Get Ready for the End-of-Quarter Whirlwind
By Don Luskin
Special to TheStreet.com
3/30/01 9:43 AM ET
Friday is the end of the quarter, so brace yourself for a whirlwind of forces moving the market. None of them has anything to do with what stocks are worth -- and everything to do with the way the investing game is played by the pros. Unfortunately, knowing that they're playing doesn't really give you very many clues about what will happen.
Fund managers who have to show their holdings only at quarter-ends will be window-dressing their portfolios. That means they'll be throwing out any stocks they'd be embarrassed to be caught holding (even though they held them) and buying the ones they want to look smart for holding (even though they didn't hold them).
Nowadays this silly preening ritual is confined mostly to mutual fund managers -- they're the only ones left whose portfolios aren't instantly accessible by their clients in real time. And when their clients do get a quarterly or semiannual glimpse at how their money is being invested, all they see is holdings -- not the trades that produced the holdings. So the window-dressing scam is pretty hard to detect.
The Losers Might Win
The conventional wisdom says that window dressing means that all of the quarter's big losers will be dumped. You'd probably expect that the most high-profile catastrophes among the brand-name tech stocks, like Cisco (CSCO:Nasdaq - news - boards), Sun Microsystems (SUNW:Nasdaq - news - boards) and Oracle (ORCL:Nasdaq - news - boards), will get whacked even more than they already have been.
Maybe it'll play that way, and maybe it won't.
For every manager who wants to get one of those stocks (and its high cost basis) off his books, there's another manager who wants to look smart by buying it at the bottom (and get to hang a nice low cost basis on her wall, like a trophy). So in the status competition to hide the bad and brag about the good, there may be a balance of interests between buyer and seller.
But then there are other managers for whom that status competition is immaterial. They're into the status competition of performance. And they know that it doesn't matter what smart positions you show on your books at what cost basis when you have awful performance.
So those managers have an incentive to crowd in near the bell Friday and try to push up the prices on their largest positions by buying more with merry abandon and making those positions even larger. And trust me, no matter how much stocks like Cisco, Sun and Oracle have already been sold, they remain huge positions for lots of managers. Companies don't sport market caps like those if nobody owns them. So there's a chance that some of the weakest stocks will get the strongest support today, and some of the most heavily shorted stocks may come in for severe selling near the bell.
Of course, mutual fund managers aren't the only ones with an incentive to "mark the close." Every investor has an incentive, although only a tiny minority dares to actually do it. (It is securities fraud, after all.) The most aggressive and ambitious investors have the greatest incentive -- and the greatest willingness -- to run this scam.
Additional Factors in Play
And overlaid on all of this is the entirely random and unpredictable effect of the big index funds and their quarter-end program trades. These institutional giants will need to execute contribution or redemption orders from their clients -- massive corporate and governmental pension funds, university endowments and charitable institutions -- and those orders always seem to be heaviest at the ends of quarters. When I was running the trading desk at Barclays Global Investors, there was nothing unusual at all about having $10 billion or more in accumulated orders at quarter-end.
First the indexers cross the contributions against the redemptions; those trades never make it to the market. But the overhang, which typically runs in the billions, has to get executed market-on-close. And just as it is when indexers are buying a new stock added to the S&P 500 index, they don't care about the price. It's all a game of "jam the close."
And then add to all that the fact that the fiscal year is closing in Japan. It's not too late for Tokyo's crippled giants of banking and brokerage to do some last-minute dumping of U.S. stocks to improve their ghastly capital adequacy issues. We've probably already seen a few waves of that kind of selling this week, and Friday we may get the last blast of it.
With all of these random crosscurrents, it will be a fitting end to a horrible quarter -- the perfect complement to the sense of apathy and resignation that permeates this market.
Well, don't worry. Next Monday it'll be a new quarter, and we'll get to start this all over again. And April Fool's Day is Sunday. How appropriate.
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Don Luskin is president and CEO of MetaMarkets.com and a portfolio manager of OpenFund, an aggressive growth fund investing in the New Economy. OpenFund strives to be fully invested, expecting to be at least 90% invested under most market conditions. At time of publication, OpenFund was long Sun Micro and Oracle and holds put options on Cisco, although holdings can change at any time. Luskin appreciates your feedback and invites you to send it to Don Luskin. |
