Here are a few of my latest thoughts on Select Fund investing. Perhaps a discussion of some of these points will be of interest to a number of regular visitors to this board.
WHERE THERE'S SMOKE .....
This past Tuesday morning, a number of Wall Street's largest investment firms unexpectedly downgraded the stocks of a number of major oil producers and service providers. The explanation given for this 180 degree reversal of opinion was that these stocks, touted only a few days earlier by the very same firms as "can't miss value plays" in an overbought market, had suddenly, and rather curiously, become too richly priced on the basis of their valuations. As typically happens at times like this, of course, the stocks in these sectors steadily declined hour after hour on Tuesday, less than a day after many unsuspecting small investors had probably been induced to take the plunge in response to the previous day's glowing reviews.
Those inclined to question the motivation for such a radical shift of professional opinion, of course, might have jumped to one or more of the following conclusions (please select one or more of the following and by all means let me know what you think):
(a) that this is a tactic used by brokerage firms to lock in short term gains for their largest and most important clients, in particular those privileged few whom they had encouraged to buy the same stocks just before their upgrades of a few days earlier,
(b) that this is a manipulative strategy that enables those privy to overnight Instinet trading to pocket their cushy gains first thing in the morning, at exactly at the same time that the unsuspecting public is jumping on the bandwagon,
(c) a poorly disguised and insidious practice which, despite having reached epidemic proportions, never raises an eyebrow at the Securities and Exchange Commission (where time is evidently better spent converting mutual fund prospectuses to plain English),
(d) merely a coincidence, or
(e) the ravings of a thoroughly incorrigible investment advisor, who, if he keeps this up much longer, is NEVER going to be invited to appear on CNBC.
It causes me great pain, as you might imagine, to insure my eternal anonymity by casting aspersions on the none too subtle tactics of some of the world's great financial institutions. We have, however, seen this pattern repeat itself time after time, where institutions and after-hours traders take advantage of significant global events, or late in the day corporate announcements, while you and I are getting some well deserved shut eye. As a result, many stocks open for trading at much higher or lower prices than they closed at the previous afternoon. Soon thereafter, of course, just when the individual investor decides to either sell his shares or ride the rocket for all that it is worth, those who got in or out after sunset grab their bounty and leave everyone else holding the bag the next morning.
Then again, since we sector fund investors are sworn devotees of the principles of hypocritical investing, and we will take our profits anywhere we can find them, we will continue to invest with confidence in Fidelity's Select Brokerage fund.
Here are a few additional thoughts on the subject of after-hours trading. The first point concerns the way that many publicly traded firms make their earnings announcements after the NYSE has finished trading for the day. Doing this, of course, is extremely beneficial to those investors who trade securities while the market is closed. It can work to the disadvantage, of course, of those individuals who buy and sell stock only during the market's regular business hours. As we have seen quite often following an extremely negative late afternoon announcement, investors awake the next day to find that their portfolio has declined significantly in value. More than likely, the market's regulatory powers would claim that since after hours trading on Instinet is accessible to everybody, there is no preference being shown, or advantage being given, to any particular class or group of investors. If that statement is to believed, however, than why would so many firms intentionally delay their announcements until soon after the closing bell, if not to insure advantageous trading conditions for a specific type of investor?
In addition, since stocks are bought and sold while the NYSE is closed, it is very likely that some of this trading is being done by either the managers or traders of mutual fund companies. They would be remiss in their duties, it seems, if they did not take advantage of the changes in stock prices in the after-hours arena. I need to do a bit of investigative research in this regard, but if this turns out to be the case, then the prices of the stocks in many mutual funds are actually changing twenty-four hours a day. The NAV's of most funds, of course, are determined as of the 4 P.M. market close, so the after hours price changes are basically irrelevant in those cases.
Where Fidelity's Select Funds are concerned, however, their NAV's are calculated every hour during the day when the market is open. If these prices are changing on a round-the-clock basis, then it logically follows that the NAV's of these funds must be changing twenty-four hours a day. Under these circumstances, an investor should be able to buy and sell Fidelity's Select Funds at any hour of the day or night, and receive a freshly calculated price whenever his or her trade is actually made. At this time, I do not believe that the Selects are priced round-the-clock, or if they are available for trading when the market is closed. If this turns out to be true, of course, it places the Select Fund investor, who normally can monitor them and place trades on the basis of midday changes in their prices, at a tremendous, and perhaps unfair disadvantage to the after-hours stock trader.
I do not, of course, want to jump to any conclusions before contacting Fidelity to get information about the extent to which they participate in after hours trading. I will, of course, immediately let you know about any information that I obtain. In any event, perhaps we should give some thought to pressing Fidelity to begin the twenty-four hour a day pricing of their Select Funds, as well as making them available for telephone, computerized, or Internet trading on a round-the-clock basis.
Best to all
Bernie Kaplan
www.sectorfunds.com |
