Tagged: activism

Activism Science

In fourteen years, we’ve not missed an Activist.

“Chest-thumping, Quast?” you say.

No, a market structure lesson, a way for investor-relations professionals to be valuable.

Activism has become the de jour Value Investment proposition for modern markets. Our data indicate 10% of all US stocks – just 12% of daily volume is driven by Active Investment – have footprints of Activism.

Think about the enormous sums spent on Activism defense.  Surveillance firms that (no offense, friends!) almost never catch Activist presence proactively because Activists have had 35 years to know how to hide their footprints from settlement-based market intelligence.

The lawyers.  The bankers. The proxy solicitors. The communications consultants.  The running taxicab meter for expenses.

I’m not saying these advisors are pointless by any stretch. But wouldn’t it be prudent to observe what the money is actually doing?  I can offer a litany of examples (scores, but here just a few).

We saw footprints of Activism more than a quarter ahead of the advent of Activism in a small-cap.  Nine months later, the Activist pushed the company into a merger with a competitor.

Maybe a deal was best. But clunky Activist steps were crudely apparent in the data. We’d see a burst of derivatives bets – and five days later the Activist would issue some public declamation. So we could always tell the company when the Activist was about to spout off again.

At no point during the process were investors enthusiastic – but management quit early. The data clearly indicated they could win. The bankers didn’t have that data. Neither did surveillance or the proxy solicitors. I don’t know what those advisors told the team. Isn’t it wise to check and balance your advisors too?

Our data in the hands of a management team with temerity would have produced a fight – and maybe a much better deal.

Market Structure Analytics are like an EKG. We can see how the heart of investment is responding. Is there a burst of adrenaline? We’ll measure it. Apathy? We’ll see that too.

We warned another small-cap two quarters before Elliott showed up in 13Fs (and surveillance was utterly unaware throughout). We have algorithms that remove subjectivity. They are indiscriminate in identifying hedge funds, which half the time are not nefarious. But it’s better to know than not, right?

Advance warning put management in a strong position, and while that situation too also concluded in a deal, the company drove it rather than the other way around, which is always best for executive teams. And too, investor-relations is frontline defense, chief of intelligence for its boards and executive teams. That earns rewards, kudos.

In a high-profile case, we observed pervasive deal-arbitrage in a large-cap with a controlling shareholder. We told the IR team we were flummoxed, but the data were irrefutable. People were betting on a deal. They had no answer.

Then they and we both learned that indeed a deal was in the works that no one (apparently not no one!) ostensibly knew about, including the IR team.

Then an Activist manifested. Every time the Activist would publicly oppose the plan, we saw short-covering and long bets hidden behind headline selling – telling us the Activist really favored the plan but wanted a bone, an appeasement.

That data was vital for decision-making and led to a solution favorable to all parties.

Behavioral data isn’t a silver bullet freeing you from the travails of event-driven behavior (Market Structure Analytics are equally effective at predicting deals and their success, signaling where arbs expect news, predicting and tracking the arc – including success or failure – of short attacks, and spotlighting big bets on surprises around financial results).

The market is mathematical. It’s unwise in event-driven situations to spend all your resources on qualitative input from wildly expensive advisors, when affordable quantitative data offers the most accurate, predictive, unvarnished and timely view of success, failure, threats, opportunities.

If you want to know how we see Activism, deal-arbitrage, short attacks and more, ask us. We can look back historically and show patterns around your own experiences – which lays the foundation for future warning. And we have a compendium of event-driven situations we’ve addressed.

What’s better than glimpses into the future? Would that we had more of them in life – but you can have them in the stock market. It’s math. And science.

Deal Data

From another rumor that game-maker Zynga might have a buyer, to a Trian bid for Papa John’s, to Bill Ackman’s stake in Starbucks, deals and rumors of them abound. Suppose it’s your company, investor-relations professionals. How do you add value for your executives?

These situations are often chess games.  Here’s an example, since much of the drama is now old news.  When Disney battled Comcast for 21st Century Fox and before bids were hiked, patterns of deal arbitrage signaled starkly that a war would ensue.

One could say it’s logical that the price would rise, and so it was.  But there is no certitude like the power of data – patterns of long bets, covered bets. They are stark in the market if one knows how to measure the data (which we do).

After Disney won the bidding war, data then showed high expectation Comcast would win Sky Broadcasting, the European unit partly owned by Disney.  Data then signaled a sudden turn toward accelerated bidding – before the UK Takeover Panel announced that a speeded process would indeed follow.

Think about the data-powered value investor-relations, so armed, delivers to those making important decisions.

I’ll give you more examples.  Two years ago, longtime client Energy Transfer tried a combination with The Williams Companies that would have created an energy giant. The deal-arbitrage data were woeful. Active money stopped buying. Massive short bets formed and never wavered. Ultimately, the firms called off the effort.

A later plan to consolidate Sunoco, an Energy Transfer unit, presented challenges. It would cut cash distributions by roughly a quarter.  Would holders support it?

Data patterns were opposite what we’d seen in the Williams deal – strong, long bets, solid Active investment. We were confident shareholders would approve. And they did.

The company is now consolidating its Master Limited Partnership into the general partner.  We highlighted big positive bets at September options expirations. A week later, both Glass Lewis and ISS came out in favor of the transaction.

Data are every bit as powerful an IR tool as telling the story.  Maybe more so, because we have a mathematical market today riven with behaviors that arbitrage events and track benchmarks passively, motivations fueled by mathematical probabilities and balances more than story.

Oh, did I mention? We have never yet missed an Activist in the data. We’ve always warned early. And we’ve seen a bunch of them.  We know legacy market intelligence struggles to find them because, as we wrote last week, routinely 98% of trading volume fails to manifest in settlement data.

In one instance years ago, Carl Icahn took a major stake in a pharmaceutical company that had two high-paid surveillance providers watching. Neither saw it. Suddenly, Icahn filed with over 8 million shares – accumulated without buying a single share (he used European-style puts.).

We showed the company Market Structure Analytics and the stark patterns of derivatives.  They hired us. Subsequently, our data showed investors were betting against Icahn. His proxy bid to put a slate of directors on the board failed.  We then tracked his gradual withdrawal in the data. Not through shares owned but in patterns of behavior (nearly realtime, at T+1).

Lips can lie. Data those behind it believe are hidden from view – but which shine like light through night-vision goggles for us – is truth.  We have an unfolding situation now where what hedge funds are doing and saying are diametrically opposite. That’s a negotiating tactic. Since management knows, they have the stronger hand.

That’s IR in the age of Big Data.  And it’s fun to boot!  Seeing patterns of behavior and reporting it to executives and board directors puts IR in the right-hand advisory seat.  Right where it belongs in this era of fast machines and market reavers.

If you want a confidential analytics assessment of what’s behind your price and volume (which are not metrics but consequences of behaviors), let us know.

Verve and Sand

The whole market is behaving as though it’s got an Activist shareholder.

In a sense it does.  More on that in a minute.

We track the effects of Activism on trading and investment behaviors both before it’s widely known and afterward. A hallmark of these event-driven scenarios is behavioral volatility. That is, one or more of the big four reasons investors and traders buy and sell stocks routinely fluctuates day-over-day by more than 10% in target companies.

(Aside: Traders and investors buy and sell stocks for their unique characteristics, when they have characteristics shared by others, to profit on price-differences, and to leverage or protect trades and portfolios. The market at root is just these four simple purposes.)

Event-driven stocks can override normal constraints such as Overbought conditions, high short volume, or bearish fundamentals.  In fact, short volume tends to fall for catalyst stocks because the cost of borrowing shares rises as more want to own rather than rent, and unpredictability of outcomes makes borrowing shares for trading riskier.

Currently in the broad market, shorting trails the 200-day average marketwide. The market has manifested both negative and overbought sentiment and has still risen.

And behavioral volatility is off the charts.

Almost never does the broad market show double-digit fluctuations in behavior because it’s a giant index smoothing out lumps. With quad-witching and quarterly index rebalances Dec 16, Asset Allocation ballooned 16.3% marketwide, signaling that indexes and ETFs are out of step with assets (and may be substituting).

Also on Dec 16, what we call Risk Management (protecting or leveraging trades and portfolios) jumped 12%. It’s expected because leverage with derivatives has been pandemic in markets, with Active Investment and Risk Management – a combination pointing to hedge funds – currently leading.

Here’s the thing. The combined increase for the two behaviors last Friday was an astonishing 28%.  Then on Dec 19 as the new series of marketwide derivatives issued, Fast Trading – profiting on price-differences – exploded, jumping 25%.

A 25% change for a stock trading $100 million of dollar-volume daily is a big deal. The stock market is about $300 billion of daily dollar-volume.

Picture a skyscraper beginning to sway.

Looking back, Risk Management jumped 16% with July expirations, the first after searing Brexit gains. The market fell from there to September expirations when again behavioral volatility exploded. The market recovered briefly before falling all the way to the election. With expirations Nov 18, Risk Management shot up 11.2%.

Behavioral volatility precedes price-volatility. We have it now, monumentally.

What’s happened in the broad market is a honeymoon before the wedding. The incoming Trump administration has sparked an investing surge betting on a catalyst – exactly the way Activist investors affect individual stocks.  Fundamentals cease to matter.  Supply and demand constraints go out the window. A fervor takes hold.

The one thing our long bull market has lacked is fervor. It’s the most hated – and now second longest ever – bull market for US stocks because so many have loathed the monetary intervention behind ballooning asset prices.

That’s all been forgotten and a sort of irrational exuberance has set in.

Those who know me know I embrace in libertarian fashion broad individual liberty and limited government because it’s the environment that promotes prosperity best for all. I favor a future with more of it.

We should get the foundation right though. I’ll use a metaphor.  Suppose a giant storm lashes a coast, burying it in sand. Some return to the beach to rebuild homes and establishments but much lies listlessly beneath a great grainy coat.

Then a champion arrives and urges people to build. The leader’s verve lights a fire in the breasts of the people, who commence building a vast structure.

Right on the sand.  Which lies there still unmoved, a shifting layer beneath the mighty edifice rising upon it.

It’s better to remove the sand – all the central-bank buildup from artificial prices, the manufactured money, the warped credit markets.  Otherwise when the next wave comes the damage will be that much greater.

So call me wary of this surge.

Function Follows Form

Let me go. I don’t want to be your hero.

Those words strung together move me now viscerally after seeing the movie Boyhood, in the running at the Academy Awards, as I write, for best of the year. I’m biased by the video for “Hero” from the band Family of the Year because it highlights rodeo, something bled into the DNA of my youth.  See both. The movie is a cinematic achievement that left us blurry. The song is one I wish I’d had the talent in youth to write.

As ever for the ear that hears and the eye that sees, there’s a lesson for investor-relations. We might have heard MSCI last week refraining those lyrics – let me go, I don’t want to be your hero – to the ValueAct team, activist investors.

Over the past few years as activism has flourished, many companies have longed to be let go but have benefited from the activist grip. Herbalife and Bill Ackman.  Hewlett-Packard and Relational Investors. Dow Chemical and Dan Loeb’s Third Point.  Tessera and Wausau Paper and a raft of others just off Starboard.  On it goes, all around.

A curious condition has laid hold of stocks in the last number of years. It used to be that results differentiated.  Deliver consistent topline and bottom-line performance, do what you say you’ll do, explain it in predictable cadence each quarter – these were a reliable recipe for capital-markets rewards. Form followed function.

Activism by its nature supposes something amiss – that a feature of the form of a company is incorrect or undervalued, or simply operated poorly. By calling attention like the old flashing blue light at Kmart (have I just dated myself?), activists have often outperformed the market.

Meanwhile, the opposite has become more than an exception.  From our own client base we could cull a meaningful percentage of companies following the formula of consistent performance yet missing bigger prizes. (more…)

Holistic IR

Do sharks belong in the ocean?

You might reply, “They certainly don’t belong on land.” But that’s not what I mean.

This isn’t a lesson on catachresis or other obscure grammatical and rhetorical principles, rest assured. But speaking of speaking, if you’re joining IR Magazine for the West Coast Think Tank tomorrow, make a point to find me and say hi, please.

If you miss us, attend the NIRI Silicon Valley chapter session Friday on Market Structure with ModernIR’s good friends Kate Scolnick, Moriah Shilton and Nicole Olson. You’ll get a unique and candid view.

Back to sharks. In Belize, we swam with them (nurse sharks, granted, though while snorkeling I spotted a six-foot reef shark, its fins tipped black, headed fast to sea). Some fear sharks are now endangered, populations shrinking quickly, especially the celebrated Great Whites immortalized by Steven Spielberg in Jaws. It’s hard not to think of them when you’re in Caribbean waters. You wonder what’s there, just out of sight. (more…)