When to count your cluckers

I spoke with an old friend over the weekend who was crowing that he made enough money in the stock market recently to buy a sports car. “That's nice,” I replied, not meaning it of course. I was about to change the subject but instead asked him how he did it. I was especially curious since he had said only a few months ago how he thought the market was completely manipulated and way too volatile and he vowed never to buy a stock again. Since then, he retired from his lucrative physician practice and is finding that he's got way too much time on his hands so he decided to dabble in high beta stocks—quite a reversal from his previous position that the market was too risky!

What is beta?
The point of this article is not to write an academic treatise on beta but since I brought it up I feel it's only right to explain it. A stock's beta measures the amount that a stock moves relative to a benchmark, typically the S&P 500. So, if the S&P moves by -4% like it did today, a stock with a beta of 2.0 will typically move by -8% and a stock with a beta of 0.5 will only move by around -2%. Betas typically fall in the 0.5 to 4.0 range, and there is such a thing as a beta for upward movement and one for downward movements. They're not necessarily the same but most data services only provide one number and I don't know which one that is. (It could be an average of the two.)

To make a short story long, I reminded my friend that high beta stocks are great performers in bull markets but can quickly turn against you in a bear market, to which he replied, “But we are in a bull market!” Doctors in general have a tough time with contradiction and my friend is no exception so I stifled my opinion knowing that it would fall on deaf ears.

Anyway, the point of this piece is not for me to gloat that possibly his high beta stocks didn't fare so well in today's market nosedive and that he might be looking at buying a bicycle instead; rather, I'm mentioning it to emphasize two points. The first is don't gloat about making a killing in the market before cashing in your chickens (to mix metaphors). This happened to two other acquaintances just before the dot com bubble burst. One of them crowed that his dot com call options quadrupled in price and the other said that his retirement account was up by $500,000. When I mentioned to both of them that it might be prudent to take some money off the table, they laughed. They both believed the Dow 50,000 theory that was circulating at the time and hung on to their positions.

You know where this is going. Those call options expired worthless when the company went bust and my other friend confided to me recently that he won't be able to retire when he thought since the value of his IRA had fallen faster than Bernie Madoff's credibility.

The second moral to this tale is that even if you do take some chips off the table, don't gloat about how much you made with the "I'm such a genius" grin. Not only does it make you look like an inconsiderate jerk but things like that usually have a way of coming back to bite you.

That's the part I get to enjoy.

MANDA & Channeling Stocks Update
In the financial world, Monday is called Merger Monday because that's when M&A deals that were finalized over Saturday's golf game are announced. Because of the credit crisis, Merger Monday is now just called Monday but today's mega merger announcements may change that.

Sun Microsystems (JAVA) finally ended its mating dance with IBM and got in bed with Oracle (ORCL) instead. The deal makes sense for both companies as Oracle relies heavily on Sun technology and the companies' CEOs are long-time bffs (best friends forever). The deal relies on the usual shareholder and regulatory approval, and although anti-trust issues can be raised, I do think it will ultimately be approved. The deal is for $9.50 in cash per JAVA share. I picked some up earlier this morning at $9.10 for the MANDA portfolio. This represents a 4.2% return on the trade.

The announcement that PepsiCo (PEP) is intending to buy two of its bottlers, Pepsi Bottling Group (PBG) and PepsiAmericas (PAS) caused both stocks to soar. That's great news if you're long either of them but bad news if you're short like I was on PAS in the Channeling Stocks Portfolio. The stock was covered at today's closing price for a 35% loss on the trade. Ugh ugh ugh. Oh, I'm not buying either PAS or PBG for MANDA because both deals involve stock swaps as well as cash, and I don't like taking a stock swap unless I'm pretty sure of the final price of the company doing the acquiring.