Ralph
06.03.2001, 15:12
Was mein Freund James C. Cramer hier nachstehend schreibt, klingt plausibel, denn er war selbst mal Manager eines solchen Fonds ..... tut euch selbst einen Gefallen und schaltet heute bloss nicht euer Gehirn aus ! ..... nur weil es mal grün flackert.
Watch Out for the Thin Ice of Hedge Fund Bottoms
By James J. Cramer
3/6/01 8:18 AM ET
We need to become more savvy about this much bandied about term "bottom." I must hear that codeword for buy a dozen times a day with reference to stocks. It almost always has the exact same feel to it: National Gift Wrap and Semiconductor has just preannounced "sharply lower than expected" earnings per share and yet the stock closed up $0.875 in active trading. That must be a bottom.
How many times have you heard that logic? How many times has it fooled you into taking action?
Let's analyze why these "bottoms" occur and what they seem so seductive.
First, we have to acknowledge the sticking point that is at the heart of every "bottom" call: Stocks have just been hammered. By virtue of stock depreciation, tech equities have to be closer to a bottom than a top. Yet, that could be an irrelevance as far as I am concerned because a bottom may not mean that stocks go up. Oil service stocks bottomed for years before they rallied. During that bottoming process, if you hung around and waited you lost a little money year after year after year while everyone else made money. I don't know if that even matters to you. To listen to people talk, they are perfectly happy to wait a year or two or three for Lucent(LU:NYSE - news - boards) to come back.
That's ridiculous. Nothing is worth that wait if other sectors are advancing, and they are.
Second, let's talk about why Vitesse (VTSS:Nasdaq - news - boards) or LSI (LSI:Nasdaq - news - boards) or Cypress (CY:NYSE - news - boards) doesn't go down after bad news.
When I started my hedge fund almost 15 years ago, there were fewer than 1,000 hedge funds. Remember, a hedge fund is a fund that is supposed to make money regardless of what the stock market does. That's the only definition you ever need to know about a hedge fund.
In practice, that translates into managers who are specifically looking to profit from the declines in stocks, because, if you are not trying to make money in the direction of the market, but in the direction of stocks, then shorting individual stocks is the standard operating procedure.
Now there are about 10,000 hedge funds and their ranks grow by the month. That means there are 10 times as many people looking to profit from the short side. They seek opportunities to bet against stocks wherever they can find them.
You can't find a more fertile place to look for declines than semiconductors. This is a group where expectations were so high that earnings have had to be cut mercilessly. Yet the estimates, seemingly no matter how low you take them, are not low enough.
Hedge funds know this. They see that LSI's end markets are being trashed, so they buy puts or sell short LSI's stock in anticipation of its missing earnings.
When the actual news hits, though, sometimes the buyers don't take any action. Sometimes the buyers are so inured to the bad news, they have so anticipated it, that they just say "ho hum," tell me something I don't know.
When they do that, which is what apparently happened Monday in the market, the longs just go into their shell and do nothing.
That's a disaster for the shorts. The short sellers need supply to be able to buy back their short sales and ring up profits. They need sellers to materialize in bulk and knock the stock down so they can cover at a lower price than they shorted the stock.
On Monday, these stocks were ignored by their owners who, at this point, don't care about the near term. The shorts, however, only care about the near term. They aren't short LSI or Cypress because they think they are going out of business. They are short them precisely for these announcements.
The hedge fund community is made up of severely disciplined traders. They go by the catalyst theory, meaning, once their catalyst is passed, they take the trade, even if it is at a loss.
So Monday, when the longs did nothing, the shorts did what they had to do, and bought the stocks in. So they rallied.
Unfortunately, this kind of covering precipitates a wrong-headed reaction on the part of other potential longs. They now conclude that the stocks have bottomed and they commit new capital to these stocks, for fear that they will miss the upturn.
Ah, but here's the rub: Stocks don't go up continually because shorts cover. There aren't that many shorts out there, believe me. Stocks go up because the fundamentals are improving. When a company preannounces a shortfall, it is not doing so because business is getting better. It does so because business is getting worse.
That means that those buying the stocks in anticipation of the bottom being real, and not of the cardboard variety, will soon be disappointed again, whether it be here or a few points up or down from here.
That this pattern is not so ingrained yet among the longs amazes me. It seems plain as day. Yet we still hear the media and traders commenting endlessly about how these stocks have bottomed because they went up on bad news.
Take it from me. These stocks are not having real bottoms. They are having HFB, or Hedge Fund Bottoms. An HFB is like thin ice. Looks like real ice. Is real ice. Doesn't support your weight. You end up drowning.
Don't step on it.
Wo er Recht hat, hat er Recht
Ralph
Watch Out for the Thin Ice of Hedge Fund Bottoms
By James J. Cramer
3/6/01 8:18 AM ET
We need to become more savvy about this much bandied about term "bottom." I must hear that codeword for buy a dozen times a day with reference to stocks. It almost always has the exact same feel to it: National Gift Wrap and Semiconductor has just preannounced "sharply lower than expected" earnings per share and yet the stock closed up $0.875 in active trading. That must be a bottom.
How many times have you heard that logic? How many times has it fooled you into taking action?
Let's analyze why these "bottoms" occur and what they seem so seductive.
First, we have to acknowledge the sticking point that is at the heart of every "bottom" call: Stocks have just been hammered. By virtue of stock depreciation, tech equities have to be closer to a bottom than a top. Yet, that could be an irrelevance as far as I am concerned because a bottom may not mean that stocks go up. Oil service stocks bottomed for years before they rallied. During that bottoming process, if you hung around and waited you lost a little money year after year after year while everyone else made money. I don't know if that even matters to you. To listen to people talk, they are perfectly happy to wait a year or two or three for Lucent(LU:NYSE - news - boards) to come back.
That's ridiculous. Nothing is worth that wait if other sectors are advancing, and they are.
Second, let's talk about why Vitesse (VTSS:Nasdaq - news - boards) or LSI (LSI:Nasdaq - news - boards) or Cypress (CY:NYSE - news - boards) doesn't go down after bad news.
When I started my hedge fund almost 15 years ago, there were fewer than 1,000 hedge funds. Remember, a hedge fund is a fund that is supposed to make money regardless of what the stock market does. That's the only definition you ever need to know about a hedge fund.
In practice, that translates into managers who are specifically looking to profit from the declines in stocks, because, if you are not trying to make money in the direction of the market, but in the direction of stocks, then shorting individual stocks is the standard operating procedure.
Now there are about 10,000 hedge funds and their ranks grow by the month. That means there are 10 times as many people looking to profit from the short side. They seek opportunities to bet against stocks wherever they can find them.
You can't find a more fertile place to look for declines than semiconductors. This is a group where expectations were so high that earnings have had to be cut mercilessly. Yet the estimates, seemingly no matter how low you take them, are not low enough.
Hedge funds know this. They see that LSI's end markets are being trashed, so they buy puts or sell short LSI's stock in anticipation of its missing earnings.
When the actual news hits, though, sometimes the buyers don't take any action. Sometimes the buyers are so inured to the bad news, they have so anticipated it, that they just say "ho hum," tell me something I don't know.
When they do that, which is what apparently happened Monday in the market, the longs just go into their shell and do nothing.
That's a disaster for the shorts. The short sellers need supply to be able to buy back their short sales and ring up profits. They need sellers to materialize in bulk and knock the stock down so they can cover at a lower price than they shorted the stock.
On Monday, these stocks were ignored by their owners who, at this point, don't care about the near term. The shorts, however, only care about the near term. They aren't short LSI or Cypress because they think they are going out of business. They are short them precisely for these announcements.
The hedge fund community is made up of severely disciplined traders. They go by the catalyst theory, meaning, once their catalyst is passed, they take the trade, even if it is at a loss.
So Monday, when the longs did nothing, the shorts did what they had to do, and bought the stocks in. So they rallied.
Unfortunately, this kind of covering precipitates a wrong-headed reaction on the part of other potential longs. They now conclude that the stocks have bottomed and they commit new capital to these stocks, for fear that they will miss the upturn.
Ah, but here's the rub: Stocks don't go up continually because shorts cover. There aren't that many shorts out there, believe me. Stocks go up because the fundamentals are improving. When a company preannounces a shortfall, it is not doing so because business is getting better. It does so because business is getting worse.
That means that those buying the stocks in anticipation of the bottom being real, and not of the cardboard variety, will soon be disappointed again, whether it be here or a few points up or down from here.
That this pattern is not so ingrained yet among the longs amazes me. It seems plain as day. Yet we still hear the media and traders commenting endlessly about how these stocks have bottomed because they went up on bad news.
Take it from me. These stocks are not having real bottoms. They are having HFB, or Hedge Fund Bottoms. An HFB is like thin ice. Looks like real ice. Is real ice. Doesn't support your weight. You end up drowning.
Don't step on it.
Wo er Recht hat, hat er Recht
Ralph