September 28, 2010

Micro IR in Macro Markets

Remember that movie, The Truman Show? In this epochal fake reality program, a guy played by Jim Carrey lives on camera, unaware that reality is beyond both his view and his control.

This may be how stock-pickers feel in today’s equity markets. At least it’s getting attention, as Truman did in the movie. Reporters Tom Lauricella and Gregory Zuckerman got page one, right below the fold, in the Wall Street Journal last week for their column on macro forces in the markets rendering active investment moot.

Messrs Lauricella and Zuckerman described how the goose step is dominating institutional investment behavior. Rather than a vibrant mix of competing time horizons and purposes, from eager growth seekers to dour contrarians, the prevalent driver behind big money now is watching what government does. This macro climate in markets means money moves in bigger herds of dispassionate followers.

For issuers, that smacks of the Truman Show. You’re out there running a great business, managing costs, making smart deals. You’re reporting quarterly on those efforts, and perhaps a bunch of analysts are with you, asking questions on calls, publishing estimates and ratings.

And then the camera pans back and back…and we discover that this world is inside a little capsule, which is inside a bottle, which is whisked away by a giant hand from a giant body in a giant universe.

That could be discouraging enough to cause one to grouse as an investor did in the WSJ article: “Stock picking is a dead art form.”

Nope. Don’t be discouraged! But do be moved to engage. We don’t have to lead IR lives on the Truman Show. But we can’t get off this TV set if we ignore what’s happening around us and follow the script.

So let’s first talk about institutional macro strategies. Since the Great Popping Sound of 2008, we’ve seen a global regulatory push toward centralization of clearing and processing across asset classes. In options now, the same “maker/taker” trading-incentive model that dominates equity markets has taken root. Currencies, treasuries and bonds can be traded electronically, with speed. Same with commodities, which went electronic in 2006.

Thus, money allocated to the Big Classes – currencies, bonds, equities, futures, and commodities (skipping cash and real estate for now) – is ever more capable of moving nimbly and globally from one to another. Meanwhile, central banks are up to their elbows in all these (plus cash and real estate too) by policy, interdiction and intervention.

Whatever the merits of centrality, standards and manipulation, one consequence is now evident in global equity markets. Equities are a spot market. Prices reflect today’s supply and demand for the asset class, rather than the cash-generating capacity of the components collectively, or their allure individually.

Have you voiced this concern today to your CFO? If not…the day isn’t over. Let’s be frank. Centralizing everything and managing outcomes is causing markets to disconnect from businesses and thus render the IR chair a cardboard recyclable rather than the gilded throne of coolness we all seek. We better do something.

And speaking of what to do, IR professionals, three things: In your IR programs, become nimbler. Don’t court only buy-and-hold investors. Be creative. Narrow your timeframes for measuring how you’re viewed. Buy-and-hold isn’t working, so adapt. Your job isn’t to mold a homogeneous base of holders; it’s to maximize shareholder value. That’s going to take some new thinking now.

Second, start providing your management teams with weekly details on trading. This is how to be sure the IR chair firmly owns trading intelligence.

And finally, the big-picture strategy for getting out of the bottle and back on capital terra firma is to advocate an about-face. This is not rocket science. If we keep grouping more and more stuff and processes together to control outcomes, and the result is that nobody knows the value of anything nor gives a wit, then let’s go the other direction.

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