RIMM: Research In (No) Motion

The NY Times today (here) reported on the mounting list of problems at Research in Motion (RIMM): declining stock prices, declining market share, proliferation of models, problems with the new tablet product (Playbook), delay in introducing both new products and the new operating system. My intention is not to pile on here, but the Random Stock Walker is always interested in the dynamics of companies that are about to collapse. What do my models say about RIMM?
First, RIM's stock price is pretty strongly being driven by growth of the World System. This is generally a good thing for a stock. However, from the attractor forecast, above, it's probably too late for RIMM to recover. The decline started in mid-2005 and was not arrested by a pop during the Financial Bubble. The stock, in all probability, does not have much more time before it is worthless.

SPB: Spectrum Brands

Spectrum Brands (SPB) is a global branded consumer products holding company located in Madison, WI. Spectrum is probably best know for the Rayovac Battery, Remington, Black & Decker and Faberware brands. Essentially, SPB acquires brands that have somewhat lost their consumer appeal, merges the brand within their infrastructure and, hopefully, resurrects the brand's image. This stock caught my attention because SPB just received a $4M forgivable loan from the Wisconsin Economic Development Corporation, a public-private partnership promoting the governor's "Wisconsin is Open for Business Message". The question is, was the money well spent? How long is it likely that the company will keep nearly 500 jobs at its corporate offices in Madison, WI (the reason for the forgivable loan)?

SPB promotes itself as a global company. The graphic above shows the time plot of SPB's stock price. The dashed red line is the dynamic attractor driven by the world economy (the blue and green dashed lines are the 98% bootstrap prediction intervals). SPB emerged from bankruptcy in 2009 (here) and was re-listed on the NYSE. I not sure what to say about the company's future, but the stock price is heading for a crash. If the company follows the stock price then the 500 jobs are probably only good for another few years.

The Collapse of MF Global and Maybe Jefferies

The Random Stock Walker is always interested in the collapse of Wall Street firms. When MF Global declared bankruptcy this week, the event caught our attention. The primary question is "Could the collapse have been predicted by the stock's history?" Investors are always in the position of having really very little information about critical activities that might get a firm in trouble, the unknown unknowns.

Someone out there in the market probably knows about the unknowns it's just not you, the individual investor. Jim Cramer of CNBC makes the argument that the "smart money" is more likely to know and that since the smart money drives the market, retail investors have to comb through the entrails of stock prices, analyst statements and conference calls to figure out which way the smart money and thus the market is moving. In other words, there should be some evidence of impending collapse in historical stock prices.

The time plot above graphs the dynamic attractor for MF Global (MF). The attractor is primarily driven by the world economy and, what is more, the attractor is very sensitive to world oil prices. On the Google stock page (here), MF global is described as a "...broker in markets for commodities and listed derivatives." The current description of "the trade that killed MF Global" (here) involves are "repo-to-maturity" trade in EU sovereign debt. This may well be the tipping point trade that brought down the house of cards but the Random Stock Walker models suggest that activities in the oil market would have eventually killed the firm also.
The reason that the Jefferies Group, an investment bank (JEF), became involved in the MF Global collapse is that JEF was involved in the financing of the sovereign debt deal. As a result, JEF was downgraded by the Eagan-Jones Rating Agency and questions began to swirl around Jefferies. One of the questions involved "lack of transparency," those unknown unknowns again.

The Random Stock Walker attractor model shows a similar fate for JEF and a similar linkage to world commodity markets creating the collapse. Of course, it will be difficult to verify all this and it's only a statistical result. Regardless, there isn't really any reason for retail investors to be in either of these two stocks after the 2007 Financial Crisis.

When To Buy or Sell AAPL?

Apple Computer (AAPL) continues to do very well even after the departure of Steve Jobs. On the October 20th edition of Fast Money on CNBC, Carter Worth (chief market technician at Oppenheimer & Co) recommended doing what the hedge funds do: sell Apple when it breaks trend.
To determine trend, Worth suggested simply drawing a line along the low prices (see the solid red line above, the top graphic shows the moving average line in solid red) to establish trend. The graphic above compares the "trend selling" approach to the attractor bootstrap 98% prediction intervals for AAPL. The logic of attractor analysis would seem to be to take some money off the table anytime that a stock is above its attractor value and to definitely sell when the stock crosses the lower 98% prediction interval on the way down. You would buy in again either when the stock crossed the lower 98% prediction interval on the way up or when it bounced off the bottom (2009 for AAPL), if you can somehow tell where the bottom is.

In either approach, you would have been totally out of AAPL in late 2008 and buying back in (depending on the other uses of your money) until 2011 when you might have started taking some money off the table using attractor analysis. For the future, it's less clear that trend selling will work past the middle of 2012 when the trend line crosses the attractor.

It will be interesting to wait and see how each approach works about one year from now. It would also be interesting to compare how well these two approaches would have done in terms of a portfolio that invested $1000 at the bottom in 2009. The trick would be to decide what the portfolio's "other uses of money" might have been!

First Solar: A Good Test For Technical Analysis

In April (here) and November of 2010 (here) and again yesterday (here), analysts have been warning investors to short solar, particularly First Solar (FSLR). The consensus appears to be that political problems threaten solar subsidies, technological problems threaten existing production processes and competitive pressure is forcing the smart money to leave solar. Since the average investor can't beat the smart money, it's time to be short FSLR.

Reading the political, technical and market analysis is enough to make me queasy. Interestingly, my best forecast paints a different picture (with a lot of uncertainty). Watching FSLR over the next few years could be an interesting test case of whether statistical methods are adequate for investment analysis.
The graphics above displays my stock forecast for FSLR. The best model, selected using the AIC criteria, showed the FSLR stock price being driven by the state of the world economy. The forecast is for positive future growth.
The attractor model (displayed above) is also driven by the world economy and produces a similar forecast. The attractor model also suggests that the price peak in 2008 was driven by an investment bubble.

The problem with the forecast is that there is not much differentiation between competitor models (the random walk, the business-as-usual model or the models using FSLR volume or the state of the US economy as input variables). The confidence intervals around all the AIC statistics (created by bootstrap resampling) are all within the same range, 266 to 280. In other words, even though the AIC criteria will select a model, we can't be very sure it's the right model.

In spite of a positive forecast, the statistical results suggest not investing in FSLR simply due to uncertainty. It will be interesting to follow the stock and see where it goes over the next year.

FedEx: Cramer Was Right!

On tonight's MadMoney (here) analyst Jim Cramer suggested that FedX (FDX), given its better than expected profits in 2011, is doing three things right: (1) Expanding outside the U.S., (2) Expanded its aircraft fleet and improved its technology and (3) Positioning itself as the "Internet play on transportation".

To the Random Stock Walker, this commentary suggests that FDX should be strongly driven by fundamentals in the world economy. In fact, the world-economy model did win out over all the other competitors (see below).
The forecast out to 2015 indicates continued growth or, at worst (the lowest 98% confidence interval) value maintenance.

In the graphic above, the FDX attractor is plotted with confidence intervals. The stock is currently just slightly above the attractor value (91.44 at close today). It's being overwhelmingly rated a BUY by analysts (here). Price targets should keep climbing over 100 for the next few years.

TECHNICAL NOTE: FDX is one of the unusual stocks where the forecasting model and the attractor model were both driven by the same input variables, in this case the state of the world economy. The bootstrap confidence intervals P[96.83, AIC=102.1,106.7] for the AIC criterion measure are clearly better than any other model (random walk, business-as-usual, US economy, Sp500 or FDX volume) with AICs all above 1200.

SBUX: A Cup of Cold Joe

Analysts are trying to form an opinion on Starbucks (SBUX). Jim Cramer, in the video above and here, talks through some of the technical analysis but still feels that (1) customers connect with the company, (2) there is tremendous international upside and (3) the smart money will soon be back in because SBUX is "a story that's working".

Cramer mentions Dan Fitzpatrick's negative view of the stock based on technical analysis (here):

Over on Fast money Tim Seymour is really bullish on Starbucks (SBUX) he thinks this is one that you gotta be owning as well on so I'm looking here at the daily chart. Fifty day moving average really seems pretty relevant here the stock has always been above that for the last several months. Tight little consolidation. In here. And finally -- break out to the upside with prior resistance here. Really kind of -- in support affect the stock's been trading up above that level you can even say it's and another little trading box so. We've got a series of steps higher we look at the weekly chart -- you can really see this nice uptrend. Let the bottom line is the stocks penetrating along this upper Bollinger band here. Difficult to kind of trade the stock because it's and -- low volatility so here's what you do you just take a little bit -- stock. Right here right now if the stock pulls back to the fifty day moving average let's zoom in there and we take a look at that. The stock pulls back to this fifty day moving average of maybe a couple bucks cheaper than it is right now that's when you buy some more so one way or another year involved with the stock breaks out here you got a little bit -- happy. If it pulls back you can get a little bit more your happy. And if it breaks all the way down here well guess what the only reason you have bought that second amount is if the stock showed signs of bouncing so you're kind of happy that you didn't buy more...

The average analyst recommendation from Market Watch (here) is OVERWEIGHT with an average price target of 41. What does the Random Stock Walker think?

Given Cramer's comments, I expected to find the SBUX attractor being driven by the world economy, but the best attractor model (above) was driven weakly by the SP500. SBUX has had some wide excursions above (2005) and below (2009) its attractor but has always returned to a narrow range between 20 and 40. A sell target above 40 is probably reasonable given error bands for the attractor (see below).

For the future, however, the forecast is mildly downward stabilizing between 30 and 35. I don't see much upside in this stock unless SBUX can link more directly to the world economy.

TECHNICAL NOTE: The SP500 input model had good power against all the alternative models tested (random walk, business-as-usual, US economy, World economy, and SBUX volume as an input variable). The AIC was 80.76 [77.6, 84.57] while the AICs for all the other models were above 680. My future forecast for the SP500 shows slow growth through 2012, which differs from the forecast being provided by the Financial Forecast Center (here).

The attractor confidence intervals are presented below. Notice that the step-ahead forecast confidence intervals (above) and the attractor confidence intervals are very different as are the forecast and attractor fitted values (dashed red lines). The attractor values are based on a "free simulation" starting at the beginning of the sample while the forecast values are based on one-month step-ahead predictions. The attractor values clearly demonstrate the periods when SBUX was either over- or under-valued relative to the SP500 i.e., the "bubbles". The future forecasts are similar only in that SBUX is currently very close to its long-run attractor value.

How Could the Market Possibly be Overvalued After the Great Recession?

This would, on the face of it, seem to be an unusual question to ask after the Global Financial Crisis. How could the stock market possibly be overvalued? In the video above, Prof. Robert Shiller thinks that, based on longer historical analysis of P/E ratios, the market is overvalued. Prof. Siegel, on the other hand, thinks not. There are other players in the debate: David Bianco of Bank America Merrill Lynch (Shiller's data is questionable) and David Arnott of Research Affiliates (he likes Prof. Shiller's approach to earnings analysis). You can read the entire debate in the Wall Street Journal (here).

How Bubbles Get Inflated

Jeff Cox, a staff writer for CNBC.com, has written an interesting piece titled "For Investors, Missing Rallies, Not Taking Losses, the Biggest Fear" (here). Cox is also the author, with Peter Tanous, of the apocalyptic book "Debts, Deficits and the Demise of the American Economy" trumpeted in the video above.

Cox's point about the stock market, which has been made by other authors describing the Subprime Mortgage Crisis (here), is that since no analyst can afford to miss their comparative profitability numbers (they are all being evaluated against their peers), everyone has to aggressively follow the next bubble up. When the bubble pops, everyone has the excuse that the market has crashed and "I can't be expected to perform any better than anyone else in this environment."

In my brief, six year experience with the private sector, I have found this to be the pervasive business dynamic. When the company wasn't performing well, there was no pressure on my groups (IT and statistics). Also, when I was short staff, less was expected of my group (keeping a few open positions helped reduce pressure and kept the accountants happy with my budget performance). There was never any idea of building for the future during slow periods. It was always the right now and the "what have you done for me this week".

Such is American business. Cue the apocalyptic trumpets, crash the symbols, preview the next crisis!

Which Honeywell Five Year Forecast: Mine or Theirs?

Tonight on CNBC's Mad Money (here), host Jim Cramer interviewed the CEO of Honeywell. What caught my attention, listening to the interview (video above), was Cramer's statement that Honeywell (HON) "...is a cyclical business. In other words, its performance is dependent on the health of the U.S. and global economies".

To the ears of a Random Stock Walker, this means that HON should be neither a random walk nor a business-as-usual stock. It should be clearly linked to cyclical components of either the US or the World economies. The statistical estimation and comparison of state space models supports the assertion. HON is clearly linked to the world economy and especially to cyclical components of the world economy.
Jim Cramer actually used the term "hostage" to cyclical components of the US and World economies. He went on to imply that something had changed with current management and that the company had now become better able to resist cyclical downturns.

Let's compare the "bullish" Honeywell 5-year forecast to a 15-year Random Stock Walker forecast. The bootstrap forecast using the model linking HON to the world economy (this is the best model) does suggest that trends in the world economy (cycles generated by oil shocks?) will not be working in Honeywell's favor.

The graph above displays the long-run attractor for HON. The stock is very choppy, the instability being more a function of shocks rather than cycles in the world economy. The analyst opinion of HON is also not very positive with four out of ten research firms rating it a downgrade. From the Random Stock Walker perspective the price targets are still optimistic with the median target being 64.50, the high target being 71 and the low target being 40. The 98% confidence bands for the bootstrap forecasts never get above sixty and over time get well below 40. Unless something has actually changed, HON looks like a great candidate for the short sellers and their 5-year forecast looks very bullish indeed.

THEORY and METHOD: Honeywell is an interesting example of a company that might have changed with a change in management around 2006. There is not quite enough statistical data to determine whether there has been a break in Honeywell stock performance. This is a good example of a case where statistical forecasting may not be justified. It will be interesting to look back after a few years, test to see whether there was a break in 2006 and see whether the new Honeywell model is really different from the old.

E*TRADE Beatdown

The video above is my favorite E*TRADE commercial. For golfers, it is very funny: Skins beatdown, shankapotomus, etc. If you want to keep laughing, follow the other commercials listed at then end of the clip. Before the Super Bowl this year, CNBC interviewed the ad exec from the Grey agency that created the idea (see the credits below). Evidently, the creative approach was to put a bunch of funny people in a room with video editing software and let them improvise. If you want to make your own E*TRADE baby commercial and email it to friends, click here. This is all a lot of fun but how about E*TRADE stock (ETFC)?

ETFC is definitely a business-as-usual (BAU) stock. The BAU designation basically means that the stock is neither a random walk nor is it directly linked to the US or the World economies.
The ETFC bootstrap forecast for 2011 is presented above. The stock went through an awful trough from 2008 to almost the middle of 2010 then rebounded sharply.

The upward jump in the middle of 2010 was actually a return to the dynamic attractor (graphed above). The bootstrap forecast for the attractor shows very tight confidence band between a price of 15 and 17. The analyst opinions of ETFC (here and here) are mixed: Median price target 17, High target 21, Low target 12, and forward P/E 15.6.

I can't think of any reason to be in this highly variable stock except that you either like the commercials or like the E*TRADE trading platform.

Credits:

Banking Baby was developed at Grey Worldwide, New York, by chief creative officer Tor Myhren, creative director Jonathan Cranin, copywriters Ari Halper and Randy Krallman, art director Steve Krauss, executive producer Bennett McCarroll, and agency producer Alison Horn. Filming was shot by director Randy Krallman via Smuggler, who also provided the voice over. Editorial work was done by Lawrence Young at Cosmo Street. Post production was done at Framestore, New York, by VFX producer Laney Gradus and Flame artists Raul Ortego, Mindy Dubin, Tom Leckie. Audio post production was done at Sound Lounge by Glen Landrum.

View E*Trade Banking Baby in quicktime format at Boards Mag Screening Room.

DirecTV vs. DISH

One way to buy stocks is to concentrate on companies that make products you know and like. For me, DirecTV (DTV) falls into that category. Over fifteen years ago, I moved to a rural area that did not have cable TV. DirecTV (founded in 1994, see history here--I've been a customer since 1996) was the only option. Over the years, I have become a fan of the company as have many of my neighbors and many people I meet casually. The video above provides the CEO's take on the company prospects (I was a little surprised that more streaming content would not appear until 2013).

My telephone provider, Telephone & Data Systems (TDS), offers a bundle that includes DirecTV's primary competitor, DISH network (DISH). I have often looked at the TDS-DISH bundle but have never thought the price and channel selection was good enough to switch.

How do the Random Stock Walker models compare with the result of personal product experience? Bottom line: DirecTV is well linked to growth in the world economy while DISH is a business-as-usual (BAU) stock.
The DTV forecast (based on the WL20 model) is presented above. Strong growth is predicted throughout 2012. The analyst opinion (here) is mostly "buy" with a high price target of 60 (well above the 98% prediction interval for 2012) and a low target of 43 (reasonable for 2011). DTV's P/E ratio is almost 30 with a forward P/E of almost 12
The DISH forecast is presented above. The forecast is for the price to rise into the 30-35 range until about 2015 when no further growth is predicted. The analyst opinion (here) is also mostly "buy." If you accept the BAU forecast above, only the short-term looks promising. The long-term upside potential is not very strong. DISH has also had a choppy history, peaking during the dot-com bubble and not performing very well after than.

An eNRGetic Random Walk

NRG Energy, Inc. (NRG) is a wholesale power generation company. The part of their business that interest CNBC's Jim Cramer in the video above is NRG's retail electricity business in texas, particularly their plans to provide charging stations for electric cars.

Cramer thinks that the electric car market is poised to take off by 2013 and that NRG will be well positioned to take advantage of the added demand for electricity. In the words of David Crane, CEO of NRG, the electricity car is what the air-cconditioner was to demand for electricity.

What does the Random Stock Walker think about NRG. Unfortunately, the stock is a random walk. The figure above shows the random walk forecast out to 2013. Since 2004, the stock has been driven by shocks. The analyst opinions are also not very positive with 6 out of 10 downgrading the stock (here) and predicting a media price target of 23. From the random walk forecast, any stock price different from 20 would be unexpected.

Charting vs. Random Stock Walking

Random Stock Walking is a form of technical analysis. On Mad Money tonight, CNBC analyst Jim Cramer did a good job of analyzing the stock OCLR (Oclaro, Inc.) using charting concepts, another approach to technical analysis. In this post, I'll compare the two approaches.

Oclaro, Inc. is a provider of optical network components. Cramer thinks that the stock has a bright future given the future of telecommunications and the lack of competitors. Cramer also thinks that both the fundamental and the technical analysis support the positive forecast.

In the video above, Cramer presents a technical analysis that uses some of the following concepts: trend lines, head and shoulders, and relative strength index. As a statistician, I'm not sure what to make of chartist concepts. Here's a start on that project.

From the standpoint of random stock walking, OCLR is a stock that is hard to distinguish from a random walk. The business-as-usual model (OCLR[t] = 0.49 + 0.85 OCLR[t-1]) with 98% confidence interval [0.70, 0.85, 0.94]) shows that a random walk is somewhat improbable. The graph above displays the dynamic attractor for the model. Notice that 2006 to 2010 draws most of Cramer's attention with a lot of weight being given to the "break out" after 2010.

Given a dynamic attractor that is below the current stock price, it's not surprising that my future forecast is not very encouraging. There aren't many analyst opinions on this stock (here) and the one analyst opinion available suggests a high price target of 23, which is about the upper 98% bootstrap prediction interval for the stock.

The Random Stock Walker approach finds little evidence for a "sky-is-the-limit" breakout that Cramer's technical analysis is suggesting. It will be interesting to follow this stock over the next few years and see where it goes. Cramer does admit that it is a speculative stock.

Worry, Worry: Steve Jobs Six Weeks To Live?

The National Enquirer (that's right) is reporting that Steve Jobs has six weeks to live (here). Stock analysts are keeping a level head in the face of this "news" (video above). One analyst on Yahoo Finance (here) downgraded AAPL from "Strong Buy" to "Buy" and another analysts upgraded the stock from "Neutral" to "Buy".

The stock was up to 364.90 yesterday but dropped down to the 358 area for most of the day today. The Random Stock Walker models (here) suggest that a stock price between 300 and 350 will be very close to the dynamic attractor for the next few months.

Should You Hold On To ARM Holdings?

CNBC stock analysts Jim Cramer recently pick ARM Holdings (ARMH) as one of his growth stocks (discussed in a prior post here). Unfortunately, the Random Stock Walker didn't validate ARMH as a growth stock even though it did validate the other stocks Cramer picked (AAPL, CMG and NFLX). What's going on?

First, as a company ARM doesn't actually make anything! It is a supplier of semiconductor intellectual property. It designs chips used in smart phones but it then licenses the designs to semiconductor manufacturers. ARM provides economies of scale in R&D in what has become a commodity market (semiconductor manufacturing).

Because ARM technology is so central to smart phone design and because cell phone technology is switching from "dumb" to "smart" phones, ARM should be well positioned to ride the "mobile internet tsunami".

If you look at the Random Stock Walker models, ARM is clearly a business as usual (BAU) model driven by shocks and a "short-memory" for the stock price (see THEORY below). It is not a growth stock (long-memory for shocks and stock price) and it is not particularly well linked to the U.S. economy. Therefore, even though the performance for ARMH (in the graphic above) shows improbable growth (beyond the 98% prediction interval) for early 2011, the forecast for the rest of 2011 is for a return to the long-run attractor at a price between 20 and 25 roughly.

Analysts don't like this stock very much either (here): it has a high P/E ratio, eight-out-of-ten analysts have recently downgraded the stock and given it a price target between 10 and 12!
Cramer acknowledges that people got burned by this stock during the dot-com bubble as can be seen from the long-term Random Stock Walker forecast above. Yet, he thinks it is a compelling story. Only time will tell. From the modeling perspective, this stock does not behave the same as other momentum or growth stocks and should not be put in the same category statistically.

THEORY. The BAU model is P[t] = a + b P[t-1] + V where b is less than unity. A pure growth stock would differ in that b would be greater than one. In the random walk, of course, b is (in probability) precisely unity. Since b=1 is actually quite unlikely, what the random walk designation should mean is that the stock price is dominated by random variability and cannot be effectively forecast.

METHOD. Looking at the behavior of ARMH during the dot-com bubble around 2000, one approach would be to eliminate this "shock" from the model and re-estimate. I've re-estimated the model starting in 2003 and the results are fundamentally the same as reported above.

What's Different About High-Growth, Momentum Stocks?

Tonight on Mad Money (video above), Jim Cramer argued that growth or momentum stocks are in a unique class and have to be judged differently from other stocks. For example, Apple (AAPL), Chipotle (CMG) and Netflix (NFLX) are typically downgraded by analysts because their P/E ratios are to high, that is, they are too expensive.

Cramer's argument is that for these momentum stocks, what really matters is that the smart money (hedge funds and mutual funds) want to hold growth stocks. Regardless of price, you can ride the momentum of these stocks as long as you are willing to take profits after a good run.

What interested me about momentum stocks is their properties when estimated with the Random Stock Walker models. What I have found is that these stocks all have significant unit roots (growth dynamics) and their attractors are also significantly related to (being driven by) growth in the U.S. economy.
The bootstrap forecast using the USL20 model shows strong growth potential but also shows a strong downside (the lower 98% prediction interval).
Chipotle also has strong growth potential but does not have the same downside risk. The same is true for Apple.
The Random Stock Walker models suggest that Netflix, at least, should be viewed cautiously. Too bad! Netflix is a product I like although many analysts think it has a difficult future ahead given potential competitors.

ARM Holdings (ARMH) is also mentioned in the Mad Money video (above). It is different from the other momentum stocks Cramer mentions (AAPL, CMG and NFLX). I'll talk about ARM Holdings in a future post.

THEORY and METHOD There are some interesting issues here. It is very difficult, because of the unit roots, to clearly determine whether these stocks are random walks (P[t] = 1 P[t-1] + V), business-as-usual (pure momentum, P[t] = a P[t-1] + V, a gt 1) or stocks that are linked to growth in the U.S. economy (P[t] = a P[t-1] + b S[t-1] + V, a lt 1). The models look very similar using the Akaike Information Criteria (AIC). It is necessary to look at the bootstrap confidence intervals for coefficients in the US index models. All the stocks are significantly related to growth in the U.S. economy and the unit roots are removed from the model when the state variables for the U.S. economy are included.

Notice also that Cramer talks about normal stocks being "driven by news." In terms of the Random Stock Walker models, news is the variability term, V, in P[t] = P[t-1] + V.

This Is Gambling

Back in October of 2010, Dan Nathan proposed (on CNBC Options Action, here) a way to play Akami (AKAM) stock using the strangle. AKAM is a tech stock and Akami provides services for accelerating and improving the delivery of Internet content. It seems to be a very popular stock among CNBC commentators. From the graph above with 98% bootstrap confidence intervals, it doesn't seem to have done much after the dot-com bubble.

What Dan Nathan was proposing was to buy the November 2010 50-strike call and the November 44-strike put. The strangle would be profitable if Akami traded above $53.10 or below $40.95 by the November expiration. What do the Random Stock Walker models think about AKAM and the strangle?
The models show that AKAM is a random walk. The business-as-usual (BAU) model was only slightly different from the random walk so it's forecast is displayed above. For the BAU, the November bootstrap prediction interval was (47.14, AKAM=54.13, 61.13), showing that Mr. Nathan's 50-call strike was just below the stock's expected value giving him some probability of success.

The AKAM strangle was discussed again tonight on Options Action because AKAM took a nose dive on Thursday, dropping below 42, which is still within he February 2011 prediction interval (45.10, AKAM=48.44, 51.78)--notice the downward trend . What to do? If I heard correctly, Mr. Nathan wants to stick with the trade, but it really doesn't matter. Since AKAM is a random walk, he's really just gambling. The stock could go anywhere. Maybe he'll be lucky.

Walk On Bye

Baidu (BIDU), China's Internet search engine, has generated a lot of interest among stock analysts (here and here) although the analyst opinion is not uniformly optimistic (here). What do the Random Stock Walker models show?

Unfortunately, Baidu is a random walk. There is some indication in the analysis, however, that if Baidu could link itself with growth in the world economy, it could become a growth stock. The bootstrap forecast above, made using the WL20 model, basically suggests that while there is some upside potential for Baidu, the stock has to get past significant downside risk extending well past 2015. That seems like a long time to wait for growth. And, since the stock is currently a random walk, short-term trading is really just gambling.

TARP Success "Probably" Depends on AIG

Everyone seems to hate the federal government's Troubled Asset Relief Program (TARP) except CNBC's Jim Cramer who thinks that TARP worked and "...was a necessary rescue of a critical industry that ended up working better than anyone could have imagined...". Tim Massad, US Treasury Secretary for Financial Stability, also thinks the program was a success (interview video above). The assessments of Cramer and Massad might prove accurate except for one problem institution, AIG (I'll get to this bad boy at the end of the post). My models suggest that there is still some probability AIG will fail and the government will loose the $40 billion invested in the company.

Cramer points to two banks as success stories. Fifth Third Bancorp (FITB) recently payed back $2.4 billion in TARP funds and SunTrust (STI) is about to make a secondary offering to raise funds to repay TARP. Cramer wants his viewers ready to buy the secondary offering. What does the Random Stock Walker think about these banks?

Neither bank is a random walk and both are strongly linked to the US economy. A boostrap forecast for First Third Bancorp is displayed above. In 2011, the trouble period has passed (the stock could have totally collapsed in 2009) and the stock is now on the way to recovery.

The same can be said for SunTrust. The stock is not a random walk and is well linked to the US economy. SITI could also have failed in 2009 but now is predicted to recover quite well in the future.

The recovery of AIG will not go as smoothly and it is not entirely past its trouble period. My model shows that there is some probability AIG will fail before 2015. AIG's collapse was more centrally related to the entire subprime mortgage crisis since it was one of the major insurers of structured debt securities backed by subprime loans. It will take a lot longer to unravel the mess created by AIG business practices and, not surprisingly, there is some probability the mess cannot be unravelled.

Quick Update: Apple Computer

At 345.03 today (not quite back to the month high) the AAPL stock price is still close to its dynamic attractor for early 2011.

The bootstrap forecast and 98% confidence intervals show that the stock price might be outperforming a little.

The dynamic attractor line also suggests that there could be a small downward correction, but 345 is still pretty close in probability. For me, it still remains a time to hold.

They're Nuts, They're Nuts! They Know Nothing!

It's August 3, 2007 and the Subprime Mortgage Bubble is about to burst. Jim Cramer is screaming at Erin Burnett on CNBC that the Federal Reserve should Open the Discount Window. The first systemic shocks were about to hit. On Aug 9, 2007 BNP Paribas (France's biggest bank) would suspend withdrawals from three money market funds because of subprime exposure (Bear Sterns had already on June 7, 2007 halted redemptions in two of it's mortgage related hedge funds).

More information on the Subprime Mortgage Crisis Timeline can be found here and, particularly for 2007, here. I'm reading Andrew Ross Sorkin's Too Big To Fail (Cramer's rant is described on page 87) and have just complete William Cohan's House of Cards about the Bear Sterns collapse. And, I'm still grinding my way through the Financial Crisis Inquiry Commission report which is not quite as interesting!

Egypt Contagion Risks

Nouriel Roubini has a very interesting analysis (video clip above) of the 2011 Egyptian protests. Roubini has so far acquired a reputation for prescient forecasts and accurate analysis, especially when the conventional wisdom has failed (Roubini has become known as Dr. Doom for his pessimistic but accurate 2005 forecast of the 2007-2011 Subprime Mortgage Crisis).

Roubini's implicit theoretical model is displayed in the graphic on the right. He explicitly links the protests in Indonesia and Egypt to rising commodity prices in world markets. Egypt and Indonesia are peripheral countries in the world system and, as such, are subject strong market shocks.

When commodity prices (oil and food, particularly) rise (as is currently happening) they generate cost-push inflation and a direct negative affect on disposable income. Cost-push inflation reduces economic growth which also reduces income, especially in countries with high inequality, such as Egypt and Indonesia. The result is protest.

All these events lead to political contagion, geopolitical risk, risk aversion and negative effects on equity markets. The effect on equity markets can be seen from Market Vectors Egypt Index ETF (EGPT) -- the only ETF devoted entirely to Egypt. It's been trending down steadily all year and has suspended trading (but not redemptions) until the Egyptian bourse reopens.

If that's not enough to scare you away from this ETF, EGPT is also the first pure random walk I've displayed. The fund is neither a business-as-usual investment nor linked in to growth in the world economy. Although I can present confidence intervals for the fund, it is difficult to say where the price will go in the future. Because EGPT is a random walk, there is no attractor. The fund price can go anywhere. Indeed, from the confidence intervals, it has already made some excursions into improbable territory. We can only expect more in the future.

Likely Double Dip in U.S. Housing Market?

CNBC is reporting (here) that the S&P Case-Shiller composite housing price index is continuing to decline and David Blitzer, the S&P 500 Index Committee Chairman, is predicting that a double-dip could be confirmed before Spring (video above).

Another CNBC stock analysts, Jim Cramer, is not so sure. He doesn't think the widely reported Case-Shiller index is the most reliable index since it only measures 20 cities (here). Data from the Federal Housing Finance Agency (FHFA), the National Association of Realtors (NAR), the U.S Census Bureau and the housing-related stocks seem to be telling a different story of housing market recovery.

Completing a reliability/validity analysis of all these data sources will get in the way of making my own forecasts. However, I am interested in the Midwest Condominium market and have used NAR data to make forecasts. If you're interested, you can read the report here.

The bottom line is that the Midwest condominium market is soft. Prices will continue to decline in 2011 even though sales will start moving back toward trend. From the graphic above, you can see that Midwest condo prices dropped about 10% during 2010. Since the U.S. housing bubble is thought to have peaked in 2005, we've had 3-5 years of downward pressure on prices on top of the steep decline in 2010. Prices at 10, 20 or even 30 percent below list are not unreasonable given the NAR data.

It's a great time to buy a condominium, but be forewarned: you will be unable to get a first mortgage on any condominium within a project that is still controlled by the developer. Fannie and Freddie simply will not, after the government takeover, repurchase these mortgages from banks (think of the Florida and Las Vegas condo markets and all the recently-started but vacant units).

Another Bad Day for Apple: Buy, Sell or Hold?

It was another bad day for AAPL with the stock closing down 6.16% from Tuesday when Steve job's medical leave was announced. What to do, if anything? Karen Finerman, president of Metropolitan Capital Advisors, thinks it's a buy (here). Jim Cramer, CNBC Mad Money, thinks that AAPL had just run up too much for a "blowout" quarter to propel the stock any higher (here).
The logic of my systems models suggests that if AAPL is below the dynamic attractor (displayed above) it's a buy opportunity since the stock price should eventually be drawn back to the attractor. Stock prices above the dynamic attractor present an opportunity to take excess profits.

For the month of January 2011 (the finest resolution for my models), an AAPL stock price of 332.68 is very close the attractor value of 331.01 (just a little over, actually). The models suggest that the stock could fall a little further before presenting a buy opportunity. In fact, Apple stock would have a long way to fall to reach improbable lows (290 brackets the lower 98% bootstrap prediction interval).

DISCLAIMER: I'm holding my Apple stock, but that has less to do with the models than with a wait-and-see attitude. Steve Job's medical leave cannot possibly have any effect on company fundamentals for many months into the future. It's a good time to watch what traders do to the stock and compare future time paths with model predictions.

A Rough Couple of Days for Apple Computer

On news that Steve Jobs, Apple CEO, is going on medical leave, Apple Computer has had a rough couple of days in the stock market and generated lots of speculation in the press (here and here). At the end of trading today (above), AAPL was trading down about 1/2 per cent at 338.84. Still, many analysts remained positive on Apple, especially as a result of a record earnings report (here). On CNBC, Jim Cramer increased his price target to $400 from $325 (here). How does this relate to my initially pessimistic forecast for Apple (here)?

First, in Burton Malkiel's terms (here), Steve Jobs medical leave is truly random, unpredictable news. The negative shock to Apple Stock, however, is predictable. In terms of my original pessimistic forecast (here), notice that the forecast is based on data ending in January 2010. Using all of 2010 (above) I get a much more optimistic forecast.

The new attractor plot (above) shows the stock peaks as the major attractor points.
Just projecting the attractor into the future (rather than using the actual stock data) shows strong growth for Apple through 2020. Just to be clear, the graphic above is the result of a free simulation starting in September 1984 and going forward to 2020. A forecast (second graphic above) uses step-ahead predictions from the actual data for each month starting in September 1984. Once the data runs out (January 2011), the forecast data is used for the prior month's stock value.
Returning to Jim Cramer's $400 price target, the attractor forecast suggests that $400 is somewhat unlikely until well into 2011.

DISCLAIMER: I have held Apple stock since 1988. None of the forecasts presented in this blog should be used to make buy or sell decisions. The usefulness of the models and the forecasts will have to be evaluated at some point in the future. My particular interest is to evaluate the models in terms of the random walk hypothesis and Burton Malkiel's persuasive view of the stock market (here). At this point, the models merely say that AAPL is not a random walk stock. What that results means for stock forecasting is unclear.