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Sunday, November 18, 2012

Bad Calls

 

Pot Stocks

 

So last Monday morning you take a flyer on MDBX. You plunk down four grand for a thousand shares. By the close on Thursday, the shares are worth over $200k (5000%). It’s tank city on Friday however. The stock opens $100 lower, and settles down 90% on the day.

 

 

MDBX makes vending machines for marijuana. That might prove to be an okay business some day. But for the market cap of the company to go from $500m to 24B in four days is absurd. The CEO of MDBX agreed, he said so, and that was the cause of  Friday’s rout:

 

“We temper investor expectations at present price points.”

 

MDBX trades in the Pinks, and there was not much volume (a few million shares did change hands in the fray).

 

I think this story is funny, but it’s no joke. $24B was created out of thin air for a few days. Most of the paper gains were vaporized on Friday. That’s Madoff sized money. I’m thinking pot smokers shouldn’t trade stocks.

 

 

 FB Shorts

 

Face Book had a great week. Up 23% in a down market. I’m sure that some folks will feel better when they look at their statements this weekend. Some will be thinking, “FB must be making progress on that mobile problem”. Actually, the move in the stock has nothing to do with the fundamentals  at all.

 

800m shares of FB got freed up this week; a bunch of money was positioned short in the stock waiting for some new sellers to appear. Of course when everyone knows all this well in advance, and CNBC is talking it up non-stop, the opposite has to happen. So the shorts got creamed, and I got a laugh.

 

I have no idea what the right price for FB is. I do know that the current price is a composite of these factors:

 

-       A significant amount of the current float is still held by retail accounts that own it from the IPO at 38. They all hate the stock.

 

-       At $23 a share, and a big float, FB is perfect trading fodder for all sorts of players:

 

+Day traders

+Short interest

+Momentum guys

+Hedge funds

+Robots

 

Generally speaking, that crowd of actors is bad news for the widows and orphans.

 

 

Apple Sauce

 

Apple’s losses since 9/21 are now at a massive $163B. That’s equivalent to the annual GDP of Pakistan or the state of South Carolina. The market cap loss is greater than the value of either Wells Fargo or Coke. The loss is equal to  the combined values of Walt Disney and McDonalds. That’s a hell of a loss.

 

My thinking is that AAPL never deserved to be a $700 stock. The price move from $500 to $700 was not justified. So now that we are back to the starting point, what’s next?

 

I’ve listened to the touts on TV for the past several weeks. Damn near every one of them has been long, and doubling up all the way down (if you believe what they say). One guy was screaming that it was a “generational buy”. Maybe. The bets still seem to be lined up on one side.

 

I’m going to stay away from this name for a bit longer. The stock is way too “loved”. After all, it’s just a phone, an expensive one at that.

 

 

 Computers Gone Wrong

 

I’m always happy to see evidence that the collective “we” are not as smart as is thought. The best and brightest climatologists (and their big computers) missed a big call on global weather patterns this fall.

 

This chart plots the expectations for the progress of El Nino as of July.  The spaghetti strings are all over the lot, but the consensus was for a return to El Nino conditions sometime in October.

 

 

The evidence for this developing shift gave cause for NOAA to issue alerts starting in July.

 

 

 

The news media jumped on the forecast:

 

 

 

The El Nino alerts continued through October:

 

 

But it did not happen. Mother nature fooled the computers. There is no El Nino, and the odds for one developing have fallen substantially. The latest status report from NOAA, and more spaghetti strings:

 

 

 

 

 

Does it matter if the scientist had it wrong? Not really. What has happened in the past month with weather would have happened regardless of the accuracy of the forecasts. But it would have (probably) made a very big difference if the forecasts had happened to be right.

 

When there are El Nino conditions, tropical storms tend have their “tops” sheared apart by winds that blow east. In addition, storms are pushed out into the Atlantic before they make landfall. This pic tells the story:

 

 

So if we had been in El Nino conditions on October 29, Sandy would never have gotten as big as it did, and might just have blown out to sea. What a difference that would have made.

 

 ++

I think that smart guys and gals should continue to use big computers to forecast the future. It’s helpful to look ahead with some rational expectations of what should happen next. That’s true for weather, stock prices and macro economic trends/performance.

 

But we should also look askance at what the computers and sages are telling us. The machines, and their operators, are consistently wrong. The bad news is that unanticipated events almost always have negative outcomes. The good news is that we can’t foretell the future; if we could, it wouldn’t be interesting at all.

 

 

Comments

  1. Great post! What is a “Generational Buy?” Computers are that smart, and neither are we!

  2. enjoy the decline says:

    “What is a “Generational Buy?”

    Tulip bulbs.
    South sea investment.
    Florida swamp land.
    Government mandated social programs.

    • I was thinking the same thing. What is a” generational buy”? I guess that means something you buy today, and proves to be a great investment for the next 20 years.

      I think they guy is all wet. Apple was a generational buy about ten years ago. I don’t think that can be repeated.

      I’m not knocking aapl. I just have trouble when something with no assets, is worth a half trillion.

  3. What is a ‘generational Buy?’
    Buy some fruit trees this winter and plant them, In half a generation, you will understand…

  4. Crocodile Chuck says:

    BK

    the climate situation is more nuanced than you write. indicators WERE pointing towards an ‘el nino’ event back in july-but these have turned neutral. As a result, here in Sydney we are heading into our third straight summer with overcast, cool, wet conditions.

  5. Apple is yet another example of succession risk. Few companies with larger than life CEOs survive the transition to the next generation of leadership. Even assuming Tim Cook does a good job (too early to say IMHO), he will be compared to the legend of Steve Jobs and real humans fall short of legends. How much of Jobs’ personal creativity could get institutionalized? What has Cook learned from the mistakes of John Scully? Not saying its a bad company or products, just saying the “new” Apple management is unproven

    Facebook is just another AOL, and like AOL the novelty is wearing off

    Climate scientists … I remember these “scientists” convincing the United Nations to issue a warning in the 1970s that the earth was entering a new ice age. Next they decided to float the idea of global warming. Real scientists use a control on their experiments to establish causality. Climate quacks are just guessing; sometimes they guess right, and a lot of times they guess wrong… but its always a guess. Perhaps it is sometimes an educated guess, but still just a guess.

    • Could not find a UN declaration regarding climate cooling but there were several popular books. media articles and the National Science foundation did make such a declaration but overall the world’s scientific community said little on the subject vs global warming today which has widespread scientific support.

      “In the 1970s, a series of scientific conferences concluded that the world’s climate is cooling.[5] Books such as The Cooling,[6] The Weather Conspiracy,[7] The Weather Machine & The Threat Of Ice,[8] Climates Of Hunger,[9] Ice Ages[10] and Climate: Present, Past & Future,[11] warned of a coming ice age within decades. In 1975, Newsweek ran an article entitled “The Cooling World” that foretold the decimation of agricultural productivity based on a dramatic decrease in the Earth’s temperature.[12] and the New York Times published the article “Scientists ask why world is changing; Major cooling may be ahead”.[13] In parallel, books such as A Blueprint For Survival,[14] The Limits To Growth,[15] and The Population Bomb,[16] warned of multiple social, economic, ecological and population crises. At the same time, Hamaker continued to generate articles and bulletins[17][18] as well as campaign, on what was by now his main pre-occupation, the remineralization of the world’s soils.”
      wikipedia.com

      • @ron — this is still not a political blog

      • According to the NY Times, Obama’s current “science” advisor John P Holdren was among the list of quacks who predicted a coming ice age back in 1971
        http://tierneylab.blogs.nytimes.com/2009/09/29/dr-holdrens-ice-age-tidal-wave/

        And current NASA scientists are predicting out that the drop in the sun’s activity will cause global temps to drop for many decades — and this effect will completely overwhelm any CO2 induced warming
        http://au.ibtimes.com/articles/291814/20120202/climate-scientists-predicts-mini-ice-age-future.htm#.UKs3dIbpUgU

        In short, these quacks are simultaneously predicting warming and cooling — but even they admit that solar activity is the dominant factor on global temps. Human kind’s influence (which is theorized but not proven by any real scientist) is a second or third order factor at best…

        Meanwhile, the Russian scientist who “supported” the Kyoto accord made no effort to conceal his scorn of the quack-science in London. Russia supports the Kyoto Accord because it forces Europe to buy Russian natural gas at whatever price Gazprom dictates. Russia is calling the global warming scam for what it really is: a revenue source.

  6. Bruce you are walking close to “Heresy.”
    An iPhone is, “…just a phone.”
    “The machines, and their operators, are consistently wrong.”

    Will you be questioning CAPM, or VAR’s ability to manage risk?
    Or the “Great Moderation?”
    Or siding with Mandelbrot who argues, “economics and finance are characterized by forms of…wild randomness…where familiar index numbers…cease to be representative..?” (Fractals and Scaling in Finance)

  7. Bad call: “Let’s create and hype a dire message on a fiscal cliff striking the US economy within weeks. As markets roil, cover will be given to both parties to be patriotic and act together for the best interests of the nation as taxes on the wealthy are raised and cuts made to SS and medicare.”

  8. This guy thinks he can predict the future, claims he predicted the tsunami and 9/11.

    http://www.halfpasthuman.com/