April 29, 2015

New Answers

What’s the purpose of life?

We want simple answers to complex questions.  Such as when management asks why the stock price is up or down. Since elementary explanations are often incorrect, there’s been a loss of confidence.  “We broke through our moving averages” wears thin with the CEO.

I’ll give you a couple examples. Yesterday an energy master limited partnership trading on the NYSE announced an unchanged cash distribution for the first time in years. This company is known for steadily ratcheting up quarterly outlays to holders.

The stock tanked. Right?  Nope, it doubled the modest sector gains in energy yesterday. Maybe investors thought the company would trim the distribution?  Now we’re speculating because the opposite of what was expected occurred.

We’re also assuming price depends on rational thought, which if the feds now contending a trader spoofing the futures market with placed and canceled trades caused the Flash Crash, is the exact opposite of reality.  Do you know the SEC’s own trading data show at least 25 cancels for every completed trade in stocks of all market-caps (250 per trade in high dollar-volume issues), and over 1,000 cancels-per-trade in big ETFs?

Another company last week dropped sharply amid block volumes, prompting conventional stock soothsayers to conclude big holders were selling. Seems logical, right? If your stock trades 8,342 times daily on average your closing price is the 8,342nd trade.  It’s where the day’s music stopped and useless as a central tendency – and yet closing price is the de facto measure of action (we prefer midpoint price, by the way).

In the 1961 science fiction novel Solaris by Polish writer Stanislaw Lem – made into a 2002 movie starring George Clooney – Kelvin the protagonist questions his sanity. Seeing things that appear real but seem impossibly so, he begins to believe his entire journey may be occurring in his own mind.  To establish a reality baseline he performs some calculations. He reverts to the math.

Back to the stock above, the math showed the opposite of what reality appeared to say. Active value investors had been buyers. When buying stopped, traders abruptly quit lifting prices, prompting a brief plunge. Short volumes, which had jumped 40% in two days, sharply retreated at once, implying block prints reflected short-covering – by the very brokers who’d just filled buys for Value money.  The stock is now trading higher, which would be unlikely if big holders were sellers.

Ah for simple answers – but we don’t live in that world. Which brings us to today. Two vital macro events collide like matter in a particle accelerator: In the morning, we’ll get a first read on US GDP this quarter.  Then later the Federal Reserve via the non-apparitional personage of Janet Yellen will pronounce something about monetary policy.

Beneath the surface the market is on pins and needles. The Fed represents the supply of money, economic growth its cost.  The US dollar has been coming off decade-highs for days now, indicating some see growth drearier than hoped.  In the ModernIR 10-point Behavioral Index, sentiment is still weakly over neutral, meaning investors think whatever happens will be accommodative and therefore helpful to stocks.

But hedging is breathtaking – radically greater in the past five days than any other behavior. Investors are in fact in sharp retreat as price-setters. Effectively, everyone but the Fed has transferred the risk of being wrong to somebody else. Where that hot potato lands will determine the fate of equities. Moves either direction could be large.

Data suggest the economy will offer a limp pulse, perhaps wheezing in below 1% despite expectations from the Fed itself last December of 3%. If the Fed is off by 70% nobody there will get fired, which is good news for the jobless rate.

What’s it all mean? We pine for Easy, Simple. We’re sure as IR officers our shares stand out, and I hear all the time, “My stock is different.”  Like doctors studying angiograms we see the data and say, “You look like the typical patient to us. The good news is that means we’ve got answers.”

The great modern opportunity for the IR profession is the same presented to any generation, scientist, philosopher or explorer challenging convention.  We first face complex reality and then translate it into refreshing value for those we serve.

It’s not simple – but it’s exhilarating. So today, whatever your stock does in response to Janet Yellen’s invigorating oratory and the probable whiff from the economy, ask the question – why? – and if you’re still laboring along the flat earth of old-fashioned perspectives, stop.  Seek new answers. They exist!

Then the CEO will again ask you for them – a measure of value from those you serve.

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