thoughts (vii)

Other than nostalgia, the point of yesterday’s post is my observation that Wall Street no longer seems to be in the business, other than at the broadest macroeconomic level, of figuring out company/industry profit trends and acting on that informed guesswork in advance of public announcement and SEC filing of actual results.

If I’m right, this will likely turn out to be particularly important for the course of the stock market over the first half of 2023 …because my sense is that reported results won’t be particularly good. Two reasons: the more important one is a world economy that’s slowing as interest rates rise, as pandemic-specific consumer spending abates and as global material and product supply chains return toward normal; plus I’m guessing that companies will try to clear the decks for 2023 when the report 4Q22 results in the coming couple of months with large writedowns of inventories and by trying to set expectations low enough that even pedestrian results will seem surprisingly good.

Ideally, what we should all want to see is companies reporting horrible results and the stocks not going down. Recent trading in TSLA shows we’re not there yet. Admittedly, this case is complicated by investors’ loss of faith in Elon Musk’s judgment/management skills. Still, losing 15% of its market value (at Tuesday’s low) on a report that I think could have been anticipated by anyone who did a little digging (I didn’t, but I don’t own the stock) seems like an extreme reaction.

I’ll qualify that a bit. What this also looks like to me is that just as sellers have become conditioned to be super aggressive on a “bad” earnings report, market makers have learned to counter by equally aggressively moving their bids down. This would have two goals: to trick selling bots to sell at lower prices than otherwise and/or to reduce the volume of selling.

Another sign of the time we’re in is a peculiar article I just read on Bloomberg, usually a pretty reliable source of information. It was commenting on studies showing that, in effect, the best training for a professional trader is to play poker rather than study economics.

I have two reactions:

–who didn’t know that?, and

–the Bloomberg article assumes that investing is all about trading. Yes, a good trader, who haggles with other traders about the buying/selling price for additions/subtractions in the portfolio is important for equity portfolio success.

But the article ignores two other aspects to investing, which are typically the larger sources of potential value-added–security analysis, to determine the worth of products/services a publicly-traded company offers, the relative strength of the firm within its industry, and the importance of the industry; and portfolio management, the overall structuring of the portfolio, including the microeconomics of the firms in the portfolio and the positioning of the portfolio to take advantage of macroeconomic tailwinds (and avoid headwinds).

The PM decides sector positioning, the individual stock names and the size of individual stock positions–with the help of securities analysts. Once the decisions of what and how much to buy have been made, the plan is executed by traders.

In fact, in the US investment firms are required to keep trading and investing operations separate. The idea is the prevent portfolio managers from being bribed to steer trading activity (and resulting commissions) one way or another to avoid scandals like the Michael Milken one in junk bonds. I guess the idea is that the poker game is easier to monitor than the economic jousting.

But I think the article accurately expresses how in today’s market the dominant activity is not anticipation of company or industry developments, but bot-driven rapid reaction to public announcements. Bear markets always have a heavier dose of reaction than anticipation, but the former is so dominant in the current market than Bloomberg seems to have forgotten that the latter exists.

This is a big issue for us, I think, over the next six months.

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