February 27, 2013

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?

We can accept that answer one place but we struggle to believe it in others. It’s a Night at the Museum out there. Which reminds me: ModernIR is sponsoring IR Magazine’s West Coast Think Tank next month. In our segment, we’ll do our darnedest to shed light on why markets and money behave the way they do.

Also, look for our cheeky poke at Surveillance starting next month through full-page advertisements in NIRI’s IR Update. I admit, we were cracking ourselves up. There are better – less antiquated – ways to know how investors value your shares.

Back to Behavior. Why would it matter what sort of money reacted to an analyst note anyway? And what would you do with that information? Suppose Rational investment never moved, and Speculative trading jumped 25%. You’d know what kind of money used that sellside firm’s views.

That helps set future priorities. And if your Rational price didn’t change, a market price 4% higher may be fleeting. Unless, knowing that Speculators are responsible, you call a high-turnover growth investor, just to maintain relationships. How’re the wife and kids? If that money takes the baton from speculators, maybe others follow.

And everybody wins, especially the IR chair. The possibilities are endless. They start with moving from assuming to knowing. That’s something you won’t find in a museum. But I can’t say you’ll see Owen Wilson.

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