June 21, 2023

Panakes

The Latin word Panacea comes from the Greek “Panakes,” a combination of two words meaning “all healing.”

I love the Greeks.

Humans love panaceas.

Photo 23332434 | Panacea © Feverpitched | Dreamstime.com

Like central banks. Fat pills.  Digital assets like bitcoin. The metaverse. Dutch tulips. Vaccines. A silver bullet. Artificial intelligence.

We humans latch onto things in hopes they’ll solve all our problems. 

There’s nothing wrong with hope.  It’s quintessentially human.  But hope isn’t a strategy and sometimes it obscures reality.

A WSJ article yesterday (subscription required) tries to explain the rally in Tesla’s stock under a title that, dissonantly, says it doesn’t make sense. It’s because Tesla is an AI play. It’s charging stations. It’s robotaxis. Musk appointed a Twitter CEO so he can focus.

And so on.

Not a single sentence reflects an understanding of the ecosystem for TSLA shares.

This same condition often manifests amid the human propensity to embrace panaceas.

Underneath Tesla’s lofty valuation are rational things, yes.  And it’s a big business with 100,000 employees.  But the ecosystem that sets TSLA’s price treats equities like products, not nuanced stories.

TSLA is above all else a Large Cap Growth stock. Of the 20 largest ETF positions – TSLA is in 325 – eighteen are large cap growth or total market. The other two are Consumer Discretionary.

So, what’s behind TSLA’s valuation is, simply, money wanting a large cap growth Consumer Discretionary product. 

TSLA and NVDA, just the two, are 10% of total market dollar-volume. Add the other five of the so-called Magnificent Seven (we have no acronym now) to them, and they’re 30% of the S&P 500.

And 98% of Large Cap Growth stock-pickers don’t beat the benchmark. Do you see the problem?  The WSJ article is built on a series of fundamental factors. And the author says they don’t explain the rise.

Correct.  What explains the rise is the ecosystem. Not a panacea like AI.  Big money needs big stocks.  There aren’t very many. So the money is concentrated ever more into the few.

NVDA now trades over $40 billion of stock daily.  The entire stock market trades about $600 billion daily.

It’s a Demand/Supply question. An ecosystem question.  That will become an ecosystem problem at some point.

Nearly all the $45 trillion market capitalization in US stocks is in 800 stocks, meaning some 3,000 small caps and micro caps are left out, adrift.

Shouldn’t companies rightly and fairly know the odds before they IPO?

My profession, investor relations, is also hoping for an AI panacea. There’s a post in my profession’s web forum where ideas are genially and generously shared about wouldn’t it be wonderful if AI powered a perfect dissection of investor data so we could precisely target investors right for us?

A panacea.  Finally, a way to address the troubling absence of investor flows.

This post came from a small-cap company, one of the three thousand adrift on an endless sea surrounding the seven islands that drive its currents.

The trouble is there’s not enough money actively targeting stocks to move the shareholder-value needle.  The 10% of volume that stock-pickers drive is overrun, overpowered, by the machines – that are already using generative, pre-trained transformation to mash up statistics and execute trades with algorithms.

No amount of careful targeting can surmount the obstacles presented by the ecosystem: The money – over 40% of all institutional dollars now – is Passive Large Cap Blend.

So what is the panacea?

I’d argue that panaceas are the problem. Panaceas breed groupthink. Which promotes concentration. Which creates bubbles. Which destroy confidence. Wash, rinse, repeat. 

Everything cannot be healthy.  Just a fact.

What’s the message of hope? For investor relations, it’s shifting strategic focus from promoting the story to feeding your characteristics.  What’s your strategy to become a Passive Large Cap Blend stock?  You have only two choices: Deals, catalysts.

So understand what kind of product your shares are for Passive money.

And streamline what you do. Calls, sellside conferences, investor outreach.  If you want to know more, we can explain. Actions should produce outcomes or be altered.

Investors, this is not Peter Lynch’s market. You can’t uncover undiscovered stories. There were 8,000 public companies then, and Intel and Microsoft could start small and grow big.

Today, there are 3,500 in the national market system, and 2,500 of those are 5% of market cap and just 1% of those will achieve escape velocity. Not even the craziest gambler bets on 1% odds.

Machines already know all knowables. You can only buy and sell the same stocks everybody else owns – at different times.  Try Market Structure EDGE. There is enormous alpha in Demand/Supply imbalances. You just have to know how to see it.

AI is no panacea for stocks, investing, investor-relations. The ecosystem determines outcomes.

To change that, we’ll have to shake up the ecosystem. That’s the next big challenge for capital-markets professionals. And that’s real rather than artificial intelligence.

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