Thin Reed Indicators

Cover stories are a high-profile tool put at the disposal of contrarians, but some less obvious ones, in their own way, can be equally as valuable.

A classic example was featured in the November 1990 edition of Investment Vision (now Worth Magazine). The article was written by Contrarius, a pseudonym for Leo Dwarsky, formerly portfolio manager of the Fidelity contra-fund. He made the point that stock groups move in and out of fashion just like styles of clothing. The article featured Campbell Soup, whose stock had quadrupled between 1958 and 1962 reaching a price/earnings multiple of 30 at its peak. In the ensuing 19 years, earnings grew consistently. There was only one down year. This certainly justified its rating as a growth stock even though the momentum of the earnings growth had begun to slow. Surprisingly, by 1981 the stock was selling for about 40% less than it did in 1962. Investors had lost complete interest in the stock.

Dwarsky then tells us of a "thin-reed" indicator that provided a vital clue that the consensus, had solidified in the bearish camp. He received a report on Campbell Soup that read as follows: "Campbell Soup—Deleted from Coverage. Investment Opinion: In preparation for an expanded coverage of the consumer area, we are deleting Campbell from our coverage."

That was it. A perfectly good national company that had consistently improved its earnings over the period of several decades was suddenly being deleted from coverage. It indicated that the stock was out of favor with the institutional community. The real kicker was that the consumer area itself was being expanded and yet a key consumer stock, Campbell, was being dropped. Research houses thrive on commissions and if there were no commissions to be gleaned from Campbell, better not to cover it. Needless to say, the stock appreciated by 900% in the next 9 years.

Another form of thin-reed indicator occurs when you read a story in a general-purpose magazine that is highly technical or specialized in nature. For example, a story on stock index futures or options would not be out of place in a financial publication such as The Wall Street Journal. They appear there all the time. However, it would be somewhat out of the ordinary to see such a feature in a general-purpose publication such as Newsweek or Time. Such an item generally indicates that an investment idea that is normally confined to a select number of speculators and professionals now has a more widespread acceptance. For "widespread," the contrarian should read "potential reversal."

Another specialist concept that could fall into this category might be a cross-currency trade. Usually the dollar is traded against the German deutschemark. Consequently, a story featuring the benefits of trading the mark against the yen or the Canadian dollar against the pound would represent a strong thin-reed indicator that the prevailing market trend was about to reverse.

The so-called Ted Spread is another favorite. This transaction involves the simultaneous buying of Treasury Bill futures and selling of Eurodollars. The idea is that, if some financial crisis is brewing, investors will rush to embrace the quality of Treasury securities to avoid Eurodollars, which are an investment of poorer quality. If speculators are able to get in on this trend early enough, they can expect to make some reasonable profits. This is the kind of stuff that is featured quite often in financial publications but only makes its way to general purpose magazines and newspapers when there is a story attached to it. That inevitably means close to a major turning point. The reversal of such trends in the relative performance of Treasury Bills to Eurodollars obviously has a lot of relevance to the small number of individuals playing the spread but it can also have wider implications for interest rates, the stock market, and the economy. Presumably, if the major players are concerned that something like the Ted Spread is widening, the appearance of the story means that confidence is at a trough and so too should be the stock market.

Other thin-reed indicators may include a story on a relatively obscure market such as lumber or sugar. There is a natural consumer interest if the prices of these commodities have risen. The chances are that they will have reached the peak by the time the popular press has got around to extrapolating recent trends. I remember in the early 1980s seeing a story on the price of sugar being featured on the CBS Evening News. This occurred after a huge run up in the price had taken place. The story "broke" almost to the day of a major peak. It is doubtful whether sugar has been featured on the program since.

Not all such indicators are as timely and useful. In 1990, for example, a gold fund was liquidated because of a general lack of interest in the precious metal. Also several major brokerage houses in New York and London deleted their gold coverage in a manner similar to the Campbell Soup example cited earlier. The gold price did rise for a few weeks after these developments, but not nearly to the extent that might have been expected. By the same token, the price did not go down either, choosing to languish in the $345 to $370 area for the next year or so. In this sense, the thin reed along with the cover story on IBM mentioned earlier told us that these markets were sold out and were a low-risk play. They did not, as they usually do, signal that a major rally was underway.

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