Kansas and Your Stock

We were in Kansas again.

We set a personal record, visiting the state twice last week. Even Wichita is nice this time of year, as this photo shows Saturday from our downtown Hyatt Regency room on the Arkansas River – don’t ask me why that river’s in Kansas.

IR pros, you’re not in Kansas anymore. The phrase popularized by Wizard of Oz author Frank Baum in 1900 remains metaphorically relevant. It means: “Things are not what they used to be,” or even better, “Rather than complaining, recognize reality and deal with it.”

It’s apropos to your stock. A vital but overlooked fact about stock prices is what actually sets them. It’s rarely investors alone. Ever heard a stock recap on the news that said stocks were up because intermediaries bid up short-term prices to trick investors? It happens all the time.

Growing up on a cattle ranch in eastern Oregon, we raised 300 hundred tons of hay. That’s a lot. But feeding 50 pounds of it per animal every day for five months to a herd of a thousand head, it’s a fraction of what’s needed.

So you buy. You may use a hay broker or you might go direct to growers, and it could take more than one. You want the right quality. Not grass, but alfalfa with its higher protein content, better for the hard winters in the Snake River Breaks.

Then you have to move it from Nevada or Georgia where you bought it. You might get a package deal, with the hay shipped and stacked for an all-in per-ton price. You might truck it separately if the deal’s better. But you’ll need truckers.

Costs are complicated. The weather during growing season, the supply of cattle in the market carrying over the winter, competition in the hay-growing industry, the price of fuel, government deals with foreign countries impacting the expected price for beef in the spring – all these determine what you pay for hay. My dad used to crunch numbers in his model for carrying costs to the target sale date. Expenses for feeding cattle could fluctuate wildly, sometimes doubling from one season to the next, requiring careful management.

The stock market is exactly the same. We’ve come to believe thanks to CNBC and the chasm that’s opened the past 15 years between the public and how the equity market works that buyers and sellers are the only forces.

Every stock-trade requires an analysis equivalent to “wintering” cattle. Except crunching numbers in models takes nanoseconds in smart order-routers and execution-management systems feeding on market and macro data.

The biggest price-setters in stocks now are the “truckers.” When you see your price jump 4% on a Morgan Stanley upgrade, it could as easily be these truckers – the brokers and traders who move shares around the fractured and electronic global market – as it is real investors. Sometimes we call this “fast money.”

Call it what you want. It’s intermediation. Middlemen. Sometimes those are high-frequency trading firms. Other times, it’s Morgan Stanley itself. A vast array of factors besides investment behavior, ranging from the relative value of the dollar versus the euro, to whether indexes or ETFs are driving a sudden surge in the options market, set your price.

The truckers were vital in the cattle market but they didn’t determine prices for cattle or hay. So why do we permit truckers to price our shares? After all, the market today isn’t an auction atop books of business owned by brokers.

We used to say: “If you want a good deal, eliminate the middle man.” Today in the stock market the most powerful forces acting on price are often the middlemen. The market is crammed full at any moment with scores of middlemen setting your price, whether you trade 40,000 or 40 million shares daily.

That’s not a good deal. But we’re not in Kansas anymore. The best thing you can do is to embrace this fundamental fact: The stock market has the same structure as any market, from Nordstrom to raising hay and selling beef.

You just have to understand the structure to know what’s going on. It’s a key ingredient, not just some interesting side line, to great IR today.