Price discovery isn't always efficient
Markets are the world's greatest mechanism for turning enormous amounts of information into a single agreed-upon valuation. Price discovery, as it's known, is one of the most important things that any market does. But it doesn't always work efficiently.
Driving the news: Lyft's S-1 was 275 pages long. After digesting all that information, the investors decided to buy: Lyft received $47 billion of orders for just $2.3 billion of shares, and the stock immediately surged to as much as $88.60 per share. It then proceeded to lose a third of that value in the space of two weeks, closing on Friday at $59.90.
- Saudi Aramco received $100 billion of orders for its breakthrough $12 billion bond issuance this week. The benchmark 10-year bond priced to yield 105bp (1.05 percentage points) more than U.S. Treasuries. After 3 days of trading, however, it closed at a spread of 120bp over Treasuries. That's a very big move in the world of investment-grade debt, which is supposed to be a safe investment.
- This week, Uber filed its own S-1. This one is even longer than Lyft's, at 395 dense pages. "It’s like a fragment bomb," one analyst told me. "Important numbers are sprinkled all over the place."
My thought bubble: The SEC is doing a pretty bad job of ensuring that companies provide genuinely useful financial transparency to their investors. The limitations of a "more information is always better" approach are becoming obvious. What's really needed is a significant expansion of the agency's structured data framework, so that analysts and investors can easily download a spreadsheet where all the important information can be found and modeled.