Why Isn't Beta Working?

It feels like higher beta names as a group are not working very well. Today's action makes the point for me. The advance decline for the NYSE has 63% up, 31% down and 5% unch. The Nasdaq has 54% up, 40% down and 4% unch (with 2 hours 40 minutes until the close).

A flatter curve helps growth stocks, but you wouldn't know to look at the trading. I have written many times that back around the election I added some beta (but not to an overweight position) to client accounts. That worked for a short while but has not been working in 2005.

So what's the problem? I'm not sure it matters what is causing this bifurcated market (I didn't like that term when it was popular and I still don't like it). It is possible that we could figure out what the problem is and I have specific opinions about this but whether my opinions are correct or not the fact still is that risk is not working. I am quite confident in the viability of all the beta names I own but not the stock price for the next few months. As an example I have disclosed previously that my clients and I own Yahoo (YHOO). Over the last twelve months Yahoo kicked off about 2/3 of $1 billion in free cash flow. They have $3.5 billion in cash. They are almost ubiquitous. The company isn't going away. That does not mean we won't see $29 before we see $39. Holding the stock does not make me the least bit nervous.

Compare this to, say, Findwhat.com (FWHT). The numbers, relatively speaking, are ok but have you ever used the site? If not, do you plan to use it in the future? Here's the real question, have you even heard of the site? For all I know this may out perform Yahoo every year for the next decade but for now the market doesn't seem to reward the risk taken for owning this type of stock.

At some point this will change. A manager may nail the exact turning point or miss it altogether. I don't want to be too cocky about my ability to nail it so I maintain some plain vanilla exposure to the these types of stocks with names like Yahoo. I will get a good chunk of the effect without exposing my clients to a lot of risk, on a relative basis.

This is right for my clients and me but not for everyone. This is just how I handle areas of the market that are out of favor.

On another note I got a good comment posted this morning calling me out on my idea about a snapback in the event of a crash. First is the comment and then my response.

None of your snapback examples occurred while the Fed was hiking rates. The best strategy in each of those cases was short until the Fed cuts and then buy. "This time it's different" is a difficult argument to make but the current stance of the Fed and increasing reluctance of central banks to finance U.S. borrowing could be a pretty big impediment to following the same course of action. I don't have a problem with your point so much as your examples

You may be right. But if there were some sort of horrible event to cause a crash, wouldn't the fed one way or another act? They can add liquidity and jawbone in addition to lowering rates. I would think the fed would do something, again, in the face of a crisis.