January 30th, 2010

Peter G

Time/Life's "Mysteries Of The Unknown" New Volume -- The End Of Trading Places

I love Trading Places.  Great movie.  (Jim Belushi gets one of the greatest throwaway jokes in movie history with the, "I'm a fucking gorilla, ya clown!")  Made in the era when the little guy was getting even through hard work, not entitlement.  When there was nothing wrong with being a regular guy.  Compare Winthorpe and Valentine's success to, say, Michael J. Fox in The Secret Of My Success.  In the latter, the characters succeed because they are the heroes and they should succeed.  Trading Places, there is a lot of risk that things will go wrong and it's through perseverence (and not just a little luck) that they win.

But, I have always had one problem, and that is the ending.  Now, it is a masterpiece of editing and directing.  You have no trouble keeping up with what is happening, how the plan is working, and the pacing of the scene really ratchets up the tension, even if, like me, you are relatively clueless about how the stock market works.  The scene relies on the characters' actions and reactions to convey what is happening.

But I wanted to know EXACTLY what was happening, how exactly this scheme worked.  One of the guys who sometimes hangs out on line does know the stock market.  He taught me about futures trading and how it influenced gas prices a couple of years ago.  Since the climax hinges on futures trading, I figured he would know.  He did.  So, as a public service, here is the ending demystified.

The key to everything is to understand how the futures market works.  The way capitalism works is you make something and sell it to make a profit.  When you are dealing with finite resources, like say, printing comic books to sell, it is easy to build business plans with this, because the price doesn't fluctuate.  But when you are building a business based on natural resources, you have to take into account availability.  Will there be a big strike of gold here?  Will the current oil well run dry?  It becomes impossible to set prices and plan around them.

This is where the futures market comes in.  The person selling the future is basically saying that he will sell you X amount of whatever and price Y.  Now, if the stuff he is selling comes in at a lower price than he is selling, he makes a profit.  If it comes in at a higher price, he loses money.  Basically, the seller is assuming the financial risk, and the seller is gambling that he can outguess supply and demand.  This is why gas prices shot up so high a couple of years ago.  With China subsidizing the price of oil for its country, futures traders were able to charge whatever they wanted, and they got it.  It wasn't until China said they wouldn't do it anymore that the futures traders started losing money, forcing the price down, because they could no longer get whatever they were charging.

Everybody with me so far?  That's good!

Now, there is a key difference between gas and concentrated frozen orange juice, the lynchpin of the scheme in the movie.  Gas prices at the pump can be adjusted almost instantly.  I've been at the gas station and seen the price go up while I was in the middle of gassing up (because I started pumping before the price changed, I got the 5 cent cheaper price).  FCOJ, the price is constant, regardless of how much the futures prices fluctuate.  So, whatever happens, you are stuck and really need to plan in advance.  In case you are wondering why futures traders have ulcers, hypertension, hair loss, and heart attacks relatively early in life.

Now, one other thing to keep in mind is the concept of the margin call.  This happens after the scheme succeeds.  Buying on margin means you are putting up collateral.  Whatever happens, the money is guaranteed to be transfered to whoever is supposed to get it.  This enables you to start trading without having to pay everything up front.

Okay, the wheels are set in motion with a phony crop report.  There's an orange harvest coming up.  It's a seasonal crop, so everyone wants to guess this one right -- there isn't a chance to do it over for a whole other year.  Now, if the crop of oranges is damaged by weather, that means fewer resources, and the people who have the oranges can charge more from them.  Who else are you going to get them from?  So, the question was, was the weather going to ruin it?  The answer, according to the real report, was no.  So the price would stay the same.  However, the phony report made the Dukes think the available resources would get smaller.  So they were buying up FCOJ futures, certain they would turn a profit, no matter how much they spent.

So, the climax starts.  Winthorpe and Valentine wait for the price to go up, and start selling futures.  Now, as it is the futures market, they are free to sell what they don't already have.  As far as the rules of the exchange are concerned, their only obligation is, when trading concludes, they provide whatever they have promised to sell.  They provide the merch, not the price.  So, when they buy back the futures at the end, they are doing it for a fraction of what they sold for.  They can't help but make a huge profit with what's left over after all the transactions are completed.  Because the Dukes bought so high, they could only sell when the price is going down, losing every step of the way.  When trading concluded, they had to provide all the merch they promised at that price.  The margin the Dukes had wasn't enough to cover the money they owed, and they had to either pay more into the margin fund or get out.  They didn't have enough money, and were forced out.

Now, I understand there have been some adjustments to trading rules since then to cut down on insider trading.  So this scheme wouldn't work this day in age.  But at the time, it was perfectly feasible.  And that's how the whole thing worked.
Barney Fife

Junior Matlock Club -- Annie Get Your Gun

"Now, it is from little misdemeanors that major felonies grow!  And it is my duty...it is ANYBODY'S duty...to stop them before they get too far!  Now, THE LAW MUST BE UPHELD!"

And, with the completion of the oath, you renew your membership in the Junior Matlock Club, where we look at criminals who should consider honest work as they just don't have the talent for a life of crime.

I decided to pull this one out of the archives, as it gives me giggle fits every time I think about it.  This is confirmed true by the Darwin Awards.

So, there's this criminal in Oregon who decides he needs some money.  If you need money and you're a criminal, your first thought is going to be to rob somebody.  So this guy decides that he's going to stick up a store.  Now, when you're considering a life of crime, you need to keep several things in mind.  The most important thing is awareness, of yourself and everything around you.  This is crucial in Oregon, which has licensed conceal carry laws.  It is estimated that half the population is licensed for concealed carry.  So if you walk in a room and see ten people, you can safely assume five of them are packing heat.

Next, you are a predator, and you need to choose your prey wisely.  The place this guy chose to rob was J&M Leather Goods And Firearms.

That's right...a gun shop.  So if you walk in here and see ten people, you can safely assume all of them are strapped.

Getting back to the awareness of your surroundings thing, a cop in full dress blues was standing at the counter, having coffee and talking with the clerk before reporting for duty.  His fully marked squad car was parked right out front, in fact.

Now, at this point, the average person would think, "Screw it, I'll just buy a lottery ticket."  Not this guy.  He marched into the middle of the busy store, pulled his gun, announced it was a stick-up, and fired two shots in the air.  Both the cop and the clerk drew their guns and shot back while everyone else in the store pulled their guns and leveled them on the crook to provide cover.

He, uh, didn't make it.

Why I Love The iPad, Even Though I Don't

Hanging with other Linux coders, naturally, lots of pot shots being taken at the Apple iPad.  Not just that you can't run Linux on it, but also things like how, thanks to Apple's app store automatically DRM'ing everything, there is no FOSS frontier on the iPad at all.

Leave it to one of the other coders to put it in perspective.  I'm paraphrasing, but here is what he said....

"Okay, so you have no use for the iPad.  I don't either.  None of us do.  But it's not meant for us.  The iPad is intended for people who aren't as into computers as we are.  You know...the ones who call you to fix their Windoze machines as a favor because they clicked on the wrong web page."



...so, if my sister gets one of these instead of a Win machine, I won't have to provide free customer service that takes almost five hours per incident because she has no computer survival instincts or spend an hour trying to connect a printer to her computer....