March 5th, 2014 — The Market Structure Map
Not though the soldier knew someone had blundered.
Alfred Tennyson’s 1854 poem, “The Charge of the Light Brigade,” offers lines more recognized than this one above including “into the valley of death rode the six hundred,” and “theirs not to reason why, theirs but to do and die.”
One wonders about a marketplace that seems today to blunder after arbitrage opportunity despite risk.
Lord Tennyson memorialized an ill-fated British cavalry unit at the Battle of Balaclava in October 1854 during the Crimean War. A side note that history often overlooks is the Crimean War’s impact on clothing: Lord Cardigan commanded the British troops, and many Russian soldiers now occupying Crimea sport balaclavas, the ubiquitous choice in headgear for contemporary fighters wanting to make noise while avoiding recognition.
In the equity market, the mild Putin swale Monday in major measures speedily dissolved in festive cheer yesterday as “Ukrainian tensions eased.” I’m not sure what eased since there were more Russian troops in Ukraine yesterday than the day before, some 130,000 Russian soldiers were engaged in “scheduled” maneuvers, and the Russians just test-fired an intercontinental ballistic missile in Kazakhstan. Coincidences, I’m sure.
In market data Monday, we saw selling by bottom-up investors, sidelined indexes/ETFs, fast money trading at about the same pace as those investors exiting defensively, and lots of hedging.
Some of this makes sense. We’d expect rational people to be disturbed, thus selling some and hedging some. Vladimir Putin has a buffet spread before him. If he wants to walk his balaclava-clad comrades into Ukraine, or for that matter Poland, Slovakia (where Russian pipelines connect to Europe), Slovenia, the Czech Republic and other parts of eastern Europe, who’s going to stop him? Germany has about 60,000 troops, Russia, 600,000. Nobody’s got an army there except Russia.
But asset-allocation systems saw no risk. They weren’t sellers. Risk-analytics tools like Blackrock’s Aladdin built around macro data and fund flows and currencies and so on for $15 trillion of institutional assets have no fields labeled Crimea or Putin. Action in global currencies and commodities point green arrows at risk assets.
I realize this is a different sort of Market Structure Map than we generally pen. Our job is to inform and entertain on market-structure topics. Admit it, balaclava, while sinister-sounding, is sort of funny.
What’s informative is recognizing when the market disconnects from reality. Yes, Warren Buffett says to buy this geopolitical unrest. Yes, most pundits say markets lack any sign of risk. It seems surreal to me, as though shooting broke out in a city and the residents made popcorn and gathered to watch the fighting. Gunfire is dangerous. Dictators with big armies in a geopolitical vacuum aren’t looking to play tiddlywinks.
When a man with grand designs has all the guys, guns and balaclavas, and everybody thinks nothing is wrong, be wary. This may not be the valley of death. But we’re half a league on, half a league on.
February 26th, 2014 — The Market Structure Map
It’s got to stop. Warren Buffett said so.
Until the Wall Street Journal’s Scott Patterson broke the story recently, most investor-relations professionals were unaware that Berkshire Hathaway unit Business Wire took fees from high-speed firms in trade for early delivery of news. It provoked outrage in circles including the office of the New York state attorney general.
I was quoted by Bloomberg’s Sam Mamudi in a related piece last Friday. What I thought was most important didn’t make the story. Sure, if something looks bad you should stop doing it, and I said so. In today’s parlance, the optics were bad.
“Quast,” you say. “They were selling our news to high-speed traders before it hit distribution channels.”
Half of every plane load today is in Group One because people get status for giving business to just one airline. It’s an early look.
“That’s flying. You don’t get in trouble for boarding early. You get locked in the poke for trading on things nobody else has got.”
That’s not true. Valuable information is the bedrock of capital-formation. Otherwise, the market would be one big index fund. And what Business Wire did wasn’t illegal.
“Are you defending it?” you say.
No. It’s bad form in an era where form, like optics, is more important than substance. But it’s like a police officer pulling somebody over for a bad taillight – which is not illegal but a safety hazard – and ignoring that the car is stolen. Continue reading →
February 19th, 2014 — The Market Structure Map
Are you a commuter? Even if not, come along for today’s ride or you’ll miss the story.
Imagine that you drove to work by car. You’d have your favored route and your backups.
Long ago in California, I commuted daily from the suburb of Roseville to 21st & P Streets in midtown Sacramento. Whether I went east to I-80 and down to Highway 160 or “across the top” on the I-80 business loop, or west on Baseline Road to Highway 99 and over to I-5 turned on whether I was out the door at 5:58 a.m. or 6:05 a.m. The spread could mean a difference of 15 minutes of commute-time based on traffic-flows.
Now suppose the work regulators released a set of commuting rules saying you could not leave before other commuters. Additional Commuting Rules followed, regulating how many left turns one could make, and how far from any main thoroughfare or traffic artery your commuting path could deviate.
Soon systems would arise that would measure commuting speed and efficiency to establish best-commuting standards. Workers applying for jobs would come in with resumes, and human-resources officials would examine them and say, “Well, this looks good. But let’s get to the important stuff. What kind of commuter are you?”
Infrastructure would spring up to support new commuting approaches and techniques. And justice departments would inevitably launch investigations and then prosecutions for unfair commuting, and the most deplorable and pernicious of all: insider commuting, in which people would secretly stay at work sleeping on cots and hiding in alcoves while claiming to have excelled at commuting.
Do you see where this is going? Continue reading →
February 12th, 2014 — The Market Structure Map
Say you were house-hunting in a hot real estate market. Would you Tweet: “I’m going to buy the house at 1342 57th Street, and I’m headed there right now.”
If you want a good deal, do you wave your hands and try to summon others to compete with you?
So why do companies announce stock repurchases?
Forget disclosure for the moment, or lowering shares outstanding to offset incentives. Sure, there’s a bit of the blue-light special. A repurchase wants attention in the sense that it signals “we think this is a great use of cash.” It blunts bad news: “Our margins were down this quarter – but guess what? The board said to buy $500 million of stock.” That’s a positive value action to forestall a negative value message.
In both cases, it’s also a marketwide Facebook post proclaiming that “we are about to spend money here.”
Let’s apply common sense now. Isn’t that antithetical to the wise deployment of shareholder resources? If you want a good deal, cut out the middlemen – don’t hail them from all over the globe to get between you and the thing you want to buy. Continue reading →
February 5th, 2014 — The Market Structure Map
That’s the word quarterback Peyton Manning should’ve used Sunday, instead of Omaha! But we congratulate Coach Pete Carroll, a gentleman, and his bruisers from the Puget Sound.
Speaking of bruising, earnings season and macro factors collided like particles in an accelerator as January slopped into February. With just 58% of our client base reporting thus far, it could be premature to deconstruct it. But I know the question burns in IR minds: Can we understand what’s going on?
People sequenced the human genome. We can measure variance in light as finite as a flashlight blinking…on the moon. We can create money from nothing. Surely we can map market behaviors.
I was skiing in Steamboat last week during a whiteout. It was though I was floating. I had no clear sense of where the slope was until I carved, and I could not gauge my speed until I turned. Powder is forgiving so I wasn’t worried.
But this is how the market seems many times, right? It’s amorphous. There’s no definition to movement. No clarity.
The next day in Steamboat, the sun shone brightly and with goggles suited to light, fresh powder took on the rich and textured characteristics of a Wayne Thiebaud painting. Slopes were luxuriant and vivid.
There are two pillars to market movements, like bright light and the right goggles. I’m not suggesting one can perfectly matrix outcomes. But core principles can be observed.
Remember: We said the market reached a statistical top in our behavioral data on Dec 27. We then warned that if institutions shifted from equities with options-expirations Jan 16-22, the first shoe to drop would be Jan 23-24.
In the days since we’ve warned that Shoe No. 2 of a process of retrenching from equities and shoring up institutional risk-hedges could occur during January window-dressing, which would mean Feb 3-4 could be ugly.
Markets reached a statistical market bottom, behaviorally, on Feb 3. The same sentiment-reading registered in our data-analytics roughly June 28, 2013, and again about Aug 11, 2013, the last two times data indicated market bottoms (markets then rebounded).
(Warning: This time could be different. We’ve never massively removed central-bank support from global risk assets before.).
You must cease viewing the market as just investment and instead see it as risk-management and data. These are the pillars. One is sun, the other goggles. If risk managers shift resources in asset classes, it will impact trading data that machines consume, because movements depend on mathematical models now. Continue reading →