BEST OF MSM – A Movable Feast

Happy Thanksgiving! Here’s a phrase Karen’s grandmother coined that you may find useful this time of year:  “We ate to dullness.” 

Since many of you are appropriately absent this week from the IR chair (or whichever office you occupy), we’ll revisit past turf. Among the most widely read Market Structure Maps of 2013 was this below from July 3. The images from our Provence cycling trip exercised influence, but sort through to the lesson.

I was reminded of it the last few days with three public companies you’d recognize. Each had the same scenario:  Declines in price of magnitude unjustified by news or facts – which had shareholders as flummoxed as the IROs.

What happens between buyers and sellers, before they ever meet each other, can have as consequential an impact as the act of changing ownership. Sometimes more. Witness the so-called Flash Crash of May 6, 2010. Shill bidders disappeared, leaving a vacuum that filled with nothing until a thousand DJIA points evaporated. That’s not selling; that’s the conveyor belt connecting our fragmented market just – poof! – vanishing.

Another major structural fact today is that investors are obsessed with risk. Read on.  Best, -TQ

July 3, 2013

We’re back from touring Provence aboard cycling saddles, weighing heavier on the pedals after warmly embracing regional food and drink. Lavender air, stone-walled villages perched over vineyards, crisp mornings and warm days, endless twilight, chilled Viogniers from small-lot Luberon wineries. If these things appeal, go.

In Avignon we feasted at Moutardier in the shadow of the Palais du Papes, the palace of the Roman Catholic popes in the 14th century. From tiny hilltop Oppede-le-Vieux with roots to earliest AD written in moldering stone and worn cobble we surveyed the region’s agricultural riches. After a long climb up, we saw why Gordes is where the rich and famous from Paris and Monte Carlo go to relax. And on Day 5 I scratched off the master life list riding fabled Mont Ventoux, which will host the Tour de France on Bastille Day, July 14. What a trip.

Meanwhile back at the equity-market ranch, things got wobbly. We warned before departing that options-expirations June 19-21 held high risk because markets had consumed arbitrage upside and new swaps rules would make the process of re-risking unusually testy. Markets tumbled.

The Fed? Sure, Ben Bernanke’s comments unnerved markets. But if we could see it in the data before the downdraft occurred, then there’s something else besides the reactions of traders and investors at work.

This is an essential lesson for today’s IR chair. Market behavior will continue to baffle until you grasp this: Movement in markets reflects a continual yin-yang relationship between asset-exposure and risk-management. Debits, credits. Assets, hedges. In between continuous transfer of risk from one column to the other are intermediaries profiting on whatever inefficiencies develop when the same behavior affects stocks with variable liquidity. Unless you are relentlessly churning material information day upon day (inadvisable anyway), your price on 18 of 20 monthly trading days will reflect these facts and not rational thought.

That’s not bad. It just is, until the Fed stops distorting prices. What matters is measuring behaviors so you identify the real price – and it’s not a moving average – paid for your shares by rational investors competing with these other forces, and quantifying the price-setting power and market-share of the other forces – Passive investment behavior moving from assets to hedges, and intermediary Speculation. Once you’ve done that, you will know your market structure. Easy as coiffing Cote du Rhone in a Sault café.

Concluding Note, Nov 27, 2013:

These factors count because the beginning point – no interesting diversion but the launch pad itself – for great IR is knowing What’s Going On.  Ponder that in the tryptophan haze this holiday!