Tagged: West Coast Think Tank

En Route to Knowing

I got a kick out of that movie, Night at the Museum.

Yes, it’s old, and no, we haven’t seen any of the movies that contended alongside Argo for Best Picture this year. But there were several times yesterday as clients reported results in a restive currency-addled market when I thought how things aren’t what they seem. If you could get below the surface, you’d find a tiny little tough cowboy who looked like actor Owen Wilson.

Just kidding. All analogies break down. But often in the market, what you think you’re seeing isn’t what it seems. One client’s share price shot up in the early going with results, jumping nearly 8%. Then it declined 4%. Imagine if gas prices did that every day. But I digress. The price finished right in line with the Rational level – fair market value from a fundamental perspective.

Why the gyrations? Speculators had bet on weak results (something that can be observed), and results weren’t. Traders covered, driving price up. Passive investors like indexes were Hedged. They’d farmed out risk, but surrendered upside. As price suddenly rose, counterparties with rights to gains above certain levels locked them. They’re not investors. When they sold to keep their collar profits, price reverted to the Rational level.

Market price may or may not reflect an investment purpose. Let’s use an example many can appreciate: An analyst ups her price target and rating on your shares, and price climbs 4%. We assume that investors responded. We explain to management, “Investors liked the Outperform rating and higher price target, and bought.”

But was it investment behavior? What if those gains evaporate three days later when the dollar rises100 basis points because Europeans think Italy will need more help from Germany and rush to buy dollars? That’s risk-management behavior, right? (more…)