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The Speculator
Get the jump on a jumpy market
With the world moving
faster than ever, smart speculators need to find ways to stay ahead
of the game. Here's one idea: Invest in companies with reason to
mind their accounting P's and Q's.
By Victor
Niederhoffer and Laurel Kenner
The pace of innovation is accelerating. Things
that used to happen many years apart -- whether in industry,
politics or financial markets -- are now happening in months. Not
long ago, this was a cause for joy. Now it's part of the problem, as
all the negatives of bad news are immediately anticipated and
discounted.
Rather than
fret about things going faster, let’s look for opportunity in
variations of the theme.
Yale Hirsch, the publisher of the
“Stock Trader’s Almanac,” has determined that since October 1997,
the Dow Jones Industrials ($INDU)
has gained 3,087 points on the first trading day of the month and
lost 340 points on all the rest of the days of the month combined. A
table illustrating this appears below:
| First days vs. other days of
month |
| |
# of days |
Total pts. gained |
Avg. daily pt. gain |
Annual return |
| First days |
55 |
3,086.94 |
56.13 |
265% |
|
| Other days |
1,079 |
-340.50 |
-0.32 |
-0.7% |
|
|
| |
This
effect is doubtless due to the regular inflows of money that come
into mutual funds, pension funds, 401(k) programs and worker
paychecks at the end of each month that are available to be invested
on the first day of the month.
The problem is that this
effect is so widely known and anticipated that it is embedded in
prices well before the first trading day of the month. The averages
all opened up on May 31 this year by nice amounts and held their
gains to the end of the day. But on the first day of the next month,
Monday, June 3, the Dow fell 216 points, the Nasdaq ($COMPX)
fell 53 points, and the S&P 500 ($INX)
futures registered a decline of 28 points -- the worst decline on a
Monday that was the first day of a month in S&P futures trading
history. The only two first days of a month rivaling it came on
April 2, 2001, and Oct. 1, 1998.
The lesson is that market
players can no longer wait for well-known effects to transpire at
their usual pace. It is key now to learn to anticipate the
anticipators, and act early.
The
Ground Zero effect
A nice example of compression of market
time came on May 30 at 10.29 a.m. EDT, when the New York Stock
Exchange and the Chicago Mercantile Exchange observed two minutes of
silence and a trading halt to commemorate the end of the recovery
effort at Ground Zero in New York. The halt elicited patriotic
fervor from all who were tired of the effort to destroy the American
way of life. It manifested itself in a 10-point rally to 1,070 in
the S&P 500 index in the minutes before the halt.
At the
time we predicted the rise and asked friends who share their trading
knowledge with us via e-mail for their views. We received the
following missive from Bipin Pathak, a scholarly Canadian day
trader: "It's bullish but, without appearing to be totally cold,
over the long-term, displays of patriotism often have led to the
downfall of many a civilization. Stoicism was significant to Western
ascendancy."
After the trading halt came that terrible
compression of time, supporting Pathak's views -- but at a much
accelerated pace. After the rise of 10 points, the S&P 500 began
a freefall of some 4% to Tuesday’s open, and the Nasdaq declined
some 6% during the same period.
Again, anyone who anticipated
the patriotic surge had to act before the overall market anticipated
the surge. You’ve got to jump early when the market is jumpy.
Enron and the productivity
miracle
Time compression seeps into the political economy
as well. Consider the concept of a miracle in industrial
productivity. Supposedly permanent, it seems to have lasted just two
years.
We can date the start of the idea in the public
consciousness to a speech by Federal Reserve Chairman Alan Greenspan
at the National Technology Forum on April 7, 2000. He spoke of the
higher productivity and improved standards of living that the speed
of innovations in American technology had brought, and he forecast
it would continue forever:
"Many argue that the pace of
innovation will continue to quicken in the next few years, as
companies exploit the still largely untapped potential for
e-commerce, especially in the business-to-business area, where most
observers expect the fastest growth. . . . The application of
existing technology is still far from complete . . . productivity
growth will remain high, or even increase further.” He added that
knowledge is essentially irreversible so that gains in productivity
appeared permanent.
Other monetary-system luminaries,
especially Michael H. Moskow, president of the Federal Reserve Bank
of Chicago, reiterated the speech for at least a year thereafter.
His take was that the rapid pace of innovation in American business
is "the most important determinant of an economy’s growth prospects,
and hence the welfare of its citizens".
Those were the days.
President Bill Clinton hosted a conference on the New Economy on
April 5, 2000. Microsoft Chairman Bill Gates himself spoke at that
conference about the unparalleled impact of the pace of innovations
on society. (Microsoft publishes MSN Money.)
The concept
peaked in a Business 2.0 article on February 2001 in which the
author pointed out that the blistering pace of innovations was
proportional to the increasing number of connections between
individuals that the Internet was bringing together. He contrasted
this to the slow pace of just a few hundred years ago, where the
village baker, banker and blacksmith might swap information at the
pub. The author capped his argument with a paean to
Enron (ENRNQ,
news,
msgs).
“In a Web-defined world, the biggest upside is not a hyper-efficient
value chain but the chance to create entirely new revenue streams.
Here’s a benchmark: More than 40% of Enron's current market value
comes from businesses less than three years old -- many of them
centered around the company’s ability to build and run
e-markets."
In a sense, then, we can date the end of the
belief in a Web-productivity miracle to the crushing of Enron and
its infinite network of infant e-market businesses. In days of yore,
it took centuries for both empires and great ideas to rise and
decline. Enron rose in 10 years and fell in about 10 months. The
productivity miracle rose and fell in two years. Perhaps that’s
progress. The lesson is that great things are lasting for much
shorter periods of time, and as much money will be made by fading
greatness as by following it.
Change
in rates
Time compression most vividly appears at the
Federal Reserve when it makes one of its infrequent shifts in
interest-rate policy. Since 1978, it has switched direction only 14
times in its attempt to effect macro-economic change. Thus the
announcement of each new direction contains information of great
potency. After its most recent major shift, on Jan. 3, 2001, the
S&P 500 futures rose 5% in seconds. The index failed to maintain
that momentum, and now rests about 300 points below that level.
Thus it took one second for the market to assimilate and
discount a change in policy that ultimately affected mortgage,
auto-loan and corporate debt spending for the entire country, and by
extension, the global economy. The lesson: Once again, if you
believe that a change in direction is coming, you’d better act well
before the crowd.
Investing in the
thin ice
Our favorite example of time-compression leading
to good occurred at the Winter Olympics recently concluded in Salt
Lake City. Rick Reilly of Sports Illustrated said he considers Sara
Hughes’ victory in figure skating the sweetest story in sports so
far this century. But he points out that without protests over the
cheating of the French judge during the prior pairs competition,
Hughes would not have had a chance to win. "Hughes had been
out-skating diva Michelle Kwan for two years,” Reilly wrote. “In
Salt Lake City the judges finally caught up. Without the stench of
Skategate, judges wouldn’t have been free to do the right
thing."
The time-bending lesson there for market participants
skating on Wall Street’s thin ice is clear: Without revelation of
the stink and corruption surrounding the collapses of Enron, Global
Crossing and others, investors would not have been awakened to
corporate ethical decay that had lasted decades.
This last
illustration has led us to an investment idea. At last count, Arthur
Andersen, the auditor of Enron, has lost 73 of 86 customers that are
members of the S&P 500 index. We postulate that these companies
might well set a record pace in the accuracy and transparency of
their accounting from now on. The compression of time has already
punished them; perhaps they are now ready, like Hughes, to soar. The
10 most recent Andersen abandoners are listed below.
| 10 Andersen abandoners |
| Company |
Symbol |
6/4/02 Close |
| ADC Telecommunications |
ADCT |
$3.23 |
| Danaher |
DHR |
$68.37 |
| R. R. Donnelley |
DNY |
$28.27 |
| Hilton Hotels |
HLT |
$13.52 |
| Newmont Mining |
NEM |
$31.56 |
| NiSource Inc. |
NI |
$23.58 |
| Peoples Energy |
PGL |
$38.68 |
| Qwest Communications |
Q |
$5.08 |
| Quintiles Transnational |
QTRN |
$13.45 |
| Sanmina-SCI |
SANM |
$10.31 | |
We
will track their progress over the next year to determine whether
our theory – admittedly untested with our usual scientific methods –
measures up. Meanwhile, kindly communicate with us at The Speculator and
let us your own thoughts on our work. We’ll send a workout of all
the companies that changed auditors from Arthur Andersen to thank
you.
At the time of publication, Victor Niederhoffer and
Laurel Kenner owned no securities listed in this column.
|
