Some reasons why APM is at play in the fields of the trading lords
APM was deleted from the Russell 3000 index last Friday, 6/26/98.
Because you have about $10 billion of index mutual funds following the Russell indices, one favorite trading strategy is to short the most likely additions and to buy the most likely additions after the tax related surge in funds flow ends (end of April) and before the Russell indices are reconstituted each year around this time (end of June).
Because the indices are reconstituted on a strictly mathematical basis, another favorite trading strategy is to trade the deletions for the first two weeks after the list of deletions and additions is finalized. It should go without saying that the effects of all that money moving in and out are amplified for small cap stocks like APM.
russell.com
My understanding -- based on a conversation with one who has been trading this seasonal pattern for some time -- is that many of the deletions eventually end up going out of business, but that most end up doing absolutely nothing for many years. A few do experience a revival of their businesses and grow. A few also get taken out. A takeout may very well be the fate that awaits APM.
Here's the case for it.
APM is the second largest independent US supplier of magnetic recording heads. Along with RDRT and Headway, the American independents are facing serious challenges from two quarters.
1) The merchant heads division of IBM, the technology and manufacturing leader which recently bagged the single largest consumer of merchant heads, WDC.
2) The more ominous challenge, however, may come from the Japanese independents and vertically integrated giants. It has long been my contention that the Japanese challenge to the American disk drive establishment is real and well-coordinated. Below is a link to the viewgraphs presented at the WTEC workshop last May. There are a couple of slides in this presentation that compare how the Japanese and the Americans compare in the critical areas of disk drive R&D and manufacturing.
WTEC Workshop on the Future of Data Storage Technologies
itri.loyola.edu
The expansion of WDC's long standing relationship with IBM (largest supplier of disk drives to IBM's PC biz, royalties, Haggerty) to include the supply of heads, media and ICs was a necessary one, but one that came at the price of severely undermining the strenght of the American independent head suppliers. Clearly, any high volume WDC program that goes to the Japanese or to IBM does not go to APM and RDRT.
This begs the question: where are these guys going to get the economies of scale to make their current and future head programs competitive? Put another way, it is in the best interests of IBM and the Japanese head manufacturers for the American head manufacturers
to go away and die a slow death because that obviously means more business for them, but will the companies that have a vested interest in seeing the American head manufacturers thrive as a healthy counterbalance to IBM and the Japanese allow these companies to go out of business. Better yet, can they do anything about it?
Stay tuned.
Gus |
