Re: Volatility

["ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Let me add the following news items to Geoffrey Gardiner's excellent post.

Item: RANCO MODIGLIANI says that the current mania for Internet and other
technology stocks is not irrational. But it is a bubble, and it will burst.

Item:  NEW YORK (AP) -- Noted money manager Julian H. Robertson Jr. announced he
is liquidating the $6 billion Tiger Management investment funds, calling the
current market frenzy for technology stocks a ``Ponzi pyramid destined for
collapse.''

Robertson took 18 years to build Tiger into the largest hedge fund family in the
world with assets of $23 billion. Tiger's demise took just 18 months.

Robertson's reversal of fortune highlights the radical shift in the markets to
technology and Internet stocks and away from traditional industries. And
Robertson, who stuck with his strategy of picking undervalued industrial stocks,
is still in a state of disbelief.

Part of Tiger's problem was its size, experts said. Most hedge funds have less
than $1 billion in assets, so their investments are usually easy to buy and sell
without moving the markets.

Hedge funds like Tiger are incorporated overseas and cater to multimillionaires,
universities, endowments and the like.  Hedge funds, which are largely
unregulated, can make riskier investments than mutual funds. For example, hedge
funds often borrow huge sums of money to pour into stocks, bonds, currencies and
commodities.

The hedge fund industry came under increased scrutiny in 1998 when the
near-collapse of Long-Term Capital Partners threatened the solvency of several
investment banks that had lent the hedge fund money.

Unlike Tiger, which invested in the wrong stocks,  Long-Term Capital borrowed
heavily and then lost huge sums of money betting on the interest rates of bonds.
Long-Term Capital has since recovered and repaid the companies that bailed out the
fund.

Despite Robertson's recent troubles, his track record is still impressive. Since
he founded Tiger in 1980 with $8 million in capital, he has posted a compounded
rate of return of 32 percent, after fees. Robertson's own wealth is also still
remarkable; $1.5 billion of Tiger's assets are his.

Item: NEW YORK (Reuters) - It's the fallout from the exploding new economy.
Federal Reserve Chairman Alan Greenspan is operating under the guise that he's not
a destroyer of stock market wealth but rather a preserver of economic health.

The critics disagree. They say the Fed chief has gained the dangerous reputation
of being a player in the market rather than just a referee.

And the fear is that there's nothing to stop Greenspan, who is obsessed over high
stock prices, from converting his irrational exuberance speech of 1996 into
action.

Greenspan believes the antidote for dealing with a runaway market is to raise
interest rates, which implies that the central banker has lots of experience in
managing unruly markets.

Interest rates have so far been raised five times since last June, each by a
modest quarter percentage point. But the monetary tightening has not caught Wall
Street's attention.

Stocks are still in overdrive and the economy is buzzing along. And investors are
looking at those rate increases in their rear-view mirrors as just annoying bumps
in the road.

The Street hasn't gotten the message from the series of rate hikes totaling 1.25
percentage points because the tiny moves did not carry any shock value. The
increases were all telegraphed well ahead of time and the news was treated as a
foregone conclusion by the market.

The central bank also will have to convince commercial bankers to tighten their
lending practices and avoid speculative loans.

Buying stocks on credit has surged recently, with the margin debt on the New York
Stock Exchange soaring 75 percent in the past 12 months to a record $265 billion.
Margin buying has exploded in popularity because the 50 percent down payment is
simply a deal that is too good to pass up.

Proof that the economy is snubbing Greenspan is that the nation's economic growth
-- the gross domestic product --  grew at a blistering 7.3 percent annual pace in
the final quarter of 1999, the strongest in nearly 16 years.

And consumer credit soared $17 billion in January, the biggest leap since 1989.
Existing home sales rose in February despite mortgage rates that were 1.5
percentage points higher  than a year ago. And the labor market is still the
tightest in 30 years.

Instead of taking air out of an overblown stock market, Greenspan's policy has
incited mutual fund managers -- who view as a sin any investment strategy that
favors holding cash -- to run to already overpriced technology stocks.

The technology-laced Nasdaq Composite Index has raced up more than 80 percent
since Greenspan started raising interest rates last June, valuing that market
index at about 74 percent of the nation's gross domestic product. Yet, the
Nasdaq-listed companies produce only 21 percent of American goods and services.

``Many view Fed chief Greenspan as omnipotent,'' says Kent Engelke, capital market
strategist for Anderson & Strudwick Inc. ``There is a real possibility that he may
view the continual ascent of stock prices as a direct assault upon  his
credibility.''

Greenspan has been negative on stocks since December 1996, when he rocked global
markets with his comments about investors' ``irrational exuberance.'' Back then,
the Dow Jones industrial average was just 6,000. The blue-chip  index has nearly
doubled since then, which doesn't say much about Greenspan's credentials as a
stock market analyst.

Henry C.K. Liu



GGard97342@xxxxxx wrote:

> Investment volatility: from Geoffrey Gardiner
>
> Writtten March 17, 2000 sent April 1, 2000
>
> On 14th March 2000 the Financial Times of London published the following
> letter.
>
> >From Mr James Coleman.
> Sir, I would like to protest vigorously about the lack of really worthwhile
> criticism of the "new economy" by leaders of opinion in the City of London,
> particularly of the final folly of the changes to the FTSE constituents. In
> view of the effect these changes will have on the economy is it not too much
> to ask that companies allowed into the FTSE should have at the very least a
> history of one year s good net profits before they are even considered for
> entry?
> What is going to happen now? The FTSE will soar as the idiot "lemming" fund
> managers sell good stocks in order to buy the rubbish that has been
> introduced into the FTSE. So for a few weeks, maybe months, the market will
> rise in a self-fulfilling spiral as the lemmings track the index. They buy,
> stocks rise, weightings then increase; lemmings buy more, stocks rise
> further, weightings again increase and so on.
> Until finally the crash occurs. Who is going to be hurt? Not your fund
> managers who are paid on relative performance. Not your city slickers who
> will have been in and out quickly. Not your venture capitalists who will
> already have their money in the bank. And not the directors of these
> worthless "tech" companies. No, the people who will suffer are the future
> pensioners whose money is being used by fund managers. Since all these "tech"
> companies have entered the FTSE at extremely high valuations, pension funds
> will at best not increase much in value over the medium term and at worst
> will be worthless for pension purposes.
>
> James Coleman,
> 124 Hartford Road,
> Huntingdon,
> Cambridge PE18 7XQ
>
> Is it not nice to read something sane? But I may be venturing into insanity
> again because I propose to revive the discussion of last November about
> volatility, and I recall that at the end of that discussion I was covered in
> bruises from being swatted with multiple weighty papers.
>
> I had dared to say what to me is axiomatic. A successful speculator, by which
> I mean one who makes money, makes a market more stable, and unsuccessful
> speculators do the opposite, but fortunately tend to go broke rather quickly.
>
> The papers seemed to be all about "noise traders", not professional fund
> managers. In a paper which claims to be scientific, one must not use
> pejorative expressions like "noise trader" for the activities one is
> researching, supposedly with impartiality. I may sound prissy, but I am very
> reluctant to read anything which reeks even slightly of class distinctions.
> But putting such niceness aside, there was a bigger problem: the academic
> researchers, possibly through unconscious prejudice, had targeted one sector
> of investors only, the wrong one, in their search for the cause of
> volatility. They may have assumed that their graduates, whom they have
> honoured with double firsts, are immaculate in conception when they perform
> as skilled analysts and researchers in prestigious merchant banks, and later
> as the senior fund managers. Only lesser mortals, who are not products of the
> "satanic mills"* of academia, become "noise traders". No scientist should
> make such an assumption. In practice the "noise traders" are often the
> professionals investors dealing on their own account, and doing very
> different things from what they do with other peoples' money.
>
> It is the professional fund managers with their professional hats on who are
> the "lemmings", as Mr Coleman calls them, and the destabilisers. In earlier
> FT letters they were called "incompetent lemmings", which provoked an amusing
> discussion as to what a lemming did to be incompetent. Did he fall off the
> cliff twice or not at all?
>
> I speak not as a peruser of learned papers on this topic, not because I
> cannot read, for I can, and in a modest variety of ancient and modern
> languages, but because in this instance my evidence is first hand
> observation, not scribblings in an economic journal based on second hand
> information. I have had fifty years experience of investment markets, and
> have observed what went on with great care, and with what my senior
> colleagues used to call "a nasty mind."
>
> >From 1971 to mid 1974 I was very close to the heart of an enormous investment
> institution, Barclays Bank Trust Company. This was before the "Eagle" started
> falling (vide Martin Vander Weyer's book "Falling Eagle", Weidenfeld and
> Nicholson), and we were a subsidiary of one of the world's top five banks in
> both balance sheet total and profits. Indeed we may have been even more
> profitable than appeared, as Barclays was trying to hide its enormous profits
> in every way possible, and one such way was to put up to 46 per cent of the
> salaries' bill into the pension fund.
>
> Nowadays Barclays claims to be the biggest investment manager in the world.
>
> My official role was "assistant to the general managers". There were two
> general managers, both of high calibre: Noel McCann, graduate of Trinity
> College, Dublin, Barrister-at-Law, former Chief Inspector of the Bank, and
> Derrick Hanson, LLM, Barrister-at-Law, since made an Honorary Fellow of the
> Chartered Institute of Bankers for his services to banking. The corporate
> investment activities of the bank came under an Assistant General Manager,
> David Moss, who had a business degree, and, most prestigious of all, was an
> actuary. He was very highly regarded in the City of London. We had a board of
> the great and the good. Among them were Nigel Mobbs, CEO of Slough Estates,
> the MP Edward DuCann (who amazed everyone by prophesying that there would be
> funds investing in Russia in his lifetime), and Professor Jim Ball of the
> London Business School.
>
> We covered the whole range of financial services, and our investment
> activities included unit trusts (equals "mutual funds" in American), pension
> fund investment, trust investment, private client investment, insurance
> company investment, property investment of all kinds, and heaven knows what
> else. You name it, we probably did it. My role was rather like what the
> French call "Chef de Cabinet". I had to know everything that was going on in
> all departments and subsidiaries. I saw all the correspondence in head office
> and if there was a dirty job around which no-one else wanted to do, or no-one
> else had the skills to do, it was mine. There was at first another assistant
> whose sole job was to monitor the off-shore operations (Channel Islands, Isle
> of Man, Cayman, Bermuda, Bahamas, Melitco, Nauru, Luxembourg), but he
> resigned and I found I could deal with that as well.
>
> The unit trust activities (Barclays Unicorn) were particular fun as we had 41
> per cent of the gross UK market for a while. Which reminds me I was also on
> the marketing committee.
>
> In the middle of 1974 I moved back to the sharp end of the business which
> included the selling of investment media, and especially one which I had
> devised and launched before leaving London. My new base was Cambridge, an
> international centre because we had graduates of the university as clients
> who lived all over the world. Several members of the Keynes family were our
> clients. We were successful as later statistics showed that in the last five
> months of 1974 my investment manager and myself were responsible for 2.5 per
> cent of the net sales of unit trusts for the whole of Britain for the whole
> of 1974. We were the only people with the right product for the time and the
> skill to sell it in a period when the All Share Index was slipping down and
> down, and horrific financial crises occurred, culminating with the collapse
> of Burmah Oil, and its rescue by the Bank of England. The market his its low
> in December 1974. It had more than halved from its peak two years earlier. My
> staff and I wanted to go into the market heavily to take advantage of the
> crash; the top investment managers in London were against. They wanted to see
> the market turn first. The rise in January 1975 was so rapid they got left
> behind.
>
> What had happened to cause the 1974 crash? The facts emerged very clearly
> when the financial statistics for the quarter were issued.
>
> What one has to remember is that the market for company securities in Britain
> is basically a one way market: net sales by the public, net purchases by the
> insurance companies and pension funds. It has been the same in almost every
> year for which I have the statistics. Every year the National Income Blue
> Book shows that the personal sector of the economy is a net investor in every
> kind of investment except company securities. The only years when this
> pattern has not been true were those in which Maggie Thatcher was making
> gigantic privatisations. Privatisation increased the number of personal
> investors from 2 million to 10 million, but otherwise did not affect the long
> term saecular trend for the personal sector to be net sellers.
>
> The personal sector has to pay every year large sums in capital taxes. As the
> personal sector in the aggregate is a net investor in everything else, it is
> I think correct to deduce that in the aggregate the personal sector pays its
> capital taxes by selling company securities. The progress of the divestment
> has of course been monitored by academics, starting with the excellent study
> by Professor Jack Revell of Bangor University, North Wales. At the
> commencement year of his study the public owned 80 per cent of ordinary
> shares, now it is under 20 per cent.
>
> Because they are largely for the purpose of paying tax, many of the sales are
> not arms length free market sales. They are forced sales. They have to happen
> in a fairly steady stream with little leeway for manoeuvre, regardless of
> what the policy of the buying institutions might be. If the institutions stop
> buying the prices collapse.
>
> The financial statistics show that that is precisely what happened in 1974.
> In the fourth quarter of 1974 the insurance companies were net sellers of
> ?62.6 million of company securities, compared with purchases of ?6.7 million
> in the third quarter. This had never happened before, so far as I could
> discover. The net purchases by the insurance funds for 1974 were ?11.7
> million, compared with ?679.9 million for 1972, a year in which the All Share
> Index reached a high of 228.18, and ?356.7 million in 1973. The highest point
> of the All Share in 1974 was 150.53 and its low 61.92.
>
> The insurance companies remained net sellers in the first quarter of 1975, to
> the tune of ?26.3 million, but the private pension funds, who had been net
> sellers in the third quarter fo 1974 to the extent of ?7.8 million, were net
> purchasers of ?114.1 million in the first quarter of 1975, so it was they who
> rescued the market.
>
> The personal sector figures are net sales in 1972 of ?1225 million, in 1973
> of ?2073 million, in 1974 of ?1368 million, and in 1975 of ?1265 million.
> During that crucial fourth quarter of 1974 the personal sector sales were
> unusually low at ?108 million.
>
> I do not think we have to do a regression analysis of such obvious statistics
> to read the correct message which is that the institutions were a lot of
> "incompetent lemmings", and that private individuals acted rather coolly,
> given their weak position. But even their reduced sales were still enough to
> overwhelm the buyers.
>
> But there is another message from the statistics: Foreigners sold ?493
> million worth of company securities in 1972 when the All Share was up in the
> 220's, bought ?286 million in 1973 when the index was between 200 and 134,
> and bought ?982 million in 1974 while the index was diving. I have no figure
> for 1975. Who were they? The stats do not tell us, nor do they give the
> quarterly figures. Why were foreigners able to outguess the British
> institutions so decisively.
>
> All values need to be multiplied by about ten to give modern equivalents.
>
> The lesson of all this is that that if you want to know who destabilises the
> market it is without any doubt at all the institutional fund manager. Why do
> highly educated people act like dolts? Simple. I believe it is because if a
> manager acts alone and is wrong, he loses his job (like the man just sacked
> from Phillips and Drew), but if he does the same as everyone else and is
> wrong, that is just bad luck!
>
> I have sat and listened to a investment research chief with impeccable
> academic antecedents telephone his opposite numbers first thing every morning
> in other institutions to find out what they are doing, unless of course they
> phoned him first.
>
> The small trader who creates the so-called noise is typically a bank clerk
> who learns about the stock market during his stint as securities clerk, and
> has experienced old hands to guide him. I joined Barclays Trustee Department
> as a graduate trainee in January 1953. By June I was handling full time
> masses of stock exchange orders and made my debut as a "stag" on my own
> account. In four days I made nearly one hundred per cent. My richer senior
> colleagues made small fortunes. We were sceptical cynics to a man. The girls
> were less inclined to take part, but those that did were brilliant, perhaps
> because they were more ruthless and less sentimental than men.
>
> In those days the London broking houses served the same purpose as the Church
> had done in an earlier age. That is it provided jobs for the fools of the
> aristocratic families. For good advice and service one used provincial
> brokers. That I still do, and a year ago a Liverpool broker made a suggestion
> to me which has produced not only a 24 per cent income yield but also a 400
> per cent capital gain. No, it was not an internet stock! The founder of the
> firm is the descendant of Jewish refugees from Russia.
>
> Geoffrey Gardiner
>
> *A fanciful interpretation of Blake's "Satanic Mills" in his poem "Jerusalem"
> is that he meant the colleges of Oxford and Cambridge. He did not, of course;
> the mills were the zinc smelters on the Mendip Hills in Somerset where legend
> says Christ spent his missing years working for his tin merchant uncle,
> Joseph of Arimathea.