A Very Good read on whats gone down since March 15
To: bsim17 who wrote (105856)
From: stephen karasick
Wednesday, May 17, 2000 7:45 PM ET
Reply # of 105875
Even the bears find this market unbearable
Those who predicted the Nasdaq's drop still took a hit, so
there's no money left to chase away the bear market. Long-term investors
may do best by holding tight until this season is over.
By Jon D. Markman
Bear markets, the experts say, are all about heartbreak and failure: Failed
rallies, failed declines, failed trends, and worse, perhaps, a failure of
confidence.
Even bears have trouble making money in bear
markets because, if they?ve been around awhile,
they fear the sharp advances that appear from
nowhere. They forever find themselves covering
their shorts -- or bets against stocks -- too
quickly in weeks like this when a comet auguring
good news flashes across the sky. If bull markets
are all about euphoria and invincibility, then bear
markets are about paranoia and vulnerability.
One of the surprises of the past few months, indeed, is that there are so few tales of
fortunes being made on the short side during the Nasdaq Composite?s ($COMPX)
35% decline from its high in mid-March. (And by the way, despite my bullish
outlook for the full year, a decline of such swiftness and size in a major index has to
be defined as the start of a bear period of some duration.) As a columnist who has
run a public portfolio that?s flat for the year after being up as much as 42%, I?ve
held out hope that there was someone else out there whose brilliant moves could
be memorialized, quantified and turned into a future SuperModel. I?ve imagined that
there?s some swashbuckling pirate at the helm of an offshore hedge fund who?s
made a killing by blowing out all of my stocks at the top, then cackled hysterically
as he watched them plunge into the sea.
But so far, the tally of winners amid the rout is, well, short. And there may be a
lesson there, which I?ll get to in a moment.
Shorting started too early
Many prominent market skeptics were simply too early; they started shorting tech
stocks in 1998 and 1999, and blew up as the Nasdaq rallied to heights beyond even
bulls? expectations. James Debevec, an analyst at a Bahamas-based firm that
invests in hedge funds on behalf of wealthy investors, says he can only name a
single fund that is up over 50% this year on the basis of timely short sales. "Most
of the bears who were shorting the market a year ago had already been wiped out
when the decline finally hit," he said. "There were not too many survivors."
Presuming that Debevec just didn?t know the right
people, I called on a gentleman who now runs a large
public technology mutual fund but had formerly
worked for a couple of the world?s top hedge funds.
He declined to be identified, but said he could only name one other hedge fund that
was known to be up sharply for the year ? about 35% -- on the basis of bets on the
short side. The reason, he said: "The funds today are geared not to hedge risk, but
to take risk. It?s a complete myth that the people who run those funds have been
smarter than the average investor over the past few years. Many were late to buy
tech stocks during the 1990s, and when they finally did buy them last year, they
were not capable of holding with conviction once they began to decline in March.
Instead, they held these stocks too long and then blew them out. They certainly
weren?t short and they certainly didn?t make a fortune. Quite the opposite."
Scratching the hedgies off my list, I next recalled that several of the Establishment
money managers who gathered for the annual Barron's magazine roundtable on
stocks in January expressed strong reservations about the bull?s longevity. So I
dove into the archives to learn if any of them had made a killing on their prescience.
The results here also surprised me: Even the ones who suggested that readers sell
short stocks or indexes had failed to clean up -- at least in their prognostications in
the public record. Swiss banker Felix Zulauf panned the S&P 500 ($INX) and the
Nasdaq in the magazine on Jan. 31, but those ideas resulted in less than a 2% gain
through May 15. Meryl Buchanan, a value manager and partner at Buchanan Parker
Asset Management, timidly proposed shorting JAKKS Pacific (JAKK, news,
msgs) in the same issue, but that stock is only down 1% since. No brave rips on
one-time darlings like Sycamore Networks (SCMR, news, msgs) or Celera
Genomics (CRA, news, msgs), which are down 125 points and 196 points,
respectively, from their highs for the year.
Bert Dohmen, a trader and newsletter writer in Honolulu who?s been a good market
timer over the years, said that the decline from the top was the first plunge in the
past three decades that he had failed to capitalize on. Despite clues like light
volume on the secondary top of Nasdaq, at 4,963 on March 24, he said, "it came too
fast."
$2 trillion to 'money heaven'
Dohmen says he believes that more than $2 trillion worth of mostly borrowed
dollars went to "money heaven" during the Nasdaq decline, and those unspeakable
losses would keep the broad averages from advancing much the rest of the year.
Since the peak, he believes that many top traders who were highly leveraged lost
60% to 70% of their funds, and would not be borrowing again to put funds back in
circulation.
The lesson, perhaps, is that because no one made a killing, there may be very little
spare cash around to boost the markets back to the old highs until confidence is
restored -- something that could happen before summer if the Federal Reserve
definitively declares it has finished draining the liquidity it pumped into the U.S.
monetary system over the Y2K scare.
In the meantime, we may have to get used to living in an "Alice in Wonderland"
world of opposites. From 1995 to 1999, we learned that all dips could be bought,
and most of our charts stair-stepped up. Now we?ve learned that in a bear phase
rallies are sold, and most of our charts stair-step down.
The best tactic for most private investors who are investing for retirement may be
the hardest, and that is to do nothing until the coast is clear. Hopefully this will end
soon; perhaps it already has. Active traders, to be sure, have the capacity to
change their habits and adapt to this new environment. But long-term investors are
probably still best served by holding firm to strategies that have been tested over
many market cycles.
Over the next few months, I?ll propose some trading strategies built on screens that
should work well even if the bear phase persists. But if you haven?t got the time,
stomach or instincts for trading, then history suggests that Year-Trader and
Quarter-Trader portfolios (down 1% and up 1%, respectively, this year through
May 15) purchased at the end of last year should continue to match the broad
market benchmarks. And if stocks perk up in the fall as usual, patient Year-Traders
could still have a very pleasant surprise in their stockings by Christmas.
On margin for grandma
I received a flood of mail expressing sympathy and advice for the young man whom
I wrote about last month in regards to his unfortunate experience with margin and
momentum. The reader said he had lost a couple of hundred thousand dollars
amassed by his grandparents for their old age, first by buying fast-advancing
stocks that got stuck in reverse during the Nasdaq?s big decline in early April, and
then by borrowing against them to "average down" on more shares.
Some excerpts from my inbox:
"I bought on margin for the first and last time in the early 70s and got
caught in the oil embargo. Margins are like playing Russian roulette. That
loaded chamber will come up; it's just a matter of when."
"Your story about the young man who lost big was very sad. If 1987, and to
a lesser extent 1999, taught me anything, it's one, don't buy on margin and
two, stay the course with solid players and don't get rattled about the
corrections."
"My message to the young man is, first, don?t give up: $100,000 is not a
negligible nut to start over with. Second, you're not alone in your
experience with margin. There's a solution, however: Leverage has to be
treated like gasoline, powerful for good and evil alike. One can't invest
leverage. One has to regard it as a trading vehicle only. The portfolio has
to be divided into levered and unlevered halves, and the positions in the
levered half must be entered and exited on the basis of a short-term trading
strategy. The important thing is to get comfortable with selling. A levered
position can't be held for the long haul through declines. If it declines, it's
sold. I have learned my lessons the hard way."
"It takes a good, sound character to wash your 'dirty laundry' in public. Go
and sin no more. Any idiot can make money in a bull-market mania. It takes
system and method to hold onto it. As a professional trader who has made
every mistake in the book, I realized that without a system, you're at the
mercy of emotion and Wall Street propaganda. Most traders and investors
have no system and will lose a lot of money. Nasdaq has become a
commodity market with a stock-market mentality."
Here?s another bit of wisdom on this subject that I have snagged on a ricochet from
Su Keenan, a friend who co-anchors Bloomberg TV in the afternoon. She attributes
the following quote to billionaire Viacom chairman Sumner Redstone: "Big success
is not built on success. It?s built on failure, disaster and catastrophe. It?s about
learning to turn it around."
Personally, I believe that a large part of the recent sell-off has stemmed from the
irresponsible extension of credit by brokerages to inexperienced investors like my
correspondent. Margin loans are hugely profitable to brokerages, so we can?t
expect them to halt the practice without a fight. Legislators and regulators would
serve the public well by passing rules restricting margin to investors with at least
three years of experience, and then looking into sharply limiting the lending
threshold to less than 50% of a stock portfolio?s value.
Fine print
The notion that a bear market could develop during good times for our economy
may seem irrational to those investors who only came into the market in the late
1990s. But a framework for thinking about this unexpected event was summed up
well, I thought, in an e-mail sent by New York reader Leonard Kreicas to our new
contributors, Laurel Kenner and Vic Niederhoffer. In response to their Friday
column "5 Rules to Ace the Market Game," which described rules from a chess and
checkers grandmaster that were equally applicable to stocks, the reader wrote:
"Grandmasters rely on illogical thinking, but they call it the element of surprise.
Generally they start the game according to the rulebook, but then they make a
move, which is unexpected: It is illogical. This causes the game to go into
uncharted waters. The winner is the one who navigates the new terrain the best.
The more illogical a master?s move seems, the bigger advantage he has, because
his opponent becomes totally confused. The weak opponent thinks only inside the
box. By the time the confused victim figures out what has happened, he is
history...Likewise, the markets prey on the confused trader who plays only by the
established rules. The more unpredictable and chaotic a market is, the more a true
master wins. He is able to transcend rules and logic to another level of
understanding.?... So far Meryl Buchanan is leading her peers in the Barron's
Roundtable sweepstakes, according to my math. She?s up 14%. Close behind her is
wizened retired value manager John Neff, up 12%. Goldman Sachs partner Abby
Joseph Cohen is up just 1%. ? Three-Five Systems (TFS, news, msgs), Adept
Technologies (ADTK, news, msgs) and Keithley Instruments (KEI, news, msgs) ?
three tech stocks that I?ve mentioned in the past month as being unfazed by the
Nasdaq decline -- all continue to bust new highs. Three-Five on Tuesday rallied
sharply after unveiling a new light engine that Nikon has built on its LCoS
microdisplay technology. Keithley announced a 2-1 split.
At the time of publication, Jon Markman owned or controlled shares in the
following equities named in this column or listed in the SuperModels
portfolios: BroadVision, Cisco Systems, Digital Lightwave, Emulex, Kopin,
Maxygen, Microsoft, Nokia, Nortel, Oracle, PMC Sierra, Qualcomm, Siebel
Systems, SDL, Superconductor Technologies and Xcelera.com.
View Next 10 Messages | Respond | Previous | Next
Bookmark this Subject
Ignore this Person
View SubjectMarks
Terms of Use |
