Once again, it is time for All Hallows' Eve: pumpkins are turning up on doorsteps, and small children are dressing like ghouls and pop stars. So to get into the spirit of things, let's look at some of the more macabre and bloodcurdling terms circulating in the investment world. (Learn more, in Wrap It Up: The Vocabulary and Benefits of Managed Money.)
The Witching Hours
In medieval times, the witching hour was believed to be a time of magic when witches took to the skies and abducted children foolish enough to wander out after dark.
In investing, there are two witching hours - double and triple - and they are also times of mischief and magic. A witching hour occurs when two (double) or three (triple) classes of options or futures expire on the same day. The triple witching hour (which can also be considered a quadruple witching hour) is the rarest, happening only four times a year: on the third Friday of March, June, September and December. The triple witching day has earned the appropriate title of "Freaky Friday."
The witching hour is already spooky because it occurs just regularly enough to be suspicious (like a full moon). But what makes it downright hair-raising is that it's a time of volatility. During witching hours traders are scrambling to offset their options and futures positions. But, because the effects of the witching hours are only temporary, they are not a big scare for the long-term investor.
In the supernatural world, a zombie is a reanimated corpse infused with the magical energy of voodoo.
Zombies in the investing world aren't that different from their supernatural cousins. They are companies that are insolvent or on the brink of insolvency, but are still operating as if nothing's wrong. Although zombies are in or close to Chapter 11 - which allows a business to continue to operate while restructuring its debt - a zombie company is perceived as not having a chance. Therefore, much like the supernatural zombie, the corporate zombie doesn't know that it's already dead. As an investor, you should avoid zombie companies like you would avoid the living dead. (For more investing terminology, check out Dragons, Samurai Warriors And Sushi On Wall Street.)
You probably know that cannibals are people who consume the flesh of other people. This grisly practice is called anthropophagy, and it's not exactly very popular. But in the corporate world, a different kind of cannibalism is all the rage.
Corporate cannibals try to consume a greater market share by releasing product lines that are in direct competition with their own established products. For example, say I designed tax-preparation software called Not Slow Tax, but then, to gain a greater share of the market, I designed another program called Moderately Speedy Tax. This new product would compete against any software within its market regardless of who created it. Since my new product would compete against my older product, I'd be engaging in corporate cannibalism.
Jekyll and Hyde
The horror novel by Robert Louis Stevenson, "The Strange Case of Dr Jekyll and Mr Hyde" (1886), tells the story of a kindly scientist (Dr Jekyll) who begins experimenting upon himself. Jekyll ends up unleashing the worst of his personality and physically transforms into his evil alter ego, Mr Hyde. Hyde eventually overcomes the doctor and commits a horrible crime for which Jekyll must take responsibility.
In investing, this term describes people or entities with a dual personality: you can have Jekyll and Hyde companies, finances, or even CEOs. Jekyll and Hyde investments, for example, are characterized by sudden shifts (good or bad) in value as previously concealed information is released. A Jekyll and Hyde CEO is good cop/bad cop rolled into one expensive suit - which isn't always a bad thing. (Learn more, in The ABCs Of The Bond Market.)
Voodoo is a religion practiced chiefly in Caribbean countries and some African countries. In most Western countries, the term "voodoo" connotes black magic and unexplained phenomenon.
Hence the term voodoo accounting: it occurs when a company uses some highly suspicious accounting methods to disguise what's really going on with the business. These methods can be as simple as spooky math (when numbers don't add up) or as complex as cooking the books through cookie jar accounting or the big bath. Voodoo accounting can also raise zombies of its own. The corporate zombies mentioned above are exactly the type of companies that would use some voodoo accounting to cover up their major financial woes.
Phantom Stock and Ghosting
It is generally believed that ghosts are the wandering souls of the departed, bound to earth by unresolved matters or penance they must pay for crimes committed during their lives.
Phantoms, on the other hand, are illusions, representations of things that are not real. Phantom ships and ports materializing in the fogs of the high sea have misled sailors. Phantoms have also caused pain in missing limbs and appeared in the occasional pop opera.
The investing cousins of phantoms and ghosts are a good match. Ghosting is an illegal practice whereby two or more market makers collaborate to manipulate stock prices. Although market makers are bound by law to remain in competition, this collusion can be nearly invisible - like a ghost - making it tough for investors to spot.
Phantom stock is not such a negative thing; it's simply stock that doesn't exist. With this imaginary stock, companies offer employees (usually senior management) the benefits of owning stock without taking any from the outstanding shares. The phantom stock follows the price movements of the real company stock, paying out any profits that are made. This is a clever way for companies to motivate management without giving up equity. (Find out more, in The Ghouls And Monsters On Wall Street.)
Tombstones and Graveyard Markets
Graveyards and tombstones are essential to the atmosphere preferred by the creatures of the night. Something about the dead is irresistible to the undead (vampires) and the living dead (zombies).
Ironically, the tombstone we find in the financial world is created at the beginning of a stock's life. It is a written advertisement issued by investment bankers before the public offering of a security. The tombstone gives basic details about the issue and lists - in order of importance - the underwriting groups involved in the deal. It's called a tombstone because it is printed in heavy black ink surrounded by a black border, and it contains the "bare bones" information about the issue. Basically, a tombstone serves as a teaser for prospective investors and directs them to the red herring prospectus.
A graveyard market, on the other hand, pops up right where you'd expect it to - at the end of a prolonged bear market, when investors have just finished weathering a financial storm. They aren't exactly moving and shaking like they used to. At the same time, any new investors are tentatively eyeing a market that just beat up the big players. Thus, there is no action either from those already on the inside or from potential new investors on the outside. The parallel between this type of the market and a graveyard is obvious: the dead (longtime investors) can't get out, and the living (new investors) aren't rushing to get in.
We saved the scariest term for last. In a viatical settlement, a person with a terminal disease sells his or her life insurance policy at a discount from its face value in exchange for ready cash. Presumably, the terminally ill individual either needs the money for medication or has decided to enjoy the remainder of his or her life. The buyer of the policy cashes in the full amount of the policy when the original owner dies.
Simply put, a viatical settlement is like betting that a person will die in the near future. Because of the time value of money, the longer the person lives, the lower the rate of return on the investment. So an investor interested in a profit is essentially hoping that the original policyholder heads to the Great Beyond as soon as possible. Grim stuff!
The Bottom Line
Well, that's our tour of the ghouls and ghosts of the investing world. Have a safe and happy Halloween and give a little extra candy to any kid trying to pass off a musty Mr. T mohawk as a Roman centurion's helmet. He's earned it. (For more, read The 5 Most Feared Figures In Finance.)