The Speculator's
Corner
Striking a Strategic Balance in Scary Market
Conditions
By Laurel Kenner and
Victor Niederhoffer
2/8/00 2:36 PM ET
URL: http://www.thestreet.com/comment/thespeculatorscorner/879772.html
There's a time every day, every week, every year, when the knife is balanced on the edge.
Take Thursday. The S&P 500s lose 8 points in less than an hour -- time to buy? The bond has the biggest rally in two years -- time to sell? Swap spreads widen like a Spanish dancer's fan -- time to double up?
Profit and loss hangs in the balance.
It is just like it was during the Trojan war, Zeus balanced the fates of death for the two sides on his sacred golden scales. The Achaeans' side sank to the ground, Zeus thundered in their direction and "pale fear fell upon them," according to Homer.
Throughout history, there have been different methods for dealing with such moments.
Pitcher Christy Mathewson, whose three shutouts in the 1905 World Series still stand as a record, kept something in reserve for that moment in a game -- he called it "the pinch" -- when things looked darkest.
The best method of all is found in a 1994 novel by Nicholson Baker called The Fermata. The musical term from which the title is derived means "hold," and is used to build drama.
The narrator of The Fermata, a 35-year-old temporary office worker named Arno Strine, has the power to stop time and act while everyone else is frozen. He uses the ability mostly to further his romantic life, although he also employs it for such things as last-minute Christmas shopping.
We've always wished we had a fermata technique for the market. Without it, we have no assurance of entering a good trade at the key point.
Irving Redel, former head of the New York Commodities Exchange, jokes that when he trades, he buys high and sells low. Point being, it's impossible to buy right at the bottom or sell precisely at the top every time.
The least we can do is to note the occurrence of such moments, and try to prepare, as Mathewson did.
We were reminded of this yesterday when we visited Empirica Capital, a derivatives hedge fund in Greenwich, Conn., and found the traders ready for a huge crash in Internet stocks.
There are too many stocks trading at 1,000 times sales -- as well as too much supply, says Empirica President Nassim Nicholas Taleb.
Money already has been rotating out of the sector. Jan. 3, in fact, can be seen as the moment when Zeus' scales started tipping, and Internet stocks sank, even as public money rushed in to the market. Internet HOLDRs (HHH:Amex) (fixed 20-stock baskets traded on the American Stock Exchange) have fallen 15% since that day, and 12 of the member stocks are down.
The worst are the biggest and best-known. From the close on Jan. 3, America Online (AOL:NYSE) is off 30%, CMGI (CMGI:Nasdaq) has lost 27%, Ameritrade (AMTD:Nasdaq) is down 26%, Yahoo! (YHOO:Nasdaq) has slumped 26% and Doubleclick (DCLK:Nasdaq) has dropped 24%. Amazon.com (AMZN:Nasdaq), even after last week's giant rally on its earnings report, is down 16% since Jan. 3.
The picture isn't all gloomy in the sector. Half the 246 stocks in the Bloomberg U.S. Internet index are up since Jan. 3, most of them up more than the Nasdaq.
That index's top three performers -- ITXC (ITXC:Nasdaq), iBasis (IBAS:Nasdaq) and deltathree.com (DDDC:Nasdaq), all Internet telephony companies, are up 224%, 158% and 118%, respectively. In general, software companies are winners, while content and access providers are losers. The worst performer in the index is Egreetings Network (EGRT:Nasdaq), a company that offers free digital greeting cards to entice consumers to buy a gift at the site, was down 53%.
As young as this industry is, age may play the same role in performance as it does in strenuous pursuits such as gymnastics or figure skating. Four of the six gainers since Jan. 3 in TheStreet.com Internet Sector index went public within the last three years. Nine of the 13 losers are pre-1997. (We're not counting Go.com, because it was acquired by Disney (DIS:NYSE).)
As for which sector ended up in the winning side of Zeus' scales, look no further than biotech. The Biotech HOLDRs (BBH:Amex) have risen 23% since Jan. 3, and 17 of the basket's 20 stocks are up. One trader observed that people who last year were showing off their superficial knowledge of the Internet are now walking around with biotech textbooks under their arms.
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Laurel Kenner is a former markets editor at Bloomberg, and a trader. Former hedge fund manager Victor Niederhoffer is currently a private investor and author of Education of a Speculator. At time of publication, Kenner was not long any of the issues in this column, while Neiderhoffer held a net long position in S&P 500 futures and options, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While they cannot provide investment advice or recommendations, they invite you to comment on this column at mailto:%20commentarymail@thestreet.com.
