May 9, 2018

Westworld

The smash HBO series Westworld is a lot like the stock market: It has the appearance of reality but is populated by machines (which are trying to take over in both places).

What the market lacks in gratuitous nudity it more than compensates for with a veneer that far exceeds what the Westworld operators call “the narrative.”  Most think the market’s narrative is headlines and fundamentals.  Examine what the money is doing, the rules of the market, the way exchanges match trades today, and it’s the opposite.

Fundamentals are the sideshow. The sellside has imploded. Blackrock, Vanguard and State Street cut costs by cutting them out. Index and exchange-traded funds (ETFs), dominating investment the past decade, don’t follow fundamentals.  We just hired a person from Janus because stock-picking is like the androids in Westworld: subject to repeated obliteration.

JP Morgan and Goldman Sachs both have said publicly that 10% of their trading volumes now are active investment. Sellside analysts in droves are trying to get investor-relations jobs. Why then is IR spending 85% of its effort on the buyside and sellside?

And the earnings-versus-expectations model is misdirection. It’s not for buy-and-hold investors. It’s for arbitragers. It’s an opportunity to bet. Investors don’t change their minds that way.

What’s exploded is the use of derivatives. The same handful of banks from Goldman Sachs to UBS that perpetuate earnings vs. expectations execute 90% of customer equity orders and handle 95% of the derivatives market.  They know the direction of equity flows so they can hedge long or short. Their best customers are hedge funds and high-speed firms profiting on price-changes.

These same big firms are ETF authorized participants, which have created and redeemed some $2 trillion of ETF shares already this year, contributing to whopping market volatility. Actual inflows to equities are 2% of that figure! It’s arbitrage.

We’ve become the hosts – as the androids in Westworld are called. Unwitting contributors to a storyline. What if we suspended all our effort at outreach to the buyside and sellside…and nothing happened?

Berkshire Hathaway doesn’t hold an earnings call. Tesla’s Elon Musk went off over banal analyst questions, but questions don’t buy or sell stocks and TSLA is right where the math signaled (about $301), up on – you guessed it – ETF creations, arbitrage.

You don’t want to hear this? Do you prefer to live in Westworld, hosts for a narrative not of your design? Don’t do that.  IR is the chief intelligence function. You’re supposed to know what’s going on.  We rarely stress it here, but I’m saying it today. Market Structure Analytics, which we invented, can tell you everything you need to escape Westworld:

-What’s setting your price every day

-The demographic composition of your volume by behavior

-The trends of behavioral change

-When Active money buys or sells, and if it’s growth, GARP or value

-If your investors are engaged

-The risk from directional bets and whether they’re long or short

-The presence of deal arbitrage, Activism and short attacks (and likely success)

-Borrowing trends in your shares

-How passive investment affects stock performance

-Visual indications of short-term market cycles including how ETFs work

-Key trends and drivers

-Key metrics for knowing if your equity is healthy or not

-Forecasted prices (with 95% accuracy five days out)

-Earnings expectation models

-Predictive Sentiment for Overbought and Oversold conditions

-Why your shares behave differently than peers or the market

You might say, “So?”

Public companies have a fiduciary responsibility to act in the best interest of shareholders, which includes understanding how the market is using those shares.  If IR was a business division, we’d expect nothing less than a full SWOT disposition. IR is the equity product manager – arguably as vital as any business division. You need data.

Analytics should first enable you to see important trends and drivers – in consumer behavior, in a business, in your equity.  That’s the starting point for actions. IR has fallen into a rut of saying it wants actionability – but without first understanding equity drivers.

Public companies have over the past 20 years let intermediaries make rules that work well for intermediaries like exchanges selling data and technology services but poorly for ourselves and long-term money. The problem is IR behaves still like it’s 20 years ago.

We remedy that deficiency.  If you want to see how, give us 15-30 minutes by web meeting to show you why Market Structure Analytics should be considered a vital part of being public today (and you investors, we’ll soon have a solution for you too!).

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