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Posted 7/14/2000
Kenner & Niederhoffer
What's next for
Wall Street
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Extra!
Investors cap bullish week: Will Greenspan spoil it?
The Fed chairman goes to Capitol HIll on Thursday, where he may trot out his "irrational exuberance" speech.
By Laurel Kenner and Victor Niederhoffer
The stock market soared this week to three-index highs, with the S&P 500 ($INX) and Dow Jones Industrial Average ($INDU) rising 2% and the Nasdaq ($COMPX) jumping a glorious 5.5%.
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There has never been a tested bearish forecast of the market that has proved profitable, so we are much averse to pushing against a closed door of this nature. However, the current market situation is particularly troublesome. First, contrary to popular belief, the market is always more bearish after a series of consecutive new highs or new lows. Second, there is the level of complacency, as shown in such statistics as a 23% implied volatility reading on S&P options. This is close to a one-year low. Over the past three years, such low levels have been particularly bearish. Finally, and most troublesome, there was a significant negative divergence with bonds down and stocks up, which makes the current ecology of the market bearish.
Exacerbating these worrisome undertones is the fact that Fed Chairman Alan Greenspan is scheduled this week to offer Humphrey-Hawkins testimony on Capitol Hill. He has just three speeches in his bag of tricks, and over the past week he already delivered two: The bullish "Technology and innovation creates value" speech on Wednesday and the netural "Markets must be left alone to bear the moral hazard of excessive speculation," on Thursday. What we fear is that with the market soaring like this, he will trot out the third speech – on "irrational exuberance" -- before the Congressmen and Senators next Thursday.
Kenner & Niederhoffer
Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a trader and former Bloomberg markets editor. In a special series of weekend columns for MoneyCentral, they'll assess the past week's Wall Street performance and next week's prospects. Let us know what you think in the Start Investing Community.
Under the circumstances, never wishing to go against the buy-and-hold strategy which is appropriate at all times for long-term investors, we thought it high time to repair to Cambridge, Mass., home of the greatest collection of prize-winning and revered financial economists east of Chicago, to ferret out some universal education from the upper crust -- and then proceed to 42nd Street in New York for ideas that should work nicely for everyone else.
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When we greeted Prof. Zeckhauser, he informed us there was bad news and good news. Almost all of his distinguished colleagues, himself excluded, were quite bearish on the market. The good news was that they had been bearish since Dow 7,000.
One of the professors we encountered, an expert in game theory, revealed a method he'd developed which he felt had legs. He buys new issues from a large brokerage when the offering price is set above the original estimated range. He generally holds a few weeks, the least amount of time the fund will permit, and sells for a tidy profit. If the new issue is priced on the first day within its offering range or below, the professor demurs.
Investing for the average Jane
As accounts need to be of a certain size before brokerages offer such emoluments, we next proceeded to the midtown Manhattan offices of newsletter publisher and fund complex Value Line, in search of alternatives within reach of the average Jane and Joe.
Value Line is best known for publishing weekly reports that rank 100 stocks at the top of the heap for "timeliness." It's the largest investment advisory service in the world, and the reports are available free of charge at public libraries. The timeliness rankings choose stocks based on price momentum, earnings momentum, earnings surprises, value and earnings-growth acceleration.
Over the past 35 years, according to Value Line, the top-ranked stocks of the four groups has risen a compounded 20.5%, beating the broad market by about 8%.
There are ways to profit from the Value Line approach, which we will speak of shortly, but it would be impossible to exactly replicate those numbers for several reasons. First, Value Line adds and removes stocks from the list at the close of trading on Wednesdays, but because of time lags associated with printing and mailing, the public does not become aware of the changes for at least eight days thereafter.
The reports are mailed out Thursday morning. We are informed by the estimable librarians of the Westport Library, who conscientiously stamp each report when it arrives, that while they sometimes come on Thursdays, arrival is more typically on Friday, and sometimes even the following Monday. During that time, a stock being added to the list typically has risen 2.5%, according to Phil Orlando, chief investment officer of Value Line Asset Management, the mutual fund side of the business.
In addition, if an investor made each trade to track the Timeliness Rank 1 picks, he would pay transaction costs of 3% to 4%.
Not even the Value Line funds and annuities attempt to precisely replicate the Group 1 performance. Because they have $7 billion to invest, only one-third to one-half of the stocks are liquid enough to allow purchases. The groups tend to be overloaded with whichever industry group is currently in ascendancy, which wouldn't allow proper diversification. Orlando's actively managed funds choose a mix of stocks ranked 1 and 2 for timeliness, and have managed to consistently beat the market. Over 10 years, its Value Line Fund (VLFX) has gained 16.3% over 10 years, while the Value Line Leveraged Growth Fund (VALLX) has risen 19%.
Maximizing the Value Line approach
There is one man known to have tried to exactly follow all the picks ranked 1. He is Henry Hill of Florida, and although we did not have an opportunity to talk with him before today's deadline, we were informed by Sam Eisenstadt, who originated the timeliness ranking system, that Mr. Hill's efforts have not gone unrewarded; since he started investing in Group I stocks in 1983, he has improved his initial stake of $100,000 by 200-fold.
Eisenstadt, who joined Value Line in 1946, after graduating from City College in New York, told us today that he is still tinkering with the ranking system.
Two companies offer a passive approach to using the Value Line system, buying the 100 stocks ranked 1 at the end of each year and holding them through 12 months. Over the past 35 years, this "frozen" method has also beaten the market, gaining 16.2% annually - enough to amount to a 21,300% gross return without even taking into account dividends.
Orlando, who has three kids and is a neighbor of Hillary Clinton, met the redoubtable commodities investor at a local parade. Unfortunately, he didn't ask her for investment advice. While Hillary's record is unsurpassable, we offer Phil's advice to investors anyway, and are confident that investors will profit from it: "Stay invested. Equities are going to produce sustainable returns superior to any other asset class."
Orlando counsels buying the leading stocks in an industry. He gave us four picks: Oracle (ORCL, news, msgs) for software; EMC (EMC, news, msgs) for data storage; Intel (INTC, news, msgs) for semiconductors; and Cisco Systems (CSCO, news, msgs) for networking equipment.
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A list of the Value Line stocks ranked 1 for timeliness are available in every library. Here are the five best and worst performers, year to date.
| Top Five | YTD Performance (% change) |
| Scientific Atlanta (SFA, news, msgs) | 207 |
| PMC-Sierra (PMCS, news, msgs) | 186 |
| IVAX (IVX, news, msgs) | 133 |
| Integrated Device (IDTI, news, msgs) | 133 |
| Network Appliance (NTAP, news, msgs) | 128 |
| Bottom Five | YTD Performance (% change) |
| Compuware (CPWR, news, msgs) | -76 |
| BMC Software (BMCS, news, msgs) | -75 |
| Micros Systems (MCRS, news, msgs) | -73 |
| Harmonic (HLIT, news, msgs) | -69 |
| Qualcomm (QCOM, news, msgs) | -65 |
| Average for the 100 stocks ranked 1 | 23.6% |
At the time of publication, Victor Niederhoffer maintained long and short positions in index futures and options. His position changes regularly from net long to net short as the market fluctuates in the short term, but remains highly bullish for all time periods forward. Laurel Kenner owns Dial, Finova, Carpenter, Modis, HB Fuller, Interstate Bakeries, National Commerce, StorageTek, Sykes and Ucar. Mail Laurel and Victor at lkvn@hotmail.com.
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