Every Investor's Arch-Enemy: The Butterfly

BOSTON (MainStreet) -- Science fiction writers have long loved plot devices that fall into the category of "The Butterfly Effect," a term that describes the convoluted connections about seemingly random events.

The term, coined by Edward Norton Lorenz, the mathematician and meteorologist who pioneered chaos theory, is often described with a cliche: A butterfly flutters its wings in China, triggering an ever-rippling chain of events that causes a tornado or hurricane half a world away.

Throughout the financial meltdown that began in 2007, a variation called Black Swan Theory was bandied about frequently, inspired by the writings of Nassim Nicholas Taleb, a former hedge fund manager and Wall Street trader who warned of the potential for economic crisis.

In his 2007 book The Black Swan: The Impact of the Highly Improbable (Random House), he speaks of Black Swan events as being surprising, unpredicted events of major consequence that are later rationalized through the benefit of hindsight.

To carry out the metaphor: Black Swans are easy to spot in the wild, not so easy to predict as they gestate, hidden in an egg.

The Butterfly Effect can be used either for serious prediction or treated as an academic parlor game, a mental exercise of connecting dots and asking, "what if?"

We took a look at some of the ways those proverbial butterfly wings may have worked their magic in the worlds of business and investing:

Hard rain and hard drives
Created by a meteorologist, it is no surprise that the Butterfly Effect often deals with ever-changing weather patterns, seeking out cause and effect.

A current example is how monsoon season in Thailand could have an impact on your email and online photo sharing.

Massive flooding has devastated parts of Thailand, leaving Bangkok and other cities under nearly seven feet of water in some locations. Many of the world's leading hard drive manufacturers, and the component makers that supply them, have a major share of their production facilities in Thailand. Western Digital ( WDC), the world's largest disk manufacturer, bases roughly 60% of its production in that nation.

Seagate ( STX) addressed its issues in a recent SEC filing, saying that although its component and drive assembly factories in Thailand are "operational, accessible to all its employees and are running at full production," this is not the case for some of its component suppliers. As Seagate works to restore its supply chain, it expects a "significant" impact on production levels.

"The effects on our industry are likely to be substantial and will extend over multiple quarters," the company wrote.

Similarly, Toshiba estimates that approximately 50% of its production has come to a halt.

The loss of 50 million or more hard drives over the next few months -- as projected by market research firm iSuppli -- will cut across a wide swatch of tech companies, among them Dell ( DELL), Hewlett-Packard ( HPQ) and Apple ( AAPL).

Where the shortage becomes uniquely problematic is related to the rising use of "cloud"-based services.

Will Microsoft ( MSFT), Google ( GOOG), Apple's new iCloud, Facebook, Netflix ( NFLX) and Amazon ( AMZN) -- as well as smaller companies that rely on products by EMC ( EMC) and NetApp ( NTAP) -- be able to effectively scale up as their data center needs multiply in the coming weeks or months? Or do consumers see even shorter supplies and higher price tags for drives, PCS and laptops if they get preferential treatment? Time will tell.

Similarly, the March earthquake, tsunami and nuclear panic that rocked Japan led to a global impact on consumers. Sony ( SNE), General Motors ( GM), Honda ( HMC), Toyota ( TM) and Nissan ( NSANY) were among the companies forced to shut plants and scale back production because of direct or indirect impacts from the disasters.

Moody's research
Never mind monsoons, flooding, earthquakes and devastating tsunamis. Can even a bad winter or gloomy spell of rainstorms hurt the stock market?

In a convoluted way, the answer is yes.

Bad weather often leads to bad moods, and people not only moan and complain about Mother Nature, they badmouth her online. Researchers at Indiana University have developed a system to gauge the collective mood of Twitter users and overlay their emotions with the performance of the Dow Jones Industrial Average.

Crunching through 9.8 million tweets by 2.7 million users in 2009, they found, with nearly 88% accuracy, that good attitudes spiked the index upward, while bad moods sank it for days at a time.

"Although news most certainly influences stock market prices, public mood states or sentiment may play an equally important role," the researchers wrote. "We know from psychological research that emotions, in addition to information, play an significant role in human decision making ... It is therefore reasonable to assume that the public mood and sentiment can drive stock market values as much as news."

Weather's effects are mixed for investors. Let's imagine a large hurricane strikes Florida: Among the likely immediate impacts will be a spike in the price of orange juice and bad news for the stock price of insurance companies looking at massive payouts; and a positive jolt to companies such as Home Depot ( HD)and Lowes ( LOW) that will benefit from recovery efforts.

Popcorn and political turmoil
A political uprising in Tunisia factors into what you pay for a bucket of popcorn at the movie theater.

Let's be honest, very few Americans could find Tunisia on a map, butt this small North African nation has played an important role in the pricing of oil, even though its mere dozen oil fields provide only a sliver of the world's fuel supply. At best, production of approximately 97,600 barrels per day makes it a minor crude exporter.

Here's how the domino-like machinations have, and could, play out, though.

Instability in Tunisia caught the eye of oil speculators who concluded it could be the start of a bigger, more widespread movement.

Those protests did, in fact, grow stronger as the so-called "Arab Spring" revolution struck Egypt and protesters took to the streets of Syria, Yemen, Algeria, Jordan, Kuwait, Lebanon, Saudi Arabia and Sudan.

Then the Arab Spring movement reached Libya, leading eventually to the overthrow of Moammar Gadhafi. Although a new government may ultimately be good news for oil companies that had their capabilities restrained under the former dictator, there will be an impact. Throughout the revolution, the nation's production of more than 1.3 million barrels a day fell to less than 60,000, and the longer it takes to ramp up production the more European demands for Libya's fuel will have a rippling impact on the price per barrel.

Meanwhile, oil prices here are likely to take an even bigger hit from tensions between Israel and Iran, with the former declaring it is willing to deploy missile strikes to wipe out the latter's alleged nuclear weapons program. Oil prices are already spiking on fears that conflict could affect the Strait of Hormuz, through which one-third of the world's seaborne oil supply travels.

Amid all this political and economic upheaval and fear, a trip to the movies may not seem very important. But let's come back to that bucket of popcorn.

Rising oil prices increase calls for alternative fuels, among them corn-based ethanol. As more corn crops shift over to fuel production (in the U.S., close to 40% is already used for fuel production), what's left for the food supply will become more and more costly.

In other words, be prepared to shell out even more -- a lot more -- for your cinema snacks.

The Adam Cheng Effect
A tip for investors: Lay low whenever Hong Kong actor/singer Adam Cheng appears on a TV show.

Hong Kong brokers and investors dread what they refer to as alternately The Ting Hai Effect or Adam Cheng Effect, a pattern of sudden stock market drops that coincide with Cheng's starring roles. (The name "Ting Hai" comes from a 1992 series Greed of Man, in which Cheng played a ruthless investor by that name.) Some Hong Kong TV stations have even refused to broadcast Cheng's work for fear they might aid an economic collapse.

The Greed of Man premiere coincided with a 20% drop in the Hang Seng Index. A tally of the premiere dates for nine shows Cheng joined between 1992 and 2003 netted an average market plummet of more than 12%.

Since that time, the job offers have kept coming and the market kept falling. The October 2004 premiere of The Conqueror's Story coincided with a 198-point drop in the Heng Seng. The July 2007 airing of Return Home was met with a 1,165 point drop.

The initial losses that piled up with the premiere of Greed of Man may certainly have caught the eye of brokers who were no doubt watching a drama about their own profession. Superstitious, spooked traders may have then continued to be their own worst enemy ever since.

And in a globalized world, what affects the Hang Seng affects investors and markets here as well.

Given the in-step tendencies of global markets to rise and fall with each other, U.S. investors might do well to subscribe to the Hong Kong equivalent of TV Guide and keep an eye peeled for so much as a cameo appearance by the illustrious Mr. Cheng.

-- Written by Joe Mont in Boston.

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