Eric's Nemesis

Bored to distraction this Succoth evening, desperate for distraction, I googled the personalities involved in Eric Falkenstein's case which I know through Mahalanobis. The conflict is not my business at all, it happens in another planet called Minneapolis Financial District, I shall never meet the actors except if they contract my services as sewage design engineer. The left pic is Peter Hajos, and the second is Tony. My sympathy is with Eric, but if they have anything going for them is their pics. Click on them to make them enjoy themselves. The story is that Eric was working for the Hajos mishpuche (Stephen and Peter), and Efi Gilmor et al, as Fund Manager designing computer trading models. Eric says he discovered in his PhD work that higher the volatility, lower the yield, or whatever. In 2006 Eric decided he to build the models he was building but for himself, resigned and proposed to Irv Kellner to set up a hedge fund. Kellner or Kessler is a kissing amigo and/or business partner of the Hajos, so the story took winds and flied to Hajos's ears, who felt that his Telluride Asset Management didnt need Eric as competitor. A legal demand to stop Eric was issued. Eric posted the documents on the web. This Secret Engineer thinks that Hajos, in Israel, would have had a good case, as it is customary to have a tkufat tzinoon ("cooling down period") between competing employers. Given how fast arb stat strategies grow obsolete, one year is a reasonable period. Another actor, Efi Gilmor, is well known in TAU (he was a mitztayen) and invests in startups. The Hajos name is common in Hungary, but I presume these Hajos are descendants of the Hajos bacsi who made his fortune in river trade in the 19th Century and Hungarized his Jewish name to Hajos, becoming Budapest's laughingstone. Kostolany Andre, the pre-war Paris bourse speculator, describes the idiosyncratic Hajos bacsi (Hajos means Ship-owner in Hungarian. I wonder how it is pronounced in the American Midwest). Now I shall wander off and tell an old Hungarian Jewish joke (Am I becoming an old fart?):

Kohn a híres kereskedő gyors karriert fut be, és a hadiflotta parancsnoka lett. A flotta az ő vezényletével vonul ki a nyílt tengerre, mikor a hajóján hamarosan jelentik neki:
- Gyors ütemben süllyed a barométer.
- Süllyed? Akkor azonnal eladni!

Dogs

Succoth is boring and the females of the family are all working. My big daughter even nationalized my car, and being no public transport on Shabbath, I am locked in Kever Benjamin's downtown. My second daughter, in her after Army around-the-world Grand Tour, decided to make a stop and rented an apartment in Brooklyn and is working in a kosher restaurant. And so on. A family of workaholics, that's us. I never heard nor met anyone nearly approaching our szorgalmassagunk (I have no word for it in other language than Hungarian). And me, planning liquid infrastructure and studying the portfolio. It appears that I have dogs too, such as this index fund. It follows 50 of TASE's second rank stocks, and reached a high point of 15% and then ended at zero. The general TASE index did 30 - 40% this year.

szorgalmas = fleißig = diligent. So says the dictionary, but in Hungarian has an extra strong flavor because of the red paprika.

Learning from Falkenstein

Its Succoth here, a ten days long Jewish holiday, when Jews live in succoth (temporary huts). Israel has the world most non-working public holidays. I just made a call related to one of my projects, and by courtesy I asked if it was inconvenient, and the answer was a gross - Yes, this is a very bad time. Discouraged, stopped working and am reading Mahalanobis old posts. He writes about Markowitz, but it is all in old old (fifty years old) text books. About indices, I have my free Microsoft website selector (mine? free for all), which allows me and my dog (should I have one) rank all the universe's shares by anything - momentum, profits/capitalization, accruals, alphabetic order, number of Hungarian Jews in the management, whatever. But something he published in 2005 is very interesting: Experiments show that individuals with a specific type of brain damage, which prevents them from feeling fear, outperform normal players when it comes to making some investment decisions. Crack and methamphetamine addicts as well as alcoholics similarly outperform. According to James Montier, a global equity strategist at Dresdner Kleinwort Wasserstein who has an interest in behavioural finance, the impared ability of these groups to feel fear can help them to make better investment decisions because it makes them more tolerant of short term losses. This makes them bigger risk takers in situations where risk taking is rewarded. "Assuming that risk is rewarded in financial markets, then the best investors are likely to be those who can keep their emotions in check", says Montier.Alcoholics in general outperform other people, I think, because their brain arteries are less calcified. The pic shows Bluto, the Faber Business School's star student ("Knowledge is Good"). Alcoholic ab ovum and probably brain-damaged, he became a Senator and a great financier.

Hotshots: It could also explain why the archetypal hotshot trader behaves so differently from most in polite society and why the 1980s was such a great period in the markets [huh?]. Montier also finds useful lessons for investors from animal behaviour. Pigeons and rats, for example, are better at predicting [certain] sequences than human beings because they don't attempt to find patterns where none exist. For example, when presented with a random sequence of red and green lights, in which one colour flashes 70% of the time, animals will always choose the dominant colour. Humans, by contrast, attempt to match the frequency to look for patterns even if none exist. "So the next time you think you spot a pattern, think twice," warns Montier.

Hedging strategies

The basic idea of hedging is to take some metric (like the profit/market value index or whatever) and order on hundred randomly chosen, comparable shares or trading objects ("thingies") by their attractiveness. Then we buy 1000 zuzim worth of the number one attractive thingies (we long it) and sell 1000 zuzim worth of the number 100 in the attractiveness ranking. Thingies have an inborn tendency to rise in the number of zuzim they are worth, because of inflation or because they pay dividend or grow and succeed. If we have shares, they tend to increase an average of 7% p.a. So at the end of the year we are expected to have made 7% on the longs and 7% on the shorts, that is, 140 zuzim on our 1000 zuzim initial investment. More precisely, we are making 7% plus on the long thingies and 0% on the short thingies. Apparently the short thingies probably will not make us money, but they provide insurance that even if we are wrong in our selection, not all will be lost. Insurance is statistical averaging, so very big players dont need. I am very small, so I do need it. The question is hedging if hedging strategy is better than straight long strategy of most managed funds and most of my portfolio, is that at this point of my thinking hedge seems better. In Israel shorting thingies is not available cheaply to small retail players, but indexes can be shorted thanks to Kesem (Excellence). The NOMAD mathematician board friend of mine is doing this, and I am doing it through my Brent oil Put index / BAZAN shares hedge pair. Now I am going to study the available index options - NOMAD knows how to calculate them, and I shall learn too. About the important question how much is a zuz worth, the Megillat Esther says "Father bought a kid for three zuzim", and Father was a good trader. A kid is sold now the Ramle shuk for 200 shekels so say 4 zuzim means about 50 shekel (12 $US) per zuz.

Irrational Producers Will Save my Puts

R.T. Williams observes that several top producers are spending every dollar of oil revenues, so any price drops will incite production increases rather than the rational expectations of constraining supply. Venezuela, Iran, Nigeria, Russia need revenues at current levels in order to avoid dipping into reserves to maintain spending policies. Venezuela has no foreign exchange reserves to speak of suggesting that they will be among the irrational producers due to the imperative to maintain spending or risk losing power to rivals. Oil is about to take a big fall.

Brent over 82 $

Yesterday Brent crude price jumped 4 $ (5%) for no reason at all, except that American economy was shown booming, unharmed by high oil prices. Krichene studied the 2006 dynamics of crude prices (Available at SSRN: http://ssrn.com/abstract=956763) and found that oil demand pressure kept increasing during this period, causing oil prices to rise by more than threefold, from US$21.13/bl on January, 2002 to US$73.76/bl on July, 7, 2006.4 Second, the noted ascent in oil prices was not monotonic or smooth; oil prices rose, often to a new record, retreated temporarily, then resumed their move to higher record; their movements were dominated by high intensity jumps, indicating that oil markets were constantly out-of-equilibrium. Third, oil price volatilities were excessively high. Measured by the implied volatility, volatility was in the range of 30 percent, implying that oil markets were facing big uncertainties regarding future price developments and were sensitive to small shocks and to news. Finally, market expectations, extracted from crude oil call and put option prices, were right-skewed. More specifically, markets held higher probabilities for further price increases than price decreases. Moreover, markets seemed to expect large upward jumps in oil prices, as reflected by the price and volume of options at strikes in the range of US$75–US$85/bl. When modeled as a jump-diffusion (J-D) process, oil price dynamics were dominated by the discontinuous Poisson jump component compared to the continuous Gaussian diffusion component, showing that oil markets were constantly out-of-equilibrium during the sample period and were sensitive to demand and supply shocks and to news.

The bottom line is that the market is out of equilibrium with strong tendencies to higher oil prices. Now what with my PUT options? A small disequilibrium of temporary overproduction or momentary fall in demand may collapse prices. So I hope.

Treacherous Oil

The graph compares last year oil price history with this year's movement. It is obvious that by this time of the year, the price should be going down, as it did last year and the year before and the one before. But it is not. Brent hit the 81 dollar per barrel. Why is oil falsifying its true nature?

I have hedged my oil put option bet with a bundle of BAZAN (the Haifa Oil Refinery) shares. But I am losing heavily in both. يبدو أن المعنى هو استفزّ بحسب بحث الأخ أدناه In Aramaic: Kus Ummak Ya Sharmootah!

The Silver Ion Sterilizing Machine

The Samsung Washing Machine has a silver plate which, by electrolysis, liberates silver ions. These ions are highly toxic and kill all living micro-organisms in the washed objects. Moreover, its sterilizing effect inhibits for a month the growth of micro-organisms so that a shirt will not smell of sweat (human sweat has no odor, but its biodegradation generates smelly molecules). One of the problem is the contamination of wastewater with silver, a highly toxic heavy metal. Samsung said that only an accumulated amount of 0.05 grams of silver are released per machine and year. 20,000 machines will discharge 1 kg Ag per year, which is not a small toxic discharge. Samsung said silver-ions quickly bind to non-nano-sized structures in the water. Therefore, the threat should be minimal. I am not sure that the silver binds and is sequestered.

The critics said waste water from the Samsung washers could be released into public water systems with unknown effects. The EPA concluded the washers were killing systems that fell under its stricter pesticide regulations. In Germany, the Greens criticized that considerable amounts of silver could enter WWTP plants and seriously trouble the biologic purification process of the waste water. The problem in the WWTPs is minimal, since the Ag in the water is highly diluted, but the water is recycled and the silver accumulates in the feeding chain.

I think that Samsung' washing machine with silver ions in the water is not a very good idea. It does remind me of the Romans sterilizing wine with Pb and copper. Metals are nerve-toxic and sterilize people too. Very bad, indeed.

Bring back the Habsburgs

Das Verhältnis zwischen MOL und OMV ist seit den 90er Jahren von einer feindseligen Stimmung geprägt. Aktuell begründen die Ungarn die Ablehnung der OMV damit, dass letztere vom Staat kontrolliert werde. Die staatliche ÖIAG und der staatliche arabische Investor IPIC halten zusammen 49,1 Prozent. Die MOL ist privatisiert. Zudem würde Budapest – auch wenn die OMV angeboten hat, die Zentrale der Raffinerie-Sparte dort hin zu verlagern – nur noch die zweite Geige spielen.

Why is the Hungarian oil monopoly MOL resisting its absorbtion by the Austrian OMV? The Austrians see it as consequence of 90 years of hostility, after the breakup of the KundK union, the double monarchy. The Hungarians have their own dreams of playing the central role in a renaissance of the Habsburg multinational framework, under which the Eastern European peoples had some peace and progress, and they never liked the arrogant East Germans (Austrians). But it seems inevitable that the political structure that ruled Eastern Europe for 400 years, the Habsburg Empire, will re-form in some way. The Austrians are one of the smartest peoples on Earth, the question is if they have enough energies left.

So now I know why Makhteshim's price fell

For more than two years I am following the price of Makhteshim, and posting notes on its comments board. There was a long period when its price was very low, and we the posters could not find a reason for it: its main market in Brasil was strong, the exchange rate of the real and the dollar was favorable, the company was chock-full of cash and announced a policy of backbuying shares, etc. It was then when the management changed, the new management received options (at the low price) and then the share price started climbing very steadily. A student discovered that this is a general phenomenon in TASE.

In a week we'll know how much Dudi Wiessman means to pay Zeev Kalimi as the new CEO of Blue Square Israel. His terms of employment include stock options, convertible into 3 percent of the retailer's stock. Stock options for the talent is normal, but the allocation is usually done after he starts the job. The hasty announcement of his windfall, just as Blue Square stock was dropping like a stone down a well, makes one wonder.

Blue Square stock tanked because it started a pricing war between supermarket chains a week before it announced the stock options for Kalimi. One can't say whether the 21 percent tumble in Blue Square's share price a week before the announcement is what impelled Wiessman to give Kalimi the options at this time, but what's clear is that Kalimi's future looks rosy. All Blue Square stock has to do is return to its pre-pricing war level for Kalimi to gain some NIS 30 million.

It is wonderful how some managers and directors seem able to predict slumps in a company's share price. That is what induced Eric Lie at the University of Iowa to publish a breakthrough paper two years ago: "On the Timing of CEO Stock Option Awards." It's still reverberating on Wall Street and it triggered a shake up that has some management talent doing time. Simply, the lower the share price at the date of a stock option award, the more the recipient of the options stands to make. Lie set out to check whether stock option awards influence a CEO's appetite for risk. But a pattern he noticed between slumps in share price and option awards caught his eye. Some managers seemed to have supernatural talent at predicting when the company's share price would sink. Or, perhaps it was not supernatural at all: they were cheating, Lie realized, and coined the phrase "backdating". The errant CEOs would look at the share price's history, chose a convenient date and write a letter allocating stock options dated back to that convenient day.

The Wall Street Journal called it "the perfect payday" in March 2006, and by now officers at more than 160 companies have been questioned. Several Israeli companies were implicated, including Mercury Interactive, Zoran Semiconductor and Comverse, whose CEO, Kobi Alexander, colorfully fled the long arm of the FBI to Namibia, where he holds court, so to speak, while deflecting American extradition efforts. Lie wasn't the first to study share prices around stock option allocation dates, but most researchers figured the companies were looking ahead (not behind): that they were choosing allocation dates that corresponded with some event likely to lower the share price in the future.

Adir Ben-Ezri studies economics at the Open University. He decided to take a look-see around the Tel Aviv arena, and made some pretty impressive findings. In a paper under the tutelage of Dr. Rimona Peles, Ben-Ezri writes that backdating is impossible here: the law here requires companies to advise the Israel Securities Authority within 24 hours of a stock options award. A company can't just up and say "two months ago we allocated x options to y." Even so, executives get stock options at mighty convenient low points in share price. How?

Ben-Ezri looked at 53 companies listed on the TA-100 index from 2000 to 2006. His findings were statistically significant: in the days before stock options awards, a company's share price slumped, reaching a nadir the day before the board decision on the award, and rebounding the day after.

How did they do it? Ben-Ezri's paper is about the phenomenon, not the wherefore, but he does speculate: "Even if regulation in Israel is effective at preventing backdating, it isn't effective in preventing timing games," he writes.

Ben-Ezri used "event study methodology," based on checking for unusual behavior by a share price compared with what its behavior was predicted to be by market models.

His event horizon was 14 days. Ben-Ezri calculated predicted returns for each share 20 days before the board decision on an options award and 20 days afterward. He then subtracted the predicted returns from actual returns for each company, and created the composite chart of average behavior of share prices around the event window, shown here. Share price dipped before awards and rose afterward, he found.

Specifically, he found that from 20 to 6 days before the award, share prices outperformed the model by 0.62 percent, on average. But five days before the award, the trend reversed, resulting in underperformance of 1.53 percent, on average. The share price reached its lowest point exactly on the day before the announcement, and in the following 20 days, the accrued yield deviation upward reached 3.57 percent.

Surprising, given that backdating is impossible in Israel, Ben-Ezri observes. Yet something looks mighty unnatural and the statistical significance of his finding means it's no coincidence. It stands out less in the case of a given company, but when all the companies are taken together, it screams.

Take Nice Systems, he says. On January 8, 2001, the board announced stock option awards on January 4, based on the closing share price of January 3. The share price was at its lowest point in a long time. A few days before, though, Nice had issued a serious earnings warning, which sent its share price down 60 percent, Ben-Ezri says.

The company did not back-date, he stresses, but the timing of the award appears more than coincidental. Note that Nice is dual-listed in Tel Aviv and Nasdaq, so it isn't required to release individual announcements about option awards. It does have to report total option awards in its annual financial statement, and to calculate the average strike price. Other awards it made cannot therefore be checked.

Then there's Israel Chemicals, which on January 30, 2003, announced its board had OK'd an options award the week before, at a strike price 7 percent below the stock's closing price on January 22, 2003. Again we see, from the chart, that they pinpointed a nadir in the stock and since then, ICL stock has done strongly.

As for HOT, on January 30, 2001, its board allocated options at a strike price of NIS 49, which was 85 percent of HOT's share price on the day of the board meeting. Again it proved to be a very low point in the company's stock.

Ben-Ezri postulates that the ones who best know the company's business and its cycle are the management and board: they can predict, with some accuracy, when the share price is likely to slump or climb (though stock markets are notoriously balky). "But the sharp U-turn on the day before the board meeting shows that if it's coincidence, the combined ability of the manager is categorically supernatural," he said.

Not backdating, but what about fore-dating? Dating a board meeting for a week before a known event likely to send the share price south? Surprises can happen but any CEO can predict what the market's reaction to a major announcement is likely to be. Managers can also try to skew share prices by whipping up a fuss: summoning investors or analysts for a conference, for example. Or they can withhold negative information for a time.

The only defense against these price manipulations is holding a stock for long time, year or more.

Talking about flimflam business...

(The world largest financial institution which I shall not name) published its profit statement and its mind boggling. How did they do it? Well, one way was to correctly foresee that the instruments based on packaged subprime mortgage loans to the lumpen were, in reality, worthless. They knew because they were doing the packaging and selling them to the German, Swiss and Chinese, and to the firm's own hedge funds. So the firm and its partners made a bet against these papers. When the subprime mortgages started to default, as foreseen and expected, they collected their profits. On the other hand, some of their own hedge funds, following a market neutral strategy, that were not supposed to hold these instruments, lost 35% of their value. The whole operation was done by electronic media, no physical papers or dollars ever changed hands, an outside observer could never detect anything happening at all. Very neatly, invisibly, a few numbers representing billions of dollars were debited in the accounts of the hedge fund owners, and credited in the partner's accounts. Very neat. Beautifully done. As said in The Dream Merchants: The only reason we are not holding up travellers on the high road is because we are in a better business.

Electra won the Netanya WWTP tender

Electra Ltd. (TASE: ELTR) has won a BOT (build, operate, transfer) NIS 300 million tender to upgrade and operate for 15 years the Netanya municipal water treatment plant Mei Netanya (2003) Ltd.. Electra will increase the plant’s treatment capacity from 40,000 cubic meters of water a day to 73,000 cubic meters by 2025, in line with the city’s projected growth. Electra has also undertaken to upgrade the sewage treatment to include tertiary treatment, in accordance with the requirements of the Inbar committee.

Electra beat Danya Cebus Ltd. (TASE: DNYA), Solel Boneh Building and Infrastructure Ltd., Uri Dori Engineering Works Corp. (TASE: DORI), and Minrav Holdings Ltd. (TASE: MNRV) in the tender by offering the lowest price for treating the sewage - NIS 1.24 per cubic meter = 0.30 US$/cu m = extremely low price!. Mei Netanya currently pays Minrav NIS 1.60 per cubic meter for sewage treatment after the company won the previous tender in 1993. Comment: The municipality charges about 2 - 3 shekel per cu m to cover administrative expenses. It is interesting who are the players - some of the most important firms in the field did not participate in the tender, like Mekorot, Kardan (Tahal), Baran, Tambour Ekologia, the people operating WWTP Ayalon, Kal Binian (operating Barkan WWTP), etc.

Mei Netanya was incorporated in 2003 as the one of the first municipal corporations. The company currently provides Netanya residents with 18 million cubic meters of water a year and treats 14 million cubic meters of sewage. The company will charge farmers NIS 0.15 per cubic meter of tertiary treated wastewater. (It must be a mistake, may be 1.50 shekel) Treated wastewater that is not sold, mostly during the winter rainy season, will flow into the area’s rivers.

A big drop in the price of oil

Double happiness.

Another project bites the dust

Israel largest IKEA store project has turned into an impossible dream. The land where it was planned is zoned as industrial area, and an IKEA store is defined as commerce. Both are obsolete categories, since what is industry today? Certainly nothing to do with a typical metal bashing shop in the Turkish Empire. But bureaucratic laws never change and will always be used to kill new iniciatives. It is extremely unreasonable.

The Tel Aviv Court for Administrative Affairs has cancelled the extraordinary rezoning permit for IKEA Israel and Gazit-Globe Ltd. (TASE: GLOB) at Ma’ayan Soreq in Rishon LeZion. In order to bypass the Planning and Building Law (1965), the Rishon LeZion municipality had awarded the companies an extraordinary land permit to temporarily use the land for commerce instead of industry. The Tel Aviv Court for Administrative Affairs has overturned this decision.The court overturned a decision by the regional planning and building commission’s appeals committee for the site, saying it had “flaws that verged on extreme unreasonableness.” The decision, if not overturned by the Supreme Court, means that the IKEA store will not be able to be built in Rishon LeZion, unless the urban building plan is changed.

Oil Mysteries

There is a spot market and there are contracts for crude supply. Both prices should be going down fast by now. If you observe carefully, the line seem to move slowly towards the lower end of the screen. Or is it an illusion?

Watching oil prices

My oil put options are 90% down, but not lost yet. I never lost so much and I am wondering what will happen. Sure I bought these options too early, today I could buy ten times more for the same money. That is the nature of options. I am watching oil prices to see when the so desired "correction" aka collapse of prices is starting. Last week there was a weak decline, but no one knows if it also will reverse itself or be the start of the correction.

"Some above-normal temperatures are expected in the Midwest and Northeast this week, but it shouldn't get hot enough for long enough to significantly raise cooling demand," said Michael Fitzpatrick, an analyst at MF Global, in a note to clients. What is he talking about? Cooling demand in October? Could it be that he is pointing out that winter is not coming and heating oil demand is due to fall?

The illustration shows a beautiful Greek amphora (2600 years old) by Exekias. Ajax, having rested his shield (painted with the head of the Gorgon medusa), his helmet, and his spears, crouches under a tree. He is planting his sword in a mound of earth, and will soon fall upon it and die. Note that in the Black Figure technique bodies become silhouettes.

Heznek Fund: Startupists Needed

The Ministry of National Infrastructures approved investments in eight renewable energy projects as part of its own Heznek Fund. The fund, established in April, will make initial investments in start-ups deemed economically feasible. 18 projects were submitted to the Ministry of National Infrastructures. Of the eight projects chosen, the ministry will provide financing at this stage for seven. The total investment in these projects is NIS 7 million, of which the ministry will provide half, and the entrepreneurs will have to provide matching funds. The ministry’s maximum investment in a project is NIS 500,000. Ministry of National Infrastructures director general Hezi Kugler will head a ministry team that will oversee the projects.

The Ministry of National Infrastructures’ Heznek Fund is basically a pre-seed investment fund designed to help entrepreneurs get their projects off the ground and to see whether they have potential. The ministry hopes that the successful projects will obtain further investment from other public and private entities, such as the Ministry of Industry, Trade and Labor’s Office of the Chief Scientist and venture capital funds.

The Ministry of National Infrastructures said that the projects selected for investment include the generation of electricity from biowaste, a control system for improving solar power efficiency, and a control system for photovoltaic systems.

Meaning of Israel's Upgrading to DM

The British have upgraded Israel to DM (Developed market) while leaving Taiwan and South Korea EM (Emerging market). The meaning of the action is that big funds specializing in DM will buy Israeli stocks and those EM will dump them. The difference may be positive to the level of 2 - 3 billion dollars of new investment in Israel. The main beneficiaries will be the heavy well capitalized stocks, like Kil, TEVA, Bank Hapoalim, Bank Leumi, The Israel Corp. Israel held 2.2% of the Emerging Market and now is expected to hold 0.2% of the Developed Market. New York holds half of the DM worth. What is beautiful in the mere insignificance of Israel is that minute improvement in the international political situation of Israel may cause a flood of incoming investment and demand for Israeli stocks.

Haim Israeli from Merryl Lynch has a different opinion.

Should Morgan Stanley upgrade Israel's status to a developed economy, that would be a catastrophe. Israel would drop from a 2.5 percent share of all the emerging markets to only a 0.3 percent share of developed markets - among this share Teva would rise from 45 to 65 percent [of Israel's relative weighting]. No analyst will invest the necessary time to understand the Israeli economy, its politics and Israel's stature in the world, in order to invest only 0.3 percent of his money, especially while most of it goes to Teva anyway. Changing the status will only scare away investors, as Israel will have to take on markets such as Japan, the U.S. and Europe.

Addendum: The numbers made me aware of the magnitudes: TASE is 0.2% of the market, while NYSE is 50%. We are less than half percent of them. It is therefore logical that TASE follows NASDAQ like a dog, trying to anticipate NASDAQ's emotional state.

Sewage Pipe Project

Friday morning I went to see a new Client who has built a large hangar near the ruins of the ancient town of Gezer, and now is required to be connected to the Ayalon regional wastewater treatment plant near the Nesher cement factory. He is very young, intense, focused, oriental Jew, and wants to build the pipe by himself under my technical direction. I like to work with professional contractors with experience and equipment, not hardworking amateurs intent on saving every cent. But he is a Client. The place is a dusty overgrown olive grove, and an olive press stone has been preserved as a monument. It has a square hole in the middle where the wooden axis was inserted, moved in a circle by an ass or horse, and a channel for draining the oil. Israel is full of these old mill stones, some of them well preserved like this one, many thousands of years old. The olive oil was stored in earthen jars and exported overseas. I can imagine that the ancient Greeks dominated the olive oil export business till Greece itself got depopulated (after Alexander's conquests, when Greeks found better employment opportunities in the East) and its countryside was left to decay.

Small Daughter and Sharp Engineer Explained

The Guardian: Children with older brothers and sisters are at risk of having their growth impaired during early life, according to a study of thousands of British families. Those with several older brothers were most affected, with medical records showing that by the age of 10, they were already significantly shorter than average. The findings reveal the extent to which children are affected by sibling rivalry and their position in a family.

Scientists followed children born to nearly 14,000 families in the 1990s who had enrolled on the Avon Longitudinal Study of Parents and Children, one of the largest public health studies to be set up in Britain. Every year, the children's height was recorded, along with other details of their development. In a family of four children, the siblings were 2.5cm shorter than average, according to the study. Further analysis revealed that the youngest was most affected.

"What's unexpected is that we see this even in a rich, western population," Mr Lawson said. "All else being equal, growth is significantly retarded by the presence of siblings. Furthermore, older siblings are associated with relatively higher costs than younger siblings, and in most cases, brothers represent a larger threat to development than sisters," he added. I have been thinking that she is small due to a phenomenon observed among orangutans, where some males remain small to avoid being pushed out from the band, and they suddenly grow up to normal orang size when the dominant male dies.

Firstborns have higher 2.3 points higher IQ. Among secondborn children, those whose older sibling died young, and so were raised as the eldest, scored better on intelligence tests than other secondborns. Studies into people living to 100 and beyond have revealed that an unusually high proportion are firstborns. The Secret Engineer is a firstborn, only son, what was to be expected.

Prof. Fujimori Extradited

Alberto Fujimori is again in the news. One of the byproducts of a long and active life is meeting people who later becomes "somebody". I met Prof. Alberto K. Fujimori in the University of Tel Aviv in the eighties, when he came to a meeting of Latin American university presidents organized by la Doctora Ilana Ben Ami. I spent several days with Fujimori, because he is an agricultural engineer specialized in plant genetics, and an important Peruvian friend of the University, with interests in the seed business, had asked Ilana that he be treated VIP. I have old pics with the group (including one Rector with sotana, from some Universidad Catolica) and with him. He is a small Japanese-Peruvian, mild mannered and self effacing, very easy to be with. He was then the Decano de la Facultad de Agronomia La Molina, the most important of Peru. He was exactly like my Japanese collegues in my School, son of very poor Japanese peasant parents, from the colonias that introduced intensive farming in Latin America, drinking tea from fine Japanese porcelain cups, in small houses full of cute Japanese dolls and wooden boiling water tubs. In La Plata, the Japanese were uniformly good students, they never missed a class and wrote clear and comprehensive lecture notes, which the Secret Engineer coveted but the Japanese didnt like to share. I wrote on my travels with Fujimori in Israel and we corresponded for a while, but never imagined he would be soon President of Peru and then, after the autogolpe, a Latin American dictator! Twenty years later, I cannot visualize him as a dictator, he was the opposite of a typical Latin American military caudillo. For me, he is still a humble profesor de genetica vegetal.

Bad Habits

Improving oneself is a lifelong effort. I copy some good advice from Zacks:

My high school fencing coach was fond of telling us, "You make your habits, then your habits make or break you". Excellent advice for traders as well as for young athletes. We all fall into habits. And once we do, it's hard to break them. So let's look at what habits traders fall into that cost you money.

10. Trying to 'time the market'. Most of the time you're wrong and being wrong is far worst than the value of being right. The stock market in the USA has an inherent upward bias. Going against that bias means that the odds are against you to start.

9. Assuming you are smarter than the 'market'. You're not. The market attracts the brightest minds in the world. Like Wille Sutton, the famous bank robber replied when asked why he robbed banks, 'Because that's where the money is', the markets attract the best minds in the business for the same reason. Thinking that you're smarter than them is ALWAYS dangerous.

8. Not having a plan. I really don't care so much if it's a bad plan, so long as you believe in it (of course, a tested, proven strategy is preferable). Most traders trade without a plan, lose money and wonder why. Duh! Find a strategy that you believe works, test it to YOUR satisfaction. Then follow it.

7. Not following your plan. So let me tell you how the evolution of a trader typically occurs. You get excited by some method. Technical breakout, upward earning revisions, moon phases, whatever. You backtest your plan and discover that it returns 8,000 % a year! 'Yowiee! Why hasn't anyone discovered this gem before?' (see bad habit #9) So you start trading your plan. What happens? You get hit with 10 losing trades in a row. 'What? Even in a singles bar I have a better batting average than this! Stupid plan!' And you move onto a new plan that returns the same result. Some years later you read that your orginial plan has enjoyed ten straight years of success but of course you're now onto trading plan #10 (and about to experience another 10 losing trades in a row). Moral, find a good plan, test it, then follow it.

6. Being inflexible. That might seem like the obverse side to bad habit #7, but it's not. Bad habit #7 was directed to those who, not having done their own due diligence, have no faith in a trading plan and thus change it faster than clothes change fashion. But the markets do evolve and your trading strategy needs to as well. If your strategy underperforms the market for several years, even if it's profitable, understand why. Look for ways to modify your current strategy, not change strategies. Here's a hint. If you're changing / modifying /justifying your strategy within a year of its development, see bad habit #7 and assure yourself that you're not committing that crime.

5. Getting into a trade without a plan to get out. We all love our trades the day we put them on. We convinced ourselves that we should buy XYZ. Damn, doesn't that new product of theirs look sexy? And the back-test of this strategy looked great. Now what happens? XYZ doesn't look so great. Two weeks later, you're out 10% and falling. What to do now? I'd argue that you're now in a terrible situation to make a decision. Especially if you hear yourself uttering the Trader's prayer… "Dear Lord, if you'll just let me out of this stock at even, I'll never trade it again!" Better that you coldly and unemotionally decided on an exit plan BEFORE you get into a trade. See mine until you can develop a better one.

4. Not doing your own homework. I've said it a million times. I could develop a very successful trading strategy, and most folk would lose money following it. Why? Because they didn't do the background work to give them the confidence to follow it. And at the first sign of losses, they would quit. So take ideas, but test them yourself until you're exhausted from testing. There really is no substitute for this work. If you're going to be a successful trader, you have to do your OWN work. Not because you're better than someone else, but because the work that you do now will give you the confidence in your own strategy so that you won't commit bad habit #7.

3. Trading on tips, the wrong way. I know, I know. You never trade on tips, right? You're too sophisticated to do something so stupid. Let's see a show of hands on how many of you who have never traded on a tip in your life. Thank you. Those of you with your hands up are lying to yourself. Now that's settled, let's discuss this dirty little secret. We all do it. But there's a right way and a wrong way to trade on tips. Tips are nothing more than idea generators. And should be treated as such. Still you have to ask yourself, does this trade fit into my style? My strategy? Would it make my screens? If the answer to any of the above is no, don't take the trade, no matter how well-respected the source or how convincing the story. Oh, and by the way, in a future blog post, I'll show you a neat trick on how to profit from tips. For now, do your own due diligence.

2. Falling in love with your company. Thinking that your stock is a company. It's not. Nor is it a product. No matter how much you love the iPhone, AAPL is still just blips of light on a screen. Now you might think that you have found how to predict that those blips of light will increase and that's fine, but don't fall in love with the backstory. It's still just blips of light. If they go down, sell.

1. Which brings us to the worst bad habit of traders. Not asking yourself EVERY day, 'if I didn't already own this stock, would I buy it today?" Start every morning looking at your portfolio. Don't have an opinion (see bad habit #2). Perform whatever voodoo that you do to select stocks. If you can't convince yourself to buy again today, get rid of the stock. If you wouldn't buy a stock today, you have no reason to continue to hold it. Period.

Dreaming on an Empty Stomach

Yom Kippur, the Day of Atonement and of fasting. Israel has stopped, no vehicles on the street, early morning people walking to the synagogue in sport shoes and striped black and white talit (praying shawls) covering their heads. The day you actually can breath the air in Kever Benjamin downtown. Silence and I remember my dreams. I dreamt of food and sex, we were in a great hall with many field beds, like in the refugee camp in Austria in 1956, and I was talking to the woman sitting on the bed next to mine, strongly coveting her. Soon the children will take over the streets with their bycicles and boards.

-------------

It is Yom Kipur afternoon. Soon shall take my Mother to the temple. Thinking/Daydreaming on an empty stomach, without time pressure, produces certain state of wakeness. I was thinking the hard working I am investing in my consulting practice, how much easier was to be an employee who at 4.00 PM left the office and took the bus home. But then I remembered that I wanted to be free to study the market and cultivate my portfolio, which should be my primary focus. In the pressure of my clients, specially the last one, I had lost the focus and I was distracted from following the ball, which is the bank statement's bottom line.

Really Shocked

Mahalanobis is one of the oldest blogs I have in my Favorites folder. Thus I am shocked to read the following note this morning:

I'm being accused of stealing intellectual property from my ex employer, which thus far includes things like 'mean-variance optimization', 'profitability' and things I have written about on the web. But their claims are broad and open-ended, so I'm under instructions to shut up. Eric Falkenstein

he was formerly employed by Moody building default models, and KeyBank from Cleveland doing math modelling on risk. The tone is neutral but the meaning is important: he had been accused and he is "under instructions" probably by lawyers. I really like reading Eric, he is direct, intelligent and thinks in statistical terms, something that, I feel, in a most humble degree, share with him. Also he is a tall, well built, blond athlete, and people can say anything they want, but this is relevant and notable too. Accusing him of stealing is absurd and malintentioned, and I never found anything private or usable in what he was writing, moreover, much of what he wrote proved later to be wrong, as the suffering of hedge funds (see Goldman Sachs fantastic, astonishing, profits), and the vital necessity of hearing market rumors early to be a hedge fund manager. I sympathize with him, as I experienced something similar once, when I was preparing an offer for a company (that went kacken soon after) and my boss called me to his office and set the loudspeaker on and I was able to hear my former employer demanding my sacking, since I had been involved in the preparation of the project and had been in charge of the design and editing of the tender documents. The man speaking was "un amigo" of mine, and I am still in contact with him, and never told him that I personally heard that "friendly" phone conversation. In my case I was not accused of anything, but he argued the possibility of my unfair advantage of having knowledge (very potential, since subsequently we lost the tender), but I never forget a "friend" who tried to harm me (and he in fact did). Anyway, Einstein's advice is proving to be, once more, the best: Say nothing about yourself.

Post Scriptum: One of the good things of alcohol, apart from the joy and happiness it causes, and the 30% reduction in vascular disease risks, is that the desorientation and amnesia it produces is reversible. And that drinking less helps the diet. Anyway, my memory is working again as well as always, which is remarkable at my phenomenal age, so when I checked out Mahalanobis I saw that Eric is changing again and again the anouncement of his non-blogging. The tone is becoming sober, formal and concise. The latest version:

I'm in litigation involving intellectual property, which unfortunately, is subject to much 'strategery'. I am under instructions to shut up, as anything I say can be used against me in a court of law. All the best.

All the best.

Peachy keen

Peachy keen: Unusually fine; dandy. Oil has reached a top yesterday and started to fall. Demand is decreasing as US economy is slowing, producers are pumping like crazy to catch this window of extra high prices, while Saudi Arabia promised to rise its output. As soon as the non-consumer holders of oil futures (speculators) feel that the peak may be behind them, they will start selling to realize their fantastic paper profits, sending the price into the low sixties. Also sprach The Secret Engineer.

Fast Day

From the over-abundant anti-Jewish literature of the Antiquity, it appears that the Jews frequent fasting made a great impression on Greeks and Romans. Of course they abhor this and other abominable Jewish customs like not killing newborn babies. Tacitus, in his History, thinks that "By their frequent fasts, they still bear witness to the long hunger of former days". Which is nonsense, because people celebrate the abundance of food by eating well. Tacitus thinks that Jews are strong and rich, but "owe their strength to their very badness". "The wealth of the Jews is due to the fact that among themselves they are inflexibly honest and ever ready to shew compassion". I derive that Jewish intelligence is not a phenomenon of these later generation, as presumed by Greg Cochran, Jews were seen as strong and rich (as well as honest and humane) already in Roman times. Early Christians also were much given to fasting, but the custom was diluted to mere abstention from meat for Cuaresma. The Islam also started off with steady fasting, but the Ramadan month-long fasting as practiced by the Muslims I know, is not really fasting but nightly feasting on mouthwatering fattened mutton and well-condimented steaming rice. Which is very nice and social. So you can find the Secret Engineer in Kever Benjamin, fasting in the next 25 hours, almost as one of his ancestors of Tacitus's time.

Diet Water

TASE graduates to FTSE

Tel Aviv Stock Exchange (TASE) is becoming investment-grade. The TA-25 index has almost tripled in the last four years, as the economy marks its fifth year of growth. ``The Israeli stock market is extremely interesting because of the valuations, especially in the banking sector,'' said Oliver Bell to Bloomberg, of Pictet Asset Management in London. ``The macro economic environment in Israel is very strong and the banks are probably the cheapest banks in the emerging universe.'' Bell owns shares in Bank Hapoalim, Israel Discount Bank Ltd., Teva and Clal Insurance Enterprise Holdings Ltd., the largest insurer by premiums. Hapoalim has a price-earnings ratio of 8.76, based on estimated profits, compared with a multiple of 12.10 for the MSCI World/Financials Index, a global benchmark.

Tripled in the last four years? Cant be. I didnt do that. I need to check this. Maybe I am not so smart as I think? No... (in the spirit of Borat). Picture: Ehud Olmert, our leader, and Chaim Ramon, our asst.-leader, in-fraganti kissing (Ramon was recently jailed for kissing too enthusiastically a female soldier).

Panique, crise ou krach

I feel that the investing public is becoming sick of the current uncertainty. The recession in the USA is due to appear more than a year now and it is nowhere to be seen. The subprime crunch had to corrupt all financial markets and a worldwide krach would seize all market, but somehow days, weeks and months have passed and the system has absorbed the crunch. Oil production was about to be falling as the world is about to hit Hubbard's Peak but somehow production is increasing. The people is expecting a catastrophe for several months now and it is not coming. This stress is affecting the mental stability of an already hysteric public. Every small irregularity is interpreted as a sire sign that the end is near, that the time of waiting is over and all shall end in a great cosmic orgasm followed by a feeling of self-satisfaction of having said "Their arrogance was asking for God's punishment. I saw it coming". But the stress and pain continues unsolved.

Today the price of Kesem Put Oil Option fell 20% to 450 shekel (1.10 US$ per option. If on Nov. 11 th. Brent oil future is 69 US$, then it will pay 1 US$, if it is 65 then it will pay 5 dollars, that is, multiplying five times the investment. Since there are no queues in gas stations and oil is flowing like ... oil, I think the current price of Brent futures (about 78 US $) reflects only the psychological phenomenon described above, and nothing related to physical supply or demand of the liquid.

In my opinion, the stress of unsolved uncertainty cannot be held at the current level much longer, and around mid November it will crack and oil price will collapse. For a change, I am taking myself seriously and shorting oil, in the hope that everybody is wrong and I am going to make some money.

A run on the bank

There have never been a run on the bank in my lifetime. I know from history books that in the 18th century and till 1930 it was a common ocurrence, but since then the Central Banks seemed to have eliminated the recurrent panics that used to seize the savers. But this week we witnessed the first run on a British bank since the collapse of Overend and Gurney in 1866; and second, the transformation of UK bank deposits into public debt at the stroke of a pen. The panic is worth of study as the management's message is worth recording:

May I begin by offering our customers my sincere apologies for the anxiety and inconvenience that we have caused you. I know how worried many of you must have been.

Today I want to make it emphatically clear to all Northern Rock customers that we are open for business as usual.

We remain a well-managed company and continue to be a safe place for your savings, loans and mortgages.

The simple fact now is that the Chancellor has made it clear that all existing deposits in Northern Rock are fully backed by The Bank of England and are totally secure during the current instability in the financial markets.

We are all working night and day to provide you with the service that you expect from us and deserve from us. And I would like to express my appreciation to our staff for their work and commitment over the last few difficult days.

Above all I would also like to thank all our customers for their support and understanding.

I am also pleased to announce that any customer who has paid a penalty for withdrawing their investment, will have the penalty refunded if they re-invest the same amount in the same type of account by 5th October 2007.

These have been troubled times but Northern Rock will prevail. We will not let you down.

Adam J. Applegarth
Chief Executive

They are killing the Dead Sea

I was involved in the first feasibility study (some 20 years ago) of a channel feeding the Dead Sea. The original idea was to productivize the 420 meter topographic difference to generate electricity during peak demand hours. But oil was so cheap then that the investment could not be justified. Nothing has been done since then, except additional studies. Planner Yaron Ergaz warned: “Within two years, six hotels in southern Dead Sea area will be flooded". The northern basin is suffering from a sharp fall in its water level, while the level in the southern basin is rising because of operations by Dead Sea Works. Two months ago, the cabinet ordered the Israel Chemicals Ltd. (TASE: CHIM) subsidiary and various ministries to finance treatment of the southern Dead Sea Basin. The World Bank is studying alternatives for saving the Dead Sea. The greens oppose the Red-Dead Sea canal solution, because could result in different water layers, which would change the character and kill even more the already Dead Sea, if possible. The Greens are decided that the Dead Sea stay dead as it is now. Of course, the current situation of the Dead Sea is only a few thousand years old, and before that it was much less concentrated and hosted sea flora and fauna.

Mike Rothman Says: Short Oil

Elliot, an excellent commenter, directed me to Mike Rothman's Interview in Barron's. Rothman believes that oil is so expensive because prices are no longer driven in the short term by supply and demand, but rather by the perceptions of players in the oil futures markets, which didn’t even exist until the early 1980s. These traders can drive up the price of oil even if supply and demand might dictate otherwise. “I have never seen a gap between the reality and the perception of reality as big as it is right now,” The commonly held belief that tremendous demand growth in China and India is driving up prices simply doesn’t withstand analysis of the data.

Barron's: What's the view from the OPEC meeting? The Saudis agree to increase output and crude goes to new highs.

Rothman: That's not the story. The story is not the increase, the story is why the Saudis are pushing for an increase in production. A big part of the answer is that it seems that the Saudis want to try to take the froth out of the oil price because they are concerned about what higher prices have done to supply and demand. Over the past year, Saudi Arabia has had to cut its production by almost a million barrels a day to accommodate the impact of non-OPEC supply growth and because of weaker-than-expected world oil-demand growth. (My comment: The widespread idea is that the Gowar field is almost depleted and they have not enough oil to sell. That is nonsense because demand is being fully meet.) It wasn't that they were depriving people of barrels, but OPEC had less demand for their oil -- and the bulk of the cuts occurred in Saudi Arabian production. The Saudis are about to bring on a big field in the fourth quarter, Khursaniyah, that's an 800,000-barrel-a-day project, and they are looking at demand numbers that are being revised downward. World oil-demand growth hasn't been at nearly the pace people thought it would be.

What are your forecasts for demand growth?

My forecast for the fourth quarter, excluding Angola and Iraq, is for about 26.6 million barrels a day. Their production right now is about 26.8 million barrels a day. From these levels it doesn't look like they have to raise output. Mind you, it's not the consensus view. The consensus view, which is from the International Energy Agency, is that demand is going to be about a million and a half higher than what I am talking about, and most people use the IEA forecast. OPEC is producing at a level that even their internal supply-demand model suggests is probably the right number for what they would need to supply -- in other words, what the market is going to demand. Qualitatively, you should know nobody is being deprived of barrels. Now, with the Saudis pushing for a higher quota, it is not about making barrels available to meet demand. It's about sending a signal or trying to lever down oil prices. The reason they want to do that is because the higher average price levels we've seen for the last couple of years have affected demand growth, and they have affected supplies from non-OPEC countries and for alternative energy supplies. The Saudis are the ones bearing the brunt of that because as demand for their oil has dropped, they have been the ones that have had to cut back.

There was talk they would delay increasing output because of concerns about the impact on prices.

That issue, of how do you engineer a soft landing, is really a tricky issue because the amount of speculative paper in oil has increased dramatically. The level of open interest in crude on the New York Mercantile Exchange has tripled in the last three years. The over-the-counter market, according to data from the Bank of International Settlements, suggests outstanding positions in oil about 20 times as big as the Nymex. Now we didn't have a big OTC market back in '85, '86 or '88 or '94, nor in the '98-'99 price crashes, so the big concern right now is when the unwind happens, it could be terribly disruptive. If you look at an oil-price chart back to 1983, when crude started trading on the Nymex, all you will ever see in the price patterns are V-tops and V-bottoms. What happens when hedge funds who have been net long in crude since October '03 decide to go short or sell? You can understand the concern. It's not just about easing prices; there is the potential for a blood bath.

So how do you explain crude prices rising to new highs after the Saudis announced they would increase production?

It would be an understatement to say I was taken aback by that. In a few days, the market went from expecting no hike in production, to expecting a largely symbolic increase, to getting a final agreement to inject 500,000 barrels a day above existing levels -- which is the equivalent of a 1.4-million-barrel-a-day boost in quotas. The big question at the meeting is, "What is bolstering the price?" I'm not sure, except the market seems to still believe the world is running out of oil.

The US Government has a different opinion. They say (see yesterday's entry) that "The market fundamentals, characterized by rising demand for OPEC oil and fairly low surplus capacity, should keep markets firm even with the planned increase in OPEC production, leaving the market vulnerable to supply disruptions". As I heard today in Kever Benjamin, Allah hum maghfirlee war-ham nee, May God have mercy on me.

Hamas Suicide Bomber Uncle

Dormant terrorist cells in the West Bank received orders to wake up - in paradise.

Siniaver wins tenders of two of "my" WWTPs.

Five years ago I made a job for Carmel Wineries in Zichron Yaakov, on the Carmel Hills, including the wastewater treatment plant's general design. Later, in another position, I conceived and pushed ahead the wastewater treatment plant project of the area, since the water was already being collected in a reservoir for agricultural reuse. The political aspect was mismanaged by my boss and the project was split into two smaller plants. Two years ago I had already approved the tender documents and were about to be published. Then I started to work as an independent consulting engineer and did not follow the process. Apparently, it got stuck because only now, two years later, the winner of the mechanical tender is announced, and it is Siniaver from the Bney Brak Industrial Area (the land must be worth a fortune), a company I am familiar with. They have innovative engineers, and are among the very few survivors of the electro-mechanical workshops founded by the German and Polish aliyah of the thirties like the old Siniaver. It is a bona fide native grown Israeli electro-mechanical company, with pumps and sewage treatment equipment designed by Israeli engineers, most of them moonlighting Tahal employees like my friend the old Goldfarb. The company saw very bad times as could not compete with Flygt Swedish submersible sewage pumps and the new generation of German environmental equipment (nowadays led by Siemens). From Globes:

A. Siniaver &Co. Ltd. has won two tenders, worth NIS 6 million altogether to supply equipment to build sewage treatment plants in the Hof Hacarmel Regional Council, south of Haifa. The company said that the projects would be completed in a few weeks. One plant is located near Kibbutz Nir Etzion, and will purify sewage from Atlit, Beit Oren, Daliyat el-Carmel, Usfiya, and other communities in the area. The second plant is located near Kibbutz Maayan Zvi. Siniaver is a privately owned company founded in the 1930s. The company manufactures submersible pumps and electromechanical equipment for sewage treatment and purification plants.

May they succeed and prosper in this new year.

Fake Memories

Googling Laszlo Birinyi, an American fund manager who says in Bloomberg that the subprime panic is overdone, arrived to a website of my hometown, Jaszbereny. Birinyi, in Hungarian, is a locative name, meaning a person from Jaszbereny. It is a uber-Hungarian name, which makes me assume that the financier Laszlo Birinyi is a Hungarian Jewish refugee, as myself. I copied a pic from the site, it shows some patriotic ceremony in front of the Municipality. I am an old man, so it is legitimate for me to be somewhat confused: One part of my mind reminds me that I am a Jew whose family was delivered by the Hungarians in sealed wagons to the Nazi asessins. The other part of my minds sends warm memories at the sight of the diszhuszars (ceremonial mounted guards), fake memories, because I was too young to remember them if I ever saw them.

The Real Oil World

Some have the mental image of an oil world ruled by the seven sisters. It is wrong - private owned companies came to play a marginal role in the oil universe of 2007. Most of the oil production and certainly most of the reserves are in the hands of state owned organizations, such as 1. Abu Dubai National Oil Company (ADNOC), 2. Kuwait Petroleum Corporation (KPC), 3. National Iran Oil Company (NIOC), 4. Saudi Arabia Aramco, and 5. Sonatrach of Algeria. The government owns at least 51% of these national oil companies. Other national oil companies: National Oil Libya, Petronas of Malaysia, Petrobras Brazil, Pertamina Indonesia, Qatar National Gas Company, Statoil Norway, Nigeria National Petroleum Corp, Petroleos De Venezuela SA(PDVSA), Pemex Mexico, China National Offshore Oil Corporation (CNOOC), and Gazprom Russia. So in fact oil market is not really a free market, it mostly international politics.

Bombach Recommends Koor

A totally irrelevant fact: Many years ago, a young man called Bombach made a lot of money for me. I was the Regional Engineer in a rice growing area of Corrientes Province, and on the side I sold funguicides against Roya del Arroz. Out of the blue appeared Bombach with a sprinkler plane and offered me to work in society. He lived in a miserable room in a Pension in La Cruz with his beautiful young wife and baby, I was living in the town's best chalet house, with elegant parket wood floor, bored and drunk. I never asked if he was Jewish, but in Israel I find many Bombachs. One of them, Amihay Bombach is an analyst. He recomends Koor, because it offers cheaper ownership of Makhteshim Agan funguicide factory than holding the share. Agriculture is booming all over the world and Makhteshim has in place a solid strategy of growth. Koor also holds ECI, an electronics factory I am familiar with (es decir, with its water infrastructure, in Petach Tikva Industrial Area). Bombach says that ECI is selling its shares in Sheraton, Knafaim (El Al), etc. in order to adopt a new strategic direction. I bought Koor two months ago and for the same reason, but it rised less than Makhteshim, if something. The name Bombach means a lot for me, it causes me pain and sadness by reminding me of a life full of wasted opportunities, a reason as good as any other to follow his advice.

No one understands oil

It's a bit of a mystery why crude futures closed at a record level Tuesday, even after some of the world's biggest oil producers agreed to a hefty increase in oil output levels.

At a meeting in Vienna on Tuesday, the Organization of the Petroleum Exporting Countries agreed to raise its production level by 500,000 barrels per day, effective Nov. 1.

OPEC's official output quota for 10 of its 12 members was at 25.8 million barrels per day, but the U.S. Energy Department said OPEC's actual output in July, excluding Angola and Iraq, was at 26.7 million barrels per day.

Then news reports emerged with the new official OPEC quota of 27.2 million barrels -- which implies that the cartel is recognizing that it's been producing above its target.

OPEC "'formalized' ... their current overproduction, which was roughly 900,000 barrels per day. Then on top of that, they added 500,000 barrels per day in new production," said Kevin Saville, a managing editor at Platts, who is on site at the meeting in Vienna.

Bottom line: It's a bit of a mystery

I dont understand oil

And I am going to lose a lot of money because of it. I bought put options on oil, and they are now almost worthless. There was a major double top. But oil, instead of collapsing, has reached an all time high of 80 dollar per barrel. I am not alone. Rex Tillerson, the CEO of Exxon Mobil, is confused. At a business roundtable in Calgary, Canada, last Friday, he said he just doesn't understand why the price of oil is so high.

"I cannot explain why we have $70 oil. The fundamentals behind supply and demand do not support $70 oil. The fundamentals support something much less... There's something else going on there that I don't get."

How the World Works writes: Peak oilers think they know why the price of oil keeps going up, up, up. Because we're running out. Every time new crude oil inventory statistics reveal surprisingly large draw downs, they feel freshly ratified. Others blame speculators, who keep prices propped up by continually laying bets that prices will rise -- a terrifically powerful self-fulfilling prophecy that works until it doesn't. Still others say all you need to do is look at China, which registered a phenomenal GDP growth rate of 11.9 percent in the second quarter of 2007.

Bottom line: There's something else going on there that I don't get.

Why Israel?

Israel is poised to play a major role in supplying the world with cutting-edge water and environmental solutions.

The world's largest RO desalination plant
The world's most developed irrigation methods
The world's highest reused wastewater rate
The world's most advanced national water management system
The most advanced solar technologies on the international market for water heating and electricity generation
The most environmentally friendly and cost effective solutions for MSW (Municipal Solid Waste) treatment, generating clean energy
The best technology to reduce air pollution from stack eliminating particles as well as SOx & NOx

(The Secret Engineer is poised to receive good projects and earn a lot of money. Hopefully.)

The Jews are Leaving America

So it is true that a sucker is born every day

Yves Smith's blog has a juicy note:

Goldman's big hedge fund, Global Alpha, took a beating along with other quantitatively oriented traders, was down 22.5% in August. But here comes the juicy bit: of that 22.5% loss, the biggest contributor was an 8.9% fall in currencies due to being hit by an unwinding of the carry trade. The fund had sold yen and bought Aussie dollars, and the Australian dollar fell 6% while the yen rose.

Let's get this picture straight. Goldman is charging hedge fund fees and claiming to deserve them by virtue of having highly sophisticated models, and one of its biggest positions in a yen/Aussie dollar bet? You don't need Goldman for that. Japanese housewives are doing far more complicated currency trades on their own. They can try to hide behind their models, but this is plain simple point of view punting on currencies.

But Goldman would have you believe otherwise:

``Longer term, successful quant managers will have to rely more on unique factors,'' the firm's fund-management division said in a report to clients. ``While we have developed a number of these factors over the last several years, in hindsight we did not put sufficient weight on these relative to more popular quant factors.''

The claim that too many other quants were making the same trade is utter baloney. Huge numbers of Japanese speculators were into that trade. Everyone knew that. Every time the yen stated to appreciate, retail traders in Japan would sell it down, until even they lost their nerve.

But Goldman is fond of coming up with justifications for Global Alpha's performance that presume that their investors are financially illiterate. At the time of the meltdown, they offered this explanation:

“We were seeing things that were 25-standard deviation moves, several days in a row,” said David Viniar, Goldman’s chief financial officer. “There have been issues in some of the other quantitative spaces. But nothing like what we saw last week.”

Brad DeLong had pointed out a mere day before that the world wasn't old enough to have have a mere 16 standard deviation event.

If you are going to make excuses, you need to come up with something better than the investor relations version of "the dog ate my homework."

How is that people keeps begging GS to manage their money. The answer must be in the title.

Vino Chinche

Sometimes I remember things that seem so far away that I wonder if if it is not my imagination creating them. Like Arthur Koestler who went back to search the yellowing, falling apart newspaper archives to convince himself that he had really had interviewed Carl Haushoffer from the Thule Society. His words were there, but having disturbed the old cheap news paper, as in quantum physics, the printed material had turned into specks of light floating away in the sun ray. I remember the Vino Chinche we used to drink in my lifeguard term in Balneario SUPE (Sindicato Unido de Petroleros) near La Plata, but no one ever seems to remember its existence.

El Vino de la Costa tiene una larga tradición en la ribera rioplatense, particularmente en la ciudad de Berisso, lindante con la ciudad de La Plata. Fueron los inmigrantes italianos de principios del siglo pasado quienes comenzaron a cultivar estas vides y a elaborar el vino. La uva “chinche” es una cepa de la Vitis Labrusca, una especie que proviene originalmente de América, a diferencia de la Vitis Vinifera o Vitis Europea, a la que pertenecen todas las cepas tradicionales (Cabernet, Malbec, Bonarda, etc.). El de uva "chinche" no es un término oficial, pero se aplica a las vides americanas y a las variedades híbridas como la Isabella, dando un vino diferente por su aroma frutado y sabor característico. Su elaboración fue desde el comienzo un proceso casero. En los anos cuarenta llegaron a producir un millon de litros, pero luego de la gran inundacion de 1940 comenzo a desaparecer.

Revolutionary Insight

The intelligence analysts should be studying the old Lenin vs Kropotkin debate on the subject of individual revolutionary action. Lenin thought individual terror was worse than useless, he conceived (and carried out) a small group of professional revolutionaries performing state terror. This certainly resonates given recent history. The probability of success in recent European terrorist acts corresponds with the degree of association the agents had with the leadership. Bin Laden's time spent organising resistance in Afghanistan led directly to the creation of the networks associated with Al-Qaeda. Motivation isn't enough; it takes the organisational knowledge present in institutions to facilitate a successful attack. I dont think the Arabs have the knowhow to establish and operate underground institutions. They have even great difficulty to establish aboveground frameworks.

Happy New Year Haiku

Kesivah, written
Vachasimah, signed and sealed
Tovah, all the best

Starting a New Cycle

Yesterday was Rosh Hashana, the Jewish New Year. We invited another family to the ceremonial dinner and it was very nice. My wife made stuffed baked kohlrabi , a creative recipe. I bought a bottle of Merlot. I hardly pulled the stopper and anyway, the wine was very bad. Yom Kippur begins Friday evening September 21. The story is told of a house painter who deeply regretted stealing from his clients by diluting the paint, but charging full price. He poured out his heart on Yom Kippur hoping for Divine direction. A voice comes from Heaven and decrees, "Repaint, repaint ... and thin no more!"

Lev Leviev Speaks

Lev Leviev is a very religious Bukharan Jew who bought Africa-Israel Investments Ltd. (TASE:AFIL; Pink Sheets:AFIVY.PK) and developed it into an international real estate developer. He once complained that in Israel up to ten years are required to get the building permits.

I don’t think that Israel is corrupt, I really don’t. I have never heard from executives, project managers, or anyone else at Africa-Israel that someone, somewhere, asked them for something, or that they every gave anything. Moreover, the hullabaloo about businesspeople and politicians has resulted in businesspeople avoiding politicians.

As for the US business scene, Leviev says, “The US is actually the cheapest market now. I’m buying cheaply, and I believe that I’ll sell at a very good profit, regardless of this or that crisis. We’re now initiating some very big income-producing property and deals and development projects in the US.”

Greg Cochran on the Middle East (cont.)

The second part of the interview provides no prophesies that could be verified. His opinion on the Jewish Lobby is dismissive, not hysterical. He thinks the Middle East is not important, that the oil is not so important and eventually will be replaced. Iraq should be left alone, somebody will win the civil war and sell oil. Yes, I presume he is right, but he could be someone like Hugo Chavez. I would say that it is important for the USA that the winner be someone who is not a delirant jihadist and say, pro-Russia or pro-China, one who will forbid the development of the country's oil resources just to displease Satan. The comment by Friedrich, quoting Gen. Petraeus, is a jewel:

Significantly, in 2007, Iraq will, as in 2006, spend more on its security forces than it will receive in security assistance from the United States. In fact, Iraq is becoming one of the United States' larger foreign military sales customers, committing some $1.6 billion to FMS already, with the possibility of up to $1.8 billion more being committed before the end of this year.

It seems that the war is starting to pay for itself, it is being won.

Liebeskind Bullshitting the Koreans

From Kunstler's Eyesore Blog I copy something for my collection: Danny Libeskind is becoming the all-time champeen of EOTM with this brooch attached to the Hyundai Development Corporation Headquarters, Seoul, Korea. Apparently Danny didn't design the box behind the brooch. His own metaphysical explication of this recondite symbol is the best part of the whole thing:

The Tangent is a project that is about the relationship between the ever changing circle of nature and the straight line of technology. In the contact between the circle and the line, one can see the meeting between the wheel and its path. Through their mutual engagement, nature gives reality to machines and machines extend nature to new and unknown horizons.

I designed this unusual image for Hyundai to show that the straight line of technology and ecological sustainable future can become a positive vector in space and in travel. The wheel and the line relate to the tension and sensitivity of one to the other.

Greg Cochran on the Middle East

From the moment I got connected to the internet, in 1999 I think, I am fascinated by the original thinking mind of Greg Cochran. He is well read, has a wide range of interests, he is very arrogant and very clever. Thinking on some diseases he understood that there must be a parasitic agent, and he was right. He also posted the idea that homosexuality is also an agent provoked condition, the idea has not been adopted. He thought about Ashkenazi intelligence, and his conclusions are that the Jews occupied a marginal niche in Medieval society and the selective pressures of that environment created the Ashkenazi Jew, with his improved intellectual and verbal capabilities. Each one of us is a reflection and a product of the environmental pressures of his ancestors's niche, but the operative corollary of the idea may be evil. Greg Cochran said he was about of identifying living Neanderthals, but apparently he didnt. Thus, some fortunate group of unsuspecting people escaped the fate of being reclassified by Cochran as neanderthalis instead of sapiens. The 2 Hardblowers blog published a nice political interview of Greg Cochran. The interview is continued today, if he foretells things that will later actually happen, I may believe he also predicted the past as he pretends. As of today, he dismisses his country's leaders as cretins. I cant agree with that, not only because I am not American but because I have a great respect for Americans, they collapsed Saddam Hussein's army almost effortlessly. Americans are very systematic thinkers and planners, and they are learning very fast. This week Bush visited Iraq, tribal leaders have been bought and a province pacified. An imperial political agent like Lawrence could not have done it better. Cochran is like the bad boy in the class, everybody is an idiot except himself. Two diamonds:

2B:What do you make of the other administration higher-ups who are involved in the mideast?

Cochran: Judging from Wolfowitz's Congressional testimony about Iraq being secular, highly educated, and free of holy cities, he knew nothing. I think that Condi Rice started out not knowing a damn thing about the Middle East and I doubt if she knows much more today: I remember her (back in 2000) suggesting that Iran was backing the Taliban, which was just ridiculous -- they'd come within an inch of war back in 1998. Which I had followed at the time, since I read the papers.

Judging from other issues, I'd say that neither Condi nor Rumsfeld know any history at all. Some might suggest that all the crap they spouted about guerrilla warfare in postwar Germany was a talking point, but I think they were sincere -- i.e. utterly clueless.

Another one:

We even hear the Prez and the head of the Joint Chiefs saying that we have to stay in order to prevent the birth of the Caliphate. I mean, there is no Caliphate, there's not a square mile controlled by something resembling the caliphate, there's no strong underground movement working for it, and it sure looks as if the Arabs are the most fissiparous pinheads who ever walked the Earth. The countries they do have barely hold together. But that's why we have to stay in Iraq forever -- although we may have a new reason by Tuesday. Maybe we'll realize that the Yazidis, as worshippers of Lucifer, are our natural allies.

Saudi Beduins Compensated

Saudi King Abdullah Bin Abdul Aziz issued directives to compensate Beduins for the death of their camels. The issue was debated in the Kingdom's Shura Council and the Minister of Agriculture, Abdul Rahman Balghunaim, declared that the cause of the 2,000 or so deaths is not an infectious disease, but contaminated bran. The Saudi Control and Investigation Commission, a government agency concerned about the performance of government departments, has joined camel-breeders in criticising the Ministry of Agriculture for the delay in announcing the results of the samples taken from the first group of dead camels. Official figures put the total number of camels in Saudi Arabia in 2005 at 862,000.

Leo Szilard (Spitzer)

Thinking of my Szabo (Spitzer) uncles, another Spitzer, Leo Szilard, came to my mind. They too had Hungarized aka camouflaged their name. While my family changed his name to the vulgar Szabo (Taylor), Szilard went for the pompous Szilard (Solid). Leo Szilard was one of the group of Jewish refugees driven from Europe by Hitler, and with Teller, Wigner, and von Neumann a product of the Budapest Gymnasia of the turn of the century Judapest. These four were called by their fellow scientists the "Martians" because their ways seemed strange to the Americans and because of their otherworldly brilliance. All were theoretical physicists, friends of the world's leading scientist Albert Einstein, and steeped in German culture and interests. They spoke Hungarian, which sounds Martian to some people.

He was a firm believer in the patent system and hoped to make money with his inventions, but did not. One of his first inventions was a method of refrigeration with no moving parts which he patented with Albert Einstein. He invented and patented the idea of a chain reaction in the mid thirties even before nuclear fission was discovered. After Uranium was found to give off neutrons during the fission process, Szilard and Fermi together patented the nuclear reactor and Szilard later proposed the term "breeder" to describe a reactor which produced more fuel than it burned. He also invented a lobbying group called the Council for a Livable World and thought up the idea for the Washington-Moscow hot line. When his political activities led General Groves to withdraw all government support from Szilard in nuclear physics, he switched his interests to molecular biology and helped establish the European Laboratory for Molecular Biology. He lived a rootless cosmopolitan life, never held a stable salaried job and had no real estate or other properties. Married late with his lifelong companion Trude Weiss, left no children. During the Cuban crisis, he thought an atomic war was possible and left for Europe. He could never follow a diet and died of heart attack at 65.