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Detritivores and Other Destroyers,
by Victor Niederhoffer
- There's something unholy about the market's reaction to
every twist and turn in the Refco death dance. With every bit of news that
made the company's death seem more likely, the market dropped 1% in a minute.
Yes, they might go under, as did Enron. And Delphi, with
$1 billion in market cap, also went under amid the change in bankruptcy
laws. But how does that compare in significance to the many
companies that reported 15% earnings growth this week, the
three-quarters of the total that reported positive surprises,
the decline in energy prices to three-month price lows, the great
news from McDonalds and Alcoa, the technology breakthroughs at Apple,
the paltry 0.1% rise in the core inflation rate for a fifth
straight month, the differential between earnings yield and bond yields of a few percent in stocks'
favor, and the fantastic performance of every other market relative
to ours so far this year? Are we that bad?
- It's a major, terrible tendency of market players to feast on the dead.
Those who have been around recall how the market went down a
fast 10% as the vultures circled around the Long-Term Capital Management
collapse. Whenever the firm went in to find a buyer, the
prospect couldn't wait to kick them out, to sell in front of
them. That's the tradition. The same thing happened with Baring's
collapse, and I well remember how the U.S. market
stopped dead in its tracks the week of Oct.. 19, 1987, and how it dropped
5% whenever there seemed any likelihood that the British
government would hold the U.S. underwriters to their pre-crash
commitments on British Petroleum.
- History abounds with these paralyses caused by death.
In Henry Clews's classic books on Wall Street, he
describes how Governor Flowers was the leader of the bull
claque, and when the homely rustic died, the market ''dropped
to zero.'' The reaction to all the
rumors planted about ''Doctor'' Greenspan's death or, it is
hoped, retirement are another horse from the same shed.
And this must be quantified.
- Detritivores and reducers
play a key role in the ecosystem by recycling nutrients and
minerals that couldn't otherwise be used by organisms. About
90% of the organic material in the forest is recycled only
when it is dead and the bacteria and worms take over. Vultures and crabs are specialized to
ingest decaying matter. It's disgusting to see them on
the road or shore, the same way it is to have your
counterparts watch over you like a hawk or vulture to see if
you're near death, try to precipitate it, and then with
no risk of their own, eat your fixed remains. Such is so
common in markets.
- The general principle here is that the
inflexible and the slow-moving are easy prey for those who are
flexible. The principle reaches its ultimate expression and a terrible
realization in the case of market death.
- Among the rumors that constantly swept the floor this week
was that this firm or that firm was intimately involved in some way in the Refco debacle
and held a current weak hand in the market firmament.
The surfacing of such rumors were usually good for a quick quarter-percent decline in the market.
When such rumors gave way to others, the market bounced
back. Such is the way of markets. And such is the way of
those who disseminate such rumors.
More writings by Victor Niederhoffer