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Daily Market Update - May 9, 2013 (Close)
Quite a turnaround in the final hour. As went the dollar so went precious metals and the markets. Opposite directions, actually. Although there was also a rumor of a rumor that JP Morgan had indicated that the Federal Reserve was preparing to taper its support of Quantitative Easing.That rumor may have been the real stimulus behind the sudden direction reversal.
Up until that final hour, there was really only a single story today and it had to do with some really large price movements in certain stocks after releasing their quarterly earnings.
Tesla, Green Mountain Coffee, Rackspace.
The list goes on. That was just yesterday.
LinkedIn, Whole Foods, Amgen and many more came in the days before.
That is the list of companies that reported earnings and had moves, in either direction, that were at one time unthinkable.
You don't have to be a stock with a high beta, either to be the kind that responds with the kind of move that used to take an entire year to traverse. Ever hear of IBM?
In-between you have companies that routinely release very pertinent information in the weeks before earnings are released that often send the shares jumping all over the place. YUM Brands, Abercrombie and Fitch and Cummins Engine are great for that sort of thing. Even worse, those typically happen without much, or any advance notice. It's not like a scheduled earnings release. They just blurt it out and all hell breaks loose.
Then, of course, you have the unexpected news. Like Baxter International, that reported some disappointing news about some European drug trials. Or a couple of months ago when Petrobras announced lower than expected price increases.
Most of the time, unless there's something truly and structurally defective about a company, such as accounting irregularities, all you can be, if you want to have a long term edge against the market, is a passive observer, who follows the biblical wisdom of Solomon and realizes that "this too shall pass."
That's really hard to do.
One of the reasons that I maintain patience in the face of a losing position is that I am a short term pessimist, but a long term optimist.
In the case of a losing position, after deciding that there remains a possibility that all can be well at some point still within my life expectancy, I ask only one question.
"What are the chances that the same idiot that selected this stock that's causing me so much grief can now go and sell it to use the moiney to buy a new stock that won't do exactly the same?"
Of course, if you are a pessimist, the answer is "not very good."
What's very difficult to do, besides looking at the paper losses, is to balance the lessons learned in many graduate business classes. The concept of "opportunity costs" is constantly a part of every analysis.
"What is the next best thing you can do with your money, as an alternative to the stupid thing you're currently doing?"
But that assumes that you'll be smarter tomorrow than you were yesterday or that you'll be doing the textbook thing and going into Treasuries.
I stopped using opportunity costs a long time ago as a criteria leading me to change direction, although I still compare each trade to the S&P 500, as a reflection of possible opportunity cost.
What's really clear to me is that the best way to offset paper losses is to first approach them without a sense of panic or hopelessness.
Again, hard to do.
But beyond that is the need to give up the belief that now you're smarter and can dump the loser in exchange for a winner.
Other than taking advantage of tax losses, by and large dumping the losers is a good way to forever have mediocre returns. Or worse.
So, speaking of mediocre returns, yesterday was another report of how hedge funds are scrambling to get investors and keep the old ones from pulling out. Due to their unique fee structures, the well known "2 and 20," trailing the index can mean that the hedge fund manager's kids don't get to eat in a year that trails the index.
Since hedge funds do best when the market is either moving down or sideways, they haven't been very happy places to be this year and are probably rooting for a downturn even more than me. At least my kids are on their own now.
For those that have enough money to be a client of a hedge fund, and who are old enough to have an historical perspective, the "2 and 20" is a bargain, especially since the frequency of trailing the market is pretty low. That's exactly why so much money goes into hedge funds. It's not necessarily to get great returns, but it's to beat the returns, especially in a down market.
In terms of "opportunity costs" the hedge fund, during most market cycles is the standard to which to compare, except that it's unreachable for most investors.
What will be interesting to see is whether the markets are in any way impacted by hedge funds starting to alter some of their hedging practices in response to a market that is single minded.
To do so is to ignore another tenet of all of those business school classes.
That is the concept of "sunk costs."
The most common interpretation of "sunk costs" leads to the application that you shouldn't throw good money after bad money in order to rescue a flailing and failing position. However, another and less common interpretation is that you shouldn't let your failing position dictate how you proceed forward. Instead, take the opportunity to re-evaluate the processes that led you to success, without abandoning them.
One last time, but that's hard to do. However, even dogs like Walter Energy and Cliffs Natural Resources aren't quite ready for the tax loss heap, quite yet.
And those hedge fund manager's kids? Don't worry. Things will be so good that they'll be back on their way to developing Type II Diabetes before you know it.
OTP Sector Distribution* as of May 9, 2013
* Assumes equal number of shares in positions
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