July 14, 2021

Supply and Demand

Happy Bastille Day!  Also, Goldman Sachs made $15 per share, 50% over expectations. The stock declined.

JP Morgan earned $12 billion on revenue of $31 billion, doubling views. Shares fell.

Why are banks making 36% margins when you can’t earn a dime of interest?

I digress.

Illustration 98288171 / Goldman Sachs © Alexey Novikov | Dreamstime.com

I told the Benzinga Premarket Prep show July 12 on Market Structure Monday (which we sponsor) that falling demand and rising supply in the shares of JPM and GS predicted the stocks would probably perform poorly despite widespread views both would batter consensus like Shohei Ohtani on both sides of the plate (baseball humor for you).

Sure, you could say everybody already knew so they sold the news. This is the kind of copout we get from people who want to tell us stocks are always expectations of future outcomes while simultaneously telling us “they were down because growth wasn’t quite good enough to get past the whisper number.”

That is BS.  Plain and simple. 

ModernIR can measure supply and demand in JPM and GS and observe that demand is falling and supply is rising.  Even amid the farcical characteristics of the modern stock market, that means prices will fall.

We can meter these conditions in your stock too, by the way.

The best thing about the stock market today is how well it reflects supply and demand.  Currency markets don’t. The Federal Reserve continuously jacks with currency supplies in such manipulative ways that almost no economic measure, from growth to inflation, can be believed.

But in the stock market, the math is so sacrosanct that it’s impervious to the ubiquitous interference by Congress and regulators with the mechanisms of a free, fair and open market. No matter how bureaucrats assail the battlements, nothing disguises the stark supply/demand fluctuations apparent in the data.

Wow, mouthful there, Quast.

I know it. I’m not kidding.

Look, regulators REQUIRE brokers to buy and sell stocks even when there are no buyers and sellers.  That’s called a “continuous auction market.”  That’s what the US stock market is.

Contrast that with an art auction.

Stay with me. I have a point.

The first requirement of an art auction is actual ART.  Even if its pedigree is suspicious, like Nonfungible Tokens (NFT).  There’s still art for sale, and an audience of bidders pre-qualified to buy it.  No shill bidders allowed.

Nothing so provincial impairs the stock market. While you can make stuff up such as always having 100 shares of everything to buy or sell, even if it doesn’t actually exist, you STILL HAVE TO REPORT THE MATH.

Think I’m joking about shares that don’t exist?  Educate yourself on the market-maker exemption to Reg SHO Rule 203(b)(2). Or just ask me. 

Anyway, everything is measurable. Thanks to rules dictating how trades must be executed. In GS trading the day before results, Short Volume (supply) was rising, Market Structure Sentiment (demand) was falling.

Unless stock-pickers become 300% greater as a price-setter than they’ve been in the trailing 200 days – a probability approaching zero – the stock will decline.

I don’t care how good your story is.  Story doesn’t change supply or demand. Only ACTIONS – to buy or sell or short or leverage – do.

This math should be the principal consideration for every public company. Were we all in the widget business, selling widgets, we wouldn’t say, “I hope the CEO’s speech will juice widget sales.”

Now maybe it will!  But that’s not how you run a widget business.  You look at the demand for widgets and your capacity to supply widgets to meet demand. That determines financial performance. Period.

The stock market is the same.  There is demand. There is supply. Both are measurable. Both change constantly because the motivation of consumers differs. Some want to own it for years, some want to own it for 2 milliseconds, or roughly 0.05% of the time it takes to blink your eyes.

Both forms of demand set price, but one is there a whole lot more than the other. If the only behavior you consider is the one wanting to own for years, you’re not only a buffoon in the midst of courtiers. You’re wrong.  And ill-informed.

Thankfully, we can solve that social foible. And sort the data for you.

The stock market is about supply and demand. Earnings season is upon us again.  The market will once more tell us not about the economy or earnings, but supply and demand.

Ask us, and we’ll show you what your data say comes next.

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