January 4, 2023

Right and Wrong

Cheers!

They got it right, and they got it wrong.  I’ll explain in a moment.

Karen and I took two weeks off from the Market Structure Map and disappeared into the white wilderness.  Steamboat Springs, CO logged the biggest pre-January snow season in nearly 40 years.  Over 200 inches.

I snapped this photo at 10,500 feet atop Sunshine Peak before pointing my skis downhill.

Sunshine Peak, Steamboat Springs ski resort. Courtesy Tim Quast

But there were days when the snow fell in such volume that we resorted to the fireplace and binge-watching Yellowstone.  We’re behind the rest of you but catching up.

I grew up on a cattle ranch. Not one like that with a chopper.

But the battle for survival was similar. We weren’t shooting people and bending interpretations of right and wrong. But I was on hand in the so-called Sagebrush Rebellion when guns bristled everywhere.

My dad would say what Kevin Costner’s character did. Ranching is a hard way to make a living because everything is arrayed against you. The government, the activists, the diseases, the weather. You can do right all day long and still get it wrong.

WSJ columnist James Mackintosh also wrote about right and wrong. Not like Yellowstone, no. He said (subscription required) Wall Street nailed earnings but missed the bear market.

Sellside estimates were within $1 of actual earnings. But the market didn’t do what those numbers should have delivered. Right, and wrong.

If earnings won’t tell you what stocks will do, what’s the point?

That question is the existential one for the investor-relations profession.  In the TV show Yellowstone, the existential question for the Duttons is how to beat impossible odds.

So, IR people, is the market for us or against us?

What John Dutton learns is you have to have influence.  There’s more and I don’t want to give it away.

But it’s the ONE THING the IR profession has never realized. We go right on doing the same things leading to the same inevitable outcome, which is that story doesn’t set price.

Why not? Because the stock market’s purpose isn’t to help your story manifest in your share-price. 

As in any market, the purpose is found in the principal activity. It’s still true that cattle ranching reflects its principal activity: raising bovines to supply a grocery market (you don’t have to like it but it’s true).

A Christmas tree farm raises Christmas trees.

The stock market sets prices.

We’ll come to it in a future Market Structure Map, but those 1,600 pages of proposed new SEC rules you’ve heard about?  They contain nothing that helps you, issuers, see your story better reflected in your shares.

No, they have everything to do with setting prices.  And who sets prices? 

Stock exchanges. Fast Traders. That’s who the market serves. 

How and why?  They learned the Yellowstone lesson. They have people everywhere. They lobby for influence.  They shape rules to help themselves.

We never have.  As a profession, we can do everything right and get it wrong.

I’ll let you ponder that.

Now, a word on the market in 2023 since this is the first Market Structure Map of the new year. Turns out 2022 was a top-ten worst for returns since 1926, with the S&P 500 down 19%.

There are only four periods since 1926 when stocks have posted back-to-back declines:  1929-32, 1939-41, 1973-74, and 2000-02. The losses for those periods were about 86%, 21%, 40%, and 46%. All those periods were recessionary.

S&P 500 losses of about 37% during the so-called Great Financial Crisis came all in a year, 2008.

It won’t surprise me if we notch the first back-to-back losing years since 2001-02 on a total-return basis. 

Why? Because stocks had a top-ten bad year on no reason save prices.  What if we get a reason this year?  All those other periods, again, were recessionary.

And here’s the trouble for investors. It’s not just that it takes five, ten, years to get back to level.  You never get back to level.  Stocks go down 40%, but prices of everything you buy go up.

Each time we retrench, governments intervene and expand the supply of money. So you lose 25% or 50% of your savings, but prices never fall 25-50%.  They rise even faster. 

I penned this letter to the WSJ on how the Federal Reserve contributes to this trouble.

The only money avoiding these growing chasms is the short-term money.  The parties setting prices don’t lose.

The stock exchanges don’t write research or provide market-making support.  Fast Traders don’t support customers, research, issuers. They trade their own capital.

It’s a new year. We have a fresh new chance to do something. 

We must first understand how the stock market works. We can’t argue for change without first knowing what’s wrong (we do, and you should have us on your side).

Number two, as a profession, we need to get some political leverage. NIRI, that’s your puzzle to solve in 2023. It’s not just the right thing to do.  It may be our Yellowstone moment.

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