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Jim Cramer may be investigated by SEC

by wchurchill Mon Mar 26th, 2007 at 01:48:10 PM EST

(These comments are a follow up to Alexander's excellent diary of last week.)  First I did receive a response from the SEC regarding my complaint and request for an investigation--I'm sure it's a form letter, but I must admit it's at least a form letter that makes sense:

Dear Mr. ___:

Thank you for your email and for taking the time to alert us to your concerns.

Please note the SEC generally conducts its investigations on a confidential basis and neither confirms nor denies the existence of an investigation until we bring charges against someone involved.  We cannot provide you with updates on the status of your complaint or of any pending SEC investigation.  We know this policy can be frustrating, but it protects the integrity and effectiveness of our investigative process and preserves the privacy of the individuals and entities involved.  Our policy is more fully described below.  

Once again, thank you for writing to us.

Sincerely,

RINELL RANDOLPH JR
U.S. Securities and Exchange Commission
(202)551-6321

The US legal system does require this kind of an approach, but they are right that it can be frustrating.  

There has been a fair amount of news coverage, such as the following:

Hedge fund lawyer Ron Geffner of Sadis & Goldberg called the interview a "somewhat surprising confession to make publicly, which definitely invites suspicion by regulators."

"Whether he violated the law is unclear," Geffner said. "That is dependent on his trading records. But it's clear that he seems to be challenging regulators to come and examine him." A spokesman for the SEC declined to comment on whether the agency is looking at Cramer's comments. A decade ago Cramer faced an SEC investigation over a column he wrote for SmartMoney magazine that touted four stocks without disclosing his holdings in them. He was eventually cleared of wrongdoing, according to news reports.

Other legal experts criticized Cramer's comments for suggesting that stock manipulation is widespread among the growing legions of hedge funds, which are investment vehicles that typically trade much more actively and use more complex strategies than mutual funds.

I hope they do investigate this, and extend it into a broader investigation of the industry.  Hedge Funds are relatively new to the financial world, not well understood by most, and comments by Cramer are not only moronic, but bound to undermine confidence in the markets,,,which in general are open and transparent in the US.  I acknowledge there were a lot of very good comments on the diary on this last week and the comments.  In particular I have thought about, I believe it was HiD's comments, that this manipulation doesn't effect investors who invest for the long term, which is the vast majority.  And furthermore that small time day traders, and we're now talking about the speculating/gambling section of market activity, should realize their playing with the "big boys" who have tremendous access to real time data and organizations that go after this 24X7,,,and they are likely to lose.  They are also able to play the game globally, "carry trade" and other types of arbitrage, in a way that smaller speculators generally can not.

But still the objective needs to be fair and open markets, and Cramer's comments says they are not today--so imho that needs to be fixed, and if Cramer committed a crime, to the slammer with him.


Display:
I'm impressed that they responded to you so quickly. As the story you quoted observes, Cramer "dissed" the SEC so badly that they have to respond somehow. Is the statute of limitations for this kind of thing different than the standard three years? If it isn't, I don't think it would be worth their putting on much of an investigation of him, since I believe he's been out of the hedge fund business for more than three years.

As for the comments in my original diary, I found the one by das monde quoting a letter from a physicist who's gotten a job at a hedge fund especially interesting. He wrote:

The most mythical of all hedge funds, Medallion, was set up 20 yrs ago by jim simons, a successful math/phys guru known for the Chern-Simons gauge theory.  This guy's been doing returns of a constant 35% since 1990 with a Sharpe of 4 (reward/risk).  He employs a little family of 60 physics PhD's in New Jersey, who devise clever algorithms to suck the stock market with systematic trades, i.e. their computer buys and sells thousands of times per minute, sometimes holding a position for just a few seconds.  Decisions are made statistically: all you need is to be right 51% of the time.

A 35% rate of return is about as good as it gets. I wonder where that money is coming from? I would guess most of it comes from small time day traders. I bet you this kind of trader has been studied, but mainly by private studies. I wonder how much turnover there is. Do these people get into trading with a certain amount of money, and then leave once they have lost it? Or do they stay in trading indefinitely, gradually siphoning off to the big boys money they earn elsewhere?

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
by Alexander on Mon Mar 26th, 2007 at 02:19:57 PM EST
Dissing the SEC.  They know they're ineffective.  They know the traders know they are ineffective .  But saying it out loud is just asking for it.
by HiD on Tue Mar 27th, 2007 at 04:01:30 AM EST
[ Parent ]
Cramer is a braggart so who knows which of his (many) stories are true.

On the bigger issue of inside information, this is the entire basis of the stock market. People out in the sticks with no access to corporate data do their own "analysis" and decide that they have uncovered some nugget of information that will make their choice prescient. The fact that this is almost never true is besides the point. It is same logic that those following horse racing use.

I once had some "inside" information about a pending acquisition so I bought some of the stock. The acquisition never took place and the stock went down. Was the information wrong, was it deliberate misinformation designed to pump up the price, or did events just take a different turn, who knows?

Look at the most popular game these days, trading on analyst's "expectations". When the earnings come out the stock goes up or down depending on whether results met expectations, not on whether the company is doing better or worse. Since most analysts work for or with trading firms the opportunities for mischief are limitless.

Even mutual funds play the same game. They sell themselves on the basis of some vague idea that they can perform better than average because of superior stock picking techniques. Of course half do worse than average and half do better. Even the ones who do worse still collect their management fees, however.

Let's stop pretending that we are "investing" and not gambling.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Mar 26th, 2007 at 02:19:58 PM EST
And I'm convinced that market manipulation is systemic and institutionalised: in fact the definition of "trading" now appears to be "acceptable market manipulation".

The losers in this "bezzle" (J K Galbraith's wonderful expression for when the losers don't know they are losing)are the "end users" who use markets to "hedge", and small time traders without the access to information the big boys have..

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 26th, 2007 at 02:26:36 PM EST
[ Parent ]
I thought the mechanics of hedging were quite straightforward and the time frames involved much loger than the high-frequency speculative trading, so how do hedgers "lose"?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Mon Mar 26th, 2007 at 05:21:41 PM EST
[ Parent ]
that's an inaccurate name.  They just have the freedom to be both long and short and to use leverage beyond what mutual funds can do.
by HiD on Tue Mar 27th, 2007 at 04:03:33 AM EST
[ Parent ]
I know "hedge fund" is a misnomer. What I'm asking is how do honest hedgers lose out?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 04:43:58 AM EST
[ Parent ]
specifically the IPE where a lot of game playing has gone on especially at the close in the past.

A real hedger doesn't lose.  say you wish to buy oil next month at $50 and that's where the future is trading.  You go buy your hedge.  Then come the day you want the physical oil you buy at noon and then sell his hedge off simultaneously (or just does an efp -- trades oil for futures) he at most loses the bid/ask.  No harm.

Some big sellers (say a Scandihooligan) sell large quantitiies of physical oil off of the IPE settles on a derivative basis.  That is, they use the settle to price a physical sale without going through the futures for most of the oil.  So another player(the buyer) can trash the settle with a much smaller quantity and gain a profit.  The problem is letting the other side have leverage.

there are easy solutions to the problem

  1.  Actually hedge.  Sell the oil on the exchange as they see fit and then take back futures on an EFP when they actually sell the oil

  2.  sell the oil fixed price and avoid the exchange all together.

But they won't.  They'd much rather piss and moan and blame manipulation than take responsibility.  So they price off of Platts (journalist "assessments" of the market based on trying to sort through the lies) or market settles.  And wonder why the settles get moved against them on an exchange with low volume and no physical delivery requirements.  Not to mention they try to sell to traders at real value + a few cents thinking their average oil is always worth more than average.
by HiD on Tue Mar 27th, 2007 at 05:10:33 AM EST
[ Parent ]
A real hedger doesn't lose.

Thanks, exactly what I wanted Chris to ackowledge.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 05:14:50 AM EST
[ Parent ]
So if I buy an option that is overpriced because the volatility is entirely manufactured then I haven't lost?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Mar 27th, 2007 at 07:26:42 AM EST
[ Parent ]
A real hedger SHOULDN'T lose for sure.

But the real hedgers don't have the advantages of the guys sitting in the middle in terms of access to data and order flow.

And if a Big Oil company is in cahoots with a Big Investment Bank - a not unlikely scenario - then other market players can get doubly screwed.

All you have to do is:

(a) add up the profits made by Goldman Sachs, Morgan Stanley energy desks - not to mention BP's trading profits - and ask yourself why the top people in the Banks got where they did; and
(b) why every other investment bank is queuing up to poach energy teams from their competition; and
(c) why star energy traders head for hedge funds, because they don't see why their employer should get so much of the profit THEY are making; and the $64 billion question
(d) at whose expense are these multi billion "super-profits" (I don't begrudge trading profits, by the way) being made?

The answer to that is hedging "end user" producers and consumers, and, increasingly, hedge funds.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 27th, 2007 at 07:42:50 AM EST
[ Parent ]
though I've tried a number of times.  
by HiD on Tue Mar 27th, 2007 at 05:24:26 PM EST
[ Parent ]
An investment in an index fund, such as the Vanguard 500 in 1987 would have grown from $30 per share to $132 today--plus provided a 1.5% dividend per year.  Those baby boomers who have maxed out their 401K's over their working lives are going to be fine in their retirement years, due to straightforward investments such as these, left alone in their accounts, not taxed until withdrawal after 65.  The long term return on these simple index investments is 10% per year, and investors who have done this have done unbelievably well--and that includes the impact of an economic setback in 2000 of the tech crash, 9/11 and the Iraqi war.

I'm not sure what you are getting at with your heldging comment, but people are hedging everyday on many transactions simply because they want to take financial risk out of their life--farmers, business people, investors.  If you want to lock in a payment being made to you in Euro's in 6 months, lock it in in dollar terms because you are a US citizen,,you can do that--and not worry about hoping the Euro is still worth the same as today in 6 months.  On the other hand if you think the euro will be stronger and you want to take that risk, you can just wait and see what happens.  to me, it's all about having those choices--and it's certainly been a good thing for me in the past.

by wchurchill on Mon Mar 26th, 2007 at 07:03:11 PM EST
[ Parent ]
by your own experiences.

The stock markets are not as black as you see them based on your exposure to a much uglier commodity market where players are assumed to be expert and have their eyes open.  For example, commod players are not only allowed but are expected to be trading based on info not widely known in the market.  That's illegal in the stock markets.  If your company is about to announce a new product, it cannot do a big stock buyback the day before.  If your refinery is burning, you can buy like hell if you can move faster than the others.

Real hedgers have opportunity to avoid game playing, they just have to not get talked into badly designed instruments/strategies marketed by exchanges like the IPE.

by HiD on Tue Mar 27th, 2007 at 04:15:53 AM EST
[ Parent ]
As HiD observed in the earlier thread, if you are in the market for the long haul, you are not gambling. But an issue that didn't come up in that thread for why the market is continually rising so spectacularly, faster than the rate of growth of GDP I believe, is not just because firms on average are performing so well, but from a continual infusion of funds into the market.

Governments are continually looking for sources of more funds to flow into financial markets, to prop up securities prices. That is one of the main things that drive privatization.

So there is something "rigged" even when it comes to long-term investment in the stock market.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Mon Mar 26th, 2007 at 02:33:08 PM EST
[ Parent ]
The second paragraph above doesn't make sense. Please disregard it.

The point is that, with an increasingly large share of the national income going to the very wealthy, you are going to have more and more funds for which investment opportunities have to be found. That alone will drive up stock prices.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Mon Mar 26th, 2007 at 03:59:50 PM EST
[ Parent ]
remember though that GDP and stock market growth are two different measurements
  1.  GDP is more of a "revenue type" measurement, while stock market growth correlates more directly with earnings per share, which is a "profit type measure.
  2.  Stock markets measure profit results of publicly traded companies.  Government spending is I believe about 1/3 of the GDP, and of course 0% of the stock market.  And also private firms are not included in stock market performance.
  3.  GDP is of more of a domestic number (in the sense that the government doesn't really export, and smaller private firms would likely export at lower levels, while many of the firms on the stock market are very global.
I think there is logic that supports GDP growing slower than the market. Some examples,
  1.  I don't immediately have the % of S&P 500 overseas sales, but just from memory 20 years ago 20% overeas sales for a company were considered high, whereas today, 50% is not at all abnormal.  so overseas growth would add more to stock market growth than it does to GDP, particularly since we import more than we export.
  2.  IMHO, there is more of a growth motivation in the companies in the public stock markets, than there is in the government sector.
  3.  our public companies have gravitated to higher profitiability and growth sectors over time.  The governement can't really gravitate to faster growth sectors.  The move to financial services in the US is not only a move to a faster growth segment, but also a higher profit segment, and of course that all gets capitalized and discounted in the stock market.

just a few off the top of my head thoughts as to why they are different, and why I would expect the market to grow faster due to some of the differences.
by wchurchill on Mon Mar 26th, 2007 at 04:33:31 PM EST
[ Parent ]
Points well taken. Still, I have read that for the U.S. and U.K., "an increasing proportion of the total return on investments since the start of the 1980s has resulted from capital gains rather than earnings, with the former accounting for as much as 75 per cent of total returns—compared with well under 50 per cent (on average) in the 1900-1979 period as a whole." That does suggest that the rise in value has been driven largely by an increasing flow of funds into the market, rather than by the actual income stream produced by the securities.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
by Alexander on Mon Mar 26th, 2007 at 05:13:40 PM EST
[ Parent ]
I would want to read the articles you are referring to, so I could understand the context and the discussion better.  However, there is something that really sticks out about the two time periods that the article evidently refers to.  I believe 1900 was a period of low interest rates and low cost of capital--I'm remember a deflationary period in the late 1800's,,,,,,not personally remembering, -:)...   but I do personally remember the end of that period, being 1979, being a time of very high interest rates and cost of capital.  and the early '80's also being high rates, and then of course today we have low interest rates and cost of capital.  So the 1900--1979 period would start with low cost of capital and end with high cost of capital.  The second period of the early 80's to today would be the reverse--high cost of capital ending in low cost of capital.  Financial asset values are largely determined by Net Present Value formulas, as well as forecasts of future earnings streams.  So an investor in the 1900--1979 period would be hurt by this, and the investor in the second period would have been very much helped.  So directionally what your saying would make sense to me--and I couldn't guess the extent of the impact, but that could be correct.  High interest rate periods are not good for the holders of financial assets, and vice versa.  but the 1900--1979 period is so long that I'm sure those investments still overall did well, despite the headwinds.
by wchurchill on Mon Mar 26th, 2007 at 07:19:59 PM EST
[ Parent ]
  1.  we had some pretty heavy inflation in the 80's so some cap gains are not "real".  A dollar isn't really a dollar anymore, it's half a dollar at best.

  2.  With Republicans pushing ever harder to minimize taxes on cap gains vs dividends and regular income, companies have pushed hard to drive up share prices via buybacks rather than pay out.  Not to mention puffing for their bonus pools.

  3.  Coming out of the 60-70's when the stock market was horrible on return, investors were not as willing to pay for stocks so price/earnings ratios were lower.  If a money market is paying 10%, why settle for 15/1 on a stock with risk (6% basically)?   Even now p/e of the s&p 500 is not all that extreme -- 17 ish and coming down over the last few years to near the historical average.

http://www.lowrisk.com/sp500pe.htm  and

http://www.bullandbearwise.com/SPEarningsChart.asp

I agree that much of the pressure is money flowing into the market that used to go elsewhere, but a big reason for that is that safer investments don't return squat compared to inflation.  The Japanese and Greenspan have made borrowing way too cheap.

by HiD on Tue Mar 27th, 2007 at 04:43:55 AM EST
[ Parent ]
I would only quibble with this point:
The Japanese and Greenspan have made borrowing way too cheap.
I think Greenspan has had very little to do with this.  There are major deflationary trends in the world today, with so much low priced labor in, for example India and China, finally getting a chance to work productively.  This is putting major pressures on prices and costs in the world economy, thus keeping inflation down worldwide.  and at the same time with all of this newly available productivity, the opportunity to invest and harness those resources is incredible.  Couple that with the ability for so many people to access information, knowledge and learning on the internet real time,,,,and you have a growth explosion.  All of the things needed to produce economic access,,,,,hampered only by some of the political risk from the Middle East accented by that area controlling so much of the oil.  so cost of capital has to be low, just given the worldwide situation and economics.

Japan, imo, is a one-off due to their unusual situation in demographics.  thus a stagflation for years,,,,,and a prelude for the world looking out 5--20 years.  ie, wonderful situations don't last forever.

by wchurchill on Tue Mar 27th, 2007 at 02:09:11 PM EST
[ Parent ]
 but for 15 years!!!!!!!!!  Japan with nil interest rates is the fountain from which the carry trade flows.

As for Greenspan and Co, I just dont agree.  Our rates have been  dropping since about 1997.  I used to get 7% in a money market then and it got as low as 1%.  That forced a lot of folks into other riskier investments if they had to have the yield.  We just spent it on a house so that took care of our cash "problem".

We didn't need to go so low on rates but the liquidity was made available first for y2k and then after 9/11 to make sure the economy didn't puke.  Still, it has had some side effects of puffing real estate and other markets IMO.

The huge deflation in labor made it possible to keep these rates low without inflation.  But it was a bad bargain for many in the labor pool while making people like me richer.

by HiD on Tue Mar 27th, 2007 at 05:22:56 PM EST
[ Parent ]
The huge deflation in labor made it possible to keep these rates low without inflation
from my perspective you have the cause and effect backwards.  Greenspan didn't keep rates low, they had to be low due to economic factors in the global economy.
  1.  markets opeing globally unleashed a huge labor pool of underutilized labor.
  2. A.  this put big downward pressure on labor costs.  and,
    B.  it opened up great opportunities for growth, as this labor was put to use making less expensive products.  Capital was needed to meld with the labor to create jobs.
  1.  I'd have to check economic history, but I think as long as monetary policy was well thought out, real interest rates have been between 2--3%.  So add that on top of 0--2% inflation, you get 2--5% interest rates.
  2.  so how could this not happen (sans horrible central banking policies).  underutilized labor, lower prices, negligible inflation, growing demand, supply side begging to work.  of course cost of captial is going to be naturally low, and working in concert with the other factors,,,,voila.

I'm not trying to argue Greenspan was perfect.  I'm just saying he is not a fundamental factor that has led to low inflation, strong economic growth, and low cost of capital.  He should get credit for being an adequate central banker, implementing policies consistent with economic principles of his time.  Obviously the Fed messed it up during the great depression (but I guess some of this knowledge was not available then.)

actually I think the boom would be far stonger in the euity markets without the terror issues in the MidEast.  There is a large risk premium on financial assets, imho, due to this factor.  these factors will make markets grow steadily since the risk premium is already there.  but if things ease in the mideast (and I doubt it), but if they do.  watch out, these equity markets will explode.

as to Japan, I think it's a prelude to the future.  the next 5 years demographically will be OK for them, so their markets will be OK.  but then it comes back, and begins to hit the western world as well.  I don't know if we have answers for this one yet.  (I know this is not accepted economic thinking, btw.)

by wchurchill on Tue Mar 27th, 2007 at 06:16:12 PM EST
[ Parent ]
could be but I question whether if cheap capital weren't available could the investment in cheap labor markets have come so quickly?  

I don't think Greenspan did a poor job either btw.  I think he and the Japanese both did what they had to for the most part.  The drop to 1% seemed a bit overdone though.  But if I was that smart I'd be rich.

by HiD on Wed Mar 28th, 2007 at 04:09:26 AM EST
[ Parent ]
well, these things are hard to call, even in retrospect.  economics is after all more social science than science.  business and investing as well.  but it makes it a lot of fun, imho.

btw, I find your comments and insight very valuable.  you're obviously a very bright guy, and I think come at things from a different experience base than mine.  one learns a lot from bright people with a different perspecitve,,,,that was a valuable lesson for me that I learned early in life.  Whew, at least I learned something early in life.

by wchurchill on Wed Mar 28th, 2007 at 04:44:19 AM EST
[ Parent ]
What's the total capitalisation of the US stock market?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Mon Mar 26th, 2007 at 05:26:01 PM EST
[ Parent ]
it depends of course on what stock markets (nasdaq, new york stock exchange, american, etc) you include, but this seems pretty logical and shows $13.4 trillion in 2001.  the markets are about 15% higher today, and there have been companies added, so a rough guess might be 20% higher than that $13.4 trillion.
by wchurchill on Mon Mar 26th, 2007 at 07:30:52 PM EST
[ Parent ]
there have been record equity withdrawals (via share buy-backs or companies going private again) in recent years.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Mar 27th, 2007 at 04:53:53 AM EST
[ Parent ]
the Wilshire index is still over $14.4 trillion

http://www.wilshire.com/Indexes/Broad/Wilshire5000/

their site shows about 14.45 Trillion as of today.

by HiD on Wed Mar 28th, 2007 at 04:14:14 AM EST
[ Parent ]
where were you in 1987?  Or in 2000-2002 when the Dow dropped from 11,500 ish to 7500 ish.  The S&P is flat from 2000 to now.  1500-->800--->1450.  

I think the main reasons the markets have done so well the last 15 years are

  1. peace dividend.  we stopped wasting so much energy on miltary gee gaws (for a while) and fear abated.

  2. China/India among others finding a way to get hundreds of millions of people doing more than scratching a living out of the soil making a dollar a day.  

  3. General increases in productivity.

the benefits have not been shared fairly though.
by HiD on Tue Mar 27th, 2007 at 05:37:27 AM EST
[ Parent ]
I think it's impossible to talk about the markets' collective performance over the last fifteen years without getting into the Internet, which is sort of inherent to your productivity reference.  That's a benefit we still haven't fully enjoyed yet.  I've read in many places that Europe, for example, should see very strong productivity growth sometime in the next couple of years, as European businesses integrate it more into their business models.  That would seem to make sense, looking at the Internet's behavior in households.  (Americans originally were far more likely to be online than Britons, for example, but this is changing rapidly when we look to broadband.)

One major reason for why Wal-Mart has smashed companies like Sears and K-Mart into dust, aside from the utter incompetence of companies like K-Mart and the fact that the game has long passed Sears by, has been its strong integration of technologies to measure and control its inventory.  Wal-Mart has enjoyed, I believe, stunning productivity growth relative to its major competitors.  CostCo -- WallieWorld's big competitor in the Buy In Bulk market -- has, as well, if I'm not mistaken.

So there are very good reasons for the markets' solid gains.  Some of it was the result of too much hype, of course, back in the 1990s.  And, no doubt, that will happen again, because that's simply a fact of life in the stock market.  But, on the whole, I think the trend makes sense.  The primary role of Iraq has been to spook investors, who really and truly hate that sort of uncertainty, especially in a region as dangerous -- and, for now, as economically important -- as the Middle East.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 27th, 2007 at 08:58:14 AM EST
[ Parent ]
I think you are correct that the punters often think they have "unique insight" into the markets, and therefor place bets on that.  but the reality is that this information is almost certainly already known, and discounted into stock prices.  this forms the fundamental assumption of the "random walk" theory of the stock market, which has been verified many times over the years.

mutual funds on average perform worse than the overall market, mainly because they have to deduct their fees from the returns.  thus even producing "market returns" means you are actually lower than the market return by the fee--likely 1-3% per year.

I disagree with the last point of course and have explained more than once the rationale.  while there is certainly day to day speculation, the vast majority of trading in the public markets is long term investing, and I've given obvious examples of this in the past.

by wchurchill on Mon Mar 26th, 2007 at 04:44:39 PM EST
[ Parent ]
this forms the fundamental assumption of the "random walk" theory of the stock market, which has been verified many times over the years.

To a certain (high) degree of approximation. The very existence of hedge funds disproves (by countereaxmple) the assumption that information has already been discounted in the stock prices.

I was going to pick a nit on the term "random walk" but I'll refrain. If you're using it in a nontechnical sense there's no nit to pick.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Mon Mar 26th, 2007 at 05:25:18 PM EST
[ Parent ]
the random walk theory addresses itself to public markets with a great deal of regulation and transparency, as well as legal controls.  basically the US markets.  my own hunch is that the hedge funds are not doing particularly well in these markets.  however there are other less controlled markets around the world where insider knowledge can be strongly leveraged.  and there are arbitrage situations such as the carry trade, and particularly as it relates to Japan, where I think they can clean up.  Cramer's comments would indicate that he can at least influence quarter ending numbers, for scorecarding purposes, in the American markets.  he also seems to say he can play the American markets, and I admit that challenges what I just said.  But I would love to see analysis of their returns to see where they are really coming from.
by wchurchill on Tue Mar 27th, 2007 at 04:33:41 AM EST
[ Parent ]
so hedge funds can find arbitrage opportunities and exploit them if they move quickly.  And then there are the guys that trade after the close.....
by HiD on Tue Mar 27th, 2007 at 04:47:08 AM EST
[ Parent ]
The point is that new information takes time to make it to all the market participants and they take time to react to it, so the "market consensus" takes some time to adjust to the new information. The idea that the market price discounts all the existing information is laughable on its face. Of course, if you're the slowest investor in the pack, you can probably assume that's true.

wc himself seems to spend a lot of effort looking at the fundamentals and investing according to his best assessment of the "available information", which means he doesn't really believe all information has been discounted, or the two-fund theorem.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 04:54:15 AM EST
[ Parent ]
bingo

And even if everyone had the same info, they don't all draw the same conclusions.  "everyone knew" that the dollar/euro at $1.35 was just a stopping point on the way to the gutter.  Then it traded back in for 2 years.    

by HiD on Tue Mar 27th, 2007 at 05:17:17 AM EST
[ Parent ]
And even if they all draw the same conclusions not everyone has the same risk aversion, the same return requirements, the same access to credit, or the same depth of pockets.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 05:28:27 AM EST
[ Parent ]
credit hasn't been an issue lately.  the guys with reputations can raise a billion or 2 before lunch.  It's scary how much money is slushing around.
by HiD on Tue Mar 27th, 2007 at 05:39:31 AM EST
[ Parent ]
Okay, so you can raise a billion in 3 hours. How much money can all the other fast players put through without tapping into their credit in those 3 hours?

And also, not everyone is a "guy with reputation". Which is only more to support my claim that the market is not as simple as the guys in mathematical finance need to believe it is so their models are even tractable with a supercomputer.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 05:43:53 AM EST
[ Parent ]
This sums it up as well as one could ask for.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 27th, 2007 at 09:08:44 AM EST
[ Parent ]
touche.  
wc himself seems to spend a lot of effort looking at the fundamentals and investing according to his best assessment of the "available information", which means he doesn't really believe all information has been discounted, or the two-fund theorem.
but I would say this just slightly different than this.  I try to find areas of the market where I have insights, or knowledge, that I think the market has not yet taken into account.  So in my little world that most commonly happens in healthcare, where I have spent years working and investing and think, hope, I have an ability for seeing through the fog,,,,,and it's doubly good if the insight is in  small cap stock, because these are often too small to have garnered attention of the big time analysts.  So there is a company I am watching that failed their clinical trial, refinanced, and modified their drug and corrected flaws in their trial design--and I think it was too small for the market to pay attention.  so far, so good, it's doubled with some recent results.  but I'm getting a little worried because now a few more people are watching it--they could outsmart me, but I think I'll get another 50%----and this is a case where up until now I have felt I know the trading patterns for the stock a little better than others, so I have done some shorter term trading (not day trading, but month to month) and earned pocket change+.  

so I look for segments where I think the market has not yet discounted available information, or maybe said another way where the markets for some reason are not closely followed and the random walk theory won't apply, and try to make a little extra money there.  (that and the private investments are areas where insight and hard work can give me an edge).

but on calling the big companies, or the overall market trends, I find that I probably lose as much as I win--ie, a random walk.  so why not just take the index funds in those areas?

by wchurchill on Tue Mar 27th, 2007 at 02:00:48 PM EST
[ Parent ]
the vast majority of trading in the public markets is long term investing, and I've given obvious examples of this in the past.

I don't think that with a billion shares traded per day one can consider the "vast majority" is for long-term investing. If you mean that individual investors generally aren't day traders then I think you are right.

However even though people may have put their money in mutual funds for the long term this does not mean that the funds are just sitting on the money. My (very conservative) retirement fund has a turnover of over 100% per year. I assume more aggressive funds trade even more frequently.

The point is that the fund always advises participants not to try to time the market and then goes ahead and does it themselves.

Another scam is to quote expenses as a percentage of the capital invested instead of as a percentage of the yield. So a fund with an expense ratio of 1% earning 5% for the year is really taking 20% of the earnings in fees. No wonder Wall Street wants to privatize Social Security.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Mar 26th, 2007 at 06:24:34 PM EST
[ Parent ]
the examples I've been using are index funds with practically no trading.  i generally don't believe in market timing, so a lot of my public investments are in idex funds.  I personally would find 100% turnover very high--but the fact that you are staying with the fund tells me they must be doing well.

I don't agree with your way of looking at the %'s.  but since I use index funds, my expense ratios are very low, so I don't worry about the argument.

by wchurchill on Mon Mar 26th, 2007 at 07:36:34 PM EST
[ Parent ]

Look at the most popular game these days, trading on analyst's "expectations". When the earnings come out the stock goes up or down depending on whether results met expectations, not on whether the company is doing better or worse. Since most analysts work for or with trading firms the opportunities for mischief are limitless.

This is a fundamental insight. what makes markets move these days (as it should in theory, btw) is "new information", i.e. information that shows that reality is different from expectations - or more precisely from the consensus, or average, of expectations.

Thus the sometimes aparently incomprehensible reactions of the market to some horrible news (it goes up, because the market was expecting even worse and had already discounted such bad news) or good news (it goes down because it now expects a different reaction from the Fed to that data).


Even mutual funds play the same game. They sell themselves on the basis of some vague idea that they can perform better than average because of superior stock picking techniques. Of course half do worse than average and half do better. Even the ones who do worse still collect their management fees, however.

Actually, more than half do less well than the market (which may be compatible with what you say, as the average of managers and what the market does may be different). It would seem that, apart from a few people that seem to be genuinely better (or are extremely lucky), the vast bulk of that industry are useless parasites.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Mar 27th, 2007 at 04:59:21 AM EST
[ Parent ]
We had a story about how well the markets' implied probabilities predict future price movements, and the answer was not too well.

Colman: A very murky crystal ball. (May 19th, 2006)

The fact is that the "market expectation" has implied probabilities of future movements that bear little relationship with the likelihoods of actual events.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 05:13:19 AM EST
[ Parent ]


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