The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

31 December 2005

Zara Elis gets creative...

Zara says of this photo, "Here is my first blush rose of the season..."

[click photo to enlarge]

To which I say, "...'Tis a beauty -- subject and photo!"

Why women do NOT take men on vacation

A wee bit of silliness to chime in the New Year! I hope no one finds these these photos to be offensive. I find them to be humorous, as I have myself posed in similar style. (What does "style" have to do with it? :-)

My wish for everyone is a happy, healthy, and prosperous 2006!

30 December 2005

How Click Fraud Could Swallow the Internet

Scott Browning, in a comments field post yesterday, mentioned this WIRED magazine article.

Cauff was a victim of "click fraud," the illicit manipulation of keyword-based advertising. In this case, the scam appeared straightforward - one company clicked on a rival's search engine ads to drive up its costs. More complex is a second type of bogus ad click that exploits a second form of PPC advertising: ads fed to Web sites - anything from personal blogs to the sites of major corporations - by search providers like Google, Yahoo!, LookSmart, and, soon, MSN. The search engine indexes the content of the Web site and matches it with a group of relevant ads. (The most familiar form is Google's AdSense program - the sets of links labeled ads by goooooogle that show up on pages across the Internet. The advertisements that appear on Google itself are part of a separate but related program called AdWords.) Thus, bloggers who write about their air-travel experiences and choose to host such ads may find links on their pages for JetNetworks and its brethren. If a blog visitor clicks on the ad, the search engine splits its fee with the blogger. Although these "affiliate" ads have been hugely successful for advertisers, search engines, and the host Web sites, the system creates an incentive for affiliates to cheat. "All you have to do to make some money is find a way to click the ad sent by Google or Yahoo! to your own Web page," says search marketing consultant Joseph Holcomb. "Click! - there's 10 bucks. Click! - there's 10 bucks. It goes on all the time."
Click fraud is an important and growing problem. It afflicts consumers, advertisers, and the venue purveyors themselves (primarily, Google, Yahoo, and Microsoft/MSN). Google suffers the most abuse, largely because it is the King Kong of the savannah. However, Google, in addition to Yahoo and Microsoft, treat this problem very seriously. It even is possible that, in their reaction, they go too far; for example, publishers lose their AdSense licenses for the mere perception of an abuse.

Every opportunity everywhere -- business, life, love, etc -- is an admixture of yin and yang: opportunity and misfortune, responsibility and irresponsibility, trust and mistrust. No opportunity anywhere is all blue skies ahead.

So I like it that this problem already has been identified. I like it that the companies involved work quickly to create an environment of trust, integrity, and reliability. I am not so innocent, however, as to believe that with each new response from Google et alii, the scammers will not conceive and rapidly deploy a workaround. Hell, if life were so easy, our email inboxes would not be stuffed to the rafters with various scams to catch the gullible and the unwitting. And yet we continue to use email. Sooner or later, IPv6 will come into use, and end the free reign (of terror) those scammers impose. Google (and other responsible companies) will achieve the same re click fraud.

Your comments, questions, and insights are welcome, as always.

29 December 2005

Journey to the (Revolutionary, Evil-Hating, Cash-Crazy, and Possibly Self-Destructive) Center of Google

This GQ article, written by John Heilemann, might be nearly one-year old but its content remains fresh, revealing, and exciting...
"The rise of Google is a tale often told as a Silicon Valley classic. Two precocious Stanford grad-student nerds swept up in the fever of the Internet boom invent technology that profoundly changes the experience of the Web; they drop out and start a company (in a garage) that achieves iconic status; they stage a historic public offering, achieving vast wealth and fame... But beneath these familiar surface details, the Google story is more nuanced and compelling. It’s a story about the clash between youth and experience, more a messy ensemble drama than a simple buddy flick — one whose main characters have persistently deviated from any script, resulting in unexpected twists and turns that haven’t come to light until now."
And it is funny. Comparatively lengthy, it makes for good reading material for the holiday-lengthened weekend.

28 December 2005

Google--what you get for $400 a share

I like this CNET article for its supplied graphic -- a table that reveals Google's many product lines, the competitors and (monetization) potential of each, etc.
"Though many of the services are free, Google will no doubt figure out a way to charge for some of them so it's not so dependent on advertising."
I do not agree with each comment, however, as you will discover upon reading; nonetheless, the article is worthy of your attention.

27 December 2005

Elizabeth Bear

I recently completed reading Elizabeth Bear's third novel, WORLDWIRED -- which really is not the third book of a trilogy, but part 3 of one lengthy novel. I required only the opening 5 or 10 pages to suggest I temper my reading pace; the novel is that good. Some critics have carped that the whole is too lengthy; that entire sections could have been elided without dulling its many other qualities. This novel proves those critics [to be] impatient.

HAMMERED, Elizabeth Bear shows her talent as a competent author, in SCARDOWN she employs a deft style, but it is here, in WORLDWIRED
, that she really, truly comes into her own as a writer; she becomes simply magisterial. Elizabeth asserts firm control of her characters, her setting, and her research (for the novels). She creates flourishes of style and excitement; not one time does this novel bore its readers.

"It was promising. If they only could be made to understand the concept of symbology, and of words, he might be able to start establishing a pidgin. If the boredom didn’t kill him first."
One stylistic flourish that really impresses me is Elizabeth's willingness to have major moments in the story occur off-stage; leaving the characters to deal with the figurative and literal fallout of major occurrences. She (Elizabeth) trusts implicitly her characters, her setting, and the readers to fill in the blanks. This is a rare (writerly) instinct, and to be treasured.

It really is a fine thing to see a writer mature as well and as successfully as Elizabeth has — and in only her third published book. I can pay her the ultimate compliment a reader can make a writer: I will purchase and read each of her books. Yes, I trust her insights and talent that much.

So it seemed only natural that Elizabeth, Elizabeth’s husband, Kit, and your reporter (moi) get together to enjoy lunch, each other’s company, and to fete Elizabeth’s rapidly mounting successes as a writer of science fiction and fantasy.
[click photo to enlarge]

Elizabeth Bear holds aloft the John W Campbell award for “Best New Writer” of 2005 in the genre of Science Fiction. (Congratulations to Elizabeth, and her Bantam Spectra editor, Anne Groell.)

Upcoming books from Elizabeth include:
A short story collection from Night Shade Press, The Chains that you Refuse;
A fantasy duology from publisher, Ace/ROC, the Promethean Age novels, Blood and Iron and Whiskey and Water that will appear beginning in June 2006.
Two standalone novels from Bantam Spectra, Carnival, a novel of Singularity, eco-terrorism, sexism, genocide, brinksmanship, art, intrigue -- and spies! And Undertow, a novel about a hit man, a conjure man, a fish boygirl, and a Woman with a Past.

Run, do not walk, to your nearest bookseller, buy (any of) these books, and then sit back and enjoy.


25 December 2005

Season's Greetings!

Happy Holidays, Merry Christmas, and/or
Happy Hanukkah
(Please select your preferred greeting. ;-)

[click image to enlarge]

CapEx slowing + Year end peace and tranquility

The comments that follow are from Scott Grannis, Chief Economist for Western Asset Management...

CapEx slowing...
Durable goods orders rose 4.4% in November, and were up 12% over the previous year. Capital goods orders rose 14% in November alone, and were up a very robust 27% in the past year. But most of the strength in these numbers came from aircraft orders. As the chart shows, after subtracting orders for aircraft and defense, capital goods orders have really slowed down, rising only 1% year to date through November after growing at a 10% pace for the past several years.

[click each image to enlarge]

Outside of the aircraft industry, business "animal spirits" seem to have cooled. This is the first palpable sign since 2000 that the economy may be slowing down. This series is quite volatile, however, and dismissing the massive strength in the aircraft industry may exaggerate the degree to which the economy has actually slowed. But nevertheless it bears watching. I have thought that double-digit growth in this indicator was a key reason to be bullish on the economy over the past few years, so now, on the margin, the bullish case is harder to defend.

Year end peace and tranquility
As the first chart shows, the volatility implied in equity options doesn't get much lower than it is today.

The bond market is pretty calm as well, with 10-year Treasury yields trading in a flat range for almost two and a half years, something that hasn't happened since the early 1960s. As the second chart shows, the bond market is fairly confident that we are only 50 bps away from the end of the Fed's current tightening cycle.

Only in the third chart do we see that things aren't totally ideal, since credit spreads are somewhat higher than their all-time lows reached in 1997.

But as the fourth chart shows, emerging market spreads are currently at all-time lows, and by a significant margin.

Overall, it probably doesn't get much better than this. There are few if any signs of above-average systemic risk, and few signs that the market is concerned about unforseen events.

In addition to all the benign signals from key financial market indicators, we have the lowest taxes on capital in our lifetimes. Corporate profit margins are at or near all-time highs. Household net worth is $51 trillion, up over 20% from the levels of five years ago. Inflation is generally low, inflation expectations are low, and the economy has been growing at an above-average and relatively stable pace for the past 30 months. The unemployment rate, at 5%, has rarely been lower. There hasn't been a terrorist attack on our shores in over four years. If it weren't for the problems at GM and Ford, and the fact that gold is over $500/oz., you could call this financial and economic nirvana.

One big problem these days is that the rewards to taking on risk in the bond market have rarely been so low. There may well be some further upside to bonds, but the downside risks have become potentially huge. Gold's rise in recent years suggests that monetary policy continues to be somewhat accommodative, and this could show up in the years to come in the form of a continued, albeit modest rise in core inflation. That in turn would most likely result in a funds rate higher than the market is currently expecting, and that is something to worry about, even though it is not likely an imminent threat, but rather one that could develop as 2006 unfolds.

Bottom line: things look pretty good right now, but we can't let down our guard.

Scott Stulberg shares more photos

After an email conversation, Scott graciously forwards several photographs snapped recently. ("I'm sending a couple pics I did in the last couple of days here in LA when the weather has been a little wild...")

[click each photo to enlarge]

A "little" wild...? :-)

And yet again, each photo is as impressive as the next, and all the others. Such talent!

23 December 2005

Scott Stulberg

From Deipnosophist reader, Harry van Beuningen -- whose visits, alas, are too infrequent -- comes this website with the most astounding photography.

Scott Stulberg's photographs are, with nary a doubt, the best and most visually stunning photography I have seen in a very, very long time. The photos on the "far away places" link unfailingly and repeatedly bring tears to my eyes.
Really, truly, the world is a wondrously gorgeous place; photographs represent an excellent art form to showcase the world's many splendors. I hope you enjoy Scott's photographs as much as I do...

(Memo to self: Get back on the 'road', camera in hand, and snap, snap, snap away. Then return home, create a website, and share those photographs.)

22 December 2005


MarketGuage appears, at first glance, to be an interesting and perhaps helpful resource, especially for traders...

"Welcome to MarketGauge, the visually powerful trading and equity analysis tool that provides you with the best way to track industry group and sector rotation, generate stock ideas, and see what’s driving the market at every level."

A bounty of links

In fact, a veritable cornucopia!

1) From JMP Securities (via

JMP Securities raises their GOOG target to $575 from $400, as they believe the company is a clear winner in the AOL bake off. The firm's estimates suggest an even higher implied value for the AOL business than the $20 billion being reported in the media. They say that at $1.2 billion in cash and ad credits for a 5% stake, the deal would imply a value for AOL in the $25 bln range. From a strategic standpoint, they believe the deal gives GOOG multiple entres into the branded market, which is important for the company's long term growth outlook. Firm's confidence in Google's ability to meet or beat their estimates is higher than any other co in their coverage group, and they believe investors are likely to look farther out in the case of Google than most other Internet stocks.
2) Something of an analysis, (shared via regular blog reader, Marty Safir)...
The AOL Winnah: Google, by a Knockout

3) Next, Om Malik, who discerns very real value in the Google/AOL deal -- but not where it is expected...

AOL, by the way continues to be the king maker in the Internet space, despite its troubles. I think many, scratch that, almost all have focused on the advertising aspect of this deal. In my mind, this is a deal which has larger strategic implications. The first - the instant messaging. The two companies explicitly state that they are going to interoperate their IM networks. For Google’s GTalk, this is a big boost, something it needed desperately in order to increase traction when compared to Microsoft and Yahoo. The IM alliance between Google-AOL is a good way to combat Microsoft-Yahoo IM combo.

Wait, there is more...
Continue reading, "Hey AOL, You Got Googled"

4) Then comes Bill Burnham...
Google Base + Vertical Search + RSS = Death of Walled Gardens

A few weeks ago, I promised to write a follow-up on my post about Google Base that detailed how the launch of Google Base might affect the Internet’s so-called “Walled Gardens” (content sites that charge users and/or suppliers for access to their databases). One month and a long cruise later, here it is...
5) An interesting item from WIRED magazine...
Who's Afraid of Google? Everyone.

It seems no one is safe: Google is doing Wi-Fi; Google is searching inside books; Google has a plan for ecommerce.

Of course, Google has always wanted to be more than a search engine. Even in the early days, its ultimate goal was extravagant: to organize the world's information. High-minded as that sounds, Google's ever-expanding agenda has put it on a collision course with nearly every company in the information technology industry:, Comcast, eBay, Yahoo!, even Microsoft.

In less than a decade, Google has gone from guerrilla startup to 800-pound gorilla.
Continue reading article here...

6) The Washington Post reports...

Microsoft Is Losing Some Of Its Elbow Room
As Software King's Growth Slows, Rivals Stake Out Their Own Territory.

Continue reading here...

7) Last, is this article from London's

Bigger and better: the internet gets a sixth sense
Ambitious plans to connect not just phones and TVs but kettles and fridges to the net will come to fruition in 2006

No more spam. No more "phishing" bank scams. News, pictures and short clips sent seamlessly to your phone ... or your fridge. Video conferencing that works first time, no hassles. Free, stereo-quality phone calls anywhere in the world. No, it's not a utopian ideal, it's the internet that some people will begin to experience in the next 12 months.

Unknown to virtually everyone except IT engineers, the internet is being upgraded to a system called IPv6 (for Internet Protocol version 6)...
Continue reading here...

Sorry for the many links, but each article, for its own reasons, deserves your attention. And anyway, the weekend is upon us -- and a holiday-lengthened weekend to boot. What else is a weekend for, but to read the many articles and essays provided by his or her favorite Deipnosophist...? :-)

21 December 2005

Does Google Want to Rule the World? (Part 2)

What follows is the complete text of part 2 of Doug Casey's research comments re Google/GOOG. (Part 1 can be read here.) It turns out these comments are freely available to the public, so I will post the commentary in its entirety. Too, the two commentaries are a rehashing of Robert Cringely's comments, previously shared. (See below, however, for a second, newer item re Google/GOOG.)

Does Google Want to Rule the World? (Part 2)

The invention of the personal computer marked the first revolution in the way business is conducted. The advent of the Internet was the second. Google’s expansion is the third.

It is by no means the end of the story, though. Ultimately, the original Google search engine, the Gmail, the Appliances, the virtual office—all of these may amount to the least of the company’s accomplishments.

So, what does this brave new future envisioned by the young Turks at Google actually look like?

We’re going to take a stab at parsing out the Google plan, with the assistance of Robert X. Cringely who understands such matters and writes about them for PBS.

Let’s start with a basic consideration: No matter how complex and far-reaching cyberspace becomes, it must ultimately rest on something physical. For purposes of our discussion, that something has two components. First, data must be moved, utilizing wires, cables, fiber optic networks, routers, wireless transmitters, and so on. Second, data must be stored, using storage devices.

We’ll take storage first, because the story is short and uncomplicated. Google’s current and potential storage needs may be huge, but the industry has done an admirable job so far of meeting those needs. You’re probably used to thinking of storage in terms of gigabytes (giga = billion). That new 60-giga hard drive in your PC may store a lifetime’s worth of information for you. But it’s not enough for a business. The next step up is terabytes (tera = trillion).

That threshold was passed long ago. The present generation stores petabytes (peta = quadrillion). That level of storage handles everything we want to do at the moment but, as we all know, need tends to expand exponentially, so the next generation is on the drawing board. It will be calibrated in exabytes (exa = quintillion).

For now, petabyte storage will suffice for Google’s purposes, leaving them with the other aspect of the problem, moving data around. To grasp the solution, we first must make a quick side trip into how the Internet works.

Let’s say you want to communicate with a pal on the other side of the country. You send a message to your Internet Service Provider (ISP), which serves X number of users, but not the one you’re sending to. So they have to route it to a larger hub, which may bounce it to another hub and so on, until it reaches the ISP that directly serves your intended recipient.

Similarly, if you want to access a web page, you have to patch into the server on which that page is stored. The overall efficiency of the system depends upon a number of variables, including the distance to be covered, the number of intervening stations, and the quality of the connections among the various routers. There’s also sunspot activity (the excuse my ISP sometimes uses to explain bad service) and, for all we know, the number of alien spacecraft in the vicinity. Among other reasons, including page design, that’s why some pages load in the blink of an eye, while others seem to take forever.

Junctures where different networks intersect are called “peering points.” But the term is also applied to the backbone of the Internet, the 300 or so sites worldwide that constitute the primary routing hubs. That’s how we’ll use it, because these are the ones Google may be looking at.

We use the word “may” advisedly. A lot of what follows is conjecture, but it’s based upon logic and common sense, an examination of current trends, and the research of the aforementioned Mr. Cringely. All quotes that follow are his, unless otherwise noted.

According to Cringely, Google is developing a data center in a box. (Though Google will not confirm this, they don’t deny it, either.) A big, 40-foot box. “We’re talking about 5000 Opteron processors, and 3.5 petabytes of disk storage [crammed into a box] that can be dropped off overnight by a tractor-trailer rig.”

Cringely’s sources tell him that Google had one such data center two years ago, that today they have 64, and that within two more years they’ll have over 300. Not coincidentally, that will allow them to place one at each global Internet peering point.

Now add in this recent job posting from Google, which is seeking someone experienced in the “identification, selection, and negotiation of dark fiber contracts both in metropolitan areas and over long distances as part of development of a global backbone network.” “Dark fiber” refers to fiber-optic cable that's already been laid, but is not yet in use. Thousands of miles of it are available in the U.S., but there have been few takers because of the high costs of making it operational.

Google has deep pockets. It is building monster data centers and branching into fiber. A good fiber connection can patch right into a nearby peering point. Connect the dots and Cringely says this is what you get: “The idea is to plant one of these puppies [data centers] anywhere Google owns access to fiber, basically turning the entire Internet into a giant processing and storage grid.”

Or, to put it another way, “There will be the Internet, and then there will be the Google Internet, superimposed on top. We’ll use it without even knowing. The Google Internet will be faster, safer [i.e., fully encrypted], and cheaper. . . a new kind of marketplace for data, with everything a transaction in the most literal sense, as Google takes over the role of trusted third-party info-escrow agent for all the world business. That’s the goal.”


But it doesn’t stop there, either. Since all human communication (save in-person voice) is now digital, and since digital data looks the same regardless of content, there is no reason for Google not to extend its reach into other arenas.

For that, we need another box, only this one is very small. It doesn’t exist yet, thus there is no name for it. So we’ll follow Cringely’s lead and dub it the Google Cube. The Google Cube plugs into your Internet connection and is studded with every conceivable I/O port: USB, RJ-45 (cable), RJ-11 (phone), video, audio, and so on. Some probably haven’t been invented yet. Inside it are chips for WiFi, Bluetooth and whatever else doesn’t, or won’t, require a physical port. A VoIP adapter will allow you to use the Net for phone calls. The Cube becomes the focus point for every computer, TV, telephone, fax and stereo system in your home, as well as home automation, climate control, and alarm systems. And you don’t even need a PC to run it.

For the whole thing to work, Cringely says, “especially with end-to-end elliptical encryption, you need a tight connection between the box client and a server, which is why those shipping containers need to be so broadly distributed and why Google will need so many of them, eventually numbering in the thousands to support hundreds of millions of cubes.”

To visualize the final result, Cringely asks us to “imagine a world where Google Cubes were distributed as widely as AOL CDs. It will be in Google’s interest to provide them in volume to every Google user, which is to say every broadband user everywhere. As a result, Google becomes overnight a major phone company, a major video entertainment provider, a major player in home automation and even medical telemetry.”

For a start-up cost that Cringely estimates at $3 billion or so, Google will provide support, sort, storage and delivery services to every aspect of business, entertainment and communications. Globally. Now, if that isn’t ruling the world, it’s the next-best thing.

And we may even like the result. As Cringely says, Google won’t take over the Net by stealing it or strong-arming us. “They’ll seduce us into giving it to them. And I am not at all sure that’s a bad thing.”
Google Groans Under Data Strain

Google is consuming storage and computing power at a worrying rate, according to David Girouard, general manager at the firm’s enterprise division.

During his keynote at the Interop show here this week, Girouard explained that the firm blows through "an incredible amount" of computing power, disk space, and bandwidth. The exec noted that the firm has “concerns about the future in all these respects.”

“If you look at what we’re doing with Google Earth,” he explained, “it doesn’t take a stretch of the imagination to say that there’s a tremendous amount of processing power, bandwidth, and storage going on at Google in everything that we do.” Google Earth, part Web-based geography app, part 3D-rendering machine, whirls users around the globe with frightening speed and clarity.

Continue reading here...

Nothing new here either for regular readers of the Deipnosophist. It surprises me, however, that this article fails to catch the real problem and bottleneck, a potential lack of power (i.e., sufficient electricity). Which, too, has been previously mooted among us.

20 December 2005

The Shell Answer Man

I get questions...

Ouch, what happened to IRIS today (Monday)? How does today's action affect your view/interest of that [former?] member of your winning list?
Good lord, you do not think I am long each stock? It seems you did not read the post to its conclusion, so I quote again its real message...
"Of course, there is this post's subject header. Qui vive means "alert, lookout" -- I am on the lookout always for changes. Negative change occurs in the market now, as former bullish patterns creak under the weight of their uptrends... These declines represent warning shots over the bow, or so goes my interpretation. Thus, I position my portfolio more defensively..."

The list includes stocks that have yet to complete their setup within a yet to be determined pattern. So I seek the process, the continuum, that I prefer among the thousands of stocks, and then wait only for the setup; the pattern reveals itself as it unfolds. This is different than 99.99999% of other investors who require a trend be revealed (read, obvious) before acting.

In a long ago post, I mentioned that the 50 day (+/-) simple moving average (sma) is final support for a continued intermediate term up trend, whereas the 200 day (+/-) sma is final support for an intermediate term base within a long term up trend. Stocks breach each sma quite regularly; if, as in the case of IRIS, the breach is of the 50 day sma, then I adjust accordingly my interest and time frame to the appropriate periodicity, if still interested. (That is, I can be 'comparatively' indiscriminate for my trading opportunites, but remain very discriminating for my long term investments. In fact, right now, only one company/stock passes that filter.)

Nonetheless, this is a good question, which provides generally applicable rules within the specifics of its answer... Thank you.

Now that you've revealed that your trading price objective for GOOG was 600 a long time ago, would you please explain the method by which you arrived at that target whenever it was that you did. I look forward to studying your annotated charts whenever you post them.
Long, long ago, when I was in elementary school, I learned the alphabet as did everyone else, including parts of speech (nouns, etc) and pronounciation, etc. Once learned, I suffered from the mistaken notion that we next would be taught how to read, to put together all the lessons into a unified whole. But no, we were taught only the rudiments; it then was up to us to place the lessons within a meaningful context.

In other words, keep reading this blog; the lessons you seek are included herein. And, if important to you, you will make the attempt at synthesizing these lessons.

Would people really complain if your target of 600 is off by a bit? I hope not. Actually, being off by a lot ~100 or more is still a bit. Most analysts will need to be raising their targets a few more times between now and 600 or so.
You misunderstand the role of cause and effect. Unfortunately, you also misunderstand the intent of my comments, even though I stated them quite clearly. Or so I believe :-) Alas, misunderstandings such as yours are why I typically do not 'reveal' these price objectives. For the record, I figure ~75% of my trading objective has been reached, although not my investment objective, which is higher. GOOG has rallied to ~$450 from its IPO of $85 -- which itself is after my first recommendations of the investment. Try to lose this concept of predictions, correct and incorrect, and focus instead on your satisfaction. At what price are you satisfied?

I was hoping to get your thoughts on a company that I have followed for a long, long time. The company, named Inphonic/INPC...

[click to enlarge]

Each bar highlighted in yellow is the stock's opportunity to cry, "Uncle" -- to reverse finally to up from down. Alas, it has failed in each instance, and does not appear this dynamic will change soon. Consider the cluster of bars in area #1, which manifests as horrible stochastics: the tendency for each day's bar to close on or near its lows. This down trend does grow long in the tooth, so I would monitor for that key reversal day. It has yet to arrive, however, so continuing new lows seems its near term destiny.

Speaking of key reversals days...

I was wondering if the up opening, peak pricing and lower close on GOOG was the signal you were discussing that might indicate an exit point is at hand. Or, was all that volatility just about the entry in the NASDAQ 100?
Yes... and no. What you note is correct -- yesterday does qualify as a reversal day -- but is not the key reversal day I seek. GOOG
● Opened higher yesterday but only marginally,
● Not at a new high,
● The shares reversed from their early morning highs, yes, but did not take out the low of the prior three days
● Yet -- which means the possibility remains for a weekly reversal pending this Friday's closing price.

However, I see nothing in the chart that tells me either the short term or the intermediate term up trends are kaput; yesterday qualifies, to me, as mere intra-trend volatility. I suspect GOOG will stabilize today, and then resume its uptrend in the days and weeks ahead. Get used to the volatility, however, because it will become increasingly prevalent as this trend matures.

An interesting commentary for those interested can be read here...

"I think the worm is about to turn on Google. The company's ascent has been too rapid, its successes too extravagant. As I wrote this sentence a few days ago, Google's stock price was $416, up more than 300 percent since the company went public a mere 16 months ago... Regular people look at that run-up and say: "Nice work, Google, you must be doing something right." Media people look at the same numbers and hear a little voice: Somebody's got to stop this."
I find articles of this type to be silly; having missed making the bullish call, everybody and his or her uncle want now to make the bearish call. Yes, the share price will reverse, but we expect that. Please do not be surprised when it does finally occur.

Finally, I was told privately that I am wrong re the Google/AOL deal; that this deal should be perceived as a defensive move on the part of Google to protect the company's turf from Microsoft/MSFT. I accept that reality and, truth be told, had factored that in to my estimation; however, I retain my perspective. This moment is a perfect example of how one investor's opinion can differ from most of Wall Street's, and still make money.

18 December 2005

On the qui vive

Trouble brews in Summerlin. I have given myself over to too much thinking about too many topics, including where and when my responsibility ends for recommending various investment opportunities -- and your responsibility begins.

I suppose I began stewing on this issue several weeks ago, when I betrayed publicly some private angst. At that time, some of you complained that I crow too often about my successes. Of course, I do not perceive that to be the case; I see it as my responsibility to follow-up on past recommendations, winners and losers all. I accept the responsibility for these recommendations, and owe you periodic updates — when I sell, when I lose interest, etc. I also believe my frequent mentions of past winners and losers are necessary to inform new readers of where I stand; they likely have no notion of past recommendations.

That said, your questions and comments are critical to my effort. They enable me to riff off them, in the attempt to answer your questions. For example,

I am long on LVLT and have been for sometime. I noticed today’s interesting trading activity. It looks to me like an institution dumped ~7-8 million shares late in the day. While this didn’t cause the stock to breach its 50 day it does show me someone is clearly headed for the exits. Would you view this as cause for concern or do you feel since the shares were absorbed by the market and the stock didn’t break the 50 day it’s a nothing to be alarmed about?
Please recall that the NASDAQ 100 index makes changes effective with tomorrow’s opening: eleven stocks, including Level 3/LVLT, drop from the index in favor of eleven additions. So the large block or blocks you saw crossing likely was position squaring ahead of that event. As for the price declining to the 50 day simple moving average (sma), its relevance is dependent upon your time frame, risk tolerance, and objective -- none of which you betray, alas.

And a comment from the blog itself…

When goog went through $420, I gave up on AFL to buy more goog. It's probably a bad sign, but I wonder why I own anything but goog... I'm sure I'll get past it because diversification is a good thing.
Comments of this type concern me. Diversification within reason (say, ~9 stocks) still has a place in the modern portfolio. Does the writer not realize the analogue between his perception of current opportunities and the market in 1999? Then, as well, investors crowded into the ever-fewer stocks that still performed (i.e., rose in price), thus powering them that much higher that much more quickly. The same occurs now for Google/GOOG. More players buy into a rising stock while other leaders crumble; this crowding likely will result in some exciting (read, fast) price appreciation near term. The following comment is from Tommy Dorsey at
Dorsey Wright Analytics

The main trend of GOOG remains positive and the stock has strong relative strength as you would suspect. The chart pattern has consolidated over the last couple of weeks to form a triangle pattern. That triangle pattern has now been completed with a double top breakout at 420. Typically, breakouts from bullish triangle patterns result in quick, explosive moves. With this breakout in GOOG, it provides an entry point for new positions with a stop or hedge point provided at 392, a spread double bottom, or 376, a violation of all near term support. The bullish price objective is, unbelievably, 608. We will see, but certainly the trend chart remains positive here.
I have not previously uttered publicly this number but have held it in reserve for a l o n g time, this $600/share has been my trading objective for Google/GOOG -- possible to achieve by late-April 2006, perhaps sooner. It is also possible it fails to achieve that objective. At this moment, I watch the process itself; i.e., how the chart unfolds. I seek the setup for a key reversal day albeit at a higher price than the current $430.

Of course, it concerns me to state so unequivocally this objective. Many readers latch on to the number they prefer, and then offer recriminations when that level fails to transpire -- $600 is a level to keep my vision focused for a continuing positive move in price; however, I home in on the process itself rather than a specific price objective.

The list that follows is a partial listing of several other companies and stocks I either monitor now as an opportunity setting up, or am already long…

Apple/AAPL: current up trend possibly nears conclusion
Google/GOOG: what can you say?
HoLogic/HOLX: More upside room remains -- which depends, however, on market conditions
Iris International/IRIS: More upside room remains -- which depends, however, on market conditions
LifeCell/LIFC: possible intermediate term base
Matria Health Care/MATR: check basis weekly bars for powerful base
Natus Medical/BABY: short term base?
Nike/NKE: Powerful long-term base in a powerful long-term uptrend. Very bullish.
NuVasive/NUVA: Building intermediate term base; must hold ~$17
Office Depot/ODP: Building intermediate term base
Palomar Medical Technologies/PMTI: Powerful uptrend catches its breath. Temporarily.
Peet’s Coffee/PEET: Less liquidity than I prefer and not a leader, but an intermediate term base nears completion. (Thanks, AP!)
Sirf Technology/SIRF: Intermediate term base possible.
Starbucks/SBUX: So much for its being an “obvious short sale candidate”
Teva Pharmaceuticals/TEVA: TEVA achieved its trading objective on Friday’s opening
Trident/TRID: A possible short term base…
Under Armour/UARM: An exciting, younger company, recently IPO’d.
Whole Foods Markets/WFMI: What can I say? A long-term winner, WFMI is up almost 100% since recommendation in this blog’s first post. Yahoo/YHOO: Thanks again, AP!

If there are stocks not included in the above list that I have mentioned previously, then it is not near a buy point, not trending, or I have lost interest.

Which is a shame, that last item. There are so many good companies, so many great opportunities, that no one can own all of them all the time at the same time. So I focus on what appears to me as the best poised; often wrong, I nonetheless forge ahead.

Of course, there is this post's subject header. Qui vive means "alert, lookout" -- I am on the lookout always for changes. Negative change occurs in the market now, as former bullish patterns creak under the weight of their uptrends; examine CMTL, CUTR, FOXH, KOSP, etc. These declines represent warning shots over the bow, or so goes my interpretation. Thus, I position my portfolio more defensively -- even though I suspect the market could continue to chop higher into the opening minutes of Tuesday, 3 January 2006. And then...?

Questions? Comments? Suggestions?

17 December 2005

Google, again

Re the news breaking late yesterday of Google/GOOG investing $1 billion for a 5% stake in AOL -- in addition to the structure of the ad sharing arrangement -- this article, by David Vise and published by the Washington Post, seems to be the one that is most free of typical journalistic pabulum.

Of course, I have zero input into Google's strategy, but I am not especially pleased by the news. AOL has been likened by many as the "Internet with training wheels"; I agree. Its membership has been declining steadily for years, as its users discover they had no need to pay an extra $25/month for access to the Internet, and at dial-up speeds! Moreover, the portion of the revenues AOL represents for Google itself declines, to 10% from 12% year over year.

So I prefer Google invest its time and money in the pursuit of new and better opportunities. But, then, who am I? If I were a Google employee in the finance department, I would convince the mucky-mucks to amortize the $1 billion cash on a front end basis; expect more from this deal in the early years of the 5 year deal and less in the later years. And meanwhile strive to distribute your revenue base more equally. Yes, I believe AOL makes out like a bandit on this deal; that is AOL gets to hitch a ride on Google's rocket ship whereas Google invests $1 billion in an asset (AOL) that slowly crashes to earth. In sum, I disagree with Wall Street, which embraces the deal, most easily seen via its quickly bidding higher the share price of Google/GOOG when the story leaked yesterday. Oh well.

I do not pretend to understand the dynamics of corporate strategy; perhaps there is something in this AOL deal that I fail to grasp or understand, perhaps even that the deal will revivify the crumbling corpse of AOL. That alone would make the deal worth doing, as it would bring with it a vibrant partner for Google, locked in at existing rates for the next 5 years, and possibly garner a return on its newly-acquired 5% holding. All that would be nice! Meanwhile, Google proceeds with its grand design, whatever that is. (To be revealed all in good time, Grasshopper. :-)
And from Doug Casey at Casey Research comes this essay...

Does Google Want to Rule the World?

At first glance, a seemingly silly question. And yet, some forward-looking people believe that, in a sense, that’s exactly what Google is all about.

Consider that when Google held its much ballyhooed stock IPO in late 2004, the opening price was $85. As we write, you have to pony up $411 and change to get a single share, nearly a quintuple. Not bad for a company founded only seven years earlier by a couple of guys—Larry Page and Sergey Brin—who were then in their mid-20s, and who entered a field jammed with competitors.

Especially not bad because this is a company that seems to have no real product, in the traditional sense of the word, and that gives away its primary offering for free. Yet the-search-engine-that-has-become-a-verb employs over 3,000 people, sports a market cap of $121 billion, and features traditional value yardsticks like price/earnings and price/sales ratios that are in nosebleed territory at 91 and 23.5, respectively. Obviously, shareholders believe that this is not only a good company today, but that it is going to be a bigger and better one tomorrow. Among those placing strong bets on Google are insiders, who hold over 35% of all stock, and institutions, which control nearly 38%. What do these people see that, perhaps, the rest of us don’t?

Well, many traders are likely just momentum players, with Google being their flavor du jour. For others, though, the answer may be contained in our initial question. Google seeks, quite simply, to gain control of the Internet. And whoever controls the Internet will, in more than just a metaphorical sense, rule the world.

Flashback to the bad old days. Remember when searching the Net was a time-consuming, frustrating experience? Yeah, we barely do, either. Google changed that in what now seems like an instant. All of a sudden, here was a search engine that was not only thorough, but that returned the results you wanted, more or less in the order that you wanted them.

Somehow, it was able to grasp that if you seek information on black holes, you’re likely to be more interested in the cosmos and less in Calcutta. We don’t pretend to have the slightest understanding of how it does this. All we know is that Google perfected the art of searching. Users noticed right away, and Google soon left the competition in an electronic dust of unused bits and bytes.

From the outset, Google continually extended its reach. After exploiting the obvious revenue bases, advertisers and users who paid to have their websites pushed up the search list, the company applied its phenomenal search and organizational skills more broadly, developing a wide range of goods and services you may not even have heard of yet. Check out its website for such innovations as Google Search Appliances, search engines in a box.

“Wouldn't it be great if search within your company worked as well as search on” it asks visitors. “From your corporate intranet to your public website and even your own desktop,” there’s a product just for you. Are you a small business, with a need to routinely index and search about 100,000 documents? Try the Google Mini, at just $2,995. Are you a bigger fish? No problem. “The Google Search Appliance makes the sea of lost data on your web servers, file systems and relational databases instantly available with one mouse click.” This box, attractively finished in gold, can access up to 15 million documents, and starts at $30,000 for half-million capacity.

How long will it be before a majority of the nation’s business transactions passes through Google? Not long, we guess.

Email? Google wants that, too, and is aggressively pursuing it through their Gmail product. According to the company, this is “a new kind of webmail, built on the idea that you should never have to delete mail and you should always be able to find the message you want.” The free service currently offers 2.6 gigabytes of storage, which archives everything you send or receive, and contains (of course) a search feature allowing you to “find the exact message you want, no matter when it was sent or received.” In addition, each message “is grouped with all its replies and displayed as a conversation.” Other free webmails look positively clunky by comparison.

The cost of all this is borne by advertisers, in small text ads down the right hand side of the page, exactly as you see them when you search using But not to worry, there’ll be no pop-ups or unrelated banners. You will only be presented with “relevant text ads” and “links to related web pages of interest.” (What that means in plain English is that Google’s Gmail automatically scans your email, searching for keywords that give it a hint what subjects you focus on and where your interests lie.)

Next up, taking over the day-to-day office environment. Office organization is presently dominated by Microsoft, with its MS Office software. Enter Google. In October, Google and Sun Microsystems announced a joint project whose aim it is to “make it easier for users to freely obtain Sun’s Java Runtime Environment (JRE), the Google Toolbar and the office productivity suite.”

That ties Sun to Google, but if you project this venture to its logical conclusion, Sun is merely along for the ride. Google is visionary. It realizes that the transmission of information is all about speed, ease of use, searchability and storage. With a big emphasis on the last. Software like OpenOffice is just fine, but it isn’t the important component.

Picture this: An office in which all you need is an Internet connection. Once Google sets up your own personal office network for you, the whole kit and kaboodle moves to cyberspace. Throw away your filing cabinets, your hard drives, your LAN routers, your Rolodexes, everything. Just log in and away you go. You have an intranet that links everyone and everything within your company, personally and privately, with all appropriate firewalling, while at the same time you’re connected to the world.

[Read more about the “Google plan” next week, in part 2 of our article.]

I disagree with much of this analysis from Casey, as well. (Well, what then do I agree with?) First, none of it is new news, second many of his facts are wrong, and third, he perceives Google's strategy and objective to be one that elsewhere, including here, has been mulled on, chewed over, and finally spat out. But whether my surmisal re Casey's perceptions is correct awaits his part 2... Become a subscriber to access the report in full, if interested.

Wealth Tax in CA?

The note that follows is from Scott Grannis, Chief Economist at Western Asset Management. He writes, however, in his guise as fellow person and potentially outraged citizen of California.
Did you know that there is a madman out there circulating a petition for a proposition to be placed on next year's ballot that would do the following? Believe it or not, it's true. You can check it out

Proposal: An additional 12% tax on all income exceeding $250,000, plus a one-time 45% tax on all wealth exceeding $40 million.

And there's presumably no way of escaping it should it pass, unless you move out of the state before the end of the year AND you haven't lived in the state for at least 5 years. This is madness, and I have to believe it stands no chance of passing (though it could qualify for the ballot), but it is indicative of the new political climate here in the wake of the Governator's big defeat in the last election. Holy Cow.
1157. (SA2005RF0096)

Wealth Tax. Tax Rates. Tax Credits. Initiative Constitutional Amendment and Statute.
Summary Date: 10/14/05 Circulation Deadline: 03/13/06 Signatures Required: 598,105
Proponent: Paul McCauley (818) 788-5919

Imposes one-time 45% tax on California residents and certain former California residents owning property worth more than $40 million on January 1, 2007. Amends Constitution to exempt this tax from 1% limit on ad valorem real property taxes. Imposes additional 12% tax on income for high-income taxpayers. Reduces corporate income tax rate by approximately 54%. Eliminates alternative minimum tax and certain tax credits, including those for head of household and dependants. Creates/increases tax credits, including those for teacher pay, public college tuition; property taxes and health insurance. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local governments: One-time increase in state revenues potentially up to $200 billion from imposition of a wealth tax. A portion of this revenue would be required to be allocated to schools with the remainder used for other state spending or tax rebates. Annual increased state taxes- primarily from increased personal income taxes- in the low tens of billions of dollars annually, offset by a commensurate amount of state tax reductions from rate reductions and new tax credits.

16 December 2005

Alligator tears for Teva

"Prudential raises their Teva Pharmaceuticals/TEVA tgt to $50 from $42, as they believe Copaxone and patent settlements help keep TEVA's earnings growth steady. Although they find it difficult to include generic launches in their model until they have a court win or other source of confidence, they feel the increased visibility these settlements provide should be reflected in a higher multiple on near-term earnings. Firm notes that Teva has already announced or executed agreements with GSK on Lamictal, WYE on Effexor/Effexor XR, BMY on Paraplatin and CEPH on Provigil. They believe Teva's portfolio of patent challenges is the largest of the generic companies (especially in combination with IVAX), and say additional settlement announcements are likely."
And yes, I remain long the shares. Since the recommendation of TEVA, the share price has rallied to ~$45 from ~$35, a gain of ~35% in little more than two months. Not too shabby.

An intrepid reader

One reader of this blog (Yes, I have an audience of at least one person!), decided to discover some history re the mysterious dmg -- that is, me. She writes...

Dear David,

I just received the book Bulls, Bears, and Millionaires: War Stories of the Trading Life by Robert Koppel (link in sidebar) in today's mail. I jumped on the book and quickly turned to the table of contents to see which chapter was devoted to an interview with you. Ahhh, Chapert 9 "Seeing Is Believing". I have to say I never tire of how cool it is that I know you.

I went to a quiet room and read your chapter. I had no idea that your eyesight had deteriorated so severely. I feel 100% sure that the source of many illnesses, diseases and symptoms is psychospiritual. My ordeal with a serious blood clot in my chest and arm was such a fiasco in the hands of western MD's. I began to turn to myself and listen to me. Why was this happening?

My health now has never been better since listening to myself as to who I was and what I need and want.

I highly recommend Lonny Jarrett's book Nourishing Destiny. It can be bought at his website. It's well-worth the price:

He has some interesting articles he has written too at the site. What's neat is one can email him directly and he'll talk freely. One is immediately struck by how interested and engaged in his profession and finding solutions he is. I found his book life altering. I called him on the phone when my credit card didn't work and he kept me on the phone in conversation. After getting his book, I realized he was assessing me by my tone and rhythm of my voice.

On emotions, Claude Larre, who co-wrote The Seven Emotions (another really cool book) said, "The problem is that we believe serenity is the lack of emotions. That is not the case: Serenity is not being disturbed by emotions."

Well, back to your book. Your interview was also bittersweet. I could picture the stories and the hiking trips -- especially the Grand Canyon. Notwithstanding the ordeal with your eyesight, you must be in outstanding shape to make these hikes.

When you were a little kid, you must have been like the little boy in the movie A Little Romance. :-) What a thoroughly delightful movie. We got lost in it. I cried and cried when they finally got to kiss in the gondola.

Anyway, it was sure a treat to get a copy of your interview. I have to remember to bring it with me for you to sign on our next meeting.

Thank you -- even though your note is more about other writers, websites, and movies. I suspect you also liked the interview with me. :-)

14 December 2005

Chart Pattern Resource

In the post below (Becoming the Path), I mention (area) patterns but spend scant time dissecting them. (Although I have previously done so, here and elsewhere, and will continue to do so as the need arises.) Thomas Bulkowski, however, has approached this topic with a scientifically rigorous and inquiring mind. His many excellent and helpful books are the result. And on his website, Thom really examines patterns...

"Chart Patterns are the footprints of the smart money. Following those footprints can lead you to riches or disaster, depending on your experience tracking their signals. This page is the gateway to describing the shape of those footprints, what to look for, and how to trade their signals."
Continue reading here... This site is so helpful and Thom's analysis so excellent (as always), that this link will be a permanent feature in the sidebar, under "Investing." By the by, Thom and I used to present (albeit not together, unfortunately) at Tim Slater's TAG seminars, which is where we first met, and how I came to know and respect the quality of his insights.)

PS: Re JW Nordstrom/JWN -- There are other stocks whose current chart patterns are similar to that of JWN; however, the structures of the patterns for these other stocks appear more positive. Thus, I do not currently own JWN, and likely will not.

12 December 2005

Becoming the Path

A reader writes...
Regarding JWN: I'm trying to learn about price action, notwithstanding all the other factors one should consider in an investment decision -- no analysis paralysis here but I wonder if you'd comment. The upside breakout hasn't occured yet, as I observe a consolidation rectangle happening since ~Aug 05. I see this in many time frames. To confirm the upside breakout we'd want to see a solid close above $38.50. Even then it'll likely retrace before going up to our first upside objective which would be ~$47 ($39 + 8pts, the depth of the rectangle, = $47). My question is this: what do you see? If the breakout is not confirmed yet, why do you buy? Are you seeing shorter time frame pattern(s) that confirm a good entry point, or are you looking at a longer time frame and see something else?

[click to enlarge]

My earlier, private reply sucks...
You are so close to the trees you can see the gnarls in the bark — but not the forest. Shift periodicities. I think I will try again...

I have previously denoted my critical four items when parsing a chart: price, volume, pattern, and trend. I note in the chart of JWN, for example, that
1) The share price is very near its all time high (itself set ~3-4 weeks ago), that
2) T
he price:volume relationship remains fine across individual bars and the epochal pattern the writer delimits, that
3) The pattern offers every indication of being a base -- in fact, it is a short term (the past 3-4 weeks) base above an intermediate term base (the one notet) -- and not a top, and that
4) It remains within the boundaries of a long term up trend.

There comes that moment where you must trust the truth of the pattern, the trend -- and yourself. I return to this 'old' post, and ponder in particular these two insights that resonate for me, and arguably are applicable to this 'conversation'...

"Experts perceive patterns in their domain. Bill Chase and Herb Simon demonstrated this point with chess players. Rather than focusing on the position of individual pieces, expert chess players perceive clusters of pieces, or chunks. Estimates suggest that chess masters store roughly 50,000 chunks in long-term memory. Notably, this pattern recognition does not represent superior perception ability. When chess pieces are placed randomly on the board, experts remember the positions about as well as novices. The difference amounts to a database of chunks, amassed through deliberate practice, from which experts can draw." (Emphasis mine -- dmg)


"Experts spend a lot of time solving problems qualitatively. When researchers present novices with a problem within a domain, the novices quickly go to relevant equations and solve for the unknown. In contrast, experts tend to create a mental representation of the problem, try to infer relations within the problem, and consider constraints that might reduce the search space. Domain knowledge and experience allow experts greater perspective on problem solving." (Emphasis mine -- dmg)

I have looked at so many charts and for so many years that I know how a pattern -- in truth,, many patterns -- fulfill themselves; i.e., complete the setup. For example, how many breakouts does the investor require ("The upside breakout hasn't occured yet") to know, to see, that the long term trend is up, as is the case for JWN? Breakouts occur from a pattern but within a trend; the continuum (more or less), as I term it.

Approximately 4-6 weeks ago, I recommended Dress Barn/DBRN, then at $25. It required the sudden lurch upwards to $35 before igniting the buying interest of most readers. Why should that be? I suspect it is because most investors draw a line of demarcation into the future from the moment they first notice or come upon an opportunity; their attention drawn to Dress Barn/DBRN at $25, they now see they gave up an easy and quick 40% gain. "Is it still okay to buy?", they wonder. To which I ask, "Why is it okay to buy at $35 and not $25...?"

Try this parallax view: select an opportunity that especially excites you, look at its pattern, step into the future, and look backwards in time from the moment in the future to today. Draw the line of demarcation from the future high rather than from the wholly arbitrary point that you stumbled upon the opportunity. You say you cannot do that, see the future? Then develop a repository of patterns and trends so that you know how they tend to fulfill and complete themselves. Cluster the information, the patterns, and the spatial contexts. From the same afore-mentioned research report ("Are you an expert?")...

• Successful investors put in plenty of deliberate practice. In investing, this generally means lots of time reading, often across diverse fields.
Great investors conceptualize problems differently than other investors. As a group, these experts go beyond the near-term obvious issues, can identify relevant principles because of their experience, and see meaningful trends.
Not pattern recognition but process recognition.

That is, the continuum. It is no different across the many opportunities I bring forth: JWN is no different than DBRN, or AAPL, CAKE, COH, DNA, GOOG, HOLX, MATR, NKE, NUVA, SBUX, SIRF, TEVA, TRID, WFMI... (I really, really must write a post updating my portfolio opportunities!) The patterns and setups might be dissimilar, but the trends remain the same -- up long term.

Have trust in youself that you always will do the right thing, make the hard decision. If you buy and the position instead declines, stop out. If you buy, but the position does not immediately rise or otherwise grieves you, then sell. But for god's sake, manage your positions, your cash, and your opportunities. You need not be always correct. And if you have proved to yourself congenitally unable to deploy such calculation in your financial dealings, then put into place a rules-based system to keep you from hurting your portfolio.

Traders and investors come in only two guises: intuitive and mechanical. (Scan ~¼ of the way down the page for the definitions.) Which are you?

"One cannot walk the Path until one becomes the Path"

-- Gautama Buddha

Reading for Investors

Barry Ritholtz of the Big Picture offers a categorized reading list for investors... And it is a doozy.

All Allan: Psychology of Investing

Allan Harris brings forth a book (The Psychology of Investing) worthy of our attention...
... That was a summary of just one chapter of ten in this book. The nine other [chapter]s similarly contain tradable observations about the human condition and how it works against even the best and brightest traders/investors. Although not yet through the book, I wanted to bring it to everyone's attention and to thank John publically for bringing it to mine. A good tip doesn't always have to involve a stock.

11 December 2005

NASDAQ Announces the Annual Re-ranking of the NASDAQ-100 Index

New York, December 9, 2005 — The Nasdaq Stock Market, Inc. (NASDAQ®; NASDAQ: NDAQ) announced today the annual re-ranking of the NASDAQ-100 Index®, effective with the market open on Monday, December 19, 2005.

“The re-ranking is a unique event in that investors ultimately determine which companies are members of one of the most closely followed indexes in the world,” said John L. Jacobs, executive vice president, NASDAQ. “The re-ranking process is objective, rules-based and transparent - one that ensures the NASDAQ-100 Index will continue to be an important benchmark by which you can invest in a diverse array of NASDAQ-listed companies.”

The following 12 issues will be added to the NASDAQ-100 Index: Google Inc. (NASDAQ: GOOG)...

Continue reading here...

(BTW, can anyone point out the four infelicities of grammar and/or syntax that occur in the second paragraph...? :-)

10 December 2005

Everybody's an expert

This essay cum review by Louis Menand is both fascinating and engaging...
The experts’ trouble in Tetlock’s study is exactly the trouble that all human beings have: we fall in love with our hunches, and we really, really hate to be wrong. Tetlock describes an experiment that he witnessed thirty years ago in a Yale classroom. A rat was put in a T-shaped maze. Food was placed in either the right or the left transept of the T in a random sequence such that, over the long run, the food was on the left sixty per cent of the time and on the right forty per cent. Neither the students nor (needless to say) the rat was told these frequencies. The students were asked to predict on which side of the T the food would appear each time. The rat eventually figured out that the food was on the left side more often than the right, and it therefore nearly always went to the left, scoring roughly sixty per cent—D, but a passing grade. The students looked for patterns of left-right placement, and ended up scoring only fifty-two per cent, an F. The rat, having no reputation to begin with, was not embarrassed about being wrong two out of every five tries. But Yale students, who do have reputations, searched for a hidden order in the sequence. They couldn’t deal with forty-per-cent error, so they ended up with almost fifty-per-cent error.

The expert-prediction game is not much different. When television pundits make predictions, the more ingenious their forecasts the greater their cachet. An arresting new prediction means that the expert has discovered a set of interlocking causes that no one else has spotted, and that could lead to an outcome that the conventional wisdom is ignoring. On shows like “The McLaughlin Group,” these experts never lose their reputations, or their jobs, because long shots are their business. More serious commentators differ from the pundits only in the degree of showmanship. These serious experts—the think tankers and area-studies professors—are not entirely out to entertain, but they are a little out to entertain, and both their status as experts and their appeal as performers require them to predict futures that are not obvious to the viewer. The producer of the show does not want you and me to sit there listening to an expert and thinking, I could have said that. The expert also suffers from knowing too much: the more facts an expert has, the more information is available to be enlisted in support of his or her pet theories, and the more chains of causation he or she can find beguiling. This helps explain why specialists fail to outguess non-specialists. The odds tend to be with the obvious.

Tetlock’s experts were also no different from the rest of us when it came to learning from their mistakes. Most people tend to dismiss new information that doesn’t fit with what they already believe. Tetlock found that his experts used a double standard: they were much tougher in assessing the validity of information that undercut their theory than they were in crediting information that supported it. The same deficiency leads liberals to read only The Nation and conservatives to read only National Review. We are not natural falsificationists: we would rather find more reasons for believing what we already believe than look for reasons that we might be wrong. In the terms of Karl Popper’s famous example, to verify our intuition that all swans are white we look for lots more white swans, when what we should really be looking for is one black swan.

Also, people tend to see the future as indeterminate and the past as inevitable. If you look backward, the dots that lead up to Hitler or the fall of the Soviet Union or the attacks on September 11th all connect. If you look forward, it’s just a random scatter of dots, many potential chains of causation leading to many possible outcomes. We have no idea today how tomorrow’s invasion of a foreign land is going to go; after the invasion, we can actually persuade ourselves that we knew all along. The result seems inevitable, and therefore predictable. Tetlock found that, consistent with this asymmetry, experts routinely misremembered the degree of probability they had assigned to an event after it came to pass. They claimed to have predicted what happened with a higher degree of certainty than, according to the record, they really did. When this was pointed out to them, by Tetlock’s researchers, they sometimes became defensive.
One important take away from reading this article is that, arguably, investors are different. We, too, must make predictions -- unlike all those other 'experts' Menand and Tetlock dissect and expose. However, we must assume ownership of our predictions, thanks to a concept known as mark to market. And if we do not assume ownership? Then our error-ridden predictions own us; aka, owning a portfolio of losers.

09 December 2005

Next up for the Google Guys

This image...

is one artist's rendering of a space elevator, a project that catches the fancy of futurists everywhere. Proponents can claim the interest as well of the Google Guys (Larry Page and Sergey Brin) -- heck, they would build it if given the opportunity.

With recent advances in carbon nanotubes, this project is not as far-fetched as it might otherwise seem...

Q&A with Charlie Munger

A big softball of an interview between Charlie Munger (#2 at Berkshire Hathaway) and Kiplinger's magazine that, nonetheless contains several zingers. Such as...

What would a good investor's portfolio look like? Would it look like the average mutual fund with 2% positions?

Not if they were doing it Munger-style. The Berkshire-style investors tend to be less diversified than other people. The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results..." (Italics mine -- dmg)

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08 December 2005

The Fed, the yield curve, and the economy - no recession signal

The comments that follow are from Scott Grannis, Chief Economist at Western Asset Management...

There has been much hand-wringing among analysts over the flatness of the yield curve and what this portends for the economy. Since every one of the past six recessions going back to 1970 has been preceded by an inversion of the yield curve, today's very flat curve is thought to signal that at the very least the economy is likely to slow meaningfully in the next year or so. As the chart shows, however, it probably takes more than an inverted yield curve to hurt the economy: it also takes very tight monetary policy in the form of a real Fed funds rate that is 4% or higher. Today's 2% real funds rate doesn't qualify. The Fed is not very tight today, and the curve is not inverted, so there's no reason to expect anything like a recession (at least by this method) in the near future.

Note: I am using the spread from 1-year to 10-year Treasuries to measure the slope of the yield curve, and the Core PCE deflator to measure inflation. Using the headline PCE deflator would give the same result, but the real Fed funds rate today by that measure is less than 1%, and that would suggest that any significant economic slowdown is even further out on the horizon. If we assume that the PCE deflator (core and headline) is likely to be somewhere in the range of 1.7 - 3% for the near future, it would take a nominal Fed funds rate of 5.75 - 7%, plus an actual inversion of the curve, to signal that a recession was likely within the next year.

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