May - 2012
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 S&P +6.80
 USB -0.25
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 S&P -2.90
 USB +0.24
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 S&P -11.60
 USB +0.00
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 S&P -23.40
 USB +0.27
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 S&P +3.30
 USB +0.02
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 S&P -7.30
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 S&P -7.50
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 S&P +6.60
 USB -0.04
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 S&P -7.60
 USB +0.25
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 S&P -15.90
 USB +0.31
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 S&P -5.90
 USB +0.10
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 S&P -5.80
 USB +0.13
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 S&P -21.10
 USB +1.18
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 S&P -10.50
 USB -0.02
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 S&P +24.90
 USB -0.13
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 S&P -0.90
 USB -1.04
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Copyright Dailyspeculations.com

May

22

We are well into the Triple Crown season with just one race left to go. It's been fun for me so far as based purely on the name I liked I'll Have Another early on in both Derby Futures as well as Santa Anita. Now we have a decent shot at a real Triple Crown winner as the horse is one of the better closers we have seen in a few years and the length of the Belmont Stakes should favor the him. We have been disappointed several times since Affirmed in 1978 so we shall see what happens in two Saturdays.

I have always been a huge fan of horse racing, racetracks and all the associated depravity. Some of my fondest memories of the past decade are the trips we used to take to Keeneland in Lexington Kentucky every year for the Bluegrass Stakes. Lexington is a town founded by Irish gamblers and is made to order for me. A diverse group of traders, investors, professors and other assorted ner' do wells used to assemble for a long weekend of horse racing and bourbon drinking with the expected adventurous and occasionally disastrous results. I guess we all outgrew the trip or just got to busy but they will be telling some of those stories at my funeral in fifty years or so!

I don't hit the races or even the poker table the way I did in the past. A combination of marriage, kids, getting older, and the end result of the earlier explained IRR have kept me from wagering and whiskey in the quantities of days past. I still follow the ponies however and am always cognizant of the lessons learned at many racetracks and card tables over the years. A day at the track contains lessons in statistics, psychology, marketing, and a host of other scientific disciplines. Many of these I have found to be directly applicable to the markets and to life its own self.

The track contains many of the elements of the financial markets. You have the touters and system developers who look for the answer and failing to find it sell their services to others. It was Tom Ainslie who pointed out how these systems develop in his book on handicapping. *" A longshot wins a race. A disappointed bettor consults his Form and discovers that the longshot had been timed at 36 seconds in a breezing three-furlong workout a couple of days ago. No other horse in the race had worked so rapidly so recently. Powie! A new system is born!"* How many of these have you seen in the stock market. Someone curves fit data to show that the winning stocks of the past had a particular characteristic or price pattern and a brand new newsletter and web site is offered to investors as the answer to all their problems and a sure fire path to short term wealth. In truth none of it works any better on Wall Street than it does at the track but selling easy answers to greedy people has always been a source of profits for stock market and horse racing system developers.

Then there are the people you meet at the track. You have the bleary eyed beer soaked despondent souls who pick up discarded racing forms to search for a long shot winner to just get them back to even so they can start over again. They won once and hit some exacta or trifecta bets, usually by luck and have been chasing that short term success for a lifetime of almost and faded in the stretch. There are those who offer an informed opinion on each and every race with all the certainty of the Delhi Oracle. They bet each and every race and brag of their fantastic winnings before hopping in their classic car (a 1988 Buick Riviera with balding tires and cracked windshield) to head off to their luxury furnished studio apartment with a spectacular view of the railroad tracks and oil refinery. The stock market is full of these folks as well. The oracle of the last market cycle and the expert who never loses are everywhere on Wall Street and I am never sure if their hearts desire is to get to the winners circle or just drag as many others into their pool of disgrace and desperation as possible. Whichever the case, they are to be avoided in life, at the stock exchange and along the rail.

At every track I have been into in my life you can always find a few gentleman, usually older who sit through the race scribbling notes in their racing form each and every race. With the exception of perhaps a close friend or two they do not talk to anyone else or engage in the tip sharing and" who da ya like?" camaraderie of their fellow rail birds. They watch, take notes and perhaps sip a cold beer, or more likely a coffee. They wander off to the paddock before each and every race and the vast majority of the time they return to their seat to scribble some notes without bothering to place a bet. On rare occasions they get up, go the window and make a bet. These are the ones who have figured out the game. They only bet when they see an advantage and are more likely to fly over the grandstand than tell you how they derived their advantage. This is similar to investors who don't see the need to trade every day and only pull out their wallets when they have an edge and prices are favorable enough to offer a high probability of long term investment success.

One such astute gambler was among the best of them all. Pittsburgh Phil had a distinguished and successful career as a horse bettor. He once said *"Playing the races appears to be the one business in which men believe they can succeed without special study, special talent, or special exertion."* This is the case in the markets as well. So many people sit down and read a book or look at a chart and think that they, of all the speculators, traders and investors who came before them, have figured out the answer to market success. They do not study, research, or test and care little for other opinions. The worst thing that can happen to these people is initial short term success that makes them even more confident in their flawed opinions. Eventually the all go spectacularly bust. If this was easy everybody would be rich.

Phil, whose real name was George Smith also once said *"Know when to put a good bet down and when not to." *This is not only the best advice for horse gamblers but stock investors. Just because the window is open does not mean you have to get in the action. Patience pays at the racetrack and in the stock market. Just because they open the casino down at Wall and Broad does not mean you have to trade. Once a year or so you will get a steep decline in stock prices that carry 10 to 15% lower. Every few years you will get a gullywhumper of a selloff and prices will fall 20% or more from the highs. That's when you want to invest your cash. Keep in mind the excellent advice not only of Pittsburgh Phil but Henry Clews in his investing classic, 28 Years on Wall Street as well. *"But few gain sufficient experience in Wall Street to command success until they reach that period of life in which they have one foot in the grave. When this time comes these old veterans of the Street usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur sometimes oftener than once a year, these old fellow will be seen in Wall Street, hobbling down on their canes to their brokers' offices. Then they always buy good stocks to the extent of their bank balances, which have been permitted to accumulate for just such an emergency."*

When I was a more frequent visitor to the track I used to look for horses that were stepping down in class in a race. I looked for a horse that had run middle of the pack races in higher dollar stakes race and are now stepping down a bit. If I could find a horse in a $50,000 stakes race that had run a few $100,000 races and had placed third or fourth I was interested. Racing against lesser competition the horse had a strong chance of running well and the past performance figures against better horses usually gave longer odds than should have been the case. The biggest ticket I ever cashed came from finding two of them in one race and hitting a badly underpriced exacta. It also provided a pretty steady diet of simple win tickets over the years. To me this is a lot like buying fallen angel stocks. Former blue chips that have had a reversal of fortune and fall into single digits have provided a fertile shopping ground for winning stocks over my career. It also applies to people. I am more comfortable being associated with someone who has fallen or failed and gotten back up to run again that I am with someone who has yet to taste defeat and disappointment. These temporarily blessed souls usually think it is their brilliance rather than circumstance that has so blessed them. When the fecal matter hits the the fan as it always does they are apt to become unreliable partners or friends in my experience.

If I was betting on a rainy day I always wanted to look for the mudder in the race. Some horses like Storm Cat just love the mud and run very well thought the slop. I have seen horses that need a taxi to reach the finish line on a dry day win by 10 lengths when the rain is falling and the mud is thick. This plays out in the stock market as well. Even in a crappy market and economy like 2008 there were some companies that will benefit from current conditions. In 2008 as the world and portfolio values sank like a well-ventilated submarine companies that catered to low end bad credit consumers did very well. AaronRents, Dollar Tree, Wal Mart, Family Dollar and others that catered to the broken consumer saw their stock prices do very well. Last year it was energy stocks and companies that sold to a resurgent upscale consumer that ran to victory in a flat market. In every economy and market condition there is a group of companies that will benefit and buck the trend.

There a lot of comparisons found at the track that apply to markets and to life. That sleek looking thoroughbred that goes off at short odds may win a good percentage of the time but if you bet him every race he will take your wallet for a ride. He will do well for his owners but gamblers will go broke betting short odds. The same can be said of buying high growth issues at very high multiples and trophy wives. The feisty little colt at long odds that has run well in the past but is under bet can make you a fortune. So can stocks that are experiencing temporary difficulties or just ignored by the investing public. The stunning high maintenance slut queen at the bar may attract all the attention but it is the good looking smart quite woman in the corner that will make you happy man for decades of life. Flash and short odds does not reward in any endeavor as does substance with a high payout.

I love the race track. Not only is it enjoyable and some of the best people watching you will ever experience but you can gain an MBA in Investing and Life $2 at a time.
 

Sam Marx writes: 

But how does one overcome the 17% edge that the track has?

The stock market vig was high in the days of fixed commissions but now you can have the edge in certain markets such as options especially options that are traded with a penny spread. 

Tim Melvin adds: 

The article is not intended to suggest one make their living at the track. Merely that there are lessons to be learned that may be applicable to markets and other areas of life…

Stefan Jovanovich comments: 

Tim's wonderful piece is better advice than some of us deserve. At the risk of being one of the beer-soaked wretches who used to hang on the rail at Hollywood Park, I have a "fallen angel" tip for the $2 bettors that even meets Tim's ''fallen angel" criteria: AMAT. And, if you want to make it a 2-horse parlay, add KLAC. The foundry business is like coking coal in the 19th century– ugly, unattractive and essential, as Mr. Carnegie and Mr. Frick well knew.

Sam Marx writes: 

From my experience of going to the track, always with a friend who talked me into it, I found interesting characters and observations there.

But I never bet there, even at the $2 window. Same with slot machines at Vegas or A.C.

Logically I know that a $2 bet would've given me something to root for, increasing my enjoyment at the track for a small amount, but my aversion to betting when the edge is against me is almost of a religious intensity.

To learn about markets and trading psychology when young, I'd recommend the stamp or coin market. If you know your markets there and try to avoid having the urges of a collector but as a trader and buy at close to wholesale prices, you'll do well.
Tim's piece was a very enjoyable read but I don't think horse players are the best source for learning about markets.

 

May

22

I note Henry Winkler and Fred Thompson touting the merits of reverse mortgages.

Without any facts my gut says they are bad?

Any Specs have any facts to share?

Russ Sears writes:

Those considering this should shop around. The commissions are high and the margins are also. This is especially true if they are not in perfect health, as the actuary tables assume anti-selection. A much better option, for those with family that can afford it, is to have a family member monthly buy a higher percentage of the resale value at time of inheritance. 

May

22

Dailyspecs who like a good Indiana Jones adventure might want to check out the book The Mountain of Moses: The Discovery of Mount Sinai.

The book is a true story expedition to find the Mountain of Moses in the Arabian peninsula not Sinai.

It does not star Harrison Ford but rather features the site's own Larry Williams.

It is a great read.

May

22

Imagine: The Fed engages in another round of QE, and does a reverse dutch auction tender for Treasury securities. However, it's a "failed reverse auction." That is, they don't receive enough OFFERS from the Street! So the QE3 policy option door gets slammed shut by Mr. Market. Last week, this is what happened in Japan. (Eat your heart out JGB bears!) The BOJ printed yen and tried to use the fresh Yen to buy government debt from their banks. But the reverse auctions were under-subscribed. Politicians want the BOJ to dramatically expand their balance sheet. But they are seemingly unable to achieve this because JGB holders won't sell their paper and hold Yen. That this could happen in the midst of fiscal profligacy and massive debt/GDP raises many questions about macro economics not covered in textbooks or research papers.

Could this be a new twist on deflation and the long-term effects of ZIRP. Or might it reflect a fear on the part of investors that the central bank will impose a negative nominal interest rate on cash? Or perhaps it's some weird Japanese-market dynamic? Or perhaps its related to mandates and duration matching? Or that JGB's are safer than cash in the bank? Even Paul Krugman must be rubbing his eyes. Ultimately, I conclude that this must lead to the central bank buying other assets besides JGB's (and in fact they are buying other assets). But I recommend Specs give this situation some thought as it may be coming to a theater near you soon!

May

22

Often times I wonder If I am the only sane person in the world. For most of my career I have never understood why a corporate seller or I-banker should be praised because an IPO zoomed in the first few days of trading. By and large we praise people who buy low and sell high, but with IPO's the conventional wisdom is that we should praise those (and their agents) who sell low.

Imagine you hired a real estate agent to sell your house. He/She advises you to sell it for 300K. You do. The next day after you sell it sells for 500K. Are you happy? Of course not. Yet, when I-bankers do that very thing, they are praised, and so are the seller who sold at a low price.

The two decades of my career have seen only the following dynamic:

Stock goes up after IPO: Seller and Seller Agent good Stock goes down after IPO: Seller and Seller Agent bad.

Now, good and bad are subjective terms. If I were a buyer of an asset, I would want it to go up in price afterward. Of course, If I were a seller, I would want it to go down.

Conventional wisdom would probably say that it is in the interest of sellers and their agents as a whole if IPO's perform well, as that makes sure that buyers are around in the long term. However, shouldn't the seller's agent have a fiduciary responsibility to the seller, and not to the market as a whole?

The simple fact is this: This is the most successful IPO ever, and if I am ever in a position to IPO my company, I would want the stock price to plummet the day after I sold. That is how I would know that the investment banker(s) on the deal did a good job.

Yishen Kuik comments: 

I am sure there are other people who have been in and around the equity capital markets, but let me take a stab at Gordon's question.

1. An investment bank needs to have a stable of happy buyers and happy sellers to stay in business. All issuers like FB (the sellers) want to sell their equity for as high as possible - greed is universal among issuers. What investment banks will say in rebuttal is that you want to give the buyers a pop to make them happy, this way when you want to do a secondary down the road, your chances of successfully building a book is enhanced. Every businessman understands this — you have to leave a little on the table for the other guy, so that when you really need their cooperation, you can cash in those goodwill chips. This is why most IPOs are priced to pop a little. It's a goldilocks game - not too high and not too low is where both sides are happy.

Sometimes like Google, they thumb their noses up at Wall St and go their own way. But from what I understand the Google IPO was a mess.

2. At an investment bank during an IPO, the institutional sales coverage is the buyer's advocate and the ECM desk is the banks advocate. No salesguy who wants to stay in business wants to burn his client on a bad deal (although they are not adverse to inserting fat fees into a deal that won't burn the client - cue the selling of rich vol in creative re:opaque ways). The ECM desk however sometimes needs the buyers to take one for the team and support a weak deal. This is then repaid by participation in a good deals. Keeping track of favours owed and granted is the job of the respective heads of sales and capital markets, and this is what keeps the circus going, and how IPO books are built. The ability of an investment banks to raise stupendous amounts of capital very quickly is a non-substuitable service, and why they can charge substantial fees. A ECM desk that does not have the investment banking deal flow, does not have access to a top sales force, does not have skilled market makers, does not have the marketing power of a good research team and does not know how to manage favours with institutional investors will see it's ability to raise capital for clients degraded. And that ability is the engine room of an investment bank.


3. CFOs and CEOs usually have careers that span several companies, all of which will need to go to market now and then. Therefore it is in their long term interest to cultivate good relationships with investment bankers. They will give a little, not much though, in order to get a little when they really need it. So when the ECM guy says he wants to price in a 10% pop, they will acquiese.

4. Buyers want to align themselves with a bank that will feed them IPOs that have a high probability of popping. It's a sure strategy to pad their annual returns. But there is a dance here as well - buyers need to know that the investment bank is able to do a good job in pricing so that between the competing interests of the seller and the buyer, it is resolved slightly in favour of the buyer so that the health of the long term game is preserved. Buyers also want to know that their favours in swallowing bad deals are at least fairly noted and repaid. A good ECM professional therefore gets paid 7 figures, and the head can clear 8 figures.

This is why an IPO that goes up a little on opening day is viewed as a success by all parties. If it goes up too much it is viewed as a success by buyers & a mixed bag by investment banks ( the seller is pissed off, but then the industry is excited so more paper comes to market). If it tanks, it is viewed as a failure by buyers and the investment bank. The sellers have a mixed reaction.

This is also why I think it is very difficult to create an investment bank — there are many very expensive moving parts (teams of highly paid professionals) that need to come together. The Europeans and the Japanese have been trying for decades with very mixed track records and most recently Ken Griffith tried and failed.

May

21

Suction is the production of a more or less complete vacuum with the result that atmospheric pressure forces fluid into the vacant space (OED definition)

To what extent did the big down moves in such markets as gold, Russia, Spain (down 24% on year), Italy (down 15% on year) and Europe cause the decline with a lag in US stocks. Is there a general phenomenon with which suction can predict declines in closely related geographic areas? How does the concept of substitute good enter into the fray. A substitute is defined as a good whose price rises as the other good rises  A complementary good is one whose price declines as the price of the other good rises. Are bonds a substitute for stocks? The dollar? What are the predictive relations?

Gary Phillips comments: 

It seems many of the moves and traditional correlations occur without much logic behind them and have little to do with valuation fundamentals but rather with the tactical games the liquidity providers play.

Also, country ETFs emerged as an asset class and this has contributed to increased price volatility.

Similar phenomena were seen with commodities whose financialization led (see Tang & Xiong, 2010) to increased price volatility of non-energy commodities and an increased correlation to oil.

Another factor to consider may be global QE policies. Each country that adopts QE [Quantitative Easing] creates mispricings in assets and goods & services; however, the Central Banks have no control over which assets are inflated, to what degree they are inflated, or in which countries they are inflated in.

May

21

It is remarkable to see the extent to which the interests of the market are now considered impotent with the interests of the top feeders who have unlimited capital and live off the service revenues of the forgotten men directly or once removed these days.

Whenever a threat to one country remaining in the EC, or any threat to an increase in service revenues occurs, (deficit reduction is now a code word for increasing service revenues on the rich), the market goes down. Is this a syndrome of man's willingness to go into slavery with a sigh, or part of the Stockholm syndrome?

One notes that stocks have gone down continuously through 3 fifties in S&P without a rise from above 1400 to 1350 to below 1300, what I call a negative sequence of length, a very rare event only 3 times previously in last 8 years. And that there have been repeated 20 day lows starting out with a rise, again not having happened since 2009 and 2008 when it occurred twice a year. The two things above are related.

May

21

On December 8, 1981, Lloyd Free legally changed his name to World B. Free. This past September Ron Artest became Metta World Peace. hat further question is there that we are within months of an historic opportunity to buy U.S. equities?

May

21

An extremely low ranked golfer just shot a 55 on a 6698 yard par 71 course. The score of 55 matches a record set in 1962 and some are claiming it to be a world record because this course is a bit longer and is a par 71 vs a par 70 in the 1962 record. The golfer, Rhein Gibson, also shot a course record of 60 earlier this month at the same course in Oklahoma.

I wonder if Gibson has the course so dialed in that his scores are reflecting his familiarity with the course? After all, he did make 12 birdies and 2 eagles and played a virtually flawless game. Is this real or is it a fluke and this golfer is merely the equivalent of a Bob Beamon long jump in Mexico City? I wonder if there is any similarity with this golfer and his game to traders who "know" their markets like this golfer obviously knows his home course. If not, why?

May

21

Hope,

thanks for sharing with us your 18 years of heartfelt effort. From the twinkle in your eye and the cooing the first time I held you, I could tell you're a fighter with a zest for life. It could be said that your birth was a miracle: twice while still in the womb you picked just the right time and way to alert Dr. Deseay you wanted to live. When things get rough, and you wonder "why", take it from a first time Dad that saw the birth, the twinkle, and the smile over and over; your life is a miracle: Never forget that. You and I never had the big battles so many parents and kids have over their independence; nevertheless, I can tell you yearn to take control over your life. Never feel guilty for wanting this. Nor should you let this responsibility overwhelm you until you cede control just so you don't have to make the tough decisions that will make you who you will become.

Over the next few years there will be plenty of people that will try to replace Mom and Dad. Suitors, bosses, even teachers and preachers will all try to exploit you to make you into something you are not. Some may be trying to enlarge their power, but others are simply passionate and want to mold you into their passions no matter the mismatch. Be true to yourself.

Over the next few years try to discover who that is. Try new things. Take classes, just to explore something. Go places just to meet different people. Take risks. Do not settle just to settle. I know it is tough, sometimes you may not know your major, may not have a job, may not have boyfriend, or may not have a group of friends to hang out with on a weekend and money will be tight. But each of these things is too foundational to pick the wrong ones.

It is scary and disheartening to think you may not be needed or wanted. But never be too afraid of the unknown to quit. When you find yourself without these anchors, then is the times to double down have confidence and invest in you. If it is not working for you, be quick to admit you made a mistake and reverse course.

However, on the other side, once you see both the potential and the real cost and you believe in something or someone and enjoy your work, do not look back. If you decide it is for you, do not trade your responsibility for the thrill of the chase, or to keep dreaming rather than face the harshness of the real world. Neither should you give up because it is too hard or not as easy as you thought.

But most of all trust in yourself when others say you cannot, it is impossible, or that only the lucky "make it" in that world if you really want it and know that you are made for it. The critics maybe right about the luck needed. The critics are always right that effort required would be too monumental if there is no passion. But for the passionate, effort is child's play and sacrifice is a perfect fit for those built for the job.

Perhaps the secret to controlling your universe is believing in others. Call it God or Karma, but "what measure ye mete, it shall be measured to you again". Therefore, look for what others bring to the table, rather than define them by their weaknesses. Look for the good in others.

This is how you find favor with other because this is how they see themselves. They believe what they bring to the table is of the utmost importance. They then can return the favor. Those that do the same for all are those that you should trust, rely on, and bring close. These are the people that will make you prosper and bring you happiness. Recognizing the richness that others bring to your life in return will bring you love. When you look for and believe the good in others only then you can see it and believe it about yourself. Recognizing what you bring to the world, and will then help you find the richness that makes you, "YOU".

Love always,

Dad 

May

17

There is a problem with every opportunity.

The following situation enforces the truth of the subject.

A few years ago, I finished decorating a house. It is in a gated and somewhat upscale community of about 400 single or attached houses, built somewhat after 2000 and just at the edge of a big metropolitan area. People here appear to be very wealthy — premium cars are common — some have 2 Mercedeses, 2 BMW's, or 2 Porsches. But please don't over imagine it –by North American standards, this is still way too shabby and crowded. Each 250-450 square-meter house has about 100-200 square meters of yard. Outside the yard, there is some limited public area, in the form of roads, trails, greens, woods, and somewhere, streams and lake. My closest neighbor is about a few yardsticks away.

I was quite excited and happy to move in the community after having stayed in downtown apartments for many years. The city life made me a schedule of going to bed at about 12am and getting up at 8am. One usually has to shut all windows at night just to be quiet. Now at this community, I was thinking that windows can be kept open (in spring, fall or summer) for the night as it is much quieter. There are trees outside and the air is cleaner.

It turned out that some home owners were raising chickens and roosters, and the many roosters crow starting at about 3am. I was shocked and angry, and wondered why other people didn't have problems with it as they moved in a few years earlier than I did. I made quite some effort in talking to property management and also seeking to find and talk with the owners. It got alleviated somewhat but never went away. I was struggling and suffering.

Gradually, partly due to the lack of sleep, I started to turn in earlier. It helped. Now years have passed, I adopted a schedule of going to bed just after 9pm and getting up at 5am, and I am very happy about it. Not only that, I also cut the propagandistic cable service into my house and have not wasted my life on it. In its place, I read more books and play more music.

P.S. there is still one rooster now in the community, but it doesn't bother me much.

May

17

I have sad news to report….the ukulele market in the UK has crashed, the price of a used Uke going from 45 pounds to a pound and change. The Ukulele market was showing bubble like conditions….when, suddenly it went south, popping like a balloon, and sinking like the Titanic. Luckily for me, I saw the move coming and was able to short the Ukulele market, my son taking the other side of the trade.

This Ukulele debacle is the worst musical instrument crash since Recorder Wednesday back in the 1993 when millions of students simultaneously quit the recorder. This might be time for the canes to step up to the plate and buy good Ukes to the extent of their balance.

May

16

It is interesting how words can become watered down and lose or change meaning. In a current context, Hedge (verb) is one of those. Not so long ago it meant to offset or reduce the exposure of an underlying position. In a new context there is hedging for profit (JP), broker hedging customer orders (white glove firm), hedge funds in general (Paulson down 50%, not really hedged), hedgerow (great led zeppelin lyric).

The Volcker Rule in Dodd-Frank, though I've not read, I am sure is littered with wording around acceptable and non acceptable hedging. Since hedging can not really be defined, this is a vague area that will be applied subjectively and retrospectively. As a rule one would want a hedge to lose money, as the larger underlying position would then be gaining, but somehow I don't think this applies.

May

16

Gary Johnson could catch presidential race by surprise

May 12, 2012 Fox News.com By Douglas E. Schoen

With his name slated to be on every state ballot in the country in November, Libertarian presidential nominee Gary Johnson is an important voice – bringing bold new ideas to the table that appeal to voters across the political spectrum.

Johnson, a Republican who served as governor of New Mexico from 1995 to 2003, is running on a platform that includes slashing government spending to balance the federal budget by 2013, ending wars the U.S. in involved in, and drug reform — beginning with the legalization of marijuana but extending all the way to the war on drugs, drug policy, relations with Latin America, and even law enforcement policies and priorities– issues that neither of the two major candidates President Obama and former Massachusetts Gov. Mitt Romney are pursuing right now.

Having received the Libertarian nomination in Las Vegas last weekend, Johnson must now cross a new threshold to ensure that his voice is heard and give these important initiatives a lot of exposure — achieving the 15 percent required by the Commission on Presidential Debates to participate.

May

15

Despite the TV poli-drama, a $2 billion loss carries absolutely no significance to JPM Chase given the size of its asset base. It could be looked at as a rounding error.

May

14

Being a mother is the greatest blessing of my life. (And with a son like A____y, I am grateful every day to be part of a bright new life.) One of motherhood’s great gifts is to draw out all the knowledge and wisdom learned from my own mother and grandmothers. Here is a very small portion of what they taught me. I hope it will make others remember and feel the lovely feeling of gratitude. (Sorry for the departure from the quantitative).

My mother taught me:

- — To test a pineapple for ripeness: Pull on one of the top leaves. If it comes out, the pineapple is ready to eat. (She knew this from working in Hawaii during WWII.)

- — To make spaghetti and chili without a recipe.

- — To look for the good in other people.

- — To apologize

- — To give warm comforting hugs

- — To look on the bright side

- — To get along with little

- — To finely mince garlic.

- — To make garlic bread in the broiler.

- — To make gingerbread cookies and Christmas breads

- — To make gifts

- — To invite the neighbors over for parties.

- — To make shabu-shabu.

- — To eat salads.

- — To cut out recipes.

- — To know that it is possible for a woman to knock down walls with a sledgehammer.

- — To create nursery schools, clothes, pottery, baskets, paintings, Girl Scout troops, friendships.

- — To love plants.

- — To use fish fertilizer on everything growing in pots.

- — To smile at others.

- — To swim.

- — To play piano.

- — To read.

- — To put my shoulders down.

- — To enjoy bouillabaisse.

- — To have a gentle sense of humor.

– To not drag my feet.

–

My mother’s mother (祖母) taught me how:

- — To test a watermelon for goodness. Knock on them and listen for resonance. She knew this from growing up in the South

- — To make a great coconut cake without a recipe.

- — To heat the pan and sprinkle it with salt before throwing on the lamb chops.

- — To harangue butchers for fresh meat.

- — To tell stories.

- — To keep sit with legs together.

- — To use nail polish.

- — To dress up for Easter.

My father’s mother (奶奶) taught me:

- — – To speak in a musical voice.

- — To grow vegetables and berries by the back door.

- — To know that it’s possible to settle down and thrive thousands of miles from home.

HAPPY MOTHER'S DAY

May

14

Wondering what the statisticians on Dailyspec think of this Atlantic article "When Correllation is not Causation but Something Much More Screwy" :

One of [UCLA professor Judas] Pearl's most interesting deductions is the idea of conditioning on a collider. If a case being observed is a function of two variables then this will induce an artifactual negative correlation between the variables. This is true even if in the broader population there is no correlation (or even a mild positive correlation) between the variables.

The article cites Professor Cowen's rules for dining out:

Assume that the two main things that let restaurants succeed are food quality and various other things that we can collectively call atmosphere. The logic of conditioning on a collider implies that among surviving restaurants there should be a negative correlation between atmosphere and food. This implies that if you are monomaniacally focused on good food you should follow the heuristic of avoiding fashionistas and seeking out unpopular ethnic groups as the only way such places could possibly stay in business is if they offer good food.

May

14

My first memory of a car that I wanted to see as a pre-school kid was the Shelby Daytona Coupe race car.

That is one of the most beautiful race cars ever built.

Dad had a drag car so naturally I became a drag racing fan. Any kid in middle school would tout the quickest production car, in the 1/4 mile.. Some would say Jeff's 67 big block Mustang, A Dodge Hemi or the1967 L-88 427 Vette, or the big block Camaro with a ZL-1 all aluminum427 factory installed race engine that ran a remarkable 11.40 seconds in the 1/4 with those awful hard compound tires.. and that was the trick of the questions. The aluminum head L-88 that was rated at 425 HP was well over 525 Horsepower. Get this a ZL-1 68 Camaro was 7200 bucks.. a V-8 camaro was 3100$ The engine was a 4100 dollar option. They sold 50 cars. The legend was that the dealers pulled the other engines and sold them to race teams and put in a new motor and sold the car as a custom. In a way the dealers learned and became famous for specializing their cars. Yenko, a famous Chevy dealership that made the Yenko Camaro. Chevy and Ford had to stuff enough of these radical engines in a few hundred production cars and sell them to the public to meet the racing rules of the 1960's.

The Guinness World record when I was in middle school was held by the Shelby Cobra. It ran Zero to 100 MPH and… back to Zero, in 13.x seconds! Caroll Shelby stuffed the Ford racing 427 engine into the AC roadster built in England. So their trick was to sell 300 cars total vs the Factory teams that needed to dump a few hundred engines in a 35,000 production per year Corvette or the Millions of Camaros and mustangs that were sold every year in the late 60's. The Cobra was deemed the Corvette killer. Shelby was a great racer. The line is this, he built custom cars for individuals… sure he did a few hundred a year. I love racers and rule books.

Wiki is funny here: "Shelby American was also highly involved with racing".

Shelby American was founded by Carroll Shelby in 1962 to build and market high performance parts and modified cars for individuals. Some of the automobiles produced by Shelby American were the Ford Mustang-based Shelby GT350 and Shelby GT500. Shelby American also created the legendary Shelby Cobra which was an AC Ace with a Ford V8. The company was also highly involved with racing, with Shelby cars winning many races at the dragstrip, at the 24 Hours of Le Mans and America's first win at the World Manufacturers' Championship.[2] In 1966, the same year that Shelby American helped Ford Motor Company land America's the World Manufacturers' Championship, Shelby American also provided support to Ford for their successful campaign to win the 1966 24 Hours of Le Mans. Shelby American moved in 1995 to Nevada becoming the first automobile manufacturer in Nevada and began production.

May

14

What's in a name?

A lot more than I expected.

I've led a charmed life. I was born in Budapest, Hungary into a revolution in 1956. My parents, at great risk, took me away to safety from an oppressive system, and had to start their lives again from scratch in a strange land in a new language, and I've never been in any real danger since, or have had anything at all to complain about it. Even before then, my father risked his career as an officer in the Hungarian army, by having me baptized in (what he thought was) secret on the outskirts of Budapest. This was mainly in deference to my maternal grandmother - who, bless her and may she rest in peace, as an avid Catholic was utterly determined to protect my soul. This was a big no-no with the communists, and they called him on it - every last detail. (My father had been followed.) Complicit in this little venture, and taking the same risks on my completely unaware infant behalf, was a man named Gyorgy Dirner, who my father had befriended in the army. Gyorgy (George) - or Gyurka, the more affectionate form - acted as and became my godfather at the baptism. I was born Zoltan Parkanyi, but the custom in Hungary at the time was for a boy to take the name of the godfather as his middle name, so I became Zoltan George Parkanyi. In Australia, to where we emigrated, my parents changed that to George Zoltan Parkanyi, thinking George would go easier on me as a child growing up in that country. And so George Parkanyi it is.

So today may father, at the cottage, reminiscing about those times, tells me the rest of the story, the part that I'd never heard before. Back to Hungary 1956. Fast forward from my baptism to November, in the depths of the short-lived, but brutal, revolution. One day Gyurka shows up at my parents' apartment to check on my father and make sure he's OK. He mentions to my father that he is somehow involved, but doesn't go into the details. They part. Events unfold quickly and my father is forced by circumstance to make the decision to leave Hungary, and my parents escape with me a few weeks later across the border into Austria.

My father loses touch with Gyurka, but every trip to Hungary thereafter once he started visiting again in the late 60's, he looks for Gyurka's phone number in Budapest directory. There is never any listing for Dirner, although my father painstakingly checks every time. Then about 5 years ago, while visiting a cemetery in Budapest to pay respects to the deceased parents of one of his other friends, something makes him divert from the normal pathway and cut across a different section. As he's walking to where he's intending to go he stumbles upon a headstone that stops him in his tracks and shakes him to his core. It says Dirner Gyurka …. 1930 - (November) 1956. Gyurka - my godfather - was killed within days, at most weeks, of when my father last saw him.

I'm named for a man, who, at no more than 3 years older than my eldest son now, either lost or gave his life to an unwinnable fight for freedom. What do I feel? Love. Gratitude. How do I feel? Unfinished.

May

14

I saw Mick Taylor play at a small club in NYC last night. He is 63 years old. Rolling Stones aficionados know that the Stones most artistic and prolific years were during Taylor's tenure as the Stones second guitarist. The output during his Stones' years 1969 through 1973 include legendary tracks off Sticky Fingers and Exile on Main Street plus he was the main lead guitarist during 1969's live romp at Madison Square Garden that is famously captured on the album Get Yer YA YAs. I suggest listening to Can't You Hear me Knocking, Bitch and Love in Vain to a get a sense of of Taylor's dominance of slide and blues guitar paying. It stands the test of time. How do I know? The small audience was a mixture of middle aged rockers like myself plus some very knowledgeable college students that follow the Stones musicians like it was still 1973. The Stones still sell lots of records.

Like his more famous partner Keith Richards, Taylor has apparently struggled with drugs an alcohol and has many up and down battles with his demons. He looks physically worn, harried and over weight. However, the man can still play. He did a 90 minute set where he was featured at all times. He ripped cords and notes like the old days plus he sang. The audience loved him and appreciated every minute of the show. By the way, he is playing 8 shows in a row during at four day stint in NY. That must take a huge toll on a man of 63. That is dedication that few men of his age can muster.

I think the lesson in all of this is that he remains an awesome guitarist because he still loves what he does and he still studies and learns from all the old blues masters from Chicago and the deep south. He respects and pays homage to the ground-breakers of the 1940s and 1950s. Even at 63, he knows where he is going because he knows where he came from. I tell my kids about Taylor all the time. I want them to understand that success and originality rarely come easily. Its all about hard work and practice. I believe Taylor picked up a guitar at 14 or 15 and he still finds ways to wow an audience at 63. Age as they say, is all in the mind.

May

14

I saw the movie Jiro and was very moved by the idea of shokunin, which I understood to be humbly doing the same work day after day and always trying improve on it. We had written about it in our book. I also was touched by the father-son dynamic — the father's care in training the son, the son's challenge in succeeding a master. I had much joy in hearing the inimitable auctioneers in the Tokyo fish market, although they spoiled it by underlaying a percussion track. Sad to see that the tuna on display was much smaller even than what I saw when I visited in 2001 — as Aubrey noted.

May

13

I have been reading a memoir about David Ricardo, and researching the details of his life. Here are some interesting things I have learned:

Ricardo destined for the same line of business as his father; and received, partly in England, and partly at a school in Holland, where he resided two years, such an education as is usually given to young men intended for the mercantile profession. Classical learning formed no part of his early instruction; and it has been questioned, with how much justice we shall not undertake to decide, whether its acquisition would have done him service; and whether it might not probably have made him seek for relaxation in the study of elegant literature, rather than in the severer exercises of the understanding; and prompted him to adopt opinions sanctioned by authority, without inquiring very anxiously into the grounds on which they rested.Mr Ricardo began to be confidentially employed by his father in the business of the Stock Exchange, when he was only fourteen years of age. Neither then, however, nor at any subsequent period, was he wholly engrossed by the details of his profession. From his earliest years he evinced a taste for abstract reasoning; and manifested that determination to probe every subject of interest to the bottom, and to form his opinion upon it according to the conviction of his mind, which was a distinguishing feature of his character.

Mr. Ricardo, senior, had been accustomed to subscribe, without investigation, to the opinions of his ancestors, on all questions connected with religion and politics; and he was desirous that his children should do the same. But this system of passive obedience, and of blind submission to the dictates of authority, was quite repugnant to the principles of young Ricardo, who, at the same time that he never failed to testify the sincerest affection and respect for his father, found reason to differ from him on many important points, and even to secede from the Hebrew faith.

Not long after this event, and shortly after he had attained the age of majority, Mr Ricardo formed an union, productive of unalloyed domestic happiness, with Miss Wilkinson. Having been separated from his father, he was now thrown on his own resources; and commenced business for himself. At this important epoch of his history, the oldest and most respectable members of the Stock Exchange gave a striking proof of the esteem entertained by them for his talents and character, by voluntarily coming forward to support him in his undertakings. His success exceeded the most sanguine expectations of his friends, and in a few years he realised an ample fortune.

"The talent for obtaining wealth," says one of Mr Ricardo's near relations, from whose account of his life we have borrowed these particulars, "is not held in much estimation; but perhaps in nothing did Mr R. more evince his extraordinary powers, than he did in his business. His complete knowledge of all its intricacies; his surprising quickness at figures and calculation; his capability of getting through, without any apparent exertion, the immense transactions in which he was concerned; his coolness and judgment, combined certainly with (for him) a fortunate tissue of public events, enabled him to leave all his contemporaries at the Stock Exchange far behind, and to raise himself infinitely higher, not only in fortune, but in general character and estimation, than any man had ever done before in that house. Such was the impression which these qualities had made on his competitors, that several of the most discerning among them, long before he had emerged into public notoriety, prognosticated in their admiration, that he would live to fill some of the highest stations in the state."*

According as his solicitude about his success in life declined, Mr Ricardo devoted a greater portion of his time to scientific and literary pursuits. When about twenty five years of age, he began the study of some branches of mathematical science, and made considerable progress in chemistry and mineralogy. He fitted up a laboratory, formed a collection of minerals, and was one of the original members of the Geological Society. But he never entered warmly into the study of these sciences. They were not adapted to the peculiar cast of his mind; and he abandoned them entirely, as soon as his attention was directed to the more congenial study of Political Economy.

David Ricardo came, for the first time, before the public as an author in 1809. The rise in the market price of bullion, and the fall of the exchange that had taken place in the course of that year, had excited a good deal of attention. Mr. Ricardo applied himself to the consideration of the subject; and the studies in which he had latterly been engaged, combined with the experience he had derived from his moneyed transactions, enabled him not only to perceive the true causes of the phenomena in question, but to trace and exhibit their practical bearing and real effect. He began this investigation without intending to lay the result of his researches before the public. But having shown his manuscript to the late Mr. Perry, the proprietor and editor of the Morning Chronicle, the latter prevailed upon him, though not without considerable difficulty, to consent to its publication, in the shape of letters, in that journal.

The first of these letters appeared on the 6th of September 1809. They made a considerable impression, and elicited various answers. This success, and the increasing interest of the subject, induced Mr. Ricardo to commit his opinions upon it to the judgment of the public, in a more enlarged and systematic form, in the tract entitled "The High Price of Bullion a Proof of the Depreciation of Bank Notes." This tract led the way in the far-famed bullion controversy. It issued from the press several months previously to the appointment of the Bullion Committee; and is believed to have had no inconsiderable effect in forwarding that important measure. In this tract Mr Ricardo showed that redundancy and deficiency of currency are only relative terms ; and that so long as the currency of any particular country consists exclusively of gold and silver coins, or of paper immediately convertible into such coins, its value can neither rise above nor fall below the value of the metallic currencies of other countries, by a greater sum than will suffice to defray the expense of importing foreign coin or bullion, if the currency be deficient; or of exporting a portion of the existing supply, if it be redundant.

But when a country issues inconvertible paper notes, (as was then the case in England), they cannot be exported to other countries in the event of their becoming redundant at home; and whenever, under such circumstances, the exchange with foreign states is depressed below, or the price of bullion rises above, its mint price, more than the cost of sending coin or bullion abroad, it shows conclusively that too much paper has been issued, and that its value is depreciated from excess.

The principles which pervade the Report of the Bullion Committee, are substantially the same with those established by Mr Ricardo in this pamphlet, but the more comprehensive and popular manner in which they are illustrated in the Report, and the circumstance of their being recommended by a Committee composed of some of the ablest men in the country, gave them a weight and authority which they could not otherwise have obtained. And though the prejudices and ignorance of some, and the interested, and therefore determined, opposition of others, prevented for a while the adoption of the measures proposed by Mr. Ricardo and the Committee for restoring the currency to a sound and healthy state, they were afterwards carried into full effect; and afford one of the most memorable examples in our history, of the triumph of principle over selfishness, sophistry, and error.

From "On Profits":

Like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature.

The clear and direct tendency of the poor laws is in direct opposition to these obvious principles: it is not, as the legislature benevolently intended, to amend the condition of the poor, but to deteriorate the condition of both poor and rich; instead of making the poor rich, they are calculated to make the rich poor; and whilst the present laws are in force, it is quite in the natural order of things that the fund for the maintenance of the poor should progressively increase till it has absorbed all the net revenue of the country, or at least so much of it as the state shall leave to us, after satisfying its own never-failing demands for the public expenditure.

This pernicious tendency of these laws is no longer a mystery, since it has been fully developed by the able hand of Mr Malthus; and every friend to the poor must ardently wish for their abolition. Unfortunately, however, they have been so long established, and the habits of the poor have been so formed upon their operation, that to eradicate them with safety from our political system, requires the most cautious and skilful management. It is agreed by all who are most friendly to a repeal of these laws, that if it be desirable to prevent the most overwhelming distress to those for whose benefit they were erroneously enacted, their abolition should be effected by the most gradual steps.

It is a truth which admits not a doubt, that the comforts and well-being of the poor cannot be permanently secured without some regard on their part, or some effort on the part of the legislature, to regulate the increase of their numbers, and to render less frequent among them early and improvident marriages. The operation of the system of poor laws has been directly contrary to this. They have rendered restraint superfluous, and have invited imprudence, by offering it a portion of the wages of prudence and industry.

The nature of the evil points out the remedy. By gradually contracting the sphere of the poor laws; by impressing on the poor the value of independence, by teaching them that they must look not to systematic or casual charity, but to their own exertions for support, that prudence and fore-thought are neither unnecessary nor unprofitable virtues, we shall by degrees approach a sounder and more healthful state.

May

11

There are some fun "facts" and observations in the JPM 2011 Annual Report:

p. 159: Chief Investment Office ("CIO") VaR in 2011: Avg: 57 Min: 30 Max: 80

(That's $mil)

On p 108, Treasury and CIO (together, whatever that means)

Security gains: in 2011, 2010, 2009 $ 1,385 2,897 1,147

Avg Portfolio: $ 330,885 323,673 324,037

So supposedly they had 57 mil at risk on a 330 bil (perhaps) porfolio while making 1-3 billion in profit.

The 57 mil sounds "funny" for the lack of a better word, but a $2 bil loss doesn't sound like it's a lot compared to the portfolio size, and not totally unexpected given the past gain.

On a separate note, the guy running the unit is named "Achilles" and he has a 6 foot photo of a missile in flight on his wall. He preferred to hire Greeks, and endearing quality, although Bruno seems fully French. What could go wrong?

It's also interesting that if you trace "the story", it really broke around April 6th.

Or as you can read in the comments to this video even before, with various Bloomberg and other "booster shots" on April 13th but it took this long to come to fruition.

The JPM stock broke a pretty steady uptrend on April 3rd.

You can also find that the woman who ran the CIO office (not sure how she shared power with Achilles) was one of the highest paid JPM executives for several years running making around $15 mil per year. 2011 was a down year for her.

May

11

I'm wondering why Jamie Dimon is so popular with the media.

He's always treated with kid gloves.

Even today's $2 billion was referred to as a "rare black eye".

Is he married to a black woman? Or gay?

Or have some other fact in his background that leads to his being treated as such a good guy?

I'm so out of things I have no idea what's going on here.

Victor Niederhoffer writes: 

The more one thinks about it, the more that one believes that Dimon and Buffett have the same hallmarks that make them beloved by the intellectuals and the media. What those hallmarks are, I can't put my finger on exactly. Perhaps it's a zacharian, "your own man says that you must be low".

Anonymous writes: 

It's what I call the no-bullshit bullshit factor. Americans like leaders who say, "The buck stops here. And I screwed up." Buffett took a 300+ million dollar whack on some energy bonds that collapsed. And he stood up and took the blame. And no one blinked. He does that regularly. I think the press likes to hear people stand up and say, "I screwed up. I was wrong. I take responsibility. This was bad and stupid." There are countless examples of this in politics, sports, commerce, etc. They don't like people like Audrey McClendon who say things like "I apologize." But who never stand up and say, "The buck stops here and I was wrong."

Victor Niederhoffer adds: 

One doesn't admit "I was wrong" when there are likely to be lawsuits as this wouldn't seem very good to a jury when defending yourself against damages. There must be an exemption from civil and regulatory liability for such activities in support of the greater good here that enables one to take blame for such "egregious" behavior and at the same time get it past your lawyers. 

Laurel Kenner writes: 

The Administration needs a whipping boy, and Lloyd was tired of the job. Anyway, Dimon likes harpooning whales in a highly public, loss-producing way. Remember what happened when he announced to the world that he would be liquidating Salomon's book. Call him Ahab.

Victor Niederhoffer writes: 

Perhaps he serves as a depository and station stop in the revolving door for former flexionic officials when they need money in various forms. Also, as a symbol of the trillions of bail out moneys that were taken away from the forgotten man, and given to the banks to invest in such useful activities as synthetic credit derivatives at the CIO's office (note the symbolic name sort of like showing the tv showing bush war activity while beggars starve on tv during a movie to show you're a fellow traveler), he must be shown to be Holier than the Pope to symbolize the verisimiliture, the halcyon nature of the transfer of the trillions and the reason for the lack of jobs.

Rocky Humbert writes: 

Folks, we can debate the politics, but don't miss the macroeconomics here. If they had done this by making a few hundred billion in new loans, people (but perhaps not the shareholders) would applaud (at first).But if they do the same trade by buying the CDX index, it confuses people. But it's really the same thing. Therefore, I think it's a multi-dimensional cognitive dissonance. Between the people who want the banks to loan. And the people who don't want them to use derivatives. And the people who hate Jamie Dimon. And the people who love Jamie Dimon. And the fact that as a multiple of price/tangible book value, their stock is among the most expensive money center bank. Lastly, the 10Q says that if the yield curve steepens by 100 basis points, their 12 month pretax earnings go up by $549 million. And, their credit losses made a new cycle low.

May

11

This winter it didn't rain here for nearly four months or more. Everything was dry, crispy brown. About a week ago it started to rain, and its rained almost everyday. Surprising how a big complex system such as weather can run such a long trend of just one pattern with almost no variation. Even random samples with a small drift can make very long runs. Same thing happened this spring in the market, a four month trend with pretty much the same thing everyday. Then all of sudden it changed as well. It's interesting how trends can just turn all of a sudden.

May

9

I've been playing a lot of cash golf recently, with mixed results, and need to offer a few rules to help protect your bankroll in cash games.

1. Never play against a guy who is older, real tanned, friendly, and laid back. (If someone offers to carry your clubs from your car…run away)

2. Never believe a handicap of a stranger until you've seen him play at least 10-15 times. Funny thing is that amateurs egos make them take 2-3 strokes off their handicap, while good hustlers add 2-8 strokes….whatever the market will bear.

3. Never bet a new guy you've just played 17 holes for fun, on the 18th hole…..Never.

4. Never, ever play a guy for money who has a set of irons that have all the impact marks on the face, dead center, the size of a dime. See this and know you are going to reach for the wallet.

5. Never, ever play a guy for money who's clubs seem to be greasy(it's OK to look at and admire your opponent's clubs). Vaseline on a club face of a wood adds yards and can correct a slice.

6. Some old time golf hustlers think that if one is not cheating at least twice a round then you are not doing enough.

7. Watch out for the player that might have a couple of greens keepers who are a couple hundred yards down the fairway in carts who will kick a ball into a better lie….or kick a good lie into a sand divot….all for a picture of Franklin, some weed, coke, or whatever.

8. Never leave your clubs overnight in the locker room while you are the guest of a club…you might find the lies and lofts of your irons have shifted more than a few degrees while you were not watching them. Not all pro shops are honest.

9. Remember that not all the world's best golfers are on the PGA tour. In fact, most of the best golfers are probably not on the tour, but I cannot afford to quantify this statement.

10. Stay away from playing "Sticks" when you are a visitor put into a foursome.

11. Never accept a bet someone who is willing to play you with a pitching wedge, left handed, while offering you a ton of strokes….You will lose

12. If someone offers you a proposition bet like they can hit the ball closer to the pin than you with their 5-iron from 60 yards out, or any similar propositions, just say NO..

13. If your opponent shakes your hand, and his hand is smooth, without calluses, avoid betting money with him. Also, those squinty, cold eyes are an indicator .

14. Remember that the talent to shoot low scores is not the key to winning money.

15. The very best golf hustlers have negotiation skills that equal or surpass their golf game.

16. For the best golf hustler, when the game gets intense, it doesn't deteriorate, it improves.

17. The very best golf hustlers are more fearful of a seasoned golf gambler than a PGA pro….much more fearful.

18. Never bet a guy who says his caddy can beat you….you will lose and the caddy will win.

19. Remember the old maxim, "You drive for show and put for dough." The short game is where the real cash is made.

20. Stay out of cash games in Florida during the winter, especially with strangers. A low key guy at my club has hustling earnings that would put him in the top 15 if he was in the PGA.

21. Never play for cash with strangers at the Las Vegas Country Club.

22. Never bet with anyone who offers you any proposition up front at a public course…..especially a run down public course.

23. Even friends might turn 5 strokes into 3 on on the front nine and you will suspect it while settling up over drinks at the 19th hole..

24. Never, ever take a mulligan in a cash game with a stranger.

25. Never play cash games with strangers, and in foursomes, watch out for the tanned, laid back, callous free, friendly ringer.

Hustlers realize that the score their opponent shoots means absolutely zilch….what matters is who walks away with the cash. The sucker can shoot a 69 and lose money, but the hustler can shoot an 86 and win. Scores mean nothing until the game is over and the checkbook is pulled out..

All of these rules have market corollaries. What do you think the corollaries are?

May

9

I have recently started to get into tea. I bought a few yixing pots and I am doing the whole gongfu cha thing.

This is a very interesting area, because tea is even more complex than wine. I am getting used to it, but I just read something which is so funny and serious at the same time, that I would like to share it.

With wine, I am used to strange comparisons. For instance, some wines are described as having a "flintlock" flavor. And they do.

But read this about tea:

Mineral impression makes up bulk of flavor. Mixed with liquor aroma it is highly reminiscent of the taste and smell of the air on a cold foggy summer morning on a beach on Mendocino's coast. I suppose Monterey is similar, but the beaches tend to be a tad coarser sand and the combined smell of cyprus and redwood is a bit more prevalent farther north.

This goes a bit beyond wine addicts descriptions. And this is not snobbery, this is actually sincere and authentic.

Leo Jia replies: 

I concur with Bruno on teas.

I drink tea everyday and have drunk many varieties: black, red, green, white, pu'er, oolong, herbal etc. Yes, one can find a lot of senses from them. One even can find different senses of the same tea at different moments.

Through the experiences with teas, coffee, wines, etc, I realized that one actually can derive sophisticated senses and feelings from just about anything one encounters in life. Be it water (from different streams, different environment/surroundings, different altitudes, and at one's different moods, etc), and likewise, air, earth, color, sound, bread, rice, etc. Very amazing.

But more amazing I think is that the very senses one gets from the things reflects, manifests and realizes one's own life. It is the fact that we can sense about these various things that makes us alive. It is also true to me that how much senses one gets actually indicate how much life one has lived - the more one has been into life, the more one can sense about the things.

With that, I am always curious about what senses I don't get, because what I don't get are what I have not got and hence are unknown to me. I am always joyful at the very moment when I suddenly sense something new, because that means I have just got something more in life.

May

9

It is often the case that I prefer position fishing to position trading, though the two are not mutually exclusive. Regarding the prior, I enjoy fly fishing on rivers and streams. Current relates closely to positioning on a river. The ideal is directly across from the trout, but not too close. From there I cast upstream at a 45 degree angle allowing the fly to sweep with the current to the fish. If the line is tight, drag free and natural a nice trout might take the fly. When the current is slow I add even greater stealth.

When the fish are rising, there is a huge advantage for the angler. A trout has chosen to reveal his position for what must be a considerably appealing meal. This is very useful information. If I can match this insect and cast well, while concealing my own position, I may catch fish. I have heard of anglers who crawl on hands and knees to the river to avoid detection, but I have never been this disciplined. Once at Henry's Fork I worked as part of a team with a friend. One of us would act as lookout on the cliffs above yelling to the other positions of the otherwise undetectable trout.

That aside, it is never good to fish with a noisy friend. And though I love an amiable labrador, they do not make good fishing companions and always give away your position. As a rule, the largest fish will always be in the places that require the most effort to get in position. They will be in the deep pools on the wrong side of the river, in slow water just next to fast water, under limbs and fallen trees or in eddies that are impossible to row or wade to. The more effort you put in climbing over boulders, fording deep streams or running to get ahead of your fishing buddy, the better your chances.

May

8

The Upas tree was a terrible tree according to Erasmus Darwin that was so poisonous that it was able to destroy all life of any kind for 15 miles around it. Who and what are the Upas trees of the market?

I would say that Madoff and Abelson and the conglomerates and real estate slumps are Upas trees, and in increase in rates, perhaps the first change in direction is also quite lethal. The signal of unbridled interference and flexionism galore as in October 08 would also seem to be a curse. The lyrics to "I've got a little list" from Mikado go through the head. The hoodoo, the parson and the albatross from O'Brian go through the head as does the report "there's a little shadow on this x-ray. Probably nothing to worry about."

What would you add? I would like to say Buffett but I refrain.

Victor Niederhoffer adds:

One Upas tree regularity is the tremendous move against the weak player when he she one is being squeezed out of position. The MF, the Societe General, and the Thailand moves are examples of that. One wonders what the other side of the coin is. What are the apple trees of the market, the benevolent things that cause it to go up. The book "The Man Who Planted Trees" is a very good one for all to read describing how a French man who planted apple trees brought a village to life from death by first stopping erosion. And then providing shade and food and respite from the heat. The oak tree is also a benevolent tree providing food and shelter for countless species and Cervantes mentions the cork tree "whose benevolent fruit provides shelter for beauteous maidens without any thought of its own welfare". What other trees? What's good for the market. Many of the things that are good for the market are bad in the short term but good in the long term. Like a decline in oil prices. The prospect of a decrease in the service revenues is also very good. What are some benevolent and some more destructive things for markets?

Tim Melvin writes:

High junk bond defaults that clear the weak players and reallocate assets to stronger hands come to mind as a short term negative that is a long term positive.

Laurel Kenner adds: 

Obamacare and Dodd-Frank are the two worst and most dangerous pieces of legislation ever introduced into the American field, and have the potential to turn into giant ruinous Upas trees. They are only shells for unknown future rules put into effect by people whom neither the electorate nor Congress will be able to control. They have no sunset, no funding limits, and no restraint on their bureaucracies. 

Steve Ellison adds:

I would nominate an inverted yield curve. An inverted yield curve pinches the flexions' net interest margins. 6 of the last 40 years began with inverted yield curves: 1974, 1979, 1980, 1981, 2001, and2007. None of them were good years to be an investor in stocks.

Kurt Specht comments:

European debt concerns and related debt market convulsions are frequently sited as short term drivers of overall market action.  

Ken Drees adds: 

I was about to opine about the benefits of the upas, even something so deadly has good parts and then I tried to fold that into a Madoff or an MF Global and couldn't come up with any quick relationships of how a bad market tree can bestow something positive other than a lesson to be learned. Other than a lesson to future investors, sometimes positive regulation comes out of these dark trees.

From wikipedia: 

It is a fairly low source of timber and yields a lightweight hardwood with density of 250-540 kilogram per cubic metre (similar to balsa). As the wood peels very easily and evenly, it is commonly used for veneer work. The bark has a high concentration of tannin which is used in traditional clothes dyeing and paints. In Javanese traditional medicine, the leaves and root are used to treat mental illnesses. In Africa and other Asian nations, seed, leaves and bark are used as an astringent and the seeds as an antidysenteric. Most famous to Africa and Polynesia are the strong, coarse bark cloth derived clothings- which are often decorated with the dye produced from the bark tannins.

The plant is often grown purposely for shade or shelter around human dwellings as it provides excellent dense shade from the tropical heat. The leaf litter is an excellent compost material and high in nutrients- often spread around local gardens, which must be grown distant to the antiaris due to its extremely dense canopy.

Recently, the plant had allegedly been used by retired Tanzanian pastor Ambilikile Mwasapile to allegedly cure all manner of diseases, including HIV/AIDS, diabetes, high blood pressure, cancer, asthma, and others.

While found to be harmless to humans when boiled in accordance with Mwasapile's mode of creating a medicinal drink out of the bark, it allegedly was undergoing testing by the WHO and Tanzanian health authorities to verify whether it has any medicinal value. However, conflicting reports suggest that the plant in question is not indeed Antiaris toxicaria, but rather Carissa edulis.


Poison Humans have long used poison for hunting and warfare. Antiaris toxicaria is most famous for being employed as a poison for arrows, darts and blowdarts. In Javanese tradition, Antiaris toxicaria is used with strychnos ignatii. The Antiaris toxicaria latex sap has the active components of cardenolides (chemicals with cardiac arresting potential).

The latex, present in the bark and foliage, contains a cardiac glycoside named antiarin, which is used as an arrow poison called upas: Javanese for poison, but, commonly to the poetic (non literal) quality of many Javanese words has a duality of meanings- watchman, messenger and courier.

In China, this plant is known as Arrow Poison Wood and the poison is said to be so deadly that it has been described as "Seven Up Eight Down Nine No Life" meaning once poisoned a person can take no more than seven steps uphill, eight steps downhill or nine steps on level ground. A visitor to South Kensington Museum in 1881 noted a picture of a Upas tree and wrote in their diary 'a picture of the Upas tree the most poisonous in the world any one fall down dead before they can reach it.

Gary Rogan writes: 

It turns out there is a poem about this tree by the traditionally the most famous Russian poet:

The Upas Tree
by Alexander Sergeyevich Pushkin

Deep in the desert's misery,
far in the fury of the sand,
there stands the awesome Upas Tree
lone watchman of a lifeless land.

The wilderness, a world of thirst,
in wrath engendered it and filled
its every root, every accursed
grey leafstalk with a sap that killed.

Dissolving in the midday sun
the poison oozes through its bark,
and freezing when the day is done
gleams thick and gem-like in the dark.

No bird flies near, no tiger creeps;
alone the whirlwind, wild and black,
assails the tree of death and sweeps
away with death upon its back.

And though some roving cloud may stain
with glancing drops those leaden leaves,
the dripping of a poisoned rain
is all the burning sand receives.

But man sent man with one proud look
towards the tree, and he was gone,
the humble one, and there he took
the poison and returned at dawn.

He brought the deadly gum; with it
he brought some leaves, a withered bough,
while rivulets of icy sweat
ran slowly down his livid brow.

He came, he fell upon a mat,
and reaping a poor slave's reward,
died near the painted hut where sat
his now unconquerable lord.

The king, he soaked his arrows true
in poison, and beyond the plains
dispatched those messengers and slew
his neighbors in their own domains.

May

7

This is an interesting article on the genetic testing of horses–trying to find the next Kentucky Derby winner.

The latest trend among consultants to horse buyers and breeders is to rely on algorithms involving a "speed gene" and other markers, not just x-rays and endoscopes.

May

7

Walking is one of the best forms of exercise. Better yet is walking uphill which causes higher cardio rates, and even better yet is climbing up mountains. Running seems to cause many injuries. The recent book, Born to Run, is an interesting look into running injuries caused by modern running shoes.

There is a move to more flexible or barefoot type shoes for running. A number of years ago, Carlos Castaneda wrote of the high involved in walking long distances. 20 minutes of walking is good, but it can easily be done for 6 hours. New Yorkers appear trimmer due to more walking than their western counterparts who drive everywhere.

The car culture is destroying the walking. Walking is very meditative and relaxing, healthy, safe, cheap. Highly recommended. Good shoes, a hat and a walking stick are helpful. Its good to bring some water on a belt or hydration pack.

Alan Millhone writes: 

Hello Mr. Sogi,

My late friend Dr. Tinsley loved to take very long walks. I carried his magnetic checker board and as we walked he would chat with me and play blindfold Checkers. He was trim and in very good shape to play at tournaments and matches for long grueling hours. I miss him.

Regards,

Alan

May

7

Aggregates and Averages, Individuality and Interventionists

By Stephen Mauzy

 
John Cowperthwaite, financial secretary of Hong Kong from 1961 to 1971, was the rare bureaucrat: a free-market noninterventionist inured against the hubris of grand economic scheming.

Cowperthwaite ventured into Hong Kong in 1941, joining the colonial administrative service after studying economics at Cambridge. Returning to Hong Kong, in 1945, Cowperthwaite was directed to determine ways the British government could boost Hong Kong's postwar economy.

A man blessed with exceptional instincts, Cowperthwaite determined that the best strategy to keep Hong Kong recovery's moving forward was to enervate the interventionists by disarming their most important weapon. When asked to name the one reform that swelled his pride most, Cowperthwaite replied, "I abolished the collection of statistics."

Cowperthwaite knew that statistics provided the raw input for interventionist mischief. He also knew that an organic, messy, free wealth-producing economy is too confounding and too replete with innumerable combinations of human action to be improved by mere mortals.

Rare is the bureaucrat and other overhead who will acknowledge such an obvious limitation. Cowperthwaite could; most can't.

article continues…….

May

7

Many of the themes Vic hits strongly on in his posts about how the financial markets are fed by money supplied by the public, which ends up in the pockets of the flexions — and many others — are driven home in the article, "A Life Driven by Desire," on p C13 of today's WSJ.

The article is a review of Theodore Dreiser's "The Financier," which is based on the life of Charles Tyson Yerkes, "one of the more freewheeling Gilded Age robber barons."

May

7

Maybe a financial version of this lifted the Nikkei to 10k? Is a stock or an index heavier/harder to move higher at retrospect lows, mid points or tops? What is heaviness in terms of financial prices at lows, inertia? Is weight in financial terms of stock movement a correct way to view? Are stock prices weightless at all times and only affected by tethers on or tethers off? What made the Nikkei rise gently to 10200 and now fall gracefully back towards its 9000 - 8000 beginning level. Lava lamps come to mind.

"Wearable Muscle Suit Makes Heavy Lifting a Cinch":

It takes a second to register, but the 40 kg of rice I just picked up like a human forklift truck suddenly seem as light as a feather. Thanks to the "muscle suit" Umehara slipped onto my back prior to the exercise, I feel completely empowered. Fixed at the hips and shoulders by a padded waistband and straps, and extending part-way down the side of my legs, the exoskeleton has an A-shaped aluminium frame and sleeves that rotate freely at elbow and shoulder joints.

It weighs 9.2 kg, but the burst of air that Umehara injected into four artificial muscles attached on the back of the frame make both jacket and rice feel virtually weightless.

The muscle suit is one of a series of cybernetic exoskeletons developed by Hiroshi Kobayashi's team at the Tokyo University of Science in Japan. Scheduled for commercial release early next year, the wearable robot takes two forms: one augmenting the arms and back that is aimed at areas of commerce where heavy lifting is required. The other, a lighter, 5 kg version, will target the nursing industry to assist in lifting people in and out of bed, for example.

May

7

One asks: When was the last time that Russia's (or the USSR's) top military officer delivered a direct ultimatum, and nobody (other than readers of the Drudge Report) noticed???

"Russia Threatens to Strike NATO Missile Defense Site":

Russia’s top military officer warned Thursday that Moscow would strike NATO missile-defense sites in Eastern Europe before they are ready for action, if the U.S. pushes ahead with deployment.“

A decision to use destructive force pre-emptively will be taken if the situation worsens,” Russian Chief of General Staff Nikolai Makarov said at an international missile-defense conference in Moscow attended by senior U.S. and NATOofficials. Gen. Makarov’s threat comes amid an apparent stalemate in talks between U.S. and Russian negotiators over the missile-defense system, part of President Obama’s policy to “reset” relations with Moscow.

The threat also elicited shock and derision from Western missile-defense experts.“It’s remarkable,” said James Ludes of the Pell Center for International Relations and Public Policy at Salve Regina University in Newport, R.I. “That Makarov would make this kind of threat in a public forum is chilling.”“He must have been drunk,” said Barry Blechman, a distinguished fellow at the Stimson Center think tank.

May

7

Anyone who has dined in Singapore's fabulous cheap eateries may be interested in these numbers.

"Secret Roast-Pork Recipe Tests Value of Real Estate":

How much is a recipe worth? About $1.8 million, according to the owner of Kay Lee Roast Meat Joint , who boosted the sale price of her Singapore eatery by that amount when she put it on the market this year.Betty Kong and her husband want S$3.5 million ($2.8 million) for their 60-plastic-stool establishment, a premium over the S$1.25 million assessed value of the site. The price includes the property, their recipe for roasting duck, pork ribs and crispy pig skin as well as other Cantonese-style classics, plus three months of cooking lessons


The Roast Meat Joint generates sales of around S$2,000 a day, she said, or S$620,000 annually, assuming it’s shut one day a week and three days for Lunar New Year holidays. Profit margin is 60 percent, according to her broker Raymond Lo at Knight Frank LLP. The asking price is 5.6 times annual sales, compared with the 1.1 multiple for the Singapore benchmark
Straits Times Index. (FSSTI) It would take six years to recoup the recipe premium.

Larry Williams responds:

Food costs are 20% in the best run restaurants so the 60% profit cannot include labor, overhead etc. No way

Black pepper crab in Singapore is one of the worlds greatest dishes.

May

7

My teens say facebook is yesterday–hope the IPO isn't a "fail" as they call things that suck, or do not work. 

Facebook IPO Status Update:

The stock now could go public at a lower price. Moreover, new uncertainty about the Menlo Park, Cal., company's growth prospects may temper some of the feeding frenzy that was expected to take place on the stock's first day of trading — currently scheduled for May 18.

Craig Mee responds:

Agreed. Looking at explosive movers and shakers like Google, Facebook is a different animal. Google gets the job done, but Facebook is more part of a trend or coolness factor that can be side stepped as quick as the share/message/like buttons allow. What's more, the site, especially the log in page, looks kind of old school. You can buy things, but you can't buy coolness, once you've lost it.

Russell Sears writes:

My daughter says it is because Facebook has been taken over by all the whiners, posting all the time and losers playing games. It seems the only acceptable use is keeping Grandma up to date. Hence if you admit you use it, you are the sucker at the table.

Gary Rogan writes:

In addition to the inherent instability of any high tech company, this one adds the delightful dependence of its success on the what most of its customers think of most/some of its other customers, usually a characteristic associated with trendy fashion retailers and night clubs. Compared to this one, Groupon that made another all-time low today at significantly less than half of its initial trading range is the rock of Gibraltar.

May

4

Some new research shows that most of the population is below average with a few individuals with outlying performance. Empirical studies of the market display fatter tails than normal and slightly skewed distributions. Anecdotal evidence supports this idea as well. I am wondering how this affects the performance of normal based models.

Put Away The Bell Curve: Most Of Us Aren't 'Average'

May

2

The next meeting of the NYC Junto will take place on Thursday May 3, 2012. The main speaker will be Ilana Mercer with "Return to Reason". All readers are invited, 20 West 44th Street, NYC, starting at about 7:30pm. 

May

2

The % of manufactures that saw increasing orders went from 53 % to 54.8 % this month, and it caused a break in the round and a 1% up move. Let's say there are 1000 or n manufactures who report in the survey. The standard error of a proportion is 1/2 divided by the square root of n, i.e. 1/60. Thus the actual proportion is less than 1 standard error away from expectation, a 35% shot by randomness to say nothing for the quantum increases in randomness caused by faulty seasonal adjustments. When you add in that manufacturing these days represents 10 or 20% of the economy, it's pretty iffy all around. That's what makes the markets run.

Steve Ellison writes:

If we are generous and estimate "more than 300" as 399 respondents, the margin of error for a 54.8% result is 4.9%, if Manta's listing of 45,000 US manufacturing companies is a rough approximation of the population.

Victor Niederhoffer replies: 

As Sholem Alechem would say, "we are both right".

Anton Johnson adds:

An off topic anecdote. For those don't who use Gmail, they mine email text to provide targeted ads. From time to time I get a chuckle at what AdWords elicits for me. Today, from Vic's "sholem alechem" comment, the algo determined that soon I will be travelling to Israel and require lodging in Tel Aviv.

May

2

World class poker rounder and poker player, Thomas Austin Preston Jr. aka "Amarillo Slim" died of colon cancer yesterday at the age of 83. Known as a real solid poker player, he was also a great prop hustler, one of the best on the planet.

Slim listed 10 rules for poker success that have relevance in trading.

1. Play the players more than you play the cards.
2. Choose the right opponents. If you don't see a sucker at the table, you're it.
3. Never play with money you can't afford to lose.
4. Be tight and aggressive; don't play many hands, but when you do, be prepared to move in.
5. Always be observing at a poker game. The minute you're there, you're working.
6. Watch the other players for "tells" before you look at your own cards.
7. Diversify your play so others can't pick up your tells.
8. Choose your speed based on the direction of the game. Play slow in a fast game, fast in a slow game.
9. Be able to quit a loser, and for goodness' sake, keep playing when you're winning.
10. Conduct yourself honorably so you're always invited back .

How do you think these rules translate to the trading arena?

Apr

30

Cycles, from Jim Sogi

April 30, 2012 | 1 Comment

On a recent ski mountaineering trip to the Alaska Range, the guide said to me that the recent AMGA guide's association newsletter had an article about the Chinese Year of the Dragon and how that way of thinking might affect mountaineering decisions. He scoffed at this. I explained that the study of cycles is important to get a larger perspective on detailed studies. The Chinese system has a repeating twelve year cycle. Whether or not it is significant is not the point, rather what is important to understand is that life and the earth go through long term cycles over a period of years. Weather and snow have long term cycles. An entire season such as this drought season for snow in the Rocky Mountain and Wasatch ranges may have a weak snow pack leading to dangerous avalanche conditions the entire year. That is a cycle which if ignored could lead to dangerous short term decisions to go skiing on a snowy day, when in fact the whole year is bad. The entire year was a record snow season for Alaska. The entire spring in Alaska was a anomalous cycle of clear steady weather and perfect snow where risk was low.

It is important to recognize longer term cycles in markets. This entire spring was a bull cycle with no pull backs and low volatility. We are in a range or consolidation cycle now. Last fall was a bear high volatility cycle, for lack of a better term. In hindsight cycles are easier to see. The trick is to recognize them in progress. This can only be accomplished with the idea of longer term cycles in mind to recognize the conditions that exist during the various cycles.

The weather reports have a number of model they use to have the computers predict the weather. They use as inputs some of the larger global weather conditions. In finance, there are some long term large scale models like the FED model using interest rates, rate direction, TED spreads, to predict and model the market and economy. The weather forecasters have global satellites to use. Finance people look to Europe and Asia to see if bad finance is working its way through the global markets around the globe.

Phil McDonnell comments: 

There is a well known Pacific Decadal oscillation. Basically there is always a cold spot and a warm spot in the North Pacific. Sometimes it is near Japan and sometimes in the Gulf of Alaska. Currently it is cold in the Gulf of A and Seattle weather is responding. There is no warming going on here.

Here is an intro to these cycles. 

Apr

30

Is there a reason to use PayPal rather than a direct credit card disclosure to a Credit Card accepting vendor? Yes. The CC accepting vendor may be wholly unknown to you, and could potentially be a front for 'harvesting' CC and all one's other information needed to forge your identity online.

True story: there appeared an online vendor that Google's Shopping feature 'found' that purported to have in stock and for immediate shipment an unreleased product from 'pointing device' manufacturer Wacom. I was dealing with their engineering product team, and at the time in question, they checked for me and confirmed that no authorized shipments had occurred to any authorized sales agent.

The order form for an entity with no physical office and no phone number was most comprehensive in gathering personal details for the CC authorization and shipment, of course. This was in the back of my mind, and I concluded not to proceed to provide such information to the 'seller'.

By using PayPal, one adds a intermediary to avoid disclosing CC details — number, expiry and CVV — to a potential gateway agent to identity theft, and also gets a guarantor to the transaction (PayPal) who actually has existence and does not hide contact information from its patrons.

–

Apr

30

The gbpusd had 10 straight up days as of Friday. For the crunchers, this has happened, if my information is correct, only 3 times (including Friday's run) in the last 3 decades. (none greater). Whats no10 Downing Street to do? Where's the stop? Where do I take profit? Is there a viable risk /reward trade in there anywhere? Oh so many questions…

Apr

30

For visually oriented learners especially, like me, there are two techniques for remembering things and names. For things, say, in a room, make a mental picture of a grid or shelf, and mentally place each thing in a room and make a mental snapshot of the "grid". That helps remember the things. For names, associate the name of the person with an image of a thing. For example say you meet Mr. Tokimoto. Think…"big toe…car key…little toe…" Put that image in your head. Next time you see Mr. Tokimoto you'll remember your big toe, your car key and trigger his name in your mind.

Apr

29

I've been reading some good pulp fiction recently. Stieg Larsson's The Girl with Dragon Tattoo series is much better than the movies. It's a page burner with a driving plot. Wilbur Smith's Hungry as the Sea and Those in Peril have adventure, cheap thrills, improbable characters, but are great time wasters. Suzanne Collins' Hunger Games series is really touching in parts for young adult fiction, and is great vacation reading. Buy all three at once, cause you'll burn through them at one time.

All great escapes if you're inclined and have a little time, and the worst of them is so much better than even the best Hollywood crap.

Reading is truly a miracle where you look at little black marks and are transported body and soul to another world.

Apr

29

It occurred to me this morning as Eddy's Mom sent me the links on Amazon to the new outdoor furniture we(she) will be buying that Amazon is Sears, Roebuck reborn. They started with watches; Bezos started with books, but the mail order/Railway express model is the same.

Apr

29

A bittersweet moment in Ty Cobb's life reportedly came in the late 1940s when he and sportswriter Grantland Rice were returning from the Masters golf tournament. Stopping at a Greenville, South Carolina liquor store, Cobb noticed that the man behind the counter was "Shoeless" Joe Jackson, who had been banned from baseball almost 30 years earlier following the Black Sox Scandal. But Jackson did not appear to recognize him, and finally Cobb asked, "Don't you know me, Joe?" "Sure I know you, Ty," replied Jackson, "but I wasn't sure you wanted to know me. A lot of them don't."

Stefan Jovanovich adds: 

Given the fact the Jackson remained a respected figure of the community and the liquor store was owned by Jackson and his wife and his name was above the door, the story could be one of Grantland Rice's maudlin inventions. For the people of his home town, Greeenville, SC, Jackson always was a figure of respect.

The site shoelessjoejackson.org has a link to the PDF of Furman Bisher's interview with Jackson — the only one he ever gave. Eliot Asinof's book (the one John Sayles relied on for Eight Men Out) is a very large pile of crap which completely ignores Bisher's interview and the Jackson's own grand jury testimony. If Jackson had, in fact, been guilty, it is hardly likely he would have prevailed on the civil suit against Comiskey for his pay for the 1920 and 1921 seasons.

Apologies to all — this subject always gets my dander up. During the series Jackson had 12 hits (a Series record) and a .375 batting average—the best record for a player on either team. He had no errors and threw out a runner at the plate. The principal "proof" against him was that the Reds had hit a number of triples to left field (where Jackson played) because Jackson deliberately dogged it in running the balls down. None of the contemporary newspaper accounts mention ANY triples being hit to left field by the Reds. Once again, the lies run round the world while the truth is still putting its boots on.

Thanks, Bill, for bringing up one the 10 greatest ball players of all time.

Apr

29

In the Franklinian spirit: My computer in my car went out; quote at dealer $2000. Forget that. Price at on line junk yard for same part $100, and $150 to install. My wife cracked the rear view side mirror in the other car. Dealer quote $550. Price for same part at on line partstrain.com $39. My body shop guy put in on in ten minutes, no charge.

They're ripping you off, and there are much much cheaper alternative out there. Time to deal with it is even less than hassling with dealers.

Chris Tucker comments: 

There is another issue related to this as well. Most people are terrified of doing any serious work on their own vehicles, either because they don't want to get dirty or because they are afraid they won't be able to figure out what to do or how to do it. Auto mechanical issues can be very intimidating. But there are tremendous resources available today that can make even the most daunting task much easier to complete.

The power window on my truck stopped working a few weeks ago and I took the door apart to see if it was something obvious. No such luck. There is a thick plastic sheet that covers most of the inner workings and I was very hesitant to pull it off as I wasn't sure how to get it back on securely. And I had no idea what to do once I got it off. So I did what most DoItYourselfers do these days — I turned to Youtube. I didn't just find out how to replace the motor and associated mechanism (its a contraption called a regulator that raises and lowers the window) - I found very detailed troubleshooting advice and diagnostics. In addition I found a complete step by step video of the removal and installation procedure on my exact door. Several of these videos are made by part selling companies and I managed to locate the part through one of them cheaper than I was able to find anywhere else.

I have always changed my own oil but when my mechanic failed to secure the bolts that held on the brake caliper on my last car I decided I should do my own brakes. There are some things you MUST know to work on brakes, but you can find them all easily online. Working on your own car can be time consuming though, especially if you have to learn a lot about the repair - so I will tackle some jobs and defer to my mechanic for others.

Jim Sogi adds: 

Youtube is a great resource. I learn complicated guitar parts by watching folks play it on video. I found a reference for a famous international guide for a recent ski mountaineering trip to the Alaska glaciers on you tube. There is stuff there that is current and informative, in addition to all the garbage.  

Apr

29

Ever changing cycles in public sentiment or just a catchy headline?

"French Sour on Nuclear Power"

Apr

26

The VIX futures never made much sense to me (among other things there is no real deliverable — it is just a bet on what a highly volatile number will be on a specific day in the future) , but maybe the Stock Index Variance Futures to be introduced by the CBOE later this year will have more applications (and certainly could make more economic sense):

CBOE Futures Exchange And DRW Trading Group Complete Agreement To Create Stock Index Variance Futures

Apr

26

I found this comment by "Global Guru" on the perceived shift back to the west in manufacturing very interesting:

And for all the talk of the decline of the United States, and the rise of China, India and Brazil, much of the know-how behind this shift is coming from the world's developed economies, with the United States far in the lead.

Much of this historical shift is thanks to the rise of three dimensional (3D) printing. Although it's hard to get your head around it, 3D printing is actually pretty much what it sounds like. Design a part on your computer using some type of three-dimensional software and the "printer" actually manufactures it for you right then and there. In many ways, 3D technologies are the closest things to Star Trek-like transporters you can have. Scan an object in Silicon Valley, and another machine in South Africa can build a copy.

3D printing provides for mass customization on an unimagined scale. And chances are it's already part of your life. Your last customized dental crown or hearing aid was manufactured using this technology. Companies soon will be making customized drugs based on your own DNA sequence. I have no doubt that other 3D printers will one day be manufacturing customized hearts and livers from your body's own cells.

The applications of 3D printing know no bounds. New 3D technologies are helping carbon fiber replace steel; breed viruses to make batteries; and help researchers at Cornell "print" cupcakes. 3D also helps manufacturing processes to accelerate at an exponential rate. While it took 3,000 hours to manufacture a carbon fiber Formula 1 race car in 1981, today it takes four.

Apr

26

For those of us addicted (Vic's fault) to 19th century naval fiction, but having run out (several times over) of the fix–Aubry/Maturin, Bolitho, Hornblower, I'd like to recommend Herman Melvilles White Jacket. I listened to it on Librovox, which is another recommendation for public domain free audio books.

This is the blurb from Librivox on "White Jacket":

This is a tale based on Melville's experiences aboard the USS United States from 1843 to 1844. It comments on the harsh and brutal realities of service in the US Navy at that time, but beyond this the narrator has created for the reader graphic symbols for class distinction, segregation and slavery aboard this microcosm of the world, the USS Neversink. (Introduction by James K. White).

 

For me flogging, though graphic and clearly political, is not what makes the book so interesting. It's interesting because the viewpoint is truly from the lower deck, and it's written with Melville's incredible gift for humor and description.Those of us, who like me, have read the term "selvagee" many times, but really didn't understand what it was, will find this book a wealth of descriptions for the running of a 19th century wooden fighting ship.

Apr

26

This might have applicability to quantifying market moves. Instead of counting past expectations and % up, and variabilities, count the number of big 1% or 2% or more days in each direction:

"Off the Dribble: Late in the Season, the Knicks Have Won Bigger"

In my last post on Off the Dribble, I wrote that the percentage in which teams blow out their opponents may indicate they are stronger than their record would indicate. This season, the Knicks have won 28 percent of their games by 10 or more points. That rate ties them for seventh best in the N.B.A., a substantial showing despite their middle-tier ranking in terms of actual wins.

One curious fact about these blowout wins for New York is when they occurred. The Knicks made a coaching change after 42 games, swapping Mike D'Antoni for Mike Woodson who has presided over the last 22 matches. Despite the disparity in games, both coaches have the same amount (9) of blowout wins.

Apr

23

There are some intriguing financial aspects of the Bo Xilai case.

1. Bo Xilai racked up $26bn USD of debt while he was mayor of Chongqing. He supposedly ran the city's budget at 150 percent of revenues - *net of *the massive "sing red smash black" campaign which looted billions of private assets from the city. He is accused of moving $1.3bn overseas just for himself, most of which came during his Chongqing tenure.

2. Bo was definitely at the gangsterist extreme in terms of how violent he was (he and his wife are now accused of nine murders between them, and massive use of torture in Chongqing. These reports did not all suddenly emerge post-scandal to humiliate him - the FT and others have been running articles on the subject for months.) However, Bo was able to do this with a very large amount of protection within the Chinese government for a very long period of time, in both Dalian and Chongqing. None of Chongqing's debt was classified as at-risk. (In fairness to the PRC, you could make an identical argument against the one-third-ish of American muni bonds which aren't backed by a specific revenue stream like a toll road or utility fees
…)

Chinese people, imho, have known that stuff like this has been going on for a very long period of time (at nowhere near this level of organization or sophistication, however). I think this is a huge driver in Chinese capital flight - rich Chinese people hear scattered stories of insane corruption (well beyond any ethical pale) and simply do not feel safe at all, and export capital at a massive rate. If the best-informed insiders are selling so much stock in PRC Inc, why should anybody else be buying?

3. Bo Xilai's close business crony, Xu Ming, was president of the Dalian Shide conglomerate. He has vanished in PRC detention for a month and his business empire is unraveling.

According to the dissident site Boxun that has been leading the news cycle on this whole scandal, Dalian Shide's core business - petrochemicals manufacture - has been unprofitable for a very long period of time. The stock-speculation side of the business has been successful, and the conglomerate also engaged in a lot of land permit arbitrage (using the commercial nature of its business, plus close government connections, to gain land and land permits very cheaply. The overall financial status of the conglomerate is very murky, but appears to have required enormous amounts of debt in order to stay functional, and the debt recall has blown the firm up.

38 lenders had exposure to Dalian Shide. Before this scandal occurred, not a single loan to DLSD was classified as non-performing, even though many of the loans had no realistic prospect of being paid back. imo, this is a blunt example of why NPLs in the PRC are massively understated.

4. Even before the Bo blowup, DLSD's Hong Kong subsidiary, Gaoden, was trying very hard to access liquidity thru HSBC, RBS, and others in Hong Kong. So the house of cards was in some trouble even before its political risk premium exploded.

Apr

23

Some interesting stats from Easley, D., M. Lopez de Prado and M. O. Hara (2012b): Bulk Volume Classification, Working paper about E-mini trade sizes:


Most of the[..] trades are small, averaging 4.50 contracts per reported fill. Figure 1 plots the frequency of trades per trade size. […not shown…] The frequency line quickly decays as a function of the trade size, with the exception of round trade sizes (5, 10, 20, 25, 50, 100, 200, etc.).

That round trade sizes are much more common than their neighbors may be attributed to so-called ‘mouse’ or ‘GUI’ traders, i.e. human traders that send orders by clicking buttons on a GUI (Graphical User Interface). As an interesting aside, this footprint of ‘GUI traders’ could be used by machines to learn the patterns of their human competitors, and eventually anticipate them to the advantage of the ‘silicon traders’. For example, size 10 is 2.9 times more frequent than size 9. Size 50 is 10.86 times more likely than size 49. Size 100 is 16.78 times more frequent than size 99. Size 200 is 27.18 times more likely than size 199. Size 250 is 32.5 times more frequent than size 249, and size 500 is 57.06 times more frequent than size 499. Such patterns are not typical of ‘silicon traders’ who usually randomize trades to disguise their footprint in markets.

Apr

23

I assigned my 13-year old to read Letters from a Self-Made Merchant to his Son and write me a page on what he learned. Here is his report:

Graham’s letters to Pierrepoint were intended to teach him things, but the letters have been educational to me as well—and very likely to many others. For one thing, I have learned that if someone makes the same mistake multiple times he can’t keep making excuses and that if you’re going to make a fool of yourself, you should at least try to make sure you’re being a different sort of a fool every time. I could use this to avoid problems. Then there’s that some people can only see those above them, and some can only see those below them, but a good man can see both ends at once. It’s easier to climb if you help those above and below you, because they might help you up. This could be useful in many aspects of life. Finally, there’s that you shouldn’t start talking before you know what you’re going to say and that you shouldn’t keep talking beyond when you’ve said what you were going to say. You may have noticed that this letter is shorter than you might have intended, but that is because I applied the third thing I mentioned to this letter.

Apr

20

I occasionally look at the AAII (American Association of Individual Investors) weekly sentiment survey. I've not found any reliable use for it, except that when the AAII survey is uber-bearish, it's anecdotally a good time to start gently nibbling at stocks (when valuations are reasonable).

This morning's survey data may be apocryphal, but it's also interesting:

Bulls 2.2%; Bears 3.8%; Neutral 5%

The bull, bear, and neutral numbers are remarkably similar. So I looked at the history of neutral opinions:

From 2002 to 2007, the "average" neutral opinion was 25%. (Defined as the mean of the entire period for neutral.) From 2007 to 2009, the "average" neutral opinion was about 20.But from 2010 to the present, the "average" neutral opinion is over 28% and continues to climb higher!

There are some amusing/surprising (and perhaps interesting) conclusions:

1) The financial crisis marked a "bear market low" for neutral opinion.

2) Since then, we have been in a "bull market" for neutral opinion. Or more succinctly, the number of people who have "no clue" continues to rise sharply!

As everyone knows, I never have any idea what's going to happen. But perhaps I need to reconsider my position since it appears to be a "crowded trade…"

Apr

20

This is a fascinating article extolling the benefits of free markets and how the free market (and freedom), and the invisible hand, guided the development of the Blues.

Apr

19

I claim that all well-known technical chart patterns that are capable of quantification have an opposite predictive power to that posited in the books on technical analysis from Magee to the updates at the top the list is the triple and quadruple top (there's one right now).

Philip McDonnell added:

One is reminded of the paper by Andrew Lo which tested something like 65,000 technical patterns. It found that the double top and double bottom patterns worked and were statistically significant even after adjusting for the serious amount of data mining.

Andrew W. Lo writes: 

I believe [Vic's claim]. No pattern can truly be 100% consistent, otherwise it would be exploited to its limit… The problem is when it seems to works 52% of the time.

Rocky Humbert writes:

My former partner was fond of saying, "There are double tops, and triple tops. But no quadruple tops." Importantly, he is my "former" partner….

Anatoly Veltman writes: 

In the upside down, they say that only cats have four legs.

Craig Mee writes: 

In my opinion, technicals have everything to do with quantification of patterns and allowing for the edges to play out just like any area of business you're trying to gain an edge. The larger the patterns IE 1 hr to 4hr, D to W, and the stronger the boxes ticked in one's strength meter, the more risk, and a little more risk/reward is expected on the trade. One might say all head and shoulders or double or triple tops are not equal.

The risk appears to lie in the fact that most technical traders move off the course, trade too many patterns from trend line breaks to wedges, etc, over too many markets over too many time frames, and thus the edge they're trying to work with or look for is blunted.

Apr

18

The gaming of the market by power utilities is described in more academic terms in Hirschhausen und Zachmann in this paper. 

Cf. Figure 1, strategy of withholding.

The problem is that it is very difficult to detect and prove that a utility is gaming the market. If one wants to find technical reasons to shut down a plant, they will always find technical reasons. This is just an example and there are other ways utilities can game the market. […]

Rocky Humbert comments: 

The paper states that RWE, EON, EnBW and Vattenfall account for 85% of total production, and allege that these producers are engaging in practices that represent a "problem." Oddly, the authors fail to calculate (or even cite) the classic HHI "Herfindahl Index," which is the standard methodology by which US regulators apply anti-trust law to industries and mergers.

I submit that the "money quote" in this paper is:

Thus, even though demand has risen, generators have reduced capacity by 4.2 GW (1.3 GW of new construction 7vs. 5.5 GW of plant closures). 3.7 GW of the retired power plants had low generation costs. The European Commission also suggests extensive inefficiency of the existing capacity: mid-load power plants have relatively low load factors (30-40%) while several more expensive power plants show load factors of 70-90%.

It doesn't take a lot of brain power to see that rising demand and falling supply means higher prices. That's not collusion. That's good old-fashioned supply and demand. They also suggest that generators are intentionally shuttering "low-cost" capacity for the sole purpose of raising prices. That belief defies rational logic. Something else must explain that behavior. Admittedly, I don't know anything about electricity generation in Germany. So I'll ask the following simple questions:

1) E.ON's ROE from 1992 to the present has averaged about 12% — with unremarkable profitability. So if they are extracting monopoly profits, they're not very good at the game.In contrast, RWE's ROE from 1993 to 2003, averaged about 15%. But from 2004 to 2010, it averaged about 20%. So, something seems to have structurally changed for them in 2004. What was it? And why isn't E.On playing that game?

2) If there are excess profits to be made, what keeps out new entrants from eventually entering the generation market? This is especially true since the authors acknowledge the availability of long-term supply contracts from producers.

3) Price-spikes are annoying, and power-outages are troubling (especially when you're in the elevator), but the authors don't suggest that the grid has become less reliable. They just say that the price has gone up. And rising prices (absent obscene profitability) could easily be attributed to other regulatory effects. It could also be attributed to better grid reliability…

Just some food for thought from someone who is naturally dubious of blaming the evil speculators and profiteers…

Apr

18

I think the following passage from Siddhartha by Herman Hesse has a lot of gems in it for speculators and gamblers despite the fact that Siddhartha is attempting to wash his hands of these filthy earthly pursuits in an attempt at spiritual nirvana:

The world had captured Siddhartha: voluptuousness, lust, lethargy, and in the end even greed, the vice he'd always thought the most foolish and despised and scorned above all others. Property, ownership, and riches had captured him in the end. No longer were they just games to him, trifles; they had become chains and burdens. A curious and slippery path had led Siddhartha to his latest and vilest form of dependency: dice playing. Ever since he had ceased to be a Samara in his heart, Siddhartha had begun to pursue these games with their stakes of money and precious goods- games he had once participated in offhandedly- with growing frenzy and passion. He was feared as a player. Few dared to challenge him, for his bets were fierce and reckless. He played this game out of his heart's distress. Losing and squandering the wretched money was an angry pleasure; in no other way could he have shown his contempt for wealth, the idol of the merchants, more clearly and with more pronounced scorn. And so he bet high and mercilessly. Despising himself, mocking himself, he won thousands and threw thousands away, gambled away money, gambled away jewelry, gambled away a country house, won again, lost again. That fear- that terrible and oppressive fear he felt with rolling the dice, while worrying over his own high stakes- he loved it. Again and again he sought to renew it, to increase it, to goad it to a higher level of intensity, for only in the grasp of this fear did he still feel something like happiness, something like intoxication, something like exalted life in the midst of this jaded, dull, insipid existence. And after each major loss he dreamed of new wealth, pursued his trading with increased vigor, and put more pressure on this debtors, for he wanted to go on gambling, he wanted to go on squandering all he could so as to continue to show his contempt for wealth. Siddhartha lost the composure with which he had once greeted losses, he lost his patience when others were tardy with their payments, lost his good-naturedness when beggars came to call, lost all desire to give gifts and loan money to supplicants. The one who laughed as he gambled away ten thousand on a single toss of the dice turned intolerant and petty in his business dealings, and at night he sometimes dreamed of money. Whenever he awoke from this hateful spell, whenever he saw his face grown older and uglier in the mirror on his bedroom wall, whenever he was assailed by shame and nausea, he fled further, seeking to escape in more gambling, seeking to numb himself back into the grind of hoarding and acquisition. In this senseless cycle he ran himself ragged, ran himself old, ran himself sick. Never before had it seemed so strangely clear to Siddhartha how closely sensuality was linked to death. Siddharta had spent the night in his home with dancing girls and wine, had made a show of superiority before others, of his standing, though he was no longer superior, had drunk a great deal of wine, and had gone to bed long after midnight, weary and yet agitated, close to tears and despair. For a long time he sought sleep in vain, his heart full of misery he felt he could no longer endure, full of a nausea that coursed through him like the vile, insipid taste of the wine, like the dreary all-too-sweet music, the all-too-soft smiles of the dancers, the all-too-sweet perfume of their hair and their breasts. But nothing made the nausea well up in him more bitterly than his thought of himself. He felt nausea at his perfumed hair, the smell of wine on this breath, the wary slackness and reluctance of his skin. Just as someone who has eaten or drunk too much vomits it up again in agony and yet is glad for the relief, sleepless Siddhartha yearned for a monstrous wave of nausea that would rid him of these pleasures, these habits, this whole meaningless existence and himself along with it…

Apr

18

My erudite son let me look at this very interesting essay, just published today in Lapham's Quarterly.  An enlightening, alternative take on Virgil, to say the least. The final paragraph in this magnificent piece summed it up:

"…As the nations of the young West fought to define themselves, Virgil stood as proof that, evidence of Rome itself notwithstanding, "empire without end" was not only possible, but worth the struggle. We saw in him what we needed to see: a hope of immortal civilization. Then, when the world cracked around us, we again took from Virgil what we needed: comfort that progress and ideal empire was an illusion, and had always been so. Perhaps there are more revelations yet to come."

There are many, many market lessons in The Aeneid.

Apr

17

I offer the following question only because I would appreciate some constructive criticism.

Free markets work well for short term investments, such as publicly traded commodities and equities. The free market falls down in long term investments because they lack liquidity and price discovery for investments lasting 5, 10, 15, 20, 30, 40 or 50 years.

How is a utility to finance capital improvement projects under such circumstances? I'm finding every investment organization I've talked to is unwilling to participate in a US deregulated power market asset because they cannot hedge their investment.

Today, few are financing power plants in deregulated regions because there is no bankable offtaker. The result is few power plants are being built in these areas.

What is the Austrian School's take on this challenge?

Henry Gifford responds:

As for deregulated electricity markets, I think what is currently called "deregulated" is different from what I think of as free market. I will use the California deregulation as an example.

When California deregulated the electricity markets, they formed three new state government agencies, one with monopoly power to sell electricity at the wholesale level. I have no idea what the other two did. The agency signed long term sale contracts with local utilities, and bought electricity from both in-state and out of state (California is a net importer) suppliers on the spot market or on short-term contracts. I repeat - they signed short term purchase contracts, and signed long term sale contracts for set prices. The agency made a few billion dollars of profit in a few years, as buyers were barred by law from buying from anyone else (remember, I am describing deregulation), and the state bought for a lower price than they sold for.

The inevitable happened - short term prices rose above the prices they had contracted to sell for. The state government did the inevitable: they passed price control laws, barring their suppliers from selling at a price that would be unprofitable for the state government (remember, I am describing deregulation). Out of state suppliers refused to sell at the lower prices, so the California governor asked the president to pass price controls for suppliers outside of California. The president did not do this. Meanwhile, suppliers went unpaid. I repeat - the state agency did not pay for what they had bought. Instead of paying, the state demanded to first investigate their allegations of "unfair profits" while the bills went unpaid. As out of state suppliers who were owed money were getting investigated, they refused to sell power to the state, and the lights went out. (repeat: I am describing deregulation). This gave deregulation a bad name for a generation, spawned the usual anti-freedom documentaries, and because the arrangement was called deregulation, free markets were also given a bad name. But, I don't think a government monopoly is a free market, and have never met anyone else who does. Instead, people just keep calling it deregulation and saying deregulation doesn't work, and the free market doesn't work, including many people who know the deregulation involved formation of monopolies, price controls, etc.

Now if you reread the description above, and think of the position you would be in if you were a producer of electricity in California, or were considering becoming a producer, or financing a new power plant, your lack of enthusiasm would be understandable, but have nothing to do with failure of what I think of as free markets, long term or short.

The statement that free markets fall down in long term investments is I think inaccurate. Lack of liquidity is priced into investments that are difficult to sell.

 I don't know what "price discovery" is. Real Estate is rather illiquid, but prices for most transactions are a matter of public record, and advertised prices for comparable properties are always available.

I would invest in an electricity producing plant in California if I thought the price was right. With some looking I would tell you what that price would be, which I think indicates there is no lack of price discovery for long-term investments.

Gary Rogan writes:

 It seems in retrospect that combining regulated rate utilities with unregulated power assets is asking for trouble. It's the same kind of trouble as defined benefits pension obligation funders eventually always have to face: when you promise something definite far into the future but the source of funds for your promise is indefinite, this has to blow up sooner or later for many participants. Nothing is ever really guaranteed and some percentage of attempts to make such promises will either run out of money or will have to ask the government for help. Some bonds in the "real world" become worthless, and some insurance companies promising life-time annuities go belly up.

There must be a long and complicated history of how natural regulated monopolies came into existence, but I bet they were accepted too easily. The real cost of energy cannot be projected too far into the future, and in what I would consider a "fair" world nobody would be guaranteed any particular rate of return, and anybody would be allowed to compete for the end customer's business, with property access rights of course being in private hands is so historically determined. Investments in new sources of power would only be made when the benefits were outrageously obvious or the investors were unwise. Even the wise investors would of course sometimes striker out. That's free market, and that's what delivers an ever increasing standard living. That said I will always look for monopolies to invest in where I can find them at reasonable prices. You have to somehow deal with the unfair world.

Tyler Cowen adds:

Maybe political risk is the worry.

If the market is pricing a Monet painting, or a forest, it seems quite well to account for the services yielded decades into the future…
 

Apr

17

I just saw the Royals (getting swept by the Indians) put in their outfielder to pitch the ninth to save what is left of a depleted pen.

The pitching was akin to batting practice, the tribe went quickly, and the pitcher got a Royals' standing ovation, the only pitcher all weekend to get one.

Market equivalent?

It seems like the batters may have been a bit taken out of their element by the novelty, maybe the overconfident factor at work.

Maybe the Royals' skipper scored a tiny tiny mental victory here to lift the team for the next series.

Apr

16

One spent many pleasant moments this weekend after uncovering a cache of books that no one has seen for some 80 years: Squash and Badminton Annual, the magazine of winter court games of Massachusetts 1932, and 1933 and Set For Three, A Brief History of Squash Rackets I, Massachussets, 1905-1934, Volume 1. One saw pictures and history of the game that started by displacing squash tennis in 1905 and already by 1927 allowed women the privilege of playing the game in the mornings at the Union Boat Club and the Harvard Club. Eleonara Sears was the womens champion and she was closely followed by Mrs. George Wightman, Miss Maurine Boyen and Mrs. Will Howe, and Miss Priscilla Bartol. The game took a big change in 1921 when Harry Cowles became the coach at Harvard until 1932 and taught the college kids the short drop and the volley pioneered by Palmer Dixon. Jack Summers, coach at MIT and John Skillman, coach at Yale, were already prominent in the pro circuit. It is rare that I read something that I don't learn something about markets and it was the case here.

Here's a list from the April 1934 magazine of don'ts in badminton.

1. Don't alter your grip for any stroke

2. Don't lose short

3. Don't try to kill everything

4. Don't omit to feint but not too often

5. Don't do a half-hearted smash

6. Don't try impossible strokes

7. Don't underrate your opponent

8. Don't give up trying

9. Don't forget to encourage your partner

10. Don't get in your partner's way

11. Don't forget that to lose your temper generally loses the game

12. Don't ever stand still but be always on the move.

The advice is very good for all activities including trading. Don't alter your grip, I would say, means don't go long and short the same day. Don't lose short— they didn't mean it, but going short is much riskier of the squeeze than going long. What I think they mean is don't stand too far away from the net. I would say that one shouldn't stand too far away from the screen or leave it during pay. Never underrate your opponent. Don't ever succumb to thinking that the other side isn't very smart. It only takes a few smart people at the margin to put prices to where they should be. Particularly dangerous is the idea that fixed income people are foolish and that a big inflation awaits us with fixed income prices falling 30 or 50 points to 30 year rates of 4% or so but the foolish people in fixed income don't understand that increases in the monetary base or money supply are guaranteed to cause tremendous inflation. Don't try impossible strokes is don't try to fit your trades through a key hole and give yourself many options to get out of the trade rather than waiting for the one singular event. You get the picture. Yet another of the 523 different areas where market people can learn from another activity.

Apr

16

It is interesting to note that the S&P has gone up more in the subsequent days when it's up over the past year than when it's down. For example, of 1030 days when it was down over the previous year the expectation the next day is -0.2 % , and of the 2658 days it was up over the previous year the expect the next day was 0.2%. Doesn't appear to be much and certainly not significant, but in total a differential of 600 S&P points in favor of going with.

Apr

15

I offer the following question only because I would appreciate constructive criticism.

Free markets work well for short term investments, such as publicly traded commodities and equities. The free market falls down in long term investments because they lack liquidity and price discovery for investments lasting 5, 10, 15, 20, 30, 40 or 50 years.

How is a utility to finance capital improvement projects under such circumstances? I'm finding every investment organization I've talked to is unwilling to participate in a US deregulated power market asset because they cannot hedge their investment.

Today, few are financing power plants in deregulated regions because there is no bankable offtaker. The result is few power plants are being built in these areas.

What is the Austrian School's take on this challenge?

Thank you for considering the question.

Henry Gifford responds: 

As for deregulated electricity markets, I think what is currently called "deregulated" is different from what I think of as free market. I will use the California deregulation as an example.

When California deregulated the electricity markets, they formed three new state government agencies, one with monopoly power to sell electricity at the wholesale level. I have no idea what the other two did. The agency signed long term sale contracts with local utilities, and bought electricity from both in-state and out of state (California is a net importer) suppliers on the spot market or on short-term contracts. I repeat - they signed short term purchase contracts, and signed long term sale contracts for set prices. The agency made a few billion dollars of profit in a few years, as buyers were barred by law from buying from anyone else (remember, I am describing deregulation), and the state bought for a lower price than they sold for. The inevitable happened - short term prices rose above the prices they had contracted to sell for. The state government did the inevitable: they passed price control laws, barring their suppliers from selling at a price that would be unprofitable for the state government (remember, I am describing deregulation). Out of state suppliers refused to sell at the lower prices, so the California governor asked the president to pass price controls for suppliers outside of California. The president did not do this. Meanwhile, suppliers went unpaid. I repeat - the state agency did not pay for what they had bought. Instead of paying, the state demanded to first investigate their allegations of "unfair profits" while the bills went unpaid. As out of state suppliers who were owed money were getting investigated, they refused to sell power to the state, and the lights went out. (repeat: I am describing deregulation). This gave deregulation a bad name for a generation, spawned the usual anti-freedom documentaries, and because the arrangement was called deregulation, free markets were also given a bad name. But, I don't think a government monopoly is a free market, and have never met anyone else who does. Instead, people just keep calling it deregulation and saying deregulation doesn't work, and the free market doesn't work, including many people who know the deregulation involved formation of monopolies, price controls, etc.

Now if you reread the description above, and think of the position you would be in if you were a producer of electricity in California, or were considering becoming a producer, or financing a new power plant, your lack of enthusiasm would be understandable, but have nothing to do with failure of what I think of as free markets, long term or short.

The statement that free markets fall down in long term investments is I think inaccurate. Lack of liquidity is priced into investments that are difficult to sell.

I don't know what "price discovery" is. Real Estate is rather illiquid, but prices for most transactions are a matter of public record, and advertised prices for comparable properties are always available.

I would invest in an electricity producing plant in California if I thought the price was right. With some looking I would tell you what that price would be, which I think indicates there is no lack of price discovery for long-term investments.

 

Apr

15

How does one find value in commodity markets? In stocks you can hang your hat on P/E, Breakup Values, P/B, etc. Bonds have relative value in rate differentials. Currencies tend to be driven by carry differentials (outside of a crisis). But how do you ascribe value to a commodity? I would think interest rates and/or inflation would apply to commodities in general, but not individually. Nat gas dropping sub $2 on the May '12 contract sparks my interest in the topic.

Carder Dimitroff responds: 

Hi George:

You ask an interesting question. Dan Dicker wrote a book called Oil's Endless Bid on the issue of creating assets out of commodities. His conclusion is that indexed funds and ETFs based on, say oil is a mistake. It is was mistake to create them and it is a mistake to "invest" in them.
From my perspective, commodities have two types of investors. The first are hedgers. In the case of natural gas, they could be utilities locking in margin on future deliveries to retail consumers. They could also be drillers, who are monetizing future deliveries. They could also be independent power producers who have a fixed contract to deliver power. Until the ETFs arrived, I believe most transactions were from hedgers.

The second investor is the speculator. This is very tricky business because it has another dimension to their bet. Prices can differ by geography. Frankly, I do not know how speculators make money in the natural gas. I am hearing many aren't and are leaving the business.

One issue in commodities is that prices can go negative. You frequently see this is electric power. Just a couple of weeks ago, I captured a screen shot of power in West Virginia at -$25 at the same time it was $80 in New Jersey. If you send me a request off list, I would be happy to send you the picture.

I've been thinking natural gas prices could go negative. The problem is producers must produce, no matter what. You can see the issue in Ohio. Chesapeake is working the Utica Shale for oil. A byproduct of their oil production is natural gas, and a lot of it. Also, to maintain hold on leases, producers must produce during the contract period or lose the lease.

If prices go upside down, it would likely occur in the spring or the fall when overall demand is light.

There are more knowledgeable people on this list, but I thought I would start the conversation.

Bruno Ombreux states:

In my opinion, commodities are not meant to be invested in. They are meant to be traded.

A stock or a bond can be invested in, because it produces a future stream of cash-flows. This is what an investment is.

A commodity is meant to be consumed. Ultimately it vanishes: in a stomach, in a turbine, in an Atmospheric Distillation Unit… It does not produce any future income stream. It is not an investment.
 

George Coyle writes: 

I disagree. I think a commodity is very much a viable investment and, on a long enough time horizon, nat gas will look like a home run at $2 in much the same way shorting bonds at current interest rates will. But the issue, in my mind, is the best means to express the investment. Futures require rolls, ETFs have contango priced in to the detriment of an investor, related equities are not pure plays. The lack of a pure play vehicle is the issue on trading vs investment. But that said, the original question is still valid if only hypothetical.

From November 26, 2004 to April 12, 2012 GLD is up 264% vs SPY up 16% (per Google finance).

Rocky Humbert writes:

I believe that it is with this statement, that Bruno's entire logical argument falls apart.

To wit, if gold is an exception, then so must be silver. Because silver has the same monetary characteristics.

And if silver, then so must copper…. And if copper, then so must platinum… And if platinum, then so must lead…

And then so must diamonds?

But what about the itinerant artist or court jester who provides a service to the king and is paid in room, board, food or a gold coin?

What about any merchant who uses his product in barter?

What about the farmer who stores his excess wheat over the winter and then barters his crop for some gold or silver? And then uses the silver as payment for a new pair of shoes for his kid ?

As I demonstrate linearly, all commodities can have monetary attributes. And historically did.

Hence Bruno's standard that only commods with monetary attributes are investments means all commodities are investments.

He may have other arguments, but this argument fails as illustrated in examples of barter. He also doesn't address art as an investment (which doesn't produce cash flow) but which clearly has investment characteristics. So cash flow is certainly important when valuing a piece of paper, but as illustrated commods have tangible value as well.

Craig Mee writes: 

What maybe of further consideration is that nat gas at these levels is a direct result of crude trading 150 approx, in 2008. What other "secondary markets" to the main event see capital inflow when the "majors" price goes parabolic, and the secondary "stuff" is so much easier to find than the major, and supply is lifted sharply thus collapsing price for some time. Possibly instead of trying to sell the "major" near the high or on the turn, a better strategy may be to take a long dated position short the "secondary".

An anonymous commenter writes: 

Hi Craig.

I'm not sure I fully understand the argument, but I would like to participate in the conversation

You said, "that nat gas, at these levels is a direct result of crude trading 150 approx, in 2008." I'm not sure this is true, but it might be.

I would like offer the following:

1. Natural gas is trading at these levels because, in the U.S., there is more supply than there is demand,
2. Demand is lower now than it was in 2008,
3. Supply is greater than it was in 2008, and
4. The U.S. gas market is entirely domestic, it cannot be exported and
it cannot respond to international market forces.

I believe there is more supply because oil prices floated over $100 making previously uneconomic plays economic. Some of those new plays come from stimulating shale where oil and gas are produced. Producers are exploiting oil but are also getting gas as a byproduct.

It turns out 2008 was a seminal year for another reason. It was the first time in decades were the downward production trend reversed. Every year starting 2008, the U.S. produced more oil than the previous year.

Leases are another driver. In order to maintain a leasehold, producers cannot sit on unproductive wells. They must produce or lose their rights (lease). As such, many are producing, even though they prefer to defer.

You ask, "What other "secondary markets" to the main event see capital inflow?" I recently learned of several. A big one is waste water wells. People are making fortunes constructing deep geologic waste water wells and providing producers access to those wells. Typically, producers see about one barrel of brine for each barrel of oil and they have to safely dispose every barrel.

Another is piping. Massive amounts of piping are needed to build the well and even more to transport product. I am aware of an Ohio company that is going to old wells and pulling out pipe, straightening it out and reselling to producers.

Another is specialty sand (and rail to deliver that sand). To stimulate rock requires truckloads a specific type of sand to lodge between the fissures. I am aware of a company that has developed special technology that produces pellets that work better than sand.

Finally, wet gas derivatives, or natural gas liquids. These are used to make all sorts of products, including plastics. The market will be flooded with these products.

Rather than going short on these secondaries, would it not be better to go long?

I may have completely missed your point. If that is the case, I hope others will add to this thread.

Craig Mee responds:

Very interesting points, thank you.
I suppose by "secondary" I was referring to Nat Gas as a secondary energy source to Crude (each obviously very specified in there uses though). However my thoughts were really that markets get bid up as the leader runs through the roof, bringing in fresh capital investment, but the overload increases supply x fold, where as the primary market i.e in this case crude, doesn't have the massive over supply coming through, no matter what the investment is that's pumped in…I suppose its a relative issue.

Price increase leads to capital investment generated by the leader(crude) = x increase in supply….. to related capital investment in the secondary = x increase in supply. If the investment in say gas, in this case, leads to large new finds, then the overall price maybe under some pressure for some time to come. (Interesting you mentioned that "Producers are exploiting oil but are also getting gas as a byproduct ) This only adding to the assistance of this potential strategy, since they are directly linked in exploration).

Hope that's a bit clearer, and no doubt there's lots to be quantified, when looking at a strategy such as this, where a deleveraged position is taken on (to maximise hold and volatility whipsaws), but I like the idea, that much interest is centered on the driver" i.e crude , but it's the passenger" i.e gas, which may prevent the better trade. 

The anonymous commenter strikes again:

Hi Craig. I think I see where you are going. However, I believe crude is a special case.

First, I don't see crude as a pure commodity. The crude coming from the next well is not the same as the crude coming from the existing well. The only reason producers move to the next well is because of increasing prices. If prices were to decline, the next well would be off the table.

Arctic offshore and oil shale (kerogen) have production costs $100 and above. Oil sands have production costs of approximately $70 per barrel. Presalt deepwater has production costs of approximately $60 per barrel (not including litigation costs). Tight oil has a production cost of about $50 a barrel.

As the price of oil moves up and down, different types of oil are "discovered" or are lost. But, it is clear, the general trend for oil is up as the low hanging fruit is depleted and the costlier fields are gradually becoming economic.

Second, crude oil by itself is useless. It takes refining to extract the important commodities, namely gasoline, diesel, jet fuel, kerosene, and so on.

Third, I see natural gas, not oil, as the bubble. Actually, it is an inverted bubble. Natural gas is responding to market forces. Refiners can make gasoline, diesel and jet fuel out of natural gas. Qatar just invested $20 billion to do such. Canada is contemplating another facility and I'm waiting for the US to follow suit (if anyone can raise a few $B, the pro formas are unhedged but the earnings potential is insane).

Do these points shift your thinking on oil, or am I still missing an important point?
 

Apr

15

I just read The Atlantic article "The Man Who Brok Atlantic City" about Don Johnson the blackjack player who once took $ 6 million in one night from an Atlantic City casino. It was a great read, and I think any one who asks questions about how to be a trader or an investor should read it.

One amazing thing I learned is that Johnson figured out how to drive the house edge even lower. Through hard negotiations he got it down to (by his estimate) just one quarter of one percent. That’s super close to dead even — but still not quite enough. And then came the coup de gras. With some negotiated loss discounts on top of that — agreements for the casino to reimburse a certain amount of if Johnson lost — he actually flipped the overall edge in his favor without the casino realizing it.

House management got played by a math shark. So how did all these casinos end up giving Johnson what he himself describes as a “huge edge”? “I just think somebody missed the math when they did the numbers on it,” he told an interviewer.

Sam Marx writes: 

The article stresses that the player, Don Johnson, did no card counting.

If true, he may have used the Basic Strategy with a few of the newer techniques , plus the concessions he received to get the edge.

Card counting is primarily used to determine size of bet and to a lesser extent to vary the Basic Strategy under different counts.

Beating the House and varying the size of the bet are the two things that give away card counting.

However, varying the size of the bet may be somewhat hidden by betting the same amount from hand to hand but after a winning hand if the count is positive then just the let the original bet plus the winnings ride, as letting a winning bet ride is a technique used by many gambler who are not card counters and usually does not cause the House to be suspicious.

The article does not indicate if Don Johnson varied his bets.

If the article is true, he may have been a big winner even with a small edge , because his bets were huge and he may have quit before playing many hands and with luck may have had a good streak during those few hands he played.

The article is interesting, it may be true or hype.

I would like to know more details.

Apr

15

I'm very skeptical about ANY credible way to reliably value small and moderate tech companies. Scalability (in both directions) is a part of it. How do you value something that can be multiplied by 0.99 or 100 in short order? Having (or not having) complementary technology to someone else is another problem. For all you know, Instagram may have two competitors that didn't get chosen, but were close, and as a result their valuation got affected by perhaps a factor of 10 or more. The nature of this type of competition could even be such that there was a choice of different, unrelated technologies that some fixed (but knowable by an outside observer) amount of money was to be spent on, so these "competitors" could not be determined by any reasonable means. Then there is the effect of bugs, flaws that only get discovered with time, etc. Couple that with the subtle nature of tech management skills and technological ebbs and flows, and a myriad of other factors, and the whole thing looks hopeless to me.

Rishi Singh agrees: 

Agreed,

I think attempting to predict the next big tech winner can be incredibly difficult and similar to picking "the next big penny stock."

The question I'm trying to dig into is established software companies -what separates AAPL from MSFT. Is GOOG heading in the direction of MSFT ( http://www.forbes.com/sites/robenderle/2011/10/27/steve-jobs-final-lesson-to-me-microsoft-google-and-obama/)? We could compare Microsoft today from 1998 or Google today from 2005. What can tech companies do to become better?

How do we backtest Steve Job's ideas of focusing and simplification to see if that's what separates successful tech companies, or is there something else?
 

Apr

14

At one time the Chair recommended a 3 strikes and out rule. If your system has lost three times in a row it may be tired and needs a rest. Another way to monitor that is more sophisticated is to use the techniques of industrial quality control. Essentially you monitor your average expected gain via something like a moving average and then take the standard deviation around that. If your average ever wanders outside the 2 sigma band above or below then your process has failed and needs to be reviewed. The idea of Shewhart diagrams is similar to this.

Apr

14

My friend Jim Loy sent me these general observations about checkers. I find them quite enlightening:

Among amateurs (beginners to middle of the road Majors), I would say that wins and losses mainly occur because of:

1. Lack of planning.
2. Shots.
3. Failure to realize that we are in trouble.

That third one is very important for tournament players, both Minors and Majors and the very bottom of the Masters.

—-

Among Masters, wins and losses occur in these broad and important categories:

1. Shots and other tactical errors.
2. Ending maneuvering.
3. One or both players king early, and threaten to win pieces from behind.
4. Half-blocked positions in which neither player is going to king soon,
and in which both players will move up most of their back rows to gain time.

Of the four, I am beginning to think that number four is the most common source of wins and losses. I don't know how to improve a person's skill in that direction, except to make them aware that that category is of great importance.

—-

Among the Masters, draws most often occur when:

1. One of the players breaks the tension (much tension or very little tension) by trading into an easy or known ending.

2. The game is still a book draw (sometimes early in the game).

Apr

12

I just noticed that the S&P dividend yield is now virtually identical to the 10-year treasury yield.

Photo finish?

Charles Pennington writes: 

Mr. Rollert was pointing out to me that the yield on German 2-year bonds is now 0.09%, about equal to that of Japan's and lower than the incredibly low US 2-years at 0.29%. That kind of sneaked up on me. That German 2-year yield fell through last summer/fall when the crisis was in full gear, but even in October it had only gotten down to ~0.5%. Now with stocks up massively, it's fallen to 0.09%.

Apr

10

One should read the chapter on strange anomalies in presidential names and victories in Fads and Fallacies in the Name of Science by Martin Gardner to see how multiple classification, i.e. over determination, and many more hypotheseses than elections can come up with the strangest, craziest predictors of election results based on things like their names, or moves in the market during certain period.

I always love when Bloomberg, which is the most biased in my opinion news service in favor of democrats, always trots out the canard that markets do better during democratic presidencies than republicans. Martin Gardner where are you. Of course if you start here or there, and don't take account of the moves likes in 2008 of -50% before the inauguration in fear of the coming president you can come up with things as silly as what Gardner reports.


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