Aug

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Species and stocks move around. They go up and down during the day, frequently starting high and ending low or starting low and ending high. They can move slowly, quickly, step by step, jump or fly. Species can swim or be dispersed by wind and stocks can be carried along by movements in the general market itself or related markets such as interest rates, oil, or Asian markets. Many species like to go back to their nests or dens and many stocks like to move back to some quieter place at the end of their day. Birds and fish often migrate back to the equator or northern regions during the winter and summer and stocks often move in opposite directions in the colder months and warmer months.

Occasionally a species moves into a new area. It invades a new territory. And if it proliferates in space and numbers, we say it's a pest. Famous invasive species in the literature include the sea otter in California, the muskrat in Europe, the European starling in North America, deer in the Northeast suburbs, and innumerable plant and insect species. As Charles Elton said "a hundred years of faster and bigger transport has kept up and intensified the bombardment of every country by foreign species."

Two excellent books on biological invasions are Biological Invasions: Theory and Practice by Shigesada and Lawasaki, and Biological Invasions by Mark Williamson. The former is a primer on mathematical modeling of invasions and the latter is an impressionistic summary of the state of the field with numerous biological examples by a leading field researcher.

The main principles that the books teach is that most invasions fail, when they don't most become pests, and when they do become pests — about 1/10 x 1/10 of the time – they diffuse in space and numbers according to the square root of time and the growth rate adjusted by a standard logistic factor based on how close they are to carrying capacity of the area they invade.

Invasions are close to the heart of every market person. The qualitative invasions that constitute the bailouts for the cronies is a new factor in the United States that should be analyzed with the same care that ecologists traditionally place on the badger.

Other invasions that market people might well study are the recent invasion of the Nikkei to 10000. The move last year to gold above $1000, and oil above $150 and below $40, and the always threatening long 10 year bond yield of 10%. Such questions as: Why did some of these fail, and what other markets did they carry along with them, and when will they come again, lead to many other interesting lines of inquiry.

SLETo put some numbers on the table I decided to study the invasion of big stocks to the rarified areas of the turbulent landscape around the number 10. I looked at the S&P 100 as of the beginning of the year and found one stock below 10, Sara Lee at 9.80.

From December to January, Sara Lee moved to 10.03, making one invasion from below to up. Dell, Alcoa, and B of A moved down, making an invasion of three down. In February, GE and Dell and Dow all fell sharply from above 10 to below 10. This invasion failed, as all three rose sharply from the below 10 territory to above in March. In subsequent months, the invasion below 10 has petered out to extinction with B of A moving above in May and Sara Lee in June.

It is interesting to speculate on the invasions of small stocks like those in the S&P Midcap to these levels during these and other time periods. And to plot the diffusion and expectation of these invasive species when then tread on these highly fugacious territories.

I would be interested in other applications and examples of invasion theory in markets.

P.S. I will post the month end prices and names and dates at an appropriate time.

Steve Ellison adds:

CheatgrassInvasions that might fail under normal circumstances can be successful when additional disruptions occur. When settlers brought cattle to the steppes of southern Idaho, the cattle ate the dominant crested wheatgrass and provided an opening for cheatgrass, an invader from Russia. Cheatgrass altered the fire dynamics by being highly combustible and having fire-resistant seeds. After a fire, cheatgrass quickly became dominant.

Interestingly, one of the best places to find samples of the original native plant species is the cemetery in Virginia City, Nevada, (web site1, web site 2) which has been kept from grazing and defended from fires for 150 years.

Russell Sears writes:

Alien species are the second leading contributing factor in extinction. For about half of the species listed as endangered, alien species are contributor to their demise.

But even more pronounced is the 85% contribution of habitat destruction or change of living environment.

Clearly the regulatory environment is changing for financial companies. The securitization process will forever change. Which I would classify as habitat destruction.

AOLHowever, back to the alien species, it would seem to me, more akin to the game changing technologies invading established territories and market share. The late 1990s early 2000s we saw the game changing technologies in telecoms. There are of course companies that are experts in introducing these game changers, Apple and Google come to mind. But many tech companies have hit the scrap heap, because they couldn't maintain a constant acceleration of products. (Remember when AOL was going to rule the world?) Even retail tech companies have a difficult time staying on the cutting edge, as Radio Shack and Circuit City seem to display.

The drug companies, and bio-tech have similar potential if the regulatory environment can be deciphered… although I certainly don't have the expertise to predict what can make it through this maze. But have known traders with enough organic chemistry knowledge to make fortunes, and vice-versa; organic chemists that have made some nice trades.

Perhaps, invading products contribute to the death of more companies, and birth and growth of new industries. Environmental changes contribute to the destructive effects, but with much more sterilization of productive potential.


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6 Comments so far

  1. v humbert on August 3, 2009 8:55 am

    An invasion that is upon us is the move of czars into the health field. The CBO estimates a 1 trillion cost but this is to be covered by the invasion of reduced profits in the big insurance companies. The three major ones have total profits of about 10 billion. How is food for the consumers going to be provided without a drastic reduction in their number by rationing? v humbert

  2. michael bonderer on August 3, 2009 10:58 pm

    Did anyone think that Larry Summers was reminiscent of Jabba-the-Hutt when he appeared on Meet The Press yesterday? There is a lust for power and control in every utterance. Stunning!

  3. craig on August 4, 2009 3:28 pm

    Check out the these alignments for Thursday's full moon and eclipse. Easy to see why we had 6 earthquakes in California yesterday…

  4. craig on August 6, 2009 3:14 pm

    There are three more days in the Puetz Window for a market crash, according to the Steve Puetz research. He studied eight of the greatest crashes in financial history, from the Holland Tulip Mania of 1637 to the Nikkei of 1990. He found that market crashes tend to occur near full moons, and that the greatest number of crashes start after the first full moon after a solar eclipse, when that full moon is also a lunar eclipse. Puetz found that all eight crashes occurred six days before to three days after a full moon that occurred within six weeks of a solar eclipse. The odds of that being a coincidence, Puetz calculated, are 1 in 127,000.

  5. Bill Welch on August 7, 2009 1:07 pm

    Where do zebra clams fit into this?

  6. George Parkanyi on August 12, 2009 10:54 pm

    I don't really see the economic influences that push securities around, or the movement of securities into new price ranges as the invasions. To me a better invasion analogy is the introduction of a new successful financial instrument into the marketplace. The dramatic increase in mutual funds in the 1980s — and the clout fund managers developed over corporate managements — is one example, the introduction of index futures another, the current crop of commodity ETFs yet another. The introduction of the new "animals" into the trading environment creates all sorts of interesting new cross-impacts.

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