Category Archives: Freezing Assets Shout Out

Personality Crisis

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Not long ago I had lunch with a friend and we discussed the Myers Briggs test (click here for a definition of the test). He mentioned to me that that he read somewhere that a majority of financial analysts were INTJ—surprisingly one of the rarest of the Myers Briggs 16 personality types (especially among women). For the record I am an INTJ. If you have never taken the test, here’s a link to a free analog version.

While psychological analysis is not the purpose of this post, there is something that has always driven me nuts about this industry. What upsets me is that there is an expectation that a stock market analyst must act a certain way to be successful. This has always surprised me. That’s likely because INTJs like me are among the most independent thinkers of the personality types in the Myers Briggs grid. This might explain why I think “Kiss Alive” is the best live album ever, but I digress…

Why do I feel this way? I am guessing it’s because that New York is the capital of our industry. Don’t get me wrong. I love New York. The Yankees and Giants are my second favorite teams (sorry Boston fans). Having said that, I believe there seems to be some expectation of a hyper aggressive personality type that might not manifest itself in people west of the Alleghenies. I realize that there has to be some degree of fighter pilot attitude amongst us as analysts, after all no one wants to look unintelligent when discussing the markets with clients. But then at the same time, I feel on occasion that we all can use a dose of Minnesota Nice. Oftentimes our worst mistakes come when we make a mistake and try to cover it up with bravado.

One of the best lessons I ever learned in this industry was in my first week on the job. One of the stocks my analyst and I were covering had an unexpected bad quarter. After doing our analysis, my analyst called up one of the biggest holders and started out the conversation with (and I am paraphrasing) “I was wrong on this stock. Here’s where I went wrong, and here’s what I think you should do now.” I was stunned by what came next. Instead of the client becoming angry he said “Thanks for the call. You are the only analyst who has called me on this name. I appreciate that.” Ever since that day I have tried to fess up to bad calls. It not always has been pleasant; and not all investors were as respectful as this one. However, I also found that rebuilding my credibility was much easier than those times I have tried to defend my decision aggressively.

Are Wall Street and Main Street on the Same Block?

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Back in 1972 after Nixon’s landslide re-election Pauline Kael, the film critic at the time for the New Yorker magazine allegedly quipped “I can’t believe Nixon won. I don’t know anyone who voted for him.” While it’s a matter of debate if she actually said this, the point is still clear—sometimes we let our own circumstances and biases cloud our interpretation of data.

For instance we were listening to one market prognosticator that said that he thought that we might be seeing a new level of frugality among consumers that we have not seen in several decades, which might explain some of the recent data and resulting market action. While we believe that the consumer is more cautious than in time’s past, we also think that the data has reflected consumer caution for a while. Why the discrepancy? In our observation since us investment types make our living in part off the performance of the market, sometimes we confuse a rising market with rising fortunes for Americans in general. Therefore it can be easy therefore to neglect data that contradicts our own personal experiences even though it might not reflect what the rest of the country is experiencing.

One such brief example may be comparing the New York Wall Street bonus average per employee to that of various income level increases in the United States. While the bonus of the average Wall Streeter has remained relatively strong as of late, the real median household income has not been as robust. While admittedly the latter is inflation adjusted, one gets the general idea. Plus we haven’t seen much of inflation the last several years. Plus GDP data has been arguably mundane the past few years.

NYC Wall Street Bonus Compensation, % of Total Compensation

2013nycsecuritiescompasperc

(Click above image to view larger graphic)

Real Median Household Income in the United States

fredgraph

Gross Domestic Product

fredgraph gdp

Therefore sometimes we investors might have to be cautious in interpreting a strong market with a strong consumer or a strong economy.

I Miss Earnings Season!!!

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If there is one thing I hate more than earnings season, it’s when it’s not earnings season. Why? Because then more often than not we investors, and especially the talking heads on the financial news networks, bloviate non-stop about macro data in between company quarterly reports. After this has gone on for several weeks, I actually find myself BEGGING for earnings season to start.

We feel this way because much of the discussions on these macro data points often end up as being so much noise. Take for instance the discussion on first quarter GDP. Most would agree it was lackluster, with a good percentage of analysts blaming the performance on the weather. Really? Earlier in the year we discussed that weather doesn’t really have much of an impact on retail sales. Additionally, if weather really does have a sizable impact on the economy, why was it not anticipated as estimates for the first quarter off by so much as the consensus was 1.5% with the actual tally being 0.9%? Conversely, when GDP is more than forecast, how come we never hear that absolutely great weather biased results upward? Our point is that when you have something as complex and organic as the US economy, it’s difficult to shrug off any result to just one factor.

Perhaps the bigger question is what comes first; unexpected GDP changes or unexpected corporate results changes? Usually in our observation GDP is fairly coincident as corporate earnings are an important part of the real economy. Sometimes we think of it as slightly lagging as we often hear from companies and their supply chains what they are seeing and expecting on Main Street before the official GDP data is released. For reference here’s one example, the S&P 500 revenues plotted against nominal GDP. We used this chart as we believe revenues are a better indicator of demand than earnings, which can be more influenced by accounting assumptions, cost controls, and changes in capital structure.

shoutout_earningsseason

However, we also think that one completely ignores these macro data points at their own peril. Macro data can help confirm or deny an investment thesis and there are plenty of quantitative and algorithmic strategies that can influence your positions, at least in the short-term. Our best use for them is to help confirm or deny existing theses we have on individual sectors or companies as some of our companies are influenced less by US macro data than others, e.g. large multi-national companies are less influenced by US data than, say, a small cap retail chain.

Social Media Sites and Investing

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Twitter and other social media sites clearly have exploded in popularity, being the preferred method of communication for teenagers–even more than talking or sudden random acts of incredible drama. However, are social media sites such as Twitter good for investment research?

Certainly many think so as there are many websites that are specifically geared to the investment community, such as stocktwits.com, tweettrader.net, and SeekingAlpha.com. Additionally investors have used Twitter, Facebook, and other mainstream social media sites for years now. These sites and others have become so ubiquitous that the SEC has OK’d the use of social media sites for disclosure under Reg FD, if companies meet certain guidelines. Often times these social sites get news disseminated faster than traditional news outlets, which add to their appeal. Social media sites are also a great repository for usually anecdotal data on companies, people, events, etc. Therefore mainstream media sources have taken note and incorporated sites such as Twitter into their news services. For instance, last year Bloomberg incorporated tweets into its terminals so investors could see if companies they are interested in are trending strongly on Twitter.

However, is this investable data or just more noise? There are firms that have developed computer algorithms to track social media sites in order to help make investment decisions in real time. Not all have been successful, however.

The bigger question, in my opinion, is how should investors use the unstructured data these sites produce? There are a lot of impactful insights one can glean off of sites like Twitter, but do most investors have the time to peruse yards of data or have the millions of dollars likely needed to develop effective artificial intelligence algorithms? Probably not. Are Twitter and other social media sites something investors should totally ignore? Probably not, and sites like this are not exactly new to investing. Back in the day when people actually wore “The Rachel” haircut in force me and countless others would peruse stock chat boards, such as Yahoo’s, for data nuggets. Was this the primary basis of any of my investment decisions? No, but it did occasionally make me think of a stock differently than I otherwise would have and I continue to use sites like this as part of the due diligence process. This is especially true with small cap companies that have a limited amount of tweets and other data one has to wade through.

If you want to tell us your opinion live, join us at the CFA “Monthly Social with a Twist” this Thursday April 17 where we will be discussing social media and investing in an informal atmosphere. Click on this link for more information if you are interested in joining us.

Kubler-Ross and High Frequency Trading

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Back in high school I once took a class called “Death and Dying”. There I learned the works of Elisabeth Kubler-Ross and her “Five Stages of Grief”. These stages are Denial, Anger, Bargaining, Depression, and Acceptance. I have always thought markets went through some similar stages. The definitions are fairly close between the Investing and the Kubler-Ross versions. Except for #5, Investor Acceptance, defined as “where the strategy is adopted, copied endlessly, and mercilessly beaten into the ground until it breaks by the Street.”

Are we at that stage with high frequency trading strategies now that Michael Lewis’ recent interview on 60 Minutes brought this strategy to the mainstream and government organizations are investigating?

On one side of the coin it likely will take a while, if at all, for investor’s perceptions to change, Washington to hold hearings on the matter, and regulatory bodies to take action. Even then, there is a chance that the status quo won’t change. Many derivative strategies and concepts that were reviewed during the financial crisis a couple of years ago survived because there is a legitimate use of them in the marketplace and that investors may actually benefit as a whole. There are similar arguments for high frequency trading, usually invoking increased market liquidity and tighter spreads. Plus the pace of financial innovation often outstrips the ability of regulators to modify behaviors. Why should high frequency trading be any different?

However, eventually investors do come up with their own successful strategies to counteract something like high frequency trading. Perhaps we might even see a comeback of good old-fashioned block trading. Plus since other countries have taken measures to regulate high frequency trading, there is a precedent. Finally, regulators can move more swiftly and take sweeping actions that vastly impact financial markets more than investors anticipate, such as with Dodd-Frank and reforms such as Sarbanes-Oxley and Reg FD several years earlier in the wake of the internet bubble.

Is high frequency trading at #5 on the investor’s version of the Kubler-Ross scale or are we still at an earlier stage?  What do you think? Has the Michael Lewis interview brought high frequency trading to the fore and that investors will find ways to counteract it and regulators will eventually dismantle the strategy, or are we just at the beginning of a new revolution in algorithmic trading and artificial intelligence?