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12/12/2005
Ephemera

Today's rise in the Nikkei to the 16,000 area, a five-year high, emphasizes again that ephemeral and predictable factors that cause declines are great buying opportunities. The ephemeral factor in the Nikkei was the fat-fingered trader at Mizuho Securities who sold 41 times too many shares of the IPO J-Com Co. But one might have predicted that the decline would be temporary, because the loss was part of a zero sum game. Also, fat fingers were a predictable tendency of many fingers, and the fact that it occurred was a realization of a known probabilistic phenomenon.

Larry Harris gives, as an example of an ephemeral phenomenon, the undue rise in Occidental Petroleum following the death of Armand Hammer, which led everyone to think that now the company would be run better. But his death was anticipated once he hit 90, and it shouldn't have caused such a reaction. Harris notes the stock fell the next day.

Recently, Jon Markman predicted that the decline in stocks in early October in conjunction with the R#fco crisis would be reversed imminently, and it was. A notable sidelight during that period has been the astonishingly high coterminous correlation between the daily returns of R#fco and the general market, approximately 30% during the heat of the fray. If  only one knew where R#fco was going to close during that period, even though it traded at less than $1.20 a share the whole time with a market value of less than 150 million, one would have had the open sesame to the whole market.

Another example was the supply situation of British Petroleum during the October 1987 crisis. Every nuance of the situation caused ebullience of distress in the US markets.  After all, the white shoe brokerages might lose more money if they were called on to make good on their commitments.

The Long-Term Capital collapse and the Barings debacle were other examples of ephemera where the market cratered for weeks before the announcement on the rumors and not one legitimate buyer surfaced until all the supply was requited. Of course, in both situations, indeed in all such situations, the situation was exacerbated by interested parties with inside information of the coming surplus of supply who front-ran the actual selling, thereby precipitating and exacerbating the decline. Many such organisms specialize in such activities in all major biota systems, and despite the useful redistribution function served by such detritovores as vultures, worms, maggots and bacteria, and their counterparts in the markets, I look upon them with a certain revulsion.

The general question remains how to quantify ephemera on a prospective basis and know when they've caused a temporary market decline or rise (in those without a positive drift), and take advantage of it with reasonable sangfroid?

In researching ephemera I find myself in strange company, as almost all the 82,000 entries for "ephemera" "stock market" on Google are to very bearish commentators who state that any market rise is due to ephemeral factors. Another strange phenomenon is that almost all the "ephemera" labels were from very old articles. For instance, my friend Charlie Minter wrote on the "ephemeral" nature of the P/E ratio, and how it's much too high, in 2003, circa S&P 950, decrying the predictive properties of the Fed Model, as is common among practitioners and academics.

 

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