Large Funds' End Of Quarter Trading Impacts Market
The Dynamic Wealth Report
March 26, 2008
Let The Window Dressing Begin . . .
by Brian T Mikes, Managing Editor
I just got off the phone with Southwest Airlines. Booking a flight to
San Francisco was a breeze. I’m flying out to the bay area in April for
a wedding. A good friend, Babe (yes that’s his real name) is settling
down, tying the knot and marrying the girl of his dreams. While sorting
out my travel plans I took a close look at the calendar and I realized a
huge milestone was about to be crossed.
It’s close to the end of the quarter and suddenly some of the market
volatility is making sense. I believe the recent rallies in the
market are being caused by large funds dressing up their portfolios.
What do I mean by that?
Every investment manager’s graded on their performance at the end of
every quarter – 4 times a year. It doesn’t matter if the investment
manager’s running a mutual fund or a hedge fund, the end of the quarter
is critical. It’s like the college student who slacked off all semester
only to study hard and focus when it counts – at mid-terms and finals.
You’re probably asking yourself why the end of the quarter is so
important to these guys?
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Remember, fund managers handle millions and billions of dollars for
investors. They’re paid primarily on the size of their fund. That’s
right. The more money they manage the bigger their paycheck. A nice job
if you can get it. Naturally they don’t want investors to pull money
out. That would be very bad possibly leading to smaller paychecks, or
heaven forbid, losing their jobs.
Every quarter these fund managers are closely examined. How’d they do
against the market? What’s in the portfolio? How’s their performance?
Next Monday is the end of the quarter and these fund managers are going
to do everything in their power to make their portfolios look good.
So what do they do?
Most of the investment dollars out there are invested long only (meaning
they want the market to go up in value). So, fund managers want to see
their investments rally and provide good performance numbers. These
managers engage in “Window Dressing”. They dump small lesser-known
stocks and anything performing badly.
Think about it, who wants to see millions of shares of Bear Stearns in
their portfolio after the collapse? Then they do their best to prop up
stocks. They make the holdings look better by buying more and bidding up
the price.
Is this legal?
Remember we are dealing with very smart people. They won’t push a stock
higher on the last day of the quarter. No. That’s just too obvious.
Instead they will start bidding the stock up a few days prior to the
quarter end.
I think a better question to ask is: “Is this the right thing to do”. Clearly the answer is no. I firmly believe that this portfolio window
dressing stuff is disingenuous. Despite my feelings, it still happens.
Do fund managers really have the power to move stocks that much? Of
course they do, they manage enormous amounts of money.
Their buying and selling can have a huge impact on any particular stock.
The impact is magnified on small and mid cap stocks with low trading
volumes. Fund managers know this. Why do you think they slowly build
into and out of positions? A big buy order hitting the market would
drive the price up significantly. A sell order has the opposite effect.
So I wouldn’t look at this latest rally as a sign of a market bottom. I
still think it’s a bear market rally being driven by quarter-end window
dressing from money managers. I would expect the rest of this week to
whipsaw as major institutions pretty-up their portfolios.
Can we make money on this phenomenon?
The best way to make money in this market is to stick to your
convictions. We’re in a confirmed bear market. The best way to trade
during these times is selling into a rally and buying on the dips. I’m
holding tight to my Nasdaq put options.
Buying near the money options on the various market indexes is another
way to profit from these moves . . . just make sure you’re on the
correct side of the trade. Lastly, for those investors with long term
horizons (5 years or more) now might be a good time to start averaging
into quality stocks and ETFs.
• Rice (Over $19.00 cwt)
After big declines last week, Rice went limit up ($0.50) this week
crossing the $19 level. Concerns over the economy drove prices lower
short term. However, continued growth of global demand is pushing prices
higher.
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