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Stock Market Window Dressing: the art of looking smart!
As investors, and all are investors these days, it is important that we understand the idiosyncrasies of Stock Market price data we use to help us in our decision making efforts. On Wall Street, investing can be a minefield for those not take the time to appreciate why securities prices are at levels that appear in the quarterly statements. At least four times a year, prices security is more a function of institutional marketing practices than they are a reflection of the economic forces that we'd like to think are its main determinants. Not at all … Towards the end of each calendar quarter, we hear the financial media matter-of-factly report that Institutional Window Dressing Activities "are in full swing. But that is as far and deep, as always. What they are talking, and just what it means for you as an investor?
There are at least three forms of Window Dressing, none of which should make you happy and especially all of which should make you question the integrity organizations that either authorize, implement, or condone its use. The best-known variety involves the culling of portfolios of stocks with significant losses and replaced by shares of companies whose shares have been the most popular in recent months. Not only does this practice make the managers look Intelligent reporting to major customers, it also makes Mutual Fund performance numbers look much more attractive to prospective "switchers" background. On the sale side of the ledger, the prices of the weakest stocks making are pushed further down. Obviously, all fund management take part in the ritual if they want to survive. This form of window dressing is, by most definitions, neither investing nor speculating. But nobody seems to care about ethics, law, or the fact that this "Buy high, sell low" picture is painted with a palette of mutual fund.
A more subtle form of Window dressing is carried out throughout the quarter, but is "unwound" before the portfolio's Quarterly Reports reach the glossies. In this less common (But even more fraudulent) variety, the managers invest in securities that are clearly out of sync with the policy of public investment funds for a period in particular specialty has fallen from grace with the gurus. For example, adding commodity ETFs, or popular emerging country issues a large Cap Value Fund, benefits, etc are taken before the Quarter Ends so that the fund's holdings report remains uncompromised, but with improved results quarterly. A third form of Window Dressing is known as "survival", but the impacts Mutual Fund investors alone while others undermine the information used by (and the market performance of) individual security investors. You may want to investigate.
I can not understand why the media reports so superficially on these businesses "as usual" practices. Perhaps ninety percent of the price movement in the stock markets is the result of institutional trading, and institutional fund managers seem more concerned with politics and marketing than they are with investing. They are trying to impress their major clients with their brilliance by reporting ownership of all hot entrees, and none of the main losers. At the same time, is manipulating the performance statistics contained in their promotional materials. They have made "Buy high, sell low" investment strategy accepted the mutual fund industry. Meanwhile, individual security investors receive inaccurate signals and incur collateral losses by moving in the direction wrong.
From the analytical standpoint, this market reality quarterly value (artificially created demand for some stocks and weakness unjustified in others) throws almost any individual security or market sector statistic totally out of wack with the underlying company fundamentals. But it gets even more diffuse, and not in the sense of love. Just for the fun of it, think of the demand "pull" impact of a growing list of ETFs. I do not think I'm the only who thinks that the real meaning of security prices less and less to do with the business economy as it does with the morning betting on ETF ponies … the dot-com new millennium. [Do you remember the "Golden Circle" of the seventies? Is not GLD, or IAU, about the same thing?]
As if all these forces institutions are not enough, one must also consider the impact of tax code motivated transactions during the last quarter of the year always entertaining. One would never suspect (after watching millions of CPA directed taxpayers gleefully lose billions of dollars) that the purpose of investing is to make money! The net impact of these (euphemistically labeled) "year end tax saving strategies" is more or less the same as the type of dressing A Window described above. But here's a buying opportunity than a quarter were not really be missed. In short, go out and buy the minimum 52 weeks November, wait for the periodic and mysterious "January Effect" to be reported to the media with eyes closed, amazement, and pocket some profits easy.
It simply can not be a method to actually decipher the true value of common action. Is the market price on the basis of business fundamentals, artificial demand for "derivative", or various forms of institutional Window dressing? But this is a condition that can be used to a huge financial advantage. With security prices less closely related to those old fashioned fundamental issues such as dividends, projected profits, and unfunded liabilities pension and perhaps more closely related to artificial demand factors, the only alternative seems to be operational trading! Buy the downtrodden (but mainly still investment grade) issues and make their profits on those who have risen to inappropriately high levels based on basic measures of quality … and try to get it done before the big players do. To over simplify, a recipe for success would involve the purchase of investment grade stock at bargain prices, allowing them simmer until a reasonable, pre-defined, profit target is reached, and seasoning of the portfolio brew with the discipline to apply in practice making Utility plan.
Call me old fashioned, but I miss the days when there were only stocks and bonds … interesting place Wall Street.
About the Author
Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”
Careers in Fashion : How to Create a Fashion Portfolio