New Merrill Lynch Tech Index Shorts Stocks of Firm's Clients
biz.yahoo.com
By Karen Talley
Dow Jones Newswires
NEW YORK -- In an unusual move, Merrill Lynch & Co. (MER) has begun coaxing investors to short stocks the firm has investment banking relationships with.
That's part of the objective of the new Merrill Lynch Long-Short Technology Index that makes bullish and bearish bets on a sector that continues to struggle.
The index, which was rolled out on Aug. 1, short-sells baskets of stocks through instruments that track sectors like software. Long positions are held through purchases of individual stocks. Right now the index is net 70% long, with the balance held in short positions.
Market watchers voiced surprise that Merrill would set up something like the index, saying this may be the first time a big investment bank had in essence said publicly that it's just fine to short the stocks of companies it does business with.
"For a long time this has been more of a private practice, with investment firms' private client groups or their hedge funds shorting stocks even though their sell-side analysts had `buy' or `strong buy' ratings on the stocks," said Craig Wonker who follows investment banks and brokerages at Morningstar. "But to go out in a big public way through an index is very unusual."
The index was developed by Merrill's technology group headed by Steve Milunovich, who is on vacation this week. His lieutenant, Zhen-Hong Fan, said the short-selling component was incorporated because tech is such a struggling area right now.
"It's very necessary in this environment," Mr. Fan said. "It's a way of protecting against all the volatility we're seeing."
That's for sure. Consider the tech heavy Nasdaq 100 Index, which hit a five- year low last week.
But the Merrill index isn't perfect, Mr. Fan said. Some of the individual stocks it is taking long positions in are also members of the sectors it shorting, like software. And a number of these stocks also have business ties to Merrill.
An example is Microsoft Corp. (MSFT). The index has a long position in the stock but is also shorting a market capitalization-weighted tech index that Microsoft is a big part of. And, according to disclosure documents, Merrill also expects to receive or intends to seek investment banking business with Microsoft in the near future.
"It's not a perfect system," Mr. Fan said.
He said his group wanted the index to be able to short individual stocks so it could be more selective, but Merrill's approval process for such a move "takes some time," while shorting sectors doesn't.
A Merrill spokeswoman explained it this way: "Normally our strategists don't short stocks; it is a function of our technical strategists."
Retail investors can buy positions in the index through futures contracts on the Chicago Mercantile Exchange which says the product is structured to prevent investors from losing more than their initial allocation, a twist on most futures contracts which are subject to margin calls.
Price information is available under the symbol MLH through Dow Jones Indexes, part of Dow Jones & Co. (DJ), publisher of this newswire.
The index will be rebalanced each month, with positions rejiggered based on how the strategists feel tech stocks are trending. Right now, it is made up of 35 stocks held in long positions, including Adobe Systems Inc. (ADBE), Dell Computer Corp. (DELL) and chip-equipment maker KLA-Tencor Corp. (KLAC), and is shorting three technology sectors: software, semiconductors and mixed large-cap tech.
-By Karen Talley, Dow Jones Newswires; 201-938-5106; karen.talley@dowjones.com
This press release just blew me away.
Thanks for the tables Don. I cannot believe the sell off going on in semiconductor stocks. Maybe this helps to explain the continued selling.
Wow, RtS |
