[From The Archives] Joe Feshbach Barron’s 1986 Interview – Part One

The Feshbach brothers, Kurt, twins Joe and Matt were three of Wall Street’s most vocal bears. These infamous short-seller made a fortune and built a terrifying reputation taking on some of the market’s most undesirable companies and management teams; they made a lot of enemies along the way.

Joe Feshbach: Substantial profits

Through the 1980s bull market, the three Feshbach brothers reaped substantial profits as they picked short bets carefully. The Feshbach brothers looked for the companies that they considered to be overpriced, overhyped or downright fraudulent becoming self-described “stockbusters”.

The Feshbach’s Southgate Partners partnership produced some staggering performance numbers over its life. Gross annual returns topped 60% on more than one occasion. Between 1985 and 1990, a period when the S&P 500 gained nearly 70%, the Feshbach’s didn’t lose money. In fact, their worst year during this period was 1989 when their fund only produced a gross return of 20%. During the first nine months of 1990 Southgate Partners reported gross gains of 60% compared to a drop of 13% for the Standard & Poor’s 500-stock index.

The Feshbach used a double-edged strategy of intensive research and broad diversification to achieve results.  Southgate Partners’ portfolio at some points contained over 200 stocks. Spending their days poring over financial documents the Feshbach’s left no stone unturned. They’d call a company’s competitors, suppliers, customers and former employees to try to spot weaknesses. Occasionally, the firm would hire private detectives. When the Feshbach’s found a stock they liked the look of (or disliked) their actions went further than merely taking a short position. Generating negative publicity was a big part of their campaign. Actions ranged from sharing information with other fund managers to answering reporters’ queries to tipping off regulators when they could smell something fishy.

Joe Feshbach

Joe Feshbach: Barron’s Interview

In June 1986, Joe Feshbach sat down for an interview with Barron’s to discuss his thoughts on the market, and where he thought the market was heading in the years after. Moreover, Joe explained what he looked for when assessing market strength and the common indicators that flashed red when the market was set for a decline.

“Barron’s: Joe, you have been talking about 1900 as a target for the Dow for some time. I basically got there, then retreated. What next?

Feshbach: We missed by two points intra-day-whoopty-do. But it is not over yet. There seems to be an underlying, inherent skepticism throughout the Street. I find a lot of portfolio managers trying to fight this because the tape continues to narrow, which is a very, very characteristic of a market that has already attained peak momentum.”

Joe then went off to give several examples of when peak momentum was achieved; the market’s momentum dropped, and stocks struggled to move higher. For example, during January 1976 momentum peaked and the market went sideways for around 12 months, there were some opportunities to make money but, on the whole, the market stagnated. Then, during November 1980, momentum slowed again, and the market traded sideways for several months. The same pattern occurred during June 1983 and then in June 1985. In each case momentum dropped, and the market moved higher but traded mostly higher before a sudden drop.

“We hit peak momentum in March 1986 and all the market is doing is continuing to narrow against higher prices in the Dow. That is very typical of what happens after peak momentum. The easy money has already been made, but there are still lot of ideas out there. They are still going to play, because the major averages will continue to do well.”

Joe Feshbach: Momentum

Joe’s assessment of the market depends on one key indicator; momentum. Barron’s asked how he went about measuring this key indicator.

“I am talking about a variety of indicators that we measure from a rate of change standpoint. Let’s say, the rate of change of the S&P 500, or just a 30-day advance/decline line, or 30-day upside/downside volume, or how many stocks at the highest point were above their 30-week moving averages. The internal readings that nobody looks at, or you can’t find in the newspapers, or by looking at the tape…”

However, after a recent decline on the Dow, Joe Feshbach was optimistic that the market averages would pick up. Why? Well, there were three key momentum indicators that Feshbach paid close attention to, all of which were pointing to the fact that the market was due a large upswing.

Firstly, the large block ratio, which measures the number of trade of 50,000 shares and more made on upticks vs. downticks — a great sentiment indicator for institutional manager trades at the time.

“It recently showed that highest amount of selling on downticks in nine months.”

“…portfolio managers were getting very nervous and blowing out stock on downticks. The fact that we had the lowest ratio in nine months sort of told me that it was a climactic situation, and there was not going to be much more downside risk.”

Second, Joe was paying close attention to the put/call ratio, which he deemed to be one of the best indicators of sentiment:

“The individual investor or speculator isn’t going out there and buying 1,000 shares of International Business Machines Corp. (NYSE:IBM) or 2,000 shares of General Electric Company (NYSE:GE) today, because it is expensive as hell at Dow 1900. So the options market becomes more and more attractive. The excitement and the leverage are there. That is where the individual investor is mostly playing.”

“At Bache, we happen to be a very large OEX [options on the Standard & Poor’s 100 index] firm, and I am able to see the numbers on OEX put-to-call buying. Anyway, the put/call ratio…got to a level which in all bull markets — 50 puts bought for every 100 call on a 10-day basis–indicates significant enough skepticism that the market has very limited risk and is about to turn to the upside.”

The third key indicator; the bond market. Joe believed that due to weakness in the commodity markets, the oil market in particular (during the first few months of 1986 the price of oil slumped around 60%) bonds would trade sideways throughout 1986 and then rally during the fourth quarter.