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Strategies & Market Trends : Tech Stock Options -- Ignore unavailable to you. Want to Upgrade?

To: Robert Graham who wrote (41226)	4/25/1998 1:29:00 AM
From: Alias Shrugged	Read Replies (2) \| Respond to of 58727

Bob - Great Post. In your breakdown of players among speculators, pros and the funds, where do you place the large pools of marginal money, such as hedge funds (Soros, etc.) and the large trading accounts of the various brokerages or investment banks (eg Goldman Sachs)? I used to work as a pension consultant, providing primarily actuarial services to Corporate and Union (Taft-Hartley) defined benefit pension plans. I sat in on many meetings where investment managers presented their quarterly results (saw a lot of dancing!!). Smaller funds ($10 to $30-$40 million) usually allocated 30% to 50% to bonds while the remainder went to equities. With few exceptions, there would be just one equity investment manager, with a large cap style highly correlated to S&P 500. In fact, almost all of the equity managers (for the smaller funds) used the S&P 500 as their performance bogey. Bond performance was usually tied to the Shearson-Lehmon Intermediate Bond index. Larger pension funds ($50 to $1,000 million) that I was involved with had more equity managers, including small cap and international guys; but a big slug went to the Large Cap guy keying off of the S&P 500 index. Some large cap guys used an "Index Plus" approach, where they would run an index fund but try to pick up marginal performance by various techniques (e.g., underweighting the worst stocks in each sector). So, there is a lot of passive money in the equity market. Besides the S&P 500 Index Funds themselves (both retail and institutional), there are Index Plus funds, closet indexers and many managers with the SPX as their bogey. Asset allocation for these pension plans is reviewed quarterly; general policy is reviewed/changed anywhere form every 3 to 20 years. A pension fund can run with a specific allocation (eg, 35% large Cap, 15% small cap 10% international and 40% Bonds) for 2 to 4 years without touching the mix (although the funds are usually rebalanced periodically). Bonds are not very appealing to a pension plan. Current funding (the actual cash the Plan sponsor must contribute to the plan) and pension expense (ie, the p&l charge) targets for a pension plan are keyed to an annual asset appreciation assumption ranging from 7.5% to 9.5%. In the current environment, bonds return maybe 6%, while equities are assumed to return 10% (long term SPX performance over 70 years?). You can't park very much in bonds if the plan's annual bogey is say 8.5%. And if bond yields rise from 6% to 6.25%, there isn't going to be much of a reaction in terms of asset allocation. So, two thoughts: (1) who is going to sell stocks?, or phrased differently, where is the marginal money?; and (2) the S&P 500 stocks are sucking up an amazing portion of the available equity investment dollars due to the way the game is played. Geez, this post is getting long. I would guess that average retail investor (including all of the 401(k) and IRA money), through the use of mutual funds, and the pension funds are not going to leave the party first. They either have no choice or are true blue buy-the-dips and I'm in for the long haul (at least until something reaaalllly nasty happens). So, the marginal players (those that can leave or are forced to leave for other reasons) consist of?? foreign investors, hedge funds, trading house and other pros? Tell me more about the foreign investors, and what will convince or force them to leave this equity market. Sector rotation. Seems there used to be a 12-step program (Lisa or Slevin can provide the details) that a stock had to go through after rising dramatically and then disappointing - you know, stardom, disaster, shock and dismay, banishment, redemption, forgiveness and then repurchase, ranging over several quarters to a year or more. Now, seems like the cycle is reduced to weeks or, in some cases, to the 1 hour following the earnings conference call. Rotation seems fast and furious. Almost like watching one of those Discover Wild Africa shows where, as the lions creep up upon the Wildebeasts, a whiff of panic races through the herd, and they start stampeding in circles. uh, where was I? Oh well, I'll write chapter 2 some other night. Looking forward to reading your views on the market. Mike

To: Robert Graham who wrote (41226)	4/25/1998 2:43:00 AM
From: Patrick Slevin	Read Replies (1) \| Respond to of 58727

I am well aware I cannot post as eloquently as you on this. The points you make on liquidity are very valid. Counter to this, I would say liquidity was rampant before strong corrections in the past. I do not envision a bear market, myself. A bear market can drag on for years such as in the roughly 1970 to 1978 time frame. Certainly not the one most refer to, the October 1987 collapse. If you look at the Nikkei a few years ago, there was considerable liquidity and yet there was a good example of a "Blow Off Top", with the resulting collapse enduring even until today. I think the Nikkei could be considered to be in a Bear Market. In my limited grasp of the situation, I am no economist, I see where there are monetary pressures globally. It appears to me that there are band-aids being applied in Asia. I don't pretend to have a solid grip on the situation there. You have a situation where in Japan, interest rates are low, taxes are low, and yet the market is weak. The exposure of Japanese banks to the rest of Asia is delicate and the exposure of US banks to Japanese banks appears to be somewhat great. A not-so-unlikely scenario of a another leg down in the Asian markets puts capitalization in Japan at levels low enough to require Japanese banks to raise cash by repatriating moneys presently invested in the US. Certainly there would be waves of investor moneys coming out of Japan but the net flow would be outward. Further, the relationship of the Greenback to the Yen seems precarious to me. A motion one way or the other carries the threat of a trade war. This, I think, is why we have been seeing the US act in concert with BOJ in recent currency transactions. Taking a thought from one of the analysts I follow, what we have is delicate equilibrium which is good. However, any slight movement one way or the other creates too much risk for the market. It's curious you should mention GE. I had lunch Sunday with a Lehman VP who practically insisted another guy at the table protect his GE investment by buying September puts. I myself am short calls on the stock. The powerhouse has just run up so fast, for GE, that it appears to make no sense even to Senior Management at a firm like Lehman. I love GE, I've had it so long my original cost is $4.62, or something like that. But as you say, look at a chart. It appears to be an aberration with respect to the normal motion of the stock over the long term. By long term I mean many years. When we speak of the size of a correction, ----unfortunately I don't have my charts up----but would you not think a return to say a 200 day MA would be a normal market event? If so, that should be below 8100. Even a 50 day MA is probably 300 points lower than here. A market or an issue of stock returning, however briefly, to an often watched MA is not an unusual event. A tool I use every day is a combination of two oddball MAs and on intraday charts they cross quite often. When all else fails, I usually can make money trying to predict the motion as the market criss-crosses the longer of the two averages, it can produce a very powerful move....albeit it usually for only 15 minutes, perhaps 25. Your grasp of the market technicals is far deeper than mine. I pay less attention than you or Don or anyone else for that matter. My view is from the point of a sparrow hopping a ride on an elephant. Although the elephant is of a size that it can crush me, as long as I don't try to tell him which way to go I should be fine. Frankly, although I am concerned that the market really requires a solid shot to the knees, it can go up as long as it likes for all I care. But I think what happened to the Nikkei after it did the same high wire act should be a sobering thought. The future for the tech stocks ..... from what I read as far as analytical forecasts from people who understand the technologies (and write as if they think people like me understand it---what the hell is a DVD, anyway?) is that within a year's time frame the change in our environment should be massive ..... I think is incredible. I think an Asian turn-down will ---Long Term --- create a financial environment that will leave New York and Chicago as the predominate players in the world for perhaps a decade with no one else even close. I just think it would be more prudent for the market to break somewhat first. Does that sound contradictory? Perhaps it does. However I'm from the (probably small) school of thought that believes the biggest bears in the world are the ones who are calling for DJIA 10,000 and more. Sure, on a chart you could easily make a case for above 10,000. Hell, make it 12,000. I say these people are bears because we all know a market which continues straight up without an occasional return to solid support levels is a little dicey. A return to a 200 day MA after a straight up move...like some say, in 3 months...to 10,000 would be quite a thing to short. Therefore, these people are bears. BIG bears. The money flow aspect is a strong point. I'm 46 years old. I first started watching the market when I was about 8, because my father and brothers often spoke about buying this or selling that. I have never seen so many people discussing the market as I see today. Thinking back, I remember the best times one could have bought positions is when people get back to a normal routine. Now I know that's patently obvious. But sitting here thinking about it, I realize that in all these years I never noticed the phenomenon as strongly as I do today. In any event, I imagine I fit into that class of people you would consider to be the short-term off the floor player. Short duration, short term trend, either side of the market....makes no difference to me. All of the foregoing was just my random thoughts on the overall issue, I hope it was not too jumbled.