June 26, 2012 Newsletter

Dear Friends,

Tangents:

I read this fascinating article in the New York Times last Sunday; thought I’d share it with you:

The Science of Illusion

By Alex Stone

PINCH a coin at its edge between the thumb and first fingers of your right hand and begin to place it in your left palm, without letting go. Begin to close the fingers of the left hand. The instant the coin is out of sight, extend the last three digits of your right hand and secretly retract the coin. Make a fist with your left — as if holding the coin — as your right hand palms the coin and drops to the side.

You’ve just performed what magicians call a retention vanish: a false transfer that exploits a lag in the brain’s perception of motion, called persistence of vision. When done right, the spectator will actually see the coin in the left palm for a split second after the hands separate.

This bizarre afterimage results from the fact that visual neurons don’t stop firing once a given stimulus (here, the coin) is no longer present. As a result, our perception of reality lags behind reality by about one one-hundredth of a second.

Magicians have long used such cognitive biases to their advantage, and in recent years scientists have been following in their footsteps, borrowing techniques from the conjurer’s playbook in an effort not to mystify people but to study them. Magic may seem an unlikely tool, but it’s already yielded several widely cited results. Consider the work on choice blindness — people’s lack of awareness when evaluating the results of their decisions.

In one study, shoppers in a blind taste test of two types of jam were asked to choose the one they preferred. They were then given a second taste from the jar they picked. Unbeknown to them, the researchers swapped the flavors before the second spoonful. The containers were two-way jars, lidded at both ends and rigged with a secret compartment that held the other jam on the opposite side — a principle that’s been used to bisect countless showgirls. This seems like the sort of thing that wouldn’t scan, yet most people failed to notice that they were tasting the wrong jam, even when the two flavors were fairly dissimilar, like grapefruit and cinnamon-apple.

In a related experiment, volunteers were shown a pair of female faces and asked which they found more attractive. Then they were given a closer look at their putative selection. In fact, the researchers swapped the selection for the “less attractive” face. Again, this bit of fraud flew by most people. Not only that, when pressed to justify their choices, the duped victims concocted remarkably detailed post hoc justifications.

Such tricks suggest that we are often blind to the results of our own decisions. Once a choice is made, our minds tend to rewrite history in a way that flatters our volition, a fact magicians have exploited for centuries. “If you are given a choice, you believe you have acted freely,” said Teller, of the duo Penn and Teller, to Smithsonian magazine. “This is one of the darkest of all psychological secrets.”

Another dark psychological secret magicians routinely take advantage of is known as change blindness — the failure to detect changes in consecutive scenes. One of the most beautiful demonstrations is an experiment conducted by the psychologist Daniel Simons in which he had an experimenter stop random strangers on the street and ask for directions.

Midway through the conversation, a pair of confederates walked between them and blocked the stranger’s view, and the experimenter switched places with one of the stooges. Moments later, the stranger was talking to a completely different person — yet strange as it may sound, most didn’t notice.

What are the neural correlates of these cognitive hiccups? One possible answer comes from studies of the so-called face test, in which a volunteer is shown two faces in quick succession. Normally, just about anyone can distinguish the faces provided they’re shown within about half a second. But if the person is distracted by a task like counting, or by a flashing light, the faces start to look the same.

Here’s where it gets interesting, though. Scientists have found a way to induce change blindness, with a machine called a transcranial magnetic stimulator, which uses amagnetic field to disrupt localized brain regions. In one experiment, a T.M.S. was used to scramble the parietal cortex, which controls attention. Subjects were then given the face test. With the machine turned off, they did fine. But when the T.M.S. was on, most failed the test. Conclusion? Misdirection paralyzes part of your cortex.

Such blind spots confirm what many philosophers have long suspected: reality and our perception of it are incommensurate to a far greater degree than is often believed. For all its apparent fidelity, the movie in our heads is a “Rashomon” narrative pieced together from inconsistent and unreliable bits of information. It is, to a certain extent, an illusion.

Alex Stone is the author of “Fooling Houdini: Magicians, Mentalists, Math Geeks and the Hidden Powers of the Mind.”

I just looked at my incoming stuff and saw a Dow Jones News Wire flash stating that one of my heroes, screenwriter Nora Ephron died a few hours ago at 71 years of age.  Ephron wrote and directed such great films as When Harry Met Sally, Silkwood, Sleepless in Seattle, You’ve Got Mail and Julie & Julia.  She wrote one of the most hilarious books I’ve ever read, I Feel Bad About My Neck.  I still have to read her latest which I have sitting at home, I Remember Nothing.

Well, as Saul Bellow said, you don’t have to visit the dead because they visit you.  Ephron will remain immortal through her brilliant creativity.

And on this day in…

1918 – The Germans begin firing their huge 420 mm howitzer, “Big Bertha,” at Paris.
1924 – After eight years of occupation, American troops leave the Dominican Republic.
1942 – The Grumman F6F Hellcat fighter flies for the first time.
1945 – The U.N. Charter is signed by 50 nations in San Francisco, California.
1963 – President John Kennedy announces “Ich bin ein Berliner” at the Berlin Wall.
1971 – The U.S. Justice Department issues a warrant for Daniel Ellsberg, accusing him of giving away the Pentagon Papers.
1975 – Indian Prime Minister Indira Gandhi is convicted of election fraud.

photos of the day June 26, 2012

A boy runs on a beach in Mogadishu, Somalia.

Goran Tomasevic/Reuters

A pelican hangs out at the port city of Sidon, Lebanon. A small number of pelicans live in the port where fishermen feed and take care of them.

Ali Hashisho/Reuters

Market Closes for June 26, 2012:

North American Markets

International Markets

Bonds

Currencies

Commodities

Market Commentary:

Canada

By Katia Dmitrieva

June 26 (Bloomberg) — Most Canadian stocks retreated as the fourth decline in five days by raw-material companies amid concern about the European debt crisis overshadowed gains by financial shares.

Gold companies in the Standard & Poor’s/TSX Composite Index plunged 2.4 percent, extending their loss since June 18 to 8 percent. SouthGobi Resources Ltd. tumbled 25.9 percent, the most since 2008. Sun Life Financial Inc. and Manulife Financial Corp. helped lead the industry’s rally, climbing at least 1.9 percent.

In the S&P/TSX, 132 companies declined and 108 advanced.

The index advanced 4.03 points, or less than 0.1 percent, to 11,334.42 after losing as much as 0.7 percent earlier. The index has fallen 1.6 percent in June, heading for a fourth straight monthly decline.

“The focus continues to be the macroeconomic and that remains with Europe,” Jeffrey Bradacs, whose team at Manulife Asset Management manages C$1.7 billion, said in a phone interview. “The issues in Europe continue to weigh on the markets and that continues to weigh on risk-based names and commodity-based names.”

Concern over the European debt crisis intensified today as Spanish and Italian bonds fell and the euro weakened as borrowing costs increased at debt sales. Canadian stocks fell yesterday, sending the benchmark index to the lowest level since May 18, on concern European leaders may fail to calm the debt crisis during a summit this week. German Chancellor Angela Merkel reiterated her opposition to a shared debt burden in the region.

Potash Corp. of Saskatchewan Inc., the largest fertilizer producer, gained 3.1 percent to C$43.53 as corn climbed to the highest level in more than nine months on speculation that hot, dry weather during the next two weeks will reduce yields in the U.S., the world’s largest grower.

Barrick Gold Corp., the world’s largest producer, fell 4 percent to C$37.83 as gold declined for the first time in three sessions.

SouthGobi fell 26 percent to C$4. The company cut output as prices and customer purchases declined and the company awaits a regulatory notification on a plan by Aluminum Corp. of China Ltd. to acquire the Mongolian coal producer.

US

By Rita Nazareth

June 26 (Bloomberg) — U.S. stocks advanced, rebounding from yesterday’s selloff, as optimism about the housing market tempered concern about a worsening of Europe’s debt crisis.

News Corp. rose 8.3 percent as Rupert Murdoch’s company said it’s considering splitting into two publicly held corporations. Apollo Group Inc., the largest U.S. for-profit college chain, surged 10 percent after beating earnings and revenue estimates and raising its forecast. A measure of homebuilders in Standard & Poor’s indexes jumped 3.8 percent as housing prices dropped at the slowest pace in more than a year.

The S&P 500 rose 0.5 percent to 1,319.99 at 4 p.m. New York time. It tumbled 1.6 percent yesterday. The Dow Jones Industrial Average increased 32.01 points, or 0.3 percent, to 12,534.67.

Volume for exchange-listed stocks in the U.S. was about 6 billion shares, or 12 percent below the three-month average.

“There are lots of variables at play,” said Keith Wirtz, who oversees $15 billion as chief investment officer for Fifth Third Asset Management in Cincinnati. He spoke in a phone interview. “People are looking at signs of stabilization in the housing market, there’s the European summit this week, it’s almost quarter end. It’s going to be a volatile week.”

Today’s rally trimmed this quarter’s decline in the S&P 500 to 6.3 percent. The benchmark measure is on pace for the first quarterly slump since September amid concern about a global economic slowdown. Energy, financial and technology shares have had the biggest losses so far in the second quarter, tumbling at least 9.5 percent.

Equities rose today as the S&P/Case-Shiller index of property values in 20 cities dropped 1.9 percent in April from the same month in 2011, the smallest decline since November 2010, after decreasing 2.6 percent in the year ended March. The data overshadowed a surge in yields at auctions in Italy and Spain ahead of a European Union summit on June 28.

“We’re caught in this limbo,” said Brian Jacobsen, who helps oversee $204 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin.

“People are waiting to see what comes out of the European Union summit this week.”

Consumer discretionary, energy and financial shares had the biggest gains among the 10 main S&P 500 industries. Homebuilders in S&P indexes advanced with PulteGroup Inc. and Lennar Corp. adding more than 3 percent.

News Corp. rallied 8.3 percent to $21.76, the highest level since 2007. Murdoch, the chairman and CEO, is overseeing internal discussions on whether to separate the company’s publishing business from its entertainment holdings, said two people with knowledge of the matter. In a statement today, News Corp. didn’t say how the company would be divided.

Apollo advanced 10 percent to $35.81 for the largest gain in the Bloomberg U.S. For-Profit Education Index. The company, confronting student reluctance to take on debt amid high unemployment and government investigations of for-profit colleges’ marketing practices, reined in costs during the quarter, said Peter Appert, an analyst at Piper Jaffray & Co.

JPMorgan Chase & Co. had its recommendation raised and Morgan Stanley was lowered by analysts at Goldman Sachs Group Inc., who said they have a better view of the near-term earnings outlook for JPMorgan. Shares of JPMorgan increased 1.1 percent to $35.71, while Morgan Stanley added 0.2 percent to $13.51.

Goldman Sachs upgraded JPMorgan to a buy on its “Americas conviction list” of highly recommended stocks, while Morgan Stanley was removed from that list and lowered to neutral, the analysts wrote in a research note today.

“Both JPM and MS shares have underperformed the broader banking group this year, driven by real but different idiosyncratic concerns,” Goldman Sachs analysts led by Richard Ramsden wrote, referring to the two company’s stock symbols. The balance of risk and potential return is better for JPMorgan shareholders, according to the note, because of “more near-term earnings and return visibility for JPM.”

Facebook Inc., facing criticism for a lack of diversity on its board, appointed Chief Operating Officer Sheryl Sandberg as its first female director. The world’s largest social-networking service, a majority of whose users are women, will benefit from the addition of a female voice to its board, said Laura Martin, an analyst at Needham & Co.

“This is a great move,” said Martin, who doesn’t own shares and rates the stock a buy. “Academic research shows that the greater the diversity on a board, the higher the returns to shareholders are.”

The shares rose 3.2 percent to $33.10.

Dow Chemical Co. slid 2.9 percent to $31.32. The largest U.S. chemical company by revenue was downgraded to neutral from overweight at JPMorgan by equity analyst Jeffrey Zekauskas. The 18-month share-price estimate is $36.

The S&P 500, down 7.4 percent through yesterday since reaching a four-year high in April on weakening economic data, is about to lose another pillar of support: the election year calendar.

The gauge has climbed an average of 0.1 percent in third quarters before a presidential vote in election cycles since 1945, the worst return of the year and down from an average increase of 2.2 percent between April and June, according to S&P. U.S. shares have returned 5.7 percent in election years since World War II, the second-worst performance during four- year executive branch terms.

Stocks have retreated following a rally in the first quarter, dragged down after reports on U.S. manufacturing and employment trailed economist forecasts and concern grew that Europe’s debt crisis will spur a global recession.

The S&P 500 dropped 8.9 percent in the July-September quarter of 2008 as the financial crisis intensified. It has rebounded 1.9 percent on average in quarters after elections, S&P’s data show.

“This lack of direction is understandable, in our opinion, as investors are bombarded by the hype from the conventions, speeches and political advertisements, as they await the outcome of the upcoming election,” Sam Stovall, S&P’s chief equity strategist, wrote in a note yesterday.

While the index posts an average gain during the third quarter of election years, it’s just as likely to rise as fall, according to S&P. Its lowest point during years of presidential votes have come in the first half 71 percent of the time, the data shows. The most consistent gains come in the final quarter, when the gauge has climbed 81 percent of the time.

Only twice out of the 17 election years since 1944 did the index bottom in the fourth quarter, in 2000 and 2008, when the market suffered the bursting of Internet and housing bubbles, respectively. President Barack Obama, a Democrat, is seeking a second term against Republican candidate Mitt Romney on Nov. 6.

Have a wonderful evening everyone.

Be magnificent!

The outward freedom that we shall attain will only be in exact proportion

to the inward freedom to which we may have grown at any given moment.

Mahatma Gandhi, 1869-1948

As ever,

Carolann

Prosperity is a great teacher,

adversity a greater.

-William Hazlitt, 1778-1830

Carolann Steinhoff, B.Sc., CFP, CIM, FCSI

Senior Vice-President &

Senior Investment Advisor

Queensbury Securities Inc.,

St. Andrew’s Square

Suite 340A, 730 View St.,

Victoria, B.C. V8W 3Y7

Tel: 778.430.5808

(C): 250.881.0801

Toll Free: 1.877.430.5895

Fax: 778.430.5838

www.carolannsteinhoff.com