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Matrix Equations

When breaking information becomes publicly available, timing is everything. More specifically, the ability to rapidly quantify data that is qualitative in nature is exceedingly important because it presents the greatest tendency to be misjudged or miscalculated by investors, and therefore is often the greatest source of variance between a security's market value and its instantaneous intrinsic value.

Changes in future earnings expectations, for example, elicit a simpler and more measurable effect on market price since they involve empirical values (or in this case, best estimates of future empirical values), and therefore, have an explicit application to future earnings. At the same time, however, many qualitative forms of information do not have a direct correlation with future earnings, and therefore are much more likely to impart differences between market price and intrinsic value, e.g. an opportunity to buy or sell.

Our advantage when interpreting qualitative information is two-fold:
1.) Highly focused, industry specific research that allows us to do one thing and do it very well.
2.) Quantitative methods for approximating the effect on a company's earnings using computer software and prefabricated matrix equations allows for more rapid quantitative assessments.

Below is a visual representation of the "butterfly effect" as it pertains to a company's future earnings potential. Each node represents a different variable in the matrix. A variable such as operating margin would be represented by a more centralized and connected node, whereas price-to-book ratio would be represented by a more ancillary node. Furthermore, the vector relationships between nodes have differing values for "elasticity," or magnitude. Nonetheless, regardless of the variable in question, changing its value, trajectory, or momentum will influence the value, trajectory, and momentum of all other points (although these aspects are all quantified differently). Similarly, the first stimulus to a node comes in the form of a vector (and usually a series of vectors). These vectors are the results of the Macro Project and are interpolated using software.

Clicking and dragging a single point demonstrates the effect that one variable can have on all other variables. This is a simplified matrix representing Elan Corporation, plc (NYSE:ELN). Where, it can be demonstrated that a negative impact on Alzheimer’s disease candidate bapineuzumab will have immediate implications on all other aspects, especially future EPS. This is a simplified visual representation of the math that occurs in the matrix equations when a node is subjected to a force.

The actual matrix cannot be displayed in 3 dimensional space in this format.

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