Strategist Bleier Gets Due Credit for Solid Call

Thundering Herd

SAN FRANCISCO -- "The correction is over. There's a good chance we'll retest the old highs."

So declared Scott Bleier, chief investment strategist at Prime Charter in the midst of today's benign inflation report/bond market rally-induced advance.

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Bleier certainly wasn't alone in making that call. But I cite him because as much as TheStreet.com is about holding people accountable for mistakes, it's just as important to give credit where credit is due.

Yesterday, Bleier said strong gains by utilities and transports suggested that bond yields and the price of oil had peaked. Today, the Dow Jones Utility Average rose 1.3% while the Dow Jones Transportation Average gained 3.2%. The price of the 30-year Treasury bond rose 31/32, its yield falling to 6.25%. Meanwhile, crude oil prices declined 5.4% to $21.68 a barrel.

Moreover, the strategist's caution on Sept. 16 proved warranted, as did his positive tidings on Oct. 18. (Perhaps you really can time the market, Bleier stated on Neil Cavuto's show recently, much to the incredulity of the Fox News anchor and fellow guest James Cramer.)

Regarding today's advance, Bleier was particularly impressed with the stellar performance of the Philadelphia Stock Exchange/KBW Bank Index, which gained 6.3%, and the American Stock Exchange North American Telecommunications Index, up 5% to an all-time high.

Waxing philosophic -- as he is wont to do -- the strategist said recent action proves "trading ranges are nothing more than mutual fund managers not taking any action. It's really that simple."

Asked to extrapolate for the undereducated (OK, so the loquacious strategist really didn't require any prompting), he continued: "The game has gotten so big that, short of Armageddon, mutual fund managers can't sit in cash. It's not [their] job. Hedge fund guys can do a million different things, but it's the mutual fund guys who control everything. This kind of action just proves it to me."

In toto (the band or the dog -- your choice), the hedge fund industry totals about $355 billion, according to a recent report from Boston-based Cerulli Associates. And clearly, some hedge fund managers choose to use leverage to increase their impact and influence -- as Long Term Capital Management did to an ugly extreme. Still, the combined assets of the nation's mutual funds totaled nearly $6 trillion (with a "t") in September, according to the Investment Company Institute in Washington, D.C.

Getting "granular" (as the VCs say), Fidelity Investments had over $833 billion in assets under management as of Sept. 30, according to a recent press release. Vanguard Group had total assets under management of over $500 billion, according to its Web site. And according to the Janus Web site, as of Oct. 19, Janus had over $170 billion AUM (which I believe is a newly minted acronym, or NMA).

Compare that to a hedge fund we've "randomly" selected for this exercise, Cramer Berkowitz, which reportedly has about $300 million. And while that's approximately $300 million more than I manage, the fund's ability to influence the market pales in comparison to the big fund guys, regardless of how many times a day the guy writes. And that's no slight on JJC -- whose support I'm eternally grateful for -- or others of his ilk. Heck, even Julian Robertson's Tiger Management had "only" $20 billion of assets at its peak last year.

"I hate to be a cynic, but it's all about what the elephants are doing," Bleier continued. "It's really a simple exercise for guys who control big wads of cash: They either have to employ cash or get ready to meet redemptions. Even if there is nervousness, most of the money coming in is 401k and IRA -- untouchable, real long-term money."

Did somebody say "demographics"?

Kremlinologists on the Dow

One final thought on the changes to the Dow Jones Industrial Average announced earlier this week. Another conspiracy theory goes like this: The decision -- specifically the additions of Microsoft (MSFT) and Intel (INTC) -- was designed to generate interest in the Dow options, which trade on the Chicago Board Options Exchange, and futures, which trade on the Chicago Board of Trade.

"What gives this theory legs is Dow Jones (DJ) gets a piece of every contract traded," said Jim Bianco, president of Bianco Research in Barrington, Ill. "So their motivation is simple greed."

Sounds reasonable. Except John Prestbo, editor of Dow Jones indices, said that was "not at all" a consideration.

"One of the reasons the composition of the Dow is staying with The Wall Street Journal is to keep it separate from business considerations," he said. "We have all we can [handle] trying to pick 30 stocks that represent the market and by extension the economy. Put more variables in, and we go into gridlock."

Harry Schiller, editor of the Short-Term Consensus Hotline newsletter, said he would be "surprised" if the changes in the index have a material impact on Dow options because they are "very illiquid and tough to trade. You can have days where the market moves 200 points and [the spread] doesn't seem to change."

By nearly all accounts, there has been a lackluster demand for the Dow contracts since their debut in October 1997.

Open interest in the Dow options totaled 350,000 at the beginning of October vs. 2.1 million for the S&P 500, according to the CBOE. Average daily volume on the DJIA futures contract has been 16,500 contracts this year, according to the CBOT. That compares with average daily volume of 110,348 for the S&P 500 futures contract through the end of September, according to the Chicago Mercantile Exchange. Dow futures even trail the electronically traded "E-mini" version of the S&P 500, which had average daily volume of 40,638 through September, CME said.

But those with a vested interest remain ever hopeful.

"There has been increased investor interest" in the Dow options since the changes were announced, according to David Gray, a CBOE spokesman.

Similarly, a spokeswoman at the CBOT said the reconstitution of the Dow "will go a long way toward bringing new users to the Dow futures market. This is a big move, and something we believe will be very positive for our equity futures complex."

Don't hold your breath.

Meanwhile, I can't help but wonder just how many exchanges Chicago really needs.

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