. Creating new offices, agencies, and energy efficiency a la the American Museum on one hand, and for rent and closing down signs in every other business.

7. As we go to DC, a new agency to protect consumers is created. And the idea that consumers are protected by competition and private information agencies is considered an absurdity just as described by Amity Schlaes in the waning years of the depression when the operatives at the White House walked out of a meeting with Good Housekeeping in disbelief that anyone could be against something so obviously good spirited as regulation of what consumers might buy.

8. The three underlying causes of everything that's wrong with health care are that doctors are not paid directly by consumers, doctors are unable to compete with each other, suppliers are forced to go through the three stage 500 million approval process to get a drug approved, and the insurers are not allowed to compete with each other across state lines. No wonder that Hayek's book has been a number one best seller on Amazon.

9. Shades of Willie Sutton when he wanted to turn himself in to headquarters after Thompson hit the home run. My whole party feels the same way after leaving the American Museum with propaganda in every exhibit similar to the fake lite bulb exhibit ( photographic evidence from Susan forthcoming), and going out to two of the most massive buildings one has ever seen outside of the coliseum in Rome, yes the EPA, and the Unmentionable. " Just take it all right now. ".

10. The Museum of Crime and Punishment, with its vivid memorialization of all the ancient torture devices, and its memorabilia and explanation for our fascination with all the great criminals of the past, and the Museum of Espionage, with its code of rules for the would be spy is a nice lagniappe after visiting the mammoth Smithsonian exhibits which must have 1/100 the number of visitors per square foot and 1/100,000 of the number of visitors per value of the exhibits as the private museums.

11. As one is back to the day and fray of trading, I can't check all the above figures rite now, but I am confident that any numbers adduced that support my point of view above that are inadvertently too favorable are counterbalanced 100 times by things I left out that would have carried my point of view of this reverse horn of plenty much more forcibly.

Kim Zussman shares: 

Here is a pertinent article.

Sep

20

And of course, how will the Fed be able to finesse a stimulatory action tomorrow in conjunction with this announcement. And most important, were any Clarkian winners at the bureau who might have been anticipated without any direct contact to take care that they didn't announce it too far away or too unseemingly close to any voting.

Kim Zussman writes: 

NBER announcement dates only go back to 1980. For these end of recession announce-dates, here are the SP500 returns for day-of announcement, next day (from close of announcement day), 5D, 10D, and 20D:

Date                     day of  nxt day     5d       10d      20d
07/17/03                -0.012   0.012    0.000    0.009   0.009
07/08/83                -0.003   0.006   -0.017    0.011  -0.032
12/22/92                -0.001  -0.003   -0.003   -0.022  -0.011
07/08/81                 0.001   0.008    0.015   -0.009   0.034

                   avg     -0.004   0.006   -0.001  -0.003   0.000
                   stdev   0.006   0.006    0.013   0.015   0.028

Historically nothing much, but then how do these compare with The Great Recession?

Sep

17

The red line on the attached plots instances when the DJIA closed within 20% of 1000 (800<X<1200). When +/-20% of 1000, the red line is horizontal with value =1. When not in-range, red = 0. Vertical red lines are transition points into our out of +/-20% of 1000. The blue line depicts the same pattern with +/-20% of 10000. Also plotted is log DOW.

Note that the 1K dance occurred in the "range bound" period of 1964-1985. The current 10K dance started in 1997 and frugs along to this day.

Sep

15

Looking at the distribution of extrema (20-day min and 20-day max) on a closing basis in the S&P futures by year:

2003 69
2004 67
2005 68
2006 65
2007 63
2008 60
2009 81
2010 96 (annualized)

The process generating S&P prices seems to have shifted somewhat on this metric. What are other ways markets are trading differently? On what metrics are markets trading in line with prior years?

Kim Zussman responds:

A variation on this is count of 20D highs and lows for non-overlapping 200D periods; this time using SPY counting back from 9/14/10. Here are the counts for 20D high, 20D low, H+L, and respective 200D returns:

Date       20D H 20D L H+L    200D ret
09/14/10    49    22    71     0.04
11/25/09    50    14    64     0.35
02/11/09    13    32    45    -0.39
04/28/08    19    24    43    -0.08
07/12/07    57    6    63     0.18
09/22/06    39    12    51     0.06
12/06/05    41    18    59     0.07
02/22/05    39    21    60     0.10
05/06/04    44    10    54     0.14
07/22/03    36    13    49     0.24
10/03/02    12    42    54    -0.28
12/17/01    25    29    54    -0.07
02/27/01    21    24    45    -0.11
05/11/00    27    23    50     0.06
07/28/99    44    4    48     0.37
10/09/98    42    19    61     0.07
12/23/97    41    11    52     0.18
03/11/97    43    10    53     0.22
05/24/96    47    6    53     0.24
08/10/95    61    3    64     0.23
10/25/94    25    17    42     0.00
01/10/94    26    9    35     0.08

The current H+L is the max since 1994.

Correlation between 20DH and 200D return = 0.81
Correlation between 20DL and 200D return =-0.85 (no surprise)
 
Correlationbetween H+L and 200D return = 0.3

Sep

4

One often admires investors "without any down years" (months, weeks, nanoseconds, etc). Here is an update on compounded weekly SP500 return (SPY, with div), 1993-present - successively skipping down weeks starting with the largest drop through the 50th largest. (918 weeks total)

The attached chart shows the compounded return curve, which for the entire series is 3.415 (ie, an initial 10,000 compounded to 34,150). The red line shows compounded return altered by successively skipping big down weeks, which rapidly increases as down weeks are omitted.

Similarly skipping big up weeks reduces compounded return, but at a slower rate than it increases by skipping down weeks. This is shown in the following data, where compounded return doubles by missing the worst 6 weeks, but is cut in half by skipping the top 8 up-weeks.

skipping
bigups  bigdns
3.42    3.42
3.01    4.26
2.71    4.74
2.45    5.28
2.28    5.78
2.12    6.30
1.98    6.83
1.85    7.40
1.73    8.00
1.62    8.58
1.53    9.20
1.43    9.86
1.36    10.54

Now where is that pointed hat?

Sep

4

As one who believes only numbers important in the employment report is the rate, which was up from 9.5 to 9.6, because the numerator and denominator have the same faulty seasonal adjustments, I was not overly impressed with the report from a economic activity standpoint especially since I believe that the numbers are vetted heavily by the flexions, as witness the prior afternoonionic moves, and rabbi-ed by …

Kim Zussman adds: 

Here is graphic of monthly unemployment rate, 1948-8/10 (seasonally adjusted, BLS data).

The '81 recession was worse in absolute terms, but the recent recessions rapid climb from 4.5% to 10% in 2 years is unprecedented in the series. It also appears that the rise to peak unemployment in recessions is generally much more rapid than the fall afterwards.
 

Sep

1

Here we are again with the September thing. The attached compares mean return in SPY (incl div), 1993-present, by month. Sept is low, but so is June, Aug, and especially Feb. No average significantly less than the global average, however.

Sep

1

Zeus and his scaleThe market is infinitely fascinating and various. Except for my leaves of absence I have traded every day for 32 years about 8000 days in a row straight. But I can't imagine what happened at 3:59pm EST when the market went up 1/2% in a second to NYSE close. The close the last day of the month is always a heroic one. Apparently all the pessimists, usually the useful idiot who thinks that because the politician in charge isn't doing things their way, the market will go down. So they sell and sell and sell and market their positions up. But today it was counterbalanced by the behavioral finance biases with the terrible close of August 30 staring in the face. Zeus took time off from romance to weight the two forces on his balance scale before making his terrible decision as to Hector or Achillles bull or bear but how?

Rocky Humbert writes:

I recall a similarly bizarre closing spike on the day of the exact March 2009 low. The memory is ingrained because I left some MOC buy orders in the stock market (as I was en route to meet The Chair for dinner,) and my mild irritation by those "bad fills" is, in hindsight, laughable.

The primary similarities between then and now is the sub-20% AAII bullish sentiment reading, and the widespread acceptance that the USA is in a state of permanent non-prosperity. The primary difference between then and now is that corporate bond yields are several hundred basis points lower, and the President's approval rating is rock-bottom– with mid-term elections just around the corner. 

Kim Zussman writes:

Quote: The primary difference between then and now is that corporate bond yields are several hundred basis points lower, and the President's approval rating is rock-bottom — with mid-term elections just around the corner. EndQuote

Another possible difference is SPX 1-year change:

3/08-3/09 -33%
9/09-9/10 +8%

Rocky Humbert replies:

Kim's entirely correct comment may be an illustration of the cognitive bias known as "Investment Anchoring." See entry on behavioral finance.

Is there any reason to argue that stocks are a better investment only because they've declined 33% over a ONE-year period — versus arguing that they're a better investment because they've decline 31% over a THREE-year period (which they have)?

It's this sort of price anchoring that got people bullish on Intel at 40 (down from 70) in 2000, but bearish on Intel at 18 (up from 12) in 2010. Both statements ignore the intrinsic value of the business — of which a share represents, and eventually reflects.

Ralph Vince comments:

C'mon Rocky!

You know all-too-well it (equities) reflects a big bag of smoke! Just like Real Estate in a Post-Kelo America, there IS no intrinsic value to what pirates control.(Har har har!)

It's the big bags of smoke…..but there are a very small and finite bags of different colored smoke we can put our monopoly play money on (real estate, stocks, fixed income, etc), and that means that most of the bags will always have some of this ocean of monopoly money on them.

Rocky Humbert retorts:

I believe you just gave a working definition of speculation. Which is a distinctly different activity from investment. Both activities provide opportunities for profit (and loss).

If you are (un)willing to sell me the perpetual royalty stream from your books at either 2x or 25x last years' cash flow, I believe that I will have proven my point.

Kim Zussman writes:

This is the technical vs fundamental analysis debate: Are future returns predicted (better or at all) by past price movements, or metrics of the business and economy?

Ex post they are often predictive, but it is hard to show which is worse, ex ante.

Can it be shown that fundamentals best predict a company's earnings stream into perpetuity, and that this prediction is also accurate in long-term stock price forecasting?

Ken Drees writes:

Years ago in econ freshman college my professor used too talk about hot dogs and hot dog buns as complimentary goods. He also noted that hot dogs came in packs of ten and that the smart bun people bagged buns in packs of 8 so you would need two packs of buns–and that the other unused buns would eventually go stale and be tossed, beefing up overall bun sales. If we now have 7 pack hotdogs HN brand (I did notice this recently, due to a common food tactic of smaller quantity at same price (tuna 5oz instead of 6oz) and 99 cent chip bags containing only 2 ounces of chips–years ago a 99cent bag could be shared)–could bun people be far behind with a 6 count bun bag? 

Vince Fulco writes:

In many ways, the public investor class has been marginalized. Their companies are:

1) run by a professional mgmt team which often has little incentive structure to pursue known shareholder friendly strategies. Enhancements to pay packages for the C-suite and employees, in the form of options or restricted stock awards, can just be reset in times of company, industry or economic troubles lowering the bar until it can be stepped over. When managers fail, they still walk away with compensation that would make a pro baseball player blush.

2) Represented by a board of directors who are protected mightily by directors and officers insurance, beholden to the mgmt team through cross-board relationships and whose compensation has no bearing on their duties or outcomes.

3) manipulated by savvy specs who can construct structured products to destabilize the nature of the more senior securities in the capitalization structure. Unimpeded by common sense regulations, the (previous) ability to buy many times more CDS than a company had debt outstanding and then attempt to wreck it for the sake of an improved position in bankruptcy court is reprehensible.

Where are the owners' yachts?

Aug

31

"'There's nothing to take us higher so we're continuing to go lower,' said Dan Greenhaus , chief economic strategist at Miller, Tabak and Co."

(NOT A JOKE).

Nick White writes:

That's bad, but the all time award had to go to the guy some years ago who made the prescient and wise call: "Well, Maria, the market went down today because there were more sellers than buyers…."

Full marks, sir.

Aug

30

Using Prof. Shiller's monthly data of SP500 returns (including dividends and adjusted for inflation), below is a table of mean monthly return ("MMR") by decade, counting back 120 months from the end of Jan 2010 to Jan 1880 (non-overlapping monthly return by decade). Also shown is monthly stdev and T (comparing mean to zero).

10/14 decades had positive MMR, though only 3 were significantly greater than zero (T>2.0), and one significantly less. Note that all down-decades were followed by up-decades, and the decade with highest MMR (ending Jan 2000) was followed by the recent down decade.


Date        av 120  stdev 120   T 120
2010.01    -0.003    0.042       -0.81
2000.01     0.010    0.031    3.62
1990.01     0.006    0.038    1.72
1980.01    -0.004    0.039       -1.01
1970.01     0.002    0.030    0.73
1960.01     0.009    0.029    3.37
1950.01    -0.001    0.040       -0.26
1940.01     0.001    0.087    0.07
1930.01     0.010    0.044    2.37
1920.01    -0.006    0.033       -2.06
1910.01     0.003    0.038    0.88
1900.01     0.001    0.033    0.42
1890.01     0.003    0.029    1.17
1880.01     0.004    0.031    1.37

Aug

28

horse whispererThe cathartic moves of Wednesday came just in time to create a sense of life at Jackson Hole in conjunction with the horse whispering and hiking so necessary to the research activities that occur there.

Desperate attempts to right imbalances come later in the week during the Summer than the other months because of vacation schedules at the Riviera and time with the others in the Hamptons.

To counterbalance the natural tendency to lethargy during the Summer, the market has moves approx 2% high to low in 19 of the last 20 days so that the public will not refrain any further from contributing to the overhead so necessary to keep the whole thing going in the absence of further subsidies from the centers at Brussels and the Beltway.

The top feeders must of necessity get on the same wavelength during the Summer so that they can get on the same page and possibly counterbalance the natural tendency of markets to homeostasis and this is why the trends in the summer are more pronounced than in other months.

East of Eden by Steinbeck has more insights into behavioral finance than all the studies of the so called men of promiscuous hypotheses, i.e. the behavioral finance gurus at the Universities combined.

The new Lloyd Webber show, Love Never Dies has more good work, more hummable tunes in it, a better plot than Beauty and the Beast of its predecessor than any other of his hits.

All the above assertions must be tested as to their validity to serve as a meal for a life time.

Victor Niederhoffer adds:

One wonders what the best use of horse whispering sessions there might be. Would it be to give instructions to the horses and engines that move the economy? Or would it be to receive unspoken in the native language signals as to the coming releases from the body language of the flexiopurveyors et al? What do you think? I'll award a prize for the best suggestion for the use of these whispers to any parties. Also one notes an amazingly large number of round numbers broken with SP 1050, Dow 10000, yen 85, crude 82, dax 5900 ish, nas 1800 as ever, beans 1000, and many others emerging vividly. What am I missing here? 

Easan Katir comments:

Another fascinating idea from the Chair. One recalls past analysis of Mr. Greenspan's briefcase as he walked to the Fed meetings. One thinks the main stumbling block to current and future analysis is lack of data: The viewer only gets brief video clips of the flexiopurveyors. A whisperer needs to observe the body language on his own terms to catch those small unconscious messages. Horse whisperers can't just watch rodeo clips. Maybe there is a way, but this is first reaction. 

Rocky Humbert replies:

The chancellors briefcaseIt's a cinch to note that the the horse whisperer's goal is to install a "western saddle" with its extra padding for the "fleecing," and its phallic horn. The English have no need for such contrivances for either foxhunts or dressage.

Similarly, the Greenspan briefcase indicator was developed by a group of American Anglophillys who lusted after the most famous briefcase in the world: The Chancellor's "Box"– which dates to the original leather briefcase made for William Gladstone around 1860– and which is carried by the Chancellor of the Exchequer to Parliament for the annual Budget Speech. Unfortunately, the "bulging briefcase indicator's" meaning was lost in translation from English to American– as the proper briefcase is rectangular and sold– and cannot be influenced by the battle of the bulge.

Details on the Chancellor's Briefcase.

Ken Drees comments:

The briefcase indicator was a made up cnbc gag/come-on; also Wayne Angell turned out to be not a talking font of knowledge but in court defended hinself as simply an "entertainer". Now we watch and listen to Bullard this morning–is he an entertainer, a wise font, a broken bell or a front? As Jimmy Rodger's said–get a tip from the company president and lose half your money–get that tip from the chairman of the board and lose it all. 

Jim Sogi writes:

Nik 9k

Kim Zussman shares:

Pierre-Olivier Gourinchas*, Hélène Rey**, and Nicolas Govillot***

Abstract

We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an "exorbitant privilege" that significantly weakens its external constraint. In exchange for this "exorbitant privilege" we document that the US provides insurance to the rest of the world, especially in times of global stress. This "exorbitant duty" is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.

Andrew Moe comments:

As the cloistered flexions whisper, a steady stream of rumors and leaks drive speculation wildly through the thinned ranks, causing the type of ranges that the former colleagues utilize to generate 100% profitable days for the greater good. 

Russ Sears contributes:

How to Listen to Jackson Hole

I currently am in the midst of writing a paper that suggests the regulators are the magicians of the markets. They direct your attention to the left, implies that your really should focus on the right. Time after time the central planners will steer the market to focus on this risk only to let the herd be blind-sided by the risk they are ignoring. There will of course be a rabbit pulled out of the hat at Jackson Hole and nobody would want to miss that. However, everybody is watching what is happening with the Feds and postulating how or even what they will do to make that rabbit pop out of that hat. Of course the assistants are in the know already. The lovely assistances will of course be able to buy all that jewelry and build castle in Vegas that such assistance need, from the crowd's tickets. But do not fool yourself that you can profit from these assistance they will only slowly get fat and growing old.

When the local college big football game is on, it is of course the time for the studious students to go to the library or simply go for a run around the other side of campus; But also it is the worst time to leave your car unlocked by the library or the other side of town. When the focus is on the imaginary, the divertive competitions of a game and fiscal policies of the Feds appear omnipotent. This is of course time to pay attention to what is real, the long term and risk all are currently ignoring.

I could specify hunting grounds and give data to validate this but will not because of the following reasons.

1. These extra-ordinary trades, without my bad ones, would seem like I was bragging.
2. I do not want to alert the competition to their mistakes
3. People do not remember what you told them yesterday, if it proves correct; it was their idea all along. History even becomes much more fuzzy, if you were right, and much clearer if you are proved wrong.

Yes, Virginia there are inefficiencies in the market, suffice to say look at the well spring of the Government's heart to find them.

Ken Drees adds:

I was thinking in a similar vein. All this attention directed to monetary policy as a myopic focus on fixing the economy (and of course the markets) when policy and the structural problems that are slow to change remain intact. The market focus is thus back on the magician and not on the real risk which i would characterize as "outside shock of any kind". When the momentum is slowing and minus a policy change –for example if Obama said that he would keep the tax cuts permanent until 5 quarters of positive sequental gdp would emerge then that would be a market booster since it would allay fears and unknowns, call it the Obama targeted tax extension business relief act". But minus a real policy change, we are back in the soup on Monday morning. We are now at the mercy of outside shocks which could very well tip us into the damned double dip—but shock could be used by pols for blame-so maybe they like that route.

If it wasn't for "x" we would have climbed out of the recession already. The economy is weak and getting worse by all measures–what rabbit will they pull–a good pro business bunny or just another QE painted hare? At election time, it's the economy stupid, will be the song on the voter–time is running out for. Maybe its just too late this time for another trick?

Aug

27

On August 27, 1918 Christy Mathewson became the only manager in professional baseball history to volunteer for military service. He was 38. He was gassed in a training accident in France and had his lungs ruined. He died on October 7, 1925 at age 45. His only son had an equally tragic life.

"You can learn little from victory. You can learn everything from defeat."

"It was wonderful to watch him pitch when he wasn't pitching against you."
– Connie Mack

Victor Niederhoffer comments:

His book Pitching in a Pinch is one of my favorites of all time, and it was also one of our good friend Larry Ritter's.

Aug

26

gold bugAUTUMN IN NEW YORK
Howard S. Katz
August 23, 2010

Being gold bug's lots of fun.
We've got the bad guys on the run.
The autumn season does behoove
For price of gold to make its move.

Al Abelson, he was a fool.
He sold his gold and broke the rule.
He sold his gold, what do you know
At price that was the very low.

Gold is, in fact, at its typical juncture of later years– where it has again moved up throughout the entire calendar month of August, silencing the skeptics and allaying the fears of the cautious!

This time: throw in spice into the mix: Silver, which was mired in unprecedented tight range for roughly half-year, has been on Bullish rampage this week. The kind of move that is almost guaranteed to fleece hapless Shorts, pre-Labor Day weekend.

Here is what I will be watching:

1. Expect Silver to dominate, putting a smoke screen around Gold– which is getting progressively overbought, to begin with.

2. At first sign of US Treasury market finally reversing to tighter course– end will be all but near to remarkable Bullish performance in non-yielding holdings such as the Yen, and Gold.

3. Have Gold bulls plan for contingency? I mean being Bullish and Long around the record highs may somehow feel comfortable to most Bulls– but would a move later in the year to below $1160.00 turn them into all-out Bears?

Rocky Humbert shares:

It is an ancient Trader
He's stopped out three of three.
"By thy margin clerk and glittering screen,
Now wherefore trades for me?"

"The Fed Vaults doors are opened wide,
And they are long of gold;
The public's met, the feast is set:
May'st hear the merry din."

The Trader raises his skinny hand,
"I am short," quoth he.
"Hold off! Unhand me, you gold-short loon!"
Eftsoons his hand dropt he.

Higher and higher every day,
Till over 1260 at noon-
The bullish public here beat their breast,
Ignoring Trader and bearish buffoons.

And when the GOLD CRASH came, and Trader
should have been tyrannous and strong;
He was instead bankrupt
because he had turned long.

Value, Value, everywhere,
And while good stocks would sink;
Value, Value, everywhere,
But Trader chose not to drink.

My inspiration came from here.

Kim Zussman adds:

Being a bull is lots of fun
When we come out the bears will run
Coming soon - our day in the sun
Fedmodel extrema (that's no pun)

Uncle Ben did everything fix
Hidden it is in daily ticks
Mr Gross still up to tricks
Allah Erian us to no sticks

The blowing blimps are good for us
Nattering nabobs we always suss
Better get on the leaving bus
Or wind up like an old fat Zuss

and while I'm at it, here's another on charts:

Charts! Charts!
Good for your smarts!

The more you look
The faster you fade

The more you fade
The better they feel

Read some charts it helps them steal!

Aug

25

Great Op-Ed in the Times called Japan and the Ancient Art of Shrugging by NORIHIRO KATO:

"GROSS domestic product figures for the second quarter show that China has overtaken Japan as the world's second largest economy. I have been traveling while on leave from the university in Tokyo where I teach, and was in Paris when the news broke last week. My first reaction, frankly, was one of relief. In English, perhaps, one might say it was "a load off my shoulders."

In Japanese, people use the phrase "right shoulder up" to describe a graph that keeps going up, with each year's figures rosier than the last. Of course, if that climbing line is someone's right shoulder, it means the left is languishing somewhere out of sight. We're seeing only half the person.

Reading the papers that morning at breakfast, I saw a graph indicating the point in the 1990s when Japan's G.D.P. had peaked, after which the line started jagging down and up, over the long run comparatively leveling out. The relief I felt had something to do with the person I saw there, no longer so awkwardly bent. Finally we know where Japan stands — on level ground.

Aug

13

We know that historical earnings yield is highly unstable. The attached Shiller P/E [i.e. price divided by average earnings for the last 10 years] for SP500 (1880-2010) depicts a range from 5-45, which translates to a one order of magnitude range in yield; 2%-20%. There are several instances when we were near the current level (~20 P/E); some were good entries, others were not. Perhaps there are better valuation metrics, but it is likely they are unstable too.

If stock prices do not reliably track valuation metrics (or reliably mean-revert to them), how does one know when a given entry-point value is a long-term bargain? Is value better considered in context, such as current historically low bond yields (ie the FED Model says beg/borrow/steal to buy buy buy).

Aug

5

Git yourself a trading account and ride fast up the wall of worry:

For Fannie Stock, Even Betting Pennies Is a Risk

By DAVID GILLEN

New York Times

Published: August 4, 2010

It is flotsam of the housing wreck, a stock no longer worthy of the Big Board. But penny by penny, the mortgage giant Fannie Mae is being salvaged in the stock market.

Nearly two years after it was effectively nationalized, Fannie Mae has become the nation’s hottest penny stock — and, perhaps, its most dangerous. Even though the shares are almost worthless, they are changing hands at a furious pace. Since June, about 31 million of them have been traded on a typical day, more than triple the average for Goldman Sachs shares.

All those Fannie Mae shares do not add up to much money. The stock closed at 40 cents Wednesday, about the cost of a first-class postage stamp. In mid-2007, before the housing market deflated, it fetched nearly $85.

“The volumes are astonishing,” said Bose T. George, a financial analyst at Keefe Bruyette & Woods. “It’s like a casino.”

The knockdown price partly explains why Fannie Mae typically ranks among the liveliest financial shares in the market: it doesn’t cost much to take a flier on Fannie.

But the Lilliputian price also explains why Fannie Mae might have buy-and-hold types feeling queasy. A penny or two change in the price translates into a big move in percentage terms. Last week, for instance, Fannie Mae’s shares rose 47 percent one day, only to sink 14 percent the next.

Behind all of this commotion are day traders, those creatures of the dot-com era. Mutual funds and other institutions have mostly abandoned Fannie Mae, as well as shares of its cousin Freddie Mac. The big money has ceded the marketplace to individuals who are bold enough, or perhaps foolish enough, to gamble on these stocks for a few hours.

Just don’t hold Fannie Mae too long, Mr. George advised. He predicted the stock would eventually fall to zero. It is difficult to know what other analysts think, since Mr. George is just about the only one who still covers Fannie Mae’s stock. His recommendation is an understated “underperform” — Wall Street code for sell.

“It’s not really a stock anymore — everyone knows this is going to zero,” he said.

Well, not everyone, at least not right away. But the running interest in Fannie Mae’s stock might seem surprising, considering that this company was the Titanic of the mortgage market. During the bubble years, Fannie Mae and Freddie Mac bought up so many toxic mortgages that the government was forced to take them over. Their stock prices promptly plunged.

The federal government today owns almost 80 percent of Fannie and Freddie, and few people, in Washington or on Wall Street, seem to know what to do with them.

Despite the trading frenzy, Fannie and Freddie have become pariahs. Most big investors won’t touch them. As of March 31, Fannie’s shareholders included two big money management companies, the Vanguard Group and BlackRock. But together they owned a mere 1.2 percent of the company, a pittance given the size of those investment companies.

Big institutions typically sell if a stock price sinks below $5. Fannie Mae has not traded that high in two years. Last month, both Fannie Mae and Freddie Mac were ignominiously tossed off the New York Stock Exchange because their share prices had languished below $1 for more than 30 days straight.

And so the once-mighty Fannie Mae and Freddie Mac have been banished to OTC Bulletin Board, home to lowly penny stocks and thinly traded “microcap” companies. As the Securities and Exchange Commission says in its guide for investors: “Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.”

The question of what to do with these troubled giants vexes policy makers and bankers alike. Together, Fannie Mae and Freddie Mac own or guarantee roughly half of the nation’s $11 trillion home mortgage market. The new overhaul of financial regulation did nothing to address the companies, even though they played a central role in inflating the housing bubble.

The Obama administration plans to hold a conference on the future of housing on Aug. 17 to seek advice about reforming the rules governing mortgage finance. The goal is to deliver a proposal to Congress by January.

What that proposal will say is anyone’s guess. Fannie and Freddie’s harshest critics want the companies shut down. But even banking executives concede that, for now, the federal government will probably have to play some role in mortgage finance, given the industry’s dependence on Fannie and Freddie.

“The fundamental problem with Fannie and Freddie is that no one really knows what to do with them,” said Bert Ely, a financial and monetary policy consultant based in Alexandria, Va., and a longtime critic of the companies. Until Washington comes up with answers, the day traders will no doubt try to ride the swings in Fannie Mae and pocket some more pennies while they still can.

Aug

3

Which lie has the highest moral velocity?

A. Scientific rumors on the web
B. Government numbers on the web
C. Corporate earnings announcements on the web
D. Current quote of publicly traded assets on the web
E. Pictures of women on the web

Jul

30

Above chart is US federal deficit / GDP ratio, 1900-2010. The two prior peaks (1919=17, 1943=28) coincided with WWI and WWII respectively. Currently we are at the 10.64; 3rd highest in the 110 year series, and not declining yet.

The rational will argue the deficits financed the first and second efforts to forever free the world from tyranny. Recalling that financial markets are forward looking, that the options market forecast the 9/11 event [A. Poteshman: Unusual option market activity and the terrorist attacks of September 11, 2001, Journal of Business , 2006] among many other things , one wonders when flags may wave again?

Alex Castaldo adds:

Some cheerful reading from the Congressional Budget Office :

Further increases in federal debt relative to the nation’s output (gross domestic product, or GDP) almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels. […]

If the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output. […]

[A] growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. [If this were to occur, to] restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.

Jul

26

Jon Hamm, CEO of California Association of Highway Patrol Officers and amateur economist, called the debacle  (WSJ Blog: Calpers should have listed to this bubble predictor ) (albeit a bit early, his letter was dated February 4, 2003).

Corollaries to Doc's axiom (to paraphrase)– that everyone has a position even if they don't have a position:

1. It is one thing to have an opinion but another to act on it (especially shorting a massive run-up)

2. There is no such thing as an amateur investment manager. Even if one does not want to make decisions and delegates, the delegator, the amount delegated, and timing of funding/withdrawal must be chosen.

3. Professional asset managers do better than self-directors, except when they don't. No matter how bad you are, if you want to feel better about your results check out Barclay's (or other) Hedge Fund and CTA returns databases. (You will feel worse, however, about your management fees).

Not inconsistently, the pension-fund director recipient of the letter has been sued:

"Buenrostro was recently named as a defendant in a civil suit filed by California’s attorney general. It alleges that as Calpers chief executive he improperly accepted gifts and got a standing job offer from a middleman trying to secure investments from the fund. Through a lawyer he has denied wrongdoing. He didn’t comment about the letter."

Jul

23

Are the S&P returns different for different days of the week? According to a vast published literature on the Day of The Week Effect, the answer is yes. (And the worst return is generally on Monday, according to French (1980)).

To make money from such a regularity, one could determine the best/worst weekdays to invest during a certain period, then try to take advantage of that during the next period. The results then determine what days to bet on during the following period, and so forth.

In my statistical study here, every non-overlapping 100 trading day interval in SPY was checked for return, by day of week, back two or three bull markets ago 5/03. Here are the T-scores (test for significance vs zero) for each of the weekdays over time:

Values outside the range (-1.96,1.96) indicate that a statistically significant anomaly (at 5% level) has been detected in the given period for the given weekday.

Alex Castaldo adds:

Mr. Bonferroni would be pleased that out of 95 reported coefficients there are 5 that are statistically significant: 2.03 (Mon), 2.85 (Wed), 2.76 (Tue), 3.25 (Wed again), and 3.36 (Mon again).

Jul

23

Hard to believe that it has been almost 30 years since "The Road Warrior" movie (Mad Max 2), a classic of the dystopian genre and coinciding with DJIA 800 ranges. The show The Colony, starting next Tuesday the 27th, on the Discovery Channel has a bit of that Mad Max/Andromeda Strain post-apocalyptic feel.

I just hope the poor geology professor with no practical skills makes a good showing and can at least find some water–coming from Arizona State.  She probably knows a bit of geohydrology. Did not see Season One, but this looks entertaining:

What would you do in the wake of a global catastrophe? Even if you survived it, could you survive the aftermath?

Season Two of THE COLONY introduces viewers to a new group of volunteers with differing backgrounds, skills and personalities, to bear witness to how these colonists will survive and rebuild in a world without electricity, running water, government or outside communication. Over the course of 10 episodes, the colonists - who include a construction foreman, teacher, carpenter and auto mechanic - must work to utilize and strengthen their exploration, technology and survival skills in ways they've never had to before.

Ralph Vince comments:

This, culturally, is AMAZING to me. A few weeks back I had an extended discussion with a group of very bright guys all in their early 20s — a candid discussion about their perceptions. A few very revealing things:

1. They are all very upbeat, economically, on a personal level. They feel they are smart and educated and will do fine even though they expect things to dissolve, they believe their formal education is their life preserver.

2. They all hate the boomers and consider them the "entitlements" generation — they regard the ones who were mostly their parents, the ones they refer to as "The greatest generation" as deserving of entitlements, but the boomers NOT entitled. Very interesting — I couldn't get to the logic of this other than we, the boomers, "screwed everything up, did nothing as a generation, and have a grotesque (to them) sense of entitlement to us".

3. They all, universally, expect things to decay, eventually, one way or another, into this MadMax anarchist future. When I would press them on this one, with things such as "Well you were saturated with these types of images growing up of the future, can't you foresee a less dark one, a more optimistic one?" They all universally agreed that "There is no other way the future can work out." Fascinating. Absolutely fascinating. With housing now more affordable than it ever was to any of the boomers — with borrowing at interest rate levels never before seen (and long rates banging around 4% !!!) and a protracted, decade-long-already contraction, the thought of a major up move over the next 15-20 years was something they could not possibly conceive of.

Vince Fulco writes:

Would note the release of the movie "Book of Eli" on DVD recently follows this post apocalyptic meme. Also has a fairly strong underlying theme of Pogo's "we've seen the enemy and he is us."

Pitt T. Maner III responds:

When will the post-Boomers give up on the end of "The Road " ideas and swing towards the "On the Road " themes again? Cyclicity. 

James Lackey comments:

One posits (as Mr. Vic did with movies and baseball) stock returns or better said premiums ratios are higher during futuristic movie and tv times.. see 60's twilight zone and late 90's everything was deep space futuristic.. then post crash it was all cop shows and today perhaps its true on the mad max which came in when the rust belt was dying post 70's Opec deals.

One does not say that its different this time. In my day Generation X was deemed stupid, spoiled and lazy.. It was a cultural and economic shift and we didn't know what to do, but the second we figured it out everyone I know ""just did it" hence the Nike slogan "just do it".

It's good to see the young beat up the old on the net, but quite respectful in person. I have a great deal of respect for my Son's buddies and all the BMX kids we train. Their only problem is over specialization and the quote above shows that in their belief their credentials will be their savior.

I do not agree they despise the boomers… I'd rather think we like to think or say that as Gen X ers for a revenge trade.. No Gen X er believed for a minute SSI [Social Security] would work out so for the Gen YZ kids to even think about it at all is a big joke..Ive never heard about it once…matter of fact if any Old BMX racers bring up the 3 sins of talking about Work Marriage or Politics at the track the kids ride off… the older adult pros age 18-24 say it flat out and crack me up "I can't handle this drama, I am gonna go talk to the girls" These kids today are "awesome". 

Ken Drees comments:

TV has recently been and still now is based on these themes "biggest loser" "bachelor" "dancing with the stars" "angry biker building show" "rock star real life" "idol" "top model" "fashion designer contest show" '"hell's kitchen" "next iron chef" "tattoo shop people" "dangerous fishing boat" "man in the wild" etc—a lot of contests, makeup, high energy, tears, people being eliminated, emotive overkill, action with real life injuries. All of this started with "survivor"–which is pretty much over–except they have a Spanish version of it on the Latin channel that I just flipped over yesterday so that trend must be in the last hurrah phase.

 But these themes are lottery like–taking a chance to make it to the top–be the one who can outlast the competition and the make it all the way. So maybe that consciousness seeps into markets–can we survive another day, the odds are against us but I feel the magic. A big cross section of age groups are relating to these shows—I personally got hooked on Hell's Kitchen–something about the angry language that I try to keep under control and watching that blond haired man just let his anger spew at those inept cooks. Then you get into the finalists and start rooting for a favorite —like horse racing.

Survival in a post 401k smashed world, surviving unemployment, etc.

 Kim Zussman comments:

1. They are all very upbeat, economically, on a personal level. They feel they are smart and educated and will do fine even though they expect things to dissolve, they believe their formal education is their life preserver.

2. They all hate the boomers and consider them the "entitlements" generation — they regard the ones who were mostly their parents, the ones they refer to as "The greatest generation" as deserving of entitlements, but the boomers NOT entitles. Very interesting — I couldn;t get to the logic of this other than we, the boomers, "screwed everything up, did nothing as a generation, and have a grotesque (to them) sense of entitlement to us.

Ralph please send our apologies for screwing things up for them. Ask them not to see "Avenue q", because exactly as Mr.s Rogers and Henson told them - and it is statistically remarkable - they really are all gifted, special, and specially equipped to make this a better world.

Sorry too about our house that you've been eyeing; its 20% upside down because of those college loans, and the one for your first car. At least there won't be any estate tax on it. And remember to hang that Ivy diploma proudly in the latrine - you never know when it might come in handy.

If you decide to get more education - forget about cloud quantum computing gene sequences. Go get your CPA, with emphasis on forensic accounting, and take some classes on retrieval of deleted emails, cash-tracing, and banking in the Bahamas. Also get certified to sell the plastics of the future - insurance.

Big shame about that 401 account. We were, as always, worried about you when they went below 700 and we sold everything. The good news is we got back in at 1200, so please work hard so your earnings propel it to the 12,000 you deserve.

About that screw-up: We were taught something like 2008-2009 was more unlikely than an asteroid collision. However now that the problem has been corrected, you have nothing to fear. Please tell your boss to deduct the maximum for your retirement account, auto-deposited in one of the index ETF's on the first of each month. Add to it on the taxable side too. More is better - buy as much as you can while you're young. Find a good ETF that will go up. If it don't go up, don't buy it.

Sorry about our health. We've been doing cardio for decades, so we're not going to MI like Opa or stroke like Oma. And we floss every day, so there won't be any need for chemo. But we did think to get long-term care insurance, and though you're mad hope you will pick nice nurses for us, and bring a case of Ensure now and then.

Alan Brice Corwin writes:

I've also recently had discussions with a large group of twenty-somethings, but I came away with a different impression. This may be a sampling or a context problem. They may have been less candid towards my generation because they were looking for money for their projects

The main difference in my encounter is that most of these people had boomers for parents. While most of our parents were in their early twenties when we (boomers) were born, their parents were often in their thirties and forties when they were born. There were a few with younger parents, but not very many. (We refer to our parents as the greatest generation because they beat the Nazis and the depression, but who are they referring to and why?)

In fact, I noticed a lot of sympathy for their boomer parents. Several of them noted that their parents had worked hard all of their lives and had expected to retire soon, but are now looking at having to work into their seventies or eighties. There was a general feeling that they would not allow this to happen to them. They would take care of their retirement needs while they were still young.

The main resentment that I encountered was that I was able to get my education for free. They don't think social security will be there for them, but they were young enough so that wasn't really a concern. The idea that someone could go to college for ten years and have money in the bank at the end of it was simply mind-boggling to them. People with full scholarships all the way through told me they had forty grand in debt after school.

I also detected less regard for their formal education among the group I talked to The pretty much all had college degrees, but they regarded their life preserver as their skills at seeing what was needed and building something to meet that need. Several told me that their college education was only good for getting a crappy job for a big corporation, and they had no interest in that.

One point of similarity I noticed is the sense of impending decay. One young man told me that he thought we would see a thousand bridges fail in the US in the next ten years, and that no one would step forward to maintain them. He said he saw no inkling of the common sense of purpose that must have existed when the roads were built. He further pointed out that the infrastructure needs were far greater today because there are now so many more people, but China and Dubai seem to be the only places where they are actively working to build a modern infrastructure. He said we have a 1900 model railroad system and a 1950 highway system (I didn't point out that the interstate highways weren't built until the late fifties and early sixties).

There was a sense that they would never have the life their grandparents had. This same young man said that his grandfather went to work for a company right out of college, worked for them for thirty five years without a layoff, and had been retired and playing golf on a generous pension for thirty years. His grandfather had bought his house for less than ten thousand dollars, and three years ago he could have sold the lot the house was on for nearly a million dollars (not any more).

Another thing I noticed was that almost everyone they idolized in business was a boomer. As you might expect with a group that was more iPhone app developers than anything else, Steve Jobs was far and away the person most admired. Eric Schmidt of Google was another favorite, but ranking way behind Jobs.

Marlowe Cassetti writes:

Wouldn't it be great if they were to make a new reality program based upon the Turtle Traders experiment. All the intrigues of students from diverse backgrounds competing. Ah, the high drama. I bet some of us Specs might be so inclined to view a few episodes. Am I right?

Lars van Dort comments:

Actually the BBC had a program called 'Million Dollar Traders' last year:

"Eight ordinary people are given a million dollars, a fortnight of intensive training and two months to run their own hedge fund. Can they make a killing?

The experiment reveals the inner workings of a City trading floor. The money is supplied by hedge fund manager Lex van Dam: he wants to see if ordinary people can beat the professionals, and he expects a return on his investment too. Yet no-one foresees the financial crisis that lies ahead.

The traders were selected in spring 2008, before the US credit crisis gathered pace. The successful candidates were chosen, trained and dispatched to their specially created trading room in the heart of the Square Mile. Among them are an environmentalist, a soldier, a boxing promoter, an entrepreneur, a retired IT consultant, a vet, a student and a shopkeeper.

The eight novice city traders struggle to ride the storm as stock markets around the world go haywire. Some of them take big risks, and others lose their nerve in spectacular fashion."
Episode 1:
http://vids.myspace.com/index.cfm?fuseaction=vids.individual&videoid=56317671
Episode 2:
http://vids.myspace.com/index.cfm?fuseaction=vids.individual&videoid=56321444
Episode 3:
http://vids.myspace.com/index.cfm?fuseaction=vids.individual&videoid=56337345

I quite enjoyed it.
 

 

Jul

20

Debrahlee Lorenzana, the woman fired for being too attractiveOne important aspect of beauty is symmetry. SPY daily closes (1993-present) were checked for local 21day minima, defined as the lowest close centered between 20 days into the future and into the past. Once located, calculated the mean daily drop for the 10-days before and the rising 10-days after each minimum, as a test for velocity of drop vs (respective) velocity of gain. For each respective minimum, used paired t-test to compare the mean after-min rise with mean pre-min decline (ie, changed sign for the mean drop to positive, as a means to compare the rate of drop to the rate of rise for each minimum. A better way would be to regress both sides to fit an OLS slope, or a non-linear function-fit, but no do).

Here is comparison of mean after-min rise with mean pre-min decline :

Paired T-Test and CI: up avg, |dn avg|

Paired T for up avg - |dn avg|

                 N      Mean     StDev   SE Mean
up avg       141  0.00395  0.00324  0.00027
|dn avg|      141  0.00346  0.00345  0.00029
Difference  141  0.00048  0.00343  0.00028  T=1.7, P=0.098

>>For all 21 day minima, subsequent up averages were greater (faster), though not quite significantly.

However as Tim recently proved, not all beauties are the same. Isolating on those which go down fast (mean daily drops worse than -0.5% per day) gave different results:

Paired T for up avg_1 - |dn avg|_1

            N       Mean     StDev   SE Mean
up avg_1    29   0.00585  0.00504  0.00093
|dn avg|_1  29   0.00874  0.00392  0.00073
Difference  29  -0.00289  0.00441  0.00082  T=-3.5

>>For fast declines, the subsequent rise was significantly slower.

Jul

19

College Board presidentA certain former collaborator just taught me how to spell mordant. I always thought it mordent. And it reminded me that in the old days on the college boards the favorite synonyms were xantippe, harridan, virago. Now you never see those words. The one thing you know about the college boards is that all the politically correct answers to the reading questions are the right ones. Other people know a lot more and have written books about it, but we will not mention that as often the idea that you can game the market the same way you can "Pam" from college boards is a lot easier in theory than practice.

But what are the market questions that they throw at you where the politically correct answer is always correct, or where as the author says the ones that the average smart person would answer is wrong, especially near the end of the test. I would hypothesize that anything that doesn't relate to greater revenues for the service, much needed when 100% of jobs nowadays come therefrom, is correct. What else?

Rocky Humbert comments: 

Mordent is a musical term. Mordant is a chemical term.

From the SAT Exam: "I whistled a mordent while dipping my T-shirt in my
mordant."

Kim Zussman comments: 

What is the SAT word for a game which alternates randomly between cynicism and polemicism?

Jul

18

Fourth Birthday Letter

"You brighten our days, you light up our life".

Let's start at the beginning. You were born 4 years ago in May, with great vigor, after overcoming many challenges, to your loving parents Laurel and Victor and an extended doting family of 6 sisters, Galt, Katie, Rand, Toria, Artie, and Kira and your step mother Susan, your uncle Roy, and your god parents, Ming and Dan, and your caretakers Lorna and Tashi, and mentors Doc, John and Jeff. We got you fresh air outside the hospital on your first day born, (tripping the hospital alarm system in the process), and good food at the Four Seasons and tennis at the town club, and music from Mommy on the piano, on your first day outside the hospital, and you have been proactively enjoying good things like that every day since that time.

I wrote you a letter when you were born emphasizing the importance of choosing the right path and friends in life, listening and learning, giving others the benefit of the doubt, taking care of small things, choosing the right incentives, counting to make sure that you know where you are, reading and surrounding yourself with good books, the importance of music and games, knowing how to handle money, and the value of competition, modeling yourself after heroes.

You have encapped most of those things so far, and amazed me by saying recently "the mouse with one hole is quickly taken" and "the little things you do get the job done". You love good books, music, and sports, machines, races, pretty people. You also said about the importance of eating good food "that's what attracts us to it " and you told me your favorite book is about the 12 heroic deeds of Hercules.

Perhaps you will reread those letters and the comments from the many friends that we have who augmented them with tips and guidance for you in the future.

Artie, my father always said that the happiest day in his life would come when I started to beat him in racket sports (a necessity along with music and books in our family). That day came to me, but I am not sure that you will ever have that pleasure since life is short, and I am still pretty good but at least you will have these letters and the knowledge that is Mom's and my most fervent wish for you to excel us in all things to look back upon. The key attribute you have as you enter your fifth year is that you radiate joy in all about you from the time you wake up to the time you go to sleep. Everyone you come in contact with loves you, from the doormen to the waiters, to the taxi drivers, to your teachers. You wake up singing songs like "those daring young men in their flying machines" and telling us that "the Large Hadron Collider at CERN has 27 kilometers of path", and you go to sleep saying that "you're thinking of silly things like all my friends have friends, and they have friends who have friends also". There's not one minute of the day, where you're not asking questions about how things work, what different words mean, why things are happening as they are, and why and what we're doing, along with your own explanations of the reason for each event you experience.

I am happy to say that somehow, you seem to already show interests and ability in all the things that are key to this family and that we have encouraged you to digest.

Your vocabulary is immense and you use word like "visible", "eventually", "finally", " theory", "familiar", "promising", "recommendation", "privacy" in everyday conversation. Here are some characteristic things you recently said "Let's not fly the kite. It might get lost. Let's just go for a scenic walk". "The three resistors make the fan go up in the air and that is how a street light works." "Practice is what makes you good at things". "I got hit by a rogue wave in S. Hampton but I don't have to worry about that on the Connecticut shore because the land is in the way". You said while we were swimming "You should board the board." Then you added, "that's a palindrome, isn't it?"

You are also good at languages and are beginning to master Chinese and you love to talk and hear Spanish.

You are a shrewd article, knowing how to solve problems and how to influence people. I was particularly impressed when you said to Susan, "do keep records of how much math I am doing now so you can tell Daddy so he'll let me watch the iron man video". Before going to sleep you recently said characteristically. "I'm thinking of something crazy. I was playing golf and then I started flying."

You are quite good at tennis, and can now hit a running backhand when you are incentivized by a banana split. You still have perfect pitch and love to sing all day, and now you have great rhythm also, and can play all the complicated rhythms of mommy's piano stuff on the drums. You've taken an interest in dancing, especially Irish dancing, and ice skating dancing, and love to imitate Michael Flatley and Apollo Ono.

You are good at the back stroke in swimming, and you can read most of the beginning Bob books. You love all machines including those used for building, cooking and sewing. You have incorporated the family's love of competition and are always ready to race anyone in anything and beat them at the finish. You also love to watch horse racing especially as the horses race to the finish. You amazed me recently when we went to the track by saying at the end as we met all the woebegones on the bus, "Daddy bet on the 4 horse in the second race, and it was in the lead but the 7 horse came up very fast at the end and we lost, but we won because daddy bet to place on second".

You love money and nothing gives you greater pleasure than selling lemonade. You dance up to all customers, give them a little kiss when they buy things, and then carefully count the revenues made in your cash register. You like to use credit card and understand what things cost and when you have to be careful about buying them. Sometimes you look at the screen of prices and say things like "oh no, what will make the prices stop going down."

You love going to concerts and have been to more live performances, ( and been escorted to the "front" ) than almost anyone. Your favorites are South Pacific which you've seen 5 times (I hope we can get you through the second act), The Music Man, My Fair Lady, and Annie. The little orchestra society has a few stars that you look for at their concert that make you love the music even more.

You are very good at counting and can add 9 to any number and know how to subtract. You recently gave a taxi driver 20 on a 17 fare and said "3 back" without prompting. You love to read maps, and can give a driver explicit instructions with all routes from West Street in Manhattan to Hillcrest in Weston.

Now that you know what's important in this family, and have already in your activities prepared the way, let's turn to some things for the future.

You will find that almost all the things you do in life come about because of the places and people that you visit and meet. Okay, you have to choose them wisely. Stay around good people who do good things that make you happy. But don't only think of short term happiness like Pinocchio did, but think about the things that will help you over the long run. The people you can always count on to lead you to good things, thinking only of your own welfare are your family and friends, the people mentioned above. You can always count on them, through thick and thin, and you must not expect to rely on others as the world spins on its axis and many a storm and uncertainty envelopes you. I had a friend once, a Palindrome.

Closely related to this is one of my most important things. Stay away from people that seem to have bad luck. People who always end up in trouble, or who seem to be in places where bad things happen to them and their companions, even if no fault of their own. I call these people hoodoos, and you will meet many of them among your friends and acquaintances who you should stay away from. As the dictionary says, "hoodoos are not confined to locomotives that are always involved in accidents through no fault of their own, but to boats, and planes also."

A good place to be is one where you can do the same thing over and over again without excessive danger. If you keep doing dangerous things, in life, play, romance or business, you'll find that eventually one of those dangerous things will cause disaster. I have made that mistake in my speculations, and life and I am afraid that you may be prone to this error also. Be careful. The best things are yet to come.

You have so many talents, so many good things ahead of you, and life is so beautiful that you should never take a chance, even if it's one in 10,000 that would cause you irreparable harm. I found this out too late in life to thoroughly incorporate and if I had, life would have been a lot easier for all of us. I know that your mother agrees with me on this, as we do on most things.

While you should stay away from Hoodoos, you should stay around heroes. I have come in contact with lots of heroes who do great things overcoming tremendous obstacles to do them in my day to day life as well as in books. Heroes I have known include Jack Barnaby, the greatest squash coach, Jim Lorie, the man who created the data base for all of finance, and most of all, your grandfather and my father Artie. He was like you. Everyone who knew him loved him and thought of him as a second father or second brother. He never did a bad thing in life and always tried to do good. He loved all of life, including not only the things above I said were so important, but writing, teaching, dancing, ice skating, games, checkers, sports of all kinds, parties, words, books, libraries, food, friends, music. His favorite expression was "this is living", which he was likely to say when eating a good tomato or watermelon. The picture of him we have showing his books, his violin, his tennis racket, football, checker board, type writer says it all. Most important of all was that he always knew and tried to do the right thing. He was a master of form and knew how to do anything just so.  His second favorite expression was "So what of it" which he liked to say whenever one of his kids was sad and depressed and worrying unduly about things. It's always good to let "the bygones be bygones" as no sense letting bad things hurt you in the past and future. And often what happens bad in past turns out to be good for the future. For example, a miserable boss helped to get Mommy fired from her job, even though she was excellent at it. But if she hadn't been fired, she and I wouldn't have met, and you wouldn't have been born.

Such an approach to life led Artie to often say "I'm the happiest man in the world". I believe Uncle Roy often says that, and I hope you can also. If there was one characteristic that marked Artie above others, and made him like a second father or older brother to almost everyone he met, it was that he was a "formist". He knew the right way of doing every thing.

Doing the right thing means doing things the proper way. Without wasting any motion, and effectively going from beginning to end. It means doing things properly regardless of whether you have to, but because it's part of your nature, and no one can take it or tell you what to do. It includes taking risk and overcoming obstacles to make your family better, protecting women, helping the weak, and being courageous when something important is at stake. It also means doing good things that will make you and others happy even when you don't have to do it. You are lucky these days in that you don't have to rely on heroes in your family and books only for guidance in doing the right thing. But you can look things up on the internet to see the right way of doing it. Thankfully you are already good at using google and wiki, and you should continue to look things up there as well as the dictionaries that you love when you want to know the right way.

I have two groups of people that have been very helpful in showing me the right things to do, the junta, and the spec list. Many of them are like family and you will be able to draw strength and nurturing from them in the future. They all agreed with me that it's important to surround yourself with good people and when I asked them for heroes besides Artie to model yourself after from books they came up with the following list. General Petraeus (smart, effective, loyal), Jack Aubrey (knew everything about his field, gusto, generous, well versed in deception, musician, big, competence), Cal Ripken (perseverance, expansive, excellence at game, sharing his love of game with others for profit), Thomas Jefferson (scholarly, omniscient, doing the right thing) Benjamin Franklin (practical, down to earth, self effacing, romantic, scientific), Morihei Ueshiba (self reliance, self defence, physical training, achieving your goals) coack K and Coach Wooden, and Coach Pete Newell, (dedication to teaching, completely knowledgeable) Bruce Lee (strategy, physical training), Richard Feynman (curiosity, ingenuity, happiness, loyalty), Michael Waltari (independence, resourceful, world as oyster), Ted Mack (not petty, serving as example, creative), Faraday (humble, able to popularize, neat, experimenting, dedicated), Thomas Edison (inventive, practical, seeing the big picture, diligent), Lord Rama (ideal son, husband, friend, and king), King Leonidas (for bravery, tenacity) Galton (ingenuity, generosity, diversity of interests, counting, visualization, diplomacy).

A boy, a man has many roles to play as he grows: to be a good son, a good husband, a good friend, a good brother, a good teacher, a good leader. Fortunately, the foundation, the qualities for dispatching those roles are rather simple. The heroes mentioned all seem to have that foundation. Strength, bigness, courage, diligence, organization, practical, knowledge, self awareness, sense of happiness, loyalty. You are fortunate to have been born with many abilities. If you try to weld the above qualities of success onto those abilities you are sure to lead a happy and productive life.

Some day you'll look back on these letters and realize that the lessons I tried to teach you come from the wisdom and good experiences of my parents and their parents before them, and that they can live forever in you, and yours.

Just one more thing. Tom Wiswell, the greatest American free style checker player, and my checker teacher for 20 years always said, "make sure you have a good foundation in Checkers and life." Try to fill in the holes before you start something. Have a strong base with checkers and resources supporting where you're coming from. Read the story of the three pigs and learn from it to use strong materials, for example strong people and products when starting a business. Dig deep and wide and strong at the beginning. Make sure there are strong posts of brick or concrete or metal all round to hold up what you're doing. And make sure there's lots of volume underneath to distribute your project over. The worst mistake you can make in business or life is to get in over your head. That mistake always starts with not building a proper foundation.

One more thing. Think big. Have great dreams. Try to make them come true. Don't worry about little things. As Galton says, "let the bygones be bygones". Or as Artie would say "so what of it" about little things that go wrong.

As the song goes, "the days grow short. I haven't time for a waiting game. These precious days dwindle down to a precious few, and these few precious days I'd spend with you." Hopefully the ideas, heroes, books, and love that make up this letter will help steer you on the path to a happy and productive life.

Love, dad

Kim Zussman comments:

I hope and believe you will live beyond the day when Aubrey beats you at tennis, and everything else. It is part of nature's plan.

Chris Tucker comments:

Spent the afternoon at the beach yesterday. There is something special about having your child run to you and reach for your hand, about holding your child's hands and helping them jump over the waves and squeal with delight, again and again. It makes all the other stuff just disappear.

Jul

15

There are many examples of historically profitable strategies which have LESS risk, if you define risk as volatility.  (Of course volatility is not risk if you could know there will be profits after period-X, and know what capitalization it takes to survive to X) Notably various above-moving-averages (see below from prior post):

SP500 daily (1951-p).  Using the rules buy at close if at today's close 50DMA>200DMA: sell at close if  at today's close 50DMA<200DMA (and stay long while 50DMA>200DMA).  Here is comparison of mean daily returns (in market =1, out of market =0):

Two-Sample T-Test and CI: ret, 50>200

Two-sample T for ret

50>200    N         Mean      StDev      SE Mean
0              4633    0.0000     0.0121    0.00018  T=-2.15
1             10301   0.00044   0.00832   0.000082

(all positive returns for the period contained in the rule)

And the returns while in-market are significantly less volatile:

Test for Equal Variances: ret versus 50>200

95% Bonferroni confidence intervals for standard deviations

50>200     N         Lower          StDev          Upper
   0            4633    0.0118321    0.0121078   0.0123962
   1           10301   0.0081929    0.0083209   0.0084528

F-Test (normal distribution)
Test statistic = 2.12, p-value = 0.000

Levene's Test (any continuous distribution)
Test statistic = 388.07, p-value = 0.000

Jul

13

Did indexing "work" when it was difficult/impossible to index (~ <1993) because it was difficult to index, and most were picking stocks, and index benchmarking was still nascent? If so, with the trend of massive indexing, closet indexing, and over-diversification, are we entering an era of renewable alpha for good stock pickers?

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