ADR: Should Sony Be Broken Up?

In somewhat of a minor market bombshell announcement (here), Third Point Hedge Fund Investor Daniel Loeb called for the breakup of the multinational conglomerate Sony (the Sony group includes electronics, motion pictures, music and financial services). The argument, discussed in the Bloomberg video above, is that parts of Sony, particularly the US-based Sony Pictures Entertainment, doesn't really fit the rest of the company and should be spun off.

The issue that caught the attention of the Random Stock Walker was whether or not it would be best for Sony to disengage from the US economy. After WWII and until the 1980's (the beginning of Neoliberalism and Globalization), Sony was a dynamic company linked closely to the US market. They originally licensed transistor technology from Bell Laboratories and found a large US market for the Walkman. Sony acquired Columbia Pictures in 1989 and the CBS Record Group in 1989. The argument to divest the US-based business units seems to be based on culture fit. A more interesting question is whether Sony would be more successful as an electronics supplier to the World economy, allowing the company to be driven by the World economy as I have show Apple is (here).

To test the Sony break-up proposal, I ran two state space models. In the first one, the Sony stock price (ADR) was driven by the World economy and, in the second one, below, by the US economy (the testing was a little more far ranging, but these were the two best models). The attractor forecast for a world economy-driven Sony shows exponential growth for the future (the black line is the actual stock value, the dashed red line is the dynamic attractor path created from a free simulation, and the other two lines are the upper and lower 98% bootstrap prediction intervals). Although Sony stock has had some brief "bubble and trough" years around 2008, 2009 and 2001, the stock has generally followed the cyclical path of the world system.

The same can be said for the model driven by the US economy. In fact the attractor tracking seems to be somewhat better. However, the future projection does not look very good. In fact, the attractor path seems to suggest that tracking the US economy too closely is driving much of the cyclicality in Sony stock.

The obvious conclusion from these two simulations is that Sony must link its fortunes with the World economy and make sure it is insulated from cyclical forces transmitted from the US economy. Whether this means spinning off the US entertainment divisions, however, is another matter. Everything depends on how much of their revenue is driven by the world economy, and that would be require a detailed level of analysis that the Random Stock Walker does not pursue!

Are We In A Stock Market Bubble?

In a recent tweet (here), political economist Robert Reich issued a "Wall Street Bubble Alert" referencing a Business Week article (here) in which Goldman Sachs claims that "...the market is at or above where it should be trading." The CNBC technical analysts, however, don't see it that way.

In the video above, technical analyst Michael Harris claims that "..from a trend-channel perspective, this is one of the most beautiful patterns I have seen in some time."

I've duplicated the "trend channel" (sometimes called a price channel) in my forecast at the beginning of the post. The graph of ^GSPC (the S&P 500 index) shows the actual index path (black line), the dynamic attractor path (dashed red line) and the upper and lower 98% bootstrap prediction intervals (dotted green line and dot-dash blue line, respectively). The "trend channel is presented as solid heavy red lines. My attractor forecast shows that the S&P 500 index is above the 98% bootstrap prediction interval and this may be the start of a stock market bubble. Whether we are in for another massive bubble, such as the one centered on 2000, remains to be seen.

Technical analysis focused on trend channels misses all this because the time period considered is restricted to the start of the last upswing. The trend channel, to be clear, is simply constructed by connecting peaks and troughs from the start of the last upswing. That's it. There's nothing more to the trend channel than plotting lines by hand. Since this kind of analysis is quite common on Wall Street, it may actually contribute to the development of a market bubble if it is believed by enough investors. If you follow this type of technical investing model, your dilemma will be "when to get out of the market," that is, when will the bubble burst. Trend channel analysis doesn't have much to say about that issue and neither does attractor analysis, which is saying right now to start selling since the S&P 500 is above the 98% upper bootstrap prediction interval.

It will be an interesting summer in the stock market!