One investor's misfortune is often another's gain, and that's been laid out on Wall Street in the last two weeks. Market shorts now have rosy cheeks.
"We have been up (in portfolio results) in both July and August," said David Ryan, president and founder of Ryan Capital Management LLC, a hedge fund in Santa Monica. "We were short on a lot of Internet stocks, such as Amazon.com, Yahoo, and Onsale (an online auctioneer of computers and peripherals)."
Internet stocks took a beating during the 500-plus-point drop in the Dow on Aug. 31, meaning nice profits for short traders.
A hedge fund is one that will either go long or short on the market, sometimes simultaneously with different investments. Ryan hints only of single-digit gains in July and August on his portfolio, but Scott Prather, a day trader working in the offices of Cornerstone Securities Corp. (formerly Westwood Securities), talks about 125 percent gains in just days.
Day traders are nervy investors who buy, short or sell stocks in thousand-share blocks, usually by trading securities hands-on, using high-speed computer terminals.
"I made $400,000 in this market, in six days," Prather said last week. "I started with $300,000. On one day I made $87,000, another day I made $90,000, another day I made $50,000 and another day I made $72,000. Those were my best days ever. But I am still mad, because I haven't had a $100,000 day yet."
Prather likes to take positions meaning short positions lately in large-cap Nasdaq stocks, such as Cisco Systems Inc., Yahoo Inc. and Dell Computer Corp. With high share prices, such stocks, on a point basis, move nicely within a single day, or even hour.
For the intrepid day trader like Prather, a one-point move in the right direction means a $1,000 profit. "I was short on 6,000 shares of Dell," said Prather. "So when Dell dropped 5 points (during last Monday's rout), I made $30,000 just like that."
The big-cap technology stocks on the Nasdaq were especially hammered in recent bear markets, yielding Prather the big gains. Of course, it should be pointed out, if the stocks had rallied, Prather would have been whacked.
Prather is looking forward to more market debacles.
"I think a 1,000-point day (drop in the Dow Jones Industrial average) is entirely possible," he said. "Many of the world's stock markets are off 50 percent to 80 percent. We are nowhere near that yet."
But not all shorts are so negative.
Indeed, money manager Ryan said last week he had closed out his short positions. "Now, I think we will see a rally for the short- to intermediate-term," he said. "I don't really look out beyond six weeks, but that's what I see."
Like other Wall Street players, Ryan noted that small-cap stocks have endured a pounding in this bear market, with the Russell 2000 index an index of the 2,000 stocks just below the 1,000 largest cap stocks falling roughly one-third from its 52-week high.
"Investors have been looking for security," he said. "They also want liquidity. And, until recently, the blue chips had a pretty good record on earnings."
It's definitely a big boys market. As of last week, the index of the biggest stocks the S & P; 100 was still in plus territory for the year, in sharp contrast to the big negatives of small- and medium-cap indexes. The S & P; MidCap index of 400 stocks was off 15.7 percent, and the S & P; SmallCap 600 index was off 21.3 percent. But even worse was the S & P; REIT composite, made up of real estate investment trust stocks: off 24.2 percent for the year.
Municipal bonds anyone?
When storms buffet Wall Street, investors start to look for safer climes, and tax-free municipal bonds long have provided safe harbor for those seeking refuge.
Not surprisingly, business is up at the Beverly Hills-based M.L. Stern & Co., a 33-year-old municipal bond brokerage though not sharply up last week, as might be expected.
Why? Yields are modest, by the standards of the last couple of decades.
"In the last couple months, definitely people have been coming into municipal bonds," said Miles Benickes, senior vice president at M.L Stern. "But now, with yields falling to around 5 percent on a 25-year bond, and less than that on a 20-year bond, we are running into buyer resistance. People want more than 5 percent. They have been used to getting more than that. Municipals have been getting to be a little bit of a tougher sell."
Benickes points out that government bonds have been some of the big winners this year, as equities have tanked. Since August a year ago, including interest and principal appreciation, Treasury bonds are up more than 15 percent.
"That looks good in comparison that what has happened on Wall Street," he said.
On a tax-adjusted basis, Benickes points out that the tax-free munis are yielding 9 percent. "People may start to think that looks pretty good," he said. "Especially if this bear market continues."
Some financial disaster-scenario pundits of late have pointed to the increase in the money supply as another sign of impending financial doom.
The reasoning goes that the Federal Reserve Board, panicked by the specter of global recession or worse, is flooding the banking system with money to keep things afloat.
The Fed won't address the issue, but UC Riverside economist Michael Bazdarich says the theory is hogwash.
Bazdarich, who is also a commentator for the CBS news Web site and proprietor of MB Economics in La Canada Flintridge, noted the money supply (as measured by M2) was up at a 10 percent annual rate for the 13-week period ended April 30.
But the supply always bulges around tax time, he points out, as people prepare to pay Uncle Sam, and move money into money market accounts or other checking accounts measured by M2. Too, there has been some bulging as assets were shifted out of Asia and parked in U.S money funds not a loosening Fed policy, he said.
At latest read, the supply is back to growing only 4 percent for the previous 13 weeks, and looks on track for about 6 percent growth this year, said Bazdarich. That marks a mild easing, but not an explosion, in the money supply, he said.
"In 1996 and 1997, Fed policy has been restrictive, making for an all-time record low growth rate in the money supply, of about 3 percent a year," said Bazdarich. "I think the Fed is still pretty restrictive, but is easing a bit."
Contributing reporter Benjamin Mark Cole covers the local investment community for the Los Angeles Business Journal. He can be reached at email@example.com
For reprint and licensing requests for this article, CLICK HERE.