Jul

22

Buy Real estate in DCOne notes that 25 years ago I knew the p/e and industry and market value of every NYSE company and most of the Amex, and now I know hardly any, a function of the changing guard, structure and dynamism of business. But the ones that I still know, the ones that did not turn over, are to a very high degree concentrated in the ones where a large % of their business was to the central authorities, and to a lesser degree the tech sector. Companies like Ametek, IBM, Raytheon, and the drug companies still exist. I believe this a function of my theory that the one guaranteed thing in our economy is that real estate in Brussels and Washington will grow ever scarcer and more valuable. The stress tests that E C is now applying to all their banks shows how bad ideas spread and central planning expands into every gap and crevice.

Rocky Humbert writes:

Cramer said something last night worth highlighting– which fits with the part of The Chair's observation

He (with chagrin) acknowledged that for most investors, owning the XLF (bank stock ETF) is now probably superior to owning individual bank stocks. He showed that the market has not been differentiating sufficiently between JPM and BAC and other bank stocks — and despite the wild gyrations and higher volatility of each of his favorite banks– they "end up in the same place as the XLF." To mis-quote him, "the XLF seems to be the same as the underlying banks but with a much smoother ride."

Part of Cramer's schtick is that "home-gamers" can pick stocks profitably — and beat the indices — if they do their homework (such as The Chair's knowledge from 25 years ago.) Last night's capitulation was a refreshing admission — that the equity markets have become commoditized — and knowledge of individual companies has become much less relevant for speculative participants with short-term views.

I submit that some part of this stock commoditization is due to government interference with the natural market process– i.e. it's much more difficult to pick "winners" and "losers" when government decides the winners and losers. But I'm optimistic that eventually this too shall pass– and a day shall come when knowing company fundamentals will again be relevant. But that day isn't July 21, 2010…

Nick White reminisces: 

I remember– all of ~10-15 years ago now– as a teenager first getting into the market, it was Cramer's early TSCM columns that attracted me to the game. The way he would kick off at ungodly hours. That he'd read trade magazines AS WELL as all the newspapers and business mags (that was alpha for sure in those days, but seems so pedestrian now in the age of blogs, social networking etc etc!). He was a man possessed, driven beyond anything to win by doing more, better, faster than anyone else. I thought it would be so great to be like that, knowing every company– who the CEO was, what their P/E's were, ROE's etc etc.The Chair has the same drive, just from a different approach and millions also recognize him for it.

Yet, it is not a death knell that such things are less important than they were…One of the most important lessons I've received from the crumbs of the Chair's intellectual table was to go and learn and re-read texts on evolution and competition. And one of the core tenets of evolution bearing on present discussion is that the environment decides whether a mutation is advantageous, not the organism's "skill", per se. Relating this to the present, 25 years ago, the market environment was totally different. It favoured one particular group; people who could be bothered going to a library or ordering quarterlies and annuals and dusting off Lotus to do their own spreadsheet modelling. Late 90's it was tech. Four years ago it was leveraged finance. Today it's an infrastructure and programming game -but this too shall pass.

To me, there is one aspect of the market that will never, ever change - the market only persistently rewards knowing better information sooner than someone else. Right now, we see it in HFT and ridiculously hyper-complex quant strategies. In the past, it was fundamental knowledge. In future, only the Lord knows from where the edge will come - but the edge will always be superior information.The best part is that hard work - properly directed at gleaning the information that is rewarded in the current environment (along with self and market awareness) - will always win. Maybe that means learning programming in one set of conditions; maybe it means learning anti-trust law under other conditions. Maybe it means doing a CFA in yet another. Sooner or later, whatever mutation we've had to our benefit will disappear as the conditions change. Our edge will be commoditized, our pl's will begin drying up and we will have to start learning things anew in line with the new environment. But we can adapt.

That's power– and an amazingly powerful tonic against throwing one's copy of "Triumph" (twice in two days!) in the trash and swearing off derivatives.

These days, I don't feel bad about not knowing the minutiae of hundreds of company off the top of my head. Rather I'm happy to acknowledge that it's just not as necessary right now. Better to try and take advantage of my current little niche for all it's worth. One day I'll get steamrolled and will need you all to help encourage me to get up and try again.

Chins up, lads. We'll all improve ourselves to greater things.

Kim Zussman writes:

Why attempt to pick individual stocks when:

1. Good results are luck, since for each stock with cap > 100,000 there are 1000 analysts swarming each item of the balance sheet

2. If hedge funds pay "ladies" like Ms Chiesi for information, how rare is legal alpha?

3. ETF is diversified, so at least for unleveraged versions the lower limit > 0

4. ETFFing *should* over-correlate component stocks, creating
opportunities for ladies as in #2

5. One option is to short stocks with mortal leaders, such as AAPL, BRKA, LDYGAGA, and go long an equal portion of their respective ETF's. Paired life-insurance.

Vince Fulco adds:

For the everyman, agree with all your points. Friends in the HF world are putting up strong long term returns by a complete 'boots on the ground' approach. I won't mention the industry group but they attend every conference, do every meet-and-greet they can with mgmt, know the companies financials intimately and can discern the nuances, body language and subtleties of mgmts' messages as they roll out strategic plans. And trade every part of the capital structure. Keeps them one step ahead of the beancounters in Bangalore. A start-up long-short fund here in town doing the same with second and third tier companies which have lost analyst coverage.

Jim Lackey writes: 

Yes for the banks but would he/you say to buy all the handset makers or AAPL as no one wants to hold the entire NDX when AAPl is already 20++. I do see moves in retail where things are a bit slower. Some times you can catch the pairs guys buying TGT selling SHLD or what ever is working that day. Not that its useful as the SPX can and will go 1% in 2ea 10 minute bars to ruin your afternoons.

One wild thing I noticed was ESRX when it was over 100 pre split. One day during lunch I was bid 100.01 then raised to .06 computer re-raised. So I said Okay I'll play and we drove the stock 100.01 bid to offered at 100.29 and back and not a single share traded. Bids offers quotes went all mad money. So I thought here must have been a big bid 100 bucks for 100k shares or what ever site unseen dark pools. Turns out no. HFT reports say guys get paid or some weird incentives to quote. I am not sure if it's true or what the point is seems silly.

Day traders are frustrated with what we call stock trades offered-@ new high, computers auto low offer and the inverse, new low, hft high bids. If a stock is at new lows and flashes on new low screens its immediately bids 1-2cents higher for 100shares on a computer. Same with new highs. What we are frustrated is every trader in the world is trained to not do that. If you're buying you want to buy the lows if your selling you want the highs and if you kill the flow or mo the guys on your desk would give you a punch in the arm. But HFT has all the money. They must be doing it right.

But all these low offers and high bids are for no size, like when some one steals your debit card they charge you 1 dollar to see if it works then sell it on internet so the bankers told me yesterday. I used it at the wrong gas station Sat. 


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