Mar

12

"The temperature curve through the Greenland inland ice sheet shows 26 dramatic and abrupt climate shifts during the last ice age that lasted more than 100.000 years. This curve shows the climate shifts during 40,000 years. The climate shifts appear to be periodic, but mathematical computer simulations shows that they are probably chaotic and random."

Read the entire article. 

Mar

12

I can't recommend this book highly enough. It is quite possibly my favorite of all time. Today I read Chapter 13, "Metafont, Metamathematics, and Metaphysics: Comments on Donald Knuth's Article 'The Concept of a Meta-Font,'" subtitled "The Mathematization of Categories and Metamathematics."

The chapter makes a case for the absurdity of the notion that creative processes can be mechanized via parameterization. He invokes Godel's Incompleteness Theorem, which states that no non-trivial formal system can demonstrate the truth of all possible assertions, because a set of those assertions is self-referential with respect to the system in question. The canonical example is, "System X is not powerful enough to demonstrate the truth of Sentence S." If the statement is true, it is false, and if it is false, it is true. This contradiction lies at the boundary of all formal systems.

This is the genesis of ever-changing cycles. The market is a system of systems, which continually generates new states, without ever exhausting the set of all possible states. This "essential incompleteness" is the core property of the family of sets called "productive" in mathematics.

(It is tempting to think that all possible states could be examined via a generative process, but there are two problems with this: in a world of zero-bounded asset prices, there is an infinite set of possibilities. Further, even if it were possible to generate a complete set, it would be impractical to attempt to analyze them all, and then the question would become one of screening which states were "relevant." But Godel's Theorem, stated another way, says that you cannot satisfy both of these goals simultaneously. Further, relevance would almost certainly have to be defined a posteriori.)

But this is not to say that pattern recognition and the search for superior risk-adjusted profits is an impossible one. It merely means that minimizing your degrees of freedom (parameter "knobs") will allow you to find relevance more reliably. And those degrees of freedom should be chosen to find the most matches, so that we are nearing the (unreachable) goal of completeness.

But how to choose our parameters? Statistics are of great use here. Analyzing predictive significance of past states is sufficient if the generative process can be (a priori) known, assumed, or believed. An obvious example would be equity markets. If you believe that the circumstances that led to a 1,000,000% price increase in the past century will continue to exist, then your job is to find past states that have predicted higher prices. This is true for any process or market, and is the key underlying factor in trading and investing success: you must have a model of how your market behaves before you can try to take advantage of said behavior via acting on state information. It is worth noting here that the derivatives expert and cohorts' central argument is that the nature of the generative process can not be known, and that therefore statistical moments and properties are just crutches for those who are fooled.

Finding these past states is of course the real pursuit. Hofstadter argues that it is essential to understand that creative processes do not just follow the "letter of the law," but also the "spirit of the law." This suggests a wide world of potential parameters and approaches that are outside the mainstream.

Hofstadter suggests that in generating states it is more effective to consider conceptual roles that must be satisfied, rather than specific, concrete conditions. These roles are quite abstract, and can be partially or wholly fulfilled. Further, these roles are modular and can exist in more than one simultaneous state (or process). The example here is that of serifs (the "feet" on the bottom of fonts), where larger serifs on the letter "a" most likely mean larger serifs on the letters in the font.

It is easy to draw an analogy to volatility in asset markets. If equities suddenly experience a jump in intraday activity, it is at least worth examining if that is predictive of a similar jump in other markets, as it would affect the possible states of those markets.

I could go on (I probably already have), but I think the "meat" of the question I'd like to ask is, "What behaviors can be examined for predictive significance that are not normally parameterized?" It's there that edge lies.

Mar

11

One of the reasons humans are still competitive with computers in chess is that we are aware of patterns that don't compute. Take, for example, nature of pawn structure. One can count individual pawn weaknesses but it's very hard to find an algorithm by which the harmony between pieces and pawns can be assessed. The human mind, however, is quite capable of this.

Might it not be the same with markets, that there are patterns which can't be effectively coded and others which can? As a very simple exercise one might try to count the number of waves that tend to accompany a decline from highs or see whether an n or u formation is being created. Seems to me that it's very, very difficult to do this with numbers; but the human eye is reasonably adept.

The problem of course is that without a clear computable definition of what one is looking for there will be too much that is open to "interpretation," so the results could hardly be relied up. So what is the solution?

I've been thinking about a possible way round this but please excuse me if it is scientifically unsound. What about having generic patterns that contain multiple computable definitions? For example one might have major categories like "panic" or "breakout," but then multiple and detailed definitions of what these are, just to be sure that the computer will recognize them but not for something else. Then when it comes to the stats the generic categories are tested rather than the details.

Just a thought.

Vincent Andres adds:

Another example: it's very easy and fast for a human eye to detect if points are aligned; it's quite a long calculus for a computer.

"So what is the solution?"

This is a deep question. One answer is to stop reasoning/computing with "crisp" sets. With crisp boundaries you have indeed threshold effects that make the reasoning/computing discontinuous and unstable. One way of doing that is using "fuzzy" sets. With fuzzy sets, set limits are no more crisp, but continuous. So working on them is more stable and more continuous. Nice applications are for instance in control.

Fuzzy sets are an interesting tool when it comes to trying to represent knowledge and work with it.

It's not a miraculous tool. Yes it is (or was) a buzzword. You can do the best and the worse with it. And it was done and it is done. Like with neural nets, genetic algorithms, etc, etc. Like with statistics, probability theory, etc. But it's a nice (and very mathematical) topic.

From Steve Leslie:

I like your analogy to visual patterns that don't compute. There are similar parallels in poker.

A computer can give exact statistics of making a hand and pot odds, etc. It can also calculate tendencies with a player. However poker is a game of imperfect information therefore much is subject to interpretation.

Now then:

Crandall Addington is one of the great poker players of all time and a true character. I saw him on TV 25 years ago playing in the old World Series of Poker with a $10,000 buy in. This was when no limit hold-em was essentially an obscure game and $10,000 was a lot of money. He was wearing a Mink Stetson. This was before PETA for sure.

He said that limit poker is a science but no-limit poker is an art.

Limit or structured poker contrary to popular belief contains little bluffing. Most of the hands are played straightforward. There are many multi-way pots and almost all hands go to a showdown.

No-limit hold-em is entirely different. Statistics and straightforward play will only take you so far. It is much more a game of playing the table and the opponents. A feel for the game, understanding its ebb and flow, and evaluating the dynamics of the players are critical. The best no limit poker players know when to be tight, when to turn aggressive, when to bluff, and when to truly gamble. This is where experience is essential.

Similarities occur in trading stocks and futures.

There are the fundamentalists. People like the Buffett of 20 years ago, who was a protégé of Benjamin Graham. Martin Whitman and others. They can be the value players and the grinders. They see big picture things and exploit opportunities but only when the balances are tilted in their favor.

There are certainly the quants, people like Mr. Symonds who obviously have a created a superior mousetrap. But of course, they are neither talking nor sharing what they have found to be successful. There are some others such as D.E.Shaw. Once again they are extremely secretive and are constantly working on their algorithms that identify patterns. Many of the employees are PhD's in computer sciences, mathematics, and music. They are the equivalent of the Rand Institute. Guys and gals who sit in seclusion and are constantly perfecting their own "black box."

Then there are those who trade on a combination of statistics and feel. They tend to be excellent at the "feel of the game" and reading the opponents. The Chair is one of the best of these. One of the finest traders in the world who worked for one of the great traders in Soros. Robert Prechter has had significant success trading off of Elliot Wave patterns.

Then there are the floor traders. They are very intuitive and great readers of the market. They get the first look at where the orders are being placed and who is placing them. In Education of a Speculator, Victor describes in detail how one of Soros's traders would enter the elevator to the floor and the bids would change. It became a game of the cat and the mouse.

In summary: There are opportunities for each of these to profit from the market. As each of the above have demonstrated in their abilities to make money time and time again. It then boils down to what kind of game are you are in and an understanding the rules.

From Bill Egan:

Plotting the data different ways pays off all the time. I earned a US patent because I examined bi-plots of ~50 variables and saw something interesting. Further investigation showed a sensible relationship to the physical mechanism I was interested in modeling, and I quickly built a model that has worked for eight years now.

I always use bi-plots. Once I have a feel for the data and can throw out some variables, I will color points in bi-plots by a third variable. I use this to highlight known extreme values, events, or odd experimental results. It often reveals useful patterns to the careful eye. Histograms of the distribution, data percentiles (percentile function in Matlab), and empirical cdfs are also handy. Multi-modal distributions are often interesting and show up in a histogram.

Software like SpotFire makes this very easy, and includes ways to size and shape data points by other variables (although it isn't cheap to buy). You can certainly do this sort of thing with a bit of work in R or Matlab or S+.

Another trick of the trade is to compute correlations among your variables. You can almost always remove a variable that is r^2 0.9+ with another variable. This will cut down on the amount visualization you need to do.

Further thought from Nigel Davies:

What if the most subtle and powerful engine for pattern recognition and synthesis is in fact the human brain? In this case shouldn't we be training ourselves rather than our computers?

Probably the search for patterns does this anyway but this would seem to be another benefit of the Chair's recommendation to hand count.

Mar

11

…what series of events other than the moves in Yen/Dollar could bring about, across global equity markets?

  1. A re-test of last week's lows in the coming week, including a minor breach within 1%?
  2. A re-test of this year's highs in the month after the ensuing week, including a minor breach of 3%?
  3. A re-test of last year's lows in the quarter after the current month, including a failure / breach of -/+ 10%?
  4. A significant breach of the highs as formed in line two, exceeding 30% or more in the year following the rolling quarter (September 2008 most likely)?

The origins of these conjectures are the mumboistic irregular b wave prevalent right since the June of 2003.

If I have to graduate beyond the mumbo, I have to find ways to convert these questions into testable hypotheses. If there were no good ways to test "targets" then I would need to ask questions framed better but still trying deciphering similar musings.

So any brickbats, balms or illuminating lanterns that help answer the original question, howsoever poorly framed, or better still any answers as to how to frame these questions that facilitate countable answers are sought sincerely.

Mar

11

Don Boudreaux's letter to the Wall Street Journal reminded me of the wider benefits of trade. I noticed today the label on a reasonably nice bath towel from Target ($1.50). It was made in Vietnam, of all places. Johan Norberg, in his book, In Defense of Global Capitalism (and his excellent Globalisation is Good documentary), starts in Sweden then visits Vietnam, along with Taiwan, interviewing workers whose stories give solid evidence of the benefits of international trade and investment.

Elderly Taiwanese multimillionaires discuss the early sweatshops of the 1950s, and comment that machinery was less safe then (they show their fingers missing digits as evidence). In Vietnam Norberg visits a Nike factory with workers both pleased and getting wealthier. The only complaints come from Nike managers irritated their skilled employees are being hired away by other firms for higher wages.

Somewhere in Vietnam is the textile factory where my Target towel was made. Someone got up that day and rode to work by bicycle or car to labor on my towel along with hundreds or thousands of others before returning home. Instead of following the communist ideas forced on their parents, Vietnamese people today enjoy the fruits of capitalism and economic freedom.

Similar thoughts cross the minds of millions of Americans when the notice their clothing, towel, and bed sheet labels. Much is from China (but where in China?), but much comes from mystery countries few of us know much about. Each label serves to prove gains from trade. Somewhere far away someone made this thing. And it traveled the world to give comfort and warmth. Maybe this is why most Americans seem more comfortable with international trade and globalization. Not the media pundits of course, but everyday people. The hysterical anti-globalization campaigns of the 1990s have faded.

I think textile unions and Congress helped change public opinion in favor of free trade. Unintentionally, of course.

Legislation empowered the Federal Trade Commission to mandate U.S. content and country-of-origin labels for textiles and cars: "Title 16, Chapter I, Section 303.33 (a)(1) Each imported textile fiber product shall be labeled with the name of the country where such imported product was processed or manufactured."

U.S. textile companies and unions lobbied for legislation to force importers and retailers to reveal the country of origin (the legislation applies only to textiles and cars). Most people don't really care where their clothes are made, of course. They care about quality, feel, design, and comfort of clothing, sheets, towels, etc.

Maybe unions and U.S. textile producers thought Americans would shun foreign clothing. Instead, each time Americans found an unexpectedly good deal for comfortable clothing, it was tagged with the name of a distant and mysterious land. Most of us have been amazed to discover nice clothing labeled from Jordan, Bangladesh, Vietnam, and a dozen other countries we never thought of as producing and exporting quality clothing.

And for all the negative things politicians and pundits might say about China, most American only gain from quality goods from China. (Had FTC rules forced firms to reveal the Chinese province of origin, we would likely know more now about Chinese geography).

Years ago The Freeman published a great Frank Chodorov article titled "The Humanity of Trade." Trade has a powerful civilizing force, and goods from far away lands lead most to wonder about people and places far beyond their everyday horizons.

The trade deficit figures that pundits and politicians regularly report are misleading in more ways than one. Trade serves as a conduit for ideas as well as for goods and services. Observes Chodorov:

"We think of trade as the barter of tangible things simply because that is obvious. But a correlative of the exchange of things is the exchange of ideas, of the knowledge and cultural accumulations of the parties to the transaction. In fact, embodied in the goods is the intelligence of the producers; the excellent woolens imported from England carry evidence of thought that has been given to the art of weaving [woolen goods are covered by separate FTC regulations…], and Japanese silks arouse curiosity as to the ideas that went into their fabrication [silk enjoys much lower tariffs, by the way]. We acquire knowledge of people through the goods we get from them. Aside from that correlative of trade, there is the fact that trading involves human contacts; and when humans meet, either physically or by means of communication, ideas are exchanged. 'Visiting' is the oil that lubricates every market place operation."

So it is, I think, that Congress has accidentally accomplished a good deed in forcing firms to label clothing, towels, and sheets with their country of origin. Every day and night we walk and sleep in greater comfort thanks to workers in faraway places. Each time we notice a tag with the name of some distant land, we momentarily reflect, wonder, and appreciate.

The long upward swing of the stock market reflects not only amazing technological advances deployed throughout the economy, but also the billions of people newly welcomed to the world of capitalism and freer trade. Returns to capital rise with its increasing scarcity relative to labor (as others have pointed out). Hundreds of millions are newly free to work with the tools and machinery long denied them by their governments. From China and Vietnam to India and Eastern Europe, the decades since the fall of communism have allowed capital to seep steadily and intelligently into impoverished and once controlled lands.

The scope of world trade is rapidly expanding and along with it new gains from the division of labor. And this process is just starting. How many hundreds of millions (or billions?) still plant crops by hand and for capital have recourse to only ox and plow?

Mar

11

Beijing is to create one of the world's biggest investing companies, with possible ramifications for global stock, bond, and commodities markets. It might also affect how the US finances its huge budget deficits.

The finance minister said China might follow the lead of Singapore's Temasek Holdings, which manages nearly $90 billion in government pension funds and other assets. It owns stakes in Singapore Airlines and Singapore Telecom, as well as in banks, real estate, shipping, energy, and other industries in India, China, South Korea, and elsewhere.

But even that represents a return of less than 3 percent on the $1 trillion in holdings. By contrast, Singapore's Temasek says it has averaged an 18 percent annual return since it was created in 1974.

From Alston Mabry:

Don't forget that this October, Japan Post will begin the privatization process:

"In October, Japan's post office will be split into four companies - a bank with assets of Y226,000bn (GBP956bn, $1,867bn, E1,428bn), a life assurance company with assets of Y114,000bn, a mail delivery service and a post office network.

"The break-up of the post office, also the world's largest bank and insurance company, will transfer management of more than $3,000bn (GBP1,537bn, E2,295bn) of assets into private hands later this year and bring new competition into the Japanese banking and insurance sectors."

Mar

11

Ever notice whenever The Chair takes a vacation, the market makes a big time crash? One of the silly jokes around our house is that I need to watch the markets to keep it from crashing, and that if I look away it will crash. I was wrong. It's The Chair who needs to do it.

Thanks, Dr. Niederhoffer for your hard work. Keep watching for me next week while I'm on vacation.

Mar

9

This is quite an ambitious and interesting project. With the identification and efficient utilization of the earth's resources being amongst the proposed goals.

Alas, I have been in working in Nicaragua for the past month. There, a "show" of petroleum was reported recently in the papers at a location just outside of Managua (old timers claim it was well known in the Somoza era). Nicaragua is a country with some electric generation from geothermal resources (San Jacinto) and a mining district where gold is found. Ignimbrites are quarried and used extensively for building stone and materials. Nicaragua is an example of a developing country with a wide variety of geological resources and hazards. It might benefit from the mapping project.

At any rate the objective of the world geologic map:

  1. The project's aim is to create dynamic digital geological map data for the world!
  2. The target scale is 1:1 million. But the project will be pragmatic and accept a range of scales and the best available data.
  3. The geological map data will be made available as a distributed web service, using the latest web feature mapping approach.

International Rock Stars Meet to Create Geological Map of the World.

Mar

9

The following is a letter to the editor at The Wall Street Journal, written by Donald J. Boudreaux:

Kicking the kicking horse.

9 March 2007

Editor, The Wall Street Journal
200 Liberty Street
New York, NY 10281

To the Editor:

You are too quick to call January's fall in the U.S. trade deficit "positive" ("Stocks Rise on Jobs Report," March 9).

What if the trade deficit fell because foreigners now find America to be a less-attractive place to invest? What if foreigners' confidence in the dollar is fading? Would these developments - which shrink the trade deficit - be "positive"?

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University

Mar

9

                                         Feb.    Jan.
                                        2007    2007

Unemployment rate           4.500%     4.600%
 Rate (3 decimals)             4.493%      4.587%
Avg. hourly earnings          0.400%     0.200%
Avg. weekly hours             33.7          33.8
 
Nonfarm employment        97            146
Total private                      58            131
                       
Avg. hourly earnings        $17.16      $17.10
MOM% change                     0.40%      0.20%
 
Damn strong, though some of the lesser entrails weren't as gangbuster as the headline figures.
 
Note ADP was off by only 1,000 in its estimate using their new technique this month; so expect that indicator to assume more importance going forward.
 

Mar

9

Sun Tzu: "To subdue the enemy without fighting is the acme of skill."

I expected some disagreement with my admittedly unconventional view - especially that of China. I was surprised, however, that no less a personage than Mr. Gave chose to do so. Through a number of John Mauldin's letters I'm familiar with Mr. Gave's new paradigm of the "platform company" and his "we think, they sweat" view of markets, trade, and profit distributions.

His example of Singapore as a model for future Chinese governmental development is instructive. Lee the Younger is Singapore's third PM (his father was its first, elected in '59); both come from the PAP (People's Action Party) which has never suffered an electoral setback. Singapore may well be the garden spot of the Chinese world. Press reports are almost unanimous in hawking this view. Those papers that disagree are quickly slapped, followed by lawsuits (which they win) followed by injunctions that prohibit further publication.

I confess to having a westernized view of things - I am a westerner. But it is possible, I admit, to adopt an Eastern view; I would suggest that most do, in fact, take Mr. Gave's view and see China as a new land (a new America some believe) rich in opportunity, resources, and labor. To date little of that promise has been realized. In that respect, China is little different from Russia.

In fact, the countries are remarkably similar in their courting of Western investment and technology, and equally remarkable in attempting to steal what cannot be purchased. Most seem to shrug this off as a "folkway" of the East and as acceptable as expense account padding is here. Demosthenes saw Philip of Macedonia doing the same thing to Greece and stated they had "conceded to him a right, which in former times has been the subject of…war.…The right of doing what he pleases, openly fleecing and pillaging.…"

I know it's considered woefully passé to label anyone or any country as Communist and worse still to use the phrase "communist conspiracy." But the idea that China is innocently toddling towards its own peaceful manifest destiny has some flaws. The Middle Kingdom has been inward looking for close to a millennium. Now they have a blue-water and a green-water navy, nuclear missiles, an army of 200 million, the ability to shoot down satellites hundreds of miles in space, and the ability and will to shoot down and hold in detention an American fighter plane and its crew. These developments lead me to believe they possess aspirations beyond their own borders.

Much of the Sino-Soviet relationship, its history, its structure, and its plans are laid out in detail in Anatoliy Golitsyn's New Lies For Old. book is unique in that it was written in '82 and in which he reveals the planned downfall of the Soviet state and its ultimate resurrection. It also reveals how phony splits were created between the two nations that lead the Western powers (chiefly the U.S.) hungry Unlike histories told by other ex-KGB agents, Golitsyn'sfor an ally, to help modernize Chinese armaments."Both in relation to the Soviets in the 1960s and to the Chinese in the 1970s and 1980s, the West has forgotten the error of the German General Staff in helping to rearm the Soviet Union after the Treaty of Rapallo in 1922. The Sino-Soviet scissors strategy has not been recognized for what it is."

And the strategy was ingenious. Why did Western politicians like Nixon, Thatcher, and Reagan seem to have a better rapport with the Chinese? Because making nice to the Left would have triggered an immediate negative response among conservatives. But it was the Right that feared the Soviets more, so they were the natural dupes for the rearmament pitch ("the enemy of my enemy is my friend"). The only thing that was essential was maintaining a fiction of friction. And they've done an admirable job.

Do we have a Sino/Soviet-American war in the future or can the Chinese accomplish the same thing by simply putting its trillion dollars worth of U.S. paper up for sale? The effect would be devastating and would accomplish exactly what bin-Laden has been promoting.

Sixteen years ago we thought the USSR was dead and a new day of freedom and "peace dividends" was upon us. Today Russia is once again run by a gang of thugs that can trace their lineage to the KGB, and Putin's replacement will have the same pedigree. Why should we expect China which, if anything, has been historically more repressive, to be any different?

Mar

9

This is very, very important. In previous career as a consultant, I reviewed hundreds if not thousands of pitches for "growth stock" managers. At least half of them had the same theme, some form of informal study about how accelerating earnings estimates, increases in number of analysts raising estimates, etc., had a positive impact on stock prices.

Because such numbers are easy to calculate, and because there are so many players playing that same game, I generally found it amusing that one would think one could make money in a strategy that is widely followed. If I prodded a manager on that, the response was always something along the lines of "well, but the numbers continue to work".

Well, now we know why "the numbers continue to work". The numbers are no good. Click for relevant article.

Mar

9

About six months ago I posted my growth rate calculation of Federal Payroll Tax Withholding in the form of a chart   showing its past relation to the stock market. The information was shocking to me, and apparently to a few others. It showed that the U.S job growth was declining, as indicated by the real numbers - payroll taxes, not surveys. It's natural to think of declining job growth as a "job growth recession." That's what scared me - the "R" word.

All of my trading information was indicating a higher market, yet the R word had me in a state of apoplexy. Boy was I dumb! I ignored the obvious: When your economy is at full employment, it's impossible to have anything but a decline in job growth. That doesn't mean a decline in jobs - just in their rate of expansion. An economy in that situation does the obvious - outsource.

So before you throw in the towel, remember, we're at full employment. And also note that the job growth numbers have been coming back up.

Mar

9

Once again, we see the common meme whenever there is a big down day. From various email lists, to chat boards, to news sites, and to TV, the commentary is all the same: What went wrong? This is usually followed by posts about how this or that system that is supposed to prevent the market from going down didn't work.

Never is there consideration that the movement might have been random, or that in fact the move was in fact an act of the capital markets efficiently pricing in new information.
Noticeably absent, of course, is the lack of "what went wrong" statements whenever the market goes up big.

Why? I offer two explanations, and the answer is likely a combination of both.

First, human psychology. It is well known that people tend to assign their winnings to skill and their losses to luck, malfeasance, someone's part, or a system breaking. Most likely there is a large issue at play regarding people refusing to view events logically when the event itself is negative. Perhaps Dr. Dorn could comment.

The other explanation is a mistaken view of the role of capital markets, specifically the stock market, in an economy.

The role of capital markets in an economy is, at its most basic, to serve as a meeting place for those with surplus capital and those with a shortage of capital. The primary market in equities consists of those with excess capital wanting to buy shares in companies who are in need of capital.

The secondary markets then serve to offer liquidity to those who purchased equity in the primary markets. The secondary market is critical to the success of the primary market. Without the liquidity of the secondary market, investors would take a liquidity discount on what they are willing to pay in the primary market.

In order to entice investors to invest in common equities, they must offer a risk adjusted return that is above other more secure investments. If there was no risk adjusted return, people wouldn't invest in the secondary markets, and thus people wouldn't invest in the primary markets.

For most of the century, the figure needed to keep the equity markets chugging along has been around a 10% annual return.

The pricing in the equity markets also sends resource allocation signals to the economy as a whole.

Now, most people don't see that as the purpose of the stock market. Most see the purpose of the stock market being "to go up." Therefore, when it goes down they think that something has gone wrong.

But, the purpose of the stock market is neither to go up nor go down. For it to serve its purposes, it must go up over time, but going up is not its purpose in and of itself.

In short, the market went down today. If you lost money, it is nobody else's fault but your own. If you made money, there's a good chance it was luck.

Janice Dorn writes:

In partial response to Professor Haave's insightful commentary, I have a several minute-long video which I made on January 24. 2007, discussing what is known as the self-attribution cognitive bias. If I am able to send it to the list, I will. Until then, perhaps this will be of some assistance, perhaps not.

Human beings are fragile as regards the whole situation of self-esteem. This is much more detailed than the small paragraph or two, but perhaps it captures some of the essence.

The human brain has many ways of protecting against assaults on the fragility of self-esteem. In psychoanalytic literature and much of the psychiatry literature, these protective tactics (which are, in large part, little or big lies we tell ourselves) are called defense mechanisms. In the language of behavioral neurofinance, they are called cognitive biases.

The self-attribution bias manifests as a tendency for good outcomes to be attributed to skill, and bad outcomes to be attributed to just plain hideous bad luck.

A decision matrix for self-attributional bias looks something like this:

                             GOOD OUTCOME             BAD OUTCOME

Right Reason                  Skill ( or luck)         Bad luck

Wrong Reason                Good Luck                Mistake
 

Among the questions that follow from this very brief discussion of self-attribution are:

  1. When are we lucky and when are we skillful?
  2. Are we right for the "right" reason, or are we right for some other reason.
  3. Does it matter, as long as we are right?
  4. How do we measure and "fess up" to mistakes, i.e. recognize mistakes as mistakes by taking personal responsibility and accumulating regret?
  5. Is it important to do this, and why?
  6. How do we learn from this and what do we learn from this?
  7. How important is it to learn from this?
  8. What about all the other cognitive biases and how they impact self-attribution?

The essence of the self-attribution bias is: Heads was skill, tails was bad luck, with all and every due apology to any long tails who may or may not be listening in!

Art Vandalay writes:

This article is two months old but very important in my opinion. It will be the main driver this year.

Mar

8

Back in the day (2000-2002), I used to joke that I could time intermediate term market bottoms based on the media requests I received. If the media wanted to hear from the shrink, the odds were good that we weren't far from a bottom. It really worked well as an indicator.

Then came the turn in 2003 and no one showed much interest in the shrink's ministrations.

Until today. One of the major news organizations wanted the psychologist to comment on how investors can survive this plunge.

I actually like my cane very much. It was given to me by a barefoot mentor who taught me to look for market tells. I took it out of the closet after I got the call. Before long, it'll be time for a walk.

Mar

8

One of the virtues of my recent vacation was that the market plunge caused me to watch prices every minute of the day while the family was playing. I found the most convenient price feed for me on CNBC which has streaming S&P futures prices and DJ every 30 seconds. The prices are interspersed with an orchestrated mélange of shows, news, and opinions from reporters, hosts, columnists, market mavens, scenes from the floor, self serving comments by investors with positions, mutual fund managers, live coverage of official meetings like the Fed before congress, and guest appearances by politicians.

As I have always eschewed reading any newspapers or watching TV, (Indeed four generations of my family have not owned a TV, and our kids frequently are asked at show and tell to describe what it's like not to have a TV in the house), I thought it might be appropriate for me to give some impressions of the coverage the same way that it might be valuable for a man from Mars to comment on the backdrop of human comings and goings.

My choice of CNBC was apparently fortuitous as this station is recognized as the leader in global business news. Time Warner Media states they reach 88 million households, a survey of financial workers shows that about 90% of them watch it at least once during the day. The profits of the station are about 250 million, and viewership of approximately 500,000 is apparently double from 2 years ago.

Influential people seem to recognize this and during the week that I watched, such luminaries as Hillary Clinton came on for a special message that foreign holdings of US debt should provide a wake up call for US vulnerability. Abbey Cohen gave a very thoughtful bullish prediction for US stocks the day after the crash and Warren Buffett himself was shown repeatedly talking down the US stock market because of its vulnerability to a hard landing, due to the twin deficits. All that was missing as far as I was concerned was an interview with the Palindrome himself stating that he was bearish on the dollar or stocks.

I have a theory that the public is always guided to do the wrong thing so that they will make a contribution to the market infrastructure and provide funds for the massive communication costs, buildings, salaries, brokerage house traders, dealers, hedge funds, and mutual funds that must survive in order for the whole ball of wax to continue. Thus, during the period I watched from Wednesday, February 28 to Saturday, March 3, which was sparked by the 4% decline on Tuesday, Feb 27 and a 5% decline in the market in a five-day week, I was particularly anxious to see how the public would be guided to take a bearish view.

As is well known, after big declines like this, the most successful investors take out their canes and hobble down to the street and buy. This is greeted on average with a 2.5% rise over the next 10 days, and smaller rises each of the next five days, as has been well documented in this space, my books, and the many that have noted the effect by counting independently or who have the ability to count it themselves, or talk to someone who has. I was not disappointed in my belief that much bearish guidance would be given. Indeed, two of my favorite techniques of propaganda pseudo talk were used prominently — namely the mystical perfect lie technique of causing magic to happen and then belittling ones abilities ('that key you lost 10 years ago that I just pulled out of the clouds doesn't count as evidence of my mystical abilities because I wasn't really trying to do it'), and the technique of the quote taken out of context.

The quote out of context was particularly salient on Wednesday as a chronic bear was interviewed about Ben Bernanke's testimony. Bernanke's testimony was the most bullish that I have ever heard from a Fed official. He stated that there was no liquidity crisis, that the economy was destined to improve over the next six months, and that there was no change in the economic data that would warrant a prediction a la Greenspan's 1/3 probability of recession. Yet the chronic bear was able to find one sentence in dozens of pages of testimony that he said showed how bearish the Fed was, in that it said that if the rate of real estate increase did not continue as it has in the past five years, that it was possible the amount of spending might not be buffered as much as it has in the past by this increase in wealth.

Similarly another chronic bear, who was greeted with an "every bear has his day" headline, emphasized that he wasn't really worried about China, which was the proximate cause of the decline on Tuesday morning but all the sub prime lenders were about to evaporate. A very nice climactic punch was thrown by a wild man coming on the stage at about one each day. Jim Cramer screamed that this was an amateur bear raid, that he couldn't really say how bad the subprime was because it would be indiscreet, and that he would have liked to see the Dow fall below 12,000 to really create fear.

The back and forth between the attractive female reporters who tried to hold him down as he screamed about how stupid everyone else was, and how he didn't care about the yen carry trade at all, made for a thrilling and highly romantic tête-à-tête. The excitement was enhanced by a distress call by the attractive other that, to make matters worse, the chronic bull Larry Kudlow was going to be on next, against the chronic bear forensic accountant.

I found watching the orchestrated performance of reaction to the market panic during the time that I listened that I could attribute the movements in the market itself to the content of the messages communicated.


When news of Hillary or Buffett was reported, or Herb Greenberg or other chronic bears spoke their piece, or Maria Bartiromo decried the latest earnings report, the market went down say 10 to 20 Dow points in the next fifteen minutes. When the venerable senior economic analyst, Joe Kernan or a Florida buy and holder, or Abbey Cohen talked, to say that it had all happened before, and in the fullness of time, that the decline wouldn't even be noticed, the market went up some 10 Dow points in the next 15 minutes. It would seem to be possible to profit from such moves by buying and selling during times when the market is on edge based on who is scheduled to talk.

I found the on the scene reports of Michael Santolli, from the floor of the Chicago Merc, very interesting. He managed to provide a good description of what people were saying about what caused the latest move in the market over the previous half hour. He was very good at maintaining a judicious manner in not forecasting anything. Indeed, during the time I watched, there was little attempt by anyone to try to provide a rudder, such as what generally happens after panics.

The consensus seemed to be that the decline had not yet reached 10% and it was likely that it had further to go on the downside before turning up later. Such communiqués go against the theory of rational expectations, which are true to the extent that if we think something is going to go up 10% by the end of the year, we're going to buy now, even if we think there's a chance that there might be some unpredictable bumps along the way. I found Maria Bartiromo a very knowledgeable and serious reporter. Her frowns, pouts, and cover the eyes bangs, seemed to inject a gentle scorn for the men she interviewed, as if she would like to give them a proper beating if only they weren't so foolish.

I understand that during the tech heydays of the 90s she had a much more engaging and cheerleading demeanor and she is to be complimented on this about face. This is also helpful to the market ecology as exactly the opposite would in my mind be more profitable to the viewers. Regardless, for me this added a very fine, exciting ambience when she came on at the beginning and end of each day with her somewhat denigrating, above the fray chastisements of those who would be long during this time of panic.

One of the ironies of my Florida viewing was that just when the market was at its most climactic bearishness, the shows would end, and a local commercial would be shown. The commercials all seemed to highlight the availability for one week only of personal loans without bank statement with an interest rate of 6%.

I found the rate more and more attractive as the market decline continued. The same for the Florida vacation homes available with 10 acres of land for just a $100 deposit. Also ironic was seeing the constant advertisements from someone whose research I find totally wanting, Jeremy Siegel and Michael Steinhardt. Together they plugged an ETF fund that somehow had the right mojo with respect to price earnings ratios. One would have hoped that these dim luminaries would have more dignity than to hawk such an untested concept.


Aside from the knowledge I gained of the rhythm of the markets, with the Worldwide Exchange moving to the squawk box to Morning Call, to Power lunch, to Street Signs, to Closing Bell, Kudlow and Company, then "one man, one visions, one hour." Jim Cramer with the moves in the market during each episode. These were somewhat predictably based on who was scheduled. I found that the main value I gained was realizing that the Dow Index is reported about once every five seconds, and thus, is a much better index to monitor for what just happened, and changes in microscopic inertia than the S&P Index, which is reported every 15 seconds.

Steve Leslie writes:

I watch CNBC mostly for the entertainment value. I find much of the information they provide glorified fill between commercials although I have to admit that Liz Claman is one heck of a fill between commercials.

That said I do find value in certain aspects of the show. Most notably the premarket opening with Bob Pisani and the effervescent Rick Santelli and guests who are interviewed who actually work on the floor. Without going into detail, I have my favorites for a variety of reasons. I watch some of the aftermarket shows, Kudlow and Company, and Fast Money at 8pm. I like the format and am growing weary of O'Reilly. Yes it can happen.

CNBC dominates this space because there is really no alternative for financial news on cable TV other than Bloomberg TV, which is hard to find in some markets. I get Bloomberg on my cable provider only from 7-9AM and it is buried on the E-Channel.

For those who have a dish Bloomberg has a station available 24 hours a day, one that is much less commercialized than CNBC. My night owl friends tell me that CNBC Europe is a very good show.

Thus what is one to do for financial information when away from the office or grows tired of CNBC?

Bloomberg has a website where you can get Bloomberg TV and Bloomberg radio live on streaming media.

I find a wireless to be a marvelous alt for my home computer. I can go to any bookstore, coffee shop, library or public building or restaurant and pick up a wireless connection. Free

I trade from my PC laptop through Scottrade elite while having coffee in the morning or during meetings at lunch. I do not trade futures but Victor tells me that Laurel likes Interactive Brokers.

Sprint offers a mobile wireless now for around $40
per month down from $59.00. I can have unlimited access to the Internet through
my PC literally anywhere I go in the world.

There is also a service called go to my PC that allows a direct connection to your PC through the internet from a remote location. Thus you can connect from your laptop to your desktop or office computer.

XM Satellite and Sirius radio have simulcast of CNBC and Bloomberg for $12.95 per month. Great for commuting. Plus you get Howard Stern not Howard K. Stern (tongue in cheek)

If carrying a PC is too cumbersome or bulky, a blackberry is the weapon of choice here. One can text message and receive financial information on demand.

On the low end, cell phones now come equipped for stock quotes and other financial information on demand. Now while in transit either by plane, train, automobile, or on vacation, you can get out of the room and go fishing or sit by the pool or go to the theatres or the movies or the craps table, or watch the zanies and crazies on Duval Street in Key West and be in continuous contact with the financial markets anytime and anywhere. It is just a matter of understanding the technology. 

Henry Gifford writes:

I don't claim to know why the information on CNBC is so bad, but perhaps things are much less planned than the big players encouraging the stream of bad information.

In the field of boiler repair, there is a popular guru who knows little, and provides much misguidance. Equipment manufacturers sometimes provide good information (some people say I made a million dollars with my apparently proprietary system of reading instructions and following them), but it is rarely followed. Thus there is no pressure to improve the quality of information, which is often poor.

One conclusion that fits is to say that the industry is happy to sell boilers to replace the ones destroyed by bad practice, and the service companies are happy to do more frequent repairs. I cannot think of any counting or examining of business relationships that would prove this wrong.

But I think there is another, more correct explanation. The guru told me he cares more about magazine article deadlines than getting the articles right. The articles help sell his books and seminars, so he has an incentive to keep the articles flowing. Service companies don't see the payback in training workers who can then just quit, and don't see any reason to sell skills better than the other companies provide, as consumers can't very well have a "control" to see what would have resulted if they chose another company. In sum, the standards are low, science and counting hardly exist, and most people in the industry don't care enough to learn what they need to know.

Seen another way, picture the Chair trying to get a spot on CNBC, and using Daily Spec sales statistics as a credential. Nobody read it because it didn't tell people what they wanted to hear.

Mar

8

There's trouble on the street today
I can feel it in my bones
I had a premonition that he should not go in alone
I knew his charts were loaded, and he was ready for the kill
Until the stock imploded and the blood began to spill.

So baby, here's your ticket…lick your wounds and slap your hand
Here's a little money now, do it just like we planned
If you're cool for 20 hours, it might pay you 20 grand!

I'm sorry it went down like this, and someone had to lose
It's the nature of the business.
It's the Trader's Blues.

The hedgies and the gurus, market makers and the law,
The pay-offs and the rip-offs, and the things nobody saw
No matter if it's futures, or the stocks that go mo-mo
You've got to get those loaded charts 'cause it's all about the dough.

There's tons of shady characters, lots of dirty deals
Every name's an alias in case somebody squeals
It's the lure of easy money, got a very strong appeal
Perhaps you'll understand it better standin' in his shoes

It's the ultimate enticement
It's the Trader's Blues

You see it in the headline, you hear it every day
They say they're gonna stop it, but it doesn't do away
They move it through an ECN or flip it on the NAS
They hide it up in arbi, and I mean it's here to stay!

It's propping up the governments and big fat global stew
You ask any SEC man, he'll say "Nothin' we can do."

From the verbose newsletter writer back down to me and you
It's a losing proposition but one you can't refuse.

It's the politics of fear and greed
It's the Trader's Blues… 

Janice (with apologies and gratitude to Glenn Fry and "Smuggler's Blues") 

Mar

8

What are your thoughts or solutions for any or all of these Time Traps?

From Jim Sogi:

It's not necessarily time, it's really a question of categorizing priorities. Take all the things that have to be done and put them into 3 categories:

  1. Must do to survive. Do those.
  2. Next are important but not absolutely necessary. Get as many of these done as possible.
  3. The rest, get to it if it does not interfere with first two. If not, forget it and give it up.

How does one categorize? In this order: Each lower item must give way to the higher in priority.

  1. Health
  2. Family
  3. Other

Seems to work well but its not going to be what the "Man" tells you or wants you to do. Another good trick is to turn off the TV and radio for good. Disconnect them and throw them in the rubbish. They are evil.

Mar

8

A while back Sam Humbert wrote a comment on our Performance-Analytics package for R. We have since cleaned up a few of the issues noted in the preview versions of the code. Here’s the new release announcement from R-SIG-Finance:

Description: Library of econometric functions for performance and risk analysis of financial portfolios. This library aims to aid practitioners and researchers in using the latest research in analysis of both normal and non-normal return streams.

We created this library to include functionality that has been appearing in the academic literature on performance analysis and risk over the past several years, but had no functional equivalent in R. In doing so, we also found it valuable to have wrapper functions for functionality easily replicated in R, so that we could access that functionality using a function with defaults and naming consistent with common usage in the finance literature. The package covers Performance Analysis, Risk Analysis (with a separate treatment of VaR), Summary Tables of related statistics, Charts and Graphs, a variety of Wrappers and Utility functions, and some thoughts on work yet to be done.This R package contains over 80 original functions, and several additional wrappers to simplify parameters or provide accessible names for other functionality.

I suggest that you start with the summary documentation, either via the Performance-Analytics package pdf. attached to the original announcement linked above, or via the HTML version of the same.

Mar

8

Tim Hesselsweet wrote: "The almanatarian introduces a little low n counting."

Thanks to Tim for bringing this to our attention. Beside the low number of observations the study seems to have another odd methodology. It is the average subsequent extreme low readings. To trade this one would require actually catching that low precisely. The study is moot on the subject of how to catch the annual low.

However, looking at the same data over the entire period there is a way to trade it. If we sell at the recommended point and see where we stand at the end of the year we find that we missed out on a 4.7% gain for all the periods. To see how it has done recently we can look at the last 12 years worth of signals. These recent sell signals would cause us to miss out on an average 10% gain for the rest of the year.

In this case it is best to ignore the signal.

Mar

8

As a public figure, Vic is doomed. He is guilty of committing what Fitzgerald implied was the cardinal sin for an American: his life has had more than one act.

There is nothing he can ever do that will excuse him from that as far as the members of the press are concerned. A while ago, I offered the comparison with Ulysses Grant. I still think it is apt. The glee with which the New York press reported the failure of Grant & Ward was matched only by their frustration at his managing to write several classic books (the autobiography appeared in successive volumes) and to restore his family's fortunes.

The journalists' revenge was to tag Grant with the reputation of being a drunkard and corrupt. Neither accusation had any truth, of course; but both remain truisms of what "educated people" know about the lessons of American history. This proves once again the truth of what Henry Ford (yet another genius and anti-Semite fool) said: "In most cases the uses of history are bunk."

I have no doubt that the Times obituary, if it ever appears (anyone want to give odds on the paper outliving the Chair?), will feature comments from every semi-public figure who disliked, feared, or envied the deceased, just as Grant's memoriam featured prominent quotations from Henry Adams (that ultimate rich kid of American literature).

From Imogen Rose-Smith:

Fitzgerald's insight that there are no second acts in American lives means not that Americans only get one act but that lives in America are a series of one acts. Otherwise it is nonsense. Then again, it is hard to know what Fitzgerald meant. The line was a fragment, written toward the end of his life and he was probably drunk. 

Mar

8

Five years ago I read here about "the inordinate tendency of companies that bought the rights to name stadiums after themselves to fall into bankruptcy, financial difficulties, or drastic declines in market value." A Bloomberg article from today offers another data point towards that pattern:

ACC Capital Holdings' need for a financial lifeline from Citigroup Inc. is the latest sign that putting a company's name on a sports stadium doesn't guarantee its business will thrive. Ameriquest Mortgage, the Orange, California-based company's subprime mortgage unit, signed a naming-rights agreement in May 2004 with Major League Baseball's Texas Rangers. The 30-year contract was valued at $75 million … ACC Capital is hoping to avoid the fate of Enron Corp., which named the home stadium of baseball's Houston Astros and then went bankrupt. The field is now called Minute Maid Park. Citigroup knows about naming rights as well as mortgages. The New York Mets' new stadium, scheduled to open for the 2009 season, will be known as Citi Field under a 20-year agreement between the New York-based company and the team.

Mar

8

A Commentary by Louis Vincent Gave, foreword by Victor Niederhoffer

The following article by the Gavekal group is indicative of their world view, as are the books they write including Our Brave New World, which we have reviewed favorably on this site. I find them a modern incarnation of the practical implementation of the creative spirit of enterprise - the purveyors of a program that Hank Reardon might have been head of, had he been in the financial consulting field. They offer a link and free trial subscription to their service to the first 100 of our readers that are so inclined.

We are often complimented by readers of this site that we are not hawking, self aggrandizing, or selling products here. While this is true, we find it enobling to proffer a mutually beneficial opportunity for improvement to our readers, and this link is made in that context. However, do understand that we have no connection of any kind with Gavekal, except for the value we receive from their contributions of knowledge and opinion to our benevolent forum. VN

Announcing the publication of a new Gavekal book:

The End Is Not Nigh, by Louis-Vincent Gave, Charles Gave, Anatole Kaletsky & Steven Vannelli

A brief review of the book: Today's global financial system is characterized by a curious mixture of freedom and manipulations. Between the two main currencies of the world, the US dollar and the Euro, we have a free float. But between the dollar and a lot of other currencies, especially in Asia, we have a dirty float, or fixed exchange rates, the goal being to maintain the exchange rate at an abnormally low parity to the dollar.

To make matter worse, a lot of those countries (especially China and India) have decided to make their currency inconvertible. This would not matter if these currencies were small and irrelevant, but they are increasingly less so by the day. This state of affairs leads to profound price, and volume, distortions some well understood (i.e.: the RMB is undervalued and can only go up) and some not as well understood. It also triggers a number of important questions. Namely:

1) What distortions does the intervention of non-market players in the Asian foreign exchange markets engender?
2) Are the distortions abating? Or accelerating?
3) How long can those distortions last?
4) If/when the adjustment comes, what assets will be most at risk?

Of all these questions, the last one is probably the most important. As we never tire of writing, money management is often more about avoiding the assets that implode, and diversifying amongst the rest, than about picking outsized winners.

While it may be tempting to adopt a very defensive posture in the face of such blatant distortion, there are many reasons to believe that the current distortions may last and that the overall positive growth environment will continue for the coming years.

In The End is Not Nigh, we push some of the themes developed in Our Brave New World a little further and review the reasons that have led us, in recent years, to shy away from prophecies of doom and why we remain positive on global financial markets.

We will be distributing the book at this Thursday's London seminar, this April's Paris & Stockholm seminars, and the May New York seminar. Clients who cannot attend these events, or who wish to receive a copy before then, can email me for a copy. Please include your hard copy mailing address in any book request.

For non-Gavekal clients, the book will be available for sale at our website starting today for US $22 per copy (incl shipping). Starting next week, the book will also be available for sale.    

Needless to say, if you like the book, we would be most grateful if you could plug it to your circle of friends and colleagues. Thanks to the "word of mouth" effect, we sold what we felt was a surprisingly high number of Our Brave New World. We ended up having to do four re-prints of Our Brave New World, and this with no advertising, hardly any PR and only the GaveKal distribution network. Thanks to our readers, Our Brave New World ended up being widely read and discussed. We hope that The End is Not Nigh will be able to follow in the same path.

If you do not like the book, or if you find some factual or conceptual errors, please let us know.

We take this opportunity to once again thank you for your support.

Mar

8

Interesting to note Asia seemed to lead or presage the decline last week, and led the bounce last night. Also interesting dollar/yen negative correlation and lead during same period.

Nikkei
  3/6/2007   16925
  3/5/2007   16510
  3/2/2007   16865
  3/1/2007   17300
 2/28/2007  17495
 2/27/2007  17460
 2/26/2007  18235

Nikkei  225                               16,844.50     202.25    1.22%
Hang Seng                               19,058.56     393.68     2.11%
Singapore Straits Times             3,036.52        54.23    1.82%
S&P/ASX 200                             5,808.90        37.10    0.64%

Mar

8

I made two predictions: that Bush will succeed in Iraq, and that the Democrats, realizing they can't allow that success, will do all they can not to let him. The second one already came true, but after Murtha, Pelosi, Levin, Reid, Reed, Kennedy, Obama, and others gave it their all, and still they failed due to lack of public and conservative Democratic support.

The left wing of the Democratic Party retreated for at least a few weeks and is seeking a face-saving way to pass Bush's supplemental bill without enforcing any kind of real restrictions. The surge in Iraq is working well cutting down the murder rate in Baghdad by 50% in three weeks. Bush is also diverting attention with a regional conference to which Syria and Iran have been invited. He can now claim he is following the bi-partisan ISG recommendations. But with two carrier strike groups in the Persian Gulf, this will further weaken the forces aligned against him, thus guaranteeing a victory in Iraq.

All this makes Giuliani the odds-on favorite to win the Presidency. In the next few weeks he will be attacked for everything from adultery to bad temper, but it will not stick. He will move progressively to the right prior to achieving a primary victory, after which he will move progressively to the left, while appointing an extreme right VP candidate (Gingrich, Tancredo, or Hunter). Neither Hillary nor Obama now have a realistic chance of victory. Gore will be under a lot of pressure to enter the race, as he is currently the only viable Democratic contender. If Gore doesn't enter, Giuliani will win.

All of this is predicated on no bombing campaign against Iran. The odds are about 4:1 that it will not happen based on betting markets. But clearly with Persian Gulf as full of firepower as it has ever been, something may trigger it.

Mar

8

Many lessons of the list are coming in handy these past few days such as lessons on canes, leverage, liquidity, and survival. More heed might have been taken though to the bear's argument during the past few months, as they were not entirely wrong or foolish. Never underestimate the opposition. It is easy to delude one's self as we and the market were.

Since this panic was the biggest drop since 9/11, it is odd, since there is nothing really wrong like there was on 9/11. It was just one of those seasonal panics that come with the regularity of the seasons or the years as the case has been. The news is good, the economy is good, the market is good, and even the price is good. Anyway, a good time to get long, as it has been difficult to do so for months now.

Mar

8

Vic, you haven't been posting on the Daily Spec website. Are you OK? Miss your articles.

Victor Niederhoffer answers:

I was on vacation in the Florida Keys and didn't wish to come back as I did previously, during Katrina.

Mar

8

This paragraph, from a New Yorker magazine article titled "Spider Woman," (March 5 issue, "A Reporter at Large" segment) resonates with a few favorite market themes:

A single spider can inject its victims with as many as two hundred compounds: proteases that dissolve flesh, gelatinases that dissolve connective tissues, neurotoxins that short-circuit nerves, slow the heart, and freeze the limbs. A spider's venom offers a window onto its evolution, Bindford says — a chemical record of its most successful experiments at killing prey.

Mar

8

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

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

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

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

Mar

8

Every time you speak to an employee at an office of a company or government, a technician, or someone who has to manage a process/activity you have to face the "procedure" issue. Everything in the US (but in general in the Anglo-Saxon countries) is regulated by a procedure in the form of a checklist of specific actions to accomplish in order to obtain the desired output.

As an Italian, I cannot certainly advocate for the capability to rationalize and structure a process in a way that it could be managed by anyone who is provided with the necessary level of training! As a matter of fact the Italian culture makes all of this very difficult. As an example, even when you go to a restaurant in the US, the result is that waiters and waitresses apply the same procedure with regards to how a customer is served. Same way of greeting people, proposing the menu, same smiles (most of the times not really sincere), same way of managing the bill.

In terms of performance this "system" allows good average results. A good standard. But only in few cases can it provide excellent performances. A change of situation, if it is not scheduled in the "checklist," may generate confusion and bring disaster to the organization.

As an example, I went to a restaurant last week with my two daughters and I asked for a steak to be cooked without particular flavors and sauces: a simple, plain steak. I understand this is something probably very unusual here, but this is what the girls normally have in our country. As this request was not in the menu, the manager came to the table to see if that was what we really wanted. Later, much later, a steak arrived which was almost burnt. We complained and, after some time, another steak arrived in the same conditions. Comment: the chef in his checklist probably did not know how to cook it without sauces and the steak got too dry. Interestingly enough, the manager apologized and eventually she offered the dinner for free. (I will go back to that restaurant, but I'll order only what is on the menu! Actually I was surprised they even ageed to do something different from the menu.)

Other approaches, less structured and more inclined to leverage on the personality and the personal characteristics of whoever is in charge of a process/activity may generate peak performances, but lower standard/average responses. The overall characteristics of the single organizations are different. Depending on which field you are operating in, one approach could be better than the other. However, the society also reflects this different culture.

In trading we could probably experience something similar. An approach based on a number of variables to be managed with flexibility based on sometimes-qualitative assessments can bring peak performances, but lower average results. A systematic, structured approach may lead to less volatile, higher average results. In this last case, however, a specific market condition not provided in the "behavioral matrix" can bring the system to collapse. And in this case the dinner will not be for free!

Mar

8

"The Prestige" is a fantastic film - superb acting with a plot full of twists and turns - much like the global markets currently at hand.

A Magic trick has three parts:

  1. The Pledge - telling the audience that something ordinary is going to disappear or do something impossible.
  2. The Turn - the magician makes the impossible happen.
  3. The Prestige - the impossible is restored back to reality.

Magic, or the illusionary art of deception and fooling that the impossible is possible, is the topic that the film's plot line is structured around. The lengths to which the characters go to create their illusions, and the greater lengths they go to to disrupt the efforts of their rivals is incredible.

It reminds of the current battle in the market. Bears, until very recently, were "turned" into a disappearing act. The recent "prestige" of their return has occurred at a time when Bulls are still in the theatre. They have not yet been turned. No one needs their disappearance, because the time waiting for their prestige can cause all sorts of problems. The Bulls know this, and they won't be.

Magic is deception, and I believe the greater trick at hand for the market, and one that will in fact be next up from its bag of tricks, will be to "turn" the Bears once more, for a long, long time.

Mar

7

I have been considering the way a chess player thinks and the chairman's trip to Florida. I wonder if there might be a major conflict between the way the fish sense danger and the way that market patterns are counted.

For example, it may be good to buy stocks during 'panics,' but how does one define a panic? Three to four days down may or may not be a panic just as an x day low may or may not be one. But as soon as one starts to add conditions, e.g., high volatility, then the number of independent variables will upset the statistically minded.

I know how chess players deal with such issues — they synthesize different factors and 'take a view,' even if the position is a unique sample. So an isolated d-pawn is not necessarily a bad thing, it depends on other factors. Some say that exchanges mean that the pawn will be more of a liability, but this is also not really true. And by the time one has thoroughly assessed the various details, it could turn out that the outcome depends on a player's king position. If it were on g7 he'd be fine, but with it on h7 he has great difficulties, simply because of a check in a particular variation.

In competitive chess this has serious implications. One of the ways to win games is to lead people to believing they have a good position when in fact there is a small but important change to the standard scenarios. So when we got four days down on Feb 26th, one needn't have looked further than Altucher's Trade Like A Hedge Fund to see how advantageous this is. But we all know how the next day turned out.


Of course knowing precedent and systemizing advantages is a valid method in chess, and one can see this very clearly in the games of Max Euwe for example. But the very strengths of this methodology would also seem to contain a serious weakness, the unique position that defies the usual means of assessment. And this was very much in evidence in the second Alekhine - Euwe match in 1937 in which Alekhine deliberately targeted Euwe's approach by finding positions with a sample of one.

Now markets wouldn't deliberately do such a thing, or would they? What if the increasing number of quant traders were to produce an adaptation in markets, just as a virus might adapt to antibiotics? Wouldn't there be increasing chaos, with traditional patterns breaking down?

Mar

7

Many Eyes is an Internet-based visualization tool created by a division of IBM that I came across in my travels. It allows users to upload and share datasets and visualizations. Some details from IBM's site:

About Many Eyes

Many Eyes is a bet on the power of human visual intelligence to find patterns. Our goal is to "democratize" visualization and to enable a new social kind of data analysis. Jump right to our visualizations now, take a tour, or read on for a leisurely explanation of the project.

All of us in CUE's Visual Communication Lab are passionate about the potential of data visualization to spark insight. It is that magical moment we live for: an unwieldy, unyielding data set is transformed into an image on the screen, and suddenly the user can perceive an unexpected pattern. As visualization designers we have witnessed and experienced many of those wondrous sparks. But in recent years, we have become acutely aware that the visualizations and the sparks they generate, take on new value in a social setting. Visualization is a catalyst for discussion and collective insight about data.

We all deal with data that we'd like to understand better. It may be as straightforward as a sales spreadsheet or fantasy football stats chart, or as vague as a cluttered email inbox. But a remarkable amount of it has social meaning beyond ourselves. When we share it and discuss it, we understand it in new ways. 

Mar

7

It's all about balance and eating healthy red meat. If you want to eat great red meat, here's how to get pure, organic, lean meat and some exercise in the process. This works for turkey too, and you get just as much exercise!

I get up in the morning, get dressed carefull, go out into the woods with my bow and arrows (walking is good exercise), climb a tree and sit in the freezing temperatures (toughens me up and burns some serious calories), keep my mind and senses alert for "the" deer to come by, wait for the perfect moment, draw, aim and release.

Zip! Razor sharp death zipping along at 300 feet per second through the chest cavity of a deer. Watch carefully where he runs, listen for him to fall, wait 30 minutes, pick up the blood trail, find him, drag him out of the woods (if you want some exercise, try dragging 250 of dead weight up and down a half mile of hills).

Field dress the buck after weighing it and taking measurements (the 'possums, 'coons, coyotes, buzzards, and crows will thank you!).

Hang him up the barn, skin him (20 minutes), cut off his flanks (20 minutes), debone the meat (20 minutes), wrap it up tight and freeze it!

Grind some into burgers and BBQ some that day. Nothing better than fresh back straps (tenderloins) BBQed that day. Get some fresh corn, some green beans, some potatoes and slow cook it all…

Do some situps and pushups while flipping the meat. Grab a low-hanging tree branch to do some pullups on your way in to check on the vittles on the stove, and on your way back out, do 25 deep knee bends.

Put dinner on table while it's piping hot (too hot to eat).

Dash to the shower and take a three-minute refreshing shower, get dressed and get back to the table within five minutes, just in time for the food to be the perfect temperature.

Eat to your heart's content!

Then go outside, stare up at the stars, and take it all in! Life is so beautiful! And it's ours for the taking!

Charles Pennington extends:

If and when I need to lose weight, I go on the more extreme version of Atkins diet until the mission is accomplished. Then I return to a steady-state diet in which I avoid bread, rice, potatoes, and most sugar, though I do cheat regularly with things like ice cream and chocolate. Avoiding the bread, rice, and potatoes usually pushes me to substitute real vegetables. Don't be afraid of Atkins's almost no-limits approach to meat. Meat is very filling. I, at least, have no craving to overeat meat, although I could easily overeat french fries, sodas, and biscuits.

It is a pet peeve of mine that there is such an anti-meat and anti-fat-in-food bias out there that is not supported by real science. The Atkins/anti-Atkins divide corresponds roughly with the political right/left divide. The left doesn't like Atkins because it involves eating meat, and they're loath to admit its merits. The major studies that have been emerging (such as a massive study of the diet and health of tens of thousands of nurses) have been showing pretty uniformly that the fear of fat is unfounded, that low-fat diets don't work, and that the extreme Atkins-type diets are effective for losing large amounts of weight.

Hany Saad adds:

I have to agree with Prof. Pennington on this. I have yet to find any scientific proof that red meat is harmful for the human body. Colon cancer patients are automatically advised to stop meat consumption, as are patients with kidney and liver diseases. I looked everywhere for scientific proof but failed to find any. 

Marion Dreyfus writes:

In Mongolia you eat lean meat from the vast tracts. On the mountains in Peru, same thing — lean, absent any hormones or commercial shelf-life preservatives. These people live longer, on average, than city folk, even with reddest of the red meats.

The difference is consuming them fresh, without additives, and eating them from the slopes or the veldt, without hormones or padding from artificial feed. I ate wild game when I worked for a hunting magazine, and that game too had little to contest.

The stomach does work harder to digest the meat, true, but if it is of high quality, it is not the cancer-agent suspect the society implicates so easily. I agree, too, that the research with suitable controls is utterly (utterly?) absent, thus far.

Bruno Ombreux adds:

There are also the Okinawan diet and the Cretan diet. Lots of fruits, vegetables and fish. Little meat. And the French Paradox. Lots of wine, goose fat…

Scott Brooks explains:

Exercise and moderation in diet: that is the key, my dear Professors! That is how I've managed my chiseled physique. You don't get this body by accident!

David Hillman writes:

Ingesting high amounts of certain carbohydrates causes insulin spikes, often resulting in fat synthesis and deposition. So, bread, rice, pasta, potatoes, sugar and greasy three-pound breakfast biscuits from Hardee's not eaten in moderation are common culprits in weight gain. Red meat, or meat of any sort, and fats, have not been shown to cause the creation of excess insulin and glucose and fat. These scientifically proven concepts are the basis of the Atkins diet.

The best advice is to eat what you want, when you want, in moderate proportions, 4-5 meals per day, exercise regularly, screen preventively for common ailments, drink clean water often, good coffee more often, and great bourbon occasionally, smoke a Cuban cigar a couple times a year, get a hobby, steer clear of the press, wear sunscreen and loose underwear, have frequent sex, and always wear your seatbelt. If you want more complete information about insulin spikes, ask a registered dietician or a professional 'natural' body builder. My experience is they know more about this than the average medical doctor.

Dr. Atkins was generally correct, but that's not to say there aren't myriad ways to eat well, stay healthy, keep excess weight off and enjoy life, or that other plans can't also be a kick start. Many enjoy success with Weight Watchers' point counting system. Or, for $300, NutriSystem will sell you enough food for a month's worth of five-a-day MREs (well, not exactly — they sell you the entrees and in the fine print you're told you have to add your own fresh fruits and vegetables, dairy, etc). The truth is, eating to excess can cause weight gain, not eating enough can contribute to weight gain and not everything works for everyone. You have to determine what works for you and develop smart lifestyle and eating habits.

But the misinformation often foisted upon the public as healthful dietary advice by gurus, government and even reputable sources ranges from misleading to deplorable. Years back I stopped sending checks to the American Heart Association after seeing its logo and 'Heart Healthy' endorsement on a box of breakfast cereal known to have 50% sugar content. "No Fat" proudly displayed. Oh, really? The AHA endorses a product that causes insulin spikes, which in turn promotes excess fat production and deposition?

Excess fat builds up around organs (including the heart, and if you're fat outside, you're really fat inside), hampering proper function. Excess weight that wears at joints promoting osteoarthritis and inflammation. Good thinking. Instead, I now support the American Cattleman's Association through regular contributions made at the butcher shop of the local Piggly Wiggly. Ever seen an obese cowboy? Neither had Dr. Atkins. At least not since Andy Devine.

Mar

7

As I look at a chart, and wonder the next move in the great spectacle of global markets, an old prop trading colleague's response comes to mind.

In his words: "I asked my five year old daughter, 'where do you think this is going,' as I held up a chart which had a reasonable bias from lower left to upper right on the page. Then came the response 'don't be silly, Daddy, it's going up!'"

As I look to fade markets — which for some reason feels like a natural instinct to me, maybe due to the usually more volatile response of these pullbacks, this memory has saved me lots of hard currency.

There's a lot to be said for the uncomplicated power of youth.

Mar

7

Podcasting is great! Ever since I decided to leave my life as a full time trader and enter into the world of land development, which allows me far more time to play, believe it or not, I have focused on podcasting.

My record label is featured on more than 300 podcasting shows worldwide. I was introduced to podcasting a few years ago when I was performing on the Island of Ibiza. Two young Brits from London wanted to come into the DJ booth of the nightclub where I was featured. Two nice looking ladies, so I said sure. They pulled out their Mac from a backpack (clubs in Ibiza all have wireless internet), pulled out their pods, and asked if they could plug into the second line out in the mixer. I was puzzled and a bit nervous as 5000 people where screaming and dancing to the sounds I unleashed on them.

I did not want dead air or anything to interfere with my mix. But, I let them plug in. Next thing you know they pull out a microphone, about the size of a pen and start commentating on my performance. They were broadcasting me worldwide. I was absolutely amazed. I mean a radio station that is portable. Great PR for my label and new release.

Needless to say, their podcast has grown to more than 100,000 individuals who tune in and listen to their show about producers, DJs and the Ibiza scene. Radio as we know is dead. Period. Technology has advanced the radio industry, pirate radio is over. Anyone can have a voice over America or the world. It is brilliant. I personally do not have a show but I work with podcasters all the time, send them material, do interviews. My label is sponsored by Apple, so whenever I appear at a Mac store, they set up a podcast. The Iphone will revolutionize podcasting once again.

And to think, I use to sit in a room and watch five screens all day long for a living. What was I thinking?

Mar

7

Baja Mexico's most rugged area is the south cape where rears the Sierra de Laguna mountains I have viewed from afar for many years. Three days ago, I started afoot up them from the Pacific Ocean.

The road to my invented trailhead, such as it was, was taken by thumb. I walked an hour before the first battered pickup approached and stopped. I was surprised to land in a rolling grocery store with food crates and the grocer making a weekly round to the mountain ranchos. In short supply myself, I bought five bucks worth of stores until the 35 lb. pack brimmed and I ultimately alighted at last call in Rancho La Aguaje. Ahead, across a stream, rose a mule track into the Sierras.

The track wound steeply for hours through a succession of canyons and cross-streams. Initially, every hour at these crossings, sat little rancho of thatched roofs and dirt floors with small numbers of cows, sheep, and goats hung with clanging bells to locate them, plus the chatter of chickens, dogs and children who emerged to see the walking gringo. They threw me oranges from trees and provided water.

There are a couple ways to take the Sierras. You can attack them with a foreknowledge of what's ahead and gut the rises at speed to reach temporary crests and rest on the descents. Or, you can acquiesce to these powerful mountains and trudge with head bowed like a burro, which is better if you don't know how far the zenith is. This was my case. The route wound steeply up and around many peaks with cascading waters in a strange blend of desert, subtropical and then alpine flora. It was sunny, blue sky and 80 degrees with a trail of sweat on my heels.

The top of the world in southern Baja is a dry sub-tropical meadow where the switch from up to down, curiously today, was marked by a 5'' thick line across the road. It was made only hours before by the biggest diamondback rattlesnake that I had missed. I sat on my pack to study it, and abruptly a man in rags with a long handle axe rushed at me with purpose. There was no escape from this quick, barefoot man and understanding he was a simple rancher protecting his property, I burst in Spanish, 'I walk the mountains alone.' He leaned the axe against his side and extended an empty right hand that I shook with relief. After an explanation of my purpose he declared, "You must meet Pedro, the father of these Sierras, who was born here, his father too, and his grandfather." The farmer threw the axe under an organ-pipe cactus and we started afoot down for a kilometer to Rancho Cieneguita that was the only one on my map atop the mountain.

"Pedro!" shouted my escort at a dirt entry. Two kids came running out a stick house but retreated to a wrecked car to peek wide-eyed through the window at the gringo with a purple windbreaker and orange backpack. Now the dogs and chickens parted for Pedro, a jet-black Indian with shaggy hair and wiry body, who strode up and shook my hand with an index finger arthritically crooked into a trigger.

Soon we hunkered with cups of steaming coffee in the front yard that served as our earth blackboard. With a stick I scratched the earlier snake track and Pedro whistled it was 6-to-7 feet long. Each adult then drew various signs but mine of a sidewinder's truncated crawl took the prize of open mouths that a snake could move sideways to its eyes and 'fly off' the ground.

Pedro was born on this rancho 88 years ago, his son at his side was born here, his two sons at his side the same, and their two sons. The latter two kids eventually left the car to come sit by me with busy hands working as erasers after each person drew in the dirt. No one could read or write but each knew the Sierras well and the family offered to guide me to a cave of petroglyphs by the first Indians centuries ago. The described cavern was 10-feet tall and the drawings about 3-feet high. This was a rare opportunity that tourists pay 50 bucks for that thousands of other tourists have seen, but likely none had viewed these petroglyphs near the Cieneguita Ranch. However, the path to the cave was 3 kilometers in the direction I had come, and I couldn't physically make the trek. Pedro understood having once made the transpenninsular hike, and said that I was the first American to follow him.

As we scratched in the dirt, the kids, eight and ten-years-old, crept closer until each rested a toe on my boots. Soon they inched a brown foot on each boot and I asked them, 'You don't have any fear?' They replied, "No," and that was my cue to rise and leave. I stated a need to press on at sunset and hefted the pack thinking that one day on this spot these great-grandsons of Pedro would tell their sons about the day they stood on the feet of the American walking through the Sierras.

I started down the mountains on a better track now and in five minutes came across a Senora and her little girl pushing to jump start a red pickup with a young husband pounding the steering wheel. Golden now, I took a place aside the girls saying I knew Pedro and we pushed till the engine coughed to life. I continued hiking steeply down, mindful of rattlers and in the dark almost brushed the horns of a black cow. I was relieved minutes later when a dozen other cows with bells round their necks were trapped ahead on the track between the mountain and drop-off and trotted ahead a kilometer, halted until I caught up, and ran ahead again and again to scare off rattlers until the night cooled and the danger vanished.

A puma track had been scratched in the dirt earlier and Pedro had sighed not to worry since there were ample calves and lambs for dinner. Nevertheless, I descended the mountain a distance before cracking a tin of tuna, not to walk in lion country with fish on my breath. As backup, I stuck a disposable camera with flash in my breast pocket to scare any big cat as effectively as a small-caliber bullet.

Midnight and miles down the mountain under starlight, I pulled off the trail and camped with a rock pillow under a waving Socorro cactus. At daybreak, four grunting feral pigs scolded me awake and I packed and followed their tracks down valley soon to be passed by last night's grinning family in the red pickup with two fat cows in the bed for market. Hours later, I reached a sign in the road announcing Los Naranjos (The Orange Trees) Buddhist Retreat. I ambled up their side track to a wire gate with a Spanish Beware the Dog sign and wheeled to persist down the great canyon to the Sea of Cortez.

The valley widened a few hours later and the road flattened toward the transpenninsular highway that runs the length of Baja. The terminus, 38 miles from the Pacific origin here among a handful of butterflies, was nondescript, and I threw out a thumb for a ride to a nearby hot spring shown on my map. I rested, drank from the spring, washed my clothes, and fell into a surprise delirium for a half-day from something foreign in the water. I awoke refreshed and shouldered the pack with relish for the next hike.

Bo Keely adds:

Backpacking a rural road in Baja yesterday, I looked up to see an 8-foot ostrich trotting my direction. I sat on my backpack and the bird walked up and peered into the shudder. I rose and it fled the opposite direction to a grateful pursuing owner who insisted, "be careful, the big bird eats gringos and thank you for saving them in the next town."

Mar

7

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

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

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

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

"Dang!"

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

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

Bill Rafter adds:

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

Our experience is as follows:

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

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

Brian J. Haag writes:

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

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

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

Mar

7

The more sagacious detectives often say sadly at the end of a particularly tragic murder, "why is it always romance?" The particularly tragic move in the market last week needs a Rumpole to put things in perspective. But with his attentions fixed on crime in the English aristocracy and Oxbridgians, I will have to take a feeble crack at it.

It's clear to every thinking person that Ben Bernanke is a much abler chief than the fake Dr. Greenspan. He's thoroughly familiar with the academic literature, understands the full sweep of the interactions between markets, and is diplomatic, clear, and positive. What a contrast to his predecessor who was a academic manqué, prone to query about steel ingots and blast furnace stats in his bathtub for guidance as to what was happening in the economy.

Yes, the fake doctor must feel very chagrined that he's been displaced and shown to be such a straw wizard. What can he do but try to gain the spotlight with ridiculous non-falsifiable statements about "the probability of recession is 1/3?" Who is there who doesn't believe there's a probability of recession? But aren't there a million macroscopic inertial indicators in the market that tell us about them, and a boatload of forecasters that are not prone to look at the old-line heavy manufacturing sector as the key to our continuing expansion?


It is sad to see an old man or old lion displaced from the head of his pride. But what a boon it would be for the market if the fake Dr. G would stop trying to look big and "snarling" at his successor. "I'm trying not to make it hard for Ben," he said. There are people that still believe that he has insight. This just exposes them to so much more loss than they would have to face as the lieutenants of the bear raid spread their hopeful messages of doom with the fake doctor's support.

Along the same lines, it is invariable that in late February, the sage from Nebraska will say something doomsday-esque about the market. It has to get worse and worse each year or else he loses his position as the supreme moral force of abstinence for everyone else but himself. What he needs, he says, is a successor genetically programmed to avoid risk. But no, what he needs is something that Rumpole knows about, or that Hammerstein wrote about in South Pacific, that he ain't got anything besides the sunlight and the sand, the moonlight on the sea, mangoes, and bananas.

This time his message was that saving and deficits are going to cause anything but a soft landing. And you'd have to be crazy, except if you were he, to hold onto anything. Regrettably, he is completely oblivious to the economics of the matter, whereby individuals voluntarily hold debt at a price, and the current account deficit is triggered by the desires of foreigners to invest in the US. The two old curmudgeons came together in late February and their old guard of lieutenants was able to spread the old-hearted message.

It wouldn't be so bad if they were relegated, as they will be in 50 years, to the rogues gallery of old-hearted who decried the economic miracle of the enterprise system just when these pillars of Americanism, entrepreneurialism, competition, immigration, technology, trade, and respect for property rites were spreading throughout the world and setting the base for an economic expansion that will eventually bring the rate of return from stocks to close to the current bond rate, rather than close to a double, thereby proving a 100% increase in base stock values.

Only a Rumpole could do justice to it.

Victor Niederhoffer and Laurel Kenner chime in:

Old-Hearted Men

(Sung to the tune of Stouthearted Men, from The New Moon. Music by
Sigmund Romberg, original lyrics by Frank Mandel and Oscar
Hammerstein)

Spare me from men
Who are old-hearted men
Who've been short ever since '82.
Who always call
For the market to fall
Who have always the same point of view
Shorting the dollar,
They don't like the dollar,
They don't like the market at all!
Spare me from old men
Who don't like high vol or low vol
Cynical old men,
Who don't like
Anything at all.

Give me some guys who buy stocks when they dive
And get out when the panics are through.
Give me the spec that will rise up from wrecks
with an optimist's point of view
Spare me from old men
who don't like growth or tech or vol
Cynical old men
Who don't like anything at all.

John Tierney writes:

If there is one line that runs through Rumpole and that will outlive the series, it is his characterization of his wife: "She who must be obeyed." This line, like our recent correction, can be tentatively linked to romance, but not the more elevated kind that sadly led to the murders Rumpole was forced to solve. Rather, it's the tawdry love of a couple of harlots who deserve little but demand much. The first is the China doll, a wench who has taken much, stolen more, and given little. I believe George Friedman's assessment was partially correct: the Chinese government engineered this little play to teach its increasingly avaricious populace that you can't get rich in the market…fast. (Can you imagine members of the U.S. Fed dealing out a similar dose of reality to the American public?)

But I believe it goes beyond that initial purpose. The last time I looked out the China Doll was still firmly controlled by a communist cadre and all the good thoughts and market innovations in the world will not make them go away. It's mooted that an increasingly prosperous middle class will lead to the eventual downfall of this current ruling class. Are we to assume that this claque of engineers (well schooled, well disciplined, and with all the compassion of the Notre Dame alumni after a losing season) is unaware of this? That they will stand by meekly as their positions are voted away? History would argue otherwise. Just ask Google or Yahoo how much freedom is being dispensed.

We have been engaged with that country for 35 years now and despite repeated and numerous investments there, the big winner has been China…without costing it as much as a kiss. Many, many foreign companies have opened there only to discover that once the assiduous Chinese learned their methods, they quickly established cheaper competitors, drove them out of business, and took over their facilities. Nevertheless, our bankers, perhaps among the most venal individuals this country produces, continue to invest billions directly or indirectly. Billions are shipped over for minority stakes in some of the world's most corrupt and financially troubled financial institutions, copyright suits are brought repeatedly against the country, and theft of intellectual property is so common that it hardly merits news coverage anymore. (Meanwhile the Doll has stashed away quite a hoard with which she is purchasing natural resources, weak governments, weak presidents, and arms which can be shipped to Iran…or Iraq…or Syria…or Venezuela).

You want this woman? Take her, but when she breaks you, remember you could have read about her infidelities regularly on the pages of world's newspapers. In fact, you probably have read it, but her "opportunities" are so voluptuous it matters little, now. The second lady is much better known and has been around, in one guise or another, for some time. Her name is Carry Trade and she walks any street on which the swinging d**ks of the hedge fund world are located and within blocks of the banks which will provide the funds for leverage. She has been a generous consort for a long time now but has recently shown indications of retiring. This would be unfortunate, as she would leave behind a significant number of unfunded liabilities insured by firms without the wherewithal to cover 3% of them.

Of course, she has done this before, but a smitten lover is easy pickings. Finally, the most dangerous romance is the one that appears repeatedly in stories going back to the Achaeans and the Peloponnesians — we have become smitten with our own histories, accomplishments, and heroics, the pillars of Americanism. There exists a mentality, a very prevalent one, that because historically we have risen to the challenges, we shall continue to do so. Like Narcissus, we have fallen in love with our own reflection. And there are whole industries devoted to convincing us that the vision we adore is true. One is called Politics, and Greenspan and Bernanke are both its handmaidens. Another is called Finance, and it will tell us (as my grandmother used to), "Every day, in every way, things get better and better." (Does anyone really believe that the recently crowned "Greatest Generation" is really superior to those men who populated this country in the late 18th century?)

There are apostates. Just this week Goldman's chief global economist Jim O'Neill said, "There has been an amazing amount of leverage on currency markets that has nothing to do with real economic activity. I think there are going to be dead bodies around when this is over."

Pretty rough stuff. But for every O'Neill there are a dozen Abby Joseph Cohen's whose unfailingly bullish bellows prevail. Are our love affairs fatal? Can we win our tart's hearts - and minds - and business? Can we drag ourselves away from our mirrors of reminiscences long enough to address today's problems? Maybe, maybe not. But to pin the dip on the old dip who uttered the R word is a reach. This started in China and the maestro has little standing and less influence there. I think Rumpole would dismiss him as a suspect.

Rod Fitzsimmons Frey writes:

Freedom begins with property.

Somebody owns everything. By "own" I mean controls it, controls what gets grown there, what can be built there, who can pitch a tent there. That somebody might be the church, or more modernly, the state. But somebody owns it.

Those who own property, whether state or individual, control those who do not. Without property, one relies on others' goodwill for the most basic needs, food and shelter. One must do what the owner wants — grow wheat, send one's sons to the Middle East, work in a factory — to obtain the basic necessities. Possessing property liberates one from that tyranny. One can quit work and open a store; one can put up a windmill, dig a well, and buy a cow; one can rent out the property for income. Freedom.

Modern finance extends the freedom of property to the entire population, to those who have been denied property throughout the rest of history. Bankers are the modern Moses, leading citizens from servitude into liberty by extending the ability to own property to everyone. Of course, freedom is riskier than servitude, and not all succeed, but that cost is inseparable from emancipation.

All bets are off when the property rights aren't real, of course. Then the ownership of property is illusory and of no benefit. That is why the continuous, almost feverish defense of property by citizens of the United States is so magnificent and glorious, and why those of us in the rest of the world owe them such a debt of gratitude.

Mar

7

A few years back I read Wolfram's A New Kind of Science. I have been thinking about snow and looking forward to some heli-skiing in Alaska next week while spending long hours watching the market day and night. Wolfram's thesis is that simple binary rules for cellular automata in computer-generated binary or trinary functions develop into patterns as they branch out in an iterative fashion, often random in appearance, but with astonishing regularity. Quite amazing regular patterns, symmetrical patterns, emerge.

One of his theories is that natural cellular development is often binary and such a basic mechanism leads to gross formations with bilateral symmetry such as a hand with five fingers, a leaf, shells on the beach, starfish and a host of others. Applying the ideas to crystal formation, such as snow crystals, a simple branching mechanism tends to create symmetry in its patterns, though varied to infinity within its randomness, but more than random nonetheless, due to the basic binary rule at the heart of the creation of the crystals.

The market bid-ask is a simple binary function which, when iterated, develops the many price patterns in the historical record. The interesting application is the appearance of more than random occurrences of regular and symmetrical patterns. TA practitioners have proclaimed this for years. But might there be a quantitative manner of deconstructing and predicting the formation of a pattern before it completes, in a rigorous predictive manner?

Though he could develop the patterns from a basic beginning formula, Wolfram's greatest question and unsolved problem was that he was unable to deconstruct the basic formula from the developed pattern. But his main query for further study was, if these patterns could be developed from simple basic iterations of a simple rule, then why can't they be backwardly deconstructed?

In the market we know the rules; we see the patterns. Why can't they be deconstructed, categorized, and thus be predicted in a more rigorous manner than the TA practitioners use? There is no question in my mind that some TA rules have grounding and can be used rigorously for prediction. The Popperian problem is to state it in a falsifiable form, in a manner that can be quantified for testing.

Mar

7

Never be:

  1. Too rushed to say "Thank You"
  2. Too proud to say "I'm sorry"
  3. Too angry to say "Goodnight"

If you are too rushed to say "Thank you," your relationship is leaning more towards being an arrangement than a relationship. If you're too proud to say "I'm sorry," and too angry to say "Goodnight," you'd rather be right than make things better and you're dangerously close to becoming the unforgiving person you knew in your childhood — that you swore you wouldn't grow up to be like.

Mar

6

Former Broker Tells Cautionary Tale About Criminal Past, by Brooke Southall, March 5, 2007

SAN FRANCISCO — A former bad apple held the crowd captive at the Investment Management Consultants Association conference here last week.

Patrick J. Kuhse, a former stock broker and supervisor at Planner Independent Management in San Diego, riveted the IMCA faithful with tales of defrauding clients and paying his debt to society in penitentiaries and a Costa Rican "dungeon."

"Everybody in [prison] looked like people in this room," Mr. Kuhse said. "That startled me."

In 1972 a high level director of parole and probation in my state asked me to give a talk before a large audience of police and justice-type folk. I've forgotten my text, but do remember I said the very same words as Mr. Kuhse said to his audience. That is, "Everybody in prison looks just like everyone in this audience." They laughed in disbelief, as if physiognomic comparisons could not be made.

They had a belief that people who don't like the laws that have been made, and so violate those laws, are in some way distinguishable by appearance.

Marion Dreyfus adds:

Robert Mitchum spent some time in the clink for possession and use of controlled substances. When asked later by a reporter what it was like in prison, he deadpanned, "Like Palm Beach, but without all the riff-raff."

Michael Olds writes:

I hope Ken will forgive me if I suggest that the phenomena he and the others mention here is somewhat more complex than the simple bias he suggests.

First of all the humor/shock expressed by the statement that everyone in the room looks like a criminal is more than likely a reaction to self-recognition; virtually everyone here today is a criminal or thinks that something that they are doing is criminal behavior for which they have not yet been caught.

Do I need to make a list?

Workers take product and tool. Twenty percent of your children are criminals because they are stealing your prescription medications and using them. Millions are made criminals as a consequence of activities that 'ain't nobody's business but they own.' Every New Yorker is a criminal when he j-walks. All women in California are criminals when they talk on their cell-phones while driving and putting on their make-up. It is illegal here in CA to drive in the rain without turning on the windshield wipers. Etcetera.

We call our politicians "law-makers." Naturally it is their conclusion that they are not doing their job unless they make laws. So what could be accomplished by one righteous king, three laws and a wise and educated judiciary is instead done by a massive self-serving misguided and ethically corrupt bureaucracy spewing out laws absurd in both number and quality.

The self-serving, misguided and ethically corrupt lawmaker, being dependant to some extent on an electorate that would desire its leaders to be high-minded, ethical, and altruistic, encourage the confusion of the legal with the ethical. Those in the position to offer moral leadership decline to pass judgment on the law.

The confusion of the legal with the ethical has in turn resulted in the corruption of the ethical standard and a population that largely acts unethically without reflection because what they are doing is not illegal.

Do I need to make a list?

I read a survey a while back that said that some 70 percent of people lie (I suspect some 29.9% of the rest lied to the survey-taker). The police are allowed to lie to trap criminals. Scott Brooks is allowed to coach children to hit other children because the rules allow it because it's the elbow or hip, not the fist. It's not just ok, it's something admirable! An indication of the sort of character we seek in our future leaders, that is to say, training in the interpretation of the letter of the law so as to permit unethical behavior.

Coffee sellers can call it Kona when it has as little as 10% Kona beans in it. That's just one example of what advertisers can say to deceive deliberately. I'd hate to tell you what may be called "organic" food today or what is called a "natural ingredient." There was a time in recent history where Jews and others were arrested, their property confiscated, and they were exterminated without popular outcry because it was all done legally. Here a while back it was OK to kill Native Americans and steal their land because it was legal. Etcetera, Etcetera, Etcetera.

So the man sitting in the audience listening to Ken say that he looks like a criminal smiles and gives an involuntary laugh, because he is not sure if Ken is referring to his unethical behavior that is legal or his legal behavior that is unethical.

But where Ken is missing out on the lesson to traders is in the fact that he has identified the man as a criminal through his appearances; that little involuntary laugh gives him away.

Mar

6

I heard today that a very large barge of sand from China, so big it fills the harbor, arrived at our local port here in Hawaii. It is for use in construction. It must be cheaper than grinding solid volcanic rock. All the dump trucks are busy ferrying it to a big project here. 

Normal meme is raw materials going to China. 

Mar

6

The question is: how to take money out of the pockets of VWAP traders? This has been bothering me for quite some time and I haven't found an easy answer yet.

An old-school broker would slice a big order, perhaps 1/3 at the open, 1/3 at the close, working the remaining third at his discretion over the day. It was possible to make a few bucks intraday by fading him at the open. Since most VWAP programs are slicing according to the U-shape of volume, they are not really changing the daily volume distribution.

So that didn't change. What changed is that the book and tape have become useless. Instead of having big standing limit orders sitting like fish in a barrel, or market orders on the tape, we have hundreds of tiny little orders that are impossible for a human to follow. The Level 2 book, and the tape, are useless now, except in very tiny issues.

So: how to spot the buyers?

Very tough. I have noticed that sometimes when VWAP orders kick in they smooth the price like crazy. One could imagine an intraday smoothness detector to spot big buyers. I have also noticed that some of those programs are operating at fixed-time intervals, such as every half hour. So we should test if price behavior at the half hour is predictive of anything following.

Going beyond VWAP and into algorithmic trading, there is a recent thread with quality posts on Wilmott.

Mark M McNabb adds:

Having read some literature on VWAP I don't see much benefit for most traders, as the inferences in the canned packages seem subject to the same heuristic biases as the investment community's at large. These packages may be good for positioning large orders across markets, but the long and short of it: they are still subject to an outlook and bias. 

Mar

6

Article by Daily Spec's Professor Ross Miller, from Alex Castaldo, in latest issue of Journal of Investment Management.

This article describes a rigorous method for allocating fund expenses between active and passive management. It also enables one to compute the implicit cost of active management. Computing this "active expense ratio" requires only a fund's published expense ratio, its R-squared relative to a benchmark index, and the expense ratio for a competitive fund that tracks that index. This method is then applied to the Morningstar universe of large-cap mutual funds and active expense ratios are found to average more than 7%. The cost of active management for other classes of mutual funds is also found to be substantial.

Mar

6

The cry "ship ashore," a call for action for wreckers to save the hands and cargo of a foundered boat, has traditionally galvanized coastal communities into action. Fortuitously, my recent vacation to Key West, the richest city in the US during the mid 1800s and whose economy was built in the main on the profits of the wreckers, coincided with a foundering in the market. Thus, it became appropriate, perhaps even imperative, during this visit for me to visit all the wrecking buildings and museums in the area, and see what lessons could be drawn.

To put this in perspective, a good way to start is to consider 5% declines in the market in 5-day periods, events that are current as the market declined from 1454 on 2/23 to 1372 on 3/5, a decline of 5.6%. Such events have been followed by an average move of 2.5% from the close of the event to the close 10 days later with a 75% chance of a rise, and a standard deviation of about 5%, with a t unadjusted for overlap of 3 during the period. Thus there are profits to be made, a la cane trading during such periods. This is the case despite low confidence since there were only 21 independent events during the period. And the last such decline occurred January 27, 2003.

The economics of the wrecking business were good in Key West from 1820-1900 because the Gulf area around the Keys was littered with uncharted coral reefs, currents that were among the most treacherous in the world, and lighthouses were not available. Moreover, shipping was very active as this was the major port of entry for European, South American, and Caribbean ships exporting to the US, often via the Mississippi and the Great Lakes.

It is documented that the wrecking business was so profitable during this period in Key West that along with New Orleans it was the wealthiest city per capita in US.

One of the key aspects of the wrecking business was the specialized equipment that the wreckers used to ply their trade. The most visible were the watchtowers that extended 200 feet high above the roofs of the wreckers' places of business. The watchtowers were equipped with lights and telescopes and railings to prevent being blown off. The search for the wrecks was supplemented with ships that sailed among the reefs waiting for the wrecks to occur and to provide an early warning. A signaling system between rival ships developed so that no wrecks could be missed. As might be imagined, there was considerable folklore that the wreckers themselves induced the wrecks by false lighting and even direct damages to ships in peril.

The ability to spot a wreck is crucial in the market. The attempt to spot one is determined by many technical tools, such as moving averages and breakouts. Regrettably, many of them are prone to false signals. And those who make their living by waiting and hoping for them often find the pickings very slow. Many players make their entire living by waiting for wrecks and then plundering them. Unlike the wrecking ships of the day, that were required to save the passengers on board first, the legend is that those in the wrecking business in markets today are more interested in the plunder than saving the passengers. Indeed, in the days before 1820 when American Indians served as wreckers, the custom was to take the boat-hands as slaves. Instances of this were much more common in markets in the old days. When foundering occurred the wrecked party might been asked to work as a night clerk, watchman, or sports coach for the plundering party in exchange for his liberty. However, the wreckers of Key West were kept in line by reasonable checks and balances including a good admiralty court in the area. Similar authorities seem to provide a reasonable balance today.

The specialized equipment of the wreckers consisted of ships with shallow drafts and large holds. They were able to maneuver flexibly and quickly near the wrecks, and to store the plunder once they were able to get it. The market wreckers of today use split-second communication devices to get to the wrecks quickly, and Dow Jones reports. For example, they are now coding their messages so that the content can be analyzed electronically before the message can be read, to take account of all the fast moving participants that follow critical announcements. The holds of the wreckers are large because financial resources are necessary to inventory and hold all the baggage of the wreckers. And often it takes considerable time to auction off the proceeds of the wrecks.

Other specialized equipment that the wreckers carried were heavy anchors, heavy ropes, and large fenders to secure their boats to the wreck and to stay in the area. Such equipment would correspond to the infrastructure that big firms have today to deal with the wrecks. This includes teams of lawyers, lines of credit with banks for such special opportunities, and ample capital structures to absorb the goods in an emergency.

Key to the wrecking business was getting there first. The captain that did so was entitled to orchestrate the wrecking process. This involved setting the shares for all the other boats that were required to help in the process. Divers were critical to the process, too, and in the Allertown wreck they report that the divers who could hold their breath 6 minutes were paid $500 a day versus the $1 a day for those who hauled the proceeds.

This aspect of the business brings back one of my favorite anecdotes from my employees on the floor. One, Mike Desaulniers, who is as fast as lightning, said that during a crisis when prices flew every which-way and spreads were enormous, he was often knocked down, and outrun in the pits by much older and more ruthless participants. Another of my employees, one with a very dear place in my heart, found herself blocked out from participating in crisis situations by a circle of men about 3 times her weight and 25% taller. I am also reminded of Wilt Chamberlain's report that he must have had heard 40,000 people claim to have seen him score 100 points (March 2, 1962, as a Philadelphia Warrior against the New York Knicks) when official attendance for that game was listed at 4,124. I have met hundreds who have told me that they made their entire fortune during the October 1987 or 1997 blowups at the expense of the Palindrome or of others to whom I have been or are close.

One of the key questions I had was what induces a man to risk his life to become a wrecker? The danger is great, as their trade is plied during periods when others have met disaster, the weather conditions are bad, the ships they are plundering are in danger of toppling or burning. It's a 24/7 job and there is immense competition from others sharing a life or death mentality. The answer is incentives. The wreckers received about 25 to 40% of the profits from the goods, the owners got about 25%, and insurance companies another 30%. With about 200 wrecks a year in the 1850s, it was enough to risk life and limb. Almost all the fine houses in Key West, including the Hemingway House, the Washington House, and the Audubon house, and the Taft Museum were built from the profits and, indeed, the wood and pegs of the wrecks.

Studies of the economics of individual companies that are near bankruptcy indicate a persistent tendency for them to underperform. As memorialized in an excellent paper, "A Wrecker's Theory Of Financial Distress," the key finding is that the stocks of distressed companies vastly underperform those of financially healthy firms, because the wreckers and inside controlling interests siphon off much of the profits.

Alas the wrecking business ended in the early 1900s. Indeed, Key West itself went into bankruptcy during the 1930s. The demise was caused by modern technology and light houses and railroads. A business that only receives its revenues sporadically, like buying during panics, is often not as good in the long run as one based on the steady drift of commerce.

I would suggest that whatever the profits available from the business of wrecking during market panics, they are inferior to the buy and hold.

Steve Ellison writes:

One 19th-century Key West preacher reputedly used his elevated pulpit to advantage in spotting wrecks. If he noticed a wreck during the sermon, he would call for the closing hymn and lead the congregation in a processional exit. Once outside, he would dash to the wreck ahead of all the others who were still filing out the doors. 

J. T. Holley recalls:

One of the deceptions Blackbeard would employ on the Coast of North Carolina was causing ship wrecks by raiding the lighthouse and turning the bright light off, then having men on horseback comb the beaches at night or in storms with large lanterns in hand. From afar this would be the direction that the ships would sail — right into the hands of Blackbeard and his men.

Those moving averages and fixed systems are Blackbeard's men! Wreckers that plunder and pillage.

Ken Smith adds:

The movie The Shipping News tells the story of a house once occupied by a family that made their living (killing) by moving fires that were beacons for ships sailing along the coast, some set to enter a nearby harbor. Moving the beacons set the ships on a course to ground on rocks. The family went out like pirates to slay the sailors and steal the cargo.

Great movie starring Kevin Spacey and Judi Dench. The story takes place in Nova Scotia. Bitter, howling winds, icy storms. How could they live there!?

George Zachar replies:

Nova Scotia is physically spectacular, and well-situated for shipping and fishing. Halifax was a major seaport for all of North America in the heyday of sail.

Also, given how apparently widespread the practice of false beacons was, why didn't captains adopt other navigation strategies? 

Stefan Jovanovich adds:

Until the widening of the St. Lawrence, Halifax was the principal seaport for Eastern Canada. It is the site of the greatest man-made disaster (other than a battle) in the history of North America — one for which the people of the city still hold an annual memorial.

Mar

6

We do not use moving average systems*, but we do use approaches (e.g. sector rotation) that have lookback periods. One of the first things we did was to check all possible lookback periods. That research was not to find an optimal one, but to look for "sweet spots" and to hopefully identify the reason. We did find sweet spots for all parameters, and not just the lookback periods. The lookback sweet spots tended to cluster around very identifiable periods, like monthly, bi-monthly, quarterly, etc. Through an interesting approach we identified some of them as related to options exercises, and others as related to earnings releases. We subsequently theorized that since a large portion of the market followers are fundamentals-based and specifically earnings-based, it is quite logical for a momentum/velocity/acceleration-based ranking system to be successful with a quarterly lookback period. That is, what appears to be a technical system (i.e. price-based) is in reality a fundamental system.

One wonders why recent success would have any predictive capability. That's a fair question, and one we continually agonize over. However, let me use a sports analogy. (I hate to use sports analogies, as it usually alienates many women, although my wife would disagree.) Last years NCAA men's basketball champion was Florida. Forgetting their current performance, Florida was highly ranked at the beginning of the season. Why? Well because they had many returning players. Past successful expertise doesn't stop just because of an arbitrary end of the season. The same is true in investing. Long ago it was discovered that one of the reasons for mutual funds having a second year of good returns is that the stocks held in the first year continued to be held.

The above approach is fine, but requires repeated testing using continually-updated out-of-sample data. What we prefer is identifying a particular characteristic of the markets that is reflective of current conditions and using that characteristic to define and alter your lookback period. This makes your lookback period adaptive, and effectively negates the need for out-of-sample data.

* If forced to come up with a long-short strategy and in need of the short side system, we have found the best approach to be moving-average based. It won't make money either long or short, but will go nowhere and reduce the margins for the long positions. However, I don't think that's an endorsement of moving average strategies.

Mar

6

Models with adjustable lookback periods, e.g., the length of a moving average, require a tedious if simple sanity check. Test all periods. Plot the results (final equity value or whatever other measure you are using) vs. period. Which are most profitable? Is a contiguous block of periods profitable?

For example, perhaps only shorter periods are profitable and longer periods lose money. Or are only a few scattered periods profitable? The last effect suggests the model is nonsense. If most periods are profitable, or if all periods between 1-30 days are profitable, that makes some sense. If the 24 and 66-day periods are profitable, but no others are, what real effect could be present to justify their profitability?

Many people use a 200-day moving average to estimate long-term trends. The model hypothesis is that long-term trends matter. I would not consider using a 200-day moving average to be data snooping or data mining. To me, data snooping is testing all possible periods and using the best one without doing any analysis like the one I suggested above. Poor analysis is testing only one period, even if it is your hypothesis, without checking the alternatives at all.

Mar

6

Some of Kent Osband's ideas in Iceberg Risk: An Adventure in Portfolio Theory, such as dividing strategies into "teams," are quite interesting. And I find Ralph Vince's, The New Money Management useful for finding maximums and helping to rank systems and strategies. He also has a new book coming out, The Handbook of Portfolio Mathematics: Formulas for Optimal Allocation & Leverage.

Mar

6

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

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

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

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

Mar

5

Japanese chart watchers would say 2/21 was a hanging man in the S&P, which portended lower prices, followed by a doji, which indicated indecision. The decision was made on 2/23, and it was let's go down. That's about all I see.

Larry Williams replies:

I do not look at candles. They just don't light my fire for some reason. Besides when I program them I can never get them to make money mechanically. I suggest you look at volume and open interest as well as price.

Mar

5

When a helicopter has an engine failure the pilot will make use of “autorotation” whereby the upward motion of the airflow through the rotor will cause the blades to continue spinning allowing for a safe return to earth.

However, sufficient altitude is required to avoid a hard landing. In a helicopter altitude is your margin. The intuitive notion that a helicopter without engine power will fall out of the sky is false.

There are a lot of correlations to the markets in flying a helicopter, the most obvious is that one tends towards overcorrection.

Mar

5

I am not at all computer literate, so this might be useful to others who are not.

I have generally not had problems with Microsoft. I have had no problems with WindowsXP and OfficeXP, although prior to the release of IE7, I thought IE6 was very poor. But I got around that by using Firefox and/or Opera.

Anyway, I find WindowsVista to be so outrageous that I have determined never to use it. My current laptop and wife's computer are WindowsXP machines, and I figure both have a two-year lifespan left. So I took an older Dell and installed Ubuntu on it. I totally wiped out WindowsXP, so I don't have two partitions.

The problem with leaving the Microsoft world is some of the applications. Now, OpenOffice actually seems to be pretty good. But I regularly use Crystal Ball, which is an Excel add-in. I suppose I could hope for it to be available on Linux in two years. But my question is, what do Linux guys do? How do they deal with the fact that most business software is Windows only?

Anyway, the install went quickly and there were no problems. It has sped up the computer compared to how it ran with WindowsXP. The multimedia packages don't have the codecs for mp3s, but a quick question about that to a message board got me the answers I needed.

I intend to use this computer frequently for the next two years as training for a planned ditching of Microsoft altogether.

Mar

5

The Economics of Private Equity Funds, by Andrew Metrick Ayako Yasuda, University of Pennsylvania, The Wharton School, Department of Finance. February 22, 2007. Noticed by George Zachar.

The overwhelming majority of funds, including all 151 BO [buy-out] funds, use 20 percent as their carry level. Among the 98 VC funds, one fund has a carry level of 17.5 percent, three funds have 25 percent, and one fund has a carry level of 30 percent. The exact origin of the 20 percent focal point is unknown, but previous authors have pointed to Venetian merchants in the middle ages, speculative sea voyages in the age of exploration, and even the book of Genesis as the source.

Mar

5

Pi, from Tom Larsen

March 5, 2007 | 1 Comment

Pi is one of my 2 favorite movies with a trading theme. When I watch that movie, I think, "I know people like that!" Charts and computers everywhere and nobody knows what they're talking about. Their heads are pounding. So the hero is a little obsessed with the market…which reminds me of a favorite quote from the book, "The World According to Garp," when the wrestling coach tells Garp, "You've got to get obsessed and stay obsessed!"

The other movie is Trading Places, which I first saw in the theater with other members of the Pacific Stock Exchange after the close one day back in the 80s. What a great time we had! Here are a few lines where the evil Duke brothers cross-examine the street person they plan to turn into a trader. Billy Ray cuts through market analytical baloney to get to the real psychology of the market:

Randolph Duke: "Exactly why do you think the price of pork bellies is going to keep going down, William?"

Billy Ray Valentine: "Okay, pork belly prices have been dropping all morning, which means that everybody is waiting for it to hit rock bottom, so they can buy low. Which means that the people who own the pork belly contracts are saying, 'Hey, we're losing all our damn money, and Christmas is around the corner, and I ain't gonna have no money to buy my son the G.I. Joe with the kung-fu grip! And my wife ain't gonna f… my wife ain't gonna make love to me if I got no money!' So they're panicking right now, they're screaming 'SELL! SELL!' to get out before the price keeps dropping. They're panicking out there right now, I can feel it."

Randolph Duke: [on the ticker machine, the price dropping] "He's right, Mortimer! My God, look at it!"

Bernd Dittmann adds:

Bearing in mind Dr. Niederhoffer's enthusiasm for the book "Secrets of Turf Betting", I propose to add 1973’s "Sting," starring Redford, Newman et al to the Specs’s movies list. The similarity between the "Sting's" plot, bucket shops from the early twentieth Century and present day counterparts (spread betting firms and alike) is striking. Besides the movie's relevance to speculation, both Newman's and Redford's performances are stellar, even in their earlier years.

Mar

5

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

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

Mar

5

I started working as an auditor, at Price Waterhouse, one of the big six, right after my graduation from university. I worked very hard and very long hours. After eighteen months I was managing a very large group and was the youngest manager in the company's history. I was very good with numbers. I studied balance sheets, income statements, and statements of cash flow. I studied hard and learned a lot about companies. I was never satisfied and always thought I could do more. I started a few businesses in my twenties and overall made money. I spent sleepless nights managing people and working to meet deadlines. My businesses grew and I had to leave my auditing career for good.

One day I decided to liquidate everything and emigrate to Canada. The stock market always attracted me. It attracted me initially as the line of least resistance and the easiest way to make money. Boy, was I ever wrong! I read every book about markets from Peter Lynch's to the scoundrel of Omaha's and his womanizing mentor's. I decided I was more interested in the demand and supply curves of the stocks whose balance sheets I am studying more than the demand and supply for heir products.

I didn't know why but it made more sense to me to treat the stocks as the subject of examination, their supply and demand, their temper and their psychology and forget everything else. I felt I was getting closer to the Key to Rebecca, as one large fund manager calls it.

I studied everything about the supply and demand of stocks. I passed the three levels of the CMT in a record time among a zillion other courses. I studied hard and learned a lot. I was living alone and didn't work for a long time. I survived on the capital from the businesses I liquidated. I read every book on technical analysis. I learned about every pattern. I programmed every indicator known to man and developed a system that weighted indicators by their success rate. Even then, unwittingly, I was trying to be scientific. I invested everything I had in the markets and was making more money that I dreamed possible for someone my age. I started living large. I once owned every model of the Rolex watch ever manufactured. No exaggeration. I owned a violin that was auctioned for the equivalent of five years of my audit manager salary without a blink. I still have my tax bills to prove it.

It always worried me that it came so easily. Even then I guess I was smart enough to have my doubts. The more money I made, the more I wanted and the more I worried. I worried that my system might be flawed. The more I worried the more I studied. The more I studied the more I figured that I might not hold the Key to Rebecca.

I had charts everywhere in my bedroom. More quote machines and news feeds than a mid-sized fund operation would need. Financial journals scattered all over my floors. Books everywhere. I was a genius. If you wanted a picture of illusion de grandeur, I was it. I always felt I should enjoy it as best as I could, as it could be taken away from me without a warning.

Every time I surfed the net I worried that my Key to Rebecca wasn't really a secret. People used my indicators everywhere. I felt that everyone knew about them and shared them very generously.

The public newspapers had them. They were all over the free websites. The TV commercials, the financial seminars all had them. They were all over the place. They were haunting me. I couldn't take the uneasiness anymore. How could everyone get rich at the same time? How could everybody be profitable? Why are they sharing? Are they mad? Didn't I study that money is a scarce commodity? Something is wrong.

How could indicators so well known to people, indicators so publicly available, be so profitable? I read and read. I tweaked my indicators so I could be ahead of the public, but only in the sense that I naively used a 47-day moving average instead of the 50 and a 17 instead of the 20 and a different method of crossover. I applied similar naive ideas to all indicators so I would ahead of the public.

I didn't like my game even though it was profitable. I didn't have an edge. Making money doesn't mean you have an edge. But, what's an edge? How do I know I have one? I studied history. I read about wars. I tried to develop a philosophical framework of what edge really is. The more I read, the more I realized that whatever an edge is, I didn't have it.

While I was browsing a bookstore in downtown Toronto, I saw a picture of a barefooted trader with chessboard in front of him. I found out he was also a champion in squash, a sport I took up very seriously at the time. The cover also attracted me, and I started reading the book.

My first reaction was, "wow, this guy knew it all along!" How many traders tell you upfront that they will not unload any secrets on you in the book they are trying to sell you? None. This alone was worth the price of the book for me.

I read the book and Victor unloaded on me a dose of wisdom beyond my brain's ability to digest over a first read. Victor, the counter, knew it all along. Victor mentioned that Jack Barnaby caught him before he learned the game of squash the wrong way. Well, Victor caught me before I learned the game of speculation the wrong way.

Yes, money was scarce. No, popular indicators will not make money over the long run. Yes, cycles change. No, technical analysis and moving averages are not testable or falsifiable. Yes, Victor went through the same stages I went through, as he explains in his encounter with John Magee, the father of technical analysis. Yes, all hope is not lost. I am still young and I can change my game.

I designed trading programs based solely on Victor's wisdom. The wisdom he gave me so freely for the few dollars I paid for his book. Victor made millionaires of, and instilled wisdom into, countless students. Victor, who never bragged about his countless achievements.

Victor answered my first email in 1998. Victor takes the time to send me emails at 2 a.m. to compliment me on a contribution to Daily Spec. A contribution that is often nothing but a recycled and repackaged piece of his own wisdom.

Scott Brooks adds:

We are all truly blessed to have this forum and opportunity to learn. I know I have grown as a manager, a father, a hunter, and as a person because of my affiliation with Daily Spec.

As a manager, I've learned how to look beyond the world of TA and see more than the shadows on the walls of the cave that my charts were.

As a father, I've been able to share with my kids, especially David, many of the life lessons on the site.

As a hunter — yes as a deer and turkey hunter — I've improved greatly because this site has given me an opportunity to write about my hunts and as a result, forced me to look more deeply at what I was doing and at the rationale behind my choices.

And as a person, I have grown from the friendships I've made with other contributors. As a businessman, from the knowledge gained from the great businessmen among them.

I am in a continuous state of awe and excitement at the knowledge of this group — and that this group actually accepts me as part of it! If you all knew where I came from and my journey, you'd understand how amazing it is that someone like me could be here in this group!

I am most grateful for Victor for allowing me in this forum. I am honored to be here. I am honored to call Victor my friend!

Mar

5

Diagnosing the System, by Stafford Beer (John Wiley & Sons) This books presents an interesting way of looking at organizational structure, but some of the terms could be applied in a financial markets system/context. Here are a few excerpts:

  1. Viable: able to maintain a separate existence
  2. Homeostasis: stability of a system's internal environment, despite the system's having to cope with an unpredictable environment
  3. Invariant: a factor in a complicated situation that is unaffected by all the changes surrounding it
  4. Variety: a measure of complexity: the number of possible states of a system
  5. The Law of Requisite Variety: only variety can absorb variety (Ashby's Law)
  6. Attenuator: a device that reduces variety
  7. Amplifier: a device that increases variety
  8. Transducer: encodes or decodes a message whenever it crosses a system boundary - and therefore needs a different mode of expression
  9. Oscillation: failing to settle down in homeostatic equilibrium, a dynamic system over-corrects itself continuously

Mar

5

Here is a list of Murphy's Laws and variations of it that have been compiled on this website. In light of the events of this week I thought it appropriate to send a list of some of the more popular ones and a link for these and other interesting quotations. I think there are many lessons here for the speculator.

Murphy's Laws.

1. If anything can go wrong it will.
2. Nothing is ever as simple as it seems.
3. Everything takes longer than you expect.
4. If there is a possibility of several things going
wrong, the one that will do the most damage will go wrong first.
5. Left to themselves, all things go from bad to worse.
6. If you play with something long enough, you will surely break it.
7. If everything seems to be going well, you have obviously overlooked something.
8. If you see that there are four possible ways in which a procedure can go wrong, and circumvent these, then a fifth way, unprepared for, will promptly develop.
9. Nature always sides with the hidden flaw.
10. Mother Nature is cruel.
11. It is impossible to make anything foolproof, because fools are so ingenious.
12. If a great deal of time has been expended seeking the answer to a problem with the only result being failure, the answer will be immediately obvious to the first unqualified person.
13. If anything just cannot go wrong, it will anyway.

Marlowe Cassetti writes:

When I was at NASA I had the privilege of working with Bill Tindall. He had a sign on his wall that proclaimed, "Better is the Enemy of Good." It was uncanny; whenever bright ideas were supposed to make a spacecraft or software better they usually made things worse.

I recall a scientist/primary investigator was pleading to change the mechanical readout on his flight instrument, to make it easier for the astronauts to record the observed data. The astronaut representative didn't think the change was necessary since the flight crew had trained with it and it wasn't a problem. With great reluctance the Skylab Change Control Board approved this minor modification. When in space, the new readout came loose and fell inside the instrument and rendered it useless. This was a 45-pound package and was carried into space at great expense. Better was the enemy of good, as Murphy would probably agree.
 

Mar

5

The pelicans at Cheeca Lodge in the Keys wait for fishermen to catch fish rather than catching them themselves. And fisherman are taught not to encourage them in their redistribution of the wealth, by pretending to throw their catch back in one direction but actually backhanding the catch back in the other direction. This is so the pelicans can't snare them in the air. Pelicans know this ruse and hide in the shadows so they can't be seen, and catch the fish that the humans try to deceive them with.

Pelicans have learned to steal fish that humans deceptively throw in an opposite direction, and they can profit from human deception by a third level deception of their own. In this case they show that any direct actions by humans to try to capture the gist of recent history of direct movements is doomed to failure as humans are at least as smart as pelicans.

The fish at Sunset harbor congregate around the ferryboat landings where they are fed daily as a tourist attraction. I dropped some muffins in the water and within 5 seconds, all 10 muffins were eaten by an average of 50 snapping fish. Then I put my net in the water, and threw the muffins in and not a single fish out of 500 would attempt to eat the muffin. Thus, the fish saw a danger signal and learned to avoid the easy meal.

The humans don't change their activities often enough when danger appears. They follow the old tried and true. The metals move of up 5% the day before I left on my first vacation in two years (the previous one being during the Katrina hurricane and floods interrupted) was a danger signal that should have caused the humans who follow systems like down 3 in a row to change their activities. Perhaps the move down of 5% in the metals as I return will be of more value.

Steve Leslie adds:

I have been practically everywhere in the Southeast US, from the Carolinas to the Dry Tortugas. And a trip to the Florida Keys remains a unique and pleasant experience. I have been to the Keys many times and am quite familiar with the Cheeca Lodge. Islamorada is a favorite destination of the Bush family. If you are going fishing you might as well try one of the greatest places to fish in the northern hemisphere! I have stayed in nearby Tavernier at the Kon Tiki and also in Marathon. My business partner is a member of a private resort in Key Largo through his father, a retired executive for General Foods.

Mar

4

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

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

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

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

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

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

Dates of declines, with 21 day forward compounded return:

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

Ken Smith remarks:

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

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

Nerves get frazzled and traders deteriorate along with nerve protection.

Mar

4

Living on the East Coast of Florida, I have learned about the phenomenon of rip currents and how to survive one should you encounter it.

A rip current is a strong flow of water returning seaward from the shore. They can occur at any beach with breaking waves, including the world's oceans, seas, and large lakes such as the Great Lakes in the United States and Canada.

Such currents can all be extremely dangerous, dragging swimmers away from the beach and leading to drowning when they attempt to fight the current and become exhausted.

When caught in a rip current, you should not fight it, but rather swim parallel to the shoreline in order to leave it and search for calmer waters where you can return to shore.

Similar events occur when speculators gets caught in a rip market. The natural inclination is to fight back and try to swim back to shore or, in this case, try to get even. They exhaust their capital by overtrading until eventually they drown in their losses.

The correct strategy when faced with a powerful force is to swim alongside the turbulence rather than engage it before re-entering, until you find the proper entry point and things have calmed down. This is taking the path of least resistance and it ultimately leads to a more harmonious and profitable conclusion.

Mar

4

I picked up "Skeletons on the Zahara" after it was mentioned in passing on DailySpec, and it turned out to be a most enjoyable read.

As per the Amazon blurb, "Dean King refreshes the popular nineteenth-century narrative once read and admired by Henry David Thoreau, James Fennimore Cooper, and Abraham Lincoln. King's version, which actually draws from two separate first person accounts of the Commerce's crew, offers a page-turning blend of science, history, and classic adventure." The book is a compelling page-turner, an extraordinary story of survival against overwhelming odds. Perhaps even a better yarn than Shackleton because the crew struggled against Man as well as Nature.

Capt. Riley and his crew set off from Gibraltar in 1815, on their way back to Connecticut, and through a combination of bad weather, bad navigation, and bad luck, missed the Canary Islands and instead ran aground at Cape Bojador on the edge of the Sahara. On going ashore, they soon were swarmed by nomadic Arabs who, as was the custom in the area, looted their money, provisions, and even clothing. The Commerces swam for their lives, back to their grounded ship, but lost one crewman to the Arabs. Then they launched their lifeboat, hoping to make their way south to sub-Saharan Africa, away from the desert Arabs. But in a few days they were overwhelmed by hunger, thirst and sunstroke and had to land at Cape Barbas, a couple of hundred miles south of Bojador, even farther from 'civilization.'

After a long struggle to climb the sea-cliffs at Barbas, the Commerces find a bleak landscape with no sign of water or vegetation, and realize they'll be dead of dehydration in a day or two unless they find water. Wandering, they stumble on a group of Arabs at a well, who give them water, but then, as per custom, take them as slaves. After fighting among themselves, the Arabs divvy up the Commerces, one or two to each 'master.' Much of the book describes the Commerces' subsequent wanderings through the desert as slaves of the Oulad Bou Sbaa tribe. A good indicator of the privation and suffering they endure: Capt. Riley's weight drops from 240 to 90 pounds during his travails.

The sailors are traded several times as the tribes folk crisscross the desert. Early on, Capt. Riley is exchanged for a blanket, and remarks that he's worth substantially less than a camel, as seen by the Bou Sbaa.

The Commerces' only hope is to convince the Arabs they have connections in Swearah (modern Essaouira), a seaport outside Morocco (modern Marrakech) where the Western nations had consulates. The notion of ransoming "Christian slaves" captured by pirates or taken from shipwrecks was well-established, and gave rise to a fascinating economic structure, as described by King:

"In this way, in an agonizing peristalsis, the Sahara slowly yielded Christians north one territory at a time, the nearer to Swearah the higher the price, with the medium of exchange switching from bartered goods to cash at Wednoon, on the edge of the desert. On the Sahara, the French merchant Saugnier was traded once for a barrel of meal and a nine-foot bar of iron, and later for two young camels. He was sold twice at Wednoon, first for $150, then for $180. Seamen with him brought $50 to $95. Robert Adams of the Charles went in the latter range, once for $50 worth of blankets and dates, and a second time for $70 worth of blankets, dates, and gunpowder."

Eventually Capt. Riley and a few others are purchased by a trader from the north, Sidi Hamet, more sophisticated and cosmopolitan than the Bou Sbaa nomads. King cleverly opens the book with a prologue from Hamet's perspective, describing his participation in a massive caravan from Wednoon to Timbuktu in 1812, led by a trader named Sidi Ishrel, that went awry after failing to find any water mid-desert:

"When they arrived in Haherah, the news spread like flying sand to the back of the caravan, reaching many of the men before they had even set foot in the much-anticipated valley: There had been no rain in over a year. Haherah's famous wells were dry. (.. ) Sidi Ishrel marshaled them together in teams to remove sand and stones from the old dry wells and mine them deeper. For five days the teams dug in unison, but still found no water. Sidi Ishrel concluded they had no hope of salvaging the caravan. The could only try to save themselves, so he ordered all but three hundred of the best camels to be slaughtered. They would drink their blood and the fluid stored in their rumens, and they would eat and dry the meat. (.. ) Thirty elders selected the camels to be spared, and the slaughter of the rest began. (.. ) In the heat of the moment, they began to quarrel. At first they only brandished their scimitars threateningly, but it was as if death must beget death. Once the crescent-shaped blades clashed, friends joined friends. There was no escaping the feverish battle that resulted. (.. ) In their fury, some of the men murdered Sidi Ishrel. More than two hundred others died that day. The survivors drank their blood." 

Sidi Hamet sees in the "Christians" a chance to make back his losses from this caravan, money he owes to his father-in-law, a powerful local warlord. Capt. Riley convinces Hamet he has a wealthy friend in Swearah, though in fact Riley has never been there, and suspects there are no Americans in the town, and fears the British consul will be hostile to Americans in the wake of the just-concluded War of 1812. His only chance is to give Hamet a generic letter "to his friend" that reads as if he and his sailors are British, and hope it falls into the right hands. He writes:

"Sir: The brig Commerce from Gibraltar for America, was wrecked on Cape Bojador, on the 28 August last; myself and four of my crew are here nearly naked in barbarian slavery: I conjure you by all the ties that bind man to man, by those of kindred blood, and every thing you hold most dear, and as much as liberty is dearer than life, to advance the money required for our redemption, which is nine hundred and twenty dollars, and two double barrelled guns: I can draw for any amount, the moment I am at liberty, on Batard, Sampson & Sharp, London — Cropper & Benson, Liverpool — Munroe & Burton, Lisbon, or on Horatio Sprague, Gibraltar. Should you not relieve me, my life must instantly pay the forfeit. I leave a wife and five helpless children to deplore my death. (.. ) My present master, Sidi Hamet, will hand you this, and tell you where we are — he is a worthy man. Worn down to the bones by the most dreadful of all sufferings — naked and a slave, I implore your pity. (.. ) I speak French and Spanish. James Riley, late Master and Supercargo of the brig Commerce" 

It's unclear whether Hamet believes Riley, and several times he emphasizes he'll slit Riley's throat in an instant if he discovers he's lying about his "friend." But now Hamet and Riley have a shared interest in delivering the Commerces to Swearah, and they set off together on an arduous journey though various provinces controlled by greedy warlords eager to steal any "Christian slaves" who pass through.

I won't spoil the fun by giving away any more of the plot. Read it and find out!

The author spent time in the Sahara "on foot and camel" while preparing the book, and his familiarity with the remote locations visited, and harsh conditions endured, by the Commerces shines through. And King writes with elegance and fluency. Altogether a wonderful book, great fun.
 

Mar

2

McCain's Campaign Collapses

Dick Morris & Eileen McGann, Tuesday, Feb. 27, 2007

The John McCain candidacy, launched amid much hope, fanfare, and high expectations, may be dying before our eyes. Even worse, it may go out with a whimper instead of a bang. It may not end in an Armageddon style primary defeat, but just dry up from lack of support, money, or interest.

When Benedict Arnold moved to England, he discovered the English didn't like him, either. Nobody likes a traitor. The McCain hype was built on his disagreements with the GOP mainstream. Now that he has either turned back on some of those issues, or they are no longer issues, the GOP faithful still don't like him, and surprise, surprise — now that the Dems and the media have no use for him anymore, they don't like him either.

Mar

2

The years most closely correlated with 2007 YTD, through February, are: 1911, 1946, 1989, 1934, 1936, 1980 and 1989.

Mar

2

I am the assistant coach on my son David's 5th and 6th grade basketball team. All the kids on the team are first-year players, whereas the other teams have been playing together for several years.

At first, coaching these kids was like trying to herd cats. Now, after several weeks of practice and games, they are starting to understand the game. The head coach is a good guy and is great with the kids. He is really good at teaching them the fundamentals and building up their confidence. He never misses an opportunity to compliment the kids whenever they do something good!

I was honored when he accepted my offer to be his assistant coach. Since I do know a thing or two about basketball, he quickly turned over the "big men" to me. What I'm trying to drive home to these big men is that winning the battle under the boards is about being aggressive, tenacious, and willing to put up with more pain the other guy. Simply put, it's about being physical.

It's very rewarding watching the kids doing what you tell them to do, and succeeding.

One kid on our team is tall with some "mass" to his physique. But he's timid on the court, unsure of himself. So I have worked with him on becoming more aggressive. On defense, we've run drills where we've taught the kids what parts of the court "belong" to them. They know that when they hear me yell, "Taylor, get him out of there!" that they are to get in front of that man, elbow him in the ribs and push him out of the paint. If the guy tries to duck the elbow, then they know to do it with their hips. As a result, there are very few points scored against us in the paint. They can't score in close when they ain't in close! Also, the boys are getting a lot of rebounds.

Getting rebounds starts way before the ball bounces off the rim. Rebounding is about positioning your opponent so that he is in the least advantageous position possible. And the only way he can get into a better position is by exposing himself to your elbows or hips.

David is becoming a real master at this. During the last game, I heard the words I used to love to hear from the other team, spoken about David. Two of their players were arguing over who was going to cover him. Neither of them wanted the job. Why? Because David was willing to be more physical than they.

It's also fun watching the kids realize how important the role is that they each play on the team.

One young man named Brett has made great progress. He is not good enough at ballhandling to play guard, and he's not quite big enough to be a big man. Coach and I were discussing where to play him. I asked Coach to let me talk to him.

I asked Brett if we was willing to listen to me and do exactly what I told him to do. I further asked him if he was liked wrestling and pushing other guys around. He said yes to both. I told him that I was going to make him a big man and teach him how to dominate under the boards. His eyes got as big as saucers and his grin went from ear to ear! He was pumped. He asked where I was going to play him. I told him that on defence I was going to play him at weakside forward.

He looked crestfallen. I could tell that the phrase "weakside" had not been taken well.


I gave him an evil smile and told him, "Brett, that was the position that I played. And you're going to love it — because the weakside gets the rebounds."

Brett is a coachable kid. He listens to what I tell him and then executes as instructed. He is, at best, average height, but he is a rebounding machine!

Another of my big kids is Taylor. He's becoming an excellent defensive player. He had four steals in the last game and several rebounds. But offensively, he's struggling. He's intimidated by shooting, afraid he'll miss.

He gets several offensive rebounds per game, but always brings the ball down low instead of holding it high above his head to use his height advantage, then turns away from the basket, looking for someone to pass to.

This happened several times last game, so I substituted Taylor out of the game so I could talk to him. I told him that when he gets that rebound, I want him to shoot it right away. He gave me excuses as to why he couldn't do it — too many guys around me, guys grabbing the ball. I told him that it didn't

matter. I wanted him to do exactly what I told him to do. We talked about how much progress he had made and all the success he was having on defense because he had been listening to what I had coached him to do. He agreed that when he listened to what I told him to do, he had success.

So I told him what I wanted him to do: "Taylor, when you get an offensive rebound, I want you do three simple things and do them all at the same time. I want you to jump up, over and shoot!

He asked me what that meant. I told him that I wanted him to grab the rebound and immediately jump up as high as he could in the direction of a defender — jump into the defender — and then shoot.

He asked, "what if I miss?" I told him it didn't matter. If he missed, the refs would call a foul on the other team and then he'd get two free throws.

The very next time we were on offense, he got the rebound and did exactly as I told him. He missed. He also got fouled. He made one of his two free throws, which at this age is pretty good!

It's great to watch kids, who had no idea what they were doing, start to excel. It's very rewarding, especially when it's your own son. David has gone from being a tall kid who wasn't very good to being the dominant big man in the league. He has gone from making a basket or two a game and getting an occasional rebound to scoring in double figures and getting 20+ rebounds a game. One of his best traits is that he is coachable.

This experience has served to remind me how important it is to be coachable and to always focus on the fundamentals.

As I work with the kids and coach them, I don't see any of them as future NBA players, although you never know! What I see is the leaders of tomorrow, the doctors, lawyers, businessmen, researchers, money managers…

Mar

2

Sarkozy appears on track to win the French elections in April. This is something I have been tracking for the past three years, since Sarkozy distanced himself from Chirac and started vocally turning away from the traditional European socialist model of political economy and towards free markets etc.

Could the French electorate finally be willing to push back against socialism? Will they finally begin to sell off state-controlled companies? Is there concern for Airbus's continued state support in Europe? Is this an indicator of a broader trend in Europe?

The questions and potential ramifications of a Sarkozy win in France are staggering and endless.

George Zachar responds:

Sarkozy has made lots of recent statements that leave him firmly in the "democratic socialist" part of the political spectrum. He's not overtly hard-left like Royal, but his election would hardly be a mandate for what Americans would term free markets.

Roger Arnold replies:

Relative to US standards you're right. But he's also running for office and needs consensus. The fact that he is even in the running, let alone in the lead, is an indication of a change in sentiment in France by the electorate with respect to the trajectory their current policies have them on.

The fact that his lead is increasing is an indication of his migration to the middle as the election approaches.

Bruno Ombreux writes:

I am watching this by necessity since I am in France. Sarkozy has not won yet. I think it will be a very close call.

The guy has courage. He is running his campaign on the theme the "party is over, time to get back to work." Problem is that the French people have had their minds washed by the leftist media and school system since 1968. So a big part of the electorate might not be prepared to give up socialism.

And Sarkozy, like all French politicians, remains a statist. I support him, however, because he is the less worse choice. And if he is elected and can get the country back to work, even a bit, that would be great.

The biggest change could be seen abroad, not domestically — in foreign policy, since Sarkozy is pro-USA and pro-Israel.
 

Mar

2

NEW YORK, March 2 (UPI) — Foreclosures among high-risk U.S. mortgages could create the worst mortgage crisis since the 1980s, a published report said Friday.

Rising foreclosures and defaults have pushed more than 20 lending companies into bankruptcy, The Christian Science Monitor says. Some housing specialists worry the mortgage industry will respond by raising its lending standards so high that would-be homeowners with less-than-perfect credit will be frozen out, extending the current U.S. housing slump.

"It's the most serious threat to the economy," Mark Zandi of Moody's Economy.com says. "It has the potential to set the housing market back another big notch since there could be a whole class of people who can't get credit."

"Subprime" mortgages, for people who do not qualify for the conventional mortgages, now account for 18 percent to 24 percent of all mortgages, up from 5 percent in 1995, Wall Street analysts estimate.

Back when I was doing college radio news, each shift would leave a roster of stories and angles to be worked on by the next group of reporters to come in. That sheet was called a budget.

UPI helpfully ran this story a few moments ago, so the Sunday chat show wranglers and business section chin-tuggers can line up their interviews and get the talking points straight.

Key words to use frequently: mortgage, crisis, foreclosure, bankruptcy, credit, slump, threat.

Mar

2

From Wikipedia's entry on the Dust Bowl:

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

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

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

Or can it be foreseen?

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

Kim Zussman adds:

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

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

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

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

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

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

 

Mar

2

 Gannett To Buy 2 Tribune Co. Newspapers, by Frank Ahrens

Tribune Co. has agreed to sell its two smallest newspapers, both in Connecticut, to Gannett for more than $65 million, as the media giant edges closer to accepting or rejecting bids for the entire company.

I worked for Gannett. Your newspapers will get worse. Much worse. Comically worse.

Mar

2

Soaring UK property prices, especially in Greater London, have motivated me to investigate these growth rates in more detail. The initial question at hand was to see whether house prices UK-wide or in Greater London have beaten the FTSE100 performance over the last years. Based on the Halifax House Price Index, RPIX and annual FTSE100 return data between 1986 and 2006. I have come to surprising conclusions:

First, all annual return rates (UK properties, Greater London properties and FTSE100) do not significantly differ between each other either in nominal or (real) terms: average annual returns are +8.3% (+5.2%), +8.6% (+5.6%) and +8.4% (+5.4%) respectively.

Second, given the difference in price volatility, both UK-wide and Greater London have outperformed the FTSE100, both nominal and real. The annualized nominal (real) standard deviations each are: 1.9% (2.0%), 2.2% (2.5%) and 3.3% (3.2%).

Third, although properties in London may appear more attractive than in other parts of the country, Greater London returns have exhibited a slightly inferior return-to-risk ratio, both in nominal and real terms. I found nominal (real) Sharpe Ratios of 0.869 (0.539), 0.890 (0.489) and 0.351 (0.215) for UK-wide properties, Greater London and the FTSE100.

Bear in mind, though, that Sharpe Ratios for properties as an asset class are biased upwards, since transaction costs (stamp duty and other dead-weight costs), their relative illiquidity and heterogeneity are not accounted for.

Mar

2

The PowerShares DWA Technical Leaders Portfolio (AMEX: PDP) tracks a 100-stock index from Dorsey, Wright Associates that uses a trend-following system in an attempt to beat the market. 

Mar

2

This paragraph, from a New Yorker magazine article titled "Spider Woman" (March 5 issue, "A Reporter at Large" segment) resonates with a few favorite market themes:

"A single spider can inject its victims with as many as two hundred compounds: proteases that dissolve flesh, gelatinases that dissolve connective tissues, neurotoxins that short-circuit nerves, slow the heart, and freeze the limbs. A spider's venom offers a window onto its evolution, Bindford says — a chemical record of its most successful experiments at killing prey."

Mar

1

A Good Speculator is a Lonely Man, a new review by Vivek Kaul of Victor's book, Education of a Speculator.

Mar

1

When I was a kid, there was a fancy car lot on the corner of the street where I grew up. It was an odd place to put it. Mainly used cars, but fancy nonetheless. Why anyone would put that car lot in the neighborhood I grew up in, I'll never know — but they are still there to this day! I used to ride my bike past that lot and dream of owning a fancy sports car, someday.

Even though my parents were always supportive of me, they did think I was crazy. There was no way I was going to be able to afford a car that cost three times what we made in a year — as much as our house.

When I was in college, I fell in love with Porsches and filled my apartment with Porsche posters. Remember the one with the lady on the hood of the red Porsche 944 facing forward with her legs pointing back toward the side view mirrors, her head raised facing the camera? I dreamed every day of owning a bevy of Porsches — it was one of the driving factors (no pun intended) that kept me working hard to achieve my goals. My mother threw away the posters after I graduated — disapproved of the lady on the hood of the red 944. Hey, I wasn't always a prudish dad, I was a teenager at one time — and had a full head of hair too!

I've yet to buy a Porsche. I've since become enamored with ozone-destroying, fossil fuel guzzling, CO2 emitting SUVs, and my wife would frown on a Porsche purchase, but someday…

George Zachar writes:

I occasionally come under pressure to consider trading up from my 1995 Mercedes wagon (I think E class), but as I rarely drive, I see no reason to do so.

Pointing out, "Oh, that's a cute one!" when a Cayenne goes past, is one tactic.

Comparing the top three Cayenne models, I am hard-pressed to understand their near 100% price spread. Must be a Giffen Good.

Jeff Sasmor suggests:

Get a BMW X5. You can assuage your carbonguilt as they are LEV or ULEV vehicles, depending on the engine. Or, if you don't feel guilty, you can feel lighter in the wallet when you have to fill it with premium gasoline.

I'm on my second X5. It blows away most of the Cayennes except the Turbo (0-60 in 5.9 sec.) and isn't fugly. The Cayenne is a rebadged VW Toureg — not even a bespoke car! That said, I wouldn't mind a Carerra Turbo…

Mark Goulston adds:

Ah! Porsche, the way s-x used to be… I have a '99 Carrera and, no, s-x was never this good.

 

« go back —

Archives

Resources & Links

Search