Hedge Fund Woes
05/11/2005
The news is there is an impending hedge fund collapse and that is why the markets are weak. The fear is because a few years back, Long-Term Capital Management lost more than 90 percent of its $4 billion fund after the 1998 Russian financial crisis. Long- Term Capital, which invested about $20 in borrowed money for each $1 of clients' cash. Are the rumours founded? Whatever the reality, the market is looking for an excuse to fall in my view.
A lot of readers will pick stocks based on what company directors are buying. Another favorite of the financial media is the company director. Again, surely he is a person to be trusted, relied upon. If we don't get him or the fund manager who do we get? Private investors? God forbid.
Did you know that each time Paul Little, a director of Direct Focus Inc, has bought stock in that company, it's share price has risen on average 75% within 6 months? Or that when Ellis Earl has bought stock in Exco Resources, a company in which he is a director, the share price has risen 67% on average in 6 months.
Of course you didn't know this. And most investors never would. That's because they ask the wrong questions about directors' dealings.
The theory behind directors' dealings is simple: directors should know more about their own companies than outsiders. Therefore, if the directors are buying shares this should signal the company is doing well and that the share price will rise.
But it's the wrong question to ask 'in which companies have the directors themselves been buying stock?' That's too simplistic.
Directors could be buying shares not because of faith in a rising share price, but because the company expects new directors to do this (just as a new worker is expected to 'volunteer' overtime). It could also be that the share price has fallen sharply and they're buying stock as a public statement of confidence in the company. Equally, it could be part of their estate planning, tax re-organisation, or an exercise of options. These purchases are hardly calculated moves based on the director's belief in a share price rise.
An equally wrong question to ask is 'in which companies are directors selling shares'.
Wharton's Andrew Metrick and Harvard's Leslie Jeng constructed a hypothetical portfolio of all 'insider' (the US term for high ranking corporate officers including directors) sales over a 10-year period ending in 1996. The portfolio merely performed in line with the market. You might as well have ignored directors' sales altogether.
Value-Growth
On my value growth criteria which are based on stocks meeting revenue and profit growth and good value based on criteria such as price earnings growth, the following names come up. Remember they are for a 6 month outlook: Scottish and Southern Energy, Erinaceous, Gleeson, Ricardo, Mayborn Group, Aero Inventory.
Remember I am targeting about 20-20% with the value growth criteria. Last year it produced 33% return.
Crazy Small Stock
These are high risk volatile stocks which could move sharply higher or move sharply lower in my view, but will almost certainly not stand still. Names on the radar include: Morgan Sindall, iTouch, Fletcher King, Numerica.
Also, if you would like a free multi-media CDROM on 'Investing Better', which covers spreadbetting, CFD trading and momentum indicators like the MACD, posted to you then drop me an email with your postal address to alpesh@tradermind.com.
Spreadbetters
Spreadbetters and futures traders often look at hard and soft commodities. Here's my quick take on the action for the week ahead:
- Oil: Mixed to lower
- Copper: Mixed to higher
- Gold: Mixed to lower
- $/£: Mixed to lower
- Dow: Mixed to higher
- FTSE 100: mixed
- Soyabean Oil: lower
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