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8:30 AM Wednesday, March 30, 2005: I cannot find anyone whose portfolio has not been devastated in the last few weeks. There are a lot of worried puppies out there. On the two charts, the blue line is the 200-day moving average. When it goes below that, the chartists get very worried. You can see it below on the more volatile Nasdaq, dominated as it is by technology stocks and you can see how it's approaching the blue line with the less volatile Dow Jones index.



I also cannot find anyone who knows why stockmarkets have recently tumbled so sharply. There are the usual theories about slowing economy, tightening profit growth, rising interest rates, big budget deficits, huge balance of payments deficits, tumbling dollar, etc. But all have been known for a while. So most people are stumped. (Keep reading. This gets better.)

The Wall Street pundits who think this decline temporary explain it all in a memo floating around Wall Street yesterday called "What the market told me today:"

1-China decided over the weekend that its infrastructure had no need for more oil, steel, coal. Back to heating and cooking with charcoal and leave the current projects in an unfinished state.

2- India also decided over the weekend that it too had no further need for oil, steel, ore, coal. Back to burning cow dung to warm the evening meal.

3- The US likewise decided to be energy challenged, no more autos, etc. bicycles only on the freeways.

OK. This is clearly nonsensical. Here's another theory. Blame it on the Trend-Following Hedge Funds. This theory sounds more plausible. Let's start with an explanation. And for much of this I owe a big "thank you" to the brilliant Dennis Mykytyn (pronounced McKitten), who runs a successful hedge fund called Modern Capital. A trend-following hedge funds buys and sells purely on the basis of which way the market is going. If stocks are going up, it buys the stocks going up. If stocks are going down, it sells the stocks going down. A trend-following hedge fund pays zero attention to fundamentals, to valuations, to price-earnings ratios, to balance sheets, to the quality of management, or any of those boring mundane items that concern "normal" investors, like you and me. The trend-following hedge funds care only about the pricing trend. They have no idea even what the companies they sell or buy do. Nor do they care.

How important are trend-following hedge funds? Do they have a material affect on the markets? Are they exacerbating the present decline? No one knows for sure. But I personally suspect that they have a major effect and they are exacerbating the present decline. Trend-followers are part of what Wall Street calls "programmed trading." What this means is that someone has written software to buy or sell stocks based on certain defined criteria. I don't know what the precise "defined criteria" are. Everyone's are different. And everyone's is secret. But I do know that on some days, programmed trading accounts for over 50% of the trading on the New York Stock Exchange. That means it's very significant. To this day, people blame the 1987 crash on programmed trading "for blindly selling stocks as markets fell, exacerbating the decline." Of course, that's the point. Trend-following, programmed selling is "blind." It's devoid of emotion and logic. That's also its charm.

Is it profitable? Apparently sometimes. This chart comes from an academic paper called "The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers" by William Fund of PI Asset Management, LLC. and David A. Hsieh of Duke University. In this chart they show the monthly returns of trend followers -- in dark -- compared to the Morgan Stanley World Equities (which I'm guessing is some composite index of world stock prices). Trend followers do well in some periods and lousy in others. Their "performance" gives volatility a whole new meaning.

I personally wouldn't want to have my money in one of these hedge funds. But their existence suggests to me:
1. Trend-following hedge funds are a fact of life. There'll probably be more of them in coming months and years. Too much money is pouring into hedge funds. And the mumbo jumbo associated with trend-following hedge funds is very enticing. I bet you don't know what a dynamically rolling loopback straddle is. I don't either. Read the article and learn, or most likely, be more confused. Click here.
2. Trend-following hedge funds will make stockmarkets even more volatile and stomach-churning. If you are or want to be an investor in stocks, this is your future. It's not pleasant. Your psyche will suffer, as it's suffered in the last few weeks.
3. You probably need to play a little of their game. The main element is tighter stops -- up and down. Tighter stops will protect you against stomach-churning drops. But they'll also deprive you of potential gains, when the market turns.
4. You may need to think of your portfolio differently. Separate it into "stocks you love long-term" (like I love Whole Foods) and "those you love short-term" -- e.g. commodity plays. You need to be in and out of the latter much faster. You need to ignore your stomach on the former.

Not a happy future. But it's The New Reality of Today's Stockmarkets.

Let's go shopping. Or ain't email wonderful?
Yesterday I received an email from Nordstrom touting weird handbags.

Five minutes later, I received this delicious story:
On a chain of beautiful desert islands in the middle of nowhere, the following people are stranded:

Two Italian men and one Italian woman.
Two French men and one French woman.
Two German men and one German woman.
Two Greek men and one Greek woman.
Two British men and one British woman.
Two Bulgarian men and one Bulgarian woman.
Two Japanese men and one Japanese woman.
Two Vietnamese men and one Vietnamese woman.
Two Irish men and one Irish woman.
Two American men and one American woman.

One month later, on these absolutely stunning deserted islands in the middle of nowhere, the following things have occurred:

- One Italian man killed the other Italian man for the Italian woman...

- The two French men and the French woman are living happily together in a menage a trois.

- The two German men have a strict weekly schedule of alternating visits with the German woman.

- The two Greek men are sleeping together and the Greek woman is cooking and cleaning for them.

- The two British men are waiting for someone to introduce them to the British woman.

- The two Bulgarian men took one look at the Bulgarian woman and started swimming to another island.

- The two Japanese have faxed Tokyo and are awaiting instructions.

- The two Vietnamese men have set up a pharmacy, liquor store, restaurant, and laundry, and have gotten the woman pregnant in order to supply employees for their stores.

- The two Irish men divided the island into north and south and setup a distillery. They do not remember if sex is in the picture because it gets somewhat foggy after a few liters of coconut whiskey. However, they're satisfied because the English aren't having any fun also.

- The two American men are contemplating suicide, because the American woman will not shut up and complains relentlessly about her body, the true nature of feminism, what the sun is doing to her skin, how she can do anything they can do, the necessity of fulfillment, the equal division of household chores, how sand and palm trees make her look fat, how her last boyfriend respected her opinion and treated her nicer than they do, and how her relationship with her mother is the root cause of all her problems, and why didn't they bring a damn cell phone so they could call 911 and get them all rescued off this Godforsaken deserted island in the middle of freaking nowhere so she can get her nails done and go shopping!!

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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