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The REAL Way to Profit on Portfolio Window Dressing

By Jeff Clark
Tuesday, September 26, 2006

It’s a legitimate form of market manipulation.
 
Portfolio window dressing is one of those Wall Street phenomena that occurs at the end of every quarter. Institutional money managers, anxious to improve their portfolios’ appearance, engage in the most well known shell game on The Street.
 
Managers unload shares of stocks that have performed poorly all quarter and then buy up shares of stocks that have done well. This way, when the list of the portfolio’s holdings is printed up at the end of the quarter, the manager can proudly say, “See – I own all the best performing stocks.”
 
It’s a ridiculous game designed to boost the short-term performance and appearance of the institutional portfolios. The artificial demand for the top performing shares boosts the prices even higher at the end of the quarter, just as the artificial supply of the weaker performing shares weighs down their stock prices.
 
Logically, once the shell game ends, share prices slowly reverse the artificial moves.
 
The effect of this manipulation has lessened over the years – mostly because everyone knows how the game is played. And, the price movements usually aren’t enough to attract the average trader.
 
But then, every once in a while, CNBC comes along and changes the odds.
 
During last Friday’s edition of Mad Money, CNBC’s highest rated show, Jim Cramer pounded the “BUY BUY BUY” button and told viewers that if they wanted to make money off the window dressing effect then they should buy shares of Charming Shoppes (CHRS) first thing Monday morning and then sell them into the inevitable strength on Wednesday or Thursday.
 
Sure enough, Mr. Cramer’s dedicated fans did exactly what he told them to do and bought shares of CHRS first thing Monday morning. CHRS, which closed last Friday at $14.31 per share, opened at $15.04 - a full 5% higher. By the end of the day, despite an overall strong stock market, CHRS gave up some of its gains and closed $14.80.
 
I’ll be shocked if anyone who purchased CHRS first thing Monday morning is able to turn a profit by Thursday. In fact, I’ll bet that everyone loses money on this trade. You see, Mr. Cramer’s forceful recommendation created more artificial demand for CHRS shares than portfolio window dressing ever could.
 
CHRS, which normally trades an average of about 2.1 million shares per day, traded over 8.1 million shares on Monday. It’s a fair bet that the 6 million extra shares wound up in the portfolios of CNBC viewers.
 
Now that the CNBC-generated artificial demand is out of the way, tell me, what do you suppose will happen to CHRS when those 6 million extra shares are offered for sale on Thursday?
 
Best Regards & Good Trading,
 
Jeff Clark




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%