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Victor Niederhoffer



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Briefly Speaking: Managed Futures, Dividends, Cascade Effects

Managed Futures:
The S&P Managed Futures Index, an investable index representative of investments in 14 systematic managed futures hedge fund programs, had one of its most severe drops in its 3 year history, falling from 1136 on December 9 to 1077 on December 15. Perhaps this is explained by and predicted in part the shocking drops in spot gold from $528/ounce on December 12 to $491/ounce Dec 21, the decline of crude from $62 a barrel on Dec 13 to $58 Dec 20 and related gyrations in the yen from 121 yen per $ on Dec 7 to 116 per dollar on December 19. Such a fall puts the Managed Futures Index back to where it was on Jan 24, 2003, 24 days after its initiation, but still 7% above its 1000 starting value.

Dividend increases have always signaled at least that the company's Board of Directors does not anticipate a serious decrease in earnings in the near future. And thus, the announcement by Pfizer on Dec 12 that they raised their dividend by 26% citing cost cuts, was particularly fortuitous in that it preceded by just 7 days the beautiful announcement that they had won their crucial patent suit upholding their exclusive rights to Lipitor, which must account for a very good portion of their profits. One has taken out the pencil and paper and found that such fortuitous news and concomitant price moves are not at all anomalous. Despite the abundance of studies and reports by those who hate enterprise and don't understand how important what you keep is relative to what the before "service" aspects are, the reduction to 15% service takes for dividends and capital gains since 2003 has been one of the major factors behind the 50% increase in the average since that time. A slew of academic articles attributes the impact of dividend increases on superior performance as due to a signaling effect that the earnings in the future are not headed for a decrease. And indeed, once a company has increased it's dividends, it is highly unlikely to do so. And earnings performance of dividend increasers is superior to the averages also. Another line of academic studies attributes the effect to the excess cash principal agent syndrome. If a company has too much cash, they are supposedly likely to use the overplus for their own benefit rather than the stockholders. The dividend increase reduces their ability to feather their own nest according to this hypothesis popularized by my former office mate Michael Jensen. Much more sensible is that companies that increase their dividends show their interest in improving the lot of their stockholders. Such stockholders show their appreciation and the expectation of continued increased emoluments with an increase in prices. I have had trouble getting the studies in this area past the Minister of Non-predictive studies, However, he reports as follows:

If a company's 12-month trailing dividend was zero 12 months ago and is non-zero 
now, then here are the stats for the next quarter's return: 
 Avg    Stdev     N   T-score
 3.12%   14.7%   164   2.70

For all S&P companies with non-zero trailing 12-month dividends, here are the 
stats for the next quarter's return: 
 Avg    Stdev     N   T-score
 2.10%   17.8% 12289   13.1

Cascade Effects:
The cascading effects of top-down ecosystems has been studied extensively by ecologists, particularly in protected marine areas. The idea is to eliminate the predator so the prey will increase. The problem is that when you eliminate the highest level feeder (the carnivore), the middle level feeders (the herbivores) increase in number and they are much more numerous and effective in feeding on the bottom layer (the producers, e.g. algae). A recent review (344 kb pdf) of 39 cases of trophic cascades by Pinnegar in Environmental Conservation, Vol. 27, Number 22, documents this problem with particular reference to the unpredictable detrimental effects of eliminating trigger fish, which increases sea urchin grazing and leads to less algae. Alternately, protecting spiny lobsters (as they do in the Leigh Reserve) leads to the reverse effect. The density of sea urchins then decreases, since they are food for the lobsters. And the sea urchins eat less kelp and thus the kelp cover increases. The situation becomes more complicated when human fisherman compete with animal predators, a situation particularly worrisome to me because my favorite food is involved. Protected otters compete with fishermen for abalone prey. Does a protected area for both abalone and sea otters allow for abalone fishery sustainability?

Yes, needless to say, all the articles on cascading impact of stocks show how one small decline, one small problem could lead to total disaster and Dow 500 as they are written by those who hope it will happen. But what about the reverse? Almost every market in the world is up 3 times as much as the US this year. The typical European market is up 25% with the Northern Europeans being up some 30%. And Japan is up 40% with all the others up about 20% except China, ranging from 40% in India, to South Korea and Pakistan up 50%. The median increase in South America is 25% with the biggies Brazil up 28% and Mexico up 35%. The situation is the same in almost every other market with Canada up 21% and the Middle Eastern markets such as the UAE up over 100%. When in heaven and earth is the cascade from the top of increased wealth that investors are finding in every other market except the US going to cascade down to us, with the US eking out a measly 5% this year? Surely we're not that bad, and the predators in these other markets will move to such depleted areas as our own country where the number and fatness of the prey would seem to be such easy picking.


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