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  • Long Live Chart Art....and Is Fundamental Analysis Dead?

Long Live Chart Art....and Is Fundamental Analysis Dead?

The Trumpf SPAC ($DJT) and Why I Would Rather Own a Motherf#@ker ($MFER)

Good morning…

I am off to Tuscany tomorrow for the first of my two ‘boys/buddy’ trips to Europe each year. This is the first time I have done most of my training/time on a Peloton as I have been buried with work the last 90 days. The Peloton has been a great friend next to my desk. It has been incredibly efficient (and a bit boring) to get myself down to a good weight and ok riding shape for the week in the hills of Tuscany. Using the Peloton as often as I did reminded me to check the $PTON stock price and a reminder that a great product does not equal a great stock price.


You know what else might have little to do with a stock price….fundamentals!

Matt Levine (Bloomberg) is worried/confused because of the Trumpf SPAC and Memecoins/Memestocks. Maybe fundamental analysis was just a fad? He penned a column a few days ago titled ‘Trump’s Media Business Does Not Matter’. It is excellent. The gist below:

Trump SPAC

What if fundamental analysis of stock prices was a temporary phenomenon? I have previously written my half-joking history of stock markets in three eras:

  1. For hundreds of years, stock markets existed, you could buy and sell stocks, but you had limited access to high-quality public financial information, and no access at all to Microsoft Excel, so it was pretty hard to estimate a company’s future cash flows and discount them back to present value. Stock-market speculation was a psychological gambling game. “The actual, private object of the most skilled investment today,” wrote Keynes, is “to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.”

  2. Then, starting in about the late 1930s, a favorable set of conditions came together for the rise of fundamental analysis. Public companies were required to publish audited financial statements, so you could analyze their cash flows. Books were written explaining how to do so. There were lots of fairly stable industrial companies, so you could predict their cash flows. Eventually, computer technology made it possible to do this more quickly and reliably. Mutual funds grew up with professional investors who did this analysis. Later, the development of leveraged buyout technology made it possible for you to realize the value of a company’s cash flows: If your fundamental analysis of a company said that it was worth more than its stock price, you could buy all the stock and take the cash flows for yourself. The result is that it was possible to do fundamental analysis, and there was a clear plausible link between that fundamental analysis and the value of the stock.

  3. But eventually — like, three years ago? — people realized that there was a flaw in that reasoning. While the value of a company’s cash flows probably does set a real floor under its stock price — if the stock is worth less than the cash flows, someone can buy the company and take the cash flows — it does not put a ceiling on the price. If the stock has cash flows worth $10, and you want to pay $20 for it, I can’t stop you, and I cannot directly monetize the difference: I can’t, like, sell all the stock for $20 and then buy it back for $10; I can’t force the price down to the fundamental value. If everyone just collectively decides to pay $20 for a thing with cash flows of $10, or $0, then it’s worth $20, isn’t it? There is no law of nature requiring that a stock’s price has to equal the present value of its future cash flows, or even that it has to equal the market’s collective estimate of its future cash flows. That’s just a matter of tradition, and the tradition is only like 80 years old. But the tradition could always change. Now maybe stocks will trade based on … I don’t know, something else, collective attention, online sentiment, the desire to “outwit the crowd.” Stocks can once again be pure tokens in a psychological gambling game.

Matt is a lawyer and classically trained in the markets at Goldman Sachs. Of course he wants/needs there to be fundamental analysis for the world of investing to make sense to him.

It is not just Matt Levine second guessing life as an investor. The mainstream media is losing its mind over the Trumpf SPAC as John Stewart and John Oliver both did takedowns on the Trumpf SPAC last week based on fundamental valuations. It is easy to look smart and project everyone else as dummies if you apply the 1930 era of thinking.

I see the markets way different because valuations have not made sense to me for decades!!

To deal, I have always added technical analysis to my work. I do not like the term technical analysis…I call it chart art. Here is a post by me on the subject from 2015. The gist:

The world is fascinated with photos and of course Instagram and Pinterest. We should be. Pictures tell a thousand words. Photos are the art of the moment. The stock markets are a giant, global real time ‘art exhibit‘ of our mood. It is represented by price and volume. A third dimension I have talked about since 2007 is the social layer. The ‘WHO’ that said something and the ‘WHEN’ he/she said it. It can all now be shared in a chart. The financial industry is shackled to horrible terminology like ‘technical analysis’. No sane person wants to be called a technical analyst. But, almost every person has the potential to look at charts in a stream and learn to see patterns and get a feel for the pulse of the mood. When the instagram of markets does show itself, technical analysts will be replaced by ‘chart artists’. It will accelerate the revolution.

For years I have been saying to young investors and traders that a CMT is more valuable than a CFA. It is why I do my Trends With Friends show with JC (CMT) and Phil P. (Behavior specialist). These are my peeps. I read Matt…I don’t want to talk to Matt’s all day every day.

Which brings me back to one more great roff from Matt’s piece:

With time, I have become more comfortable with the answer to “what are we all doing here?” The answer is “not fundamental analysis.” Maybe it is “having fun online.” Maybe it is “playing a complex game of mass psychology.” Maybe it is “using our investments as a form of self-expression, buying stocks and cryptocurrencies we identify with and feeling better about ourselves if they go up.” The third era is new, and we do not understand the mechanisms here as well as we understand discounted cash flow analysis, but maybe there are mechanisms to discover; maybe in 10 years there will be textbooks on Meme Stock Analysis.

And maybe there will be a first-year M.B.A. course in Meme Stock Analysis. And maybe it will have a final exam question — really a first-week pop quiz question — like: “Donald Trump has a publicly traded company with the ticker symbol DJT (his initials), he owns more than half of the stock, its business model is to ‘fight back against the big tech companies … that it believes collude to curtail debate in America and censor voices that contradict their woke ideology,’ and last year it had a net loss of $58.2 million on $4.1 million of revenue.1 How much is that company worth?” And if you write “well Meta Platforms Inc. trades at like 9.3 times revenues so maybe $40 million?” you will fail.

I pray for Matt’s sanity but I’m not expecting fundamentals to matter as much as they did from 1930 to 2009. In this new world I would rather own this ‘motherf#@ker’ - $MFER than the $DJT Trumpf SPAC.

Long live chart art which is and always has been as much art as the $MFER above.

PS - I appreciate and love fundamental analysis and it has never been more accessible with products like Koyfin and Finchat.io (both Social Leverage portfolio companies).

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