Jan

9

Vic,

I hope all is well with you and the family. I took an online course on writing autobiographies and thought you might enjoy the attached.

Happy new year.

Love,

Howie
—

"Never give a sucker an even break," uttered by W.C. Fields in the 1941 movie so entitled could well be the credo of the pool hustler. What does this have to do with me? Fleecing the less proficient at what is termed pocket billiards in some circles was a significant source of income for me from age 15 through college. It accorded me a much needed supplement to my meager allowance and/or the part time jobs that I held as a student.

At Brighton 5'th Street at the same level as the elevated subway train that runs along Brighton Beach Avenue, there existed a 2400 square foot den of iniquity that housed about a dozen pool tables. This sea of slate covered by green felt was not a billiard emporium by any means. In the mid 1950s, it was frequented by many of the neighborhood's young toughs and assorted characters like Mutt, Teddy the Twitch, Pittsburgh, the Guzzer, Sonny, Sam the Communist, Blackie, and Miguel. Sonny was a big muscular homosexual whom nobody messed with. Silver haired Sam was the best shooter in the pool room. Blackie a middle aged man was a close second as he ran rack after rack in straight pool, never taking off his hat. Miguel, a bookie who ran a cut poker game and was later shot to death after balking at sharing profits with the mafia was about as good as Blackie. Added to the mix were me and some of my school friends including Harvey Keitel, who later became a well known actor and Mark Reiner, a basketball star.

The pool room was a hustler's haven where we hung out after school until 1:00 A.M. closing when we weren't playing ball. Substituting time there for homework, our formal education may have been diminished but the street smarts we acquired were more than ample compensation. The proprietors were two diminutive men in their sixties, Izzie and Charlie, a pro boxer of some renown in the '20s. Despite their age and small stature they ruled their roost with an iron will. Roost was more than a figure of speech in this instance as there was a creaky stairway that led to the roof that housed Charlie's pigeon coop. He had preceded Mike Tyson in pugilistic affinity for our fine feathered friends by 4 decades.

The absolute power that Izzie and Charlie had over all of us was the specter of being barred from entry into this hallowed ground and being relegated to hanging out in less exalted venues. After learning the rudiments of the game, I gradually acquired a modicum of skill by observation, shared tips, and practice. Making a stable "bridge" with the non-shooting hand; keeping one's head down; and a smooth stroke were basic requisites. Learning where the object ball must be hit by the Q-ball to direct it into a pocket is essential. Although the ability to make difficult shots comes in handy, getting the Q-ball into position for an easy shot after making the preceding one is what distinguishes the more accomplished practitioners of the game.

"Position" is achieved using various methods. "Drawback" to make the Q-ball go back in the direction from whence it came after striking the object ball is accomplished by striking it low and snapping the wrist imparting back spin. "Follow-up" to make the Q-ball go forward is effected by striking the upper portion. Either of those techniques can be applied in conjunction with "English" to make the Q-ball go left or right after hitting a rail by striking it on the left or right side respectively. How hard the Q-ball is struck determines the distance it will traverse and its ultimate position..

Most games were played for money with the stakes ranging from "time", the 50 cent per hour charge for use of the table to many dollars. There were various handicaps given to supposedly level the playing field but after blowing my allowance a few times, I realized that you never play better players. They are not only better, they are more knowledgeable and better able to figure the "spot" that will still give them the edge.

Accomplished hustlers rarely play better than needed to win and frequently let the "fish" win for small amounts and reel him in when the stakes are raised. Another gambling precept was always put the money up with someone who can be trusted to pay off (the "house": Izzie or Charlie in most cases). This was especially important for me at 6' 1" and 150 pounds against many of my more burly adversaries.

I never became a great pool shooter but the level of proficiency was not nearly as important as applying these principles. The goal was always to have a "lockup" - a game where there is virtually no chance to lose. Another way of putting this is, "Never give a sucker an even break". As mentioned, hustling was a significant source of income for me during my school days. In actuality, outsmarting and outplaying my opponents was more important to me than the extra cash in my pocket. One of the greatest compliments I ever received was years later when I ran into a guy that I had known casually and he said, "I remember you. You used to make your living in the pool room".

P.S. In retrospect this sounds pretty crass but I didn't cheat anybody. Everybody was trying to get the edge. I was just more successful at it than most.

Jan

9

Richard Kostelanetz writes:

My friend Victor drafted this essay toward his autobiographical The Education of a Speculator (Wiley. 1996), only to obey his publisher’s command to reduce personal material, which he did, nonetheless leaving behind in his book a luminous opening chapter about growing up amid the handball courts in Coney Island, New York. Self-published in 1994, this essay inspired my own memoirs published here. Since Victor’s Harvard memoir is unavailable elsewhere, I'm pleased to reprint an excerpt of it, with his permission and my gratitude. I’ve omitted a few digressions in the original, while adding between brackets some clarifications. You can find the whole essay in my latest book.

HARVARD COLLEGE: SQUASH & SCHOLARSHIP

Victor Niederhoffer

Copyright c 1993, 1994.

Education at Harvard has always favored the dilettante, coddled the "gentleman's C" scholar and allowed those who concentrated on extracurricular activities such as football, computer programming or musical theater to survive. During my undergraduate years (1960-1964), of the 1,500 freshmen entering each year only a handful wouldn't graduate. To earn a degree with honors was as easy as getting a mosquito bite at a nudist colony; more than half the class received this token, even in those days When you consider that at least half the student body at Harvard hardly attends more than half of their classes, and most of the others are so totally committed to their extra-curricular activities that they have no time for reading the assigned course work, let alone any outside readings, the graduation rate becomes an example of noblesse oblige.

I was one of those students who would have been hard-put to survive in any other college. I have always had a reluctance to attend large lectures. And most of the popular undergrad courses were given by eminent professors in halls like Sanders and Emerson where 500 to 1,000 were in attendance, if not wakefulness. The smells in a lecture hall turn me off. I can't breathe well with all that carbon dioxide circulating back into the air. Besides, I like the idea of feedback. The ideal form of education to me has always seemed to be sitting on a log with some erudite professor on one end and me on the other, talking about areas of common concern. In this day of copiers and desk-top publishing, there is no reason why lectures should be delivered in a no-feedback format. Notes could be prepared in advance and distributed to students. This would force the instructor to be concise and accurate, as the printed word

demands more presentational logic and rigor than does the spoken lecture. I have found that only at prestigious universities and cabals do the lecturers balk at providing written notes.

During the 2 or 3% of the time in my waking life I have truly been interested in becoming educated I have garnered 99% of my learning. I suspect I am typical in this regard. The challenge to the educator, then, is to motivate the student to desire to learn, and then to figure out how to provide the product when it is desired.

On a more mundane level, I have always found it difficult to stay awake at morning activities after a strenuous day of exercise. And my mornings were invariably taken up with a squash match, and then a rush to finish up my homework. Having not yet developed the art of blindfold checkers or chess play, only way I could stay awake in class was to buy an advance copy of the Suffolk Downs Racing Form and handicap the races. Many of the professors seemed to me to have been coerced into teaching the undergraduate courses because they were over the hill. Others seemed more interested in the handful of attractive [Rad]Cliffies in the class than in engaging in dialogues with shallow Harvard youth.

I subsequently learned how right I was in this regard, at least with respect to the University of Chicago, where I read rhapsodic letters of recommendation for Michelle S., my sweetheart during my time there, of the professors independently wrote about how they looked at her constantly while lecturing for a feel for how it was going, and how uplifting it was to receive her approval when they delivered a particularly apt précis, how they valued the feedback she provided with her smile, frown and other body language. I noted that they found her body language equally uplifting outside of the lecture halls. She told me that once she was having a departmental dinner with four professors and four students at a table at the Faculty Club, and that three of the professors independently passed her notes to meet them afterward for a continuation. Needless to say, she graduated summa cum laude, one of two of her class (1966) to do so. As I was to learn some years later [while teaching] at the University of California at Berkeley, this incident was merely one example of a tendency endemic to academia.

Even with the policy of noblesse oblige, my education at Harvard was in jeopardy. Professor Williams, who taught my Introduction to Logic course, one day caught me in the act: he suddenly stopped his lecture, walked to my seat and grabbed my Racing Form, loudly upbraiding me in front of 500 eager scholars for my rudeness in handicapping races while he was droning on about such fascinating subjects as the difference between probabilities based on relative frequencies and degree of belief, and the Popperian view of probability as a revised estimate of one's knowledge based on various hypothetical experiments.

Since that time, I have found only one satisfactory motivation of probability. This was by Richard Hamming, a professor at the U.S. Naval Postgraduate School. Strangely enough many 'experts on probability theory have worked at military installations, especially in England. Hamming's view is that where you have events in a sample space, such as tosses of a die, that are symmetric, or interchangeable, the probabilities must all be equal. So if you take the number of events possible in the space, the probability of each event must be one divided by the number of events. As Hamming remarks in a typical passage, "Although very likely you have been interpreting many of the results in terms of frequencies, probability is still a measure derived from the symmetry of the initial situation." (The Art of Probability, 1991).

His extensions are sufficient to resolve all the philosophical questions that were the meat and potatoes of Professor Williams' class.

But first, I had to get through my classes without unduly antagonizing my teachers, as my performance on exams would never be sufficient to undo any bad impressions made on the professor, nor would I have enough sex appeal to barter for a good grade.

My solution was one of my masterpieces. I noted that most of my teachers were graduate students obviously down and out in terms of money, but who were teaching for the prestige and potential career advancement. When I saw them, they always seemed to be grinding away at their own course work in an effort to reverse their bad fortunes by garnering a job. Even then, Eastern Illinois University favored [hiring] assistant professors who had put in a stint as an adjunct assistant professor at Harvard earlier in their careers.

Now Harvard has always been masterful at maintaining low salaries among their employees. One of their techniques was to refuse to hire any of their graduate students until they had taught at some other school for at least five years. This policy was already famous in those days for having lost Paul Samuelson, the famed Nobel Prize-winning mathematical economist who popularized Keynesian economics in his best-selling textbooks of the 1960s, and who can still be counted on to trot out his theory favoring greater government spending and higher taxes for the benefit of any sitting or would-be President. Samuelson's doctoral thesis, written at Harvard in 1955, was entitled "The Foundations of Mathematical Economics", in which he quantified the interaction of the multiplier and the accelerator in fomenting government's impact on total output. This study is still considered one of the classics in the field, but it wasn't sufficient to break the Harvard taboo against hiring its own.

But there was a quid pro quo for the graduate students. In exchange for low wages, and no chance for tenure, the grad students were graded on a very high curve. The average grade in most of the graduate courses, A-, was considered quite good in those days before grade inflation, egalitarian marking, and numerous pass/fail courses — all of which have made most grade-point averages as meaningful as the chants of the whirling Dervishes.

I quickly realized that if I confined myself to graduate courses as an undergraduate, that even if I consistently copped the worst grade in the class, I would still be likely to pull a B+. And this would more than compensate for my bad study habits.

I was so successful at this approach that when the time came for a final class ranking of all the economics majors at Harvard I came in second out of 150. My technique did not pass unnoticed. Any time an undergraduate of apparently limited intellectual accomplishment took on a curriculum of mainly graduate courses he or she was said to be "Niederhoffering the curriculum." .

Years later, I ran into Professor Wassily Leontief, founder of input-output economics, at a [George] Soros party. Soros loves to stock his foundations with distinguished, collectivist emigrés from Eastern Europe and Russia. Leontief was at that time serving on the boards of some of Soros' foundations. He had been my professor in 1962 in graduate-level Microeconomics 201, where I had received a B+, the worst grade in the class. The Professor's basic idea, that there are fixed technological relations between the output of an economy and the raw materials necessary to produce them, makes about as much sense as the Russian notion that there are some genius master-planners in Washington responsible for all the wonderful variety of goods on American supermarket shelves. Nevertheless, Leontief had one of the sharpest minds I have ever encountered. He remembered me, after 25 years, and said, "Here you are Niederhoffering the commodity markets by picking up the detritus of Soros' trades, just as you did in my classes." As I was surrounded by government officials, foundation mavens, administrators, philantropists and other liberal types — as is the norm at a Soros party (and indeed at most other New York parties I have attended) — I held my tongue and played the respectful guest.

* * *

The Harvard Club of New York each year collects a scholarship fund for needy students with outstanding academic records. Somehow my credentials and my experiences at my high school, where the principal was actively working to keep me out of college, struck a responsive chord in some of the members of the scholarship committee, and I consequently was a beneficiary. Some of them, apparently, had also once been blackballed, and instead of working against me, my principal's active lobbying actually helped me. My experience coaching at Kaplan and the resulting improvement in my board scores didn't hurt either.

Even with the scholarship, my parents were making a heroic sacrifice to keep me at school. The then staggering tuition and board of $3,500 per year represented 25% of their pre-tax income. The balance of $1,000 they gave me for out-of-pocket expenses added further to their debt. It seemed only fair that I should reduce the burden by getting a job.

My first job at Harvard was in the Student Post Office. My duties were to sort the mail and run the route, delivering and picking up mail at all departments on the north side of the campus. The pay was the munificent sum of$1.80 an hour. After a few days on the job, I graduated to full-time mail carrier. My boss, an elderly Irishman with white hair and a Boston accent, was from the old school. His shoes were polished to a gleaming luster and his tie choked his neck in a perfect knot. As I left for a delivery one day in typical Boston fall weather, freezing rain with winds in the 50 mph range, he gave me some sharp advice. "Keep your head on your shoulders and whatever you do, don't miss picking up the mail at the Watson Laboratory in Biology. Since that professor won that Nobel Prize, he's thinks he owns the world, and when the mail isn't picked up twice a day, he calls up to complain. Last time we missed him, I found myself apologizing to a vice president of the corporation. "

Yes, Mr. McCarthy."

I have never been too good at sense of direction, and now, in retrospect, I see I was not well-suited to a career in mail carrying. My ideal career would probably be as the women's squash coach at a large university or director of research at a flavoring laboratory. But I needed the money from that mail job badly. Perhaps I was distracted by the rain, the secretary, or my studies, but I did manage to forget to pick up at Watson's lab. My boss's dismissal of me was abrupt.

"You're fired. How they let incompetents like you into Harvard, I'll never know. You don't even have enough sense to get out of the rain and come inside to pick up at the one place I told you over and over again not to forget. Get the Hades out of here and never come back."

I was crestfallen. This was the final blow. No way was I going to ask my parents for more money. It looked like I would be going back to Brooklyn College after all. Life seemed hopeless, so I called my father up and gave him the bad news.

"Don't worry about it. This could be a blessing in disguise. Remember what happened to Winston Churchill, as a young man in the British Army, on his arrival in India. Eager to disembark from a small boat that was tossing on the waves, he grabbed an iron ring fastened to the pier just as the boat fell sharply, and dislocated his shoulder. This injury stayed with him the rest of his life, and plagued him in every physical activity he undertook from then on, from polo games, to speaking in Parliament, to war.

"But as he says in his book, My Early Life, the injury probably saved his life during the battle of Omdurman. He was the only one in his cavalry to be unable to swing his sabre; but knowing his shoulder might give out at any time, he had purchased one of the newly-invented Mauser automatic pistols, and had practiced with it assiduously in preparation for the campaign. In one cavalry charge, he saw most of his colleagues cut to pieces around him by the dervishes' scimitars in their fierce resistance. But his skill with the Mauser saved his life, and he wrote of the experience, that one never knows when some apparent misfortune might actuaJly save one from something much worse.

"So remember, what seems to be a tragedy might actually be a lifesaver"
 

(to be continued).

RIchard Kostelanetz Books on Amazon

Richard Kostelanetz eBooks on Kindle

Dec

22

1. There is a critical point in the market, a critical decision that the market gods weigh on a scale like Zeus with his balance scale deciding whether Achilles or Hector will win, that determines the market fate, and it is key and should be the focus of all news stories and market considerations but never is.


2. Never trust anyone but your family and best friend because everyone is disloyal in a pinch. Peleus was left for dead by his father in law after killing his brother in law to become ruler and this led to the Trojan war. Caesar trusted his best friends but they turned on him when an opportunity for power, money, and romance reared its ugly head.

3. Deception is key. The most successful Greek was the Deceiver Odysseus, and he tricked everyone he dealt with as the market tries to trick you with Odyssean power.

4. The goal is always to come home. Odysseus went home, as does the market. The only loyal ones were the wife and son and the best servant. The market retraces and comes home to break even an inordinate number of times.

5. Never mix romance with business or the market. The Trojan was was started by Paris intervening in romance and being swept off his feet by Aphrodite, and Achilles killed tens of thousands and prolonged the war by 10 years when Menelaus stole his mistress.

6. Don't try to walk with the Gods. Peleus married a half God and married her the last time the Gods and mortals mingled at a celebration and it caused him to be the most distressful of men. Trying to emulate Soros or the other greats is the seed of destruction.

7. Okay, give me the rest. And correct and tighten the above. I'm out of my depth but wanted to get the gist across.

Ken Drees comments:

Like using a mirror against Medusa, one must plan against the adversary and sometimes use their expected attacks to beat them. Like shielding oneself from the siren song, one must be totally prepared, seek council before the journey (the trade) about what dangers are expected.

Also, it seems every entity in mythology had a weak spot. It's probably best to note these weaknesses in your thinking and in your emotions, not how can I beat the market, but how can the market beat me today?

Bill Rafter writes:

The greatest two rules:

(1) nothing to excess and (2) know yourself.

Pete Earle writes:

One lesson from mythology which resonates with me is the oracles/prophets/predictors almost always forecast correctly, but rarely in an obvious or immediately relevant way. The predictions made are usually realized, but not before taking extremely circuitous, and usually counterintuitive ways to reach fulfillment.

In my experience, predictions regarding the direction of equities or commodities inferred from option markets so often prove accurate…but only after traveling in the most wrong, most unanticipated ways.

Alston Mabry responds: 

Pete, I think of that as "shaking the tree", i.e., we're gonna get there, but we're gonna shake out as many weak hands as we can along the way.

Peter Earle replies: 

Absolutely. Stop-running and the like as the "gods" way of seeing who's "worthy"; who can withstand the flood, the fire, the sturm und drang.

Jim Lackey writes: 

In 2008 I learned from Ryan Carlson– Sisyphus. There is a little useless book Wit and Wisdom from Wallstreet. So many of the quotes are the exact opposite from 3 pages ago… yet for a day they are seemingly sage advice. Worse for the long term. It's all good advice, yet in the mean time we must eat, and in the long term we all end up dust in the wind.

Traders lament when we miss profits. We are miserable when we lose. If we are not careful we are never happy. I have the habit of having to work myself up into a fury to win a race, pass a test or trade. My wife calls it "business mode" everyone else calls it being a jerk. Finally this year I have the ability to take a loss and this week miss a glorious rally and profit… yet at 4:20 PM its over. I am done pushing the boulder back up the hill for the day. I will return at 1:30am or by 7am, all but two business days a year. It can be torture if you do not like to trade, but if you love it…

Here is a quote from my kids music, "This is Our Science" by Astronautalis: "Our work is never done/ We are Sisyphus".

p.s I notice that if I don't like the rap beats I miss quite a bit of new poetry. I hear my teenagers say random lines and say what! That is amazing. Then I hear the song and say no wonder I never heard that line before. Damn drum machines.

Jack Tierney adds: 

Recently I've been reading up on complexity, system dynamics, and the unpredictable consequences that occur when tinkering with non-linear systems. The markets seems subject to all and, if I'm even remotely correct in interpreting the literature, there's only one certainty: expecting linear consequences (e.g, provide banks with more liquidity, bringing about an increase in business borrowing, resulting in a resurgent economy) is rarely, if ever, realized.

Instead, the unseen effects on unimagined factors, almost always derails the logic train. A source I've referred to on occasion is "Cassandra's legacy." Appropriately enough, the custodian of that site provides an interesting historical allegory, in the form of Goth Princess/Roman Empress, Galla Placidia, and her part in the demise of the Roman Empire. It's a very lengthy read and, unless history like this interests you, tough going. So, a few highlights:

"Managing any large structure is difficult and we tend to do it badly; a whole empire may be an especially difficult case. To do it well, we would need to use a method what I mentioned before: system dynamics; which is a way to describe systems and the relation of the various elements that compose them.

"…every time that the Romans fought the Barbarians, they could win or lose, but each battle made the Empire a little poorer and a little weaker. The empire was using resources that could not be replaced; non-renewable resources, as we would say today….the solution was not more troops but less troops. It was not more imperial bureaucracy but less imperial bureaucracy, not more taxes but less taxes.

"In the end, the solution was right there and it was simple: it was Middle Ages. Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages.

"What Placidia could do as an Empress was, mainly, to enact laws….It seems that Placidia was acting according to her style; ease the unavoidable, don't fight it….Placidia forbade the coloni, the peasants bound to the land, to enlist in the army. That deprived the army of one of its sources of manpower and we may imagine that it greatly weakened it. Another law enacted by Placidia, allowed the great landowners to tax their subjects themselves. This deprived the Imperial Court of its main source of revenues."

Stefan Jovanovich comments:

As much as King George's scribbler Edmund Gibbon despised Christianity, he had the Middle Ages even more because its bureaucracies were the worst of all — local and mean and stupid.

Professor Bard should revise his history. What he wrote here — "Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages." - is nonsense.

The Roman Empire's tax collections were always "local"; that is why Roman politicians were willing to pay such enormous bribes to be appointed provincial governors. The legions were also "local"; the Empire's expansion came from granting "foreigners" - i.e. the people we would today call Spaniards, French and Syrians - the privileges of citizenship, which meant they were also qualified to serve in the local legions. This was equally true under the Republic; "crossing the Rubicon" would not persist as a bad metaphor if Rome's soldiery had been centralized.

As for economics, whatever the "terrible expenses of the imperial court", they were nothing compared to the ravages of coin clipping. The solidus of the Eastern Empire maintained an unchanged weight and measure for 4+ centuries - a record that is likely never to be broken. (It exceeds the span of sound money for the British Empire and the United States of America put together.) After Princess Placida's day coinage, under the wonderful decentralization of the Middle Ages, effectively disappeared.

"Dearth of provisions, too, increased by degrees, and the scarcity of good money was so great, from its being counterfeited, that, sometimes out of ten or more shillings, hardly a dozen pence would be received. The king himself was reported to have ordered the weight of the penny, as established in King Henry's time, to be reduced, because, having exhausted the vast treasures of his predecessor, he was unable to provide for the expense of so many soldiers. All things, then, became venal in England; and churches and abbeys were no longer secretly, but even publicly exposed to sale." - William of Malmsbury wrote this in 1140 AD - the period that Professor Bard praises so highly for its progress over the degeneracies of the Empire.

Hume deserves the last word on this and most other subjects that interested him.

"Mankind are so much the same, in all times and places, that history informs us of nothing new or strange in this particular. Its chief use is only to discover the constant and universal principles of human nature."

Easan Katir adds: 

The Greeks have fooled people since the Bronze Age. Instead of a horse, they now have Trojan bonds.

Steve Ellison comments: 

Jack, the Atlantic had an article about why projects that had successful pilots often failed when rolled out to the general population.

Why Pilot Projects Fail– Here are some excerpts:

Promising pilot projects often don't scale … Rolling something out across an existing system is substantially different from even a well run test, and often, it simply doesn't translate.
Sometimes the 'success' of the earlier project was simply a result of random chance …

Sometimes the success was due to what you might call a 'hidden parameter', something that researchers don't realize is affecting their test. Remember the New Coke debacle? …

Sometimes the success was due to the high quality, fully committed staff. …

Sometimes the program becomes unmanageable as it gets larger. You can think about all sorts of technical issues, where architectures that work for a few nodes completely break down when too many connections or users are added. …

Sometimes the results are survivor bias. This is an especially big problem with studying health care, and the poor. Health care, because compliance rates are quite low (by one estimate I heard, something like 3/4 of the blood pressure medication prescribed is not being taken 9 months in) and the poor, because their lives are chaotic and they tend to move around a lot … In the end, you've got a study of unusually compliant and stable people (who may be different in all sorts of ways) and oops! that's not what the general population looks like.

Dec

22

I wonder if there is anything economic to be learned from this chart from Mark Perry's blog. The per-capita growth from 1810 to 1850 was more than 120% in 40 years. According to the wiki, by 1860, manufacturing (primarily limited to the Northeast) accounted for 30% of the nation's income, with cotton cloth production the leading industry. This indicates that some strong contrast/conflicts between the industrial northeast and the farming south existed.

Is it reasonable to believe that these economic conflicts were among the underlying causes for the eventual war?

Obviously the economic conflicts were the result of a fast and an uneven development. Perhaps it serves as a very valuable indicator for today.

Dec

16

I have heard that about 25 percent of the population are introverts, but as many as 60 percent of gifted children are introverts.

I don't find this strange. But our understanding about the brain is too minimal to explain for instance the intrinsic links between being an introvert and being gifted. In addition, the concept of being gifted is very vague– it perhaps simply means that he/she can perform something somewhat better than an ordinary human.

With all these unknowns, many wonders often appear to us.

Dec

16

One particularly nasty feature regarding the housing market which I am surprised to have seen no writing on is the treatment of capital loss. Losses on primary residences can not be deducted from other capital gains. What you eat, so to speak, you must pay tax again on making that capital back. Using a 20% tax rate of say 6 trillion in lost housing capital, that is roughly $1.2 trillion that the public will have to pay in incremental tax. (true if housing rebounds the loss may not be realized or incurred. Also true that some of the capital loss may be transferred to the banks if owner walk on the loan) But thinking like a politician and using government finance should they not include this potential for windfall tax receipts over the next decade or so as new "revenue". And why not just bring it all forward to 2012 and solve the whole budget gap for next year.

Dec

15

Here's a link to my article about Bo Keeley "The Legend of Bo Keeley grows". They or I got the photo credits goofed up. Sorry. Story comes out in NYC, SF, LA, Seattle, Austin, TX, DC, Chicago, Shanghai, London. Welcome home.

Ken Drees sends us a poem to honor Bo's welfare: 

.

.

.

Bo Left Us Dead

(Written after reflection on good news of Bo Keely's safety)

Finished Bo's book, just put it down,
Next thing I hear
Sad tragic news,
Keely's not to be found.
No, not in anytown,
Got himself killed this time 'roun.

Them Mex think he's undercover narc,
Down there, too tall and off white
He sticks out,
One too many rides in the dark.
DocBo, The speculator surmises,
Has run plum out of lucky devices.

No facebook, email or phone, G*d please help Bo,
Sadly, its over for him;
No more of his stories, and that grin.
Please bring him back whole.
But if he's truly dead Lord,
Least his soul's in your yard.

Praying is over, Bo left us dead,
No more tales, rails or boxes
To inspire, tranfix,
To dazzle our heads.
Keely has jumped one reefer too far,
Somber, even the bulls at roundhouse bar.

And then like rain that drought licks for,
Bo's Alive for sure. For sure!
Been in the desert, all this time,
Playing with spiders, rocks, and slime.
Those mental puts on Bo expired,
Luckily not the man, that a freight train sired.

So comes the end of this tiny tale
Let the celebration begin,
Dead, now alive, its all win-win.
February's, cruel winter's gale,
Will no doubt herald,
A cupid hearted Hobo, quite undead sans peril.

Dec

14

Some one was telling me they thought "shutting down Hillarycare gave us about 15 years of safety from the cancer that is big government intrusion into our lives. Repealing Obamacare could protect us for, possibly the rest of our lives."

Our medical colleagues may not believe that. Insurance companies picked up the ball that Bill/Hill dropped (the meme that health care is too expensive) and turned free enterprise medical care into civil service (for the insurance companies).

The insurance bloc is government too.

Dec

7

Small cap stock out-performance explains at some or all of the equal-weighted SP500 out performing the cap-weighted version. The attached is the ratio of two tradeable ETF's: IWM (Russell 2000 stocks) and SPY (SP500 cap weighted), from May 2000 to present.

On a weekly-return basis, though IWM was was more than 2X higher than SPY they were not significantly different:

Two-Sample T-Test and CI: IWM week, SPY week

Two-sample T for IWM week vs SPY week

         N    Mean   StDev  SE Mean
IWM week  601  0.0016  0.0341   0.0014 T=0.6

SPY week  601  0.0006  0.0271   0.0011 

Though as expected IWM did have significantly higher volatility:

Test for Equal Variances: IWM week, SPY week

95% Bonferroni confidence intervals for standard deviations

      N      Lower      StDev      Upper

IWM week  601  0.0320  0.0341  0.0364
SPY week  601  0.0254  0.0271  0.0289

F-Test (normal distribution)
Test statistic = 1.58, p-value = 0.000

Levene's Test (any continuous distribution)
Test statistic = 24.34, p-value = 0.000

Dec

7

I belong to the final stage of the baby boom, being born in 1963. My generation is starting to pay the bill for decades of overspending and welfare supported by debt. We are getting older at a time when structural growth is over. The organization where I work in Italy, like many others, has been going from rationalizations, budget reductions and downsizing over the past 10 years. Hard to build a career in this environment. The only way to make money is for those clever enough to continue milking what is left of the government cow. As parties and technocrats continue to believe that raising taxes is the only solution to the crisis we have to expect long and tough times ahead. In the meanwhile I hear a lot of people willing to retire early.

Nov

30

Economist David D. Friedman will be speaking on the use of free markets to solve difficult problems not usually thought of as market problems, on Thursday December 1, 2011 at General Society Library, 20 West 44 St., NYC, between 5th and 6th Aves, approx 7:30pm.

Nov

25

Vic recently stated that we were not in a range bound market. I have held that we are in a long term secular bear market since at least 2000, and one could make an argument that we've been in a bear market since 1998.

When I look at the S&P monthly closing values starting in Dec. 1998, I see a figure of: 1229

When I look at the S&P monthly closing values through October 2001, I see a figure of 1253

Eyeballing the chart, I see a high of around 1549 and a low of around 735 during that time frame. I see the high approached several times and the low approached several times.

How can we trade in the above range for the last decade+ and it not considered to be a range bound market?

I've always contended on this list that secular bear markets and secular bull markets each have certain characteristics that you see to help you recognize them.

Bulls have lower volatility and have a general upward trend. They do have pullbacks and crashes (i.e. the bull of 1982 - 2000 had the 1987 crash). But as a general rule of thumb, you can set your sails and just ride the bull winds to profits.

Examples of secular bulls include, the roaring 20s, the 1950s/60s, the 1980s/90s.

Bears have higher volatility (often much, much higher). They shot up and down but basically end up where they started and often end up where the started several times. You need to pull your sails down, turn on your engine and use a lot of energy to navigate the rough waters of the bear.

Examples of secular bear markets include, the Dust Bowl Years, the Great Depression, the 1970s, 2000 - ?

Not being a counter or someone with great math or statistical skills, I'm sure that there is a way to refute my point. I'd be interested in better understanding where I'm wrong and where I might be right.

Steve Ellison writes: 

Mr. Brooks has suggested that it is better to invest when stocks are in an upward trend with low volatility and to stay away when stocks are in a downward trend with high volatility.

Since Mr. Brooks is talking about very long periods, I used S&P 500 index data back to 1950 and Dow Jones Industrial Average data from 1928 to 1949. For each day I calculated a sort of normalized 1-year VIC: the average of the daily absolute percentage changes over the past year. Beginning on the day after Pearl Harbor, I determined the median 1-year volatility of all the previous dates. Thus, using data that could theoretically have been known at the time, I classified the 1-year volatility each day as high or low.

If the index was higher than a year previously, I categorized the trend as up; otherwise the trend was down.

I considered a bull market to be in effect if the previous day's close was higher than the close a year earlier and the previous day's 1-year volatility was below the historical median. I considered a bear market to be in effect if the previous day's close was lower than the close a year earlier, and the previous day's 1-year volatility was above the historical median. I considered all other days to be neutral.

By this method, a bull market was in effect continuously from March 12, 1992 to March 30, 1994. The market then flipped several times between bullish and neutral as volatility was low, but prices in 1994 sometimes dropped below year-earlier levels. The market was then continually bullish from February 7, 1995 to March 31, 1997. The market then moved to neutral status as volatility rose. Except for two days in October 1998 when a bear market was in effect, the market was neutral until November 10, 2000, when it moved to bearish. It stayed bearish for all but 6 days until June 2003. There was a continuous bull market from July 12, 2004 to October 26, 2007.

There was a continuous bear market from January 14, 2008 to October 7, 2009. Then the market was neutral (up trend but high volatility) until August 9, 2011. It was bearish for one day and then flipped back to neutral. There have been a few more flips between neutral and bearish, and after Wednesday's close, this indicator has again flipped from neutral to bearish.

Using this method to contemporaneously identify bull and bear markets, I got the following results since 1941.
 

                                 Number    Average      Value of $1000
Type of market        of days    daily return  invested on these days only
Bull                             8118       0.034%       $16335

Bear                            2872       0.018%         $1695

Neutral (downtrend    2163       0.004%         $1094

but low volatility)

Neutral (uptrend         4463        0.031%         $3933

but high volatility)

It does appear that investing in contemporaneously recognizable bull markets is better than investing in bear markets. But wait–is that just by random chance? For example, see the following graph of the cumulative results of 300 coin flips. The underlying process is completely random, but there appeared to be a long heads trend, followed by a Fibonacci retracement.

To answer this question, I ran 500 simulations in which I randomly chose 8118 of the daily returns since 1941. I then compared the total returns of these random selections to the total return of the 8118 bull market days. The actual return of the bull market days was in the 82nd percentile of the randomly generated 8118-day returns. Thus, I estimate the outperformance of bull market days has p=0.18 and falls short of statistical significance.
 

Charles Pennington writes: 

I think Scott is saying that the market has been bounded ON THE UPSIDE, never going much above 1500 at any time over the past >10 years, although bumping up against that level a few times.

"Range bound" should mean that the market is tightly bound both on the upside and the downside–it has a tight RANGE. I think that when Vitaliy wrote his book, he was expecting that the market would have a true tight range going forward, and his readers might fairly have concluded it would be a good idea to sell some puts and calls to capitalize on the forthcoming tight range. Instead, of course, the market fell 50%. So Vitaliy re-interpreted his prediction to mean "bounded on the upside".

Victor Niederhoffer comments:

Yes. The professor has captured the gist of the promotion and huckstering and conversion of property and putting on the pretty face to hook the rich so typical of those raised in that environ that caused one to boot him off the site.

Anatoly Veltman writes: 

May I twist the subject slightly…

We all remember Greenspan's only explanation of unusually long subdued inflationary pressures over the 90s decade and into the 00 decade: super-efficiency, labor achievements. And then came the real-estate bubble.

Bernanke's issue appears more deflation than inflation. However, the redistribution of means achieved politically creates somewhat of an asset bubble relative to real economy.So remembering that market is never favorite to go down, I'm still struggling with these fears: what if market's only nominal robustness is purely a devaluation phenomenon? Is equity investment then justified, or is some sort of hard-money is just as well (not gold necessarily– maybe oil, gas, agri commodities)?

Paolo Pezzutti writes:

Hmm…. Maybe gold or oil? It does not seem that for the moment gas is appealing to investors. That is why I decided to buy it, contrarian as usual, and UNG went down from12$ to 8$. And when I bought it I was thinking that it could not possibly go lower given the steep fall already printed. After all gas is something tangible and oil was relatively much more expensive. Who knows, may be things will change when someone will demonstrate that shale fracturing techniques damage the environment. If this downtrend continues soon they will gas for free at the corner of the Streets…

Bruno Ombreux comments: 

I don't understand this concept of "investing" in a commodity.

A commodity is meant to be produced then consumed. How can anyone invest in that? It does not pay an interest or a dividend. You eat it, burnt it… Just taking one extreme: power. It is not storable. Supply must equal demand all the time.

I cannot think of anybody idiot enough to invest in commodities except hedge funds, who are really idiots.

No?

p.s. Gold is the only exception. Some people say it is a commodity. I do not agree but let us accept this to avid a semantic debate. You cannot invest in it but it is money. So you can buy it and keep it. But you don't really "invest" in gold.

Just to be clear, one can "speculate" in a commodity, as long as it is storable. As Keynes brilliantly showed, the economic role of the speculator is storage. So not only can you "speculate" but also you make the world a little bit better. But "invest"? Come on… 

Gibbons Burke replies:

Gary North, in an ebook he provides for free on his website, has an interesting description of times when commodities become money:

Joseph in Egypt

Now let’s take a real historical example, the famine era in Egypt. Joseph had warned the Pharaoh of the famine to come, and for seven years, the Pharaoh’s agents had collected one-fifth of the harvest and had stored it in granaries. Then the famine hit. The crops failed. The people of nearby Canaan also suffered. No one had enough food.

And Joseph gathered up all the money that was found in the land of Egypt and in the land of Canaan, for the grain which they bought; and Joseph brought the money into Pharaoh’s house. So when the money failed in the land of Egypt and in the land of Canaan, all the Egyptians came to Joseph and said, “Give us bread, for why should we die in your presence? For the money has failed” (Genesis 47:14-15).

What did they mean, “the money has failed”? They meant simply that compared to the value of life-giving grain, the money was worth nothing. Why would a man facing starvation want to give up his remaining supply of grain in order to get some money? What good would the money do him? He wanted life, not money, and grain offered life.

Because the money “failed,” it had fallen to almost zero value. Thus, in order to buy food, the people had been forced to spend all of their money. Now they were without food or money.

And Joseph said, Give your livestock, and I will give you bread for your cattle, if the money is gone. So they brought their livestock to Joseph: and Joseph gave them bread in exchange for the horses, the flocks, the cattle of the herds, and for the donkeys. Thus he fed them with bread in exchange for all their livestock that year (Genesis 47:16-17).

Were the Egyptians foolish? After all, all those cattle and horses were useful. But animals eat grain. The grain was too valuable during a famine to feed to animals. All that the animals were worth was whatever they would bring as food, and in Egypt, the meat wouldn’t last long. Dead animals in a desert country don’t remain valuable very long. Why not trade animals for grain, which survives the heat? The only reason the Pharaoh had any use for the animals and money is that he knew he had enough food to survive the famine. He knew that it would eventually end. Thus, he would be the owner of all the wealth of Egypt at the end of the famine. For him, the exchange was a good deal, but only because he had the food, and the army to defend it, and he also possessed what he believed to be accurate knowledge concerning when the famine would end. Joseph had told him it would last seven years.

Because he had a surplus of grain beyond mere survival, and because he had “inside information” about the duration of the famine, money and animals were valuable to the Pharaoh, even though they were not valuable to the people. Thus, a voluntary exchange became profitable for both sides. The Pharaoh gave up grain for goods that would again become very valuable in the future. The Egyptians gave up goods worth very little to them in the present in order to get absolutely vital present goods. Each side gave up something less valuable in exchange for something more valuable. Each side improved its economic position. Each side therefore gained in the transaction.

Notice here that we are not dealing with any so-called “equality of exchange.” This theory says that people exchange goods only when the goods are of equal value. It is true that in the marketplace, they may be of equal price, but they are not of equal value in the minds of the traders. What we are always dealing with in the case of voluntary exchange is inequality of exchange. One person wants to possess what the other person has more than he wants to keep what he already has. Because each person evaluates what the other has as more valuable, a voluntary exchange takes place.

Egypt’s money failed. In fact, grain became the new form of money, although the Bible doesn’t say this explicitly. What it says is that everyone was willing to trade whatever he had of former value in order to buy food. But if some item is what everyone wants, then we can say that it’s the true money.

The Properties of Money

Why would grain have served as money? Because it had the five essential characteristics that all forms of money must have:

1. Divisibility
2. Portability
3. Durability
4. Recognizability
5. Scarcity (high value in relation to volume and weight)

Normally, grain doesn’t function as money. Why not? Because of characteristic number five. A particular cup of grain doesn’t possess high value, at least not in comparison to a cup of diamonds or a cup of gold coins. The buyer thinks to himself, “There’s lots more where that came from.” Normally, he’s correct; there is a lot more grain where that came from. But not during a famine.

Why divisibility? Because you need to count things. Five ounces of this for a brand-new that. Only three ounces for a used that. Both the buyer and the seller need to be able to make a transaction. The seller of the used “that” may want to go out and buy three other used “thats” in order to stay in the “that” business, so he needs some way to divide up the income from the initial sale. This means divisibility: ounces, number of zeroes on a piece of paper, or whatever.

Portability is obvious. It isn’t an absolute requirement. I have read that the South Pacific island culture of Yap uses giant stone doughnuts as money. They are too large to move. But they are a sign of wealth, and people are willing to give goods and services to buy them. Actually what are exchanged are ownership certificates of some kind. Normally, however, we prefer something a bit smaller than giant stone doughnuts. When we go to the market, we want to carry money with us. If it can’t be carried easily, it probably won’t function as money.

Durability is important, too. If your preferred money unit wears out fast or rots, you have to keep replacing it. That means trouble. A barrel of fresh fish in a world without refrigeration won’t serve as money. But there are exceptions to the durability rule. Cigarettes aren’t durable the way that metal is, but cigarettes have functioned as money in every known modern wartime prison camp. Their high value per unit of weight and volume overcomes the low durability factor. Also, they stay scarce: people keep smoking their capital.

Recognizability is crucial if you’re going to persuade anyone to trade with you. If he doesn’t see that it’s good, old, familiar money, he won’t risk giving up ownership of whatever it is that you’re trying to buy. If it takes a long time for him to investigate whether or not it’s really money, it eats into everyone’s valuable time. Investigations aren’t free of charge, either. So the costs of exchange go up. People would rather deal with a more familiar money. It’s cheaper, faster, and safer.

So what we say is that any object that possesses these five characteristics to one degree or another has the potential of serving a society as money. Some very odd items have served as money historically: sea shells, bear claws, salt, cattle, pieces of paper with politicians’ faces on them, and even women. (The problem with women is the divisibility factor: half a woman is worse than no woman at all.)

Rocky Humbert disagrees:

I'm not going to waste everyone's time articulating why Mr. Bruno is wrong. (You can find that in any reasonable textbook.) I will simply note that ALL investments (including commodities) have many complex and related attributes, including replacement cost, store-of-wealth, scarcity value, Graham & Dodd "margin of safety," and of course, cash flow and future expected value. (If Bruno doesn't understand how to derive cash flow and future expected value from a commodity and/or commodity futures investment, I'll be more than happy to tutor him at an hourly fee that appropriately compensates me for my annoyance in having to deal with a pompous windbag.) Whether one is "investing" (or "speculating") in a start-up company in someone's garage, in a T-bill (with a negative real return), in natural gas (which is trading below its fully-loaded marginal cost of production), in aluminum (which may have a worldwide supply deficit), in Groupon (because eventually they will make a profit), in BAC (because it's trading below Book value)….etc, etc, etc., the discipline, analysis and approach are consistent.

I have to hand it to Mr. Bruno — he now has two things in common with my brilliant wife. They both enjoy fine French wine, and they both think I am an "idiot." (The similarities end there — since my wife knows that California produces some wines that embarrass the French Premier Cru's — and she also knows that those with an IQ between 51 and 70 are "morons;" whereas "imbeciles" possess an IQ between 26 and 50. She sadly knows that as a hedge fund manager, I live in the "tail" of the distribution — as "idiots" have an IQ between 0 and 25.

Bruno Ombreux replies:

I am not going to retract. I think the hedge funds who say they invest in commodities are idiots. If they are not idiots they are crooks which is even worse.

You cannot invest in a commodity. If you present it as an investment, there are two possibilities:

1) You do not know it is not an investment, and then you are an idiot.
2) You know it is not an investment, and then you are a crook.

And I am sorry, I met many people from hedge funds. It is true they are nice people and sometime extremely clever, if often a bit naive. But the are not competent in trading commodities. They are clever marketers. That is they are clever at raising money. But most of them suck as traders or investors.

I wouldn't blame them if they took exception to your comment and demanded that you be keelhauled then ordered to buy a round of drinks for all. I know a couple hedge fund managers on the list and they seem to be the smartest people I've ever had the occasion to know. 

Nov

22

A debt-reduction committee with special powers that was supposed to dissolve congressional gridlock in Washington is instead on the brink of failure, setting the stage for $1.2 trillion in automatic spending cuts.

Finally. Hopefully the US will show the Europeans that solving the economy problems by just issuing new debt is not an option. Markets have just reacted printing higher prices for EURUSD. It seems that the Euro continues to be relatively strong despite the situation in Europe.

How long can the markets be blind and not see the obvious?

Signed,

a frustrated short on the Euro.

Nov

8

Why would people PAY the government to take their money?

WSJ: Paying to Give U.S. Money? Some Like Idea [registration may be required]

By MIN ZENG

With yields plummeting on U.S. government bonds, the Treasury Department has quietly asked some banks if they would agree to buy new short-term bills offering yields below zero.

Effectively, the Treasury is asking investors if they are willing to pay the government to take their money. And some big banks have answered, "Yes."

It may sound crazy, but yields on Treasurys of less than three-month maturity are already occasionally trading below zero in the secondary market. Under current auction rules, though, the Treasury can't sell so-called T-bills with a negative yield. In the bond market, however, higher yields mean lower prices, so the Treasury is effectively losing out every time it sells bills with higher yields than the prevailing level in the market.

The question was included in a questionnaire the Treasury delivered on Oct. 14 to the 22 primary dealer banks that are obligated to bid on primary auctions of its debt.

[…]

Gibbons Burke comments:

It is just another form of protection racket. For a small tribute, you can keep your money.

Victor Niederhoffer comments: 

The banks are so indebted to the government for their survival and bonuses and trading and purchase of distressed assets, and redeeming of sovereign debt, and capital at the funds rate, and bailouts, and investments et al , and freedom out of hotels that they are happy to accommodate their masters on the Hill with any emoluments like paying the master a fee for the privilege of holding the master's…

Oct

19

Dear Steve,

Hope you are well. A statistical problem has come up. The idea of comparing two charts, in this case Netflix and Green Mountain Coffee. I wonder if statisticians have a way of handling this problem. I've seen some books on statistics on place but never this problem of comparing two mountains as to their similarities. I wonder if you could refer me to the proper area. I asked a geologist whether they have a way, and apparently they take into consideration many physical factors. I am going to enclose the chart separately.

Stephen Stigler replies: 

Hi Vic,

Any statistical model would have to have a dynamical model for the mountain. It could be an empirical model, like if you had a sequence of mountains, as with predicting sunspot cycles or tides. But it would either need a number of examples (not just two) or a very strong math hypothesis. You might be able to generate a set of examples if you focus on a telling feature, like one day descent of x% after trading within + or - y% for z days.

Hope all is well with you & yours!

Best,

Steve

Pitt Maner comments: 

 A geomorphologist would have to consider many factors in trying to interpret how the hills and valleys were formed, the timing of such, and what they might look like in the future. Erosion is a key but it can occur at differing rates within a range of timescales based on rainfall, climate, vegetation, composition and homogeniety of the rocks, fractures, landslides, river sediment carrying capacities and as noted in the article below—Slope . There are instances, however, where the rate of erosion at the surface is offset by the continuing forces of uplift (denudational isostatic rebound for word lovers).

There are rules of thumb— with the higher slopes and steep mountain ridges eroding quite quickly —E. Himalayas at a whopping 2 to 3 mm/yr, as example.  But those erosional rates will change over time to meet new equilibrium requiremen ts.

"I don't think we'll ever find the single smoking gun of erosion," says Portenga, "the natural world is so complex and there are so many factors that contribute to how landscapes change over time. But as this method develops, we will have a better sense of what variables are important — and which are not — in this erosion story."

For example, it has been a truism of geology for decades that rainfall is the biggest driver of erosion. Semi-arid landscapes with little vegetation and occasional major storms were understood to have the greatest rates of erosion. But this study challenges that idea. "It turns out that the greatest control on erosion is not mean annual precipitation," says Bierman. Instead, look at slope.

"People had always thought slope was important," Beirman says, "but these data show that slope is really important."

Oct

17

Deception theory often refers to the eight basic emotions communicated through facial expressions: anger, fear, sadness, joy, disgust, curiosity, surprise, acceptance. Are these emotions manifested in markets? Are they predictive? Do they change? Is the theory of deception useful for studying, understanding and predicting markets?

I am reaching a point where I am frequently asked to give lectures on markets, a point usually related to about 3 to 5 years before one receives a bevy of awards, which is usually a year or two from the awarder's estimate of your death. I think I will try to develop a theory of deception from biology and game theory that will substitute for my usual talk on music and markets, which takes tremendous physical and financial resources, and is similarly poignant to the audience.

Alan Millhone comments: 

Dear Chair

Most master checker players notate (record moves) while playing. A few would write down the wrong move and let their opponent see what they record on their game sheet — then they move elsewhere. I can see where this might disrupt their opponents thoughts.

Are there traders who position one way for all to see then do otherwise ?

Sincerely,

Alan

Anatoly Veltman writes:

Within the 1980s COMEX floor hierarchy, there was the Price Committee. Say, Gold traded 364.0-364.5 closing range. If I were going home short, I'd ask my influential broker, who was on that committee, to make sure day's settlement price is fixed at 364.2; if I were Long, I'd ask for 364.3. Sounds trivial– but when I carried 3,000-lot positions, it would put instant $30,000 in my pocket, day into day. I can only imagine shenanigans in the OPTIONS after-pit, where they settled hundreds of different strikes daily– and some might have carried 50% price discretion!

In any case, here comes the punchline: shrewd floor operators, who didn't carry overnight positions but loved to push Gold around during pit trading– kept tab of post-bell haggling. One fateful day, seeing Gold gap way against my position, they kept pushing the trend all day just to cause me margin liquidation. That one-day loss swallowed all of the settlement-print windfall collected for the year. 

Jordan Low adds: 

In Blink by Malcolm Gladwell, a game of chance drew cards from two piles. The bad pile that lead to losses was avoided at some point consciously, but the subconscious detected that pattern before the conscious. I, of course, tried to measure my sweat, heart rate etc before each trade. Am I deceiving myself on an opportunity when I am just trying to get a gambler's high? I couldn't find anything useful except that hearing the news is negative to my process. Reading subtitles and skipping the music is probably better. Perhaps there might be technology to read the general emotions on TV using facial recognition one day.

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

This idea of yours, Victor, reminded me of a book I recently finished, River of Doubt. It's an interesting account of Teddy Roosevelt's post-presidential, near-fatal adventure into unknown portions of the Amazon. While much of the story revolves around the encounters, challenges, and actions of the discovery team, significant portions tell an interesting story of Amazonian flora and fauna adaptations.

Some of these occur over large portions of the region, others might exist in an area measured in square yards– almost all, though, occur with incredible rapidity and are developed to attack very specific prey. As one might expect, within another very short period of time, it, too, is the prey of a newly evolved predator.

Of the different adaptations briefly encountered in the book, the one that aroused my curiosity the most is called "masting." I had never before heard the term and subsequently looked it up and did a little research:

Mast is a noun… that refers to the accumulation of various kinds of nuts on the forest floor that serve as food for… animals. The process… is known as masting…. it is not a continuous process, but rather is cyclic. Approximately every three to five years certain trees produce prodigious quantities of nuts; in between the "masts" they will produce almost none. "There are two elements of the economy of scale hypothesis for masting variability: First, predator satiation - by producing a gargantuan nut crop, the predators become satiated [and enough] nuts will survive to succeed in propagation. The predator population is held in check during the non-mast years. Second, [p]ollination efficiency - masting trees are wind-pollinated…from staminate to pistillate flowers, a rather precarious and random process…it is therefore advantageous for them to fill the air with pollen from many trees at the same time.

The masting trees' surreptitious and unpredictable flowering, as well as the feast-or-famine results experienced by its "predator" classes might parallel some of the actions/consequences of the flexions as they periodically feed and starve the lesser fuana.
 

Oct

17

In SP500, the last two calendar weeks rose about 8.2% and the prior two weeks dropped by almost 7%. Going back to 1950, identified 14 instances in which two consecutive up-weeks gained at least 5% (for two weeks), and the prior two weeks were both down and lost at least -5% (for two weeks).

For these 14 big reversals, here are the following two week returns:

One-Sample T: dip 2W

Test of mu = 0 vs not = 0

Variable   N    Mean     StDev   SE Mean          95% CI            T      P
dip 2W    14   0.0183   0.040     0.0106     (-0.0046, 0.0412)  1.73  0.108

10/14 up, but NS vs zero due to high variance. One notes the prior instance marked a long term bottom March 2009:

Date       dip 2W
03/16/09     0.096
01/28/08    -0.033
10/14/02     0.019
10/01/01     0.002
10/19/98     0.066
12/14/87    -0.008
08/16/82     0.085
10/05/81    -0.023
12/22/80    -0.023
10/14/74     0.022
07/13/70     0.005
10/17/66     0.034
12/02/63     0.004
07/02/62     0.011

Oct

17

How is it a boon to investors to get screwed on every transaction by people with better information? Mind you, it's not that they worked harder for more information about a companies prospects, they just paid a lot of money to get an unfair edge.

I know the standard response is "liquidity" but I also know that such liquidity disappears the second the "liquidity providers" aren't guaranteed profit. The normal justification for the money earned for providing liquidity is that it is a service and that risk is incurred.

With HFT it's just a guaranteed screwing over of everybody.

And people wonder why investors are buying gold and silver.

Oct

17

For those New Yorkers that haven't seen it, there is an interesting IBM exhibit in Lincoln Center.

Located on Jaffe Drive at Lincoln Center in New York, the THINK exhibit combines three unique experiences to engage visitors in a conversation about how we can improve the way we live and work. Data wall

Visitors approaching the exhibit are drawn in by striking patterns displayed on a 123-foot digital wall. The wall visualizes, in real time, the live data streaming from the systems surrounding the exhibit, from traffic on Broadway, to solar energy, to air quality. Visitors discover how we can now see change, waste and opportunities in the world’s systems. Immersive film

Inside the exhibit space, visitors step into a media field composed of 40 seven-foot screens. As the screens come to life, visitors discover a 12-minute immersive film. A kaleidoscope of images and sound surrounds them. They are enveloped in a rich narrative about the pattern of progress, told through awe-inspiring stories of the past and present. They are inspired to think about humankind's quest for progress, and about making our world work better, today. Interactive experience

At the conclusion of the film, the 40 media panels become interactive touchscreens, transforming the space into a forest of discovery. Visitors can explore our quest to see more—from clocks and scales to microscopes and telescopes, RFID chips and biomedical sensors. They learn how maps have been used to track data, from early geographical maps to the most recent databases and data visualization platforms. They interact with the models used to understand the complex behaviors of our world—from weather prediction algorithms to virus spread simulations. They hear from leaders of world-changing initiatives about how they built belief. And they read about some of the most inspiring examples of systemic progress around the world. Each touchscreen also gives visitors the opportunity to provide their point of view and learn what others are thinking.

Oct

17

This is an article about a 100 year old man completed a full marathon in Toronto. What more can one say about this uplifting, heart warming feat.

Oct

17

A good way of estimating someone's life expectancy is by the frequency and number of awards he receives.

Gibbons Burke adds:

A friend observed, after my uncle, international champion at the age of 20 and an Olympic Gold Medalist (Sailing, Acapulco, 1968), tactician for Ted Turner, drinking pal of fellow Star-boat sailors the kings of Greece and Spain, and frequent collector of silver trophies in Gulf Coast regattas his entire life, dropped dead one Monday morning of a heart attack at the age of fifty:

"Everyone is allotted a certain number of heartbeats… Buddy lived in such a way that he used up his quota."

Oct

17

The Three Musketeers (1921 film), a 1921 silent film version starring Douglas Fairbanks
The Three Musketeers (1935 film), a black and white RKO version featuring Walter Abel
The Three Musketeers (1939 film), a comedic version starring Don Ameche and the Ritz Brothers
The Three Musketeers (1948 film), an MGM production starring Gene Kelly, Van Heflin, Lana Turner, and June Allyson
The Three Musketeers (1973 film), and The Four Musketeers (film) (1974) a two-film adaptation starring Michael York, Oliver Reed, Frank Finlay, and Richard Chamberlain
The Three Musketeers (1993 film), a Disney production starring Charlie Sheen, Kiefer Sutherland, Chris O'Donnell, Oliver Platt, and Tim Curry
The Three Musketeers (2011 film), a 3D version of the film starring Logan Lerman, Ray Stevenson, Luke Evans, Christoph Waltz, Orlando Bloom, Milla Jovovich, Matthew Macfadyen.

Oct

17

It is conceivable that many long forgotten mineral and metal prospects in Georgia and Alabama and other southern states are now undergoing re-evaluation given improved techniques for assessing the extent, composition, geometry and economic value of ore bodies.It would seem to be a highly speculative field not without significant risks. Not an area for persons susceptible to hyperbole.

1) "A Canadian mining company and a tiny South Carolina town are leading what could be a modern gold rush to the southeastern United States."

These technical reports give an idea how these gold and metal deposits (some abandoned during the gold rush to California in 1849) are looked at today.

3) Chris Tucker mentioned mica and I remember quite vividly as a boy seeing large areas of ground near Rockford, AL shimmering with light reflected from small pieces of muscovite while hunting mine "spoil piles" for beryl crystals with my father.

There are "potential" pockets of minerals (pg 25 of linked document) all within and along the southern end of the Appalachian Mtns. Various regulations probably impact whether some of these deposits can be mined for profit.

http://www.gsa.state.al.us/documents/misc_gsa/IS64RMinerals.pdf

Oct

5

This article contains what has to be the quote of the day:  " the market never goes up or down in a straight line ". 

This quote by Zemsky is interesting: “There’s no sign of recession in the U.S. and yet the market is pricing for one."

As an anecdotal data point, I saw an advertisement for gold to protect against the double-dip recession on a market-oriented website today. I interpret this sort of advertising to mean that the meme of the coming recession is now general among the public.

Bud Conrad adds:

I have a different take on what happened: The margin reduction was leaked ahead of time. I'm getting pretty cynical about the manipulation of metals and stocks from the margin clerks at the CME:

ZeroHedge : Soaring Financial Vol Leads CME To Announce A 33% Margin…Cut

Victor Niederhoffer responds: 

I believe the margin thing was key. The financial times is apparently manipulated the way the message boards are when they wish to bear a stock down. Was a foreign general disrespectful to one of our general's wives? I like Gen. McArthur's mother who accompanied him to West Point to make sure he studied.

Oct

2

If you got Pennington to find any valuable info when you asked him to develop quantitative analogies between forest life cycles and those of corporations to find some profitable trades you could certainly do the same in finding some numerical formula that could identify trade opportunities by analyzing baseball.

Each team– a stock, the aggregate teams– the market, each player– a corporate division, each salary– an investment made in the division and the company, each relevant performance statistic– a relevant performance statistic. Identify the right decision mix that makes teams perform better over time and improve over time and analyze similarities in companies doing the same.

The greatest liability is  also the greatest asset– human decision and performance permeate the game of baseball from start to finish and one could question whether it's possible to find a truly consistent system as a result. I would argue that this complexity makes it a perfect analogy to market/company performance. It moves based on imbedded and sometimes unexplainable intellect and experience of its participants. The chaotic human decision making process is pervasive in both.

Sep

29

Reflections on the life of Carl Icahn and 9W Search: a SINGLE ANSWER TO MILLIONS OF FINANCIAL QUESTIONS (my latest venture).

Carl Icahn's “survival of the fittest and “greed is good” religion has fueled his 50 year+ rampage in the Wall Street jungle. His random attacks on peaceful, generally complacent, and then confused, corporate management (TWA, Clorox, Yahoo, Lion Gate et al) is the culmination of his life’s goal of victory over the corporate weak with no mercy to the fallen. His record of booting out any participants in his forays who thought they would share profits with Carl is pretty grim:

• an uncle (Elliot Scnall) who was the source of Carl’s money in his early career as corporate raider and extortionist

• Icahn company internal managers (plump Kingsley, Dr. Mark Rashefsky, overly ambitious Russell Glass, key operative Keith Meister;) all fools who expected to get paid what they were actually were worth to Carl

But Carl has an unusual witty side too. If you haven’t seen these two video you might be amazed by his story telling ability: “Texaco video" , "US Steel video ”

These videos present an aspect of his persona known to just a few friends (not counting his virtual dog). Carl’s view of friends: “if you want a friends, get a dog”. A new financial search engine from the founders of EDGAR Online, Inc, 9W returns the single correct answer (no scrolling like Google or clicking like Yahoo)

Go here, enter your email address, choose a password and see how 9W works.

Examples:

What was the latest Pfizer employee termination cost? Employee termination costs

COMPANY: PFIZER INC
RESULT: $189,000,000
AS OF: 1/4/2005 - 7/3/2011

Another question: “Hewlett Packard’s CEO bio”

Fri Sep 23, 2011

About 27,400,000 results (0.10 seconds).

Sep

29

One posits that dependency on the past is sacrosanct to all trading/ investing, and when past relationships break down there is always the question whether the current instance is a temporary state or regime change. (2008-09 contained many such, as well as a few more recent examples).

This reduces further to how well success in markets (life, etc) tightly correlate with intelligence, learning from study and experience, and discipline, and what happens to successful trend followers (which all living creatures are) when the trend dies and nature deals out an extinction. The quaint notion that fear is conserved in the genome for a reason.

Ralph Vince writes: 

As the Old Frenchman would have put it, stamping out his Gitane on the dashboard itself, "Adaptation…..The first rule of survival."

anonymous writes: 

Clearly, it would be best to know in advance if things that worked in the past stop working. But aside from a very very few circumstances (true arb is the only one that comes to mind, and even that relies on technology working), do traders ever have this knowledge? Instead, isn't money management of some sort used?

With respect, for example, enter a tiny amount, if it works, put on more, if it doesn't work, but the idea remains the same, take off some and wait for a truly outrageous spread to try again, if it never works, exit and take it off the screen or something etc.

Ralph Vince talks about not needing to predict movement to make money and I keep thinking about this.

Sep

25

This is an article about a chronic problem I have noticed in most not-for-profit orgs. When we trade we create nothing but liquidity, no matter what you think of yourself, we are just vultures, exploiting many inefficiencies in the financial markets. Instead of curing diseases or engineering new products or even creating a work of art, we just trade. Call it what you want, but at the end of the day, if your mathematical formula didn't make a trade you didn't make anything. But in our free time however, some of us donate large amounts of money or seed interesting projects that most of the time are intellectually interesting, but hardly ever profitable. You work very hard for your money so I think you should demand from those companies that your money is spent wisely and not in a wasteful manner. I think Dell was one of the first guys  and Mike Milken before him, who successfully asked and got results for his money.

Stefan Jovanovich comments: 

Arthur's premise - "when we trade we create nothing but liquidity" - is certainly accurate; but his conclusion is shocking. Markets are the only successful means human beings have developed to define their state of knowledge about the fundamental fact of existence for all life on the planet - scarcity. Medical research, engineering and dramatic production (my favorite "art") are all wonderful gifts; but none of them can exist without the seemingly useless activity of the people who define prices. (If you have any serious doubt about that, examine the art, engineering and science being produced right now in Zimbabwe and North Korea.)

The difficulty with non-profit and for-profit salaries in organizations is that they are not set by any open bid-ask market; instead, they are the product of politics. That they tend towards being corrupt and ugly should hardly be surprising. The proposed solution - "demand that your money is spent wisely" - is the same fantasy of "reform" that keeps money flowing for "rehab" and has people believing that sick organizations can somehow be saved. It is no accident that the best example of sustained corporate benevolence - HP - is now turning to the solution of hiring a purely political "name".
 

Gary Rogan writes:

Well the bigger beautiful things are invariably created either involuntarily (the Colosseum built mainly by recently captured slaves, the original St. Petersburg which was built by serfs with a short life expectancy), through donations, like say the Vatican, most of the cathedrals and churches of Europe, or taxes and exploitation of peasant labor for money, like most of the other attractions in the old world. I wouldn't call the funds supplied by the Soviets and especially North Koreans "donations" though. It's also hard to say the grandeur of the results is a justification for subjecting people to the "donation process", in fact I would say just the opposite based on general moral principles and the net migration vectors involving the Soviet Union, Eastern Europe, and (when there is an opportunity) North Korea.

Stefan Jovanovich writes:

My dad was choleric by nature, but he did a good job of restraining his temper in business. The only time I ever saw him entirely lose it in public was when someone asked at a shareholders meeting why his company was not doing as good a job as ETS - the non-profit monopolist that literally owns the college and graduate school application testing market. His reply was: "If you allow me to run at a loss so I have no nasty profits and tax liabilities and persuade colleges and graduate schools that there should be competition in the test market, it will not be a problem. Until then, we have no hope of competing with those saints of American education in Princeton."

Kim Zussman adds: 

For want of a bailout Lehman was lost.
For want of Lehman the market was lost.
For want of the market the economy was lost.
For want of the economy the election was lost.
For want of the election the kingdom was lost.
And all for the want of a bail

Ken Drees adds:

For want of another backdoor USA bailout Germany is pissed..
For want of a German handout the PIIGS are pissed.
For want of more austerity Germany stays pissed.
For want of continued power all the politicos are pissed.
For want of a viable solution the markets are pissed.
And all for the lack of a Euro Debt Bond

Alston Mabry adds:

What if the €uro experiment, instead of introducing the new currency, had simply been the proposition that all EU countries issue their sovereign bonds denominated in DMarks? Wouldn't it have been clear immediately that certain problems with such a scheme were unavoidable? And isn't that essentially where we are now?

Sep

25

I'm skeptical of the eurobond idea because I don't think it addresses what to me is the underlying problem. The problem is not, for instance, "Greek debt". Rather, the issue is who owns the Greek debt, i.e., the banks. The problem is not whether the Greek government (or the Portugese or the Irish) is insolvent and should default — of course they are and should — but rather what the knock-on effects will be.

The Germans should put up a big chunk of money, and get others (France) to contribute what they can, and then do a Bernanke and announce a schedule by which they will purchase over time €X of PIIGS bonds from the eurobanks. They could drain the problem paper from the financial system, with some haircut for the bondholders, after which they could restructure that debt as they pleased, meanwhile putting some downward pressure on rates, but also allowing the market to continue to discipline profligate governments.

Germany gained the most from the €Mark, in one sense, so they are now in a position of paying off the problems created. I think the ECB sees US-style QE as poison, and that's why the ECB is not allowed to be the buyer of bad bonds (even though they have been, in fact, doing it under the radar to keep the banks from folding). So, put the money into the EFSF, buy the bonds back directly in the marketplace, and then restructure them as needed, while redesigning the "system". Moral hazard, for sure, because some players will think it's okay to lend to the PIIGS again because the bad bonds will be bought back -hence the need for some kind of haircut, enough of one to send the message that, "whenever we have to buy bonds back, the bondholders will take some kind of hit, so don't count of this as anything but a money-losing strategy". You've cleaned out the bulk of the Greek (or Portuguese, etc) balance sheet, and then they are left to the bond markets and must adjust their fiscal reality. And lenders know to be skeptical, but the eurobanks are on better footing. Then the Greeks get to decide whether they want to become more like the Germans, or whether they want to go "back to the drak".

Sep

19

If you have not read this, you should: "Letters from a Self Made Merchant Man to his Son"  by George Horace Lorimer.

Craig Mee writes:

I simply mention Stan in passing as an example of the fact that it isn’t so much knowing a whole lot, as knowing a little and how to use it that counts.

Oh, how I have learned this the hard way. As an old squadron commander told me in my 20s, “You get a whole lot more bees with honey than you do with vinegar, young man.” Great advice, and I am happy to say I am finally following it many years later.

Sep

17

The book Executive Hobo by Bo Keeley is an excellent read that is half Louis L'Amour, half John Steinbeck on a tour of the greatness of every day United States. Every page has an adventure and an ingenious escape and solution to a chess problem of nature and authorities against the little man that Bo solves. It is beautiful to read about the scenery and to vicariously experience the rhythm of a hobo tour of the original transcontinental line from Davis to Denver. Specs figure prominently in the book with Omid having taken part in the ride, the Eris Society a destination (co-instigator of the junta), and food for the 4 executive hobos provided by—– guess. Laurel Kenner.

Highly recommended.

Sep

9

The scientific method has two parts. There is theory, which requires knowledge and intuition to posit a cause and effect, and there is testing, collecting data to determine whether the observations refute the theory. If I understand your point correctly, empiricism is necessary but not sufficient. There should be a theory that is not entirely based on the observed data. As an imaginary example, “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” is better than “The S&P 500 was down on 19 of the past 30 Friday afternoons”.

Ralph Vince responds: 

Steve, yes, but the premise, the cause, needs to be proven. “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” needs to be proven as causal, not merely posited as a possible cause.

Frankie Chui writes:

Yes, I always end up asking myself “why does it not work anymore after it has worked for so long?” when the moment I trade it the system stops working. It has also happened to me quite often where I backtest a strategy, everything seems ok, trade it for 2-3weeks and that’s the end of that system. Therefore, I am now experimenting with optimizing parameters in systems more frequently, perhaps once every two weeks on a rolling basis. Optimize two weeks of data, trade it for a week, optimize the past 2 weeks again, trade it for another week. Of course the 2 week/1 week time frame may not be the best (I just randomly chose it), but has anyone ever done anything with this kind if approach? I’m curious to see if this will work for day trading. I am new in mechanical trading, but I’m very curious to know if optimizing data fast enough will allow a trading system to work better and longer (for day trading).

Jeff Watson writes: 

Frankie, you’re running up against Bacon’s ever changing cycles, which tend to render systems obsolete.

Phil McDonnell adds: 

There is an insidious danger when you use optimization. The optimizer will fit the system to the data too well. It will never perform as well out of sample as in sample. It becomes especially important to use tests of statistical significance when you do optimizations.

The optimizer can actually create a multiple comparison problem in some cases. For example if you tested, looking for seasonality and wanted to find which month was the best to buy it would create a multiple comparison bias and any test for significance would have to have a much higher threshold than if you just tested September.

One way to judge a system and evaluate whether it will continue to work is to plot out the equity curve. If your testing assumes an equal sized investment each time then the system can be plotted on an ordinary arithmetic scale. If you compound it should be plotted on a log scale. Either way the most desirable system would be a system that looks like a smooth line going monotonically up to the right as time passes. If it starts to roll over then it may be a system about to fail.

Paolo Pezzutti writes: 

The system should be quite robust. It should work pretty well with a sufficiently wide range of values of parameters. There should also be few parameters avoiding curve fitting.

 

Sep

7

One found that these informed people understand how changing the basis will improve employment next year when Obama needs jobs the most…as he works his employment miracle. Check out this article "U.S. changes how it measures long-term unemployment".

Sep

2

How do they say Lobogola in the South.

Gibbons Burke writes:

"The South's Gonna Do It Again!".

Sep

1

The next Junto speaker will be Richard Epstein on the topic of "simple rules for a complex society".

Please join us, Thursday, September 1st, at The Mechanics Institute at 20 West 44th Street.

The meeting starts at 7 pm and the speaker speaks at 8 pm. There will be feedback. 

All are welcome.

Victor Niederhoffer commented on the night: 

Richard Epstein a genius. Totally great. v

Eric Dennis writes:

It was an impressive performance, and characteristic of him from what I've seen.

While I agree that interpersonal value measurement is technically not well-defined, I think the larger problem for Richard Epstein's case is the historically demonstrated inability to constrain state power by stretchable, aggregate welfare-based rules. There is little doubt that if an army of Richard Epstein clones were to adjudicate, e.g., eminent domain proposals, they could find some cases where "takings" would increase aggregate welfare, however imprecisely defined. The problem is that we don't have an army of Richard Epsteins. We have bureaucrats with no appreciation for the Hayekian knowledge problem, bureaucrats who are incented to maximize votes and campaign contributions by means of talking about economic efficiency rather than by means of achieving it.

The innovation of defining laws by reference to rights rather than to notions of aggregate welfare is that the former provides a clear limit on state power comprehensible even to the simpleton. Once the principle of private property has been subordinated to some kind of collective goal, we rely on the ability of the simpleton to decode polticians' vague arguments about whose property it will be necessary to sacrifice in the name of that goal. We might as well just enact the New Deal at the start.

If we can get 95% of the way to some hypothetical Epsteinian efficiency by means of a system of rights-based law, why try to eek out the residual 5% by striking at the heart of that system's robustness? If there is a detailed historical case for why it's not actually just a 95/5 split, I'd like to hear it; otherwise, I think his own acknowledged presumption for non-coercion ought to be applied to at the level of legal philosophy rather than simply at the level of individual "takings" cases.

Gene Epstein comments:

Well put. I agree with what you just wrote, Eric–especially since you agree that the term "general welfare" is "imprecisely defined." You're certainly right that Ultimate Ep's world, if people like him were administering things, would be vastly superior to the one we live in.

However, as libertarians–or even as classical liberals–our default position is presumably to respect property rights, to recognize that all value is subjectve–hence recognizing that terms like "just compensation" also have no precise definition–and also to recognize that refusal to sell, or refusal to sell at the "just" price being offered–is a necesssary part of property rights.

On the other side, Ultimate Ep seems to be arguing that, if we respect these rights, roads will be built, but not quite enough roads to suit him. Even if he's right–and if you appreciate what entrepreneurs can do, it's debatable–private ownership of roads would bring other benefits, especially the more efficient allocation of this scarce commodity.

But Ultimate Ep is always a treat. And thanks again, Vic, for hosting the event. 

Aug

26

I view the adoration of the folksy and simplistic in finance as yin to the yang of irrational fear and hatred of allegedly "sophisticated"/"rocket science" instruments such as credit default swaps (which are, fundamentally, quite simple) and fundamentally mundane — while ostensibly terrifying — strategies and technology such as algorithmic trading.

It's a form of comforting primitivism, in my opinion.

Aug

24

There is a paper making the rounds from the FRBSF that looks at the predictive relationship between "middle" savers (40-49) and "old" spenders (60-69) for equity market P/E ratios. The paper demonstrates a relationship between the M/O ratio and historical market P/E ratios from 1954-2010. The paper is a quick read.

The conclusion that is getting the attention reads:

Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.

A couple of quick points on the FRBSF economic letter:

1) The key paragraphs in terms of stock implications are:

Since we have forecast a path for the P/E ratio, predicting stock prices is straightforward if we can project earnings, the E part of the ratio. For this purpose, we assume that, in the next decade, real earnings will grow steadily at the same average 3.42% annual rate by which they grew from 1954 to 2010. To obtain real earnings, we deflate nominal earnings by the consumer price index.

The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027. On the brighter side, as the M/O ratio rebounds in 2025, we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.

Note that they are using "real" stock prices. Converting this to nominal using currently depressed inflation expectations of 2.01% over the next decade (from TIP breakevens) implies an increase in stock prices that is roughly 50% higher than what is priced into long-term S&P options. If they are right (and I think they are wrong), then the returns to equities using long-term options should be around 3.7% over the next decade (better than government bonds) while the returns to holding the S&P should be roughly the same 3.65% due to dividends received over the next decade.

They are also making an assumption that trend earnings growth mimics that of 1954-2010. They are calculating this using a straight line two point growth. Fortunately, they ignore that 1954 earnings were roughly 50% above long-term trend lines while 2010 earnings are roughly 30% below trend. Using an actual trend line (rather than point to point) growth would imply that S&P earnings should grow 10% per year over the next decade (this makes more sense if you forget about "peak margin" nonsense and recognize the current profit levels are against a very depressed economic output line). Using their other data (dubious for reasons articulated above and below) and trend earnings would imply the S&P should rise roughly 83% over the next decade (to ~2,100). This would yield returns from long-term options of 22.3% per year over the next decade while holders of the S&P should receive returns of 8.1% per year.

2) They "fit" data from 1954 to 2010. There is a reason for this choice of data sets — it's the only one that works. The demographic data offers zero explanatory power for periods prior to 1954 for one very simple reason — the proportion of the population that was aged 60-69 (their "old" people who are supposedly liquidating assets) was far, far lower. This would imply that P/E ratios should have been stratospheric in the pre-1954 period. We can see a tease of this in their chart that shows rising P/E ratios from 1964-1954 on their "model generated" line. Pre-1954, this model generated P/E would have risen dramatically. In contrast, they were depressed. As a result, I would strongly question whether we can generate any real insights on the forward direction of P/E ratios from this analysis.

The reality of all this nonsense is that when equity markets are low and falling, most people will offer explanations for why they are low and falling. Those arguments will sound intelligent until equity prices begin rising inexplicably. Then they will rage against the "bubble" until they suddenly see the light and argue we are at a permanently higher plateau.

Kim Zussman writes:

This is a variant of the "sell to whom" question posed by Jeremy Siegel in "Stocks for the Long Run". ie, when boomers retire and they change from saving to consumption, who will buy their stocks?

Siegel's suggestion was younger people of developing nations / emerging markets. Given the known tendency for people to invest closer to home, why wouldn't up and coming Indians and Chinese buy domestic vehicles rather than SPY?

Jason Ruspini writes: 

Whatever problems we think we see with such studies, it is an embarrassment for economics that the effects of demographics, globalization, and diffusion of technologies are not more widely studied and understood. This provides cover for all sorts of claims like "tax rates were higher in 1950 and 1990 and we had excellent growth then…"

Russ Sears adds:

While I agree that studying the effects of the predictable real economy on the real economy should get more study. Further I agree with your implication, that jumping from fiscal/monetary policy to real economy often hides a large amount of nonsense. However, I can not encourage a tunneled vision approach of narrow real effect to narrow real effect. Especially when I see the design of the study to be such that its intent is to keep people from following their natural ambitions and make sure the individual is smaller than he needs to be by discouraging investing in capitalism. They (the govt) only do these studies when this is the case. The nonsense comes by narrowing the line of vision to reach the conclusion that we need them to protect us from ourselves.

Jason Ruspini replies:

This sort of criticism was behind some of the controversy with Tyler's Cowen's book. To those on the right it sounded dangerously like " 'We' should do something! " To those on the left, " 'We' are poor and can't do anything…"

But I don't see why low average rates of return should discourage entrepreneurs. Situations like Apple and Facebook suggest that where there is growth in a low growth environment, money funnels to the innovators just the same if not more vigorously. Regarding Facebook, my sense is that part of the "problem" with current technologies as compared to those of the 19th-20th century is that the latter often compressed time in terms of more efficient communication, travel and production while the former largely serves to fill time with questionable effects on production and average asset returns. Additionally, the diffusion of the latter 20th century type across the world is now past its inflection point.

One other point..

Japan in the '80s through present might be a better complement to the Fed study than the pre-1950s world as suggested in Mr. Green's original email. Equity returns aside, all things equal, more retirees should translate to lower rates. Given sovereign debt, I guess one should say lower real rates.

Russ Sears responds: 

The government is in competition with the private sector for capital…In the fiscal world should the retiriees give their capital to Government and let them continue to spend or should they give it to entrepreneuars and let them spend it.

In either case fewer real world projects will begin to those who loss the competition for capital. All things being equal if less money goes to the stock market, few projects are begun and cost of captial is raised. If they cannot get capital from issuing stock, they must issue more debt, real cost of borrowing goes up.

But if real demand for private sector goods are raised and fewer project in the private sector were funded, cost of loans will go up and the profits per $ in the stock market would also increase.

If more money goes to government, the more our government becomes addicted to the low cost of capital, and the more it spends on less and less productive projects.

Am I missing something?

Which do you think will raise the overall wealth the most? Would you believe a government study suggesting investing in the private sector is doomed to low real returns for decades?

 

Aug

23

I have not seen a model yet that shows how all this redistribution causes weakness in economic activity. Certainly the incentives are hurt. But I think a model similar to what Friedman uses to show how money should grow with 2 or 3 people on a desert island would show how hurtful this is.

Tyler Cowen writes:

Moral hazard escalates.

Keep in mind that since bank failure is deflationary, the Fed can address bank failure by printing up a lot of money without a net inflationary effect. On the inflation front we are simply holding even, more or less.

But we are substituting interest-bearing reserves for M2, or public sector assets for private sector dealings, a very bad long-term trend.

Plus higher moral hazard and now European banks are Too Big To Save and don't have a real central bank behind them.

Did you see that JP Morgan is now forecasting 9.5 unemployment for 2012?

Aug

14

National Geographic has an excellent article on the effort of scientists to determine whether they can detect the existence of other universes by carefully measuring the cosmic microwave radiation, (kind of a leftover radiation from the Big Bang), and determining whether our universe bumped into other universes shortly after they were created.

In this man's opinion, this is one of the better paths of study to determine whether our universe is alone, or if there are or were other universes in the multiverse. The scientists contention is that if there were collisions, and the collisions were detectable, they would have left behind some kind of evidence that present collection methods might be able to detect and data analysis might be able to interpret.

Aug

8

A Currency Note is akin to a Time Insensitive Zero Coupon Bond with zero regard to the idea of Inflation. Whether you present it now or a year later the Promissory Note that a Currency Note is will provide you with goods or whatever you have agreed to obtain against it at the face value that day.

Over simplification being a standard problem of modelling, the diversification with cash idea propounded by Markowitz is a numerical illusion. Since the face value of cash does not change it dampens volatility. We understand high school level Mathematica. Thank you very much Mr. Markowitz for showing us how by doing nothing one can reduce risk. I as a student of markets am interested in figuring out how can I reduce my risk while I am still doing something.

Yet, things could have been still tolerable had the negative rate of return on cash implicit due to unavoidable inflation would have been plugged in somewhere in the diversification model.

Holding cash for dampening volatility for a very short period of time is fine. But then Portfolio Management is such an aggrandized term that traders cannot even come remotely close to it and has to be a long term religion. How does anyone ever reduce risk by holding onto a guaranteed to lose investment in their portfolios?

Using even my high School standards only Maths I cannot accept to believe ever that cash that keeps getting trashed over time in value will ever add anything but negative returns in my portfolio and even if a theoretically flawed calculation of a dampened volatility is accepted as still correct then too bring me to a higher utility curve.

The higher investment utility curves built using cash to me appear similar to claims of reaching higher states of consciousness by starving. All I have known people reaching is altered states of consciousness by starving.

Hold cash and starve. Simple. Why do I need a celebrated model and an entire marketplace revolving around such a flawed reasoning. Well I need this since without such mass hysteria, where is the money to be made?

Mr. Krisrock writes: 

Cash is a proxy for the currency… that's why the Japanese bond market can be among the best performers despite near zero rates. Smart bond men are willing to accept zero if the total return is simply the currency appreciation. Ask John Taylor he called all this…

Sushil Kedia replies: 

I cannot agree more with your point here. Accepting zero interest is fine if the interest rates on other currencies are higher and thus the currency in which the zero interest rate bond is denominated will appreciate.

Yet that is a different point.

I am only crying over the years consumed in living with Portfolio Theory that was drilled down my brains in the MBA days.

Aug

5

A section of this brief Reason TV video on Matt Damon went viral.

Memo to Matt:

Matt, as for that "lousy cameraman" (Jim Epstein), would you fire him if he were shooting your movie?

No, I'm sure you'd keep him on because his salary is "shitty" compared to yours. And besides, firing people is what CEO's do!

Matt, I'm sure you send your kids to public schools. Exercising school choice–which charter schools and vouchers might allow poor people to engage in almost as much as rich people like you–is also striclty for the CEO's of this world.

*Please *don't tell me you send your kids to private schools! Isn't that what CEO's do?

Gene Epstein
Economics & Books Editor
Barron's

Aug

2

Did you read (and comment) the article Ten Reasons Why China is Different by Stephen S. Roach?

It appears the Yale faculty member of MS-Asia is attempting to sell a stale bushel of IB produce…

May be worth publishing here that which the commentator (vn 05:28 31 May 11) wrote in response to Roach a la "ten reasons why Stephen Roach is wrong…" [Ed.: we don't know the identity of the commentator].

"1. China's financial sector is in a mess. Read "Red Capitalism" by Carl Walter and Fraser Howie. Banks have been going through multiple recapitalizations but there continue to be piles of debt accumulating in a range of Ponzi schemes that would make the traders of Goldener Sacks and Lehman Brothers blush. And just as the global financial crisis came from nowhere, so will China's.

2. The seemingly wise, strategic, and committed leadership of the communist party that Roach so extols is as prone to crony capitalism, corruption, nepotism, and political patronage as the most capitalist societies. The state-owned corporations and banks of China are being carved up between communist party leaders, their families, relations, and friends.

3. The aggrandizement of China's export success as an example of superior strategy and impressive competitiveness actually rests on ever-increasing subsidies through low prices for energy, land, capital, water, and the environment, a labor force kept suppliant by the communist party, and an undervalued currency.

4. Continued high investment rates are being achieved by taxing households through a plethora of channels — including low interest rates, wages well below marginal productivity, and the delivery of health and education services at exorbitant prices.

5. China's gleaming cities have been built by migrant workers with no access to health, education, or housing services. Urban areas conduct a discreet form of apartheid where access to basic services depends on where people are born. (The so-called  户籍   system).

6. Inequality in consumption and income are rising — and inequality of asset ownership is probably at stratospheric levels. Yet popular discontent is repressed.

7. As a senior communist party official once remarked, China has privatized its government. It can no longer tell the difference between a public or a private good (or service). Most government departments and agencies have become profit centers, even the PLA. The China Banking Regulatory Commission — responsible for regulating China's powerful banking system — relies for its budget on the banks it is supposed to oversee. As it is, information asymmetries are powerful in banking — the incentives implicit in the Chinese supervisory system make them virtually insurmountable. The conflict of interest in the west’s credit rating agencies pale in comparison to the practices in China.

8. Mercantilist policies have created an accumulated environmental deficit that will take years to remedy – although the chances of reforms in this area are low given the close family and patronage ties between heads of large (polluting) firms and senior leaders in the party. Vested interests in the current arrangement have become very powerful.

9. The practice of “pragmatic, incremental” policy changes that China so prides itself in has created a complex web of interconnected policies, laws, guidelines, practices, and informal arrangements that make it very difficult to untangle. Even if the Chinese know what they want to change, they are not sure how to do it. Recent shortages in energy availability are a case in point. Power generation plants have had to close because of losses caused by high raw material costs and low administered energy prices – but raising energy prices would hurt energy-intensive industry; and raising public subsidies through the budget or banking system run counter to the government’s efforts to withdraw economic stimulus at a time when inflation is high and rising.

10. Encouraged by the success of the stimulus package, the government’s further encroachment into economic decision making by firms and individuals is moving in the opposite direction to where it should be going – if it is to become an innovative, flexible, and dynamic society. China’s leaders are drawing the wrong lessons from their past success. They believe it was because of the government’s superior decision making ability, when in reality it was because of the strength of markets."

Jul

23

Mara Hvistendahl , the author of "Unnatural Selection" was on TV a week or so ago and suggested male-female ratio imbalances will cause some Asian countries to become like the American "Wild West" and more war-like and aggressive in nature in the future. Interesting (if not flawed) idea with possible market implications (at least until equilibrium is re-established).

It sounded a bit Malthusian though too…

from an article on npr:

As men find it more difficult to find wives in these countries, Hvistendahl says, "it is leading to unrest and almost certainly will lead to more." Unmarried men are responsible for more violent crime than married men. And, Hvistendahl adds, research in eastern China showed a correlation between a high male-to-female sex ratio and the crime rate.

Don Boudreaux adds:


In light of the fact that the most creative and versatile resource (by far) is the human mind, world population today truly is not too great but, rather, too small. Far too small.

Jul

18

I had a delightful dinner last night with a Porsche 911 owner and Swiss resident. In a discussion of marginal tax policy, he noted that Swiss traffic fines are increasingly based on personal wealth and income — rather than the American fixed penalty model.

This is a wonderful illustration of the BENEFITS of marginal tax policy: In crafting a deterrent for the reckless endangerment of innocent people, a 500 franc fine will have a different deterrent effects on a working man versus a multi-millionaire. Scott: It's impossible to quantify "power," but creating and destroying incentives can be observed and measured — and in this Swiss example, it can be measured in nearly real time.

Here's a Fox news story story from January 2010 that cites a $290,000 Swiss speeding ticket on a Ferrari driver. (In the unintended consequences/unintended incentives department, this might be just one more reason why people are buying gold and hiding visible assets.)

Jul

13

I like this quote of Paul Romer's:

"Every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. Possibillites do not add up. They multiply."

Would have been great to have him at the Tyler Cowen talk.

Tyler Cowen writes: 

Over time Romer has come closer to my view. He did read my book and sent me some comments. I don't think he believes in "increasing returns" any more. I actually think Romer (the old Romer) is right about increasing returns, just over a longer time horizon, not over short horizons.

You should try inviting Bryan Caplan (linked is a good article of his) to speak.

Jul

11

You at dailyspec say you are "animated by a desire to apply systematic, tested reasoning to improve our understanding, not by appeals to authority or the transition of charts."

To understand why you do not achieve your goal see:

"Why Do Humans Reason? Arguments for an Argumentative Theory" by Hugo Mercier and Dan Sperber

There is also discussion about it here and other places.

The claim is that human reasoning developed to win arguments and not to discover the truth. There is evidence for it at every meeting of the NYC Junto. The theory does a pretty good job of explaining phenomena like "confirmation bias" (i.e. your speakers basically confirm your beliefs) and that people first "emotionally" come to a conclusion and then find facts to support what they "feel" (as evidenced by audience comments and questions).

Jul

8

May I announce that some major books of mine are now available on amazon kindle for single digit prices (cheap). Some are criticism.

The Art of Radio in North America:

This offers chapter-length appreciations acoustic excellence in radio comedy, John Cage, Norman Corwin, Glenn Gould, et. al.

Jewish Writings So Far:

What a surprise it was for me to recognize that I’d been writing about Jewish subjects or out of the Jewish tradition for more than four decades. Since there wasn't enough material to make a printed book, Jewish Writings So Far seemed an appropriate addition to my website, particularly in collecting materials unavailable elsewhere. This 2011 edition expands an earlier Kindle/Website text.

On Sports and Sportsmen:

This book collects essays written over the past four decades about sports and sportsmen. It reprints a New York Times Magazine profile of the legendary orthopedic surgeon James Nicholas, long the team physician for the New York Jets, as well as the profile of Detlef Schrimpf, the first German professional basketball player in America, “Working/Playing a Long Way from Leverkusen.” The book also contains an appreciation of European soccer and a critique of a patently under-researched book about baseball in Latin America. I include two essays on the esthetic and the esthetes’ appreciation of spectator sports —”Artistry in Football” & “The Opiate of the Intellectuals.”

A Book of Kostis:

Not unlike other prolific writers, I regard some of my texts as more classic than others; these represent my choices for My Most Classic under these topics: Abridgement, Abstract Film, Acoustic Fiction, Alternative “Poetry Readings”, Alternative Exposition, Alternative Publishing, Aphorisms, Art Prints, Arts History, Audio Documentary, Audiovideotapes, Autohistoriography, Avant-Garde Criticism , Book Art, Book Composition, Book Reviewing, Cameraless video, Choreographic scores, City Anti-Planning, Collective Translation, Conceptual scripts, Connecting people, Creative Nonfiction, Creative Photography, Critical Policing, Curating Exhibitions, Digital Art, Documentary Film, Documentary Photography, Drawing, Electro-Acoustic Composition, Exhaustive Narrative Film, Experimental Prose, Extended Interviews, Film & Video Criticism, Grants Criticism, Hörspiel (German Ear-Plays), Humor, Innovative Erotica, Intellectual History, Intellectual Portraiture, Interior design, Internet Correspondence, Inventing Categories, Investigative Reporting, Jewish Art, Journalism, Kinetic installations, Literary Criticism , Literary Demolition, Literary History, Literary Journal Editing, Live Media Presentations, Memoir, Minimal Literature, Multiplex Holography, Music Criticism, Music Journalism, Musical Composition, Musicology, Numerical Art, Numerical Literature, Organizing Assemblings, Performance Studies, Performance Texts, Photolinens, Political Commentary, Polyartist Criticism, Public Art Proposals, Public Intellectual , Radio Features, Radio Scripts, Randomly Accessed DVDs, Satire , Scenarios, Scholarship, Simultaneous Translation, Social History, Sound Poetry, Sports Writing, Straight Prose, Taste-Making Anthologies, Text objects, Texts for Composers, Theatrical Scripts, Thematic collecting, Humor, Thematic Dictionaries, Transmission Holography, Travel Writing, Urban Studies, Verbal Fiction, Verbal Poetry, Video Documentary, Video Narration, Video Poems & Stories, Visual Arts Criticism, Visual Fiction, Visual Poetry, Workshops in Innovative Writing

These others are cultural history:

The Maturity of American Thought:

This was begun in the late 1960s, with the help of a Guggenheim Fellowship. It was meant to be a comprehensive intellectual history of post-WWII America (1945-68), and its thesis was that only in the post-War period did American thinking in many fields achieve first-rank importance and major international influence. My strategy in writing this book was less to prove this thesis, which I took to be virtually self-evident to those who knew (and cared) than to identify and summarize what this major thinking was. I completed several chapters before putting the project aside to complete something else; it was never resumed. The chapters I finished beyond the introduction covered “Historiography,” “Sociology,” “Social Philosophy,” “Government,” “Anthropology,” “Esthetics,” “Architecture,” and “Literary Criticism.”

Autobiography:

Categories:

An elaborate summary of my work in several domains conventionally understood.

Remembering Everyone Met:

Short descriptions of many people remembered recently—my life entirely through others.

Fiction:

More Openings & Closings:

These stories are meant to be, alternately, the opening sentences or closing sentences in otherwise nonexistent fictions. They are differentiated in print with the Openings in roman type and the Closings in italics type. This text supplements, without duplication, the "Openings & Closings" published more than three decades ago.Openings: Just the opening sentences of otherwise nonexistent fictions.

Epiphanies Complete:

Just the heightened moments, no more than a single sentence long, in a multitude of stories, mostly written decades ago.

1001 Stories Enumerated:

One thousand One single-sentence fictions, each with its own number, as a contribution to Richard Kostelanetz's continuing exploration of minimal fiction–work frequently acknowledged in histories and encyclopedias of contemporary literature.

Minimal Audio Plays:

A large number of exchanges between two speakers, for self-reading or performances.

Lovings:

Several hundred erotic stories no more than a single sentence long.

Poetry:

English Incredible English:

Thousands of unfamiliar English words, in an extended investigation into “found poetry.”

OTHERS COMPLIMENT PREVIOUISLY PUBLISHED BOOKS:

Preambles to the New reprints all the prefaces written for previous books both published and unpublished over the past five decades.

Additions to the Rise and Fall of Artists’ SoHo has a chapter missing from the first edition as well as elaborations and updates.

Here is the kindle site.

to come soon:

Autobiographies @ 70

There No Such Thing as a “No-Cost Delay”

New Entries Toward a Third Edition of my Dictionary of the Avant-Gardes

The Rockaways: Fall & Rise of NYC’s Beach Towns

www.richardkostelanetz.com

Jul

7

Tyler Cowen will be speaking at the New York Junto, tonight, July 7th, on "the great stagnation of capitalism" at the Mechanics Institute at 8 pm. All are welcome. 

Jun

21

I have been having an interesting discourse with friends and family on the subject of social media versus the news services on the timely delivery and accuracy of "facts" presented. My thesis is that social media is replacing traditional news sources as a better, more up to date, more accurate, broader coverage, more accurate, more varied source of current events than traditional news. The case in point was the tsunami here in Hawaii Island which was totally lost to traditional news. Governmental sources were wildly inaccurate declaring the danger over when it was just beginning here. Facebook and Youtube and other blogs and social media had current up to date, accurate data, video, sensor readings and on-site reporting while government and news were still asleep. Twitter broke the Bin Laden story. Everyone has data collectors on their cell phones. On the other hand traditional news is biases, has limited coverage, is slow, limited reporting capacity and notorious for getting the story completely wrong.

Jim Sogi adds:

Here are some interesting links

Democracy 2.0 in Iceland.

Democracy 2.0: Iceland crowdsources its next constitution  

Cyberdemocracy  

The town of Omaha

Jun

18

Technology is tricky, eh? It's great on the upswing, but it sure does hurt when it starts to get replaced by the next big thing.

I can't help but think of a friend of mine who is an engineer. About forty years ago he did consulting work for a small company that paid him partially with company stock, because actual cash was tight. The stock wasn't worth much, but he must have liked the people running the company, because he kept it. That little part of the account is now a 7-figure position that he can leave to the kids. The company's business? Gravel and rock.

Jun

17

Steve Nison in Candlesticks describes the "Abandoned Baby" pattern where price gaps up, then gaps down the next day.

This occurred two days ago. The pattern was bearish (despite prior drop) according to traditional candlestick theory and modern scientific analysis.

Jun

10

As a beach boy who doesn't much like to leave New York City, who has never owned a car and doesn't normally wear a watch, who thinks that meeting trains or planes scheduled to fixed times is strictly for neurotics, I've necessarily become a connoisseur, a gourmet really, of the beaches accessible by our Metropolitan Transit Authority. And I mean the real beaches available for swimming, serious swimming, not those crowded shorefront sunbathers' oases scattered through Brooklyn and Manhattan.

The most accessible, and always the most popular, has been the beach that runs continuously from Coney Island to the west to Brighton Beach on the east. Over two miles long, only one long block away from the elevated MTA stations, it has for over a century been a proletarian playground with a wide spacious boardwalk that runs from end to end. So convenient to public transportation is this beach that the walk from the boardwalk to the water's edge is usually longer than that from the subway to the boardwalk. Likewise conveniently, several subway lines once again (after reconstruction) service the four stations parallel to the beach: Brighton Beach, Ocean Parkway, Aquarium-W. 8th Street, and Stillwell Avenue-Coney Island.

The subtle truth of this beach is self-segregation, which is to say that the successively numbered bays (divided usually by rock jetties running perpendicularly from the shore into the ocean) attract radically different cultural groups. Nowadays, most of the people at bays 1 to 6 are Russian immigrants from nearby Brighton and Sheepshead Bay. By contrast, the bays in front of the Stillwell Avenue and Aquarium stations, numbered 10 through 13 or so, have hosted for the past few decades mostly Latino crowds. No signs tell prospective bathers where to go, but there are good reasons why, say, the sellers of mangoes wrapped in plastic bags, poked with a thin stick, and freshened with hot sauce rarely go east of bay 9. (I can recall a Russian friend asking me, "What are those?") Needless to say perhaps, most guidebooks don't acknowledge this segregation in PC times.

I myself have favored Bay 8, between the two crowds, because it has always been comparatively emptier, which is to say that the number of people at bays 9 or 7 are roughly 50% greater than that at bay 8 on weekends as well as weekdays. Bay 10 is likely to have twice as many people as Bay 8, and bay 11 yet more. The best way to explain why bay 8 should be so empty is, simply, that "no one goes there" for some three decades now. The only signs identifying the individual bays are small medallions mounted high on poles on the ocean side of the boardwalk; but if you can't locate them, ask the lifeguards. They usually know the official number of the bay to which they are assigned. Since I once before recommended Bay 8 in print without noticeable effect on the beach itself, I don't fear mentioning it again.

On the other side of bay 13 are beaches yet emptier, if they are open, but often closed with a make-shift fence, especially before July 4th, and patrolled by uniformed people threatening to arrest you if you bathe there. When open to water-lovers, these are the cleanest beaches for the simple reason that fewer people patronize them—don't forget the truth that human beings make the most water trash. On the western end of this beach is Sea Gate, a community secure behind a forbidding fence that goes out into the water; but just before (or east of) it is a beach that attracts people visibly different from Coney Island proper or Brighton. I'm told they are mostly Italian- Americans, but am not sure. Not knowing anyone residing in Sea Gate, I've never sampled its beaches; but my father, who did a summertime rental there with his buddies in the 1920s, tells me that they were great then. (Yes, 80 years ago, and he's still around, though not swimming.) You don't need to subscribe to the Gaia hypothesis to believe that Sea Gate beaches fronting into New York harbor are no less hospitable several decades later. Since most of the people on the entire Coney Island-Brighton beach speak languages other than English, the proletarian beach has become an immigrant beach, which means that their beach small talk thankfully won't be understood. The atmosphere is also pervasively mellow, even on the hottest days, mostly because most people plant themselves among their own kind with sufficient space between themselves and others; and everyone is as pleased as I am to be near the water. Indeed, public beaches are my model for mellow anarchy, where everyone is equal with respect to visible wealth or power, few trying to put down others. Or as a portly friend put it, his arm sweeping across the horizon, "Fashion models don't hang out here." If only the whole world could be forever like a public NYC beach.

For swimming, distance swimming, which is what I do, this beach can't be beat. Go out far enough and you can swim (and think) without needing to worry, as you might in a swimming pool, about colliding with someone else. If you visibly demonstrate that you know how to swim well, the lifeguards won't hassle you, no matter how far out you go. When I pointed to a slow swimmer chugging far out from shore, the chief lifeguard replied, confidently, "We know him." Though the water comes from the Atlantic Ocean, Coney Island/Brighton is actually a bay protected on the southwest by Sandy Hook, the New Jersey peninsula that extends north into New York harbor. and on the northeast by Breezy Point, the westernmost end of the Rockaways. Therefore, on most days the water here is placid; only with the threat of a hurricane will there be waves high enough to body surf. Surfboarding is unknown here.

Bear in mind that all New York City beaches are officially "open" from 10 am to 6 pm., from Memorial Day to Labor Day, which is to say that only during those times will they be staffed with lifeguards and ancillary City workers who give first-aid and scare away fisherman. However, since the beach isn't fenced off, people do on warmer days stay after six pm., when newcomers carrying fishing poles emerge. Since the temperature of the water is higher in September than in June, some patronize New York City beaches after they are officially "closed"–after the lifeguards (and garbage cans) have departed. Others swim into the winter. (A lady friend and I once celebrated New Year's Eve with a dip before midnight, preceding the "polar bears" photographed running gleefully into the ocean on New Year's Day. Prancing through cold water is easier to so than one thinks, if you keep the back of your head out of the water and don't stay too long.)

On truly hot summer nights, some try to stay overnight on this beach, which would be reasonable, did the City not send out noisy trucks in the middle of the night to churn garbage out of the sand. Awaking to these dinosaurs can be, I'm told, an unforgettable nightmare. Decades ago, people homeless and otherwise, both loved and loveless, could spend the night under the broad boardwalk; but this has become less possible since the Army Corps of Engineers raised the level of the beach sand roughly to that of the boardwalk, thereby making a windowless cave of the areas under the planks.

On the other side of waterfront houses east of Brighton is Manhattan Beach, much smaller, which is accessible by public bus from the Brighton Beach subway station. Perhaps on a crowded weekend a visit here is worth the inconvenience of a bus ride. I've heard of yet another public beach on the other side of Coney island, on the northwest coast, just east of Sea Gate, facing New York harbor with a spectacular view of lower Manhattan; but since getting there would require a trek from public transportation, I've never sampled it.

As the subways to the NYC beaches eventually emerge into open air, you can with your own eyes observe if, since you began, the weather has turned bad, as it does often in the summer. (Forget about what the weather forecaster "predicted." I'd sooner trust horse- touts.) If clouds threaten, you can simply disembark your train, sniff some fresher air, and go over the other side of an express-train track before returning home at no extra cost. One persuasive advantage of the main Coney Island-Brighton beach is its proximity to an MTA subway with continuous service; so that if the weather suddenly turns foul while you're at the beach, the elevated subway is only a short hustle away. Pity the day chumps on Fire Island waiting in a sudden rainstorm for a scheduled ferry to get them to a scheduled bus to get them to a scheduled train before they can connect to the MTA. Perish the nightmare.

The Rockaway beaches are different because they front on the Atlantic Ocean, much like the beaches in Fire Island or even the Hamptons, which is to say that here is salt water essentially no different (and no dirtier) than that in the purportedly classier watering holes to the east. A century ago, the Rockaway beaches attracted the same sorts of folk who nowadays go further east. I have a collection of century-old photographs from the Rockaways, portraying people looking prosperous not only on the boardwalk but overdressed in the water.

Sometimes the water on the Rockaway Beaches is placid; other times there are waves—real high waves, when this beach can be dangerous, especially to non-swimmers. The lifeguards here make many more saves than those at Coney Island, and several people drown here every year, usually before or after the lifeguards work or in areas that aren't watched. This Rockaway beach is over ten miles long; its boardwalk, while much narrower than that at Coney, is several miles long and remarkably empty in comparison.

 Unfortunately, much of this beach is officially closed, sometimes purportedly for a lack of bathers, which is true, as the bungalows near the ocean between 35th and 72nd Streets were scandalously demolished in the name of "urban renewal" four decades ago, leaving miles of oceanfront property pathetically empty ever since. Other times they are closed for a "shortage of lifeguards," which seems dubious, given how little they are paid. Anyone trying to swim in these fenced-off areas will soon attract a visit from a uniformed official. When a local newspaper tried to make a photograph of me standing, but clothed, in the water at 67th Street last summer, a succession of guys in beach jeeps came by to ask what we were doing, until one assured us that he read the paper.

This beach too is self-segregating in ways reflecting two factors— the kinds of people living in the streets near the beach and the routes of public transport. The beach around 60th Street is roughly 300 yards wide, 50 feet deep, kept officially open to service a grim- looking low-rent housing project overlooking the ocean. Sometime last summer, an New York Times's intrepid beach reporter wrote that the project people didn't patronize this beach because they thought it "too dirty," which it isn't, or because they couldn't swim, which seems more true. Therefore, during the weekdays it might have two dozen patrons (at 2000 square feet apiece) along with several lifeguards. The water on one side of the dividing jetty I find best for body surfing; that on the other side of the jetty has 200 yards for continuous swimming. On weekends, Caribbean-American families arrive, crowding up the water; and in the playground behind the beach are generous barbecues, one mostly Latino Caribbean, another West Indian. This 60th Street beach is directly accessible from Manhattan and Brooklyn on the A-train marked "Far Rockaway," not Lefferts Avenue or Ozone Park, just three stops after Kennedy airport.

The folks on the A-train with giant surfboards are probably going to the first stop, 90th Street, changing to the shuttle train that begins anew at Broad Channel, itself the first stop after JFK airport. The beach at 88th Street has been officially set aside for surfboarders. This shuttle train (marked "S") continues parallel to the ocean, only a few blocks away from the water, to its terminus at 116th Street, which is a shopping thoroughfare of sorts, with the only Rockaway stores offering beach paraphernalia (as well as Irish bars that are plentiful in this area, unlike, say, 60th Street, which has none). The beach at the end of 116th street is invariably the most crowded and boomboxy in the Rockaways, usually with teenagers and, I'm told, Brazilians. Older or quieter folks might prefer to get off at the shuttle stops at 98th or 105th Streets, the emptiest beach being around 103rd Street, or to walk west of 116th Street. The beaches in the 120s reflect the predominantly Irish-American population of Belle Harbor; those in the 130s and 140s the Jewish upper-middle-class of Neponsit. One reason why beaches here are under-populated is obnoxious street signs forbidding parking in the daytime during the summer months, which is to say that aspiring bathers driving here from elsewhere must either park in a friendly driveway or go somewhere else. The lack of public lavatories here also discourages outsiders.

Another way for the car-less to get to the Rockaway beaches is taking the public bus that originates near Brooklyn College, which is also the southern terminus of subways # 2 & 5. This bus # 35 proceeds down Flatbush Avenue over the Marine Parkway (aka Gil Hodges) Bridge to the Rockaways, where it swings east. The first stop is Jacob Riis Park, which is a large if aged New York State facility with lifeguards (some of whom wear spectacles, which are forbidden to NYC lifeguards) and locker facilities, as well as food concessions. Its 16 sections are likewise self-segregating. I've been reliably informed that at the eastern end is a beach favored nowadays by gays; two decades ago, it was the only nude beach within New York City. (Nowadays, those with Northern European "naturist" tastes go to Sandy Hook or eastern Long Island.) The section on the other, western end of Riis Park is reportedly favored by Italian-American teenagers who tend to get into fights among themselves. In between are a succession of crowds more subtlely defined. Need I mention that that entrance here, as in all the beaches mentioned favored by me, is free, that's FREE, which is my favorite price range, though the parking lot charges four bucks. Don't forget the inarguable truth of anarchist economics: the best things in life, in this case sunshine and surf, are free, absolutely free.

This # 35 bus can also take you through Neponsit and Belle Harbor, if you want to sample those sparse beaches, probably before walking down to 116th Street, where there is a public lavatory under the boardwalk, not to mention a subway home. Yet other public buses, # 21 and 53, come from Queens across Jamaica Bay over the other bridge to the east, Cross Bay, to run parallel to the shuttle train, likewise terminating at 116th Street.

On the other side of Riis Park is Fort Tilden, a sometime military base, which into the 1960s housed the Nike missiles facing out into the Atlantic. It has magnificent beaches that are officially closed and thus lacking lifeguards but nonetheless accessible. Indeed, several of us once celebrated Rosh Hashanah with a midnight swim here, and we were not alone on the beach at that time. Yet further to the west, well beyond public transportation, is Breezy Point, which is another gated community, much like Sea Gate, but far less secure, as its fences don't extend down the beach into the water. Here is certainly the most beautiful beach in New York City as well as the most isolated, separated by dozens of yards of sand dunes from the nearest housing.

Breezy Point, at the western end of the Rockaway peninsula, miles away from any other residential community, is known affectionately as the Irish Riviera. With modest detached houses tightly packed next to one another, in the largest coop of single-family homes in the US, mostly owned by police and firemen, it is very much its own world, with its own rules, typified by burly folks carrying their cans and bottles of beer unwrapped, even though they would arrest you for doing the same in Brooklyn or Manhattan. Breezy Point doesn't take kindly to uninvited guests, even if they can legitimately enter it by walking along the beach or bicycling past by gate on the main road. Perhaps I shouldn't have mentioned it at all.

A friend recommends the beach at 25th Street, at the end of a row of classic bungalows still occupied, which is also accessible from the direct A-train. "It's quite wide with dunes and that same wave energy," he tells me, "protected from erosion by Atlantic Beach," which is the western tip of the barrier island called Long Beach. (The barrier strip beyond it has Jones Beach; the next extending out into the ocean, to the east, is Fire Island.) However, I don't claim to know the beaches east of 60th Street, because, not unlike others in the Rockaways, I tend to regard everything east of a certain point to be fearsome. (For those residing further to the west, the cut-off points can be 88th Street, 103rd Street, 116th Street, or even 132nd Street; but that's another Rockaways story.)

 Because the New York City beaches are thankfully so accessible, I find that I can spend the morning writing, hop around noon into a subway where I read for an hour or so, swim for an hour and even take a nap before returning by subway home for dinner, an evening out or with my computer, and a night in my own bed. The only other cultural capital in the world where that is possible in my experience is Berlin, which has several comely lakes; but I'd rather body surf or swim in the ocean with its extra buoyancy than lap around a lake or a pool. And, accustomed to the easy access of MTA subway stations, my Metropass in hand, I'd prefer not to navigate all the hideous obstacles of Penn or Grand Central. Believe me, masochism need not be a prelude to the pleasure of a summertime beach.


Richard's website

Jun

3

Pete Earle wrote a very good article over at Mises.org.

The Aksumite civilization began coalescing approximately 400 years before the birth of Christ, with the aggregation of a number of tribes and clans in present-day Ethiopia.

Personally, I feel my heart swell knowing that I have friends as smart as Pete and the rest of the contributors to Dailyspeculations for that matter.

Jun

2

Dr. Niederhoffer,

I was always fascinated by your career. What's more interesting to me is your ability to stay in an excellent mental and physical shape. I recently read your "Letter to a Newborn Son", congratulations. I learned a lot from it, but your assumptions on Soviet system and Russian people were simply wrong. Everyone of course is entitled to their opinion, but because I learned a great deal of knowledge from your writings on how to trade and market in general, I felt obligated to correct the assumptions that you made.

Unlike you, I actually lived in Soviet Union, before, during and after collapse and in 1995 when I turned 15 we immigrated to US. Myth number one: "people had no incentives in Russia, no one worked hard, and they never produced what people wanted". The great example is simple, educational system in Soviet Union that put to shame any education that students receive in public US schools. My mom taught in school in Russia for most of her life, to the last day we stayed there. We lived through 3 hyperinflations and 2 devaluations, that wiped out all of her and my grandparents savings, and yet she diligently worked every day and taught to the best of her ability not for monetary compensation (she was getting bed linen sheets at one point as a salary), but for personal gratification of doing a good job (definition of a good job, her students learned the subject). And my father who worked as an engineer, and cared about his intellectual progress rather than how much and how he will be paid (died many years ago for disagreeing with some of the practices in that system). I was taught chess, tennis, piano and swimming all for free and all by excellent teachers while they were getting paid very little. A concept that is hard to grasp for most Americans.

Another example was both of my grandparents, who lived and worked in the Soviet time, and received University Education (even though they were both Jewish we were lucky enough to live in Tashkent where antisemitism was not as bad as in the rest of the Soviet Union) in engineering and in German language and both served during WW2.

I am surprised that you would write something like this, looking at the pattern of your performance it always seemed to me that money and performance is just a byproduct, and the important thing for you was/is an intellectual pursuit and making a right decision.

There are 2 groups of people that you met and talked with, group one: mostly ex cons, criminals, conniving, deceitful thieves that never produced anything of value in the Soviet system, those that despised "communists" and left Soviet Union in the 1970th and 80th, because they were smart enough to realized that the system is fixed and people in general are slaves in that system (unfortunately for them, they were not in charge).

Group two; those that are also conniving, deceitful thieves that never produced anything of value, but they used to be in charge of the system therefore there was no need to go anywhere (and they are still there).

I have a better explanation for the "phenomena" that you witnessed and experienced. I call it "homeless complex or slave complex". I walk around NYC and can't help, but notice that unlike in Russia homeless people are extremely obese, I decided to sit down with one and treat him for a dinner and ask him several questions. He finished everything we ordered and even though he was already full he ordered more and started eating more. I couldn't understand him and asked him why is he eating more if he was already full? He said "There might be nothing to eat tomorrow" (there are other reason why they obese, but I won't go into it here). When we came to America I worked with my mom in the pushcart that sold bagels, after everyday we gave all the leftover bagels to homeless people, the food never ended, day after day it would be the same homeless guys and yet they ate everything.

So the simple answer is "Russians" that you met are simply experiencing a "homeless complex" that if they won't steal everything today, from whomever they can (and outsiders like yourself make a perfect target) tomorrow it might run out. They learned from the experiences of the intellectuals that surrounded them and died in poverty and hopelessness. I also noticed that majority of people that buy cars that they can't afford are Russian and Chinese immigrants and African Americans. I call it "Slave complex". We are trying to make up for all those days of hunger.

 At your level you never met true "socialists" that do things that make no sense for someone like me, who understands and lives in US system (I remembered we were getting paid $70 per day for 12 hour shifts (even though sales were close to $900 per day, that's lots of bagels and coffee). It was a cash business, and the owner (who came to America in the 70th) paid so little because he assumed that we will steal from him, and of course my "socialist" mother would not dare, and she simply said, if you are not interested in working, don't work here). And still, I can not understand why is my mom who is currently making 50k a year as a High School teacher, stays every day after school and makes sure that every student will understand the subject before they go home. Nobody is paying her extra for it, nobody will fire her (she is tenured) if she is not there. There is no incentive for it. In America we call people like that, dedicated idiots.

After visiting Russia many times in the recent years, I realized that there are still lots of people like my mom in the country, but they are a dying hopeless, and in some cases homeless, breed because in the new system you are mostly surrounded by people with "homeless/slave complex".

I love the American system. At the age 18 I became a trader by chance and did well (high frequency with leverage 50-100 to 1). I quit for almost 4 years for 2 reasons. First, health; I was too young and did stupid wild things that caused my health condition to deteriorate rapidly and second, for precisely the reason you described, every day I would get up from my chair see that I made over 400k a day and "produced" very little for society (except maybe commissions or as Goldman said "we provide liquidity". I was a vulture. I made peace with it over the years by talking with other traders, became a marathon runner, and went back to trading because nothing else that was available interested me, and with the money I make I can create things for society (good thing now, my black box can be a vulture and I can finish my PhD).

Again, we are shaped by our experiences and we do and think what we like, but for some crazy reason (maybe to show you other side of the story) I felt obligated to spend 30 minutes of my life to write this email. Maybe it's genetic. You are much smarter and older than I am and have had more experience in life and maybe there is a mathematical explanation for that behavior (but it is not a simple matter of improving oneself, or lack of incentive to work hard, there was an incentive for masses it just wasn't monetary (and for those that were in power I like what Mr. Soros said, that being an agency issue) that's what Ayn Rand didn't get).

Keep up the good work,

Love reading your material,

Arthur. 

May

30

One of the more useful skills one can have, at least if one is a researcher, is knowing how to program a computer to extract online data, e.g. stock market prices.

I personally use VB.NET, but I'm sure most programming languages have built-in functions that make the process quite easy.

I wrote "quite" easy, as in everyone can do it, assuming they know basic programming. An introductory book, or a little tutoring from an experienced programmer, should be sufficient.

Two line are all it takes to download a web page:

Dim wc As New System.Net.WebClient wc.DownloadFile("http://EXAMPLE.com/DOWNLOADME.html", "savedFile.txt")

The above lines tell the computer to save the webpage's source as a text file named "savedFile.txt" in the same directory as the VB.NET program.

Naturally, one wouldn't make a program just to download a single page. It's when one needs to download dozens or more pages that the programming approach pays off. If these pages are numbered (they often are), then all one needs to do is to loop through them, e.g:

For i = 0 to 1000 Dim wc As New System.Net.WebClient wc.DownloadFile("http://EXAMPLE.com/DOWNLOADME.php?id=" & cstr(i), "savedFile-" & cstr(i) & ".txt") Next

With stock market data, one often needs to specify the tickers. Thankfully, this is easily overcome:

Dim tickerList() as String = {"ABC", "XYZ", "JPJ"} For i = 0 to tickerList.getUpperBound(0) Dim wc As New System.Net.WebClient wc.DownloadFile("http://EXAMPLE.com/DOWNLOADME.php?ticker=" & tickerList(i), "savedFile-" & tickerList(i) & ".txt") Next

If neither of these approaches work, then the process is slightly more challenging. One needs to search for links within the downloaded source files. It's doable, but too complicated to include in this text.

Although it's very fast to write the code for downloading webpages, the actual execution is very slow. This varies a lot with the internet line and proximity to the remote server, but a rule of thumb is that one page takes one second to download (one should also consider waiting a a short while between each download). One hour, as you know, exists of 3,600 seconds. One day is 86,400, and one month is 2.6 million seconds.

Because of these time concerns, I almost always download all the raw source files to a hard drive, and I do not manipulate them. You never want to find out that there's a bug in the data extraction algorithm, and then having to do all the downloading again. Once the files are on the hard drive, one can easily read them and then save the relevant information into new files again. Reading a file takes something like a hundredth of second or less. The downside with this approach, is that raw data takes up tremendous amounts of space. But with affordable 1TB external usb-connected drives, this is not a problem.

Although reading files from the HD is many, many times faster than downloading them in the first place, working with data loaded to the memory (RAM, as variables in the program) is many, many times faster than reading and writing files. I therefore prefer to make one, only one, text file (CSV) with all the relevant data from the raw data, and every time the program starts up, this file is loaded. When the program finishes, the manipulated variables are then saved to a text file.

I know I only scratched the surface here, but I hope this short text will inspire other researchers to learn the skill of automated data downloading. Once fluent in instructing computers to do your dirty work, you have an extremely valuable slave at your disposal.

P.S. Some useful codes can be found here.

Work in progress!

May

26

I apologize in advance for [an article that starts with] a quote from Sage, but…

Five Magic Formula Stocks For The Next Year:

Ontario-based Research in Motion ($23 billion market cap) is the creator of the BlackBerry smartphone and its operating system. It's been producing tremendous growth in recent years, but has been losing some market share to Google's Android smartphones and the iPhone recently, which has spooked many investors. My Greenblatt-based model thinks that's made it a bargain. With an earnings yield of 22.2% and a return on capital of 66.6%, it's the 11th-highest-ranked stock in the market, according to this model.

James Goldcamp writes: 

Interestingly when I run the screener on their own site (the strategy's author not Forbes) I don't get RIMM, but a host of other tech stalwarts like CSCO, MSFT, AMAT, HPQ, and DELL are returned in the screen of the 50 highest rated by the magic formula.

May

25

What % of NBA games these days are won by the team that puts in the first point, and can this be generalized to markets?

Jeff Watson writes: 

My grandfather used to tell me that a fist fight among boys was usually won by the kid who got in (not threw) the first punch. As an aside, I wonder if markets are susceptible to rhetorical sucker punches? 

Russ Sears writes:

In distance racing it is the opposite. You do not want to be out front at the start. This is especially true at High School races and at the big road races. Too much adrenalin spent at the beginning will waste it. The amount of aggression used at the start, may vary from sport to sport. But might I suggest that one on one sports or team against teams are different than sports like running or poker and trading where it is not just about beating the guy closest too you. You don't want to crush your opponent but use them or propel you to the front.

On the other hand you must be watching for signs they can hold the pace. Exhaustion can be contagious if the pacer slows, all follow. Plus you must have confidence in your plan and stick to it. Do you beat all with a kick or do you win with a blistering last mile?

Having thousands chasing you can be a rush, but it is also very draining to wear the target on your back. You take the wind hardest without any wind blocks and you are also wasting mental energy setting the pace.

What I think all the comments below suggest is there are really 2 questions you need to ask yourself…How aggressive do you want to be at the start? And the second one is how intimidating should you be?

As Scott implies below, thugs will nip at you until they know you are or are not armed. But to answer these 2 questions in most civilized matter, you have to know yourself; be confident in your capabilities and and equally realistic about your limitations.

In racing, poker and trading, patience is the key. Be aggressive when you truly have the edge. Believe in yourself enough to wait for that edge.

What may be more fruitful questions are: what are the signs that the opponent has started too fast? And what are the signs that they are exhausted? 

A Mr. T.C responds: 

I spent years running, and I choose to disagree a bit. I don't know what type of resume is required, but I did manage two state championships and posted a 4:12 mile time in college.

Going out first doesn't always mean having to go out fast. Runners settle in as soon as someone takes the lead, whether it be track or cross country. If you can use just a quick burst at the beginning to get the lead, you can then set the pace you need in order to win. If it buries others, then great, but if you not, then you know what you have in terms of a kick when it comes to the finish because you set the pace.

Losing stinks, but there is nothing worse than losing and still having something left in the tank. That can happen if you let someone else set the pace, and you can't outkick them. Why? Because they set a pace knowing they could still have a strong finish. Yes, there are rabbits, but they are pretty easy to ferret out. They sprint out too far, too far, plus in any race you should have a pretty good idea of who your competition is not just who are the participants are. The wind is a factor, but only when the wind is actually a factor. Giving yourself some distance gives those behind you no benefit. They will hit the same wind. The idea of having to chase someone down can be tiring, and mentally it can crush you if you catch them, then they pull away.

The real key is any race with hills. A leader can really stretch a lead on the hills. It is where races are won and lost. I can tell you from experience, you do not want to be chasing on a hill nor do you want someone else to set your pace on a hill. If you have the discipline then being in front means you do not have to catch anyone else, and you merely only have to run the race. The same race you've trained for day in and day out. The same race you've run in your head so many times.

When I was good (and believe me when I say I am not good anymore), there was a span of 12 races that I did not lose (it was the 800m for those that care). In that time, I did not even trail a single lap. My first loss came when I altered strategy and ran with the pack. Through a combination of injury and mental roadblocks, I didn't win again after that…until the 4:12 road mile in which I never trailed. It is rarely about adrenalin. It is about preparation, planning, and running your race. And no, for some, it isn't from the front, but for others, they become almost unbeatable if you give them even an inch.

Russ Sears responds:

Yes, there definitely are times to be the front runner. If you are better than everyone in the field and know it, taking the lead, pushing the pace is the way to go. Winning 8 races in a row shows that you had out grown your competition which does happen in high school and college. But as you imply, if a rabbit sprints to the lead let them go. The goal is not to win the first 100 meter, but the race.

A 4:12 mile would never have happened without preparation, planning and running your race, but also a personal record also never happens without digging deeper and find something extra within yourself at the end. As a 2:58 1200 meter runner, but only a 4:05 miler; I did not have a kick. So I understand that often you do not want to leave it down to the last 100 meter and you beat them when you can. But having to lead from start to finish sets yourself up for mental roadblocks in tough races.

Finally, I must disagree somewhat about the hills. If you are clearly better than your competition then the hills may further show this. But if your competition is equal or slightly better than you, extra resistance of the hills prevent you from putting too much distance between you.

On my hill workouts, I would practice relaxing at the punishing pace up a hill. In a race I would let my equal push trying to get away but near the top when the heart rates are at the highest, I take the lead. After the peak I then tried to stretch the lead on the level or down hill parts.

As a high school coach, kids would often think that we did hill work so we could beat the competition on the hills. So they would try to demolish the competition on the hills. But I would tell them it was to withstand the hills, and learn to relax while still giving the most effort, so that you can beat them when they are hurting the most. It is like buying the dips or taking out the cane.

Sam Marx writes:

4:05 is very impressive.

The greatest mile race I ever saw was Roger Bannister defeating John Landy at the Empire Games in the early 50s. For those of you unfamiliar with these names, etc., Bannister, of England, was the first one to run the mile in under 4 minutes, a major athletic feat at the time. John Landy, an Australian, broke Bannister's record shortly thereafter.

The two greatest milers in the world, both of English background, by a strange quirk of scheduling would then shortly meet thereafter and compete at the Empire Games.

In their race, Landy had the lead on the 4th lap going around the turn and looked over his left shoulder for Bannister. As Landy was looking, Bannister darted past him on the right took the lead for the last 100 yds and won.

It was the first time two men ran the mile in the same race in under 4 minutes or the first time anyone ran the mile in under 4 minutes and lost.

Maybe the film clip is on the net. An exciting race to watch and historic.

Russ Sears adds:

The distance runners are posting some incredible times. Granted the Boston marathon was wind aided point to point course, but simply amazing.

Thimes remained flat and perhaps a bit slower from 1985-1994 then times started dropping again.

Some of it is in the new training methods, some is due to the coaching available to most that show a promise, some is due to more ways to make a living while still coming up the ranks, and some may be due to the drugs available, but I suspect many of the best are clean, and those that aren't add motivation.

Jay Pasch writes:

Jeff, quite the interesting post as my father coached the same thing, and being small in stature, that it's not the size of the dog in the fight but the fight in the dog, and to work in tight, inside, where you have the advantage.

Scott Brooks writes:

Having grown up in a "rough" neighborhood and in light of the fact that I've been stabbed 3 times, I have always found that the best course of action was to avoid the fight at almost any cost.

I learned early on in life that there are "guys" out there who don't see the world the way 99% of the people do. They don't feel pain or fear like like 99% of the world. They are capable of a level of brutality and violence that is, quite simply, mind boggling. The way they fight and the things they are willing to do to their opponent in a fight is truly scary. They win fights because they are willing to go to a level of violence that 99% of the people in the world are not willing to escalate too.

My brother and three of uncles were "those guys". I witnessed them do things in fights that was truly stunning. My uncles grew up in one of the worst toughest neighborhoods in St. Louis. They were, hands down, the toughest guys in that neighborhood….no one was a close second to them. Two of these uncles were only a 2 - 5 years older than me.

I remember one time when I was around 12 years old, I was over at my grandmothers house visiting. I was playing down the street from her house when these 4 guys came up to me and started to "accost" me. They surrounded me, started shoving me around and telling me to give them my money, and that they were going to beat the $#!% out of me. Basically, I think they picked on me because they didn't recognize me (they left the rest of the guys I was playing with alone….all of whom were from the neighborhood). One of the thugs asked me what I was doing in their neighborhood and I told them I was visiting my grandma. They kept picking on me. I was really scared and my mind was racing as they were starting "the process" of beating me up. It was then that a possible way out of this situation occurred to me. I asked the guys if they knew my uncles. They, of course, didn't care about knowing my uncles. So I said, you don't know my uncles, Mark and Kerry?

The next moment became frozen in time. You could have heard a pin drop. They immediately stopped shoving me around and all they stood perfectly still, first staring at me with a shocked look on their face, then their eyes began to dart from side to side looking at each other with the same stunned look on their face.

They immediately began to back peddle. They became my best friends and let me know that they were just joking around and were just messing with me. They said they were good friends with Mark and Kerry and that there was no reason to tell either of them. The "fear" in their eyes and their body language was as visible as lava pouring out of an erupting volcano. The mere mention of the names "Mark and Kerry" was like flipping on a light switch in a dark room. These guys who were just getting ready to steal my money and beat me up, who quickly became my friends, were now really anxious to leave the area as quickly as possible.

What happened next was really interesting.

When I saw my uncle Mark later in the day, I told him what had happened. He asked me to describe the guys who tried to mug me. Mark knew exactly who the guys were. Mark told me to stay at the house and he left. He returned some time later with bloody knuckles. He said he took care of the problem and that no one in the neighborhood would ever bother me again.

He was right. I was never bothered again. I saw those guys a few times after that. They not only never bothered me, they were semi-pleasant, while at the same time trying to get away from me as quickly as possible.

Between the level of violence that my uncles, my brother were capable of administering, I have decided that avoiding a fight is always the best policy….why take a chance on running into someone like my brother or uncles.

And anyway, even if you get into a fight and whip the other guys butt, if lands one good punch, you'll be laying in bed for the next week saying to yourself, "yeah, I won that fight, but man oh man, does my broken nose really hurt".

Call me a wuss if you want, but know this: I've been in more fights than most and had my butt WHUPPED by numerous people……and I never enjoyed any of them. I'll take "avoid" over fight any day of the week.

Sam Marx writes:

I grew up in the Weequahic section of Newark NJ, in the '40's (popularized in Phillip Roth's books).

We didn't fight we sued.

Steve Ellison writes:

I find it nearly impossible to literally score the first point in the market because of the bid-ask spread. If I hit the ask, chances are the next transaction will hit the bid. If I have a limit order to buy, it will not be filled unless the price is going lower. The best I can hope for is the analogy Mr. Sogi once made to a football play: the quarterback always has to retreat a few steps from the line of scrimmage to start the play. Similarly, the strategy on a hockey face-off is to draw the puck back to the defensemen so they can establish puck control and start a play.

Vince Fulco writes:

I often dream of being in the inner circle particularly under the scenarios of a nice outsized move off the O/N lows before the cash session. Then cash opens, declines all of 1/2 pt quickly, stops on a dime then zooms higher doubling the overall move.

Steve Ellison writes:

There are interesting parallels to the three choices for commerce posited by William J. Bernstein in his book A Splendid Exchange: trade, raid, or protect.

May

4

I was a white collar criminal. Convicted of securities fraud. I sold securities that were a classic ponzi. I went to a federal prison and served 33 months. Why did I do it? The answer is not easy. I am currently 41, and committed my crimes at the age of 27. I did it because I was impatient for success. I felt that the world was bitter and cold and that I should also be bitter and cold. I did it to impress my father. He never thought much of me and I desperately wanted his acceptance. I did it fulfill my own feelings of inadequacy. I did it for the money, it was easy and fast.

In retrospect, I was a monster. A sociopath. A very ugly person.

Would I do it again? If the stakes were right, I probably would. I have felt the terrible sting of the federal whip, have been subjected to the worst the penal system has to offer. Stuffed into a solitary cage for 39 days, slept on a cold floor with only a blanket of human hair and fingernails. Been publicly humiliated in the newspaper, TV, and internet. So, why would I possibly take such a risk?

May

4

It may take Trump to get the photos released to the public.

News now cautions USA about too much jubilation!

After 9/11, we were cautioned that America might be showing too much patriotism!

G. Humbert writes:

Trump will not get involved in this as this is a loser issue for him any which way you look at it. He is just biding his time, waiting for the hoopla to die down before starting the next phase of his claims and demands. I bet OBL owes his untimely demise to Trump's success in garnering the media's attention. You've got to admit this was pretty effective in derailing Trump's momentum. Plus it takes time to do the forensic analysis on the birth certificate and decide what to do next.

May

4

Let us augment the Zacharian situation which I used to call a Finnegan where you look at the screen and a price is too terrible to contemplate because it's ruinous to you, and then you realize to your utter delight that the price was a misprint on the screen, and you're whole, and not losing at all, but …. by the end of the day or week, the price you feared actually turns out to be worse than you feared and you lose even more. Such a situation occurred in conjunction with the flash crash of May 6 when the price of 1060, which was ruinous for individual stocks and S&P was there for a second, but then it rose 8% in a day, and then Zachar predicted it would go bak there after it rose 100 points.

Okay, two other situations deserve a name.

You look at the screen, and you smile. Your market or stock is way up you think. But then– "Oh no," you were looking at the wrong market. And your thing is the only one that's not good or up if your long. That happened to me with my Rimm and Vix today. I see a market way up. I smile. Oh no. It's not Rimm, it's Vix that's way up.

What should this be called. And what about the variant where you have a price in mind to get out, and then you go to shave or take a call from a non-agenarian, and the price is realized, but by the time you can enter the order it's not there any more. And it never gets back.

A related situation is that you're out of office for a second, and you hear an announcement. The economy is very strong. However, bonds are down because of the crazy idea that a strong economy is inflationary. But that's causing stocks to go down. Okay, you're losing money on your longs. The market is crazy right? You grit your teeth and go back to take a look. Amazingly the bonds are way up however. WHY? Because stocks are way down. In other words, you lost on stocks because bonds were going to be down, but they actually went up when stocks went down, so you lost for an opposite reason.

What are the proper names for all these? And what variants of these type of things deserve a name?

Peter Earle writes:

The one where you look at the screen and smile– perhaps that moment is best termed an "Eastwood", a "Harry", or a "Dirty Harry", or being struck with/by (a) "Sudden Impact", as demonstrated by the relevant portion of this scene: first from 0:18 to 0:51…and then from approximately 1:05 to 1:13.

Chris Tucker writes: 

The last situation could be referred to as a "Cyclone", not for the storm, but in honor of the Chair and the iconic roller coaster of his youthful digs at Coney Island. The Cyclone is terrifying, filled with thrills, dips, lunges and jerks. And people keep coming back to plunk down there hard earned cash for more.

Very nice short history of the park at Coney Island here.

Vince Fulco writes: 

The Cyclone seems most apropos. What is it about Mr. Market's ability, esp. with these leveraged ETFs to give you a nice gain but not hit your target price and then revert back to your cost in an instant (many multiple percent away and seemingly not to be seen again in the near future with the new info) then turn within pennies and return you back to profit mode testing your temperament so mightily? The silver ETFs have acted like scalded dogs the last few days.

George Zachar comments: 

The Coney Island Cyclone was the signature thrill ride of my youth. I've ridden it well over 100 times.

What's always fascinated me about it, is how the experience varied with one's position in the 12 rows of seats.

In the very front, with the center of gravity many feet behind you, the visual danger signs led the acceleration by a couple of seconds, giving you the sensation of hanging over a cliff.

In the very back, my favorite spot, the acceleration came before you could see the rails dip, so it would catch you unawares and whip you sooner/faster than your mind anticipated.

Also, at the start of the right turn off the NW corner, the right-front wheels would leave the track for an instant, making first-time riders wonder if they were destined to die on Surf Avenue, in the shadow of the D train.

Alston Mabry writes:

The one where you're out of the office for a second, and hear an announcement– It's called "duck season".

The followup is too good to leave out: "Pronoun trouble".

Craig Mee writes:

About the one where "it's even worse than the mistaken price you mistakenly thought was your" :

I thought you were going to say, Victor, if after getting heart palpitations at the first incorrect reading, just by the fact you had done this, it's better to get out of your said stock now anyway, as you've brought bad karma to the trade.

Apr

25

Margot Adler, from National Public Radio, interviewed me Saturday, and took my "Atlas Shrugged" walking tour.

Her piece will be three minutes long and will air Tuesday.

Google NPR for the times.

Josh Huntington writes: 

Hi Fred,

I really enjoyed your piece on NPR, and you should be very proud. Here's the link to the NPR interview, in case some of your friends missed it.

Best,

Josh

Apr

20

I posted this some months back:

"Considering the nature of governments, markets and timing, I find it instructive to contrast the timing of the British government's sale of gold in 1998 (which came at, or at least very near, the lowest prices of a decade-plus time frame) against the timing of Blackstone's IPO, which came within several hundred points of the highest levels the DJIA had ever seen.

It seems to me that the perfectly logical, state hostility toward markets (begrudging their existence for purposes of fruitful taxation) would suggest that unique issuance events and decisions associated with them are likely to coincide with market bottoms, but that study has a very small 'n'."

I wonder if the government's sale of GM stock– moreover, and consistently, at a loss– is a logical, perhaps generational, buying opportunity. Alternately, one wonders if the multiple factors of unions under siege, radioactive Japanese suppliers, and the like are inspiring Barry & Co. to leave a bad situation badly before bad gets worse.

Apr

19

Hi Victor,

A lot has happened since we spoke after my Junto presentation in February.

I've made "Inside the Mind of Ayn Rand" more compelling by focusing on what's at stake for the world if we don't embrace Rand's concepts of limited government, free markets and reason. And I've made the story of her life–epic as it was–more of an enhancement to the story rather than the main event. Thanks again for helping me see that with your feedback.

Also, in talking to people after the Junto meeting, I recognized that many Rand fans want to support the film but aren't in a position to be investors (and I'm sure there are thousands of such fans around the world). So we just launched a grassroots internet fundraising effort that we are very excited about:

I hope you will take a look. As you can see, for anyone wanting to help to get the film made, it makes it easy for them to join in. They can see our new two minute video about the project (starring yours truly!). Of course, we chose to launch the site right now to take advantage of excitement surrounding the "Atlas" movie.

This grassroots approach joins the other three financing strategies we are using: private investment, institutional support, and pre-sales to distributors.

We are hoping that everyone will want to jump in at whatever level they are comfortable with, and please do forward this to any others that you think would be interested.

Thanks for everything,

Duncan

Apr

17

Let's say a high PE stock in an efficient market trades at 1x PEG. Then the share price needs to appreciate at he PE level (20 -> 20%) for the valuation to remain unchanged. This higher drift might be an argument for growth stock investing. Is this an argument usually seen?

Gary Rogan writes:

A simpler version is often seen, simply related to "growth" corresponding to a higher growth in earnings or that the stock in underpriced based on the high growth and not high enough PE. Few people make an argument based on the valuation in the sense of PEG remaining unchanged, probably because there is no rule that it has to remained unchanged due to the volatility of growth rates in growth stocks.

Apr

10

I've been thinking a lot about randomness lately. Trying to define randomness, I presume that it can only be defined negatively, as in the absence of any discernible or systematic patterns. I believe that complete randomness can only be disproved and not proven; but a test will only detect a single pattern or a group of related patterns. I would appreciate any thoughts on randomness in a philosophical vein as there might be a few meals lying right under our noses.

Gary Rogan writes:

Just some random thoughts on the subject. Randomness signifies the lack of an informational connection between the process that generates one even and any other event. There are two kinds of connections: the specific knowledge of one process knowing what the other one is doing, and the inherent construction similarity between the processes. Imagine that you need to pick 100 random events. You could pick 100 individuals, put them in separate rooms and let them pick a number each. They will satisfy the lack of the first type of connection, but not the second. Their picks will not be truly random because human beings of any kind have enough similarities to not satisfy the second, yet their picks will be more random than if they were together as a group. So the trick is to find processes that have not connection to each other and no preferences to generate any particular number within the rules of what's acceptable. 

George Parkanyi adds: 

Randomness seems to be overlaid on some kind of order – a basic framework within which seemingly unconnected events then play out to set up our environment and our experiences. Kind of like a board game - a basic set of rules with additional random elements, say dice, shuffled cards and individual decisions that ensure that no two games will ever be played exactly the same way. The game overall works toward a predictable outcome (someone winning), but the means of getting there will never be the same for any two plays. 

Mark Schuetz writes: 

Apologies if Rumsfeld's quote has become hackneyed, but I think it describes one facet of randomness well.

"There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know."

Some always think of randomness as "known unknowns": everything was determined by some underlying process or fits some probability distribution. Depending on one's definition of randomness, perhaps there are more "unknown unknowns" than meets the eye: a truly random event or series of events might not determined by some underlying logical process and a descriptive probability distribution might not exist or might be impossible to know.

Russ Sears adds:

Randomness is a major topic in Abstract Algebra, and studying it almost became my career after grad school. Not sure if I can do it justice now, as I have been away from the subject for so long. However, in sequence of numbers (most events/things can be numbered), if there is no way to discern step t+delta from t even by narrowing its probability down then by most definitions it is random. For practical matters to "create" something that is random it is really a matter of hiding the pattern so that these probability distributions can not be discovered. You do this by the size of the numbers involved. In other words it is deterministic (it really can be discerned by cause and events ) but the numbers involved make it impossible to do so either because the measurement of the determining factors are impossible to categorized with enough accuracy to determine (think lottery ball drawings or weather/chaos) or because the "code" is varied and on such a large scale that only those with the "key" can decipher it.

Apr

5

I know that there have been posts not long ago on great books for kids regarding business. My seven year old son has been showing a keen interest in the idea of business and particularly in entrepreneurship. I was wondering if readers of this site might share the names of books or other resources that might assist me in fostering this in his development. The kid wants to make money!

Mark Schuetz writes: 

Hate to bring up a touchy subject, but I think it would be fun for kids to read about Buffett starting out. Definitely an interesting story about how he went from a paper route, to repairing pinball machines, to buying and renting a house, and so on, and SAVED money the whole time instead of spending it. It doesn't even have to be Buffett– maybe a kid could relate more to reading about famous businesspeople/investors when they were young and how they developed even at a very young age. It could inspire kids to think about more current ideas for themselves (very few will be interested in repairing pinball machines).

An editor writes: 

When I was a kid I really enjoyed the book The Toothpaste Millionaire about a 6th grader who starts a business selling toothpaste and becomes very successful. 

Victor Niederhoffer recommends: 

Self Help by Samuel Smiles, The Incredible Bread Machine, The Little Red Hen, Letters from a Self Made Merchant to his Son, by Lorimer.

John Floyd adds:

Toothpaste Millionaire

The Girl Who Owned a City.

Gibbons Burke adds: 

This is an oldie but a goodie: The Richest Man in Babylon by George S. Clason. Many meals for a lifetime in this book.

Another good one for personal development skills helpful in business is Og Mandino's The Greatest Salesman in the World.

Mar

28

What is the American Dream?

The Dream is to work, to have a home, to get ahead. You can start as a janitor and become the owner of the building. The American Dream is not written into the constitution but it is so ingrained in the national psyche that it might as well be.

Bo Keely comments:

The American Dream is still alive and that's why I return occasionally to USA from globetrotting to selective Shangri-Las around the world. Though the American Dream there is diminished and threaded with nightmares, after 100+ countries it's still the best place to own property, work to get ahead, and use as a base to travel from during retirement. 

Mar

22

You think you don't have an edge in the market, well, if you don't have this you may just have one…… Toxoplasmosis:

Around 15 to 20 per cent of Americans are infected with the parasite, according to a study by the U.S. Centres for Disease Control and Infection (CDC).

The study suggests that male carriers have shorter attention spans, a greater likelihood of breaking rules and taking risks, and are more independent, anti-social, suspicious, jealous and morose. The behaviors observed, if caused by the parasite, are likely due to infection and low-grade encephalitis, which is marked by the presence of cysts in the human brain, which may produce or induce production of a neurotransmitter, possibly dopamine, therefore acting similarly to dopamine re-uptake inhibitor type antidepressants and stimulants.

Femi Adebajo:

There we go again so many conditional verbs and clauses… suggests….likelihood….if….likely due to….may produce..or induce the production of…possibly dopamine… a flimsy theory built on a speculative (not in a trading sense) foundation.

Victor Niederhoffer explains:

Okay. The mice make themselves sexy so they be eaten by cats. Then the cats spread the mice around through the sewerage system. The breakout occurs and the trend followers jump in (one can now say this with much greater impunity than the last year), and then the trend followers and pivot boys and breakout boys spread their genes, I mean money, around to the locals and the homeostasis boys when they get out. In former days the locals played a role in the detritovore works. 

Anon writes:

[I hate ladies with too many cats.] The scented candle, mystical music, flavored coffee crowd always that has the de rigeur loofah brush hanging somewhere in the shower. It's all part of the Bed, Bath, and Beyond archetype.

Russ Sears replies:

Considering the alternative Bed, Bath and Beyond is to be praised. Besides John Adam's compassionate pining over his alcoholic son, another major difference between David McCullough's book [John Adams ] versus the mini series movie version was his relationship with Ben Franklin. It was not the moral filth of Franklin's mistress that Adams wrote his wife about that he could not stand, it was the literal smell and filth of the pets of this mistress. This filth was hard for Adam's to get past.

Comparing the movie version to the books is a good lesson in the necessary pandering to the liberal stereotyping needed in a movie this days. Let the historical facts be damned.

 

Mar

22

One 2AM in 1974 I was awakened by a call from an irate man who said, "Mr. Shay , the (expletive) Lifetime Warranty waterbed you sold me two years ago has a leak in the left front corner and the water is dripping through the floor and ruining our new dining room set downstairs. You're liable for it of course. It costs $1645.33 . My wife is hysterical and she's trying to call her brother who's a lawyer but he's in Washington, D.C. right now and can't be reached until the morning. He added he was calling from Eugene, Oregon, as if that and his lawyer's being in the capital carried the implicit threats that Eugeneites were not to be trifled with and that his lawyer relative was in D.C. advising President Ford for the day. And merely warming up for dealing with me.

It was not the first Womb Waterbed leak complaint I'd received over the four years that had passed since I financed my son's high school project. His canny business plan had incorporated a "Lifetime Warranty Against Leakage!" in big letters, followed by a weasel-worded 6 point type line : "or your money back".

"I'm sorry for your trouble," I said to my caller, "but I think you want my son Richard. He used to be in the waterbed business four years ago. It was his high school business project . You've called me on his temporary phone number at the time."

"Put him on!" said my complainant.

"I can't," I said affably. "He's in Italy , somewhere in the Dolomite mountains, working as a dog minder for a Mafia family. They have 12 big guard dogs that love him and the family doesn't let him use their phone for anything that's not dog related. Give me your address. I'll have Dick send you a refund. $29 less shipping? Right? Do you happen to have your Womb Waterbed receipt in front of you?"

He uttered a string of expletives and hung up.

Aside from laying out about $ 800 for some 50 Taiwanese waterbeds that smelled as if they'd survived a barber shop tsunami, my most important contribution to the business , I think, came the day following an article on Womb Waterbeds in the local Deerfield Review. CBS wanted to come out and do a 12 minute segment at Dick's 80 buck a month one-floor-up headquarters. I advised Dick that whatever he and his girl-friend employee Jody did,whenever the TV guy came close to quizzing them on why people liked waterbeds- for God's sake to forgo part of his usual sales pitch, delivered with an innocuous shrug: "People say it enhances their sex life."

After the CBS show in which Dick deftly fended off anything about sex, (not easy for a 17 year old being pushed by a 1 and l/2 entenderist, a wannabe Mike Wallace) ,Womb Waterbed sales climbed nicely.

When Dick left home shortly afterward to seek his fortune abroad, all I got stuck for was three or four leaky Wombs, one month's rent and two months of storage. A cheap business learning experience for someone with three other enterprising kids.

Mar

22

One wonders whether such past anomalies found as the "the accrual anomaly" based on large accruals in non-cash assets, like inventory and receiveables, which are manipulatable, that flow into earnings are overstating the persistent ability to profit, such as this,  are still profitable. A quote in Malkiel–, "I have never seen a back test that I didn't love, but devil take the hindmost when you try to use it" comes to mind, but such studies that look at the balance sheets seem less likely to have been exploited.

Paul Hendry comments: 

The basic thrust of the paper is that individual equity investors with limited attention are fixated on accounting profitability while neglecting cashflow profitability. The primary cause of mispricing is the net operating assets anomaly or "balance sheet bloat".

Reading over this 50 page study which is highly technical but has a few interesting points:

-They do not believe that mutual funds who identify the mispricing take out all the arbitrage opportunity.
-Most equities with high accruals on the books are typically small size, low price, low liquidity but high systematic risk. Traits not appealing to funds.
-High institutional ownership reduces accrual mispricing.
-Growth orientated mutual funds outperform benchmarks.
-Funds that concentrate of fewer industries perform better after adjusting for risks and styles.
-In general, mutual funds underperform the market by 0.6% to 1%. Transactions costs are significant.

If you accepted their findings then a mutual fund investor should go into an aggressive growth fund, that goes both long and short, low transaction costs, specializing in one or few industries. To capture the mispricing would take consistent analysis that a fund has the resources to do..
 

Mar

14

THE MUSIC NEVER STOPPED

Directed by Jim Kohlberg

Reviewed by marion ds dreyfus

Cast: J.K. Simmons, Julia Ormond, Cara Seymour, Lou Taylor Pucci

Of the 39 prime movie plots, one that gets hardly any coverage or ink is that between a father and his grown son. Film writers are usually men, and men seem to be about lots of things, but apparently, according to male informants, one of them is not often family. Success. Competition. Honeys. Sports. Money. Expensive toys. But rarely hanging with a kid, nurturing recuperation in an afflicted offspring. OK: Hold the objections—how many men you know do the domestic two-step with an ailing son or daughter?

This film is different. Not only does it involve a loving if often inarticulate father, but the marriage between the parents of their brain-traumatized son is a solid one, with a loving mother and wife (British actress Cara Seymour), and a devoted if slightly old-line father. The film involves the true case of a rare sidelined recovering brain-tumor patient, Gabriel Sawyer (Lou Taylor Pucci) who is ‘treated’ for his brain lesions and deficits by the determined effort of a music therapist Dianne Daley (gorgeous, gemutliche Julia Ormond), a mother (Seymour, most recently of An Education, 2009) and determined father, Henry Sawyer (J.K. Simmons, a sturdy, if usually sour, character actor seen in a wide variety of TV and film roles) as the afflicted’s conflicted no-nonsense father.

Fresh from its acclaim at the 2011 Sundance Film Festival, "The Music Never Stopped" chronicles a heartwarming trajectory of a father and son adjusting to cerebral trauma and a lifetime of missed opportunities through the music that embodied the generational breakaway of the 1960s. Based on a case study by Dr. Oliver Sacks, MD (Awakenings) the film features prominent tracks from Bob Dylan, The Beatles and Grateful Dead, Donovan and The Stones.

There is speculation that hardly needs rebuttal over the casting decisions being much more modest than they would have been had the director not had to pay out vast royalties for the costly music rights; but for all the B-roll actors cast, the truth is, they are play their parts well. It’s a breather not seeing the Hoffmans or Streeps grabbing up all the oxygen in every intimate drama on the event horizon.

Brain tumors are not, generally speaking, a sexy clay for a non-docu armature. Sacks recreates a sensitive and instructive prescription for involvement from his real-life case history. It’s a story that engages us below the neuronal threshold—we plump for Gabriel to pull through, not giving ourselves much hope that anything determinative will happen; we’re by now too entrenched in the contemporary sophisticated wine of the incurable. But seeing the nearly autistic man-boy emerge into vibrancy (Gabriel is, after all, the name of the Archangel, the Holy Messenger: Jude 1:9) with the music that sets most toes to tapping has many rewards for the viewer interested in the clinical progress of this handsome, sad, lost apotheosis of loss.

After a week of catastrophe and harrowing vision, redemption can be satisfying.

Marion DS Dreyfus . . . 20©11

Mar

12

Just wondering if a west coast fund's 2010 continued bond buying on the way up to the high, and their complete position liquidation in second half– might be seen as an ultimate insider trade…

See, I remember my dilemma on Oct. 13th 1989, the day later dubbed Friday the 13th in U.S. stock history.

Gold futures were closing at a relatively early 2.30pm; and somewhere in the last half-hour the newswires reported a snag in the UAL deal. In my view, S&P took out important support intraday and looked ominous from there. I began pyramiding my Gold longs, that barely started climbing late in the day from $366 to over $367 toward the 2.29pm closing minute. I was uber-confident Long "over the weekend" - but my accumulated position exceeded the overnight margin deposit requirement by an extra 1000 lots!

Thank Goodness, I employed the tallest broker at the Comex, who commanded authority in the pit -and I conveyed a very unusual order to him: show 1000 @ 367.5, but only agree to sell ALL or NOTHING. He tried to get attention of every big dealer in the usual closing minute mayhem - but got nothing, and the bell rang… In the next hour, the S&P crash got into second and third gear and spiraled into total limit-down halt… So it's Friday night, and a personal friend dealer calling: I have Goldman/Aron on the phone, they say they couldn't trade with you on the close -but asking if you could make them an EFP market for some size, they will not hold you… Well making market implied at least 40 lots. I utter 369.4/369.8; they buy 40, and I say enough…thanks. Of course, Sydney opened Sunday night with a 371 bid…

But the reason for my story is this– if I had a big brother that Friday whisper "keep buying as you please, knock yourself out… when you decide to get rid of them - we'll take the whole thing from you at the market" - would I ever halt buying and start offering?

So, conveniently, the fund kept pyramiding all the way to Aug/Sep top– and then the Bernanke was a declared taker of all of their size for the rest of the year; I doubt they ever had to hit market bids… Did I get anything wrong there?

Mar

12

Super Moon are discussed in the two following article links and are considered by the authors to have a very small role, if any, in increased seismicity. But other effects on March 19th may appear as noted in article #1 below. Water held behind dams, however, has been looked at as a possible source of "induced seismicity" in some cases–so the effect of the weight and movement of water perhaps can not be entirely dismissed.

1)

"So let’s hear the bottom line. Will the March 19, 2011 full moon – which coincides with the moon’s closest point to Earth – bring more earthquakes and tsunamis? Will it cause volcanic eruptions? Let me ask another question first. Why, I wonder, do people want to believe in predictions of disasters?

The moon’s distance from Earth is changing continually. The full moon on March 19 will be a close one, but there’s no scientific evidence it will cause any of those events. The March 11 moon does not prove the supermoon-earthquake theory. In fact, it disproves it. Plus we know of closer full moons than the March 19 moon that did no harm.

Will the March 19, 2011 close full moon cause floods? Yes, that’s different. Now we’re on more solid ground. Close full moons do cause maximum tidal ranges. So if a storm moves into a coastline on the day a full moon is closest, it can cause flooding along that coast. If you live along a coast, and a storm is heading your way on or around March 19 … expect possible flooding and take precautions."

2)

'So, what can we take away from all this? * The Moon plays a very small role in increasing seismicity and volcanic activity on Earth - potentially increasing activity ~1% during full/new moons.

* The change in the gravitational pull from the Moon during apogee and perigee is small.

* Beyond this, there is no statistically-sound evidence that geologic disasters can be predicted based on lunar alignments or distance (or any other astronomical phenomena).

* The keys to understanding how to predict earthquakes or eruptions (if at all possible) lie within the Earth, not deep in space.

* From Chris Rowan: "The moon does not magically load up plate boundary faults or fill magma chambers … The most the moon can do is slightly alter the timing of an earthquake or eruption that was on the verge of happening anyway." '

Mar

9

It seems logical to increase the money supply during a liquidity crisis, as happened in 2009. But to persist in money creation when the crisis has passed and in the teeth of rampant inflationary signals seems sinister to me, akin to what Keynes termed the Euthanasia of the "Rentiers" - meaning (apparently wicked) people with savings.

This is manifestly unjust and can only be explained as a form of debt default, albeit masquerading as economic stimulus. If inflation is rife rates should be raised, it's that simple. I am writing this from England where the disjunction between current inflation and the B of E discount rate is more manifest than in the U.S. - and clearly a species of theft.

I was one of the first to argue for Q.E. 1, as early as 2008. I was something of a lone voice. But now that deflation has been averted rates should be hiked, irrespective of the national debt. If deflation returns then at that time they can lower the rates.

Mar

9

Directed by Catherine Hardwicke

Once you know that Hardwicke directed the two Vampire movies ("Twilight" and "Thirteen"), you don't need a Fantasy Thriller on $5 a Day guidebook.

In a story that is transposed into a 'dark' re-purposing of the traditionally sanitized legend, stabbing at the metaphysical while failing miserably at the ordinary, you don't really need much more than to realize all the girls in this medieval forest village are lovely, no one has carbuncles or bad skin, all the young men are unshaven in the 2-day stubble style recently popular in South Beach, and all are strong jawed and mighty of [puny] intellect and [leather-laced] broad chest. And messing around by various adults before the story begins does not pay off in dividends down the road.

The language is annoyingly anachronistic (the young men set to jubilate in the town square suggest they 'have some fun' in a locution people would not even dream up for centuries), the casting is wrong (Riding Hood herself is Amanda Seyfried, playing Valerie, whose eyes are enormous orbs of exophthalmic goiter size, whose lips are cherry red but not a-tremble, and who is too-modern-wrong for the part). The 'legendary' werewolf who has been prowling under the 'blood moon' every 13 years for sacrificial peccary or virgins since the dawn of these teen-agers' first eyelash flicker is ferocious, but–like the shark for most of "Jaws," largely unseen for the curettage of blood and carnage inflicted on auxiliary characters–is really over-the-top in terms of audiences who have seen far more threatening unseen CGI creatures in "Alien," "Planet 9," "The Fly," anything with Pauly Shore, Vin Diesel or your African E-bola virus stories.

The picturesque village of Daggerhorn features a malevolent Gary Oldman, too grandiose or Shakespearian for the over-zealous Father Solomon/nasty wolf-avenger he plays; a handsome scion of the town's sparse richies, smithy Henry, played by Max Irons (though Valerie is totally turned off to this hunk of adaptive protoplasm, most of the audience at the screening swooned at sight of him); and Virginia Madsen, as Valerie's incandescent mother, Suzette, prettier than her daughter, actually; and the surprising Julie Christie, who offers the only amusing and mischievous depiction of a character in the film. In dreadlocks and bohemian attire, she plays Grandma, (you know the one: "What big eyes you have, Grandma! What big teeth!" "The better to eat you with, my dear."), giving the viewers the Willies every time Seyfried's Valerie comes to visit and calls her non-conformist gram, Gramma. Does not parse.

Val wants only the lantern-jawed, poor woodcutter Peter (Shiloh Fernandez), though she will be not only forever dirt-poor if she runs away with this preternatural metrosexual, but her name will probably be, like as not, Valerie Axman (no? insertion humor?).

It is unlikely that anyone would enjoy this fabricated trope on a fairy tale that used to have some metaphorical heft before it was purloined for leathers and firebrands except a very dim pre-teen smitten by the Vampire franchise. The press notes say "The implicit message of the film is 'Don't talk to strangers.' " But what if that stranger/danger turns out to be someone one loves? The big bad wolf represents the molten fear of not knowing whom you're really dealing with.

Not for the kids. Sadly, not really for the adults, either.

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