As investors, and we\nall are investors these days, it is important that we understand the\nidiosyncrasies of the Stock Market pricing data we use, to help us in our\ndecision making efforts. <\/p>\n\n\n\n
On Wall Street,\ninvesting can be a minefield for those who don’t take the time to appreciate\nwhy securities prices are at the levels that appear on quarterly account\nstatements. <\/p>\n\n\n\n
At least four times\nper year, security prices are more a function of institutional marketing\npractices than they are a reflection of the economic forces that we would like\nto think are their primary determining factors. <\/p>\n\n\n\n
Not even close… Around the end of every calendar quarter, we hear the financial media matter-of-factly report that Institutional Window Dressing Activities” is in full swing. But that is as far, and as deep, as it ever goes. <\/p>\n\n\n\n
What are they talking\nabout, and just what does it mean to you as an investor?<\/strong><\/p>\n\n\n\n Window dressing activities are manipulation done by a business\/company management to improve the financial statement of such business and make it look appealing to shareholders\/inventors. <\/p>\n\n\n\n For stakeholders or investors, it provides them with a good motive to keep an eye closely on the company’s financial performance report.<\/p>\n\n\n\n Forms of Window\nDressing <\/strong><\/p>\n\n\n\n There are at least\nthree forms of Window Dressing, none of which should make you particularly\nhappy, and all of which should make you question the integrity of organizations\nthat either authorize, implement, or condone their use. <\/p>\n\n\n\n Type 1: Replacement of\nportfolios’ losses<\/strong><\/p>\n\n\n\n The better-known\nvariety involves the culling from portfolios of stocks with significant losses\nand replacing them with shares of companies whose shares have been the most\npopular during recent months. <\/p>\n\n\n\n Not only does this practice make the managers look smarter on reports sent to major clients, but it also makes Mutual Fund performance numbers appear significantly more attractive to prospective “fund switchers”.<\/strong> <\/p>\n\n\n\n On the sell-side of the ledger, prices of the weakest performing stocks are pushed down even further. Obviously, all fund managers will take part in the ritual, if they choose to survive. <\/p>\n\n\n\n This form of window\ndressing is, by most definitions, neither investing nor speculating. But no one\nseems to care about the ethics, the legality, or the fact that this “Buy\nHigh, Sell Low” picture is being painted with your Mutual Fund palette.<\/p>\n\n\n\n Type 2: Quarterly\nfinancial database<\/strong><\/p>\n\n\n\n A more subtle form of Window Dressing takes place throughout the calendar quarter but is “unwound” before the portfolio’s Quarterly Reports reach the glossies. <\/p>\n\n\n\n In this less prevalent\n(but even more fraudulent) variety, the managers invest in securities that are\nclearly out of sync with the fund’s published investment policy during a period\nwhen their particular specialty has fallen from grace with the gurus. <\/p>\n\n\n\n For example<\/strong>, adding commodity ETFs, or popular emerging country issues to a\nLarge Cap Value Fund, etc. Profits are taken before the Quarter Ends so that\nthe fund’s holdings report remains uncompromised, but with enhanced quarterly\nresults.<\/p>\n\n\n\n Type 3: Survivorship<\/strong> <\/p>\n\n\n\n The third form of Window Dressing is referred to as “survivorship”, but it impacts Mutual Fund investors alone, while the others undermine the information used by (and the market performance of) individual security investors. You may want to research it.<\/p>\n\n\n\n I cannot understand\nwhy the media reports so superficially on these “business as\nusual” <\/strong>practices. <\/p>\n\n\n\n Perhaps ninety percent\nof the price movement in the equity markets is the result of institutional\ntrading, and institutional money managers seem to be more concerned with\npolitics and marketing than they are with investing. <\/p>\n\n\n\n They are trying to\nimpress their major clients with their brilliance by reporting ownership of all\nthe hot tickets and none of the major losers. <\/p>\n\n\n\n At the same time, they\nare manipulating the performance statistics contained in their promotional\nmaterials. <\/p>\n\n\n\n They have made “Buy\nHigh, Sell Low”<\/strong> the accepted investment strategy of the Mutual Fund\nindustry. <\/p>\n\n\n\n Meanwhile, individual\nsecurity investors receive inaccurate signals and incur collateral losses by\nmoving in the wrong direction.<\/p>\n\n\n\n From an analytical\npoint of view, this quarterly market value reality (artificially created demand\nfor some stocks and unwarranted weakness in others) throws almost any\nindividual security or market sector statistic totally “out of whack”<\/strong>\nwith the underlying company fundamentals. <\/p>\n\n\n\n But it gets even fuzzier, and not in the lovable sense. Just for the fun of it, think about the “demand-pull” impact of an ever-growing list of ETFs.<\/p>\n\n\n\n I don’t think that I’m alone in thinking that\nthe real meaning of security prices has less and less to do with corporate\neconomics than it does with the morning betting line on ETF ponies… the\ndot-coms of the new millennium.<\/p>\n\n\n\n Do you remember the “Circle\nof Gold” from the seventies?<\/strong> Isn’t GLD, or IAU, about the same thing?<\/p>\n\n\n\n As if all of these institutional forces weren’t enough, you need also to consider the impact of tax code motivated transactions during the always-entertaining final quarter of the year. <\/p>\n\n\n\n One would never\nsuspect (after watching millions of CPA directed taxpayers gleefully lose\nbillions of dollars) that the purpose of investing is to make money! <\/p>\n\n\n\n The net impact of these (euphemistically labeled) “year-end tax-saving strategies” is pretty much the same as that of the Type One Window Dressing described above. <\/p>\n\n\n\n But here’s an\noff-quarter buying opportunity that you really shouldn’t pass up. Simply put,\nget out there and buy the November 52-week lows, wait for the periodic and\nmysterious “January Effect” to be reported by the media with eyes\nwide shut amazement, and pocket some easy profits.<\/p>\n\n\n\n There just may not be\na method to actually decipher the true value of a share of common stock. Is\nmarket price a function of company fundamentals, artificial demand for\n“derivative” securities, or various forms of Institutional Window\nDressing? <\/p>\n\n\n\n But this is a\ncondition that can be used to great financial advantage. With security prices\nless closely related to those old fashioned fundamental issues such as dividends,\nprojected profits, and unfunded pension liabilities and perhaps more closely\nrelated to artificial demand factors, the only operational alternative appears\nto be trading! <\/p>\n\n\n\n Buy the downtrodden\n(but still fundamentally investment grade) issues and take your profits on\nthose that have risen to inappropriately high levels based on basic measures of\nquality… and try to get it done before the big players do. <\/p>\n\n\n\n To oversimplify, a recipe for success would involve shopping for investment-grade stocks at bargain prices, allowing them to simmer until a reasonable, pre-defined, profit target is reached, and seasoning the portfolio brew with the discipline to actually implement the profit-taking plan.<\/p>\n\n\n\n Bottom Line<\/strong><\/p>\n\n\n\n Window dressing in business, accounting, and finance is a strategy used by portfolio managers to improve the company’s financial statements than what they genuinely are, specifically done to impress investors who without proper operational knowledge of the business.<\/p>\n\n\n\n Businesses do this for several reasons; to get potential shareholders to invest with them, to see funds from investors, to achieve targeted financial results, cover-up actual business status, and poor management decisions. Therefore, investors and stakeholders should be wary while making a decision.<\/p>\n\n\n\n Just call me old\nfashioned, but I miss the days when there were just stocks and bonds…\ninteresting place Wall Street.<\/p>\n\n\n\n Steve Selengut<\/p>\n\n\n\n