Here's a piece that I wish I had read when I first got in the business. I had no idea this kind of stuff occurred. I want to thank my wife, Karen, who first explained this to me. It has saved me millions of dollars.
Working a piece.
(I want to introduce some important slang in here. Everybody in my business uses a lot of slang, and it is never explained. When I was at
(GS) - Get Report in 1983, I heard stuff like "piece" and had no idea what was going on. That's because I was not thinking about concepts that exist in all businesses. A piece is a piece of merchandise.)
All over the Street, people are working pieces. It is part of the profit-taking experience, and this one column is going to pay for a lifetime's worth of
because I am going to describe what you are seeing on the screen.
(I say this stuff too often probably, but I am proud of what we have built here. This cuts to the nature of interactivity and the Net itself. I have worked at a dozen print places and never really got turned on by any of them. But your feedback from this one piece was enough to stoke me for months!)
The stock is
National Gift Wrap & Web Co.
It's a company that designs Web sites for bricks-and-mortar companies, and it has been as hot as a pistol. The chart of the stock looks straight up. There hasn't been a break. The quarters have all been things of beauty. There is nothing wrong with this stock. Nothing at all. Heck, even the insiders know that.
(All of this stuff is important for one reason only: I want to make a case for a stock that has profit-taking pressure as opposed to one that is beginning to roll over because of fundamental problems. I am not talking about that kind of stock.)
National Gift is at 56. The bid is 55 1/2. The offering is 56.
(Remember the nomenclature. You hit bids when you want to sell. You take offerings when you want to buy. That is the universal argot for our business. It is not like real estate where people mix these up all of the time. You never take a bid. You can only take an offering. You never hit an offering. You only hit a bid. Remember that when you win the stock-trading contest and come to
because I find it intolerable when people around me screw this up.)
Or it was last time you looked.
Suddenly, without any sort of volume, maybe no more than a few thousand shares, the stock is down 3. Its bid is 53. Its offer is 54 1/2.
(Often this happens right at the beginning of the day. The stock goes down on nothing.)
You're thinking, Heck, how did that happen? How did it get down that fast?
(In our business, we look at times and sales all of the time. That is the function that tells you what traded and at what time. You might see something like this if you hit up the T&S on this one: 500 @ 55, 500 @ 54.5, 1000 @ 54, 200 @ 53. That is a sure sign that some broker is working a piece of merchandise.)
You call the company. The company has no comment other than to say, "Hey, we just reported and everything is fine."
(When we call a company, we don't get through to the CEO and ask him if we should buy stock. That's not cricket. We call the investor relations office and we ask if there are any announcements or meetings or analyst downgrades we might have missed. If they say no, we could still be hit by a shortfall, but that's not this situation. (Earlier this decade when Jeff and I first started working together,
(STK) - Get Report was trading down a couple. I asked him to call investor relations. They told him nothing was going on. I asked him to call back and ask if the company was going to have any meetings or releases or anything later in the day. The company said no. I bought 50,000 more shares to bring my position to 100,000. After the close, the company preannounced a terrible quarter. It opened down 15. People lie. People don't know. But that, alas, is part of the game.)
So you think, Hmm, maybe I should buy some.
Forget about it. Forget it. National Gift has fallen into one of the market's very own sand traps, and there's no getting away from it.
(Follow this advice. Don't deviate. It will make you money nine times out of 10.)
Someone is working a piece. Someone has a big slug of National to go, and this stock is now out of your hands. Only the volume, the dramatic increase in volume, will let you know when it has bottomed. Until then, you will just drive yourself crazy and lose a fortune every time you try to call National Gift's bottom.
(Why don't you ask a broker if he has stock for sale? Because typically they won't want to admit it to you until they are in position. The level this piece is written about is all about trust. If someone were to tell you that he is working a big piece of National, he might be worried that you will short National and try to profit from his candor. It is illegal to run ahead of pieces like that, but people make careers out of it. I think it makes for a short career because everybody talks in this business, and you will quickly be known as a scum-sucking pig if you short ahead of a piece.)
Big-cap stocks don't do this. There are always willing buyers for big-cap stocks, usually right in line with where the stock was, if not down a tad.
(Let's say someone had 100,000
(INTC) - Get Report to go. He calls a big trading firm, and that firm can virtually "stop you" at the last sale, if there is nothing about to happen in Intel. If you call and say I want to sell 100,000 Intel and they stop you and then a second later
Morgan Stanley Dean Witter
downgrades Intel, you will not only not get your trade done but someone is going to rip your eyeballs out because the trader will think you knew, even if you didn't. Paranoia reigns supreme on OTC trading desks. And it is an instinct that is purely of the self-preservation kind.)
But younger companies and medium- to small-cap stocks get afflicted by this piece-illness periodically, and unless you have worked at a house that merchandises pieces or you have trained at the game a long time, you will think that what is happening to National Gift is just plain madness.
(There have been hundreds upon hundreds of new companies that have issued stock in the last year. Many trade only by appointment, Wall Street slang meaning that you have to work hard to line up buyers and sellers. Illiquid stocks are just like auctions where the auctioneer starts up and works down. I have National for 55, anybody pay 55, how about 54, no takers, do I hear 53, and then someone surfaces and takes the 53 offering.)
It isn't, of course. It makes all of the sense in the world. Here is what is happening: One of the market makers has been given a very large order in National Gift. Almost like a secondary. It is probably "major six figures" to go.
(I presume that size, but I don't know for sure. When I say almost like a secondary, I mean that it is almost like when an issuer hires a banker to place a million shares of stock all at once. The stock gets dislocated down over the course of a couple of days. This time it happened over hours though because the person is free to trade and doesn't feel a road show is necessary to place the stock.)
As long as little orders dominate National Gift, they are matched effectively and there is not a problem. But when someone has a ranch-sized National Gift order to go, that's a different story. That merchandise has to be placed. And not up here at 56.
(The price of 56 had been established when the market was in mild equilibrium, leaning toward the buy side, meaning the buyers have been more aggressive than the sellers and walked the stock up. Now a seller has materialized that overwhelms the market.)
So market makers go out and hit bids around the Street -- small bids, to soften the market. The only analogy I can think of here is a military one. What you are seeing from 56 to 53 is an artillery barrage, as the market maker working the piece knocks things down to a level where he is sure the piece holds or works for the buyers.
(This worked for me. Market makers are virtually knocking the stock down ahead to get it to that level where real demand lives. They knock it down with borrowed stock that they return on the print that occurs at a discount when the merchandise trades.)
At the same time, he is getting short the stock, and possibly, his buddies are, too. You could argue that he is shooting against the seller. But I have long since dropped the moralizing. He is getting the job done the way he has been taught to: He is placing the stock like a secondary.
(Remember those trades from time and sales; those might be signals or outright messages by a market maker that he is working a piece. These guys aren't supposed to collude. Still, you know that when big sellers are trying to get done, there has to be give-and-take among a large number of parties.)
When you come in to buy shares while the stock is in one of these self-imposed dives, you are just knocking your head against the wall. Forget it. You are never bigger than a piece. You have to wait until the market maker has knocked it down enough for his satisfaction before you can move.
(These market makers make their money by having sold the stock at 56 and buying it back where they find the demand. They sell small amounts, though, and it is not that lucrative a game. Most of the time they are just simply trying to get the job done. They want to please both buyer and seller because what they are really selling is a fairness level, where the merchandise will trade steadily.)
How will you know when the piece is finally cleared and the stock is safe again? When you see a huge increase in the volume. That's the only tell there is. When you see a stock trade 200,000 shares -- one that usually only trades 30,000 shares an hour -- that's the signal. That is the time you have to pounce.
(Remember, this is a stock that rarely trades much. For a major expansion in volume to occur, the stock has to have found equilibrium.)
And pounce you must. Because everyone who is short the stock in anticipation of the piece will have to cover on the piece. The piece, which looked so heavy at 55, looks well placed at 50 or 51. It looks well placed because it is. That's the beauty of how well the market works a piece. The increase in volume shows that the market has digested the piece. The short-covering firms it. The next thing you know, you are out of the sand trap and going higher.
(The trader who has the order has most of his buddies short so they, too, can profit from this seller's nightmare. They all come in and want a piece of the action. You are merely an afterthought with these guys.)
Wait for the volume. Then move. Not before, though. And not much after either because you will just end up paying mid-50s again!
This is a time-honored process. It never changes. It is happening now all over the Street. So be careful out there.
(It happened all week. People are still blowing out of pieces as of the end of the week. So, when you see a dramatic decline without a consummate drop in volume, you may be about to experience the whole cycle. Be patient. It will trade. It will trade. It always does.)
More weekend TV viewing -- catch me and
"Reliable Sources" on
on Saturday. Wild show.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Goldman Sachs 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