January 7, 2015


Happy New Year!  We trust you enjoyed last week’s respite from the Market Structure Map.  Now, back to reality!

CNBC is leaving Nielsen for somebody who’ll track viewer data better.  Nielsen says CNBC is off 13% from 2013. CNBC says Nielsen misses people viewing in new ways. Criticize CNBC for seeming to kill a messenger with an unpopular epistle but commend it too for innovating. Maybe Nielsen isn’t metering the right things.

I’m reminded of what we called in my youth “the cow business.” The lament then was the demise of small cattle ranches like the one on which I grew up (20,000 acres is slight by western cow-punching standards). Cowboying was a dying business.

And then ranchers changed. They learned to measure herd data and use new technologies like artificial insemination to boost output. They adapted to the American palate. Today you can’t find a gastropub without a braised short rib or a flatiron steak. On the ranch we ate short ribs when the freezer was about empty.  But you deliver the product the consumer wants.

Speaking of which, a Wall Street Journal article Monday noted the $200 billion of 2014 net inflows Vanguard saw to its passive portfolios, which pushed total assets to $3.1 trillion. By contrast, industry active funds declined $13 billion. That’s a radical swing.  The WSJ yesterday highlighted gravity-defying growth for Exchange-Traded Funds, now with $2 trillion of assets.

The investor-relations profession targets active investors. Yet the investor’s palate wants the flank steak of, say, currency-hedged ETFs (up about $24 billion in 2014) over the filet mignon of big-name stock-pickers. IR is chasing a shrinking herd.

Let’s learn from CNBC and ranchers, and adapt.  All the investing and trading activity in your stock – not just active holders – reflects how you’re viewed. You don’t have to cultivate the crop to tally its yield. Remember that old adage that you “manage what you measure?” Above-market inclusion in indexes and ETFs acknowledges your appeal to the investor’s palate, as does below-market levels of hedging. Are you leaving this luscious low data fruit hanging by ignoring it or failing to measure it? It’s yours!

You can target more investors, sure. Can you separate your company from the nearly $8 trillion of indexed assets held by Vanguard and Blackrock when that money buys or sells? Periodically. Then you’ll revert to the mean. This is a mathematical fact not much different than Eugene Fama’s theory on the cross-section of expected stock returns defining strategies at Dimensional Fund Advisors.

If you tell management that 40% of holders are low-turnover investors, you should also be telling them that last week indexes/ETFs drove 31% of volume and this week their market-share rose to 35%. The former owns shares but the latter sets price. Measuring data is far easier than repetitively pushing the targeting stone up the ridge after it rolls down. Sisyphus exhausted the notion of futility in Hellenic Corinth. Let’s learn from history.

And you know what?  Among the most valuable constituents in your equity market are speculators.  They’re not noise, they’re a sensor telling you many things investors can’t or won’t about risk and uncertainty (or event-driven behavior).  Measure them!  Own the data.  Use the data to define IR success in a way that reflects investment behavior now.

Moral of the story:  When history moves on, move with it. Tomorrow’s IR relevance rests not in doing more of the same old thing but in adapting to the world as it is (too bad the Federal Reserve and climatologists don’t learn this lesson).

Last, a word on markets:  Have you ridden a teeter-totter with somebody heavier than you?  If they slide forward and you shift back, you can balance unequal things.

Let’s tweak that analogy now. Suppose the fulcrum – the bar in the middle – moved instead, adjusting with you to stabilize imbalances. That’s the Federal Reserve. When it began buying mortgage-backed securities in January 2009, the Fed skewed the fulcrum, causing things like stocks, bonds, real estate and oil to perform much better than any of these would have if the fulcrum had remained fixed.

The fulcrum is the dollar.  It’s now moving back toward center. So far, only oil has revalued to reflect the real-world position of the fulcrum. But everything else must follow.  We’ve been saying this since September.

We think a great many do not appreciate the importance of the fulcrum – the dollar – in how everything is priced. Unless we switch to goats or camels as the medium of commerce, we should expect what mathematically follows the reversal of sustained currency-depreciation.

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