Thursday, August 13, 2015

Q2 Commentary

Bid/Ask

I recently attended a televised auto auction – tire kicking for us tire kickers at its best.  It’s like a neighborhood auto show but with money.  There is some kind of perverse thrill in seeing a car you could’ve owned in your high school days for a mere $700 (used) go for $300,000 when paraded across the stage under bright lights with an auctioneer encouraging the bidding crowd in the bar area right up front.  Makes one want to buy a bidder’s ticket just to hang out with the moneyed crowd.  The psychology of these events is as fascinating as that demonstrated daily in the capital markets.

As always at these events, there were all kinds of cars and trucks – some in fully-restored show room condition, but many not - in the room.  There were even several examples that are euphemistically called “20 footers” – i.e., “it looks pretty good from 20 feet away”.  My fellow car nut companion and I enjoy playing “which one would you buy” – predicated on the idea that there would be no hindrance in wiring the required payment to the seller.  The rules of the game are somewhat vague, as they’ve never actually been codified as Hammurabi or Parker Brothers might have, but we’ve winnowed it down to “if you could only pick one, which one would it be?”.  There are inevitable comparisons drawn between years, makes, models, features, condition and other arcane minutiae such as “would I actually allow myself to drive it on the street?”.  Many tire kicker types have a “the past must be preserved at all costs – including my own enjoyment – attitude” but we’re more practical.  Why spend the money if you won’t let yourself enjoy it?  This often leads to a discussion about drivability.  Many of the cars we covet were built when doing 50 was considered fast.  My daily commute requires 65+ just to stay out of the way – not a good environment for a classic mid-60’s Corvette with a 4 speed and a 4.10 read end gear ratio.  Your fellow travelers on the freeway don’t care if you can smoke the tires for a block – but can you go fast enough to get out of their way – and stop in time when they do something stupid?

In contrast to the capital markets as currently conducted, the bidding at these car auctions is conducted live, in real time.  An auctioneer with a classic auctioneer’s cadence which is barely intelligible except the price at the end of each phrase, cajoles the crowd to step up.  Naturally, there is an emphasis on the “ask” – the next highest increment above the current “bid” or offer price.  Sometimes you will see what looks like a perfectly good example of its kind stall out at well under what might be fair value and it rolls off the block unsold.  The car didn’t sell because the seller’s reserve (minimum price) wasn’t met.  At times, the seller is present in the crowd and the auctioneer will get him/her to drop the reserve: “the reserve is off!”.  This sometimes results in another round of bidding as the buyers anticipate a “deal”.  Here’s the kicker though: only the seller (and the auction house) knows what the reserve is (or was)!  Car auctions are about as opaque as it gets when it comes to the seller’s asymmetrical information advantage.  Even buying from a new car dealer nowadays is a fairly level playing field for an informed consumer who does his homework.

In contrast, the auction model in the capital markets is dead – people push buttons to activate computer programs to buy and sell with virtually no human intervention.  Here’s a comparison of some of the salient elements:

Car Auctions

Capital Markets

Participation:

In-person

Electronic




Bar service:

Drink while you bid – make a mistake?  What the hell – it was fun!

Only after markets close – make a mistake?  You’re fired!




Auctioneers:

Live - though largely unintelligible

Silent - though the occasional epithet can be heard




Bid/Ask spreads:

Wide - enough to drive a Corvette through

Narrow – often less than a penny




Seller’s information advantage:

High

Low




Entertainment value:

High – view nice cars, watch someone else mess up

Low - try to avoid messing up


The capital markets aren’t the place to shoot the breeze while downing a few cocktails – save the fun stuff for a car auction.