Aug

16

If you divide S&P500 cash daily closes into non-overlapping 20 day periods, there are 724 of them since 1950. If you then check the low close of the recent 20 days and the high of the prior 20 days, these drops can be compared against each other. (This finds drops as short as two days and as long as 40.) As of this morning, the current decline is -10%, which ranks 51/724 worst, which is in the bottom 7%.

Not that many sigma after all. Here are the 51 worst 20/20 declines:

Date              decline
10/19/87        -0.332
11/16/87        -0.306
08/14/02        -0.218
09/27/74        -0.214
06/28/62        -0.214
09/28/01        -0.209
05/21/70        -0.199
05/31/62        -0.195
10/10/02       -0.193
04/03/01        -0.182
07/17/02        -0.179
08/29/74        -0.176
12/12/73        -0.173
08/23/90        -0.168
09/18/98        -0.166
06/18/70        -0.163
04/14/80        -0.157
08/01/74       -0.154
07/20/50        -0.140
10/21/57        -0.138
10/14/81        -0.137
10/25/74        -0.137
09/13/66        -0.137
12/23/74        -0.136
12/15/87        -0.133
05/02/01        -0.128
09/21/90       -0.126
03/06/03        -0.123
10/16/98        -0.122
09/10/75        -0.122
10/26/01        -0.119
09/16/81        -0.119
12/07/78        -0.118
11/08/78        -0.116
01/11/74        -0.111
03/14/80        -0.110
09/23/57        -0.109
08/06/69        -0.109
03/09/82        -0.108
10/25/55        -0.106
08/20/98        -0.104
11/07/00        -0.104
10/11/66        -0.103
07/01/82        -0.103
01/05/01        -0.103
11/19/79        -0.102
02/02/90        -0.102
05/07/74        -0.102
03/06/01        -0.102
08/17/50        -0.101
08/16/07        -0.100

Aug

13

Animal studies suggest all creatures attempt to maximize calorie density, and recall that:

Carbohydrate=4cal/g
Protein=4cal/g
Fat=9cal/g

Since we cannot predict the future, there is survival advantage to consuming as much as currently available and store the excess as fat for leaner times to come.

Rather distinct from devolved creatures with >100%LTV on the lair, and their evolved predators who thought they snuck away with the fat.

Aug

9

Jazz fans in NYC might check out Charlie Haden at the Blue Note for the next couple of days. The bass legend (and personal friend) is playing with different accompanists this week to commemorate his 70th year, and we took in last night's show with Ethan Iverson at piano.

It was hard to resolve whether the riffs were logical or emotional, and this conflict implies they were emotional. Great irony was in ample evidence, just in case there's not enough in your day to day.

Bring a lady, or your wife, and you will have a nice evening.

Jul

30

I hypothesize that the higher purpose of the 2000-2002 decline was to scar for life a whole generation of the public… After that decline, many found the next way to riches in real estate. (Jeff Sasmor)

This may relate to a generalization of the Fed model and consumption wealth effect. Investors soured on stocks were incentivized by low mortgage rates and rising home prices to speculate in real estate instead of stocks. For families with roughly equivalent stock and real estate holdings, their net worth didn't change much through the stock bear/real estate bull market.

There is evidence that wealth effect (income+investments+home) at least partially propels the stock market. The richer people feel, the more they spend (goosing earnings) and the more they invest.

So where does the money go if both S&P and real estate go down? Perhaps conservation-laws don't hold because a stock can drop a great deal while only a few percent of the float trades. 

Jul

30

Checking dates of the eight major (suspected or proved) Al Qaeda terror attacks against either US or US allies, I was curious about the possibility they time attacks to coincide with the falling US stock market.

Here are the dates, along with S&P 500 emini futures total point change for 20 days. PR20 is point total 20 days counting back from three days prior to terror attack — i.e., (t-3)-(t-23). The theory is that it takes a few days to execute the attack after down market has occurred. PPR20 is the 20-day sum of the period before the one just prior to the attack (as control for current market climate):

    N Mean    StDev  SE Mean
pr 20        8  -21.50  49.31  17.43
ppr 20      8   29.12  27.43   9.70
Difference 8  -50.62  38.07  13.46

95% CI for mean difference: (-82.4537, -18.7963)
T-Test of mean difference = 0 (vs not = 0): T-Value = -3.76  P-Value = 0.007

Date           pr 20    ppr 20
06/29/07 -40.75   34.00 Glasgow airport/London car bomb
08/10/06    5.25   15.50 London Heathrow plot
07/07/05   -3.50   23.50 London Underground bombing
03/11/04    5.00     9.50 Madrid train bombing
05/12/03   51.25   79.00 Riyadh Compound bombing
12/21/01   -9.50   60.50  Richard Reid bomb plot
09/11/01  -82.00    0.25  WTC attacks
10/12/00  -97.75   10.75  USS Cole bombing

I used paired t-test to see if the difference between pr20 and ppr20 was not zero, and it's not:

Paired T for pr 20 - ppr 20

    N Mean    StDev  SE Mean
pr 20        8  -21.50  49.31  17.43
ppr 20      8   29.12  27.43   9.70
Difference 8  -50.62  38.07  13.46

95% CI for mean difference: (-82.4537, -18.7963)
T-Test of mean difference = 0 (vs not = 0): T-Value = -3.76  P-Value = 0.007

Only 3/8 pr20 periods were markedly down, so it's hard to say they target declines. But the significant pre-attack decline from prior might suggest the market sees them coming. 

Jul

29

For S&P 500 index weekly returns since 1950, what happens after this week down more than 3%, last week down more than 1%, and none of the prior 10weeks were down more than 2% (i.e., the current condition: one of prior avolatility ending in large 2-week drop)?

Here are returns for next 1wk, 3wk, 5wk, 10wk:

One-Sample T: 1wk, 3wk, 5wk, 10wk

Variable  N    Mean       St Dev      SE Mean          95% CI                 T      P
1wk       11  0.00903  0.02487  0.00750  (-0.00768, 0.02574)  1.20  0.256
3wk       11  0.00267  0.03384  0.01020  (-0.02006, 0.02541)  0.26  0.799
5wk       11  0.00368  0.04448  0.01341  (-0.02620, 0.03356)  0.27  0.789
10wk     11  0.00873  0.10454  0.03152  (-0.06150, 0.07896)  0.28  0.787

Means all positive but N.S.

Date           1wk    3wk     5wk   10wk
01/24/00  0.047 -0.010  0.036  0.115
08/11/97  0.025  0.031  0.055  0.045
03/28/94  0.003  0.004  0.005  0.029
08/31/87  0.017  0.011 -0.018 -0.224
04/20/70 -0.016 -0.071 -0.075 -0.119
06/09/69 -0.020  0.010 -0.038 -0.028
11/18/63  0.052  0.064  0.069  0.107
01/25/60  0.007  0.011 -0.019  0.014
01/14/57  0.004 -0.030 -0.026 -0.012
01/16/56  0.003  0.010  0.049  0.122
05/14/51 -0.022 -0.001  0.002  0.047

07/23/07 1473
07/16/07 1534
07/09/07 1553

When it was 53…it was a very good year
A year of patterned girls…with independent means
When it was 53…
We'd ride in limousines
Until 4:15
When it was 53…

07/02/07 1530
06/25/07 1503
06/18/07 1503
06/11/07 1533
06/04/07 1508
05/29/07 1536
05/21/07 1516
05/14/07 1523
05/07/07 1506
04/30/07 1506
04/23/07 1494
04/16/07 1484
04/09/07 1453
04/02/07 1444
03/26/07 1421
03/19/07 1436
03/12/07 1387

Jul

25

Thinking about use of manufacturing control systems to time market cycle-changes, take the example of a Malibu Oxycontin 120 tablet machine.

Say the FDA specifies that the tablets must have 120 mg of oxycodone with a standard deviation of 1mg. From this you can determine the frequency of pills which are too high, and adjust the machine (and keep checking it) so that it "never" makes 130 mg tablets (never > 10 st dev, etc).

But is the market like a pill machine that gets clogged with chemicals or wears out, and can be adjusted back to good behavior?

Here, for example is check on frequency of SPY c-c drops <-1%. The control system is regression of wait times (in trading days) between 1% drops vs. arbitrary timescale:

Regression Analysis: wait versus td

The regression equation is wait = 6.59 + 0.115 time.

Predictor     Coef     SE Coef     T      P
Constant     6.588    2.917  2.26  0.026
time            0.115    0.055  2.09  0.039

S = 14.1789   R-Sq = 4.6%   R-Sq(adj) = 3.5%

Looks like the wait gaps between such days is increasing, so is it time to adjust the machine?

More on engineering control:

"His face is melted to the wire!"

"The flies are on him!"

Jul

25

The two recent 1% plus declines in the SPY (07/20 and 07/24) were separated by an up day. It turns out there have been no other 1% plus down-up-down combinations like this since October '05. Below, I have charted them back to January '03, with returns for the next one, two and three days:

  Date        1d       3d       5d
10/20/05  0.004  0.017  0.004
05/12/05 -0.002  0.014  0.029
03/15/04  0.005  0.017 -0.010
09/24/03 -0.008 -0.002  0.010
07/21/03  0.009  0.002  0.016
06/27/03  0.000  0.022  0.031
06/25/03  0.013  0.001  0.023
02/26/03  0.013  0.010  0.002
01/24/03 -0.014  0.001 -0.004

avg          0.002   0.009  0.011
sd            0.009   0.009  0.015
z              0.732   3.159  2.299

Andrew McCauley adds:

So far this year there have been seven declines of 20 points or more in S&P 500 futures. On all occasions the next day provided a positive outcome. 

avg 1.00%
n 7
sd 0.71%
t 3 (versus all other one day returns for 2007)

Referring to Dr. Zussman's previous post, a case of "buying the dips before they occur." 

Jul

23

I did a quick check under the AAPL tree and looked up earnings report dates from 1/05 to the present. I then checked returns for the three days prior (to the close of announcement day), on just the earnings day, close to following close, and three days after (close the day after announcement to the close three days later). I did this, not only for AAPL, but also for SPY, and QQQQ.

Here is three days prior:

One-Sample T: AA3d pre, SP 3d pre, QQ3d pre

       N       Mean     StDev   SE Mean             95% CI                 T      P
AA   10  -0.00490  0.03970  0.01255  (-0.033315, 0.023497)  -0.39  0.705
SP   10   0.00366  0.00923  0.00292  (-0.002940, 0.010274)   1.26  0.241
QQ  10   0.00082  0.01510  0.00477  (-0.009981, 0.011625)   0.17  0.867

I found that there was an insignificant pre-earnings drop for AAPL, and SPY was up slightly over the same period.

My next check was the day after earnings announcement: 

One-Sample T: AAer day, SP er day, QQer day

      N       Mean     StDev   SE Mean             95% CI                T      P
AA  10   0.01325  0.06872  0.02173  (-0.035904, 0.062418)   0.61  0.557
SP  10   0.00141  0.00693  0.00219  (-0.003541, 0.006378)   0.65  0.534
QQ 10  -0.00511  0.01064  0.00336  (-0.012734, 0.002497)  -1.52  0.163

Here there was nothing much with AAPL, but QQQQ was somewhat down.

Next I checked the three days following earnings announcement (from close the following day):

One-Sample T: AA3d post, SP 3d post, QQ3d post

      N       Mean     StDev   SE Mean              95% CI                 T      P
AA  10   0.01002  0.04008  0.01267  (-0.018647, 0.038697)   0.79  0.449
SP  10   0.00150  0.00910  0.00287  (-0.005008, 0.008016)   0.52  0.614
QQ 10  -0.00271  0.01481  0.00468  (-0.013312, 0.007881)  -0.58  0.576

Again nothing much.

Now what does AAPL do on the day after earnings announcements, as a function of the pre-earnings three day return?

Regression Analysis: AAer day versus AA3d pre

The regression equation is AAer day = 0.0179 + 0.946 AA3d pre

Predictor     Coef     SE Coef     T      P
Constant    0.0179   0.0195   0.92  0.385
AA3d pre    0.9461   0.5123  1.85  0.102

S = 0.0610337   R-Sq = 29.9%   R-Sq(adj) = 21.1%

There is a positive correlation between AAPL post-earnings day returns and it's prior three day return. What about the next three days in QQQQ vs. AAPL post-earnings day?

Regression Analysis: QQ3d post versus AAer day

The regression equation is QQ3d post = - 0.00420 + 0.112 AAer day

Predictor       Coef      SE Coef      T      P
Constant   -0.00420   0.00432  -0.97  0.360
AAer day    0.11230   0.06505   1.73  0.123

S = 0.0134105   R-Sq = 27.1%   R-Sq(adj) = 18.0%

There is some tendency for a positive correlation between QQQQ three days after and AAPL post-earnings day. However tests with SPY shows much weaker results:

Regression Analysis: SP 3d post versus AAer day

The regression equation is SP 3d post = 0.00085 + 0.0495 AAer day

Predictor      Coef      SE Coef     T      P
Constant    0.00085   0.00289  0.29  0.777
AAer day    0.04950   0.04344  1.14  0.287

S = 0.00895612   R-Sq = 14.0%   R-Sq(adj) = 3.2%

From this it seems hard to conclude that AAPL moves the market much, but maybe some industrious spec can check on interactions between GOOG and AAPL. Here are the AAPL dates and data:

Date AA3d pre AAer day AA3d post
04/25/07  0.048   0.037   0.006
01/17/07 -0.009  -0.062  -0.038
10/18/06 -0.007   0.060   0.026
07/19/06  0.068   0.118   0.024
04/19/06 -0.012   0.030  -0.022
01/18/06 -0.021  -0.042  -0.038
10/11/05 -0.002  -0.045   0.085
07/13/05  0.003   0.063   0.060
04/13/05 -0.062  -0.092  -0.005
01/12/05 -0.055   0.066   0.001

Jul

21

Akira KurosawaI'm becoming a big fan of Akira Kurosawa's movies, despite only having watched two so far (Dersu Uzala and Yojimbo). I commented earlier on Dersu Uzala.

The storyline and elements of Yojimbo can be seen in many Westerns. But there's much more to Yojimbo, mainly because of the insights we gain into the mind of the enigmatic lead character, a masterless Samurai (we never learn his real name).

The film starts with the Samurai throwing a branch in the air to determine which road he will take. Arriving in a town he discovers there is a conflict between two warring clans and soon has them competing for his services.

Yet as the film continues we start to discover that his true motive is not money — he later gives his entire fee to a family he saves (simultaneously describing them as 'pathetic'), and apparently leaves without making a penny. So what is it that makes the Samurai tick?

I believe that much of the answer can be found in Japanese history. With the outbreak of peace that came with the Tokugawa shogunate, many Samurai found themselves with nothing to do. Yet generations of Samurai had devoted themselves to warfare and the perfection of their skills, with warfare and honor being in their blood. Could they simply forget about this and do something else?

Apparently not, as the Satsuma Rebellion (very roughly portrayed in 'The Last Samurai') was to demonstrate. History ascribes this rebellion to the loss of status the Samurai had to suffer, but in Yojimbo there is a clue to another element. When a man has lived for an appointed task (whether it be warfare, chess or trading), he is only truly alive when given the opportunity to ply this trade. Take the trade away and he becomes a kind of anachronism, but one which will search for pockets of meaning.

This, I believe, is the dark secret in Yojimbo which Kurasawa was no doubt aware of (he was born into a Samurai family) but which I don't think will be widely understood. When one compares the Samurai with, for example, the character William Munny in 'The Unforgiven' , Munny is given a financial reason for embarking on his killing spree (failing farm, kids to feed and then subsequently the murder of his friend) with his darker side being something akin to Dr. Jeckyl's Master Hyde.

The Samurai, on the other hand, kills because of what he is, the gradual emergence of his humanity being an endearing weakness that almost costs him his life. The brusqueness of his final goodbye shows that he doesn't intend to let it happen again, and not because he fears death. It's more a question of professional pride. 

Kim Zussman comments:

I am reminded of the busted traders of yore hanging around Wall St. If markets evolve, there must be extinctions as well as successful mutations. Is it possible that new and profitable traders must defeat the old lions, and have the advantage of not yet holding a deep identity as market maven? Once deemed a master it will be difficult to accept the possibility that old market understanding has become obsolete, and what should be a logical inflection becomes instead a battle to the death.

Similarly, success at trading begs to be made a continuous career; though there is pretty good evidence that tradable periods are ordered irregularly in time.

The best lady’s-men are truly indifferent. 

Jul

19

1999: Buy dips after a week or two
2000: Wait two years to buy dip
2006: Buy dips after a day
2007: Buy dips before they occur

Jul

17

VitaliyIn the long run, the performance of a stock in isolation (ignoring the external environment, i.e. interest rates, risk, inflation) is the product of fundamentals (i.e. earnings and cash flow growth) and valuation ( i.e. P/E, P/CF).

Google and Apple may have great fundamentals: their innovation has led and may continue to lead to high earnings and cash flow growth. But are they good stocks? They may or may not be. But, more importantly, will they be good stocks at any price? No! If I were to follow the above conclusion, that since Google and Apple are great companies they are great stocks at any price, at any valuation – at 50, 500, 5000 times earnings, then I'd walk into an overvaluation trap.

Take a look at eBay in the late 90s: it was a great company (it still is), but it was grossly overvalued. So, if you bought it in the late 90s and held it until today, despite its earnings going up 100-fold, the stock is roughly at the same level it was then. I'd argue few would have the patience and conviction to hold it through the downturn the stock took in the early '00s. Most investing in the stock in the late 90s lost money on it.

One of the biggest mistakes investors make in investing is failing to separate a good company and a good stock. A great company's (fundamental) performance is wiped out by valuation compression. This is the battle of two winds: the tailwind of earnings growth and the headwind of P/E compression.

Also, with a high growth priced appropriately (even to perfection) there is no room for even a small mistake (no margin of safety) left in the valuation - a small disappointment (it doesn't have to be much) will lead to a substantial decline in price. The latest performance of Starbucks and Whole Foods stocks is a great example of being priced for perfection and delivering slightly less-than-perfect results.

This myopia in differentiating between good companies and good stocks is not just limited to wonderful, exciting, larger-than-life (Google comes to mind here), fast-growing internet companies. The bluest of the blue chip stocks, like GE, Coca Cola, Home Depot, Amgen, Johnson and Johnson (and the list goes on) were all great companies that one "had to own" but were terrible (overvalued) stocks in the late 90s. Their earnings have doubled or tripled since but the stocks have not gone anywhere.

I think it was Benjamin Graham who said that "price is what you pay, value is what you get."

Kim Zussman adds:

What are the parameters which make a good company or stock? Here are some good stock categories from the literature:

1. Large five year decline in price (DeBondt and Thaler)
2. Large one year price gain (-large 1 year price decline.) Momentum (Jegadeesh)
3. Small cap stocks (Lakonishok and others)
4. Valuation: Low P/E, P/B, P/cash flow, high dividend yield, and
various concatenations thereof
5. High (low?) short interest
6. Put/call ratio (especially when options orders are placed by grandmas in Serbia)
7. Value line timliness (used to be more timely)
8. Double tops and wiggle bottoms above and below 10 minute panting average

The problem is that they all work sometimes; actually, just often enough to keep people interested in them.

Vitaliy Katsenelson adds:

I spent a good portion of my soon to be published book called, Active Value Investing: Making Money in Range Bound Markets, discussing what constitutes a good company and a good stock. I created the QVG framework (Quality, Valuation, and Growth).

A good company should get high scores on Quality and Growth dimensions. For instance a high quality company will have high return on capital, strong balance sheet, a sustainable competitive advantage, competent, shareholder friendly management, significant free cash flows. A Growth dimension encompasses predictable (high recurring) revenue growth, multiple sources of growth, a nice dividend, etc.

If a company received high scores on Quality and Growth dimensions, for it to be a good a good stock it should pass get a passing grade on Valuation dimension - be undervalued (have a appropriate margin of safety).

As anything in investing this analysis is very subjective, but I find this framework is very beneficial to maintaining a rational head and helps me to stick to an analytical process. 

Steve Leslie comments: 

On June 28th (post number ?p=1834) I mentioned that one year ago, when Google was $350, Vic and Laurel went all-in on the search engine provider. I also remarked that Apple and Garmin were both $50 then. Today GOOG is $550, AAPL $137, GRMN $80.

When one finds a great company with a great product line and great prospects, selling at a reasonable price, it is time to buy. Strike when the iron is hot! And eschew the short-term gain for the much larger pot o' gold that lies at the end of the rainbow.

Charles Pennington responds:

I can find nothing in the original post of Mr. Leslie stating any requirement that the stock be bought at a reasonable price (let alone any definition of what a "reasonable price" would be). The concluding quote was:

".. most importantly the speculator should be willing to hold onto the companies eschewing the quick buck in search of the really big gains that can be achieved through diligence and patience."

I'm sure it was an oversight not to have included some kind of requirement of "reasonable price" in the original message. The vehemence of the reaction is because, I think, the post's assertions were untested, apart from anecdote, and Daily Speculations is supposed to be reserved for ideas that are tested.

An example among many of the way the assertions could be tested is to go back to old issues of magazines, newspapers, etc., and find the companies that were rated at the time as highly admired, and then look at their performance afterwards. If you do this exercise, you might find that highly admired companies do well.

However, it is not at all obvious. Many companies which were once highly admired are not so highly admired now, and their stocks have not done well. Enron, for example, was once highly admired.

Barry Gitarts comments:

Haven’t many value experts said Google has been overvalued since its IPO, and Apple for several years now, however both stocks have significantly outperformed the market.

Driving looking out the rearview vs. the windshield could also be the difference between over and under valued perception.

Jul

13

Given yesterday's moves by the market mistress, I'm inclined to set up a passive investment account and wondering: What is the most leveraged way to play the indices, specially NASDAQ, long term? Any case for or against ProShares such as QLD? I believe the optimal leverage historically for indices has been calculated as 2x.

Kim Zussman replies:

Dr. Saad's post recalls dating days, when so much emotion and gravitas spins moment-to-moment around the affections and afflictions of the deadly fickle opposite sex. About 99% of her moves are random (to you), not attributable to knowable causation, and there is as little merit in crowing when you are chosen as crying when you are dumped.

"Am I clever and erudite?" Or does she just like to boogie? "Am I dashing and dapper?" Or does she just like to boogie? "They were all cruel - I will show her true valor!" Or does she just like to boogie? "She danced with the others, but says I'm the one!" Or does she just like to boogie? "She moans and she shrieks!" Or does she just like to boogie?

Hany Saad responds:

No, no more confusion. I am certain now that she likes to boogie.

Her dance yesterday came out of the clear blue sky. To add insult to injury, I left the dance floor on Tuesday after three long weeks with her in my arms, leaving her to perform her best dance ever all alone while I watched from afar, sipping on a tasteless drink.

Jul

6

Here is an easy way to check whether equal weight or cap weight index out performs:

Cap-weighted index emphasizes return of large-cap stocks over small, and thus differs from equal-weighted index in which all stocks make equal contribution to index returns. It is well known that small cap stocks have out-performed large-caps in recent years, here shown by regressing weekly returns of Russell 2000 index vs. S&P 500 from 1/01-present:

Regression Analysis: RUT versus S&P 500

The regression equation is
RUT = 0.000274 + 0.920 SP500

Predictor       Coef         SE Coef       T        P
Constant     0.00027    0.00047    0.58   0.563
SP500         0.91963    0.02226  41.32   0.000

S = 0.0151692   R-Sq = 62.3%   R-Sq(adj) = 62.3% 

The small stock advantage becomes very small and insignificant. One conclusion is that small caps may out-perform large caps in some periods, but there does not seem to be a sustained advantage (even including recent out-performance).

Also interesting to consider that (widely used in academic finance) FF regressions have a term for a presumed durable small-stock effect, which in combination with increased popularity of various ETF and equal-weighted index products could help explain recent small-cap strength. 

Jul

5

Time for another look at war's effect on the stock market (yes this is mercantile, but someone's got to pay for the BBQ), using DJIA monthly returns (w/o div), checked wartime against peacetime. Dates used for US involvement might be contestable (they’re from web timelines):

WWII 12/41-8-45
Korea 6/50-7/53
Vietnam 8/64-4/75
Iraq II 3/03-present (or until Democrats rescue us, whichever comes first)

First, I lined up monthly returns for the four wars starting at their first month through the 38th (the shortest was Korea at 38 months), and regressed monthly return vs. number of months into war:

Regression Analysis: ret versus Month

The regression equation is ret = 0.0093 - 0.000123 Month

Predictor     Coef    SE Coef       T          P
Constant   0.0093    0.005     1.85    0.066
Month      -0.00013  0.0002   -0.57   0.567

S = 0.0305157   R-Sq = 0.2%   R-Sq(adj) = 0.0%

There was no trend in returns as wars progress from the start. Next compare mean monthly returns in and out of war (peace back to 2/41):

Two-sample T for war vs peace

                  N      Mean     StDev     SE Mean
war            264  0.0050   0.0370   0.0023  T=-0.9
peace        533   0.0076   0.0419   0.0018

War months just a tick lower, but not significantly. What about volatility?

Test for Equal Variances: war, peace

95% Bonferroni confidence intervals for standard deviations 

             N      Lower      StDev      Upper
war      264  0.03370  0.03701  0.04099
peace   533  0.03921  0.04191  0.04499

F-Test (normal distribution)
Test statistic = 0.78, p-value = 0.022

Interestingly, war was less volatile than peace (maybe investor focus on war news or patriotism distracted them from looking too hard at the economy?). With war’s end possibly just an election away, traders pining for those volatile months may get their wish. 

Jun

29

To the single guy, marriage is buying a put: a round bottom just below a long position. For ladies selling same, there is high initial opportunity cost but over time her position comes out on top.

Theta decay results in long-term downward drift, with negative gravitational risk premium. The buyer's asset declines by half, and the seller - well the seller's asset appreciates.

But never lie to the mistress.

Jun

24

Barring a big week next, we have a down June in stocks. This is the first down month since Feb 2007, and they have been quite scarce. Through Feb there were only two down months since the beginning of 2006.

Assuming we waited four months, here is stem-leaf of waits (in months) between downs (defined as down month preceded by up, SPY 93-present):

Stem-and-Leaf Display: wait

Stem-and-leaf of wait N = 61
Leaf Unit = 0.10

22   1   0000000000000000000000
(16) 2   0000000000000000
23   3   00000000
15   4   0000
11   5   000
8    6   000
5    7   00
3    8
3    9   00
1    1   0

The waits ranged from 1-11 months (11 was Oct 95, and tied for 2nd longest Feb 07 wait=9 mo). Assuming up then down month, what came next? 

Variable     N    Mean      StDev SE Mean      95% CI                  T      P
aft 1dn      39  0.0129   0.041  0.0065    (-0.0004, 0.0261)  1.97  0.056
1dn 04-07  9   0.0084   0.020  0.0067    (-0.0070, 0.0239)  1.26  0.244

The first row is mean of all months after UD, showing positive. The second row is just 1/04-present.

Just cant wait for next week…. 

Jun

21

One hypothesis is that in trading with leverage, the intellectual nut is insignificant compared to the emotional one. The pain game. Further, pain tolerance related to endurance exercise seems wholly irrelevant. Yes it hurts to pound up hills, but (notwithstanding cardiac arrest) your family isn't going to go begging from that burn.

No, it is more like locating supremacy in killing animals not planned for food. Or at least learning to look beyond weepy eyes in their last moments, with mixed feelings of victory and remote sympathy for another sovereign equal about to go down to make you up.

Finally, as an exercise in Darwinistic soul-hardening, this year it was time to do something about the army of squirrels eating all the apricots off the tree in the yard. No, we don't need the extra calories or fiber, and yes there may have been "squirrelets" to feed.

"Rodents carry disease (e.g., Yersinia pestis)!" But is it logical to pine for yard rodents while dining on chicken or fish? They must go.

The local sporting goods store had on sale Crossman break-back pneumatic 0.177 pellet guns 1000 feet-per-second. A few weeks practice and adjusting the sight made cans at 100 feet easy hits.

The first person was the fattest; a bold fellow who bent the branches while hogging the fruit. They hide by hugging a tree-trunk 180 degrees opposite you, and sitting stock-still while peering around the corner. After spotting his plump head, I took a bead, slow breath, and squeezed the trigger. He flew down to the ground at the base of the tree.

The Mourners' Kaddish is said as part of the mourning rituals in Judaism in all prayer services as well as at funerals and memorials. Mention of "saying Kaddish" unambiguously denotes the rituals of mourning.

The opening words of this prayer are inspired by Ezekiel 38:23, a vision of God becoming great in the eyes of all the nations. The central line of the Kaddish in Jewish tradition is the congregation's response "May His great name be blessed forever and to all eternity", a public declaration of God's greatness and eternality.

How grand it is becoming greater than the smallest of the small.

Jun

19

It's a good thing we don't have French reporters chatting with Ben.

Bruno Ombreux adds:

What about Marie Drucker? She is presenting news every evening — but she is dating a former government member, so no chance for us mere mortals.

Jun

16

A common assumption in finance is that because of panic, declines are bigger or faster than rises. Though through personal experience it certainly feels like it, evaluation of single-day moves does not bear this out.

SPY c-c daily returns were ranked, and for each day found how many standard deviations from mean the individual move was. Then compared big up and down days in terms of their st dev multiple. Here, for example, are top and bottom 10:

Date         ret  #stdev    Date         ret  #stdev
07/24/02 0.060 5.580    10/27/97 -0.072 -6.877
01/07/00 0.058 5.426    08/31/98 -0.071 -6.765
10/28/97 0.058 5.391    04/14/00 -0.057 -5.429
10/15/98 0.054 5.019    09/17/01 -0.052 -4.971
09/08/98 0.054 5.019    08/27/98 -0.047 -4.472
07/29/02 0.049 4.551    03/12/01 -0.043 -4.076
01/03/01 0.048 4.487    02/27/07 -0.039 -3.730 (hi pal!)
10/15/02 0.048 4.486    01/04/00 -0.039 -3.730
10/01/02 0.048 4.482    08/04/98 -0.039 -3.693
03/16/00 0.047 4.361    09/03/02 -0.038 -3.638

Notice that for the biggest three up and down days, the magnitude (of move and st dev) is bigger for drops. But going down the list, paired ups are bigger than downs.

This effect was evaluated further by charting the sum of paired up (positive) st devs and down (negative) st devs.

This shows that for all but the most extreme three pairs, the size of big up days is greater than big downs all the way to 40 pairs. Moving in from the tails beyond 40 pairs reverses the size relationship, but the differences are much smaller.

So it seems that for daily returns extreme up-days are bigger moves than extreme down. 

Alston Mabry comments:

Dr. Zussman's post showed that for SPY, the biggest C-C up moves
over the last 10 years were larger in magnitude than the biggest C-C
down moves. (All moves converted to z scores.)

But just to satisfy perverse curiosity, take the SPY data for the last
10 years and look at not 1-day, but all 3-day moves (overlap allowed).

All 3-day moves:
count: 2511
mean move:  +0.10%
sd: 1.95%
negative moves: 1200
positive moves: 1311

Here are the largest 20 of each paired:

Date / z                      Date / z
31-Aug-98  -6.10      15-Oct-02  +5.07
27-Oct-97  -5.16         8-Aug-02  +4.33
14-Apr-00  -4.95       14-Oct-02  +4.23
22-Jul-02  -4.87        30-Jul-02  +4.17
23-Jul-02  -4.63        17-Mar-00  +3.95
5-Aug-02  -4.20        29-Oct-99  +3.63
19-Sep-01  -3.82      26-Jul-02  +3.57
10-Jul-02  -3.76        17-Mar-03  +3.57
12-Mar-01  -3.64      19-Apr-01  +3.45
19-Jul-02  -3.36        31-Jul-02  +3.28
4-Aug-98  -3.29        27-Mar-01  +3.26
21-Sep-01  -3.21      16-Oct-98  +3.23
1-Oct-98  -3.15         15-Oct-98  +3.02
17-Sep-01  -3.05      29-Jul-02  +3.00
21-Feb-01  -3.01      19-Oct-98  +2.91
19-Sep-02  -3.01      15-Sep-98  +2.84
4-Oct-02  -2.99         16-Mar-00  +2.81
28-Aug-98  -2.92       9-Aug-02  +2.73
13-Mar-01  -2.91       6-Jan-03  +2.69
20-Sep-01  -2.79       1-Jun-00  +2.66

In only one instance in the top 20 does the positive move have a greater magnitude than its paired negative.

And it turns out that if one pairs the top 500 in magnitude of negative
and positive 3-day intervals, the negatives are larger in magnitude
than the positive 498 times.

So, watch out for those drops!

Jun

13

It has been 342 trading days since Mr. Ben began chairing the Fed. Has his kingdom been different from his immediate predecessor? SPY daily returns compared Bernanke and Greenspan:

Two-sample T for Ben returns vs. Greenspan:

               N     Mean       StDev     SE Mean
Ben ret  342   0.00054  0.0066   0.00036   T=0.1
Grn ret   342  0.00049   0.0065   0.00035

 no difference

What about volatility?  Here the same data are used to compare variance:

Test for Equal Variances: Ben ret, Grn ret

95% Bonferroni confidence intervals for standard deviations:

              N      Lower   StDev      Upper
Ben ret  342  0.0061  0.0066    0.0072
Grn ret  342  0.0060   0.0065    0.0071

F-Test (normal distribution)
Test statistic = 1.03, p-value = 0.760

no difference

The Fed chairs have not exerted differing effects on mean or variance of stock returns, which does not exclude certain efforts for Alan to Pimpco his ride. 

Jun

12

Curious whether June (or any month) in particular has historically hosted big sell-offs, I checked S&P500 index daily returns (1952-present). I found the low close of the last 10 days of each month and compared this to the high close of the 1st 10 days of the same month.

The ratio min/max for each month was then ranked, and the worst 10% of the declines noted. Here they are (69 months): 1st column = month, 2nd = count of months, 3rd = mean min/max drop, standard deviation, and 95% CI:

Individual 95% CIs For Mean Based on Pooled StDev

Mon  N   Mean   StDev
1      6  -0.085  0.013
2      2  -0.086  0.016
3      3  -0.105  0.031
4      4  -0.088  0.022
5      9  -0.094  0.037
6      7  -0.084  0.019
7      6  -0.099  0.047
8      7  -0.112  0.032
9    10  -0.089  0.026
10    8  -0.117  0.082
11    6  -0.088  0.017
12    1  -0.084  *

-0.160 -0.120 -0.080 -0.040

The count of 7 for June was close to mean count for all (5.75), and the mean drop (-8.4%) tied December (the only one in the sample) near the top of "least worst." 

Jun

12

I lost money last week but I'm still up since starting to trade futures in late January. Ironically, I lost Wednesday and stayed out Thursday until right at the close. My mistake: sold too soon in the AM and shorted prior to the close, thinking ‘no way they hold the weekend.’ I should know better and was mad at myself for selling too soon.

Currently I wonder if last Thursday's big sell-off will act as a mini-2/27 or there is more to come. Lots of worry in the air; that must be good. Seems like PPI/CPI later this week will fuel or douse the fire.

Victor remarks:

Shorting after a big decline is an unforgivable mistake.

Jun

2

This May sported a 3.3% gain in the S&P500, the biggest since 2003. Going back to 1987, however, May 2007 is not that unusual:

Date      Return
05/1990  0.092
05/1997  0.059
05/2003  0.051
05/1991  0.039
05/1995  0.036
05/1989  0.035
05/2007  0.033
05/2005  0.030
05/1996  0.023
05/1993  0.023
05/1994  0.012
05/2004  0.012
05/2001  0.005
05/1988  0.003
05/1992  0.001
05/2002 -0.009
05/1998 -0.019
05/2000 -0.022
05/1999 -0.025
05/2006 -0.031

Somewhat more unusual was May 2006, having the lowest return of the series. Could it be that fears of repetition of 2/27/07 and 5/06 goosed risk premium enough to produce new record close?

Individual 95% CIs for mean based on pooled standard deviation:

Level N  Mean     StDev
1    20  0.0122  0.0365
2    20  0.0012  0.0371
3    20  0.0064  0.0377
4    20  0.0139  0.0375
5    20  0.0173  0.0310
6    19  0.0027  0.0324
7    19  0.0066  0.0417
8    19 -0.0110  0.0503
9    19 -0.0052  0.0469
10   19  0.0189  0.0334
11   19  0.0199  0.0425
12   20  0.0225  0.0357

Jun

1

Regarding the Swedish tax situation, it is encouraging that we now have a government that aims to lower taxes. At over 50% of GDP we are highest in the world. I am sure that it will be very beneficial long-term as huge amounts of money currently are held outside the country to avoid taxes, and this outflow will be lessened and money and companies will instead grow here. It will be a triumph for the optimists.

While companies and high net individuals try to lower taxes by either going abroad or at least keeping their capital abroad, ordinary citizens gravitate towards using the underground economy and paying Polish guest workers outside the tax system for help with cleaning, house renovation and such. Even a few ministers in the government did that, and had to leave their posts once discovered. But this excerpt from the earlier mentioned pdf, is too funny by far, showing that even the tax authority tries to avoid the sky high taxes here.

"Even the Swedish tax authority tries to avoid Swedish taxes. As noted by the Wall Street Journal, 'When it comes to paying taxes itself, the Swedish Tax Authority, responsible for collecting some of the highest in the world, would just as soon keep them as low as possible. It's saving a bundle on the production of slick TV spots that encourage Swedes to file online by producing them in the neighboring free-market, low-tax haven of Estonia'. _Spokesman Björn Tharnstrom told us, "We decided to do it in Tallinn because the costs are lower. One of those costs is taxes, of course." 

Victor Niederhoffer asks: 

Do you see any opportunities for Swedish equities with new tax rates?

Henrik Andersson comments:

It might come as a surprise that despite the highest tax rates in the world, the Swedish stock market is one of the global winners during the past 100 years or so. Of course it has to do with the state of the country 100 years ago not high taxes.

The earnings yield differential for the Swedish equity market is currently 2.0%.

Kim Zussman adds:

Point at figure analysis suggests high correlation between national tax rates and risk-return profiles of the indigenous female. Like Sweden, Russia has exorbitant nominal tax rates commensurate with 100% non-compliance.

Any comments about reduction in US tax rates relating to immigration patterns or legislated anti-social Darwinism are bifurcative.

From Jan-Petter Janssen:

My macroeconomics teacher told an anecdote about the Norwegian tax system (Norway's tax system is very similar to neighboring Sweden's.) An American professor came visiting him while he was building a sauna. The American just couldn't understand why he was making it himself. Did the Norwegian professors really get paid so badly he couldn't afford a carpenter? Well, the answer was both yes and no. No, the wages were quite good. Yes, even quite high wages could not buy much labor. The Norwegian came up with a calculation that stated this problem. After income taxes, VAT and the employer's tax, a gross $4 has to be made in order to leave the carpenter with $1.

However, while the economic policy makes labor-intensive services ridiculously expensive, the stock market is flying high. The economy is excellent in supplying our natural resources to a demanding world. In February 2003 the benchmark was playing with sub 100 levels. This Friday it passed the 500 mark for the first time. 

Thomas Bjurlof writes:

I left Sweden some 25 years ago a never returned (except for visits) partly for reasons related to the tax regime and the monolithic political culture. There were other reasons more related to opportunity.

When my father died in 1992 I spent a couple of months in Sweden and I then invested in a number of smaller tech companies. You can imagine the results having timed the bottom of the 1992 crisis and the beginning of the Internet boom (by luck, since in those days I had no idea what a banking crisis was).

The event that tipped my decision to invest was that someone offered gold as payment for some items I sold! I don't know whether this event was representative, but it certainly hinted at a shortage of liquidity in the markets.

I have recently noticed that GaveKal is very upbeat about the Swedish market, so Martin's positive statements about taxation intrigue me. What if tax rates decline say an average of 10%? Is there any research that quantifies the effect of taxation on the market? I understand the direction a change will cause, but what about the quantity?

My question is what reason is there to believe that there will be significant sustainable change to the system this time? Should we start believing in a Thatcherite change emerging in Western Europe? Is there a new "Swedish Model"?

Since there has been a cultural connection between France and Sweden for a long time, might the election of Sarkozy be a first hint of a tipping point? 

Martin Lindkvist responds:

Indeed, Thomas hits the nail on the head as we had a "new start" also in 1991 when a right wing government started to lower taxes only to be voted out of power three years later and taxes once again ware raised. And I don't know how good our chances are for a lower tax environment for the long term, although my gut tells me that it's less than a 50% chance (if that sounds pessimistic, it should be said that I still think we have a better chance now then ever, not least because of international development).

The problem you see is that to lower the tax rates, the costs must of course be lowered, and the obvious and most important cost savings can be made in the redistribution area. And then there are always groups that gets their benefits lowered and are an easy target for the socialists in the next election.

In a sense it is a miracle that the right wing won the election at all. Ha ha, they had to rebrand themselves as "the new labor party." This was true because one of the most important changes has been to start to lower taxes on work and at the same time lower unemployment benefits. Thus it should pay to work. They did get that logic across, but it has been harder for them to get across why it is important to take away taxes like the wealth tax and realty tax. And that might be why they would fall way short of winning the election were it be held again today.

It is amazing but the average Swede has no clue how much he or she pay in taxes. If you ask, you might get an answer like 31%, which is the typical tax for a worker up to about SEK25k a month. If you ask one that is paid more, you might get an answer of 55%, which is the highest marginal tax rate. They are both wrong of course since you have to add a lot to get the full picture. Social costs are paid by the employer but they lower the room for paying the worker.

Then you have value added tax on most things bought, and special taxes on things like liquor, gas, cigarettes, etc. Realty tax of course also raises the rent for those that don't actually own their own house. And more. The Swedish taxpayers association estimates the real tax for a low paid worker to be 65% for a person earning SEK 132k (that is less than USD 20k for crying out loud!), and 69% if you are at a "lofty" SEK 397k (and it does not stop there of course but goes much higher the more you earn).

The real irony is that since the person earning more sees more tax being withheld on the paycheck, percentage wise, he is more likely to vote for the right wing than the poor guy not earning much. But the taxation is almost as high on the latter.

It is a shame that Swedish people have been brainwashed to the extent that they don't even understand what monster they have created in the Swedish tax system. And this is where the rubber meets the road. If things are to change for real this time, then people will have to wake up and understand that if they are paying between 65-80% of their real earnings in tax then they are not free. The day they wake up and want to be free we can expect lasting change

May

31

Today's all-time high close on the S&P 500 was first such since 3/00, about an 1800 trading day wait. In the past long-term highs were much more frequent, so in order to find analogous long waits (S&P 500 index 1956-07), conditioned:

Today's close is a 2000 day high, and there were no 2000 day highs for prior 100 days.

Then I checked return for subsequent 10, 20, 50, and 100day, as well as wait times between occurrences:

date        10d    20d   50d 100d wait
02/14/95  0.01  0.02  0.06  0.15  376
08/19/93  0.01  0.01  0.02  0.04  268
07/29/92 -0.01 -0.02 -0.03  0.05  368
02/13/91 -0.01  0.01  0.03  0.02  181
05/29/90  0.02 -0.02 -0.06 -0.15  212
07/26/89  0.03  0.02  0.06  0.04 1140
01/21/85  0.03  0.03  0.03  0.06  560
11/03/82 -0.03 -0.03  0.03  0.06  581
07/17/80  0.00  0.03  0.04  0.07 2112
03/06/72 -0.01 -0.01 -0.02 -0.01  947
04/29/68  0.00 -0.01  0.04  0.05  246
05/04/67 -0.02 -0.05 -0.02  0.03  924
09/03/63  0.01 -0.01  0.01  0.06  461
11/01/61  0.04  0.04  0.00  0.02  192
01/27/61  0.00  0.03  0.09  0.06  590
09/24/58  0.03  0.03  0.05  0.09  641

mean       0.01  0.01  0.02  0.04
stdev       0.02  0.03  0.04  0.06
z             1.16  0.78  2.10  2.51

The returns going forward are positive, with the most analogous wait gap ending 7/80. Regression of returns vs. wait days suggested slight (NS) positive correlation. 

May

30

Climb Shanghai mountain, from low to high!
Follow every night move; silk road to the sky.
Climb every mountain, black duck boiled in steam
Chase every decline, and cook up your dream!

A dream that will need
all the blood you can give,
Every day of your life
beyond overplus that you live.

Climb every mountain, crush every meme
Chase every wiggle along her inseam.

May

27

Swedish online traders trade more and lose more if they have higher percent total wealth in their trading accounts.

May

22

Yesterday was almost an all time (close) high for the S&P 500. Will it actually happen today?

The last high was 3/27/00, about two above yesterday's close, and 1797 trading days ago. How does this compare with other wait times between new highs in the S&P 500 since January 1959 (prior all-time high considered that of February  1950)?

It turns out that the current wait is the second longest of the series; 100 shorter than the 1897-day wait which was broken on 7/17/80, but far longer than the third place wait of 819 days which ended on 3/16/72.

Here is stem-leaf of waits:

Stem-and-leaf of gap N = 776
Leaf Unit = 10

(2nd column is hundreds, 3rd column is 10s)

The arrowed row will be the end of the current wait, should that occur tomorrow or Wednesday.

(747)000000000000000000000000000000000000000000000000+
29    0   55555667778889
15    1   13344
10    1   5
9     2
9     2   5
8     3   02
6     3   7
5     4   3
4     4   88
2     5
2     5
2     6
2     6
2     7
2     7
2     8   1
1     8
1     9
1     9
1     10
1     10
1     11
1     11
1     12
1     12
1     13
1     13
1     14
1     14
1     15
1     15
1     16
1     16
1     17
1     17 (9)<<<<<
1     18
1     18  9

May

19

The recent nine weeks in stocks have been rather bullish. Since the week of 3/12/07 when the S&P was 1387, we are up 9.8%. How does this rank historically? Going back to 1950 and ranking returns of (overlapping) 9 week periods (closes=Fridays), the current run is in the top 6.5% (93rd percentile).

Strong up-runs are neutral short-term: Weeks following those up >8% (90th percentile) test equal to all weeks (this since 1980):

                            after     90th percentile     all
Mean                    0.0027   0.0021              T=0.3
Variance               0.0004   0.0005
Observations        183        1425

The recent pop is best since 12/04. Here are the biggest nine week gains since 2000:

Date       9wk
05/14/07 0.098
12/20/04 0.104
01/20/04 0.103
06/16/03 0.114
06/09/03 0.139
06/02/03 0.124
05/27/03 0.116
05/12/03 0.133
05/05/03 0.126
04/28/03 0.106
12/02/02 0.139
11/25/02 0.132
11/18/02 0.101
11/19/01 0.191
06/04/01 0.121
05/21/01 0.121
05/14/01 0.123
03/27/00 0.102

May

19

The high concentration of crackpots amongst scientists helps explain the weak/poor correlation between testable IQ and financial success. What is posited to be more important than facility with tensor calculus is the ability to rank theories as to reasonableness, especially in relation to the nature of human incentives and immutable emotional non-linearity.

May

17

Brian J. Haag wrote that it's more than 12% more likely that on a given day the market is up rather than down.

For every 100 down days (SP500 since 1980) there were 112.2 up days, so the uncertainty component in predicting daily returns strongly favored the long side.

However another possibly more important aspect of prediction is whether it is easier to forecast bullish or bearish periods. If bearish patterns were easier to find than bullish, this might out-weigh the 112/100 odds for longs. But in the real market panic sell-offs (of various incarnations) test consistently bullish subsequently, whereas there do not seem to be predictive antecedents to big declines. If this remains true, then there will still be profits as long as one is brave enough to buy earlier than everyone else (who also know that panic is bullish) and endure the pain of intermediate-term losses, and risk that they continue deeper.

In light of recent market behaviour these arguments are easier to make (and take) than (say) 2002. It would be a lot more fun to invest if up and down days were homogeneously dispersed. But the problem is that upward drift comes in streaks (like recently), is taken away in lumps, and human nature is hard to ignore. How many traders, in the face of increasing losses or even going under, got more and more bullish in 00-03?

"Gee, hun, sorry we lost the house and owe all that money to your dad's homebuilding company. But the good news is that there is high probability it will go up from here!"

Vincent Andres writes: 

I would posit (to avoid one-line questioning) that:

  1. There are fewer bearish situations than bullish ones and hence, mechanically, fewer predictive patterns to find, so the task is harder.
  2. Bearish situations are sharper than bullish ones and hence perhaps the predicting patterns are also sharper, (kind of homeopathic reasoning), i.e., easier to detect (perhaps more contrast). I try a parallel: I see a snake, and I quickly get my hand away. The move is sharp, and so is the pattern/snake.
  3. Bearish patterns maybe come with short or very short notice (think of the snake threat), while bullish patterns may be seen with enough notice. So bullish patterning might be bit easier.

Kim Zussman responds:

My (not well stated) hypothesis is that, due to the immutable nature of human fear/panic reaction, people are generally over-reactionary and bullish for the future. However there do not seem to be similarly predictive preconditions of bearish futures; prior neither to sharp declines nor gradual ones. Or alternatively, there are such preconditions but they are harder to find

2nd hypothesis: Even though the probability of up and down days is close to the same in historic totals, the way days aggregate in actual ordered series is non-random to an extent not explained by actual 0.52/0.48.

I am thinking about other ways to test this (the pairs study was a first step) such as comparing runs in actual series to randomly shuffled days from actual series. As always suggestions and amplifications are encouraged. 

May

15

Three Dog Nights is gone just like two down days. In SPY condition of two consecutive down cl-cl after an up day, it has been 11 days (Apr 30), and such have gotten quite rare. Looking back to Jan 2004Here is list of wait in days between 2 downs:

Date       Wait
03/09/05 33
04/30/07 23
10/30/06 21
11/27/06 19
09/09/04 19
03/27/07 17
01/26/07 17
05/06/05 16
06/01/04 16
04/29/04 15
11/15/05 14
06/24/05 14
07/13/06 13
01/20/05 13
11/29/04 13
03/09/04 13
05/11/06 12
03/21/06 12
09/02/05 12
04/07/04 12
09/22/06 11
09/07/06 11
08/22/06 11
02/21/06 11
01/31/06 11
10/26/05 11
07/18/05 11
11/09/04 11
10/08/04 11
06/17/04 11
02/09/07 10
10/04/05 10
08/01/05 10
09/23/04 10
06/19/06 9
06/06/06 9
01/13/06 9
12/30/05 9
11/29/05 9
04/14/05 9
12/31/04 9
12/17/04 9
03/22/04 9
02/22/07 8
12/07/06 8
04/07/06 8
03/03/06 8
08/17/05 8
05/25/05 8
04/01/05 8
07/15/04 8
12/18/06 7
08/01/06 7
12/08/05 7
06/06/05 7
08/04/04 7
07/26/04 7
02/13/04 7
03/02/07 6
07/21/06 6
04/25/06 6
12/16/05 6
09/13/05 6
08/12/04 6
06/25/04 6
05/07/04 6
12/29/06 5
09/29/06 5
04/17/06 5
03/28/06 5
10/11/05 5
09/20/05 5
05/13/05 5
03/16/05 5
12/06/04 5
10/20/04 5
07/02/04 5
02/04/04 5
08/07/06 4
06/23/06 4
05/23/06 4
05/17/06 4
08/05/05 4
06/30/05 4
12/21/06 3
02/03/06 3
03/21/05 3
10/25/04 3
10/13/04 3
02/19/04 3
01/28/04 3

May

14

A striking feature of recent stock market moves is the weakness of the housing sector. For example, the S&P 400 Homebuilding Index, which is a cap-weighted index with six members (NVR, Toll Brothers, Ryland, MDC, Beazer and Hovnanian), with a base of 100 as of year end 1990, hit a high of 725 in July 2005, and now stands at 373, down from 450 as of three months ago.

Needless to say, this decline has been heralded as indicative of coming woes in the overall stock market. But as with most things widely disseminated by the media, shouted from their posts in Trinity Church by chronic bears (where they wait to hook a lunch from a member who's not broke from listening to them), such views are false and lead to the public's losing much more money then they have to.

Practical Speculation has a chapter on the relation between real estate prices and stock prices, following in the footsteps of Henry George. Studies show that boom/bust cycles in the economy and stocks are started when real estate prices get out of line with underlying economic activity. When real estate is too high, retailers can't make a profit and they downsize. When real estate falls, retailers and others who use property make more profit because their costs of real estate is lower. Henry George and others, such as Homer Hoyt, documented this phenomenon for many economic cycles up to the 1930s. David Ricardo first elucidated the theory.

Laurel and I documented that the cycles had continued vis a vis REIT prices, with declines in quarterly REIT prices forecasting gains in the overall market in the next quarter of about twice the normal rate, 7% versus the normal 3%. We recently updated the study to look at what happens to the overall market after changes in the S&P 400 Homebuilding index and found a highly negative predictive correlation of -20%. After quarterly declines in the Homebuilding index, such as we've just witnessed, the average gain in stock prices in the next quarter is 5%, with about a 75% chance of a rise. Once again, a commonly held fallacy leading the pubic to sell when they should buy bites the dust.

Kim Zussman writes: 

Here is a quick check of HMI this month change vs next month change in SP500 index (12/85-3/07):

Pearson correlation of HMI chg and nxt mo rt = -0.085
P-Value = 0.167

Regression Analysis: nxt mo rt versus HMI chg

The regression equation is nxt mo rt = 0.00889 - 0.0535 HMI chg

Predictor      Coef       SE Coef        T        P
Constant    0.00889    0.00260     3.42   0.001
HMI chg    -0.05353    0.03859   -1.39   0.167

S = 0.0424313   R-Sq = 0.7%   R-Sq(adj) = 0.3%

Negatively correlated, but not quite significant, on monthly frequency.

James Tar remarks:

Shorting real estate and housing is difficult. You can't go out in the housing market and get a borrow on a few million homes that you can then go out and short. So everyone in the market who wants to be short housing/real estate is crowded into the homebuilders and select REIT issues. REITs have high dividends, so you can imagine how expensive it to carry your bearish disposition. A few buddies of mine running fairly large funds are feeling the pinch.

A good way to make sense of it all is to step back and take a look at what is really going on. I believe inflation, just like alpha in the stock market, is a finite quantity. There is only so much inflation that can go around. My studies indicate that the deflation we are seeing in housing/select REITs/mortgage banks is just about the same amount in dollar terms as the inflation we are seeing in energy, precious metals and agriculturals. So there is an inflation/deflation cycle constantly at work in the marketplace. As some assets inflate, others deflate.

To make sense of a confusing cycle, look for smaller, more easily identifiable components within this difficult game. I am looking at firms such as Georgia Gulf Corporation. Till the middle of last week the market believed it was headed for Chapter 11. But now this key supplier to the housing market has a much different story unfolding, perhaps indicating the imbalances in the housing market are declining.

From Alan Millhone:

On a very local note, I was talking to a neighbor the other night who was chatting with a man we both know who wants to build a new home. My neighbor said the fellow had scheduled several appointments to meet several builders and none of them ever showed. He asked me if I wanted to meet with this person and I told him no.

Houses are hard to figure due to rising material costs and the volatile changes in prices, sometimes on a daily basis. Also, I am now figuring mileage for my employees into my jobs X-number of days I project we will be on a particular job. I am confident giant home builders are having a tough time getting a firm handle on material prices to 'lock in' their hard costs of building homes in vast subdivisions. At present I would want little to do with building stocks of any type. 

Roger Arnold writes:

The real estate pros who stepped out in 2005 are prepping to get back in and with big ideas about restructuring the entire industry. Gargantuan funds are prepping to get into the real estate game.

May

9

James StockdaleThis paradox is named after Admiral Jim Stockdale who was the highest ranking US military officer imprisoned in Vietnam. He was held in the Hanoi Hilton and repeatedly tortured over eight years. The "paradox" lies in the way that he managed to survive where others perished.

"I never lost faith in the end of the story. I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade."

Asked: "Who didn't make it out?"

"The optimists. They were the ones who said we're going to be out by Christmas. And, Christmas would come and Christmas would go. Then they'd say, We're going to be out by Easter. And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. Then they died of a broken heart.

"You must never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be." 

Kim Zussman adds: 

This recalls Viktor Frankl's "Man's Search for Meaning", in which he describes Nazi concentration camp survivors and those who didn't. He was surprised that big, tough guys were usually among the first to go. The psychiatrist learned to function as a physician at the camp, and managed to avoid despair by remaining mentally active. The book he wrote had been destroyed, so he re-wrote it mentally and memorized it giving him an important goal to publish when it was all over.

How much does mental toughness correlates with volition and how much with genes, and to what extent you can improve it? Suffice it to say you can't choose your parents.

From Stefan Jovanovich:

To equate survival in a prison camp with "mental toughness" is to indulge in what the surviving Japanese military leaders of WW II came to describe as "victory disease". You assume that a happy result says something about your intrinsic superiority as a human being when it doesn't. Neither Lance Sijan nor Eric Liddell survived their imprisonments, yet dozens of the survivors from their camps have said that they owe their lives to the help and example of the bravest men they ever knew.

I know Frankl's book was immensely popular when it was published and still remains one of the bibles of secular humanism; but I find it chilling in its narcissism. When I did some minimal research on Frankl's own life, I found it odd that that there was no one from the camps who praised Frankl for what he had done for the other survivors. I would have expected that from Theresienstadt, of all places, there would have been at least one testimonial - given its importance as the Nazi's show camp.

Joseph Fabry, the person best known in America as a "fellow survivor" with Frankl, was held briefly in a detention camp in Belgium, but was never in Austria or Germany with Frankl himself. (If anyone on the List knows of any testimony from others who were in Auschwitz and Turkheim with Frankl, I would appreciate the reference or link.) The only survivor commentaries I have found that could relate to Frankl are the comments made about the Jewish camp doctors. Sadly, those affirm that most of the doctors, like the Sonderkommando, put their energies into working the system for their own survival, not into the care of their patients.

I don't imply that those general comments apply to Frankl, and I lack the necessary chutzpah to judge anyone who was ever imprisoned for more than an evening in the drunk tank. What I can say, without embarrassment, is that I wish that Frankl's desire to find profound meaning in his own random survival had not encouraged the temptation to rank others as somehow inferior just because, like Frankl's own wife, father and mother, they were given different numbers in the Nazi's insane lottery.

What Kim Zussman did not quote were Admiral Stockdale's many remarks about those - like Admiral Alvarez - who never gave up. They, like Stockdale himself, were the ones who always did their best to help and encourage others.

Nigel Davies adds:

I don't know anything about surviving prison camps but this did strike a chord with me vis-à-vis chess players. I've met lots of players who are perpetually optimistic and this shows in every decision that they make. One very noticeable facet is that they tend to be very poor at defending inferior positions, showing a tendency to lash out. In one case I've known the parents too, and they weren't optimistic at all.

This made me wonder about the value of 'state of mind' in survival. A direct application would be to draw up a matrix of returns during the last 100 years applying 1-10 times leverage in stocks. I hypothesize that mild optimism may be an advantage, but with a rapid falling off of efficacy in higher doses.

Admittedly this would be very tricky to do 'realistically', for one thing there are not many 100+-year-old stock investors around and for another margin requirements will have varied considerably. But it might nonetheless be interesting to know that just how optimistic one might be in order to still triumph.

Kim Zussman remarks:

Martin Seligman wrote about "learned optimism" (as opposed to the inherited kind, which is much easier to acquire). In scientific trading, there is "optimistic learning" (OL).

OL is a variation of the scientific method whereby you open trades during the day's churn based on gut, then go back at night and do enough statistical studies to find at least two in support your position. Then you share these studies with at least two friends, who for social reasons don't debate your conclusion, and you are fully prepared for tomorrow's shellacking. 

May

8

Severe traumatic events seem to have durable physical effects on brain, according to a recent imaging study.

In no way is the trauma from 9/11 studied in this paper comparable to market mishaps. But it is tempting to speculate about similar mechanisms following events (such as 10/87, 2000-2002, and 2/27/2007), and possible durable effects on investor psyche that play out subsequently. 

From Vincent Andres:

This reminds me about somebody speaking from the market before and after the last traders active in 1929 (ie traumatised in 1929) had disappeared, and positing that the market was not the same. (Of course there could be many other reasons.) The sum of all coincident individual trauma/psyche is certainly a big part of markets mistress's own trauma/psyche. 

May

7

One question is whether stock price relationship to some moving average has any predictive value, in that stocks show negative correlations in shorter time periods, tested trending and reversal as a function of moving average.

SPY weekly closes (since 1993, with dividends) were categorized as above or below 20 week moving average (as of that week). Then, looked at mean week returns following up or down weeks, for cases when stocks were above or below 20w MA:

  weeks
               after up  after dn
above MA -0.0006    0.0053
below MA  0.003      0.005

The relationship between the mean returns of these weeks shows better in ANOVA 95% CI's:

Individual 95% CIs For Mean Based on Pooled St Deviation

Level       N      Mean    StDev
+———+———+———

all wk ret724      0.00221  0.02129                 (—-*—–)
dnwk ov   187    0.00534  0.01720                       (———*———)
dnwk und  129   0.00447  0.03023                  (———–*———–)
upwk ov   331   -0.00063  0.01738     (——-*——-)
upwk und   72    0.00273  0.02656        (—————*—————)
+———+———+———+———
                                             -0.0030    0.0000
0.0030    0.0060
 
Note that weeks after down weeks are slightly higher than all weeks. There is little difference between weeks following down weeks, irrespective of current 20w MA relationship (dnwk ov, dnwk und). But interestingly, during periods when stocks were above 20w MA, weeks following down weeks were higher than weeks coming after advances:
 

Two-sample T for upwk ov vs dnwk ov

N     Mean   StDev  SE Mean
upwk ov  331  -0.0006  0.0174   0.001  T=-3.8
dnwk ov  187   0.0053  0.0172   0.0013
 
This suggests that when stocks are above (some) moving average, rather than trending up after advances, there is stronger reversal of declines. Of course the choice of moving average and return period will likely influence outcomes.
 

May

7

For FOMC meeting periods, checked SPY daily returns for 5 days up to, and after, FOMC day itself. Here is ANOVA comparison of these days, with FOMC labeled as 0:

Ah, there is no way to profit kindly, frugally from the herd, sigh. Some predators become greater, and greater, and smarter and smarter. That's a law of nature. And from their point of view, all the rest is the herd. All the flesh tastes the same.

One-way ANOVA: -5, -4, -3, -2, -1, 0, 1, 2, 3, 4, 5

Source   DF         SS         MS            F      P
Factor   10  0.0003095  0.0000309  0.97  0.475
Error     99  0.0031609  0.0000319
Total   109  0.0034704

S = 0.005651   R-Sq = 8.92%   R-Sq(adj) = 0.00%

Individual 95% CIs For Mean Based on Pooled Standard Deviation
                             

Level N       Mean    StDev  ——-+———+———+–

-5     10   0.000714  0.0053           (———*———)
-4     10   0.000842  0.0051           (———*———-)
-3     10   0.000843  0.0039           (———*———-)
-2     10   0.001315  0.0053             (———*———)
-1     10   0.002249  0.0033               (———*———-)
0      10   0.004365  0.0084                     (———*———-)
1      10  -0.000143  0.0056        (———-*———)
2      10  -0.001150  0.0063      (———*———)
3      10  -0.000653  0.0038       (———*———)
4      10   0.000466  0.0032          (———*———)
5      10  -0.002264  0.0088  (———-*———)
                                      ——-+———+———+–                                      -0.0035    0.0000    0.0035    0.0070

Pooled StDev = 0.005651

 
All 5 days leading up to FOMC day, and FOMC itself (and especially) have positive means, but starting the day after things go down.

The current "conundrum" is that all news is greeted with a rally (as is every drop), and we passed 1500 + near all time new hi on the S&P. Friday's jobs report reaction of a rally is interesting because though it suggests low inflation, it also hints at slowdown.

May

6

How did the market change post the 2/27 bear-fake? One aspect is follow-up responses to up or down days. SPY day returns (w/div) were used to compare returns for days following drops and rises. Here is the result from 2/27 to the present (inclusive):

Two-sample T for after dn vs. after up

           N     Mean    St Dev     SE Mean
aft dn  15  0.00160  0.00859   0.0022  T=0.0
aft up  31  0.00160  0.00597   0.0011

There was more than twice the number of up days as down, and returns following both were positive, with means identical (after down had higher standard deviation). For the 48 days prior to 2/27 there was a somewhat different pattern:

Two-sample T for after dn pre vs. after up pre

                N      Mean     St Dev       SE Mean
aftdn pre  24  -0.00152  0.00892     0.0018 T=-1
aftup pre  24   0.00050  0.00499     0.0010

Here there were equal up and down days (close to long-term pattern), and unlike post 2/27 response to down days was also down.

Comparing all days post 2/27 and 48 pre-2/27 shows that the recent period also has a higher (NS) mean:

Two-sample T for post 2-27 vs. pre 2-27

                 N      Mean     St Dev      SE Mean
post 2-27  46   0.00160   0.00683   0.0010 T=1.45
pre 2-27    48  -0.00051  0.00722   0.0010

Thus the rise since 2/27 came from:

1. More up days than down
2. Higher mean return of all days
3. Reversal of down days rather than continuation

May

1

Some recent events have had me thinking about cause and effect, and the logic which surrounds their application. Let me explain:

Just over a year ago a family member was diagnosed with Asperger's Syndrome. Now whilst there is plenty of denial around about the causes (people seem to go out of their way to blame vaccines etc.) it seems that the most likely one is inheritance. And since I am related and happen to be a chess grandmaster with some social 'eccentricities', fingers quite naturally get pointed.

After reading up on the condition I noticed that I had a number of traits. So I figured it might be good to get tested, which in older people is done via an interview of the suspect together with one of a close family member, in this case my sister. The upshot was a 'not guilty' verdict, it was simply impossible for the psychiatrist to establish a positive diagnosis (too much eye contact, apparent sense of humour etc.). On the other hand he thought it possible that I was somewhere on the spectrum and that had he seen me 30 years ago then I might well have tested positive.

This was quite thought provoking. Can a still existing physical condition (in this case the small matter of dodgy brain wiring) be regarded a 'cured' if the person who has it finds 'work arounds' so that any symptoms effectively disappear? The prevalent view seems to be that those who are on the spectrum are somehow 'incurable', but I do wonder about the evidence for this. First of all the hypothesis that Asperger's Syndrome means xyz traits relies on testing a sample of people who show xyz traits in the first place. This ignores the possibility that many people might have overcome the same condition so as to be undetectable. An excel spreadsheet would call this a 'circular reference', demonstrating how smart it is compared to the average humanoid.

Then we come to the confusion of cause and effect. The process through which one finds effects have particular causes may be a good way to study many things, but flaws may appear when the reverse argument is applied (ie that a cause will necessarily result in a particular effect). So if someone breaks their back and therefore cannot walk, this might prove to some that they could not possibly become, say, one of the world's strongest men. Yet Valentin Dikul did exactly that, breaking his back and then curing himself with a set of unique exercises that developed other muscle groups.

Similarly one of the word's greatest composers was in fact deaf when he wrote much of his best music. Beethoven certainly 'worked around' his deafness and possibly his Asperger's Syndrome as well (see Fitzgerald for evidence of Beethoven's Asperger's Syndrome).

I can see the very early stages of a similar process at work in my son. His difficulty with the standard way of acquiring language is being offset by an ability (not to mention determination) to remember a large number of phrases (mainly from Thomas the Tank Engine DVDs and software) and then recombine them in situations he recognises as being appropriate. The results are slightly odd at times (not to mention comical) but this work around is doing its job, he's learning to talk. I further speculate that he will learn to work around the other 'disabilities' associated with Asperger's Syndrome, including sacred cows like 'empathy' and 'humour'.

Is his method of 'working around' approved of? Apparently not. Whenever I've had to discuss his case with any 'authorities' who have been involved, they try to say that his 'understanding' needs to be developed rather than him using memory. I get the impression they'd say that Dikul had no right to cure himself either, at least not by methods that weren't approved of.

What's their problem? I think their understanding of cause and effect is flawed in that the assume the causes they know of are inseparably linked to the effect being observed. And I further suggest that one can find similarly poor linkage in things like 'climate change' in which a series of plausible relationships is being presented as proof of impending doom. It's there in markets too, lying at the heart of failed and failing models.

Why are cause and effect leading to such problems? I think it may be down to a lack of creativity, the ability to come up with alternatives. Normally creativity seems to be sidelined as nothing more than an adjunct to the analytical process (come up with an idea and then analyse it). But what if analysis is necessarily flawed if it lacks a creative element at every stage, the reason being that without the ongoing generation of alternatives, cause and effect will be assumed to be fully reversible?

Chess players here may note that Kotov's famed 'tree of analysis', in which the player first comes up with 'candidate moves' and then analyses them afterwards, may be similarly flawed. For years Grandmasters have felt guilty for being 'undisciplined' by generating new candidate moves during the analytical bit and then going back to square one. But perhaps they weren't so wrong after all.

I'm not sure if my thoughts on this are 'new' or not, at least they're new to me. Sharpening, clarification and criticism appreciated as always.

Kim Zussman adds: 

On 5/1/07, Stefan Jovanovich wrote:

One group was identified to each of their new teachers as having exceptional potential and the other as being what my recently released from high school daughter assures me is still the term for dummies -"retards".

There is also correlation between intelligence and good looks; some of which may stem from teachers and mentors affinity for cute kids and interns.

(Those hoping for something here about priests will have to settle for this)

You can see this with income/net worth also. For example we have Whole Foods and Trader Joe's markets here, which sell similar "healthy/organic" (what food isn't carbon-based?) TJ's is quite inexpensive, but WF is very high. If you enjoy retailing adventures, shop them both and you will see a clear difference between clienteles. The TJ housewives are trying, but saggy and kind of hungry-in-the-soul looking in the eyes wishing it weren't so. A lot of the WF crowd looks machina ex-Berkeley, with things still holding up well by dint of good jeans toting a perky-in-the-credit-card eager to check out.

All of which evidences that Asperger's and volitional Tourette's may still have funny jeans, especially large ones they wore as a child impersonating Jonathan Winters. 

Stefan Jovanovich says:

The women in my household (one 58, one 22) disagree with Dr. Zussman. They attribute the WF phenomenon to the trophy wife syndrome, and they remain skeptical about the correlation between brains and good looks, given what the older one knows from three decades of working in show business and what the younger concludes from having survived both high school and college. They offer the Drive Through ATM joke by way of confirmation.

Apr

23

DJIA checked for first-ever breaks of 1000s from below. Then compared next 20-day (1 month) and 120-day (6 month) returns to all 20-day and 120-day returns (non-overlapping).

Here are the dates and subsequent returns:

Date        20d      120d    Millenium
10/19/06  0.024  0.059     12000
05/03/99 -0.038 -0.065     11000
03/29/99  0.082  0.080     10000
04/06/98  0.013 -0.111      9000
07/16/97 -0.014 -0.016      8000
02/13/97 -0.012  0.176      7000
10/14/96  0.041  0.091      6000
11/21/95  0.007  0.120      5000
02/23/95  0.021  0.159      4000
07/16/90 -0.084 -0.145      3000
01/08/87  0.100  0.208      2000
11/14/72  0.027 -0.064      1000

mean        0.014  0.041
all other   0.006   0.036
t-score     0.630   0.160

Though returns following new milleneal highs are higher than comparable periods, the difference is not significant. 

Apr

22

We are all accustomed to that unholy feeling of vertigo that happens when we are squeezed and squeezed on a position going against us. But usually it's in a currency or commodity market where prices seem to go against you until you are forced to cave just when the turning point occurs. This is not truly a random effect or a hateful aspect of market misogyny. Rather it is usually the knowledge that your brokers have as to how far it can go against before they can force you out and take the opposite side of your positions.

What we are much more unaccustomed to is a continuous rise and setting of new highs in stocks. We haven't seen such a thing since the 90s and the trillions of opportunity cost losses by delta neutral and long short people have about been used up by those who follow the views of optimists such as Gavekal.

But now there is a new modality, the consistent, persistent unalloyed new high after new high. Certainly if the market is going to go up 20% a year as it does in such times as these, when the earnings yields so much higher than the bond yields, there will be many such periods of continuous horrible shorts rises. The question is, how can they learn to survive? How can they cut their losses before the last short fund is closed down again as it was in 1999?

The book The Science Of Disasters, by Bunde, is a series of papers by chronic pessimists of the garage that the Expert was stored in for 15 years. And it consists mainly of non-predictive studies of impending disasters that somehow fractal analysis provides an interesting graphical backdrop for. It is mixed with a smattering of mathematics from the particular authors' home base, be it physics, pure math, or geology, and it's completely useless for helping the shorts in this dilemma.

One overriding question is how have the extraordinarily liberal and extraordinarily conservative anti groups and funds have been able to react to such unequaling rises. They don't believe in the grand sweep of entrepreneurial activity of the function of markets in providing a mechanism for the masses to participate in human creativity and free trade. And presumably they are long shorted in grinded to death positions that have no hope of ever making more than the risk-free returns.

I think of the University I attended whose main contribution to the structure of ideas on investments is acceptance of the liberally mystical idea of Buffet, Soros and the Expert, that risk is so cheap that the grand thing to do is to buy forests and hedge against the Grossian-predicted Dow 5000, and wonder how long they and their ilk can bamboozle the assembled ever-skeptical public.

From Kim Zussman: 

One way to frame this is in relation to worries of participants driving price. The transcendence of the 2/27 decline has been quick and sure, seemingly surprising bulls and bears. Current worry drivers:

"The higher it goes, the more likely a future decline"

This worry keeps out reversalist longs waiting for a decline entry, which they grow to regret as gains continue. Little by little reversalists join the fray out of fear of missing the party.

"The higher it goes, the less shorts can survive"

How many shorts have closed worried about further losses, and how many still hold but worry there won't be another 2/27? More and more are forced to buy out their positions, contributing to the rise.

A possible turning point could be the inverse of the massive intraday bull-move of 3/14 (a many week low from which we are up now about 8%). This week, China sell-off was met with a short decline then rally, and Friday's big up-move ended at day's high, suggesting they are eager to hold the weekend.

"This week and Friday seem worrisome."

Up we go next week? 

Apr

22

At the end of each month, checked the DOW high daily closes back to 1980. If this month's high was a new all-time high (not including dividends), noted the following calendar month's return (actually 21 days). This next month return was compared to calendar months following those which were not new all-time highs:

Two-sample T for mo aft vs non month

                  N     Mean    StDev    SE Mean
mo aft        111  0.0109  0.0391   0.0037  t=1.0
non month  216  0.0059  0.0433   0.0029

This is somwhat bullish, and one notes the Dow is making a new all time high again this month. 

Apr

16

A great big fall
it scared us all
They saw the writing
on the wall

The end was nay
to market play
Bears would finally
have their day

But now it's axe-day
before the tax-day
And up we stray
New record intra-day

When will they not fight
To just have the rite
Never to lose sight
Of their interminable plight

Apr

15

"If You Think You Can Beat Buy and Hold, Try Looking at Taxes"

Standard and Poor's gives SP500 returns with and without dividends back to 1990. Here are the returns at year ends, without and with dividends:

date       1yr rt  total rt
12/1990 -0.066 -0.031
12/1991  0.263  0.305
12/1992  0.045  0.076
12/1993  0.071  0.101
12/1994 -0.015  0.013
12/1995  0.341  0.376
12/1996  0.203  0.230
12/1997  0.310  0.334
12/1998  0.267  0.286
12/1999  0.195  0.210
12/2000 -0.101 -0.091
12/2001 -0.130 -0.119
12/2002 -0.234 -0.221
12/2003  0.264  0.287
12/2004  0.090  0.109
12/2005  0.030  0.049
12/2006  0.136  0.158

Mr. B. Holder (BH) puts $100,000 into the SP500 index 1/1/90, reinvests dividends into the index at year end, and pays tax on dividends out of his salary as school janitor. BH sweeps into retardment 12/2006, and notices that without taxes his initial investment became $555,637, including reinvestment of $22,271 in dividends along the way.

For this exercise, let's assume that long-term capital gains and dividends are both taxed 20% (they are currently taxed less, have been taxed more in the past, and will no doubt be more in the future). When BH cashes out 12/06, he gets to contribute $91,128 and keeps
$464,510.

Also in 1990, recent refugee Natasha Otradeskaya (NO) plows $100,000 of hard stolen capital into a U.S. trading account. Like others from her country, NO has degrees in math, physics, and nuclear medicine, but unlike competitors in the US and A, does well enough with trading (after slippage, commissions, and opportunity costs) to exactly equal yearly SP500 returns including dividends. Exhausted after 16 years and 10^16 quantitative studies, she decides to look back at her results:

date      100000     P/L     tax        net
12/1990   96896   -3104       0
12/1991 126416  29520   7925  118491
12/1992 127526    1110    333  127193
12/1993 140004  12478   3743  136261
12/1994 138060   -1945        0  138060
12/1995 189939  51880 14980 174959
12/1996 215129  25190   7557 207572
12/1997 276825  61696 18509 258316
12/1998 332140  55315 16594 315546
12/1999 381941  49801 14940 367001
12/2000 333588 -48354        0 333588
12/2001 293938 -39650        0 293938
12/2002 228973 -64965        0 228973
12/2003 294665  65692        0 294665
12/2004 326724  32060        0 326724
12/2005 342770  16045        0 342770
12/2006 396907  54137   4490 392417 <<<<Final balance

NO trades full-time 100% of her account every year, and pays income tax of 30% on her gains (the calculation carries forward losses, which are balanced against future gains; which is the case for a trader who has no other income tax to offset capital losses. Note also that losses carried forward from 00-02 are not used up until 2006). Thus she is unable to reinvest what is lost to taxes, and these amounts do not compound.

In the end, BH cleans up: He gets paid an extra $72,093 for not doing studies or trading frequently, and uses it to order a new bride who happens to be NO's grand-niece from the old country.

J T Holley adds: 

The old gray mare ain't what she used to be. You can actually get no load low M&E annuities that aren't as bad as you would think. Most people think though that investing should be free and that one bp is too much.

Vanguard's isn't in the example above but its M&E is .20 basis points with a .10 basis point administration charge and the S&P 500 clone sub account is .44 expense, bringing the total to 74 beeps. Anyone counting this out remember that annuities are like mutual funds and take fees out daily on an annual basis.

I'll take the ordinary income later in life over the stg/ltg now and avoid Uncle Sam. Even with the 74 beep vig annually that is better than the taxable stg/ltg combination paying taxes now, that the S&P 500 tax toll can be annual. I like the compounding and pay later acting as a quasi spigot trust if you have enough time and persistence.

Steve is right though. There are tons of annuities that have a lot higher costs. The industry average is around 250 beeps in M&E and charges, but even these higher vigged charges show the tax deferral outperforming the pay as you go in a taxable account if you hold long enough to let it happen.

Also, annuities have a 10% penalty much like IRA's if you yank out before 59 ½, unless you 72T. I would recommend neither unless "liquidation" is really needed.

Mr. Sears might help us here. I'll defer all annuity and running knowledge to him.

Steve Leslie writes:

ETFs are not fairly new. Diamonds and Spiders have been around for a decade or more. And irrespective of their longevity if one's goal is to replicate an event using an ETF, what difference does it make how long they have been around? This is not Morningstar; as we know track records do not matter.

There is a big misunderstanding as to the elimination of estate tax law in 2010 and the questions surrounding it. The reason there is a gap in 2010 is that it is my understanding tax law cannot be written for more than 10 years. So it is clear that the next administration will rewrite the tax code. Who knows what they will come up with then?

There are some very low cost variable annuities which stripped down to the bare minimum may have an attractiveness. When I was a broker (sounds like my father) the lowest cost one we sold was the Nationwide Best of America. Still, be very careful that there are some pretty good back end charges if you redeem the annuity. I think there are some no load annuities with low M&E perhaps in the Vanguard family. M&E is mortality and expenses.

This is where all the hidden charges show up. You pay for that death benefit. And the charges are rarely below 1% and then you add management fees of the funds on top of that. The management fees can be higher in annuities if they are funds outside the annuities family of funds. You pay to play. And once again there is no stepped up cost basis on date of death. That is an extremely expensive thing to have the heirs have to face should that happen.

I still argue there is no perfect solution, however, ETFs stack up very well against no load index funds, in performance for expenses and after tax return ease of ownership and liquidity. One added thought; they are a heck of a lot easier to track the cost basis for reinvested dividends than mutual funds. You do not get average cost basis. First in first out, etc.

I am not sure about the dividends being left in cash as Mr. Sasmor suggests. I thought by definition they try to be as fully invested as possible. Not even open-end index mutual funds are fully invested at all times. They do by the mechanics of the machine have to keep some cash on hand. And in open ended mutual funds, when a run on liquidity happens they must sell stocks accordingly to handle redemptions. Whereas with closed end funds this does not happen. There may be times when closed end funds trade at a discount to the NAV. Open ended mutuals are marked to the market on the end of business. And purchases are restricted to last day's closing price.

Bill Rafter adds: 

Regularly I get an idea from an investment professional who typically does not do any quantitative research, but has a "hunch" that he thinks will work. More often than not the investment pro got the idea from some huckster. Investment professionals are really no different (nor less vulnerable) than the public at large. To keep the investment professional devoted to quality research, I have to disprove the cockamamie hunches, lest he wander off following outlandish ideas.

The latest is the "gravity idea" based on "celestial mechanics". Every good con job contains a certain amount of truth, and this one evokes Isaac Newton, Kepler, and some other luminaries. The celestial mechanics is BS to make the huckster sound important and establish him in an intellectual pecking order. I think this is something they teach in huckster school on the premise that the mark has to look up to the huckster.

The system the huckster is peddling is really just based on tides, which of course is a function of celestial mechanics. But neither the huckster nor the mark knows that. I can tell the huckster doesn't know that because he claims to use both the celestial cycles and the tides, which in his case is redundant.

The huckster uses tide schedules from a point in Delaware Bay. I cannot really find out why because all conversation has to go through the mark. Apparently the mark has told the huckster that he has had conversations with another one of his confidants (me) who is skeptical. This gets the huckster's back up: how dare the mark give any credibility to non-believers! Another lesson from huckster school: get indignant when challenged and threaten to cut off communications. The mark always wants what he cannot have.

The huckster really has the mark convinced. I try all sorts of arguments, like why we cannot find any evidence of these cycles using Fourier analysis. And if the idea were true, why isn't there more volatility during the "spring tides" when the earth is at perigee? However, I'm getting nowhere because the huckster has a track record with great performance. Of course there are reasons why he cannot show it, so no one has seen it.

Well I don't want to go searching for the Delaware Bay tide schedule. And since I live near the seashore, I have the Barnegat Light tide tables bookmarked on the PC. That data are neatly presented in a spreadsheet with the date and four columns representing the two daily high and low tides. The similarity with bar-chart data is overwhelming, so I copy the data, import it into my charting software and have it displayed as open, high, low and close. I send that chart back to the investment professional with my commentary that the highs on the 2nd of the month will be higher than the highs on the 16th, and the lows of the 23rd will be lower than the lows of the 9th.

At the end of the month the investment professional (i.e. the mark) gives me a call and tells me that my trading signals were right on target, and the gravity man (i.e. the huckster) complements me on having mastered the technique in such a short period of time. I know the trading signals did not work and I suspect that the huckster is now using me to validate his own importance. This must be another lesson from huckster class: if confronted with an outside challenge, turn the challenge around to support your own claims.

I have no choice but to have a personal meeting with the investment professional and show him exactly what I did, which takes about two minutes. He really doesn't want to believe me, but when he sees that my tidal signals did not work and then realizes that the gravity man is just playing him, I finally win him over.

Hey, anyone want to buy my gravity system?

Steve B. adds:

The con game is not so much about the con be it in financial services, health and beauty, or the red-hot real estate (mortgage) market. The con game is about the mark - the one who must get conned for the game to work. The con in this game has the advantage of instant feedback from the mark. The mark is spotted by the type of work he does, the kind of car he drives, his or her age. These are just general and to get specifics he needs to talk directly with the mark.

How is it that the con can come to know about us? We provide him the information via physics and other shamsters. But in this case we feel we are dealing with a respectable person and our guards are down. Basically, one starts with general statements and through feedback (verbal and body) the con figures out which of his general statements are specific to you.

We all have the desire to trust our fellow human and the con operates with this advantage. You may not always know when the con is on but if you feel the flattery (and a feeling you may miss the boat) then you may be a mark.

From Henry Gifford:

While it seems so many con games include some true physics in the story, the physics are usually redundant (as already mentioned) or not relevant. My favorite is energy-saving devices that incorporate the use of "bipolar" magnets. As all magnets have two poles, the statement is meaningless yet true. 

Apr

12

"What kind of animal would you be if you were reincarnated?"

"Where would you live if you were the richest person in the world?"

"What would you do if you were the president?"

"What happens to compounded returns by excluding extrema, empirically and simulated?"

OK, that last one has a dollop of testosterone. However inspired by a friend, here is a revisit of prior study on effects of final sum compounded by simultaneously removing (as if by magic!) the paired top and bottom daily returns for SPY from 1993-present (includes dividends): "But wait; we can't get right to it. Let's first do a simulation!"

(Yes dear.)

Using SPY daily returns since 1993, calculated daily mean return and standard deviation. From this used random number engine to generate 10,000 daily returns with a normal distribution having the same mean and st dev. This series was then ranked, and compounded returns calculated after successively removing top and bottom return pairs. Here is the graph of final compounded return.

From this graph, one notes that removal of top and bottom returns initially boosts compounded result, but quickly the final value declines monotonically as the normal distribution tails are clipped. This suggests that were returns normally distributed, both tails contribute to final compounded return (since their symmetrical removal reduces final sum).

"But wait!"

This graph compares this result to the actual empirical SPY series, successively pruned of top and bottom day returns. 

"Oh that one's different!"

Here we see the same short initial boost in final cpd sum by removal of tips of tails, followed by a decline in total return as more of the tails are clipped. However unlike the simulation, further paired pruning of tails improves final compounded sum, and for many iterations this sum exceeds buy and hold. Evidently removing the non-normal/fat tails (but-yours is perfect, dear!) of the empirical distribution actually improves returns, whereas cutting tails from the normal hurts.

"So just by taking away the top and bottom returns, we would be even richer? Have you figured out how to do that?" 

Apr

11

There is still an enormous number of subprime and stated income loan programs available for people with low credit scores and few assets. Only the programs for the most marginal borrowers have been taken from the market. And new creative programs have been introduced to fill the temporary void at startling speed. It has truly been a marvel to behold.

Far from being the contagion I was expecting, the mortgage markets and residential real estate markets have not only absorbed this shock but are exhibiting signs of even greater confidence and liquidity now that the underlying concerns about fraud and irrational underwriting in the mortgage markets and loose appraisals of collateral have been acknowledged.

There will still be more headlines but those unscrupulous players not already knocked out are quickly being isolated from participating by the mbs markets. Underwriting to exact specifications for each loan program has returned following the sloppy underwriting that was at the heart of the real problem in the mbs market.

This tension release and resulting rapid tightening up of the industry appears to have worked amazingly well and amazingly quickly.

Charles Sorkin writes: 

Just throwing this notion out there, but is it accurate to say that "home-ownership for all Americans" is a stable economic regime? For instance, jobs for all Americans (i.e. 0% unemployment) is widely considered unstable, and would lead to sporadic regional labor shortages and is associated with inflation pressure.

Is there a NAIRH (non accelerating instability rate of homeownership) associated with the American economy, much like the much-debated NAIRU concept?

An insightful reference to housing stock, homeownership, and the means of financing it, are referenced in Paul McCulley's monthly commentary on the Pimco website.

Ken Smith writes: 

The next step in America will be to follow Britian which in the period 1979 through 1997 converted municipal housing to ownership housing. Well over a million former tenants became homeowners.

This was the era of privatization. In 1979 British government institutions owned much or all of coal, steel, gas, electricity, water, railways, airlines, telecommunications, nuclear power and shipbuilding, and had a significant stake in oil, banking, shipping and road haulage.

The agencies responsible for these changes were called Next Step Agencies. So the next step in America is conversion of municipal housing to private ownership by individuals or corporations.

The Bush Administration has voiced, many times, the goal of home ownership for all Americans. It appears the goal is to implement this program without regard to ability to pay. I can see a way to profit from this. Get the loan without ability to pay, peddle the property for an appreciated value, pay off the loan and keep the difference. Do another flip, and another.

So what happens when everything falls apart? When jobs are lost, as in Illinois, Ohio, and other hard hit states? Nothing bad happens. Since anyone can get a property without income then anyone can pay up for the property being flipped. So another person steps in, without income, to purchase property that has been appreciated by an appraiser willing to be part of the game, for compensation, of course.

Is this magical thinking? Is this reason? Is this logic? Is this traditional? Is this paradise? Is this the new economy? Is this a bubble?

Apr

10

Stocks, stocks
Like musical charts

The more I look
The less I smart

The less I look
The less I trade

The less I trade
The more I make

The more I make
The better I feel

Looking less:
A lifetime meal

Apr

2

There once was a primitive man in a farming village who didn't like manual labor, but wanted to get paid to tell farmers when the rainy season was at hand. Everyone already knew from the ancients about the length of shadows cast by sticks when the sun was high over-head. The villagers made a standard stick and marked shadows so they could look for the time between the longest and shortest. But the shadow forecast could be weeks off, and sometimes months.

One thing the weatherman noticed is that before it rained it got darker outside. Since he didn't like the outdoors (and liked to help the harem with the cooking), he decided to automate his system by staying indoors and having a messenger tell him every time it got darker outside.

Unfortunately it got dark every day, and sometimes it clouded up but didn't rain at all. Checking his records over time, only a small fraction of outer darkenings were correlated with imminent rain. He undertook a serious study so he could use experience and knowledge of nature to help: The weatherman learned that if it got dark AND the humidity increases, the odds of rain were much higher than for either condition alone. When he discovered how to measure air pressure (using a closed glass tube inverted into a tub of water) and the air pressure drops, he learned to make an even better forecast.

Adding understanding and experience greatly improved his forecast accuracy, still he often got it wrong. However he didn't have to be 100%; only do it better than others who might claim his job.

The farmers in his area had different levels of success. Those able to more accurately time the planting of crops did much better in certain years, and many farmers diligently monitored them for signs of when to plant. Year after year there were fantastic successes and dismal failures, but over a lifetime success didn't seem to correlate with efforts to precisely time planting.

Despite the obvious discrepancy the farmers were often afraid not to pay the weatherman, who eventually became the richest in the whole village and could afford the biggest harem.

Mar

31

What is the relationship between range and return? Using SPY intraday 1/04-present, %range and %return defined as:

day range = ((H/L)-1)*100
return =((close/open)-1)*100

Then regressing return vs (same day) range:

The regression equation is day rt = 0.246 - 0.262 day range.

Predictor      Coef    SE Coef      T      P
Constant    0.24619  0.05315   4.63  0.000
day range  -0.26152  0.05195  -5.03  0.000

S = 0.605558   R-Sq = 3.0%   R-Sq(adj) = 2.9%

Wee! The bigger the range, the more the drop. Seems obvious in that large range implies large variance, and there is contemporaneous negative correlation between variance and return. Logically big range can accompany big gain, big drop, or little change, yet it turns out most often to drop.

Optics trivia: this scatter plot resembles geometric spot-diagram of off-axis star image for system exhibiting the aberration known as coma.

In other regressions, tomorrow's day return had little correlation with yesterday's range or return.

The association of big range with contemporaneous negative returns is also seen if plotting range vs. date since 2006, the broad and (so far) narrow peaks corresponding with summer 2006 and recently, respectfully. 

Bernd Dittmann adds:

To further Kim's findings, it would be interesting to note that the daily range (as defined above) is strongly partially auto-correlated with a maximum lag of 10 trading days for the sample period since Jan. 2004, whereas intraday returns do not exhibit such a degree of auto-correlation. This would be in sync with findings of volatility clusters.

Day of high volatility or high daily trading ranges are likely to be followed by days of similar wide trading ranges. If one were to expand the sample period back to 2000, the above returns vs. daily range equation no longer holds. Neither the intercept (0.041, p=0.41) nor range (-0.026, p=0.38) is significant. 

Mar

30

Count this: expectation of (logic=and):

1. weekends which include first of new month
2. down last of month of up month prior, which followed largest 1-day drop in years
3. likely weekend UK/US defrocking of Ayatollah
4. FOMC not inclined to tighten with new chief either buying or selling puts

(hint: N=0)

Mar

26

For the following evaluation, I used SP500 daily index returns from 3/57-3/07, partitioned into decades. The signal was to be long the SP500 any days when the past five have been above the 200d moving average, and to be "cash" otherwise (without interest).

No adjustments were made for transaction costs or taxes (not that the SP500 index would have been difficult to own until the 1980s). Returns and variances were compared for MA vs. B/H (buy and hold) for the five decades. The following table summarizes results, with "ret T" being t-score for difference in daily mean returns for the strategies, F the F-statistic for difference in variance, (p) the probability associated with F:

Decade MA v B/H MA v B/H
              ret T        F (p)
97-07       -0.1      1.5(0.0)
87-97       -0.1      1.7(0.0)
77-87        0.6      1.0(0.7)
67-77        0.6      1.8(0.0)
57-67        0.8      1.7(0.0)

The mean daily returns in all periods are not significantly different. However, in 4/5 decades the variance of MA strategy was significantly lower than B/H. 

Mar

25

Here is a fixed-system signal using a 10 month moving average. It is a bonus quantification of risk using Ulcer index, which was not clearly diagnosed with endoscopy.

Philip J. McDonnell writes:

Looking at exhibit two, it should be noted that the greatest differential between the 200-day moving average timing strategy and buy and hold was achieved in 1932. Since that time buy and hold has out performed. The trend following strategy appeared to do better mainly in the 1929 crash, 1973-4, and 2000-2002 bear market years. Given that it is 30 to 40 years between such events one wonders how soon the next one will be.

Mar

21

The sentence, "Even mathematicians don't have all the answers" is a frightening one. Mathematicians strain hard to have all practical answers. Even engineers go up a zillion blind alleys, and often don't know that the alleys are blind until they've already been announced as the answer.

"It may well turn out, of course, that what they need are more mathematicians." Heaven help IBM, and us.

The classic mid-life arc of the mathematician (esp. the pure one) goes like this:

  1. At 42 - Notice that some friends are getting rich.
  2. At 44 - Notice that zillions of "idiots" are getting rich.
  3. At 47 - Form company based on brilliant idea. Insist on maintaining complete control, to avoid corruption of idea by idiots.
  4.  At 50 - Declare bankruptcy.
  5. Later - New buyer of company makes a success out of it, sometimes a greatone.

I must admit that the high-tech age has reduced the probability of step 4 to, say, 96%. I am not writing as an outsider.

Rich Bubb adds:

Here is an article about one of IBM's chief mathematicians, and the real-world problems her department is solving. 

Kim Zussman writes:

Re: "Zillions of 'idiots' are getting rich:"

This is actually the key to everything. You will never get over how many less (intelligent/educated/motivate/ethical) people have more than you can ever hope to, and the explanations about randomness will fall on the deaf ears of all significant others.

What is much harder and more important to appreciate is how many of your betters will always live in incomprehensible hopelessness.
 

Mar

20

We are now 15 days since the drop of 2/27, and SPY is about three percent below where it was 16 days ago. This is near the 2.9% below 5/11/06, which occurred 15 days after that decline started.

To compare these events I plotted change in SPY closing price for each series such that the declines are superimposed trading day for trading day:

Though the recent decline was much sharper initially, it rebounded more quickly before converging with last summer's drop. Hopefully there is little to conclude from the parallel beyond this.

Mar

20

“It is better to set wide perimeters for profits than to take the quick profits.” (Duncan Coker)

Is this true as well in volatile markets, in that volatility tends to cluster? Isn’t it prudent to trade smaller (your profits will be the same over shorter periods with higher ranges, as will risk of extreme loss) or analogously shorter? Consider that many participants have been mortally wounded and are trying desperately to get back to even, do or die. If you have not been mauled in this way maybe there is a current advantage to slow and steady.

Like in motocross, the answer is different if you are trying to win the race rather than just finish well. There are lots of racers who will crash in the bumpy downhill section of the course. And perhaps you don’t mind being one of them if that’s the risk it takes to win.

Mar

17

Now that the "too low risk premium" problem has been ameliorated, this week the Fed has an opportunity to stabilize recently volatile markets. Since Bernanke took over the bank, has there been any change in market reaction compared to his predecessor?

Checked weekly SPY returns for weeks which contained FED meetings (dates from FOMC calendar site), and compared returns for the last eight (Bernanke) and the 17 prior back to 1/27/04 (Greenspan):

Two-sample T for Ben rt vs green rt

              N     Mean   StDev  SE Mean
Ben rt      8   0.0019  0.0155   0.0055  t=0.4   4/8 pos
green rt  17  -0.0005  0.0128   0.0031           9/17 pos

The difference is not significant, but interestingly while B weeks were positive, G weeks were slightly negative in the period. Here are Green and Ben weeks:

wk start   green rt
01/30/06 -0.018
12/12/05  0.006
10/31/05  0.019
09/19/05 -0.017
08/08/05  0.001
06/27/05  0.005
05/02/05  0.012
03/21/05 -0.012
01/31/05  0.024
12/13/04  0.006
11/08/04  0.013
09/20/04 -0.015
08/09/04  0.003
06/28/04 -0.008
05/03/04 -0.009
03/15/04 -0.010
01/26/04 -0.008

wk start  Ben rt
01/29/07  0.019
12/11/06  0.007
10/23/06  0.008
09/18/06 -0.004
08/07/06 -0.009
06/26/06  0.023
05/08/06 -0.025
03/27/06 -0.003

Also from Kim Zussman:

Based on MC's suggestion, for FED weeks since 2004 what is the effect of the prior week? Checked this with regression: Ind var = week before, dep var = week after:

Regression Analysis: wk ret versus wk before (all weeks, Ben and Al)

The regression equation is wk ret = 0.00040 + 0.108 wk before

Predictor      Coef   SE Coef     T      P
Constant     0.0004    0.0027  0.15  0.886
wk before    0.1075    0.1714  0.63  0.537

S = 0.0135695   R-Sq = 1.7%   R-Sq(adj) = 0.0%

Shows slight, insignificant positive correlation.  Next checked same
since Ben took over:

Regression Analysis: B week versus B-fore

The regression equation is
B week = 0.00533 - 0.996 B-fore

Predictor      Coef   SE Coef      T      P
Constant   0.0053    0.0058   0.92  0.392
B-fore      -0.9963    0.7486  -1.33  0.232

S = 0.0146648   R-Sq = 22.8%   R-Sq(adj) = 9.9%

Here there is a trend toward reversal of prior week's return (rsq pretty hi). In that Ben's weeks tended to reverse the priors, since 2004 Al must have had positive correlation:

Regression Analysis: G week versus G-fore

The regression equation is G week = 0.00008 + 0.172 G-fore

Predictor      Coef   SE Coef     T      P
Constant   0.00008  0.0032  0.02  0.981
G-fore       0.1716    0.1700     1.01  0.329

S = 0.0127503 R-Sq = 6.4% R-Sq(adj) = 0.1%

Hope springs eternal from so little n. Or at least next week.

Click for chart. 

Mar

17

The variegated and splendid forms of disease, both macro and microscopically, are simultaneously wonderful and awful. Lifetimes are spent studying cell morphology and disease categorization, usually accompanied by a fascinated respect for the curves that nature throws.

Here is a sequence of benign and malignant conditions of the female reproductive system, which if taken in the non-objective context of lovers, mothers, and daughters, requires humility of the highest order.

[Editor note: graphic image.] 

Mar

15

My true love gave to me,
A black eye and a kiss you'll see.

Daily range is high when volatility spikes, and decays over time. Yesterday was day 12 since the 4% decline in stocks. Checking the SPY intraday high/low as range (actually (H/L)-1), I used linear regression to measure the rate of decline. Here is a plot of SPY daily range since 2/27/07 (inclusive):

One might argue that range or volatility decay is not linear since it cannot progress continuously downward. In fact tests using quadratic regression showed better RSQ by adding **2 term, though linear term explained most of the variance. For simplicity the 1st 12 days are modelled as linear.

As a check on the current daily range decline against historics, I repeated regressions of the intraday range vs. the day following (analogous) declines; defined as 1day cl-cl drop worse than -3%, preceded by 5 days without a drop worse than -1% (SPY since 1993). Here is a table of the regression slopes and T-values for the range vs. the day following big declines, by year:

Yr       slope      t
2007  -0.0011  -1.8
2003  -0.0001  -0.2
2002  -0.0018  -2.4
2000  -0.0019  -2.8
1998  -0.0027  -1.5
1997  -0.0004  -0.9
1996  -0.0018  -2.4

It looks like the current change in range lies mainly in the plain, and is consistent with prior such events.

Bernd Dittmann adds:

As Kim outlined, both daily volatilities and daily high-low ranges decline after a spike. I estimated for the S&P 500 between Jan 03, 2000 and today a simple garch based on daily returns rather than daily range. The equation of the conditional variance ("h") seems to be consistent with his findings: Its regressor of lag 1 is 0.9276. A one-off vola spike (with subsequent error terms of the equation of the mean being zero) feeds through the model and decays as shown below:

day h
1 0.9276
2 0.8604
3 0.7981
4 0.7404
5 0.6868
6 0.6370
7 0.5909
8 0.5481
9 0.5084
10 0.4716
11 0.4375
12 0.4058
13 0.3764
14 0.3492
15 0.3239

This yields a similar picture as declines in daily high-low ranges.

Mar

14

I am both an investor and trader. But looking at my results I should probably only be an investor. It is not easy to trade with a full-time job on the side.

As an investor I am 100% long with my stocks. I will stay 100% long no matter what. I can sell a stock, but only if I am able to find a better one to replace it. I am not going to sell because of the overall market. Actually, I could sell if it goes up 130% like Shanghai last year. But I am never going to sell because it has been going down.

Today, my investments are down 2% from 12/31/2006, and down 10% from February intraday peak equity. I don't care the slightest bit. They could go down 30% and I wouldn't care either.

I am not crazy. There is a very good reason for this stubbornness.

I started investing seriously in stocks in 1996. Since then there has been a crisis in 1997, another one in 1998, and one of the biggest bear markets in history in 2000-2002. I was investing with a mix of stock picking, market timing, style timing, and small/big timing. Believe it or not my market timing allowed me to sell at all the intermediate tops in 1997, in 1998, and in March 2000. It allowed me to avoid the bulk of the bear market in 2000-2002. I came back too early in August 2002, sold in September, came back at the exact bottom in March 2003!

With this nearly perfect timing, you would think I have impressive compounded returns. That couldn't be further from the true. At the end in 2005, I did a complete audit of my 10-year record. It was prompted, among other things, by some things I read on the Spec List, mostly from the Chair but not only from him. So thank you guys for your down-to-earth audit-prompting approach.

Results of the 10-year audit:

Market timing resulted in dramatically lower volatility and draw-downs than the market; but who cares? It resulted in only a 2% over-performance compared to the index. In terms of absolute returns, beating the index by only 2% is ridiculous. It is incredible that even though I caught most major tops and bottoms in 10 years, I only over-performed by 2%. Even more sobering is that if I had kept the first 10 stocks I ever bought and never sold them, forgot them and never done anything else, my over-performance would have been 4%.

How could this happen? Well, that's very easy:

First, I caught all the actual tops, but also about 10 of them which never turned out to be tops. The market continued higher and I missed part of the move. Second, even when the top was an actual top and I was flat, it created the problem of knowing when to get back in, which in most cases occurred a bit too late. Third, buying and selling too much is created a lot of friction in the form of commissions. Over 10 years, the amount paid in commissions can be really impressive.

Based on this I decided to be always 100% long. I am not timing the market, styles, or anything any longer. I still hope to continue beating the market by a couple percent a year from stock-picking (probably more beta than alpha). I don't care if the results are more volatile. This is largely compensated by a huge decrease in workload and worry. Freed time can be dedicated to more useful pursuits, like learning to trade.

Jaime Klein writes:

I have, well, had, two now only one extremely financially talented relatives. The late one, when told I was going into the financial business, laughed rather rudely, I thought. And noting so many of my family members were already in that line of work, he asked me who was going to bring home the bacon. Well, he said, seeing as you're determined, I'd give you this bit of advice: Never buy a stock if in your lifetime you don't see it returning your original investment to you annually in dividends. And if they're any good, they only pay two percent.

Absurdly enough, his own results were so far beyond this as to make this counsel seem the most conservative expectation possible. He was probably 30 years ahead of the sage into Coca Cola, which he obtained by selling Minute Maid to them for stock. He never sold it except to buy the occasional Goya or Renoir, or make a charitable donation to Harvard or MIT.

I was aware of only two other plays: one was a quick flip which his partner told me netted over 100X in less than three years. The other was selling United Fruit, which I imagine he paid near nothing for, to Eli Black, right at the top back in the conglomerate heat of the '60s. I can't remember much about the foolish and ill-fated acquisitor except that he defenestrated himself shortly thereafter, taking his briefcase along with him.

Anyway, it's been my pleasure, while unfortunately lacking in outstanding talent myself, to have met so many ingenious and interesting people in my all too brief 65 years. One of these days I'm hoping I'll learn something from them. But in the meanwhile, it's always fascinating, albeit particularly in the political and religious arenas sometimes quite alarming, to see how clever so many people are.

From Scott Brooks:

Volatility is a terrible measure of risk. There is no risk on the upside of volatility. The goal should be to reduce all down side volatility, thus my patented investment strategy of buy low and sell high (Green List/Red List post from several months ago).

In all seriousness, I am fixated on the discovery of ways to mitigate downside volatility while participating in most of the upside of volatility. But since I'm far from the smartest person on this list and have been told in no uncertain terms that it can't be done, I feel like I'm fighting an uphill battle. Still, who knows, maybe there is a way!

I've never been one to give up just because others say it can't be done. If I listened to others (like my guidance counselors), I'd probably be laying carpet back in Maplewood, going to the corner bar, watching COPS every night, and aspiring only to be the "Maplewoods, King of White Trash."

From Craig Mee:

I accept these results, however…

Plenty of you know a lot more about stocks then I do. But I would like to offer here that a two percent increase in returns and with this, the opportunity to be out of the market in major declines, represents to me some nice sleepy nights.

With a bit of fine-tuning maybe marks can be picked slightly better on entering and exiting longer term positions. But on that black swan event, when something may drive the market into a huge selling spiral, I believe for me at least it may be worth that extra agro.

From Kim Zussman:

Similar but less quantitative self-assessments:

1. At least in US, taxes bite deeply into putative alpha (or masquerading beta) if you trade vs buy and hold.

2. Concur that most effect was lowering volatility. You will get lower volatility with stocks<100%, and pretty much always lower returns. Looking back, you will regret not being 100% stocks, but during the ride you live happier <<100%. Thinking about a big down year as a future possibility feels a lot different than having one.*

3. Besides drift, the reason buy and hold works is that there is too much temptation for the vast majority of people to time the market. It is unnatural not to check your investments, and not to be tempted to act on them. People don't like it when their million $ port becomes worth $800,000, and sell before "losing it all". Then it turns around and people don't like missing up 30% years, and buy back in. The hope-panic-irony cycle makes the market rise over time only for those not riding the emotocycle.

* The abstraction of future pain and foolish willingness to fall in love is nicely summarized by the late Sam Kinnison.

Jack Tierney adds:

I was invited to a dinner party but expected very little. The guests were getting thin on top and hefty through the middle. Our host was dressed in colors that defy the known spectrum and civility was to be shown the greatest horse's rectum. So we mingled and we spoke and mentioned our positions. I mooted that I was all in cash and was swarmed by five physicians. "Perhaps an evil humor attacked him on his flight or maybe he's an infidel who has yet to see the light." Their concern was very real and they needed to be consoled so I admitted that in addition I owned a little gold. Screams and wails followed and the panic gained momentum.

To quell the crowd I shouted, "Wait, I also own argentum." Now that they were fully aware of these judgmental flaws they ripped away my velvet gloves and exposed my hairy paws. They marched me toward the door when the host yelled out to quit, "Why this poor benighted soul has never heard of drift."

So began my lessons and I've brought them to the south, a bearish thought may cross your mind but never cross your mouth.

Abe Dunkelheit adds:

Bruno's post was very interesting. I made exactly the same observation. Market timing lowers volatility but doesn't guarantee any substantial out performance. And yes, one's first ideas tend to be much better researched than all these other in and out decisions. Never to sell them would have turned out the best in my personal case also.

And there seem to be people who don't make any professional impression and live a very retired life who tend to buy and hold and accumulate incredible returns without doing much.

I know about a guy in Switzerland who was retired and did it with wine. He bought all these Chateau Mouton Rothschild wines for USD 500 a bottle 10 years ago and they now go for USD 10,000 at auction because rap stars and Russian mafia are pushing prices up. I only know about this guy because I was one of the sellers. I had bought my bottles for USD 300 and thought a cool 60% gain in less than two years could not be wrong. He had an incredible cellar with all these wines, but his house and car and his whole appearance were very modest.

Another example I know about is a guy who was jobless and lived on social security, but had saved several hundred thousand euros [back then deutschmarks] and invested them through the accounts of his children. He put it all into Deutsche Telecom at the IPO and cashed in a 600% profit during the Internet boom. That was his one and only investment.

Mar

13

It is interesting to note that Viacom is going to provide video to Joost. Behind Joost are the Scandinavian super entrepreneurs Niklas Zennström and Janus Friis (who founded Skype and Kazaa). Keep an eye on Joost as TV is moving to IP distribution.

Wired has a good article on Joost. 

Unfortunately it is not a public company, but maybe Google should make a strategic investment. 

Kim Zussman writes:

Content now on Youtube will soon only be on the boobtube.

Mar

12

Mexican Carlos Slim, world’s 3rd richest person, sits several unattenuated standard deviations above the mean of a very poor nation.

"Diners at Slim's ubiquitous Sanborns restaurants can use Slim's wireless service to connect to Slim's Internet provider and check their holdings through Slim's brokerage, part of Slim's Grupo Financiero Inbursa group. Banking online, they can pay bills to Slim's car insurance company or credit cards for Slim's retail stores, among them Sears Mexico and the Mixup record store chain."

From Hany Saad: 

Here is what I wrote about Slim a few days back in response to Scott Brooks's post about the new Forbes list of billionaires. Slim had the most unusual jump in net worth.

News like this, while interesting to skim through, can be very valuable if analyzed deeply. In fact, they can give you subtle clues on what cycles are about to change (specially if you keep historical data of the list year over year). I certainly try to keep in mind that the data can be flawed especially when it comes to analyzing the net worth of the super wealthy. I will state here the obvious example as an exercise in analyzing humdrum data like the above profitably.

Notice how Carlos Slim, 67, Mexico, $49 billion, telecom, had the highest jump in net worth and is getting uncomfortably close to Buffet? You compare that with a chart of the peso to weed out the possibility of a huge jump in the local currency as the main reason for the increase in net worth. This is not really important in the case of Slim and most of the others since they mostly keep their wealth in US dollars. In fact, Slim doesn't even reside in Mexico. This exercise is, however, useful in the case of others like the Egyptian Naguib Sawiris, whose OTOH is required by law to keep a significant percentage of his "disclosed" net worth in the Egyptian pound.

Some other obvious questions to ask other than the general currency differentials include: What sectors are they involved in? How did the sectors do in general over the period? How did their specific company fare relative to the sector? Did they target new markets? Which ones? How did these new markets do? If all the above is not significantly changed compared to the previous year to warrant the big change in their net worth, then the info can become even more valuable and more digging can be worth your while.

In general, this can be a good exercise in ever-changing cycles, if you keep in mind the importance of incentive and self-interest as the only driving motives. This is how this trader reads the news.

Mar

8

SPYing the forest for rare daily drops worse than -3%, which (like recently) were preceeded by five days without drops worse than -1%; there were only six instances since 1993.

Checking SPY closes, identified the first subsequent close greater than the one before the big drop. Then counted wait between the pre-drop close and the first one higher than pre-drop level (trading days):

date       day ret  wait  maxdrop
03/21/03  -0.033  17  -0.055
01/28/02  -0.031  24  -0.051
01/03/00  -0.039  4    -0.083
08/26/98  -0.047  45  -0.118
04/10/97  -0.032  4    -0.032
03/07/96  -0.032  7    -0.036

The 4th column is the deepest decline from the pre 3% drop, before getting whole again. Note that the two from the recently avolatile mid-90's had fairly short waits and shallow pain compared to subsequent more volatile periods. 

Mar

7

Chris Cooper wrote: "I am trying to determine what lessons I should learn about my trading during the past week of large moves in the markets."

If the objective is consistent profits (positive returns), how can this be accomplished under all market conditions?

Persisting stable drift, such as the 8-month period that ended last week, requires long exposure/leverage. But as recently demonstrated, this approach has risk that cannot be controlled while maintaining exposure.

Even more ironic is the plight of those who concluded that the 00-03 bear market was "a big one," which would continue as a rational correction of the prior irrationalities. Or the OMWPS (older white males with pony-tails) still holding PALM and EMC from their days as millionares circa 19 and 99.

"Dang!"

Maybe the problem should be reframed: Consistent profits are illogical, because no one can anticipate 2/27's, 911s, nor 3/00s. (OK there were many who got one right; some got two, and even a few all 3. Just as magical as 9 heads in a row.)

The only state of risklessness is death. We reach for risk as we follow the path of the delusional Quixote in the moribund hunt for immortality.

Bill Rafter adds:

Depending on how one defines "consistent profits," they may be achievable to the extent that they are more frequent than random would dictate. We would suggest that the focus should be more on reducing the number or severity of periods of negative returns.

Our experience is as follows:

If your investment universe is large-cap stocks, you are going to be vulnerable to overall market declines. Your only escape is to find a tool/indicator that enables you to change your universe during those periods. Some sector rotation will work to the extent that you will be able to claim positive relative returns, but we don't call that "winning," although Wall Street generally does.

If your universe includes mid-cap, small-cap stocks, and foreign equities, you are going to be less vulnerable to overall declines, particularly if such declines occur over an extended period (e.g. 2000-03). But in a "whoosh" such as the market experienced last week, it is more likely that all will fall somewhat together until the panic subsides. If you can predict the whoosh, then good for you. But if you cannot, and your universe is equities, you must find some of those that will behave somewhat independent of the averages.

Brian J. Haag writes:

I've said this in response to various topics, but I will continue to beat the table on it:

The biggest reason so many people perceive increased correlations is because they look at everything in dollars. That's fine; but then they shouldn't be surprised when correlated moves happen. Any time you buy something for dollars, you are essentially selling dollars (or loaning them out, if you want to get all "swappy" about it). So if, after you have made your trade, people decide they like dollars more than your asset, you will lose. And sometimes they decide they want dollars more than just about anything else –and then almost everything goes down together.

It is extremely instructive when looking at a trade (even if you are relatively high-frequency) to price the asset in question in terms of other assets. For example, how much did US equities drop in terms of Euros? Or in terms of gold? It's not orthodox to think of long stocks/short gold as a hedged trade, but sometimes it is. The key is to have the trade on in the right amount and at the right time (of course, that's the key to every trade). But in any case the trade will have add a different kind of diversification, which is probably what you're really after. Call it a "correlation call."

Mar

6

DBV is Deutsche Bank's currency "carry trade" ETF. Curious about its correlation with stocks since inception (Sep. 06) to present, regressing daily change in DBV vs. change SPY:

Regression Statistics
Multiple R 0.45
R Square 0.20
Adjusted R Square 0.19
Standard Error 0.004
Observations 112

                         Intercept     X Variable
Coefficients        0.00018       0.315
Standard Error   0.00037       0.060
t Stat                 0.48000       5.200

There has been a high correlation between DBV and SPY on a daily basis. 

Mar

5

Can be used as adherent patchwork quilt over the (thin) skin, as excellent battle armor:

http://www.healthsquare.com/newrx/tes1438.htm

Mar

4

An article in the Sunday New York Times connects the success of the Russian tennis program with a combination of talent and very young training at Spartak tennis. The general idea is that myelinization (fatty insulation on nerve fibers) patterns may be affected by repetitive reinforcement at very young ages, which in turn may create athletes superior to those who train older.

This recalls the European invasion of off-road motorcycle racers in the 1960s, who dominated US motocross racers for about a decade. One of the great motocross champions was Swede Torsten Hallman, whose book, "Mr. Motocross," documents this period in the sport, and possibly gives a hint of causality. He began racing at a very young age with his older brothers and other experienced riders; perhaps the combination of talent, fearlessness, and highly repetitive early training helped mold a champion. In America of the 50s and 60s off-road motorcycling was not as evolved, and boys prior to this likely were not as exposed as those in Europe.

American racers today dominate motocross, much as Europeans did in the 60s. Unlike the 60s, many of today's racers grew up on motorcycles and racecourses open to young boys, and quite possibly their early-myelinated tracts helped carry them to the podium.

Early learning is also known to effect cognitive skills. Studies (functional scans) suggest brain centers associated with multiple language skills are different, depending on the age second languages are learned.

Do today's generation of traders and hedge-fund quants, who grew up immersed in computers and sophisticated games, have different brains than past generations scanning newspapers or tapes? Such a competitive cohort could be more aware of emotion-traps played out in past markets, and possibly contribute to ever increasing market efficiency (randomness).

Speaking of traps, looking at SPY daily returns back to 1993 there were 25 days that dropped more than 3%. Counting from the close of the big drop days and compounding forward 21 days, the market was higher 84% of the time (mean +5%). I made a chart of the compounded mean return following the 25 drops, with 95% CI bars.

Dates of declines, with 21 day forward compounded return:

Date Ret
03/24/03 1.06
09/27/02 1.08
09/03/02 0.95
08/05/02 1.07
07/19/02 1.13
07/18/02 1.06
07/10/02 0.99
01/29/02 1.01
09/20/01 1.09
09/17/01 1.06
04/03/01 1.13
03/12/01 0.99
01/05/01 1.05
04/14/00 1.08
01/28/00 1.01
01/04/00 1.02
09/30/98 1.08
08/31/98 1.06
08/27/98 1.02
08/04/98 0.93
01/09/98 1.11
10/27/97 1.09
08/15/97 1.06
04/11/97 1.14
03/08/96 1.02

Ken Smith remarks:

If the Russian youngsters abstain from alcohol all their lives they might be superior, otherwise no.

Myelinization deteriorates with alcohol consumption. "My nerves are shot" is a refrain by those who consume too much alcohol. I am surprised there are traders who consistently make money yet spend an inordinate amount of time in bars or sipping booze on the stern of streamlined yachts. It can't last.

Nerves get frazzled and traders deteriorate along with nerve protection.

Mar

2

From Wikipedia's entry on the Dust Bowl:

On November 11, 1933, a very strong dust storm stripped topsoil from desiccated South Dakota farmlands in just one of a series of bad dust storms that year. Then on May 11, 1934, a strong two-day dust storm removed massive amounts of Great Plains topsoil in one of the worst such storms of the Dust Bowl. The dust clouds blew all the way to Chicago where filth fell like snow, dumping the equivalent of four pounds of debris per person on the city. Several days later, the same storm reached cities in the east, such as Buffalo, Boston, New York City, and Washington, D.C. That winter, red snow fell on New England.

Abrupt changes occur as natural consequences of invisible butterfly activity in far corners of the planet. Temperature inversions occur in a minute. Ice age abrupt changes are historical facts. Spontaneous combustion occurs when least expected. Methane gas explosions occur unexpectedly. Tornadoes come in the middle of night, wiping out whole villages. Lightening strikes out of nowhere. Typhoons take lives and property when people least expect disaster.

Financial chaos occurs too. Abrupt drops in market prices are as historical as other natural disasters. We can say such drops are natural, are integral to the nature of things. The record is clear. Risk is inherent. Risk that is unaccountable, appears out of nowhere, cannot be foreseen.

Or can it be foreseen?

Nothing comes to mind that is more important to trading than finding hypotheses that provide insights for predicting the unforeseen. The Holy Grail is out there, somewhere, and as long as my mind is working I'll be looking for it.

Kim Zussman adds:

In comparison to recently a volatile stock market, Tuesday's 4% decline was quite unusual. In further tests, SP500 index daily returns (1980-07) were checked for instances of declines more than 3%. The absolute move was compared to the prior 20-day standard deviation, as a ratio, to rank big declines relative to recent market climate.

Variable = (abs(decline))/(standard deviation prior 20-day).

Turns out, Feb 27 was the biggest relative decline since 1989 and ranked 3/38, behind only such instances in 1989 and 1987 (and even greater than 10/97).

In regressions of the next 10 or 20-day returns as a function of the ratio, the following returns were positive and were not significantly related to the ratio.

Here are the dates and decline ratios (2/27 was 8.9):

Date |ret|/sdev
03/24/03 2.22
09/27/02 1.85
09/19/02 1.89
09/03/02 2.02
08/05/02 1.24
07/22/02 1.84
07/19/02 2.30
07/10/02 2.06
09/20/01 2.15
09/17/01 4.57
04/03/01 1.84
03/12/01 3.78
12/20/00 2.03
04/14/00 3.77
02/18/00 2.25
01/04/00 5.21
10/01/98 1.36
09/30/98 1.17
08/31/98 4.50
08/27/98 2.86
08/04/98 3.56
10/27/97 7.31
03/08/96 3.78
11/15/91 6.72
08/06/90 3.42
10/13/89 11.85
04/14/88 4.10
01/08/88 4.04
12/03/87 1.99
11/30/87 2.06
10/26/87 1.54
10/22/87 0.73
10/19/87 11.47
10/16/87 3.61
09/11/86 5.16
07/07/86 3.60
10/25/82 2.83
03/17/80 2.89

 

Feb

28

The size of yesterday's decline in stocks was in the top several since the 1990's, however, since volatility and the size of moves in general were greater in the past, one way to put today in context is in comparison to recent market behavior.

This kind of analysis could pertain to trader herding: Long periods of small moves punish those betting on big moves while rewarding small patterns (and vice versa for volatile markets). In terms of environmental pressure, recent market behavior selects for followers, but such easy feeding may occasionally lure them to extinction.

SPY daily returns since 1993 were checked for cases where the close to close move was bigger than 2% (up or down). At each such instance, the prior 100 day mean and standard deviation were calculated and used to determine how many (recent) standard deviation units the big move (in absolute terms) was.

For big moves compared to the prior 100 days, todays decline of almost 4% in SPY was over eight standard deviations more than the mean move; ranked 1st of all such moves in relation to standard deviation.

Feb

24

…and taxes too low, just wait:


Compared SP500 monthly returns since 1950 under Democratic and Republican presidents (from inaugurations in January). Turns out under Dems stocks do a little better, but not significantly:

Two-sample T for Dem ret vs Rep ret

                N       Mean      St Dev      SE Mean
Dem ret   685    0.0073    0.0408      0.0016 T=0.51
Rep ret    410    0.0060    0.0429      0.0021

Notice the standard deviation is a little lower for the party of redistribution, so maybe their appeal is less volatility?

Test for Equal Variances: Dem ret, Rep ret

95% Bonferroni confidence intervals for standard deviations

               N      Lower    St Dev      Upper
Dem ret  685   0.038     0.041        0.043
Rep ret   410   0.040     0.043        0.047

F-Test (normal distribution) Test statistic = 0.90, p-value = 0.252

Depending on your definition of what "is" is (as well as significance of DNA on children's clothing), Dems do have slightly lower market volatility (N.S.) as well as possibly better skills subduing the mistress.  

Feb

22

There's a Mistress who's sure all that glitters is gold
And she's climbing a stairway to heaven
And when she gets there she knows if your shorts are all closed
In a day it will go up even more so

Woe oh oh oh oh oh
And she's climbing a stairway to heaven

There's a chart on the wall but she wants to be sure
'Cause you know sometimes moves have two meanings
There's a page in the book by a bull always sings
Sometimes all of bear's hopes are misgivings

Woe oh oh oh oh oh
And she's drifting up stairways to heaven

There's a feeling I get when I look toward Wall Street
And my spirit is crying for leaving
In my dreams I have seen smell of smoke in tea leaves
And the voices of dead from two thousand

Woe oh oh oh oh oh
And she's buying a fairway at the seventh

And it's whispered that soon, if we all heed the tune
The bull piper will lead us to reason

And a new day will dawn for those who stand long [actual]
And the patterns will patter will all be reversals
And it makes me wonder (am I getting younger?)
If there are shortputs in your hedgerows
It's just a spring clean for the May Queen

Yes there are two paths you can go by
but in the long run
There's still time to realize the dependency on them

Feb

21

(That is to say, selling OTM Nasdaq puts + long high beta small caps at multi-year highs.)

Here in Southern California, the drug rehab business seems to be booming. In Malibu, there are several such facilities conveniently located across the road from The Colony where all the celebs are ensconced.

Lately these "clinics" (with 70% 1-year relapse rate), which charge thousands per day, have been good local employers of therapists, counselors, cooks, etc.

What about a Hollywood hedge: Company which simultaneously opens pricey rehab centers co-located with medical/dental offices staffed by foreign-trained doctors versed in the Rx's du jour (Vicodin, Percodan, Oxycontin, Methadone, Phenodammital, etc)?

Feb

20

Here is the quick and dirty of SP500 index since 1951, number of months up in each year, as well as year return (not shown regression results yr return vs number up RSQ64% T=10). 2006 was tied with 1954 for first place:

year #up yr ret
2006 11 13.6
2005 5 3.0
2004 9 9.0
2003 9 26.4
2002 4 -23.4
2001 6 -13.0
2000 4 -10.1
1999 7 19.5
1998 9 26.7
1997 9 31.0
1996 10 20.3
1995 10 34.1
1994 7 -1.5
1993 8 7.1
1992 8 4.5
1991 9 26.3
1990 5 -6.6
1989 8 27.3
1988 8 12.4
1987 8 2.0
1986 8 14.6
1985 7 26.3
1984 5 1.4
1983 8 17.3
1982 6 14.8
1981 4 -9.7
1980 9 25.8
1979 8 12.3
1978 7 1.1
1977 4 -11.5
1976 5 19.1
1975 8 31.5
1974 1 -29.7
1973 3 -17.4
1972 10 15.6
1971 6 10.8
1970 7 0.1
1969 4 -11.4
1968 8 7.7
1967 9 20.1
1966 4 -13.1
1965 7 9.1
1964 10 13.0
1963 7 18.9
1962 6 -11.8
1961 10 23.1
1960 6 -3.0
1959 8 8.5
1958 11 38.1
1957 5 -14.3
1956 6 2.6
1955 7 26.4
1954 10 45.0
1953 5 -6.6
1952 7 11.8
1951 6 16.3

Feb

20

On a television channel dedicated to religious topics, a clip of Daily Spec contributor Larry Williams appeared within a segment on Bible Codes. Larry, a journalism graduate, dug up information about Moses and wrote a whole book on the material he found. I was surprised to learn of Larry in this context, since he is best known for other marvelous achievements.

The Bible, according to cryptographers, is replete with predictions written centuries ago and found to be accurate by the events unfolding in our time.

Kudos to Larry for investing his time and expertise, his flair for language, in this remarkable project.

Nigel Davies writes:

This is highly analogous to searching for Codes within the markets, with many of the same problems applying. I understand that one of the bones of contention is the asking of the questions and that sceptics have found apparently similar Codes in Moby Dick and elsewhere.

One of my acquaintances ended up becoming ultra-religious on the strength of Bible Codes. I guess he might have wanted them to be there or he'd have tried to falsify them before donning the black hat.

Such proof would also contradict one of the major philosophical ideas of Judeo-Christianity in that any 'struggle with G-d' would essentially be over once 'proof' were discovered. I guess they figured it was more important to get bums on seats.

Adi Schnytzer replies:

There have been (unsuccessful) attempts by statisticians (but what would they know, right?) to refute the Codes, but I don't want to spoil Nigel's day with facts. If he really cared about this beyond heaping contumely on it, a little Googling would go a long way. 

Gordon Haave responds:

Please! Let's not get into fantasy. Numerous statisticians have shown what a fraud the Bible Code is. But, even if you want to go back and forth between competing websites, all you need to know is that there have been no "predictions" at all. After certain things happen, the Bible Coders go back and data-mine the bible to see if the event was predicted. When they predict something unlikely in advance (not a vague "there will be trouble between Israel and Palestine") then get back to me. 

Adi Schnytzer retorts:

Well, I guess I'm going to have to blind you with facts! The paper that studied the Codes was written by Doron Witztum, Eliyahu Rips, and Yoav Rosenberg and is entitled Equidistant Letter Sequences in the Book of Genesis. It was published in the very respectable journal Statistical Science in 1994. An attempted rebuttal was published by Brendan McKay, Dror Bar-Natan, Maya Bar-Hillel, and Gil Kalai in 1999. See Ralph Greenberg's site for links. For myself, this will do:

"The present work, represents serious research carried out by serious investigators. Since the interpretation of the phenomenon in question is enigmatic and controversial, one may want to demand a level of statistical significance beyond what would he demanded for more routine conclusions… The results obtained are sufficiently striking to deserve a wider audience and to encourage further study."

H. Furstenberg, the Hebrew University
I. Piatetski-Shapiro, Yale University
D. Kazhdan, Harvard University
J. Bernstein, Harvard University"

Laurent Glazier remarks:

I am not sure what this particular example might mean, but because a Canadian academic has succeeded in finding similar patterns in the text of Moby Dick it has been widely assumed that this invalidates all Bible Code findings. Similarly the artificial construction of small scale crop circles in England has led people to conclude that all such formations, including those on a huge scale, are artificial. These conclusions are appealing, and may be true, but are not logical.

The Bible Code discovery I found most intruiging was that the encoded occurrences of the Hebrew names for tree species are nearly all found hidden in the verses describing the Garden of Eden. Designing statistical tests to prove the likelihood or otherwise of such patterns, found in context, has caused great difficulty in the past to fine minds, largely because preconceptions can interfere in setting up the tests.

Testing for geometric patterns in star formations is another matter, especially Mark Vidler's unpublished discovery of the clustering of bright stars at multiples of 10 degrees from Regulas, as seen from Earth. Another issue entirely would be looking for a cause of any established patterns.

Kim Zussman adds:

The movie "Pi" (3.14159…) is about a mathematician who suffers from severe migraine and mental illness, and is deciphering hidden numerical codes like Fibonacci series in The Kabbalah. He is pursued by a rabbi who is also a mathematician.

G-d's commandment is to index: shouldering the risk of capitalism while not attempting to gamble or covet other people's wives is written in the WSJ between the mutual fund quotes.

Feb

19

The folowing excerpt from Samuel Beckett, is a backward-looking old man reviewing tapes of his youth with scorn and disgust not only at his former romantic primitivism, but again now at his own lonely state obsessed with bodily functions, perfunctorily organized painful memories, and drinking.

Tonight we saw this one-act play in an unusual way: a company which performs using sign language (and voice) for the deaf. And Krapp's signing and gesticulating made his frustration and pain remarkably more palpable, even for those of us unable to read signs.

The themes of love lost and the delicious impossibility of savoring the present until it is too late, are familiar memorials to all the many squandered opportunities of then and now.

Pause.

"Ah well . . ."

Pause. (Krapp rolls the tape of himself at age 39…notice how the answers to key questions are always edited out)

"Spiritually a year of profound gloom and indulgence until that memorable night in March at the end of the jetty, in the howling wind, never to be forgotten, when suddenly I saw the whole thing. The vision, at last. This fancy is what I have chiefly to record this evening, against the day when my work will be done and perhaps no place left in my memory, warm or cold, for the miracle that . . . (hesitates) . . . for the fire that set it alight. What I suddenly saw then was this, that the belief I had been going on all my life, namely–(Krapp switches off impatiently, winds tape foreword, switches on again)–great granite rocks the foam flying up in the light of the lighthouse and the wind-gauge spinning like a propeller, clear to me at last that the dark I have always struggled to keep under is in reality–(Krapp curses, switches off, winds tape foreword, switches on again)–unshatterable association until my dissolution of storm and night with the light of the understanding and the fire–(Krapp curses loader, switches off, winds tape foreword, switches on again)–my face in her breasts and my hand on her. We lay there without moving. But under us all moved, and moved us, gently, up and down, and from side to side."

Pause.

"Past midnight. Never knew such silence. The earth might be uninhabited."

Pause.

"Here I end–" Krapp switches off, winds tabe back, switches on again.

"–upper lake, with the punt, bathed off the bank, then pushed out into the stream and drifted. She lay stretched out on the floorboards with her hands under her head and her eyes closed. Sun blazing down, bit of a breeze, water nice and lively. I noticed a scratch on her thigh and asked her how she came by it. 'Picking gooseberries, she said.' I said again I thought it was hopeless and no good going on, and she agreed, without opening her eyes. (Pause.) I asked her to look at me and after a few moments–(pause)–after a few moments she did, but the eyes just slits, because of the glare. I bent over her to get them in the shadow and they opened. (Pause. Low.) Let me in. (Pause.) We drifted in among the flags and stuck. The way they went down, sighing, before the stem! (Pause.) I lay down across her with my face in her breasts and my hand on her. We lay there without moving. But under us all moved, and moved us, gently, up and down, and from side to side."

Pause.

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