On Buffalo Pass, autumn blazes. In fact, there are a lot of things ablaze, with another earnings season looming. Will you report results the same old way, public companies?
One thing blazing are Chinese stocks, which posted the best week and day since 2008. I’m not sure you want a 2008 comparative. But it’s symptomatic of a pervasive force in equities, bonds and economies: Government.
The Chinese government was not about to let bedraggled equities drag down Golden Week, the big celebration marking 75 years of communist rule in China. Because truth is, Chinese stocks have been among the worst investments of the past 15 years.
While perhaps less overt (although it’s arguable), the Federal Reserve does the same thing. JP Morgan observed that the Fed has hiked or cut in the past ten election cycles.
Are you reporting earnings during a Fed meeting? Don’t do that. It’s hard enough to be heard above the electronic hum of the stock market.
Also ablaze are the skies in the Mideast. Yet oil has barely budged. Machines setting prices haven’t been subjected to a generative pretrained transformer that says to juice commodities in response to war.
Have you accounted for how machines will read your earnings release and react to it in microseconds? There are steps you can take, a strategy to follow, to mitigate machine-fed volatility.
Boeing is sort of a dumpster fire. A worker strike, a series of gaffes, and now an impending stock-offering to stave off what could be existential financial threats. The stock rose. Seem rational to you?
I could go on about the stupefying geopolitical and economic immolation on the planet but that’s not the point. You don’t want to set your stock afire – no, really – when you report results, public companies.
And I mean up or down. If your stock soars double digits with earnings, it’s almost a statistical guarantee that you’ll have no further sustainable gains – and that a quarter or two ahead you’ll reverse it.
Why?
Because volatility is the enemy of Passive Investment, and Passives have ALL THE MONEY.
Repeat that.
Your job then is to reduce volatility, executive teams and investor-relations professionals.
Take SNAP. On Feb 7 with earnings, it plunged 35% on a 94% increase in quantitative volume, and a 24% jump in put bets with derivatives.
By the way, Demand was falling, Supply was rising. Every public company should know BEFORE reporting what its Demand/Supply balance is. We have that data.
Back to SNAP, on Apr 26, it shot up 28%. Back to good, right? No. Demand was strong, Supply was sliding. A 7% increase in machine-driven trading in options coupled with a 10% drop in shorting juiced the stock.
SNAP rose some more but on Aug 2 with earnings, it was down 27% and down to a 52-week low on a 25% jump in quant trading, 17% spike in shorting. Quant hedge funds bet short. Demand was at 1.0/10.0, Supply was soaring over 50%.
I don’t mean to pick on SNAP but to repeat the same mistake over and over and over is somewhat embarrassing. There are solutions! No silver bullets. But a process, a strategy, a plan.
Isn’t the market just broken, Tim?
Well, in part. Some parties can trade outside market hours with massive derivatives bets while the rest can’t. And there are no rules to mitigate volatility. That’s not right. Issuers and NIRI should take that up with the SEC.
Meantime, we have thoughts on what you should do. Ask us.
But much of what happens is a product of two distinct behaviors. Hedge funds with great technology and leverage and all the data are betting directionally and tipping the market over. No matter what you report.
And secondly, machines set all the prices. Yes, all of them. It’s an automated market. Machines are faster than everyone else, sprinting through the maze of the stock market in microseconds to change prices.
That combination is deadly. Quant hedge funds tip the balance of Demand or Supply with bets, and the machines crumble all the quotes and your price falls off a cliff.
Or hedge funds smash the buy button, and machines hit ludicrous mode. I’ll borrow from WSJ car columnist Dan Niel (subscription required) describing the Lucid Air Sapphire – maybe the world’s fastest production car at 1.9 seconds zero-to-60 – to tell you what happens to your share-price: “…my squishy internal structures were rudely mapped onto the Sapphire’s rapidly accelerating reference frame – a convulsive, sneeze-like lurch, a burst of there-not-here, a vanishing. Whoosh. Gawd dang, car….”
Dan Niel is a funny man. But this is not helpful to shareholder value, because the Blacrocks of the world with their trillions consuming Active stock-pickers like a swather in a hayfield will leave you out of the basket. You will stall, and fall.
Your job, public companies, is NOT to hit the ludicrous button with earnings. Either direction. You have your mission. If you don’t know how to do it, don’t worry. We do. Ask us.
