
864614169
−84−74−26−80
Source: Bloomberg L.P.
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Empty Shelves, Rising StockIn their paper, “Inventory Change and Future Returns,” Thomas and Zhanguse as their starting point the well-documented finding that a company’s stockperformance tends to suffer after a period in which accrued earnings exceedcash earnings.1 Accrued earnings are those that are reported in the annual report and the earnings statement, and they’re what the media report. The maindifference is that accrued earnings recognize revenues when a sale is legallybinding and match expenses against the revenues. Cash earnings recognizesales and expenses in the period during which the money arrives and the expenses are paid. Companies have been required since 1988 to reconcile thedifference between cash and accrued earnings on their statements of cashflow, one of four required financial statements that every company must submit to auditors.More and more investors and analysts are focusing on the cash flow statement. Thomas, an immigrant from India, and Zhang, an immigrant fromChina, have made an important contribution to financial analysis by systematically testing which items on the cash flow statement are most predictive of future returns. After analyzing 39,315 firm years from 1970 to 1997, theyconclude: “We find that inventory changes represent the main component thatexhibits a consistent and substantial relation with future returns.”Companies with the greatest reductions in inventory (scaled by assets)show a greater price-plus-dividend return of 4 percentage points more thanthe average for all companies. Companies with the greatest increase in inventory, on the other hand, show a return 7 percentage points less than that of theaverage company. The difference held in 27 of the 28 years of the study. Theusual statistical tests indicate this is a highly unusual event that could only beexplained by chance on substantially less than 1 in 1,000 occasions.Amazingly, the returns in the next year for these chosen companies addanother 4 percent differential to the abnormal return.Two other components of the balance sheet also have a large impact onreturns, although significantly less than does inventory: depreciation expense(the higher the better), and change in accounts receivable (the less growth thebetter). Both these items give an abnormal return differential of 4 percent forthe favorable companies versus the favorable ones.Why do inventory changes matter so much? The professors offer threepossible explanations:1. Demand shifts. High inventory could be a signal that demand is declining and future profitability is in danger.
332 Practical Speculation2. Overproduction. For manufacturing firms, producing more than initially anticipated causes per-unit inventory costs to be lower this year,which results in lower cost of goods sold and higher profitability.Everything reverses in the following year when fewer units are produced to bring inventory levels back to normal.3. Inventory misstatement. Firms may use inventories to manage earnings. The cost of goods available for sale is determined by previous period’s ending inventory and current period’s costs for producing andpurchasing inventory. At the end of the fiscal period, we have to assigncost of goods available for sale to either cost of goods sold or the endingbalance of inventory. If you overstate the latter, cost of goods sold willbe understated and earnings will then be overstated. The followingyear, inventory is written down and profits take a hit.The professors conclude that earnings management is the likely suspect.They do not, however, attribute the inventory effect entirely to the practice ofearnings management. “Consider the following scenario,” Thomas wrote inan e-mail to us. “Cisco is running along on all eight cylinders, making routersand such like. There is a sudden decline in demand, but they think they canovercome it. Things get bad enough where they should reasonably be writingdown some of the unsold inventory, but they don’t because they’re a bit optimistic. In the year after the inventory buildup, they finally admit things arebad and take a write-down, and returns fall. Would you construe the reluctance to take a write-down as earnings management? Some people would notcall that earnings management, and view it simply as reasonable optimismabout one’s prospects.”Born in China, Zhang earned his bachelor’s degree from Beijing University and came to the United States for his doctorate. “I entered Columbia’sPhD accounting program with a blind trust in accounting numbers,” Zhangtold us. “Four years later, when I got out, I had developed a healthy skepticism.The flexibility offered by GAAP allows a company’s management to manipulate the company’s earnings while the investor community’s steep penalty fornot meeting analysts’ forecasts sends the management off in that direction.My paper with Jake shows results consistent with investors being misled byearnings management through inventory. It’s just another piece of evidencefor my view of the world: Accounting can be dirty.”Much gold is hidden in a company’s statements of cash flow. In practice,however, the investor is confronted by items beyond the ken of all but themost sophisticated accountants—and even they acknowledge difficulty.
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Thomas, acknowledged as being among the giants in the accounting field,wrote: “Combing through the statements of cash flows and footnotes ispainful but rewarding. There is no substitute for doing it the old-fashionedway. Unfortunately, the disclosures are often so cryptic and there’s so muchintentional distortion that most of us remain confused even after reading thedamn thing over and over.”
Compustat ConfusionThe case for relying on cash earning rather than accrued earnings, with particular emphasis on inventory, would seem to be sound as a nut. But wait: theThomas-Zhang study was based on companies taken from Standard andPoor’s Compustat data files. While Compustat’s files are widely used, we havegrave concerns about them because of their retrospective nature, and what weconsider their survivor bias.MIT professor Andrew Lo, of whom the cognoscenti in this field alwaysspeak in superlatives, pointed out that Compustat “backward-revises” its data,posing insidious problems for researchers. With Compustat, “today’s values for1997s IBM current assets need not be the same as last month’s values for1997s IBM current assets,” Lo wrote us. “Compustat’s backfilling is a problemevery single month, including this month. Do the following analysis (I’ve doneit): this month, take all observations in the Compustat files for October 2001and save it; then next month do the exact same thing for the exact same date;now run a variable-by-variable comparison of the two supposedly identicalfiles—you’ll see at least 200 discrepancies, if not more. These issues don’t eventouch on the quality of the data, spottiness of the coverage, and timeliness ofthe updates.”Another potential problem is that Thomas and Zhang examined manydifferent balance sheet items and methods of computing them before settlingon the specific ones in the paper. This approach may yield statistical bugs related to the correlation of many balance sheet items with each other as well asto the serial correlation in these items between consecutive years.Thomas agreed that backfilling of Compustat data is a potential concern,but said it hasn’t been a problem in the last decade. “As far as I know, the lastmajor backfill was done in the 1970s.” He added: “To me, the two big questions are (a) Why did the market not see this mispricing until it becomes veryevident in the next quarters’ reported earnings? And (b) Does the mispricingoccur even now?”
334 Practical SpeculationWhom do you call when you want a scientific update? That’sright, the Spec Duo. We pencil-and-envelope tested whether inventory and account receivable changes have been inversely associated with subsequent price performance for recent years.
DowSince this was an exploratory study, and we wished to use prospective datafrom a relatively homogeneous sample, we restricted our study to the 30 Dowcompanies. These companies are important in themselves, accounting forsome 28 percent of the total market value of all U.S.-based publicly tradedcompanies.We took the five best (those with the greatest decreases) and the fiveworst (those with the greatest increases) in inventory and accounts receivablefor 1998, and compared the performance of the groups during 1999. We thendid the same for the best and worst of 1999 as shown in Table 17.11.
Table 17.11 Total Return (%)*5 greatest inventory increases5 greatest inventory decreases5 greatest accounts receivable increases5 greatest accounts receivable decreases
2000
1999
−7−1−14
−1712−186
* Price appreciation + Reinvested dividends.
The results show that in the year following increases in inventory and accounts receivable, performance was highly inferior, with returns of some −10percentage points.For the companies with the greatest decreases in inventory and accountsreceivable, the performance in the next year was relatively good, with returnsaveraging about 5 percentage points.Because only 20 companies were involved, and because the results werehighly variable and subject to much in the way of ever-changing cycles, theodds are only about 20 to 1 that these results could not be attributed to chancevariations alone.Nevertheless, we conclude that you have to know the accounts receivableand inventory territory if you’re going to make music in the market.
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A Combination TellRewards have never been greater for those able to discern truly superior investment opportunities. Yet favorite buy signals such asbuybacks and insider buying too often turn out to be misleading inindividual cases. In the words of our favorite science fiction novel,Invasion of the Body Snatchers, more than one company that seemed to fit ourcriteria “only looked, talked, and acted” like one that really thought its stockwas a good value.We have designed a new system to weed out imposters. We started byconsidering imposters in life and nature. The story of 1890s adventurerLouis de Rougement proved particularly inspiring. As told by Sarah Burtonin her entertaining book, Impostors: Six Kinds of Liar—True Tales of Deception, de Rougement claimed to have survived 30 years in the vast Australianoutback by convincing the cannibals that he possessed supernatural powers.Eventually, he found his way back to London and sold his tale to Wide Worldmagazine.The very first installment of the story created a furor. De Rougement’s account of riding sea turtles was widely ridiculed. “I have caught and handledsome thousands of turtles,” wrote an Australian, “and I never yet saw onewhich when afloat and when touched anywhere on its body did not sink almost vertically.” An admiral weighed in on de Rougement’s side: “I have considerable experience of turtle-catching, and know of a midshipman who goton a turtle and enjoyed a 10 minutes’ ride before he brought the animal to astandstill.” In 1906, the self-proclaimed cannibal chief rode a sea turtle at theLondon Hippodrome, disproving the naysayers. By then, however, investigative reporters had unmasked de Rougement as an imaginative former valetnamed Louis Grin.On reading de Rougement’s story, we realized we needed more than amere sea turtle test to avoid being fooled. This point was driven home whenwe read about the outrageous high-stakes frauds perpetrated by innocentseeming plants.European orchids not only look like bees, they smell like sexually receptive female bees—all to seduce male bees into carrying pollen. A bee, after excitedly crawling all over an alluring flower and attempting union, quicklylearns to distrust the fraudulent scent—but 100 other types of orchids practice similar shams.“After visiting four or five different plants, he has learned his lesson—thewhole lot that smell in this general way are useless and he visits them no
336 Practical Speculationmore,” writes David Attenborough, in The Private Life of Plants. “But by thattime, he is likely to have done what the orchids required of him.”So it goes with investors. They are attracted by companies that buy backtheir stock, or have insider buying, only to be surprised by disclosures of secret debts, vaporous earnings, or magic-trick accounting for acquisitions.After a few encounters with such impostors, investors may beready to give up on stocks entirely. But by then, they have madetheir contributions to the market.Some plants practice deadlier deceptions, pretending to be food for a predator and then making the predator their prey. The pitcher plants of SoutheastAsia are shaped like beakers, flagons, decanters, and champagne flutes. Usingcopious amounts of nectar, they lure insects inside—and then dissolve theirtrapped victims in digestive acid.To avoid being fooled, seduced, or eaten alive by our stock selections, wedecided to require multiple signals before buying. Our evolutionary groundsfor doing so are that no life form (and hopefully, no company) would expendthe energy necessary to give off multiple false signals.Three-Signal MonteWe settled on three signals that we feel have been particularly efficacious:1. Buyback announcement.2. Big decrease in inventory.3. Big decrease in accounts receivable.As reported earlier, companies that announced buybacks from year-end2000 through October 3, 2002, outperformed the S&P 500 by some 6 percentage points. The five Dow Jones Industrial Average companies in 1998and 1999 with the greatest inventory decreases outperformed those withthe greatest increases, with the difference averaging out to some 10 percentage points.Before choosing these particular signals, we conducted many tests thatcould be classified as negative studies. The buyback companies perform sowell that additional criteria are not overly helpful. For example, we found thatthe percentage of shares bought back as well as insider buying within thisgroup did not add significantly to the returns during 2002.Our exploratory work showed a slight edge for the 93 companies that announced buybacks in the first three quarters of 2002 and also reported thegreatest decreases in inventory and accounts receivable. Table 17.12 illustratesthis signal.
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Table 17.12 Performance of Buyback Companies Reporting LargeDecreases in Inventory and Accounts ReceivableBuyback Companies10 largest inventory decreases10 largest accounts receivable increases
Percentage Points overS&P 500’s YTD Return (%)3 percentage points1 percentage point
It might be useful to consider the returns from buying baskets of companies showing each of these three signals in the future. But it will requiremuch study before the results will be of practical or statistical significance.When we presented our findings in a series of columns on fundamentalanalysis for CNBC Money, some readers remarked on the irony. Vic, after all,has long traded on price interactions, not financial statements or dividendpayouts. One reader wrote: “The Speculator talking about dividends as a valuable investment criterion! Now I know I’m in Kansas.”There’s a certain wisdom in that observation. By the timeVic and his ilk are ready to study value, chances are that techwill be back. It never hurts to know your way around a balancesheet, though. If investors agree about anything nowadays, it’s that we needtransparent, nondistorted financial statements to restore trust in CorporateAmerica. You would think that all executives of major companies would leanover backward so as not to be perceived as managing earnings, for the good ofthe business world as well as their own stockholders.The time when a company could expect applause for pulling a rabbit outof the hat to meet earnings forecasts—say, by selling one of the businesses ithad acquired over the years—would seem to be over. But apparently, somecompanies don’t feel this way.General Electric, for example, stated on Wednesday, September 25, 2002,that it expected to meet third-quarter earnings projections. Wonderful, the market said. General Electric shares rose 4.3 percent. The next day, it came out at anews conference that the forecast would be met by selling a business unit,Global eXchange Services. Disappointed investors sent General Electric down2.3 percent. By Friday, when they figured out that General Electric had loanedthe purchase money to the buyer and had even taken back a 10 percent interest;they were more than ready to laugh General Electric out of town. The 9 percentloss over those two sessions took some $25 billion off the market capitalizationof the world’s most valuable company.General Electric may have a great reason for the sale, but as the companyhas refused to grant us an interview and advised us to refrain from contacting
338 Practical Speculationit again, we can’t report any explanation at all. What’s clear is that GeneralElectric’s decision cost its shareholders dearly at a time when the need to bebeyond reproach is more than evident.Such a reaction wasn’t exactly unprecedented. In February 2002, IBMtook a 5 percent hit after the New York Times reported that the company usedthe sale of a unit to lower fourth-quarter operating expenses, instead of reporting the sale as a one-time gain. The demise of Enron, WorldCom, and ArthurAndersen after the disclosure of earnings misstatements and cover-ups hasmade investors skeptical even of squeaky-clean companies with cash from operations soaring to the moon and no nonrecurring items of any kind.Yet General Electric’s skill in managing earnings to meet analyst expectations has been known for years—and until recently, renowned. Carol Loomis,writing in Fortune in August 1999, observed that after the Wall Street Journalpublished a front-page story in 1994 detailing the many ways that Welch andhis team “smoothed” General Electric’s net income, AIG, Champion International, and Cigna called to say, “Well, this is what companies do. Why is this afront-page story?” (We suspect that many other companies read the article tosee how it was done.)SEC chief Arthur Levitt declared war on managed earnings back in September 1998. In a dinner speech at New York University, the audience putdown their forks and started taking notes when Levitt said many executivesand auditors were playing “a game of nods and winks” to meet or beat earnings projections to pump up market capitalization and increase the value ofmanagement’s stock options. Levitt asked Corporate America and Wall Streetto stop using accounting gimmicks: no more big write-offs for restructuringcharges, future operating expenses, or “in-process research” to make futureearnings look better, no more stashing profits in “cookie jar reserves” to bringout later, no more booking sales before delivery takes place, no more quibbling over how big a lie has to be before it’s “material” under Generally Accepted Accounting Principles.The “better-than-expected earnings” game has been a long-time favoritefor corporations and their Wall Street cheering section. Come recession, comeboom, come 100-year interest-rate events, come terrorist attack, some 60 percent of the S&P 500 has consistently “beat” analysts’ forecasts. Here is the distribution percentage of positive surprises for S&P 500 companies from 2000to 2002:Q2 2002Q1 2002Q4 2001
60.1 percent62.1 percent55.3 percent
Chapter 17 • Earnings ImpostorsQ3 2001Q2 2001Q1 2001Q4 2000Q3 2000Q2 2000Q1 2000
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51.2 percent (even though country was shut downfor a fortnight)55.2 percent54.4 percent51.0 percent58.2 percent63.7 percent70.7 percent
The question is not whether they nudge and wink, but howhigh they’ll take you before they drop the ball.We wonder how many other companies have a choice now of decidingwhether to meet earnings expectations by selling a company or asset they acquired long ago. Let us hope they learn from General Electric’s experience.Otherwise, there may come a time when their own credibility is on the line.If their response meets the new standards of evaluation, success is assured.If not, investors will be disinclined to accept at face value any official statements at all.Similar turning points can be observed in politics. If the gap betweenword and fact becomes so noticeable that even supporters cannot countenance it, an office holder will soon find his power on the downtrend. Insports, the scandal at the Winter Olympics in Salt Lake City indirectly enabled Sara Hughes to finally gain her well-deserved recognition. Accordingto sportswriter Rick Reilly, Sara Hughes had been the best in the UnitedStates for some time. Only after the public pantsing of the judges in thepairs skating competition were the figure skating judges able to do the rightthing and give the nod to Sara.Unfortunately, merely vowing to change won’t work when credibility hasbeen damaged too badly. Between mid-July and early October 2002, morethan 50 companies pledged to treat options as an expense, responding to callsfor greater transparency in reporting operating costs. We compared the performance of these “transparent” companies with that of the S&P 500 and foundthat they actually lagged the index by 3 percentage points. The 52 companiesthat took the pledge lost −9.6 percent, on average, versus −6.4 percent for theS&P 500.Vic’s father, Artie Niederhoffer, used to say that if a choice came up between giving people in trouble cash or advice, to always give the cash. Artie’swisdom carries the day here. What counts in troubled times is cash. We hopethat the indicators we wrote about in this chapter will prove of service.
18
FINALE
[I]t appeared to me that I should do welcome service toall who have to rough it—whether explorers, emigrants, missionaries or soldiers—by collecting the scattered experiencesof many such persons in various circumstances, collatingthem, examining into their principles, and deducing fromthem what might fairly be called an “Art of Travel.”—Francis Galton, The Ar t of Travel 1
W
e get asked four questions regularly:
1. Aren’t there any technical indicators that you use in your work?2. Where do you find all those down-home philosophers and scientists,who from their job descriptions seem like average Joes but who turnout to have wild but useful ideas about the market?3. How can you say such awful things about Alan Greenspan? Are you sobullish that you didn’t realize there was a stock market bubble?341
342 Practical Speculation4. What book do you recommend for me to continue my education afterreading this one?We will answer each of these questions.
Technical IndicatorsAs mentioned in Chapter 3, there are so many different indicators that one always seems to work well in any particular time period. Thus, when we answerthis question by observing that almost all technical indicators are untested,and that most are amorphous and unsusceptible of testing, and the results ofall of them are completely consistent with a random walk, the person who hasfound the indicator to be successful in a specific period invariably respondswith disbelief.To prevent this, we have taken another tack. Without boasting unduly,Vic has been programming for more than 40 years and is quite capable oftesting any indicators or method. During many of those years, he was a wellrespected and potent force in the industry, and technical analysts often visited to get him to finance or test their systems. This was particularly truewhen he was chief bottle washer and evaluator of scientific systems forSoros, because if the system was a hit, there was the potential for billions tobe thrown at it.Vic has been recording hourly prices on 15 to 20 markets on a real-timebasis by hand for the past 40 years. One of his record books, from 1965, appeared in a Japanese television special on him. In Japan, defeated ronins makepilgrimages to Mt. Fuji for guidance and sustenance; in this case, he wasshown seeking guidance from his ancient book of hourly price records.The three universities he was fortunate enough to attend—Harvard, theUniversity of Chicago, and the University of California, Berkeley—were associated with a large part of the seminal research into the behavior of stock prices.The University of Chicago, where he received his PhD, developed the databaseused by almost all studies of stock market behavior, the Center for Research inSecurities Prices. Of the 12 Nobel Prizes that have been given for economics, 10of them had some association with the University of Chicago, including theBlack-Scholes options pricing model, the Miller-Modigliani cost of capital anddividend contributions, Aliber’s work on foreign exchange, and Lucas’ rationalexpectations theory. The theory of portfolio insurance that figured so prominently in the 1987 crash was developed at the University of California while hewas attending that institution.
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In addition to that, the one thing that he has been very good at doing hasbeen attracting smart people to his organization. Almost all of them are highlyquantitative. Richard Zeckhauser, who now is considered a leader in behavioralfinance, was Vic’s partner for 20 years. In those days, he was always willing toapply his expertise developed from being number one in the mathematical actuaries exam in high school to the solution and scientific analysis of technicalstudies. Between Vic and his highly intelligent current and former partners andcolleagues, we have the ability to implement and utilize on a practical basis anytechniques of technical analysis that may have merit.Therefore, the fact that we are not using such a particular system wouldmean that it has been seriously multiple-comparisoned here and found wanting, Thus, we are the last people in the world who should be asked to opine onone of the 573 indicators.After all of this, the conversation invariably comes to an abrupt end as thequestioner goes away saying, “Niederhoffer, if it’s not invented there,he’s too vain to even consider it.”
Where Do We Find All Our Experts?Much of the value in our columns, and in this book, has come from the net wecast to catch all the specialized niches of knowledge, technical expertise, andinsights in various fields that our readers kindly communicate to us fromaround the world.When we started writing a column on the stock market together in January 2000, we realized that no duo, however well informed, could know everything useful about the market. The great lesson of the twentieth century isthat central economic planning creates poverty, but the combined tastes, preferences, know-how, and insights of millions of people somehow direct goodsfrom all over the world to store shelves and tables in a beautiful celebration ofprosperity and well-being.Because we were writing for the Internet, we decided to make full use ofour medium. Hayek’s great insight was that free markets function best because they draw on the knowledge, wisdom, and skills of the many. We putthe idea into practice by asking readers for insights, and our hopes were realized beyond our wildest dreams.It frequently happens that an expert in one field or another writes in witha constructive suggestion as to how we can improve and pass along sharpand valuable information to our readers. We awarded canes as prizes forwhat struck us as the most outstanding contributions, in a nod to one of our
344 Practical Speculationfavorite passages about the market, from Twenty-Eight Years in Wall Street,written by Henry Clews in 1887:But few gain sufficient experience in Wall Street to command success until theyreach that period of life in which they have one foot in the grave. When this timecomes, these old veterans of the Street usually spend long intervals of repose attheir comfortable homes, and in times of panic, which recur sometimes oftenerthan once a year, these old fellows will be seen in Wall Street, hobbling down ontheir canes to their brokers’ offices.Then they always buy good stocks to the extent of their bank balances, whichthey have been permitted to accumulate for just such an emergency. The panicusually rages until enough of these cash purchases of stock are made to afford abig “rake in.” When the panic has spent its force, these old fellows, who have beenresting judiciously on their oars in expectation of the inevitable event, which usually returns with the regularity of the seasons, quickly realize, deposit their profitswith their bankers, or the overplus thereof, after purchasing more real estate thatis on the up grade, for permanent investment, and retire for another season to thequietude of their splendid homes and the bosoms of their happy families.2
The first cane went to Brett Steenbarger, a State University of New Yorkpsychologist who would become a dear, valued friend. On February 25, 2000,just two weeks before the Nasdaq peaked at 5048, Dr. Brett wrote:First, the kiss: You and Vic write one of the most lucid and thought-provokingcolumns anywhere. Your musical analogies to the markets are dead-on.
Now the tell (favorite indicator):On a speculative note, I hypothesize that there is a positive and significant correlation between the beats-per-minute of popular music and price changes in thestock market. From post-Depression blues, forties crooners, fifties/sixties rock ‘n’roll, late sixties/early seventies psychedelia, late seventies disco, eighties NewWave, and now the electronic dance raves (150 bpm de rigeuer), we’ve seen asteady ramping up of acoustic adrenalin. And what are we to make of the recentresurrection of the twenties dance sound?
In a subsequent e-mail on March 2, he added:The market’s music is reaching a heightened tempo, at least on the Nasdaq. Buteven in the clubs of Ibiza, when the pace has become frenetic at 4 a.m., they haveto shift the pace and go into “melodic trance” mode with Robert Miles. It’s thatold A-B-A structure, I guess. . . . We’ll have to see if the dancers start stumbling,spent of their Ecstasy.
We messaged Dr. Brett to tell him we were sending him a cane, and thenext day received the following note:
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Well, it was quite a day. First your most generous e-mails re: the tells and then myreturn home. I opened the garage and there, greeting me in bright colors, was alarge sign hand-drawn by my two little ones. It read: “Congratulations Cane Winner!” That’s enough to melt even the most wizened trader’s heart.
We told the story in our column, noting the names of Dr. Brett’s kids.The next e-mail melted our own hearts:“I wish you could have been there,” wrote Dr. Brett. “I took Macrae to the computer and showed him your article. When he got to the part with his name, hiseyes grew wide. ‘You mean anyone in the world who goes to this Web site can seemy name?’ he asked.“ ‘That’s right,’ I responded.“He turned from the computer and stared into space, his eyes still quitewide. In a tone of absolute wonderment, he whispered, ‘I’m famous!’“It was a priceless moment.”
One reader, Don Staricka, sent us excerpts from his forthcoming Devil’sStock Market Dictionary, a masterpiece of humor surpassing the work of Ambrose Bierce.***Balanced Portfolio: A strategy for breaking even over the course of one’sinvestment career.Buying Opportunity: Any occasion where an equity suddenly and unexpectedly loses value.Contrarian: One who bets against the winners.Correction: A distasteful remedy for unwarranted bullishness. When theprices of equities within a sector (or the market as a whole) movedownward simultaneously the market is said to have “corrected.”This implies that the higher prices were “incorrect.” Contrast withRally.Dividend: A booby prize.Equity