hard drives, fat tails, and the peso problem · hard drives, fat tails, and the peso problem. idema...

IDEMA SymposiumSuzhou, October 20,2010 1

Hard Drives, Fat Tails, and the Peso Problem


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The Peso ProblemA peso problem occurs when the potential for discrete shifts in the distribution of future shocks to the economy affects the rational expectations of market participants. It is generally the case when the distribution of the data generating process includes a low probability, usually catastrophic, state that generates extreme disutility to economic agents. Because this state has a low probability, it is unlikely to be observed in a given small sample. Because the state is catastrophic the possibility that it may occur substantially affects agents’ decisions and hence equilibrium prices.

Source: TERM STRUCTURE ANOMALIES: TERMSPREMIUM OR PESO PROBLEM?Caroline Jardet, May 2006


Illustrating The Peso Problem

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Drive Industry’s Cyclical Discount

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Western DigitalSeagateS&P INDEX

Margin Cycles Multiple Discount

Source: Avian Securities, Bloomberg, Company Reports


Normal DistributionInvest $100

96% chance of earning $44% chance of losing $100


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Fooled By Randomness – John’s Story

Source: Bloomberg



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Fat Tails and Tail RiskInvest $100




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WSJ – August 21stPreparing for the Next 'Black Swan'

Investors Are Flocking to New Strategies Designed to Profit From a Market Calamity. But Will They Fly?

• The term black swan was popularized in a 2007 best-selling book by author and investor Nassim Nicholas Taleb. It derives from the ancient belief, once widespread in the West, that all swans are white—a notion that was proven false when European explorers discovered black swans in Australia.

• In financial terms, a black swan usually results in drastic moves in the market—events such as the 1990 Iraqi invasion of Kuwait, the Sept. 11, 2001, terrorist attacks and the recent financial crisis. Statisticians call these events "fat tails" (because they occur on the fringes, or tails, of a bell curve), while professional investors try to manage their "tail risk."

• A growing number of money managers and financial firms are rolling out investment products designed to exploit big declines known as "black swan" events … Today, there are as many as 20 hedge funds specializing in tail-risk strategies, most of which have formed in the past 18 months, according to Hedge Fund Research Inc.

Source: WSJ 8/21/2010


Diverging Expectations

Industry Analysts“STAMFORD, Conn., May 26, 2010 — Worldwide PC shipments are projected to total 376.6 million units in 2010, a 22 percent increase from 308.3 million units shipped in 2009, according to the latest preliminary forecast by Gartner, Inc. Worldwide PC spendingis forecast to reach $245.4 billion in 2010, up 12 percent from 2009.”

Wall StreetBy early June, portions of Avian’shedge fund clientelle suggested back half PC shipments could be flat or down.Morgan Stanley was not quite as bearish in assuming 15% Y/Y industry growth (equating to just 10% growth from Q2 – Q4)

CRAZY!CRAZY!Source: Gartner


But In the End Accurate• PC prices flattened as component prices held steady or even

rose

• Tablet sales expanded at the expense of the netbook market• Consumer purchasing slowed along with worldwide economic

growth slowed hurting • The corporate refresh cycle disappointed

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Source: Avian Securities


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Even Including Tablets!

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Source: IDC, Avian Securities


News Priced In & Sentiment Shifts• Reports around Chinese New Year were relatively positive• Intel reported better than anticipated results (including unit growth)• Component prices have been falling (and we are anticipating aggressive retail PC pricing this Holiday season)

• Most of the corporate refresh (Win 7) has yet to take place • Our customers have become more bullish

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Source: Avian Securities


If MSDW is Your Barometer• Quoting Morgan Stanley:“We see near-term share price upside on the back of a modest quarter-over-quarter uptick in PC shipments,” …. “Specifically, we model PC units +5% and HDD units +4% in [the] December [quarter], better than current investor expectations of flat-to-down HDD shipments. We believe further downward earnings revisions (due to ASP/margin pressure) are priced into shares and that better than feared shipment trends will be a positive catalyst.”

Source: Barrons


Every Distribution has Two Tails“SCOTTS VALLEY, CA — October 14, 2010 —Seagate Technology plc (NASDAQ: STX) announced today that it has received a preliminary indication of interest regarding a going private transaction. The company is in discussions with the party from whom it received the indication of interest, and its board of directors is evaluating the indication of interest and other strategic alternatives. The company has retained Morgan Stanley & Co. Incorporated and Perella Weinberg Partners LP to provide financial advice and Wilson Sonsini Goodrich & Rosati and Arthur Cox as legal counsel. There is no assurance that the company will receive a formal offer or that any transaction will take place.

Source: Company Filings


What About the What About the Tablet?Tablet?

What’s the growth rate?20M to 50M in 2011?

Compliment or Cannibilize PCs?


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Source: Display Search


Some Skepticism1) The UMPC has already

flopped once.

2) While Apple has chosen not to use HDDs; we view the first generation of product as evidence HDDs can have a place in the tablet market.


And if I’m Wrong … There is More Then One Type of Fat Tail

W/W Tape Shipments by Capacity


Questions/Comments

Contact: [email protected]

hard drives, fat tails, and the peso problem · hard drives, fat tails, and the peso problem. idema...

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