Tuesday To-Do: Inflate Market Cap: All of the speculative darlings got into the act today -- with SOX stocks, biotechs, and financials strong, and housing stocks on fire. From wire to wire, it was just one giant feeding frenzy. Since most of the indices closed at new highs for the move, one could reasonably expect that the momentum players will be back, ready to pile on again tomorrow.Away from stocks, fixed income staged a big reversal to the downside, with the long bond down about a point. The dollar was a tad stronger. The metals were up about 0.5%. A Field Trip to Fund Land: Turning to the news, there is a good behind-the-scenes look at the professional money management industry in a story in today's Wall Street Journal titled "Experts Duel Over Fate of Bellwether Rally." In his profile of two fund managers who work for the same firm (one bullish and one bearish), writer E.S. Browning illuminates a point that I have made in the past: Some "professionals," in the aggregate, are acting loonier than the public, in that they have failed to learn some of the lessons absorbed by the public since the market peaked three years ago. The more conservative of the two fund managers, one John Rutledge, has done better than his peers over the last few years (by losing less). As someone who has been following tech stocks for 35 years, he remains rather skeptical of the market and doesn't much believe in the current rally. "There is no evidence of an upturn in demand
Editor's note: This column, which reflects market activity from the day before, originally appeared June 16 on RealMoney.com. To sign up for RealMoney, where you can read Bill Fleckenstein's commentary every day, please
click here for a free trial. The markets were a mixed bag overnight, with Asia a little soft and Europe firmer. This morning, our market bolted out of the starting gate, such that within a few hours, all the indices were up 1%. In the early going, chip stocks lagged the speculative leaders from housing, biotech, and finance. After the early-morning surge, the market ground steadily if only slightly higher. Then, with about half an hour to go, it tacked on another little surge to the upside, basically going out on the high of the day. for tech gear," he tells the Journal. But lately, his peers have been outperforming him, which is why his boss called Mr. Rutledge in for a talk, "to discuss ways to stop his slide in the rankings. The discussion was friendly and constructive, but the message was clear: Mr. Rutledge mustn't keep trailing the competition."
Faith-Based Money Management: This, folks, is part of the problem. The investment business is not like a horse at the track, where you can crack a whip to make it go faster. Sometimes, you do better than others, and sometimes you do worse. Nobody has all the right ideas at the right time, and folks should expect that from time to time, their money manager will not do as well as everybody else. The idea is to find somebody who you trust, who rewards confidence, who can provide a reasonable rate of return over time, and who does not take too much risk -- "risk" being defined as the loss of your money. Now if you're going to give money to somebody to manage, and you have any sanity at all, I can't imagine that your perception of risk would jibe with how the investment business perceives it. To them, "risk" centers around this notion of underperforming the competition for 15 minutes, period. It is a belief that's fundamental to too many fund managers throughout the industry, as well as to the lunatic consultant community that serves them. To them, risk is all about falling behind in the rankings, when in reality, and to repeat, risk is the chance you will lose money. The popular idea of volatility or beta is a poor measure of risk. Only after the fact is it clear that you took too much. A competent money manager who demands a margin of safety will likely "underperform" in wild times, but so what? Long-term returns are built by negotiating many up and down periods. Anyone who sets out to maximize wild times is destined for failure. Think Ryan Jacobs or Munder Internet funds, vs. John Templeton or Warren Buffett. In any case, during market rallies these days, risk is literally perceived to be a four-letter word, not something anybody worries about, as the little vignette from the Journal article makes clear. To bring his fund's ranking up to speed, the less-than-optimistic Mr. Rutledge has now allocated 17% of his portfolio to semiconductors, even though he is not at all sanguine about them. That's how the game is played these days. Now if one of its less bullish players is acting this way, can you imagine what the bullish contingent is doing?