Daniel,
I'll try to find the original post related to Fidelity ContraFund. It was in reference to a Fidelity Funds newsletter. As I said, it was back in early Nov. Also, I didn't mean to imply that all Fidelity was selling this sector.
The "contrarian" strategy of the ContraFund is to buy stocks/sectors when nobody wants them, and I mean nobody. This sector had been in a 12 year bear market up until the early 90's. Simmons and others can explain this sector's history better than I. In most cases, way back then is when the ContraFund picked up shares, at very cheap prices. As this sector has run up, funds will sell to rebalance their positions, which is normal. But when the ContraFund moves, they move out for a very long time. Again, the stocks may still be great, but their strategy is to get in when they're out of favor and to get out when everybody else starts pounding the table. They want to catch the initial runup, 100-500% or more in many cases. They figure they got the biggest pop on the stock price and any future appreciation will not be as dramatic.
Whether they are right are wrong does not matter, if they decide to move, the result is a ton of downward pressure on the sector till they're done.
As for the rest of Fidelity, those funds that invest in this sector, may not necessarily sell, due to their particular fund strategy. Yet, if they know Contra is going to move out significantly, they can hedge their position by selling calls - receive the premium, and buy puts. As the stock price falls, their loses are covered by the increasing value of the puts. The result is they're not significantly effected by the sector collapse. Whereas Contra buys the puts, starts selling shares for profits, and knows all those puts are soon going to be in the money. To what degree they can improve their returns, I don't know, but I would think a lot. If I knew which way the sector was headed, I'd sure do it. Someone else maybe able to offer more insight into the fund managers option strategies.
All of that said, I just trying to understand what has taken place over the last several months. The investors on this thread are not going to move a whole sector 30-40% one way or the other - at least I don't think so. The big money is what lowers or raises the tide. The rest of us are just along for the ride. It all depends on when you catch the wave and how long it last. I think this sector has more to offer long term, but lately the tide has been going out.
As far as the analyst pounding the table on this sector, their brethren were loving INTC at 100, and want to shoot it at 70. They may telling the world to buy, as there big institutional clients may have quietly been moving out. As you can tell, I'm a bit cynical about analyst.
Sorry, I didn't intend for this to be so long.
Scott |
