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Posted 6/6/2005
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Intel keeps rising, but that doesn't make it safe
Intel has been beaten by AMD in chip design, but its stock keeps going up. Why? Blame the human factor that drives markets.
By Bill Fleckenstein
Over the course of my investment career, I have often been asked why such and such happened, or, if A happened, then how come B didn't follow, when it "should" have. To those questions, I often find myself responding: Because these are markets. They're made up of human beings who are governed by human emotions.
In other words, markets can do whatever they want.
That reality is keenly understood by Emanuel Derman, the physicist-turned-quantitative-analyst-turned-author who recently spoke at a conference hosted by my friend Jim Grant. (Jim reprised the quotes that I am about to share in the April 22 issue of his always-interesting Grant's Interest Rate Observer.)
First, though, a word about Derman's fascinating recent book, "My Life As a Quant," which I have read and suggest that others might also. Derman used to run the Quantitative Strategies Group at Goldman Sachs, but he left in 2002. In plain English, he describes his transition from the pursuit of physics to finance, during which he explains lots of concepts that folks might find interesting. (Though I was a math major, there's a vast array of concepts in physics and mathematics that I do not understand. I pass that along so folks won't think a sophisticated knowledge of mathematics is necessary to understand the book.)
An eminently quotable quant
Meanwhile, I encourage everyone to read the following quotes from Derman's speech more than once. I myself read them several times, as I thought they were so insightful and accurate:
"Most trained economists have never really seen a first-class working theory, because economics doesn't have any. ... I don't mean to say that physics is better. I like economics, but I think that it's rather that finance and financial economics are really much harder."
(To quote Derman quoting MIT Professor Andrew Lo: "Physics has three laws that explain 99% of the phenomena, and economics has 99 laws that explain 3% of the phenomena.")
Related news and commentary on MSN Money
"In physics, you are really playing against God, and He sets the laws once and for all, and you are trying to figure them out, and He doesn't really change them too often. And if you figure out what the laws are, then He kind of gives up and says, 'You're right.' In finance, you are really playing against God's creatures, people like us, who value assets based on their ephemeral feelings. ... They overshoot, they undershoot, and they sometimes don't know when they've lost the game. They keep on trying to play, and they keep trying to change the rules on you."
Living with lawlessness on Wall Street
This is the best description I've seen of the difference between how markets work and the laws of physics. I frequently do my best to try to infer what the markets are concluding, though that effort is complicated by the fact that there's often a high noise-to-signal ratio. (That, by the way, may be higher than normal now.)
The bottom line to take away from Derman's book: There are no hard-and-fast rules in markets (as opposed to science) -- just relationships that are constantly changing.
With Derman's anatomy of market "logic" as a preamble, let's discuss the ongoing no-news rally -- to help illuminate the point that the events you think should matter sometimes do not. Who would have thought that the market could shrug off a downgrading of General Motors' (GM, news, msgs) and Ford's (F, news, msgs) debt to junk, to pick just one recent news item?
On the other hand, certain facets of this tech rally have been somewhat predictable, in that we are once again seeing a no-news period in which dead fish are upgrading their sectors. Recently, one of them upgraded the software sector after virtually all its members blew up last quarter. We've also heard many dead fish saying wonderful things about the chip sector during this period -- as they do in almost every no-news period.
That brings me to Intel (INTC, news, msgs) and the number of e-mails I've received about why it's going up. Thinking back to what Emanuel Derman said, I quite frankly don't know the answer. There are rumors circulating that Intel is doing just fine thus far this quarter, and that its mid-quarter update (due Thursday after the market close) will go swimmingly.
Perhaps that's the case. Perhaps business in Asia is strong enough that everything is hunky-dory thus far in the quarter. Also, with Intel stock having done well, sometimes buying just begets buying. Intel moved higher 19 out of the 21 total trading days in May and the first three days of June. So, folks are unambiguously voting to own it. In any case, I have kept my puts, though I trimmed my short position along with other shorts several weeks ago.
AMD: Spokesman for Intel negativity
I prefer to express my negative view on Intel via a long position in Advanced Micro Devices (AMD, news, msgs). One reason to be long-term negative on Intel, and one of the reasons for my buying longer-dated options in the first place, is the fact that AMD has beaten Intel in the processor-design game. Additionally, with AMD jettisoning the flash-memory business, with insider buying in the stock and given my expectation of a rally, I felt I could better express my Intel negativity in the short run via a long position in AMD.
At some point in the next group of weeks, I plan on adding to my Intel put position and rebuilding my short position. But for the time being, it seems futile to fight the imagination inherent in the no-news period, especially when it comes to the tech tape. Bottom line: I have not changed my opinion on Intel. I have just modified how I express my view, due to the changing set of circumstances that has evolved over the year.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money. At the time of publication, he was long Intel puts, AMD and AMD calls.
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