This is weird.
I’m traveling to an actual business meeting, by aircraft, and I intend to wear a suit.
There are many things in our society that I had considered weird but these two were not among them. It’s pretty weird seeing Will Smith slap Chris Rock, who took it with aplomb while the Hollywood audience weirdly applauded.
But that’s not what I was thinking about.
Currently among the weirdest – by no means alone – is the divide between what people think is true about the stock market and what actually is.
Which I suppose makes it somewhat less weird that my suit-wearing face-to-face is with American manufacturing firms in Atlanta at the MAPI conference. That’s the Manufacturers Alliance for Productivity and Innovation.
I’ve been invited to talk about how Passive Investment profoundly shifts the center of gravity for the investor-relations profession, liaison to Wall Street.
Glad to see these companies caring about their stock market.
And it’s not ESG causing the big shift. Without offense to those advocating the hot ESG zeitgeist gusting globally, it’s yet another way for public companies to do qualitative work turning them into quantitative trading products.
You may not like that characterization. Well, scores are quantitative measures. Score something, and somebody will trade that score against another – exactly the way sports athletes are, or wine-rankings are, or restaurants on Open Table are.
Long-only investment is qualitative, like writing an essay.
Well, get this. Active Investment is almost 50% higher in SPY, the S&P 500 ETF, than it is on average in stocks actually comprising the S&P 500.
Public companies, it means stock-pickers invest more in SPY than in the fundamentals of individual stocks. That is a statistical and irrefutable fact.
The problem isn’t you. The problem is the market.
SPY has a 50-day average of 1.2 million trades per day, and over $53 billion of daily dollar flow. TSLA alone comes remotely in range at $25 billion, half SPY’s colossus. AAPL is a distant third at $15 billion.
Public companies continue to do ever more to ostensibly satisfy what investors want. And they’re buying SPY.
If the SEC persists in implementing regulations with no precedent legislation – which will mark a first in American history – soon you’ll face mandatory climate disclosures.
So, from the Securities Act of 1933 implementing reporting rules for public companies, through 2022, the amount of information issuers are required to disgorge has become a sandstorm right out of the movie Dune.
And investors are just buying SPY.
That should exercise you, public companies. You bust your behinds delivering financial results, blowing sums of Congressional proportion populating the fruited plain with data.
And investors just buy a derivative, an ETF with no intrinsic value or story or results.
Years ago we studied the SPY data, measuring creations and redemptions and trading volume in the world’s largest ETF. We found that 96% of it was arbitrage – aligning SPY with the basket of 500 stocks it tracks.
But because the amount of Active Investment is significantly greater in SPY than the average one of those 500 stocks, we know stock-pickers well outside the S&P 500 are simply using it as a proxy for bottom-up investing too.
So, what should we do as a capital-markets constituency?
The first rule of holes is when you’re in one, stop digging. If we want to dig something in, how about our heels? The entire contingent of public companies should rise up and tell regulators to pound sand.
That you will no longer comply with any further disclosures until the SEC makes markets more hospitable to the investors we work our fingers to the bone to court.
Because it’s not working.
The SEC has overridden the stated purpose of the law that created it – notwithstanding that Congress had no Constitutional authority to regulate financial markets in the first place because the states never delegated it by amendment to federal government – which is to foster free, fair and unimpeded capital markets.
Instead the SEC decreed that the purpose of the market would be a continuous auction. Creating prices. And so investors are forced to own things with enough prices to permit them to get in and out.
For stupidity, it’s right up there with Will Smith slapping Chris Rock.
But we’ve got ourselves to blame. Public companies have not cared enough about the market to even pay attention to how it works. So we have a market that sets vast numbers of prices but impairs investment.
If you want to know how the stock market works, use our Market Structure Analytics for a year. See what really happens. Then you can fight back. Maybe you’ll be moved to storm the regulatory Bastille and bring an end to this aristocratic crap.
That would be weirdly and wildly and wonderfully beautiful.