more on top-down investing

the macro turn

Last week I wrote about a phenomenon I’ve been noticing lately–that stock reports published by analysts from first-rank brokerage houses seem to have little company- or industry-specific reasoning in them, but rather rely for their conclusions on general macroeconomic arguments. (Macroeconomics is the study of prospects for the total economy of a country, a region or the whole world; microeconomics looks at the decision-making behavior of individuals and firms.)

The Wall Street Journal’s“Heard on the Street” column from this Monday makes a similar observation, that “traders seek salvation from correlation.”  It reports on research from Credit Suisse showing the prices of stocks have recently been moving together (without regard to individual company differences) to an extent not seen even at the peak of the financial crisis of a few years ago.

possible reasons

As my friend Bob pointed out in a comment to my post, for brokers who regard research as a loss leader, it’s cheaper and easier to try to apply macroeconomic insights–generated either in-house or from third-party economists–to individual companies than it is to hire experienced microeconomic generalists, who know the characteristics of firm vs. firm and product vs. product competition, or veteran industry specialists to create original research.

In addition, my hunch is that many hedge funds are run by traders, whose strengths are in their willingness to take risk and their ability to sense the short-term (meaning from a few hours to a few days) direction of the stock market.  They find microeconomics and accounting much too time-consuming, and maybe too boring, to learn.  And doing so would make them look too much like conventional (read: low-fee) investors, as well.  So they’ve settled on the macro analysis that’s much easier to learn the rudiments of, but which is much more characteristic of bond markets, as a guide to their equity dealings.

The Wall Street Journal suspects that the increasing popularity of ETFs–mostly index products–as trading vehicles for individuals and institutions may be the root cause.

the key question

It’s possible that the current Wall Street fascination with macroeconomic-based investing will prove a short-term fad.  I suspect it will have a longer life than that.  In any event, I think the key question for investors, especially those who want to buy and sell stocks based on their micro analysis of individual firms, is whether this current macro trend is:

–a substitute for microeconomic knowledge the big players don’t have, or

–an alternative, a change in investor ideas of what makes a good stock, away from its individual traits to the way it reflects aspects of the overall economy.

In the first case, having economic or marketing insight into an individual company’s structure and products will be an advantage.  In the second, you risk being in the position of someone trying to use the rules of checkers to play a game that’s morphed into pachisi (Sorry!, to you Parker Brothers fans).

the TIF case

the negative analyst report

The Goldman report on TIF that I mentioned in my original post argued that the jeweler would report a blowout 2Q11, but would say that its worldwide business was going to be negatively affected in the second half by global economic slowdown.  Goldman suggested that the 2Q report would be a last hurrah for TIF before a period of sub-par results.

the quarter

The quarter was a blowout.  In a sense, the company did acknowledge the possibility of future earnings weakness as well, by upping its full-year guidance only by the amount its 2Q results had exceeded consensus expectations.  TIF also remarked that the current period held great uncertainty.

At the same time, TIF management made it clear that the company continues to see very strong results to date.  It’s also apparent from the numbers that business accelerated into 2Q, even though macroeconomic worries were rising (see my TIF post for more details.)

the stock response

The stock reacted to the earnings report by rising almost 10% on Friday.  To me, this suggests that the stock market still wanted to buy the individual profit characteristics of TIF and was using macroeconomic tools as the best (only?) means it had for figuring them out in advance.  If so, what we’re seeing in the overall market may just be imperfections in the research process and not a paradigm shift.  This argues that good individual stock research is still an advantage–perhaps a greater one than usual.


The other report I cited concerned the Macau gambling stocks, and was negative.  Hong Kong-traded gambling stocks sold off on the report’s publication and haven’t really recovered.  The Macau government will publish gambling industry data for August in the next couple of days.  This will also be an interesting event to observe.


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