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> This is the first time I've seen someone refer to a Small Cap/Large
> Cap effect. I'm very interested in learning more - can you point me
> to a reference?
Chip,
I don't know if I can give you an exact reference, but you might try finding
some stuff written by Harvey Eisen (Prudential?) in December which may point the
way.
If you are looking for some gut confirmation think of it this way. If IBM has
a terrible year and we get to December maybe it will sell off 15 points. Philip
Morris the same way only this time 8 points. These are on the order of 15-20%
of the stock price. Anything more and you are dealing with something else.
Now think about that hot biotech stock you bought last summer at $16 and is now
trading at $5. You want to capture that tax loss, so you dump it. Thin market,
oversupply and lack of buyers might drive this stocks down to $2 before the
carnage is over.
Suppose you buy these beat up stocks and they return to the previous levels.
IBM and MO went up 20-30% on a recovery bounce, but that little biotech would
have to more than double. Even if you get a partial bounce, the small stocks
will outperform.
This is of course a function of stock price, but I think my examples are in the
general trend.
Jerry wrote that it isn't happening this year and he is absolutely correct
(want to see my list of beat up biotechs?). People are paying for "safety" and
"predictability" in the face of the dire news coming out of Asia and the scandal
out of Washington.
If you have access to indexes, take a look at the large cap drug stocks, or the
large regional bank stocks (not the money centers). These are perceived as
"safe" and performing well. My holding in MRK has gone from a November low in
the mid 80's to 119 yesterday. 40% in 3 months on Merck??? It wasn't
undervalued to start with, now the flow of funds into "safe" stocks is pushing
it higher.
By the way my theoretical "blood in the streets portfolio" is up almost 50%
since 12/31/98. 1/2 Thai Fund and 1/2 Korea Fund. I wish I had the guts to
pull the trigger on that one. ;-)
----
Dave
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