Posted on 07/02/2003 12:54:10 PM PDT by shrinkermd
Is the Pope Catholic?
The latest evidence of manipulation came Monday, the last day of the quarter. On that day, the majority of mutual funds beat the market. While that would seem to be a mathematical impossibility, researchers take it as evidence of a manipulative practice that is known in the mutual fund world as "marking the close."
The SEC defines "marking the close," which is illegal, as "attempting to influence the closing price of a stock by executing purchase or sale orders at or near the close of the market."
Right before the close, in other words, funds will place buy orders on stocks that they already own. That will cause the prices of their stocks to rise and thus make the performances of their funds look better than they otherwise would.
Four researchers, led by Mark Carhart, co-head of quantitative strategies at Goldman Sachs Asset Management, have collected overwhelming evidence that mutual funds have engaged in this illegal behavior for years.
For example, they found that trading volume tends to spike significantly in the final minutes before the close of each quarter in the very stocks that top mutual funds are holding.
(Their research, "Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds," appeared in the April 2002 issue of the Journal of Finance. Those interested in a more detailed discussion of their research should read an article I wrote about it in the Oct. 6, 2002, New York Times. I should also note that I have witnessed investment newsletters engaging in this practice in an attempt to boost their Hulbert Financial Digest performance ratings.)
Other evidence suggesting that mutual funds are marking the close comes from the percentage of them that beat the market averages on the final trading days of each calendar quarter.
For example, the researchers found that on the last trading days of the calendar quarters between July 1993 and June 1999, some two-thirds of all domestic equity funds beat the S&P 500 -- about three times higher than the percentage of them that beats this index on all other days.
This pattern was apparent in mutual funds' performances for this past Monday, when the S&P 500 index (SPX: news, chart, profile) fell by 0.18 percent.
The average fund in 11 of Lipper's 12 major domestic equity fund categories did better than this.
To be sure, the performance boost that mutual funds enjoy because of marking the close will be short lived in most instances. In fact, the practice will tend to dampen their performances over the long run, since the stocks they buy right before the close of a quarter will tend to be relatively high priced.
But, according to the researchers, many funds are more than willing to pay that long-term price in order to boost their standings in the short-term performance sweepstakes.
This means that you should not invest in mutual funds on the last day of a quarter, since by doing so your purchase price will be artificially inflated. You'd be surprised how many investors nevertheless invest in funds on those dates.
Many firms' retirement plans, for example, invest each month's employee contributions as of the end of each month.
Just by changing the investment date to any other day, according to the researchers, you should be able to increase your returns significantly -- by more than 4 percent per year in the case of small-cap funds, for which marking the close tends to have the greatest impact.
It's too late to change what happened on Monday, of course. But it's not too late to start lobbying your retirement fund to change its investment dates, so that come this coming Sept. 30 you won't once again pay the price for many mutual funds' manipulative behavior.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
you don't understand the process - when you short something you're (near) always borrowing it from somebody else (or your broker). Since silver continues to become increasingly irrelevant and devalued so significantly on almost a daily basis, however, that was a pretty good bet ;)
"When you consume more of any commodity than you produce for 14 straight years, and can prove the declines in inventory, the price must be substantially higher at the end of that time, than at the beginning. Otherwise, something is seriously wrong. It is not possible that the price could be lower unless there was a manipulative device over-whelming the forces of the free market.
"For most of these 14 years, there has been no evidence of liquidation by silver investors, especially in the last five years. In fact, purchases by the retail public (as confirmed by U.S. Mint, as well as dealer reports) have been quite impressive. And it isn't just the small investor buying silver, witness the well-known purchase by the most successful and respected investor in the world, Warren Buffett. Since there is zero evidence of any net liquidation of silver inventories by investors, and significant evidence of net buying in response to the depressed price, it must be concluded that there was inventory liquidation by a source for which price was unimportant. Not only does the decline in inventories, with no price increase, prove a manipulative and uneconomic device overriding free market forces, but we can specifically identify two manipulative devices. Leasing and excessive COMEX speculation provide a one-two manipulative punch. If we needed further proof of leasing's real impact on prices, we can see in gold the clear evidence of manipulation. Prices dropped for years as leasing supplies were dumped, and now, the price has risen for the past two years since that dumping stopped.
"The price of silver has been volatile lately, and as I complete this article, silver has been displaying price weakness, especially when compared to gold. These short term price movements are invariably dictated by speculative activity on the COMEX between the dealers and the tech funds. By the time you read this, that may have changed. We are in no man's land after having rallied 50-60 cents. Where we go short term is a guess, but I'd rather have the volatility. We either make new highs as the tech funds go long, or we breakdown as they take the short side again. It needs to be emphasized that the fundamental low risk and high reward opportunity, created by the structural deficit, always threatens to overwhelm the manipulators. That point must inevitably be reached."
"IS THE STOCK MARKET being manipulated?" "Is the pope Catholic?"
"That undeniably catchy lead is to a piece on CBS.MarketWatch.com by our old and prolific friend Mark Hulbert, proprietor of the worthy Hulbert Financial Digest Monthly and a canny and skeptical spectator of the Street scene.
"The manipulation Mark espies is by mutual funds and is known in the trade as "marking the close." What that means, simply, is that right before the close of trading, funds place orders on stocks they already own; their intent, of course, is to goose the price of the stocks and, by extension, the performance of their funds.
"An old story really, but as Mark relates, chapter and verse have been supplied by a quartet of researchers, including Mark Carhart of Goldman Sachs Asset Management. They documented that in the last trading days of calendar quarters, no fewer than two-thirds of the funds invariably beat the S&P 500. When two-thirds of the funds beat anything, you know something's fishy.
"And Mark says, this past quarter's end was no exception.
"In case you wondered, "marking the close" is illegal, but when did that ever stop anyone? Anyway, Mark strongly advises investors to go jogging, see a ball game, read a book -- but diligently avoid buying a fund in the final session of a quarter, when the manipulators are pumping up the price.
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