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/

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