Tagged: consensus estimates

We were in San Francisco Sunday escaping the heat parching most of the country. Cool heads are better than hot heads, we thought. It was nice to need a sweater.

Speaking of needing things, there’s a flaw in consensus estimates. Consensus by definition means it’s the general view. But the general view reflected by estimates of earnings, revenues or cash flows comprises less than 15% of total market volume.

Across the market, we find that about 12.5% of substantive volume is what we’d call rational – driven by thoughtful investment derived from fundamentals. How can this be? Great swaths of trading today are driven by relative value – the current value of this basket of things versus that basket of things.

Somewhere around 30% of volume is this kind of trading that we consider program trading. It’s driven by market factors and relative value. After all, currencies that denominate securities have only relative and not intrinsic value. Should we not expect trading instruments to behave the same?

What’s more, some 65% of total market volume on average is just air created by the maker/taker model prevailing across global exchanges, in which we’ve all been fed this line of hooey that a massively mediated market is better for buyers and sellers than one with few intermediaries. When in the history of human commerce has it been more efficient to cut the middle man in rather than out? (more…)