In the hallowed halls of investment academics researchers rage self-righteously about whether market anomalies exist and are tradable. If you manage money, these are serious questions. If there are places in the market that are not efficient and if you can successfully trade them (the transaction costs are less than the estimated profits) you can produce alpha. And if you can reliably produce alpha people will pay you enough money to become wealthy.
Some suspected market anomalies follow:
- Insider trading - buys or sells
- Analyst upgrades and earnings revisions
- 6 to 12 month momentum in industry sectors
- Stocks with little or no analyst coverage
- Companies paying dividends (or other Fundamental Indexing factors)
- Santa Claus Rally
- January Effect
There are numerous academic papers written pro and con each of these assertions. Now in keeping with the highest ethos of Wall Street - give the customer what they want and are willing to pay you for - companies are setting up ETFs (Exchange Traded Funds) that track many of these ideas.
According The Wall Street Journal on July 12, 2006 on p. C11 John Spence reports that Claymore Advisors, LLC has filed with regulators to launch five new ETFs. One will track favorable insider buying AND analyst upgrades. One will try to find micro growth companies that analysts aren't following. One will be a dividend weighted fund. One will do sector rotation (probably based on momentum). Their final fund looks at the largest emerging markets and buys companies in China, India, Brazil and Russia.
If you believe there are market anomalies, these funds will let you express that view. If you don't, keep buying a broad based market index. It has proven remarkably hard to consistently beat.
Gee, insider trading is now being promoted as a source of alpha to become wealthy? I think I'll pass. How about as a source of hard time in prison, instead? Perhaps we should consult with Ivan Boeskey about the wisdom of this idea.
Maybe somebody at the Department of Justice or the S.E.C. should point out to Claymore Advisors LLC (whoever THEY are) that insider trading, whether it involves buying or selling, is not a particularly admirable practice, as a way to take (unfair and illegal) advantage of the market and its anomalies, let alone advocate it as a specialized ETF.
The highest ethos of Wall Street indeed! Isn't that an oxymoron, like cruel kindness, military intelligence, or jumbo shrimp?
Posted by: Bob Hansell | July 15, 2006 11:07 AM | Permalink to Comment