Thematic Thursdays

With this post, I begin a series of commentaries that are more thematic in nature.

If you look for a definition of thematic investing you will be hard pressed to find one definitive answer. But, rest assured, it is an integral part of the changed market structure of today - be it longer term (trends and themes that stretch out over years, even decades) or short term (hot money flows from the short term oriented crowd).

Let's begin with a look at an important thematic issue: the changed market structure.

To say the financial markets have changed significantly over the past several decades is an understatement. And a failure to recognize this reality and to seek to understand its impact on the dynamic, interactive, interconnected global market place is to submerge one's self into the depths of ignorance.

Where once stocks and bonds and buy and hold ruled the roost, derivatives and nanoseconds trading are now king. For alongside traditional institutional investors - pensions, mutual funds, insurance companies, and endowments - are the new kids on the block, with their new toys, and new ways of playing. The consultancy, McKinsey, calls them the New Power Brokers. I classify them as the 3 Ps:

* New Players
* New Products
* New Processes

The justification for their existence rests in the claim that they facilitate price discovery and improve spreads. The reality is closer to the profit potential they provide for those engaged in this financial new world order. To illustrate, when you have a NASDAQ representative tell a private dinner gathering in Phoenix this past December that NASDAQ is an index company that happens to be an exchange, it's hard to argue against a changed market structure.

Whatever the reason, the fact is change has occurred and its impact via "reflexivity" (feedback to the real economy) is undeniable. Moreover, its impact to that core constituency that most of the big money boys and girls and the fast/hot money crowd could care less about - the average, individual investor - is also undeniable: Elvis has left the building!

Investment Strategy Implications

What and how a changed market structure impacts the primary function of the capital markets - to raise capital for businesses - remains to be fully understood. But to deny its existence and the fact that impacts have and will continue to be felt is to accept that once in a century Black Swan events that occur every seven years have nothing to do with a changed market structure. And to deny its existence and the fact that impacts have and will continue to be felt is to accept that individual investors have left what appears to many as a casino (a/k/a the stock market) solely for personal financial reasons (e.g., aftermath of the great debacle of 2008-09).

In other words, this isn't your grandfather's stock market anymore. And what it means is worthy of acknowledgement, understanding, and more.