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To: Alias Shrugged who wrote (41259)	4/25/1998 2:57:00 AM
From: Robert Graham	Respond to of 58727

I am continually amazed at who I met here at SI. I am happy that an individual with your background chose to respond to my post. I have been thinking about hedge funds lately since I have been subscribing to Cramer's "the.street" web site. I see hedge funds as short term players, professionals who are off the trading floor but the successful hedge fund manager is still well connected with what is happening in the market and where the money is going to. So I think they are should be placed with the other market professionals. I do not see them accumulating stock for a longer term position. Also hedge funds tend to use options. So their efforts capitalize on the short term swings in the market that can even be news related. But then I may have a warped view of hedge fund manager having followed what Cramer does. Hedge funds certainly can move allot of money around very quickly which can exaggerate or counter swings in the market. I think that in my previous post I left out the individual investor. But I think the movement of fund money can occlude or negate any effects seen by individual investor monies, and fund money tends to be longer term in duration like the positions investor take in the market. Still over time as the market has become more overvalued and volatile, funds in their competition for the public dollar have been taking shorter term views of the market. Since most fund managers appear to be young like in their 20's and have never seen a major market adjustment, I suspect they can feel "safe" speculatng in shorter time frames with fund money. Very interesting and valuable information you are giving me on funds and their portfolio and performance measures. I have noticed a trend toward a smaller cash position by the average fund. Have you noticed this too? Based on your model portfolio descriptions in terms of the allocation of monies, I see you are saying that there are still allot of passive monies in terms of bonds. I consider bonds similar to a cash position with respect to the stock market. But then there are important liquidity differences. But then you are referring to pension based funds here which represents a part of all institutional money, albiet a significant and important part. A smaller cash position places the fund in a more reactive position with respect to the market. In a sense I suspect it provides more stability because that is allot of money to commit to the market that you cannot just remove from the market on a whim. But at the same time during significant market corrections, illiquidity caused by redemptions can accent and prolong the market correction. Also I think this makes funds more dependant on public money that can provide them relative liquidity in the market which for instance can provide them the stock to meet their large block demands or provide the funds with demand that they can sell their large blocks of stock into. For this and other reasons, I do not see funds playing with the small caps unless they are accumulating for a long term position. I have been recently noticing a procedure that funds use periodically in the market. This is where they find a temporary place to park their money while the market is in transition. For instance, when the market bottomed out and firmed up after the market correction last November, the funds parked some of their money in the box makers for the short term. When this attracted public money causing the price to rise on these stocks, the funds sold into this demand to next move their money into the leadership of sectors that they chose. This helped start the next bull cycle of the market which the funds subsequently have rotated their money out of and were in the process of accumulating stock in different sectors and industries before this recent market adjustment. What is interesting is that evidently they have found another temporary resting place for their money just in time for this market correction. This is in stocks like CPQ, GTW, HWP, and even IBM. They were so rushed to place their money in these stocks that they actually ended up agressively bidding the price of these stocks up which is not normal for funds. Note that this selection includes the box makers once again. I suspect after the market correction is over, they will sell their holdings as they rotate their monies into the next sectors on their rotation list, and they will do this by selling into public demand for their stock holdings in these companies. So the funds must not see this market correction as being anything significant, otherwise they would of taken a much more defensive position. However, I heard that consumer staples did see some new money recently which is a more defensive position than lets say the cyclics. I see a pattern developing here. Funds appear to pick the "second tier" leadership companies of a sector or industry that has lead the market in the past. The companies are fundamentally sound and well-known by the buying public. The prospects are positive as compared to their peers, and they tend to be undervalued when compared to their peers. Perhaps that is why the funds choose the "second tier" leadership companies instead of the industry leaders. The industry leaders are still considered to be comparatively overvalued with respect to their near future fundamental outlook. Here you have IBM which has not gone up with the market, CPQ which experienced an adjustment due to their aquasition of DEC, GTW which has not seen the price growth of its shares like DELL has but is still in the same industry and has seen good earnings growth rate in the recent past. HWP has also not participated in recent market runups with its peers but is a sound high-tech company. So the funds have moved to comparative value in companies of the tech sector where public monies have been moving to in the recent past. This can in the near future provide them with public demand for their shares of stock to sell into when they complete their sector rotation besides a relatively safe place for their money in a small market adjustment. Any thoughts on my observations and deductions here? The foreign investors are just that: investors. They will not flee until they can find something better at comparable saftey. The Asian markets will not be able to for some time provide them with the performance they are looking for. When our bonds breaks above 6%, I suspect this will attract more foreign money to the bonds since many foreign investors onvly involve themselves with bonds instead of stock. IMO this will keep the long bond rate below 6% unless the Fed does something with short term interest rates. I think the yield curve is still relatively flat right now. A movement of more foreing money into bonds can even help the stock market since during an uptrend the bond market is linked with the stock market. The Japanese may step up their sales of our bonds and even start to sell their holdings in our stock market. Their economic situation is IMO going to get worse. So this can be a major source of cash outflow if this happens which can dry up market liquidity and create a more volitile market that is more prone to correction. The market came become more pessamistic and an event like the Fed tightening of the money supply can be the news to trigger substantial selling in the market. But I see the current market sentiment being too positive for this to happen in the near future other than concerns by the big money in finding value in the market. Perhaps this search for value by the funds will end up facilitatng the next market correction? When I see secondary leaders and leaders of the past like IBM start to do well, it is usually a sign that the market is topping. The speculative "exhuberance" that we have seen with the Internet stocks is another sign. Still I think short term market sentiment needs to change for the worse before a news event like the Fed increasing ST interest rates can cause the market to go through a significant correction. When we have money entering stocks that are reporting declining earnings and revenue, and even in some cases reporting disappointing earnings, what we have is a very positive market sentiment, which is what happened latter part of last earnings season and this earnings season so far. This is on the heels of stock valuations that have previously been discounting next years eanrings. Notice the pattern here? The "elevator" pattern that I mentioned in a previous post of the indices generated by massive amounts of money moving into the market has been helping this confident and positive market sentiment. I have now recently heard that the market is starting to be concerned that the economy is doing too well which is conntrary to the changing fundamental picture and so they are now turning their focus back to the Fed. Hmm...there must be too many people doing well and feeling "successful" in today's market. So we may be seeing the start of a change in market sentiment. Time will tell. The market if it were a person would be diagnosed with the Bipolar Personality Disorder. I would like more information on the "12-step program" of sector rotation and its effect on stocks. This sounds interesting. Comments and feedback welcome! Bob Graham

To: Alias Shrugged who wrote (41259)	4/25/1998 2:01:00 PM
From: j g cordes	Read Replies (1) \| Respond to of 58727

Mike, the stability of "passive funding" is the key question to longer term market security but for traders there's a different key. With the advent of the general population narrowing its investments through funds, and funds narrowing their placement into the largest cap stocks there's been an unprecedented concentration of equity feeding on its own success... or as you say the S&P is drawing in an amazing portion of investment capital. The question we must ask as independent traders is how to perceive this new entitiy to advantage. I personally get very frustrated with common measures like pe's, cash flow, top line growth, and the rest... because these things tell one what's happening, not so much about what might happen next. Analogies are great for prying open the lid a little. Lets use the analogy of storms... with thunderstorms being new issues that crackle, with tornadoes being companies like SEEK, VVUS, IOM, PFE (having intense wind sheer), etc. Sector rotations are like frontal systems in collison. But this massive market has to be seen as a dominant hurricane that's powerful enough to sweep up the energies of local systems into its circulation. I pick hurricanes because they don't end suddenly, with blowoff tops.. instead they swirl their way into fair value, dissipating their winds and rains into New England or out over the Atlantic. On Jupiter, there's been a hurricane of global proportions circulating about the equator for hundreds if not thousands of years... a structural storm? Many have been watching for the Big Kahuna. I'd suggest the core companies of this massive market are prone only to the most basic kinds of valuation shifts... those being international currency/trade contests, tax policies, energy, interest rates and short term consumer demographics. Some of the multi-nationals are so far outside the norm of local disturbances that they react very little to even a continent having a consumption slowdown... like MCD, KO and PG. They reflect averaged global changes in their business. The thing that sustains a huricane is open water and rising warm air. The S&P's driving power is world wide deregulation and open markets. The multi-nationals are the core of this market, they are the engine within the engine centered on Wall Street. Is this power source dissipating? Specific to your post, the marginal money of substantial players could, in aggregate, fund a competing storm.. we saw that in the '80s with Japan's powerhouse stock market, and we saw something like that most recently in SEAsia with currency. Longer term we could see that with the EU or the emergence of China/Japan/Koreas.. but I really think that with the multi-nationals operating through wall street, holding the center with a large portion of funds being committed to long term holding, its less likely we'll have a blowoff. Part I --------- Part II A trader has to take two sides to every issue. The above is one side, here's the other. Most of us fail to realize its a bidding market, which means prices are set not by how much money is coming into a market but by a process of matching buyers and sellers. We could find ourselves in a situation of more money funding lower prices on wall street if the ratio of bidding doesn't increase price. A situation where more equals less... much like improving your home with a hundred thousand dollar addition and it sells for less than you paid a few years earlier. I add this because a trader has to look past cash flow and percentage gains and most of the other stuff that passes for investing economics.. and focus on the exception to the rule. Its the only way to get an edge on the masses and the averages. That's where the 'marginal money' tries to leverage itself and we should be most observant for opportunity. Jim