From: John Conover <john@email.johncon.com>
Subject: Intel stock
Date: Wed, 17 Jan 1996 21:20:00 -0800
68 million shares of Intel stock changed hands today. A NASDAQ record,
(after trading was halted last night,) dropping today 5 3/4 to 50
dollars.
For those that think the Rational Market Hypothesis (RMH) from
economic equilibrium theory is valid, Intel dividends are about 3
bucks a year per share, on an investment of about 60 bucks, or about
5% ROI per year, on stocks in a company with traditional 50% gross
margins-is this reason to punish A. Grove? (Have you looked at the
dividends from the utilities, lately, as a comparison?)
Intel dropped 5 3/4 to 50 dollars-returns were 98 cents, with
projections that the next quarter is going to be about the same. Let
me see now, that is an instantaneous return rate 4 * 0.98 / 50 = 7.84%
ROI per year. US long bonds and T-Bills are 6.04% (Jan 17, 03:27 UMT,)
... now, let me see, ... I can figure this out, ... I know I can,
... let me see, now, ... but the RMH has to be correct, ... I'm sure,
... I think, ... I KNOW! well all go by Sun Micro, at 44 bucks, since
they increased dividends to 56 cents, or a 5.1% ROI per year ...
that's the rational thing to do ...
Ok, ok, so I'm taking a cheap shot at the RMH'ers. Such things can not
be explained under RMH*-but they can be explained by the speculative
market fractalists. The point is that speculative markets do not need
to be rational, but they do need to be fractal.
John
* RMH equilibrium predicts that Intel's stock would not drop as far as
it did, since when it got below about (0.98 * 4) / 0.0604 = $64.90,
(roughly where it was,) there would be a buying spree by investors
wanting to park their money in a 6% investment, thus stabilizing the
the stock price in a new "rational" equilibrium. The fractalist would
claim that that is not the way speculative markets work.
FYI, the first description of speculative markets was made in Holland
in the 16'th century, concerning investments made in tulip bulbs, (of
all things.) They had been imported from Africa, via explorers, and
came into demand as an investment. It got so bad, that folks were
trading whole farms for 2 tulip bulbs, speculating that it was a good
investment, since the value of tulip bulbs was rising very rapidly. As
you would expect, after a brief while, tulip bulbs fell out of favor,
and the tulip bulb market collapsed, (almost bankrupting the Dutch
economy in the process.) A mathematical analysis of such market
characteristics indicates that they are what is called "fractals."
(Fads and pyramid games are too-which one would expect, since they too
are speculative, BTW.)
Interestingly, the stock for radio companies in the 1930's also had
speculative (fractal,) characteristics, as did the stock of television
companies in the 50's, (and so does the value of Netscape stock
today-it looks like the leading half of the radio and television
industry stocks of several decades ago-all of which went up, and then
...) For example, look at Philco Radio, and compare it to Netscape.
And, for the historical perspective, after the tulip fiasco, none
other than the Bernoulli's addressed the issues of speculative
markets-but with only limited success. Interestingly, the next advance
was from the discipline of Physics, and by none other than one
A. Einstein, who explained that the motion of small particles in a
liquid exhibit irregular behavior, (after the observations of the
Scottish Botanist, Robert Brown, of Brownian Motion fame)-and modeled
them with the classic diffusion equation, (which is one of the
equations that can exhibit fractal characteristics.) Norbert Wiener
then gave the first satisfactory mathematical construction of Brownian
motion. Harold Hurst then applied Wiener's constructs to weather
phenomena, such as flooding, etc., (which, also, exhibit fractal
characteristics.) Then, in the late 1940's, the information theorist,
Claude Shannon, was the first to recognize that speculative markets,
(and the fluctuating capital of a gambler,) also, have characteristics
of Brownian motion, (and, is said to have become quite rich applying
his observation to the NYSE, BTW.) Finally, in 1956, J. L. Kelly
proposed that the Brownian nature of speculative markets was the
result of an information-theoretic mechanism-and invented the
disciple of programmed trading.
Interestingly, the idea of programmed trading is not to predict stock
movements, (since if it is a fractal, that is impossible-like trying
to explain the "Intel phenomena," above, or the weather,) but to use
information theoretic concepts to compute an optimal wagering strategy
that maximizes capital growth in un-predictable markets.
As another little interesting tidbit, if RMH is true, you can use
regression analysis, (like smoothing and curve fitting,) to derive a
"forecast" of a stock's performance. But if it is a fractal,
regression analysis is not applicable, (because there is no
equilibrium, and that is a fundamental requirement for the
applicability of regression analysis)-which would mean there are a lot
of MBA's exercising inappropriate concepts to manage business
operations.
Further, if you look at things from the fractalist's POV, monetary
policy, (like from the FED,) will not be effective since fractal
systems are, by definition, globally stable, and everywhere, locally,
unstable, (like the weather-we don't have a stable, equilibrium, of
85% humidity, everywhere, but "clusters" of rainy and sunny weather,
ie., fractal,) and spontaneous and unpredictable events are to be
anticipated to be a characteristic, and not the exception.
--
John Conover, john@email.johncon.com, http://www.johncon.com/