Refco's Death, Victor Style..........

10/13/2005Detritivores and Other Destroyers, by Victor Niederhoffer
There's something unholy about the market's reaction to every twist and turn in the Refco death dance. With every bit of news that made the company's death seem more likely, the market dropped 1% in a minute. Yes, they might go under, as did Enron. And Delphi, with $1 billion in market cap, also went under amid the change in bankruptcy laws. But how does that compare in significance to the many companies that reported 15% earnings growth this week, the three-quarters of the total that reported positive surprises, the decline in energy prices to three-month price lows, the great news from McDonalds and Alcoa, the technology breakthroughs at Apple, the paltry 0.1% rise in the core inflation rate for a fifth straight month, the differential between earnings yield and bond yields of a few percent in stocks' favor, and the fantastic performance of every other market relative to ours so far this year? Are we that bad?
It's a major, terrible tendency of market players to feast on the dead. Those who have been around recall how the market went down a fast 10% as the vultures circled around the Long-Term Capital Management collapse. Whenever the firm went in to find a buyer, the prospect couldn't wait to kick them out, to sell in front of them. That's the tradition. The same thing happened with Baring's collapse, and I well remember how the U.S. market stopped dead in its tracks the week of Oct.. 19, 1987, and how it dropped 5% whenever there seemed any likelihood that the British government would hold the U.S. underwriters to their pre-crash commitments on British Petroleum.
History abounds with these paralyses caused by death. In Henry Clews's classic books on Wall Street, he describes how Governor Flowers was the leader of the bull claque, and when the homely rustic died, the market ''dropped to zero.'' The reaction to all the rumors planted about ''Doctor'' Greenspan's death or, it is hoped, retirement are another horse from the same shed. And this must be quantified.
Detritivores and reducers play a key role in the ecosystem by recycling nutrients and minerals that couldn't otherwise be used by organisms. About 90% of the organic material in the forest is recycled only when it is dead and the bacteria and worms take over. Vultures and crabs are specialized to ingest decaying matter. It's disgusting to see them on the road or shore, the same way it is to have your counterparts watch over you like a hawk or vulture to see if you're near death, try to precipitate it, and then with no risk of their own, eat your fixed remains. Such is so common in markets.
The general principle here is that the inflexible and the slow-moving are easy prey for those who are flexible. The principle reaches its ultimate expression and a terrible realization in the case of market death.
One of the rumors that constantly swept the floor this week was that a certain firm was intimately involved in some way in the Refco debacle. The surfacing of this rumor was usually good for a quick quarter-percent decline in the market. Thank goodness the rumor was squelched -- and yes, it was false, and the presumed dead will rise, and it's ill waiting for dead man's shoes.