March 27, 2019

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.

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