With this piece and its companion filed Friday afternoon, we bid adieu to these two characters. Oh sure, maybe we will usher them back for an encore sometime, but I'm a huge believer in leaving on a high note, before the device gets stale. These guys accomplished their goal, which is to show you the underside of an increasingly dirty business, in which people will go to any lengths to outperform so they can get more money in. As long as managers are paid by the pound -- meaning they get paid by how much they bring in -- you're going to get these kinds of shenanigans.
Oh shoot, it's the end of the month. Do you know what happens at the end of the month? Why, it's time for Buzz and Batch to make their numbers!
(The premise of this piece is that every month, millions of people chose to give money managers billions of dollars. It's a well-known fact that people give money to winners and take it from losers. I could argue and argue that this decision may be wrong, but it doesn't matter. That's the way of the world. When I got into this business in the early '80s, there wasn't this kind of competition. We just didn't get so crazed about month-to-month numbers. People would focus on quarterly numbers, but not monthly numbers. That's all changed now. And the mark-up game has become prevalent at many major mutual funds. Understand this: Marking up stocks, which is the term for buying a stock you already own at a price that will move it up to increase the value of your own holdings, is a no-no. You are not allowed to foment or manipulate securities. But it's a very hard call. Imagine that you know you will get a lot of money in. It makes sense to prebuy your favorites and run down your cash at the end of the month. Also, within the business, there are brokers and managers who, with a wink and a nod, know that some order is given to move a stock. If you come in to buy 50,000 shares of a small stock in the last five minutes, it's obvious what you're trying to accomplish. But what if you come in with 100,000 shares of stock to buy at 9:30 a.m., the order doesn't get completed and you still have 50,000 shares to buy in the last five minutes and you tell the broker, "Finish that order no matter what." Is that marking up? Or how about if you buy stocks aggressively with two days to go to the end of the month and continue to do so right up to the last hour, but then you stop? Is that marking up? It's very hard for the authorities to nail you. So it happens. Who does it hurt? It hurts the fund's own investors, particularly those who buy into the fund's net asset value when it is artificially inflated. And it hurts the marketplace in general, because people buy on top of the mark-up quicksand and then get hurt.)
So let's check out those two lovable, mythical characters who run a major mutual fund of the go-go variety. Remember, these two gents don't really exist; they are composites of what I know does happen. I know it because, heck, this is the business I have chosen.
(By the end of the week I was thinking people think these guys do exist, as they kept asking me, "Well, what will they do on Monday? Or what would Buzz do with his Exodus (EXDS) ? Or do you think Batch is going to operate on Akamai (AKAM) - Get Report?" These folks are mythical, no doubt about it. However, this stuff goes on routinely and we all know it. The fact that it has never been written about cuts to the libel laws. Nobody can admit doing it and no reporter can ever write about it. So I chose the medium of fiction to make it happen. That way I can tell the truth.)
: "Batchy, one more day to the month. We gotta make 12% in two days.
(These funds all watch their net asset values like hawks. To move a fund up this much in two days requires concentrated buying of already owned names. If you own 500,000 shares of Akamai -- and I am only picking on Akamai because it was blatantly and outrageously marked up in an unconscionable fashion on the last day of April -- and you can move that stock up 20 by buying it aggressively, even if that means you must buy another 200,000 shares, you're going to inflate your net asset value hugely. Now, if you do that 10 times, to 10 different stocks, you're going to have a darn good quarter unless you blew your head off. These kinds of jumps do occur. If your fund spurted gigantically on Friday, that was probably why!)
Damn the torpedoes, full
(The go-go managers love the Nasdaq. It's a tremendous playground for them. They are bored by the listed stocks. Listed is slang for stocks that are listed on the NYSE or Amex. The "tape," by the way, is an allusion to the old ticker tape that used to print out prices. It's a vestige, but everybody uses it to describe the action. "What do you think of the tape?" is the same as saying "Are you a bull or a bear? and What do you think of the action?")
: "Oh man, Buzz, aren't you worried that we'll take the stocks up and the regulators will get wise to the fact that we're just marking our own stocks to boost performance?"
(The regulators are the Securities and Exchange Commission. I'm sure they have brought cases against managers who have blatantly manipulated stock prices, but I don't know of any, probably because of the difficulty of catching the people who do it and the defenses -- sloppiness, I love that stock, I had to get it in, etc., that can be made.)
: "Oh, my silly Batch-mo, my silly silly Batch-mo ...
(OK, I love all of this kind of trader talk. Traders are obsessed with nicknames. I gotta tell you that until I got in this business, nobody called me Jimmy except my late mom and my editor friend Don Forst, who was my boss in L.A. The moment I hit the floor of Goldman Sachs I was Jimmy, Jimbo and Jumbo, almost right out of the gate. We never call each other by our own names in this business. We're constantly calling people by nicknames. I call our head trader "Cookie" and I don't even know why. I make up nicknames for Matt because that's what I do. My wife knew me as Jimmy from my trading-desk days with her. It's funny, after I sold ice cream and Cokes at Veterans Stadium for four years, I never again wanted to hear "sport" or "buddy" or "boss" or "captain" or "chief." Now I must use that nomenclature a thousand times a day. If Todd, our head trader, isn't "Cookie," he's Todd-o, or Todd-o-roonie (like HySki-a-roonie for you Philadelphians) or "Schnitzel," whatever the heck that means. One of the reasons I wanted to do Buzz and Batch is to catch the ridiculous way in which we talk. Believe me, I'm using one-tenth of the jargon we use. If you sat on my desk, you would think we're speaking a foreign language. We have our own hand signals, words and dialect that could be universally understood by 15,000 people and would be authentic gibberish to just about everyone else.)
Don't you know that if we ever get caught -- and no one ever has -- we can just say that we expected a lot of money to come in over the transom and we were just doing anticipatory buying? Anyway, we never buy in the last hour of the last day of the month. That's for amateurs. That's like drinking on New Years Eve!"
(In truth, everybody in the business lives in fear of getting nailed doing a mark-up, so what has tended to happen is that a mass of buying goes on at the beginning of the day before the end of the month and continuing up until an hour or two before the close. Notice the contempt that the portfolio manager (Buzz) has for Batchy. At all the bad firms, the PMs trash the traders and think they're a bunch of thugs. When I say "bad," I mean all of the firms where they don't know that trading is a beautiful and high form of art that can generate huge returns in its own right.)
: "I am in awe of you Buzz. When do we get started?"
(This awe stuff keeps coming back to that fat guy who worked for Uncle Junior in The Sopranos. Like all traders, I was totally possessed by that show and had quite a large bet made on the outcome, which I was able to lay off effectively on others so I had a push in the end.)
: "Actually, most of the buys I gave you this morning, especially the B2B and the infrastructure plays, those are the groundings for some terrific mark-up activity. I see you moved Akamai up seven."
(This is an hysterical life imitates art situation because a couple of real-life Buzz and Batches did mark this stock up huge, no doubt in order to boost their performances. When I talk about groundings for mark-up, I'm saying that most Buzzes feel much more comfortable starting the mark-ups the day before and controlling the stocks so sellers will know that they shouldn't materialize. It would not be beyond Batchy, by the way, to pick up the phone and tell the traders, "Get out of my way between now and tomorrow, Akamai, and tell the sellers to wait, 'cause I have some "special" buying to do.)
: (Interrupts) "Actually, Buzz, Akamai was on the list of stocks that the consortium passed out at
last night. All of us in the consortium of go-go mutual funds are long Akamai so we're tag-teaming it up."
(There is no consortium that I know of. Privilege is a place where guys go to have drinks and watch scantily clad women. Buzz and Batch are single, so they go to these places. I don't condone it; I'm just telling you what they do. The theme here is that these managers all help each other walk stocks up. The fact that they do so is well-known. There are a bunch of stocks that have what I consider to be almost a controlled float. You saw many of them go up all last year. There are five buyers and no sellers and they all take the stocks up to where they bring out sellers. This kind of buying dove-tails perfectly with that nifty underwriting trick of just issuing a sliver of stock to the public. On many of the hotter deals, two or three mutual funds would gobble up all of the shares, then walk the stock up and take other shareholders out. This game worked as long as the bulk of the supply did not hit the market. But the lockup expirations that have hit this year destroyed this walk-up game and gave managers major losses. Guys like Buzz and Batch made a lot of money buying and flipping new hot issues, except for a few, which they then sought to buy the whole float of and move them higher. It's a funny business, and not necessarily a clean one.)
: "Good work. Now that
is out of the way,
(Greenspan spoke on Thursday. Now that some of his inflation indicators are flashing bright red, he is bound to be more vigilant. A guy like Buzz couldn't care less. He hasn't been in the business long enough to know that the Fed could wreck the stock market with higher rates, so he doesn't care. I hate him for not caring because it screws up my game. So I have to think like him to win. Hence this series of articles.)
how about buying a ton of
(these are options on an index, the semiconductor index)
and simultaneously getting the
derivative desk short
and some of the other key names.
(Morgan is Morgan Stanley Dean Witter, which has an excellent derivative desk. Rambus is a stock that is wildly overweighted in the SOX and tends to move the index all by itself. Morgan wasn't the lead on the AT&T Wireless (AWE) deal, so that's a bit of fiction. But remember, a guy like Buzz uses his commissions as a club. He will think nothing of picking up the phone and calling an analyst and demanding an upgrade of a stock; likewise, he will think nothing of cravingly begging/demanding some hot issues to make good money. He is a loathsome horse turd, let's not forget, so is capable of lots of crummy behavior.)
They didn't give me all of the AT&T Wireless I wanted, so make 'em pay!"
(Understand that "make 'em pay" in this sentence means give Morgan some business that they will lose money on, despite the commissions. How does that work? OK, if you go in to buy calls on the SOX index, who do you think sells them to you? Real sellers who are at the ready? Forget about it. Only sellers who are facilitating, meaning the Morgan derivative desk itself. Morgan Stanley's people might buy the underlying stocks in the index and sell you a call on those stocks. Unfortunately for them, they might sell you the call and try to get the stocks in but find that there are other buyers out there, and then will be at considerable risk that they'll take a beating on that call they shorted to you. How would that work? OK, just imagine that there are five stocks: Intel (INTC) - Get Report, Motorola (MOT) , Rambus, Texas Instruments (TXN) - Get Report and KLA-Tencor (KLAC) - Get Report. These five stocks can be artificially lumped into a basket by buying say, 100,000 shares of each, and then a call crafted that can be sold against that basket. Morgan Stanley makes the commission on the business and hedges its risk by buying the stocks and selling the calls. If you come in and want the calls, and they don't own the stock that they're going to use to hedge the calls, they could be in big trouble if they "put you up" or guarantee you a report and then not be hedged. Now, guys like Buzz and Batch know this. They know that Morgan might not own the stocks underneath and be able to "get in shape" in time, meaning be hedged, before they give you the report on the call. So what they might do is begin to buy these stocks that are in the basket away from Morgan Stanley, thereby pressuring Morgan to pay up to buy the stocks. This is blatantly illegal and dishonest because it is "front-running," that is, knowingly running ahead of another buyer to take advantage of order flow. It does serve to boost the value of your call, though, and that can be what Batch and Buzz might want to happen.)
: "I will rip their lungs out Buzz. Maybe even gun some Texan and MOTE right in their faces with some takes at
(Again, these are components of the SOX index. So, you give an order to Morgan, Morgan puts you up on the call, tries to "get in shape" and gets blocked by orders you placed away from them with another broker, Robertson Stevens. Cruel world.)
: "Touche" (pronounced so the E is silent.)
(Silly type of thing a trader would say.)
: "The only problem, Batch, is what happens if real sellers materialize?"
(Here is an obvious point that always bothered me about the concept of the mark-up. If you see it going on, why not take advantage of it and sell? The answer is threefold: 1. Managers almost never sell unless they have redemptions. 2. Why sell if you get the benefit of the mark-up for your performance? 3. How do you know that it will come down so you can buy it back?")
: "Rest assured Batch. Everybody from
is in the same boat. We all need it higher these next two days. You won't see any tech selling. Let 'em rip."
(This was simply a cheap shot at large fund managers. Gratuitous and unnecessary, as we have no way of knowing whether these folks do this kind of thing.)
: (grabbing phone) "Hey Mark, how about a size offering in Intel and Rambus calls?" (Click mute button, grabs other phone.) "Hey David, take 500,000 Intel and 300,000 Rambus. Go to work!!"
(A size offering means, "Show me thousands of calls. A call needs to be hedged so that "Mark" doesn't lose money if the common flies up after he has sold you the call. The phone call to David almost assures that the stocks will fly up, which is the real problem with this blatant front-run. It is an evil act and if you got caught doing it Mark would probably never work hard for you again. But because nobody ever gives up an account's name, Batch will probably get away with it.)
(What a repulsive guy.) Random musings
: Many of you have emailed that you wanted me to tell you the inside story of
. I don't know the man or the players, so I balked. But
, who is a tremendous markets reporter, has the
full story elsewhere on these pages. Congratulations Brett for getting the scoop!!
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long AT&T Wireless and Intel. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at