Mark Cuban: Is this the New Normal?

Mark Cuban is known by most as a very rich guy who owns the Dallas Mavericks. He actually had the timing of a lifetime as he sold a company called Broadcast.com at the height of the internet boom to Yahoo (YHOO) for a cool $5 Billion. Literally a year later it would probably of sold for $100 million. Right place, right time. But he is also a serial entrepreneur and a very bright guy; most guys who have blogs are ;)

Cuban has an interesting post up on his blog asking if "this" is the new normal? Some interesting comments that dovetail some of what we've been talking about here. The portability of money and "attention span" of investors is something that I do believe has changed things permanently. Anyone who has time should go read the Yahoo Finance Message board for CGM Focus (CGMFX) which is a mutual fund - there is day to day analysis on what manager Ken Heebner SHOULD or SHOULD not buy, what he is doing WRONG or RIGHT, and all the focus is on short term results. When someone with a sterling 20 year record is constantly doubted, really there appears to be no way to please the attention deficit masses. Other people are out there swing trading mutual funds - moving in and out on weekly basis from one to another within a family. If you have 3 bad months, people flee en masse to the next hot thing. It appears now we see the same thing on the institutional side based on the hedge fund situation. The implications of this are vast. Everything is about the near term - if you have a bad month or bad quarter you can lose a lot of assets as a money manager. Almost no one cares about the long term it appears - so many managers are rushing into the same trades and trying to squeeze return for the very short term (month or quarter). By long term I mean "2 years", not 5 or gosh sake 10 years. But 1 year of underperformance vs peers effectively kills a business now. You simply cannot blame the managers in my opinion for this; they are catering to their customers.

The same customers who I see on the retail side, many of whom never even open up an earnings press release - they read the headline and then make a "decision"; if the stock doesn't hit some magical whisper number, the lemmings sell en masse. If a company dares to think for the long run and spend money on Research & Development, in our current thinking we punish them because that means EPS will be lower than it could be in the short run; even if its in the best interest of the company to spend money to innovate for the long run. The customers demand "always positive" results - how many hedge funds can sit and buy what they believe is under valued merchandise and sit on it for 3-5 years waiting for the market to see it's value? Same in mutual fund world. So the "customer" is driving this change - yet another aspect of our Ritalin happy, video game mentality of instant gratification that has seeped into all forms of life.

Interesting fact I heard on CNBC last night - only 6% of Japanese are invested in their stock market - in Germany and France it's 20%. Due to the 401k plans and the like in the US it is well over 50%. Which is why the stock market cratering (again - twice in the decade) is much more damaging to the US consumer (with his 0% saving rate) than in other countries; much less of their populations are affected. It will be interesting to see if this number materially changes over the coming decade.

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“Past Performance is No Indication of Future Results”. Its a statement attached to every financial salespitch ever offered. So why is it no one believes it ?

Turn on CNBC, Fox Business, Bloomberg, and every other comment from the “experts” mouths are “historically when the Dow ….fill in the blank….” or “for the last X years, every time the market did X, then Y has happened within Z months”

Folks, it is different this time. Until this past year, at no other time in the history of the US Markets has there been Investment Banks investing for their own accounts to the tune of 30 or more to 1 leverage.

At no other time in the history of the Markets are there 17k mutual funds and more than 10k hedge funds. All competing with each other for the right to make a ton of money off of your money.

At no other time in the history of this country did savings fall as far below zero pct of income

At no other time in the history of this country were net effective interest rates as far below zero

At no other time in the history of our markets have the words “blue chip” completely lost their meaning.

At no other time in the history of our markets has the money of consumers been so portable and movable between hedge funds and mutual funds. Which means that at no other time have mutual funds and hedge funds been so susceptible to redemption runs.

At no other time have consumers been so in the dark about what is happening with our funds. At least George Bailey could see the line at the bank and know what was happening. We as consumers have zero transparency as to whether or not there is a run on our funds, so we run to take out our money first, just in case. The result is a virtual run on the fund where we hold our money, except that no one knows about it but the fund itself, and they aren’t going to say a word for fear of making it worse.

At no other times have financial engineers and investors been so in the dark about how bad the runs on funds have been, so we sit on the sidelines, dribbling in cash, not wanting hedge and mutual funds to dump their shares into our bids.

At no other time have their been 3 financial news networks and thousands of websites providing so much financial information and opinion. The sum of which has definitely lead us into a situation of “Paralysis by Bullshitalysis”. Everyone is afraid to buy. Everyone is afraid to sell or short. Sales forced by de-leveraging is the catalyst for the market. However, there are so few buyers, the de-leveraging sales are taking forever.

Who knows what the new normal is. No one has any idea what is going to happen in this market. NO ONE. Personally, I am completely hedged. I bought puts, sold them. Sold Puts, bought them back, then decided to hedge every long dollar and then some with big puts on the market. This allowed me to be protected on the down side, and tip toe on the long side. As stocks go down, my hedge allows me to buy more of the stocks I like. If the market takes off on the up side, hopefully my longs will more than cover the cost of my puts. If the market does nothing. I’m stuck right where I am, with my puts losing time value every day.

Maybe it will work, maybe it won’t. What I do know is this, everyone is a genius in a bullmarket. The last 5 years, that wasn’t a stock market. THIS is a stockmarket. This time it is different. This may just be the new normal.