October 29, 2014

The Audience

“I’m going to write a four-letter word meaning intercourse,” my speech-class colleague Jim announced, striding to the chalk board. It was 1986.

Stunned, the rest of us stared open-mouthed.  The chalk clicked.  Jim stepped back and with a flourish gestured at what he’d written.

“Talk,” he declared.

Freshman college speech burned into my mind the importance of knowing your audience.  Seated there in the IR chair, who’s yours?

As you tee up an answer, let me tell you a story. It must’ve been a long last Sunday at Goldman Sachs.  Late Oct 26, with fanfare and after machinating immense quantities of data or perhaps just looking at sliding oil prices since August, the firm pronounced a new view for the energy sector. Oil, it said, would be priced lower than previously thought.

I’m poking fun, yet it was anything but for many in the energy sector Monday as the Goldman Tsunami appeared to crash over its investing audience, driving some energy and chemicals companies down 4-5% on a flat market day.

Okay, stop for a moment. It’s not your sector so you want to move on to your Twitter feed. Right? Stay put.  The same may apply to you and your peers.

Back to our story, the conclusion one would infer is that having waited for the vaunted Wall Street firm to speak, investors, teeth gnashing, doused themselves with ashes, donned sackcloth, and punched out of petroleum.

The data show something else. Sentiment in energy and related stocks like chemicals is mostly neutral or positive now after negativity dating to late August. That means the balance of capital flows is up, not down. Money wasn’t waiting to hear what Goldman thought (no offense to the folks at 200 West in Manhattan).

Short volumes, while healthy still in petroleum stocks (but light in chemicals), declined some Monday in the group as shares dropped.  It wasn’t shorting.

The two biggest price-setters were high-frequency traders and hedging (yes, we measure both). Hedging means what you think it does: When you hedge bets, you reserve an exit.

And HFT? Here’s an illustration. The old kind of market-making was like a merchant who buys, say, boutique clothing from suppliers and sells it through a storefront on a busy boulevard.  The merchant committed capital and has inventory that if unsold will be a divot on the balance sheet.  She’s got skin in the game.

HFT is somebody who looks like the merchant that stops you just before you enter the store and flashes a view of the merchant’s goods, and if you bite, dashes in the store and buys the one thing you want and sells it to you at a tiny profit.

Now suppose HFT also supplied the merchandise in the store a garment at a time and trades the insurance contracts the merchant uses to protect goods against loss or theft.

You’re getting a picture of the market.  HFT trades everything all at once (stocks, commodities, bonds, currencies) but tries to be exposed to none of it. It’s everywhere simultaneously, long the insurance and short the product, or vice versa.

What shuffled on Goldman’s note for the industry was the insurance – futures and options on commodities and stocks and indexes and ETFs – and the traders who trade them, which in many cases are one and the same (but double the volume).

Sure, there were exceptions.  But for most of the market Goldman was the poker dealer turning up the river card in Texas Hold’em. The odds became clear and parties folded hands, upped bets, changed exposure.

The point today is the audience. My friend Jim knew how to hook us.  I can’t remember the speech but I’ve never forgotten his intro.

The point for investor-relations is to understand the composition of your audience. It’s far more than the investors you talk to.  The story about Goldman Sachs is a microcosm of investment, intermediation, information, hedging – which all set price.  I cannot overstate this:  IR pros, your audience is ALL of this. It’s ALL setting your price.

You need to know it, own it. If your only focus is the money you talk to, you’re back by the restrooms while somebody delivers the keynote.

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