Investment Thesis
Big money moves markets, but not always permanently. With active and evolving communications technology there is almost always TMI - - too much information. Some, lacking credibility, can mislead even if that’s not the intent.
The sorting key is comparisons. But they must be of like features, ultimately winding up in their impact on coming market prices for specific investment issues.
We find volume trade orders by institutional investors have high credibility, are current, and provide good comparability when viewed through the active screen of derivative securities markets. The specific reasoning behind trade orders does not have to be evident when substantial costs are undertaken to protect market-makers in their implementation when Billion-dollar portfolios are to be adjusted.
It turns out that the limits of coming price change expectations provide dynamic measures of specific stock changes in reward~risk balances, which in turn offer active investment guidance to portfolio management. Guidance which is usually ignored by passive-investing buy&holders.
Today’s examples areAT&T Inc. (T) andIridium Communications, Inc. (IRDM)
Description of the Subject Company
“AT&T Inc. provides telecommunications, media, and technology services worldwide. The company operates through Communications, WarnerMedia, and Latin America segments. The Communications segment offers wireless voice and data communications services; and sells handsets, wireless data cards, wireless computing devices, and carrying cases and hands-free devices through its own company-owned stores, agents, and third-party retail stores. It also provides data, voice, security, cloud solutions. The company was formerly known as SBC Communications Inc. and changed its name to AT&T Inc. in 2005. AT&T Inc. was incorporated in 1983 and is headquartered in Dallas, Texas.”
Source: Yahoo Finance
Description of Investment Alternative
“Iridium Communications Inc. provides mobile voice and data communications services and products to businesses, the United States and international governments, non-governmental organizations, and consumers worldwide. The company offers postpaid mobile voice and data satellite communications; prepaid mobile voice satellite communications; push-to-talk; broadband data; and Internet of Things (IoT) services. It also provides hosted payload and other data services, such as satellite time and location services, and inbound connections from the public switched telephone network. Iridium Communications Inc. sells its products and services to commercial end users through a wholesale distribution network that includes service providers, and value-added resellers and manufacturers. The company was formerly known as Iridium Holdings LLC and changed its name to Iridium Communications Inc. in September 2009. Iridium Communications Inc. was founded in 2000 and is headquartered in McLean, Virginia.”
Source: Yahoo Finance
The technological and competitive environment
Few industries have seen greater technological advancement than communications. Urged ahead by computer technology, information technology, and space exploration, the 21st century has posed difficult challenges for organizations mired in hard-wired consumer telephony experience. There has been no scarcity of competitive intellect making the industry both very profitable and demanding.
The investing industry has been keenly aware of the basic developments in communications, as evidenced by the striking advances in reducing information handling costs to the point of eliminating the need for stock transaction “commission” charges on trades made over the internet.
And the internet itself is a huge communications competitor to telephony. Dozens of new competitors have arisen and died in the march of technological progress. Figure 1 shows how the Institutional Investing community currently appraises the Reward opportunities and Risk exposures of over a dozen current competitors.
Figure 1
(used with permission)
The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale). Both scales are of percent change from zero to 25%.
The intersection of those coordinates by the numbered positions is identified by the stock symbols in the blue field to the right.
The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today's.
Our principal interest is in T at location [11] and its principal competitive nemesis, IRDM at location [2]. A "market index" norm of reward~risk tradeoffs is offered by SPDR S&P 500 Index ETF at [3].
Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. The protective actions taken with real-money bets define daily the extent of likely expected price changes for thousands of stocks and ETFs.
This map is a good starting point, but it can only cover some of the investment characteristics that often should influence an investor's choice of where to put his/her capital to work. The table in Figure 2 covers the above considerations and several others.
Comparing Alternative Investments
Figure 2
(used with permission)
Column headers for Figure 2 define elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerics are negative, usually undesirable to “long” holding positions. Table cells with pink background “fills” signify conditions typically unacceptable to “buy” recommendations. Yellow fills are of data for the stock of principal interest and of all issues at the ranking column, [R].
Readers familiar with our analysis methods may wish to skip to the next section viewing price range forecast trends for T and IRDM.
Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how soon it may happen, and d) what price drawdown RISK may be encountered during its holding period.
The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ "institutional" clients.
[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history ofrelevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are most likely to accept losses.
[H] tells what proportion of the [L] sample of prior like forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences.
[N] suggests how credible [E] may be compared to [ I ], and it is here where T is in the greatest trouble with Institutional Investors. Its long history of below-average price-gain performance despite positional and political advantage tends to damage credibility.
Further Reward~Risk tradeoffs involve using the [H] odds for gains with the 100 - H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides afigure of merit [fom] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among candidate securities, with IRDM in top rank. T is well-down among competitors.
Along with the candidate-specific stocks, these selection considerations are provided as perspective. The averages of nearly 3500 stocks for which MM price-range forecasts are available today, as are 20 of the best-ranked (byfom) of those forecasts. The forecast for S&P 500 Index ETF (NYSEARCA:SPY) as an equity market proxy is more-than usually involved with uncertainty because of the war between Russia and Ukraine and its potential for serious broadening.
Recent Trends in MM Price-Range Forecasts for T
Figure 3
(used with permission)
This picture isnot a “technical chart” ofpast prices for T. Instead, it is the past 6 months of dailyprice rangeforecasts of market actions yet to come in the next few months. The only past information there is the closing stock price on the day of each forecast.
That data splits the price range’s opposite forecasts into upside and downside prospects. Their trends over time provide additional insights into coming potentials, and helps keep perspective on what may be ahead.
The small picture at the bottom of Figure 3 is afrequency distributionof the Range Index’s appearance daily during the past 5 years of daily forecasts. The Range Index [RI] tells how much the downside of the forecast range occupies of that percentage of the entire range each day, and its frequency suggests what may seem “normal” for that stock, in the expectations of its evaluators’ eyes.
Here the present level is near its least frequent, lowest-risk presence, encouraging the acceptance that we are looking at a realistic evaluation for T. With nearly all past RIs above the present RI than below there is ample room for an even more positive outlook, but the narrow horizontal spread of that distribution severely reduces the size of coming capital gains.
The yellow horizontal row position for T in Figure 2 emphasizes the stock’s limited payoff capabilities. Even the most generous dividend policy imaginable makes T a bad choice for either retirement wealth growth in anticipation, or for adequate living expense coverage once there. Many other stocks likely will provide multiples of the financial resource investors regard as credible coming from T. Their expectations are reviewed in Figure 4.
Investment Candidates' Prior Profitability Prospect
Figure 4
(used with permission)
This comparison map uses an orientation similar to that of Figure 1, where the more desirable locations are down and to the right. Instead of just price direction, the questions here are more qualitative: “how big” and “how likely” are price change expectations now?
Our primary interest is in T’s qualitative performance, particularly relative to alternative investment candidate choices. Here T is at location [6] with others, at the intersection of horizontal and vertical scales of negative gain and low assurance (odds of a “win”) in the upper left corner of the map.
The position of IRDM at [5] is just the opposite of T, with strong (97 of 100) odds of future gains at 3-month or less prospects of price growth well in excess of any T annual dividend.
As a market norm, SPY is at location [4] with a +7% payoff and an 100% assurance of profitability. This is a highly unusual posture for the ETF index most often considered to be an overall image of equities’ valuations.
The turmoil being created internationally by Russia’s invasion of Ukraine is undoubtedly a major factor here. SPY rarely is at so lowly a Range Index as 17. That suggests 5/6ths of the prospective price changes for the market ETF will occur to the upside. Over 83% of a near +16% market price range may be in store for equity investors. While the “Odds of a gain” from this level may be 100 out of 100, that is never a certainty.
A look at the trend of MM price-range forecasts for IRDM in figure 5 provides an interesting contrast to what was seen for T in Figure 3.
Figure 5
(used with permission)
The Range Index balance of upside-to-downside price change prospects are similar for both stocks earning attention in that the upside is several times that of likely price draw-down; 7 to 1 for IRDM and 4 to 1 for T. But the potential for more sizable gain is higher for IRDM, as shown by the width of Range Index experiences in the past 5 years, seen in the small lower pictures of each Figure.
Conclusion
Among these alternative investments explicitly compared,AT&T Inc. appears to be a less desirable buy preference now toIridium Communications, Inc.for investors seeking near-term capital gain or most forms of wealth building by equity investment.
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