Sailing Away

Sailing takes me away to where I’ve always heard it could be just a dream and the wind to carry me.

Christopher Cross said it (youngsters look it up). In this pandemic we said, “That boy might have it figured out.”

TQ and KQ sailing

So, with two negative Covid tests in hand, we’re currently near 17 degrees North, 62 degrees West readying our 70-foot catamaran for a float with friends.  Chef, bar, crew, trade winds blowing our hair around, azure waters, sunrise, sunset. We’ll catch you after, Feb 8.

And in between, let’s have a look at the market.  The big buzz is GME, Reddit now dominating chatter with WallStreetBets (y’all can look that up too), the stock streaking, a push-pull among longs and shorts, and Andrew Left from Citron cannonballing into the discourse and an pool empty.

It may be a sideshow.  GME is up because Fast Trading, the parties changing bids and offers – shill bids, I call it – and buying retail volume surged from 38% of GME trading to over 57%.

At the same time, Short Volume, daily trading that’s borrowed, plunged from 47% to 34%. The funny thing is it happened AFTER the news, not before it.

The Reddit WSB crew has the sort of solidarity I wish we’d direct at being free. Nobody says to them the words “allow,” or “mandate,” and I love that.

But.

In a free stock market, your actions as traders are known before you make them.

That is, plow millions of limit orders into the market from retail brokerage accounts, and the firms like Citadel Securities buying them know before they hit the market.  They will feed the fire, blowing on the conflagration until it runs out of fuel.

And BBBY is up 50% in two weeks.  But it’s not the same, looking at market structure (the behavior of money behind price and volume in context of rules). Quantitative money plowing into BBBY to begin the year ignited the surge.

Could the actions of machines be misunderstood by humans?  Of course. Already the pattern powering GME has reverted to the mean.  In BBBY, Short Volume is up already on surging Fast Trading, the same machines we just talked about.

All but impossible is beating trading machines. They know more, move faster.

However, they are, paradoxically, unaware of market structure beyond fractions of seconds into the future.

Humans have the advantage of knowing what’s days out.  And on Fri Jan 29, the largest futures contract in the market comes due.  It’s designed to erase tracking errors. This is a much bigger deal than GME and BBBY but not as much fun.

Tracking errors are the trouble for Passive investors, not whether they’re “beating the benchmark,” the goal for Active stock-pickers.

A tracking error occurs when the performance of a fund veers from its benchmark.  The aim is generally less than 2%.  Yet S&P 500 components are 2.5% volatile daily, the difference between highest and lowest average daily prices. For those counting, daily average exceeds monthly target).

It’s why Passives try to get the reference price at market-close. But the market would destabilize if all the money wanting that last price jammed into so fleeting a time.  It would be like all the fans in Raymond James Stadium pre-pandemic – capacity 65,618 – trying to exit at the same time.

Congrats, Tom Brady. We old folks relish your indomitable way.

Like Brady’s achievements, everybody leaving RJ Stadium at once is impossible in the real world.

So funds use accounting entries in the form of baskets of futures and options.  ModernIR sees the effects.  The standard deviation between stocks and ETFs in 2019 was about 31%.  The difference reflects the BASKET used by the ETF versus ALL the stocks. To track that ETF, investors need the same mix.

Well, it’s not possible for everyone in the market to have the same quantity of shares of the components. So investors pay banks for options and futures to compensate for those tracking errors.  The more errors, the higher the demand for true-up derivatives.

In 2020, the average weekly spread rose to 71%, effectively doubling.  In the last eight weeks since the election it’s up to 126%.

The paradoxical consequence is that increasing volatility in benchmark-tracking is creating the illusion of higher demand for stocks, because options and futures are implied DEMAND. 

And so we’re

sailing away. You guys hold the fort. Keep your heads down.  We’ll catch you after the last Antigua sunset.

440 Market

How durable is the US stock market?

It sounds like we’re talking about shoes.  Can I wear these hiking? Are they waterproof?

No, it’s a legitimate question, a fair comparison.  Public companies, your capacity to raise capital, incentivize your executives, and deliver returns to shareholders in large part depends on the stock market’s ability to reflect what you’re doing as a business.

And investors, how do you know you can trust the market?

Trust is the bedrock of commerce.  The founders of our republic thought you couldn’t have confidence in transactions involving the exchange of time for money, or goods for money, if the value of the money wasn’t constant.  It was thought back then essential to assure the people that their money would not be misused or devalued.

In the same sense, I think it’s right to expect assurances about the market.  Our retirement accounts are there, by the trillions.

I think pooling public capital and trusting its deployment to smart, seasoned people is a bedrock capitalist principle. People and money are the pillars of productivity – labor and capital.

Agreed?

We can generally concur that prudent deployment of capital is good. Putting money in the hands of smart, experienced people is a winning idea.

We agree, I expect, about the need for a system of uniform justice.  If a dispute arises about the way money has been handled, you’re owed recourse, redress, due process.

Right?

Then there’s the probity, the integrity, of the capital markets.  It’s as important to know you won’t be jobbed by the commercial market for your public investments as it is to have clear, speedy and reliable jurisprudence.

But the big question hangs there.  Do we have that kind of stock market?

To that point, I’m speaking to my dear investor-relations family, the NIRI Rocky Mountain Chapter, tomorrow as part of a program on macroeconomics and market structure. Guess which piece I’ve got? Come join us!  It won’t be boring.

It’s always been important to understand things.  Money.  Government.  Economics. Markets.  The harder these become to comprehend, the more we should ask why.

I understand the stock market.

Reminds me of a line about bitcoin I saw on Twitter, and I think I’ve shared it before so apologies: I’ve never understood bitcoin. On the other hand, I’ve never understood paper money either.

Rather than valuation metrics I see the stock market as machinery.  I grew up on a cattle ranch where the motto was “hundreds are nice, but we need thousands.”  We fixed everything, welded everything, patched everything.  We paid attention to the machinery because we owned it no matter how old it was, and our livelihood depended on it.

My point is it’s not valuation that necessarily determines the health of a market. It’s the machinery creating the valuation. 

Country singer Eric Church laid down a tune for the ages in 2016, Record Year. One of the best songs ever.  The following year, 2017, was a record for ETFs, which saw almost $500 billion of inflows, data show.

And between then and now, trillions of dollars more have followed, leaving the allure of superior Active returns for the durable machinery of Passive crowd-following.

Not surprisingly, Active Investment is down almost 40% as a percentage of daily US trading volume since 2017.

The weird thing, so is Passive Investment.

As market volume has risen from about $250 billion daily in 2017 to $625 billion so far in Jan 2021, investment of both kinds is down almost 75%.  And speculation and derivatives – substitutes for stocks – are up more than 50%.

Wow, right?

I think it means Passive money isn’t adjusting to rising valuations, leaving itself dangerously out over the skis, as we Alpine folks say on steep slopes.

I don’t think the machinery is about to collapse. But. Let me tell you one more story.

We had a gorgeous John Deere 440 that came with the ranch. It was old. And orange, and easy to drive and full of superfast hydraulics for the blade, the backhoe. Fine machinery.  And it left us too often with a slipped track supine in the river with the busted metal heavy on the fast-flowing river-bottom. Or on hillsides. And in ditches.

Love. Hate.  Like the stock market.

The stock market is sleek and lovely. But the hydraulics are hot and we’re crawling the tracklayer through fast waters. I’m concerned that Passive money isn’t keeping up, that the market is reliant on things that don’t last.

It’s not fear.  It’s prudence that leads me to keep an eye on the tracks and not the trading multiples.  And we have that data for you.

Don’t forget to join us at the NIRI Rocky Mountain session today!

Onward and Upward

The market is always forward-looking, said the pundit.

courtesy Cnet.

We were driving back from Steamboat to Denver and listening to satellite radio.  It was noon coming through Kremmling in Grand County and the temperature was five degrees Fahrenheit, 50 degrees chillier than Denver.

And I thought, “Do these people pay attention?”

I like traditions.  Thanksgiving.  Anniversaries.  Hieratic observances that remind us there are bigger things than ourselves.  Skiing before the riff-raff gets to the slopes.  Reading Federalist 41 periodically and then looking at our government and laughing.

But clinging to traditions like sell in May and go away and the market is always forward-looking while ignoring the geological upheaval in market form and function the past 15 years is inexcusable.

How can you say the market is always forward-looking when Citadel Securities is its largest volume-driver and its investment horizon is a day or less?  Over 52% of all trading volume has an investment horizon of a day or less. It’s machines changing prices and profiting by sitting in the middle.

If you wonder if that pays, have a look at the stuff Ken Griffin owns.  And Doug Cifu. And Vinnie Viola.  Ed Bosarge (that’s quite entertaining, no offense to this innovative high-frequency trader).

The market cannot be forward-looking if the majority of its volume is living in the moment. The market then lives in the moment.

Do you follow?

It’s not just wrong to cast the market as a forward-looking.  It’s dangerous.  Take Transports, a classic subdivision of the stock market long used as a barometer of commerce. They’re trading at all-time highs. The thinking is a strong Transports group predicts economic prosperity.  After all, it’s the machinery and apparatus of the movement of goods.

And how about retail stocks?  I was just saying to the folks at EDGE, the decision-support platform built on market structure that we founded to help mom and pop traders out-think the machines, that retailers looked best.

That’s not because we examined all the data on spending patterns in the USA or concluded that folks would plow their latest Covid cash from the government into garments and furniture.  No, it’s math. The short volume trend was down, and the ramp in Sentiment was the best of any sector or industry.

Son of a gun.  Look at Overstock, Wayfair, pick your component.

But supposing that it’s anything other than math is supposing amiss.  You can no more look at the market and draw a reliable economic conclusion than you can look at a forked stick and hope it leads you to water.

Unless you’ve been touched by the spirit, I suppose.

You get the point.

Transports?  Sure, the stay-at-home pandemic culture enriched distribution channels like trucking and rails.  AMZN isn’t a component of the Dow Jones Transportation Index (DJT).  But a bunch of airlines and a rental-car company are.

You can try like all the pundits to come up with a rational reason for why the future is brighter than ever for Transports. And you can always find one.

That doesn’t make it so.  The reason Transports are up is because they’re volatile. You can make a crap ton – to use an elegant Latin term – trading volatility in the moment.

Speaking of volatile, so is the outlook for Activism in 2021.  It may be INTC is a harbinger of things to come.

If you want to know what that data looks like and how you can see it coming in your own trading, I’ll show you at the NIRI Twin Cities program this Thursday at 11a CT. I’m moderating a discussion on the data, the preparation and the battle – and why 2021 might bring the Viking raiders back ambuscading our ranks.

Back to the present.  I’ve said it before. There are facts apparent to any observer about the stock market.  More assets are passive now than Active.  Citadel Securities dominates.  Options trading is at records.  Volatile is a plague. Short volume is nearly half the total.

When is our profession, the investor-relations discipline, going to adapt? Are these facts part of your regular communication to your boards and executive teams?  If not, why not? If you’re ready, we’ve got the orbit, the data, the tools and the structure to help you keep your relevance in a right-now market. Have for 16 straight, unrelenting years.

The world moves on. We must too. We can’t be the last people on the planet to catch up.  Now if you’ll excuse me, there are three planets upward in the sky I want to see (Jupiter, Saturn, Mercury, this week),  moving onward, like time and the stock market.

Last Year’s Language

Happy New Year!

Last year’s words belong to last year’s language and next year’s words await another voice.

TS Eliot said that. If you need a break from the daily tempest, read my favorite of his, The Love Song of J Alfred Prufrock.

So often what is said of the machinery of the stock market reminds me of a line from it.  In a minute there is time for decisions and revisions which a minute will reverse.

Against that poetic backdrop, let’s review the math of the stock market and look ahead at what it may this time bring.

Stocks were up. Simple math.  Like the $7.4 trillion now on the Federal Reserve’s balance sheet, representing the spread between what we had before and what we next needed. The market valued that intervention more than real production.

Ponder that. Read some TS Eliot.  If you’ve wondered what Modern Monetary Theory is, this is it.  If economic activity decreases, the government manufactures offsetting money to get the collective back to level.

So last year’s language says we can survive a long-term economic idling. But next year’s words subsequently speak of the ebbing value of money and work and time.  Repeated, it will lead to societal collapse because we cannot pay out money without getting something – stocked shelves, harvested crops, cut hair, worked biceps – in return.

Thomas Jefferson said in a 1790 letter to William Carmichael, “The right to use a thing comprehends a right to the means necessary to its use, and without which it would be useless.”

Next year’s words come from a past voice. If governments insist they can shutter the economy, people lose the most foundational right of all: Independent survival through freedom and initiative.  It transcends government and squats at the base of Maslow’s Hierarchy beside food, clothing and shelter, which shouldn’t depend on another’s edict.

The Hegelian Dialectic – the tension of competing ideas – has become stretched cultural rawhide. Yet the stock market merrily courted 50 million online brokerage accounts and a sort of Bacchanal befitting an F Scott Fitzgerald novel.  Party time!

Let’s go, however, to the math.  The graph here compares a number of the core ModernIR quantitative measures of market behavior central to our intellectual property, Market Structure Analytics for stocks comprising the S&P 500.

By the end of 2020, Active Investment – classic stock-picking, the money motivated by long-term financial performance – was down almost 32% year-over-year as a share of trading volume and totaled less than 10% of the total, a historical low.

What prices the market is what transacts in it.  Not who owns the stocks.  It’s the same as a neighborhood. What prices it isn’t who lives there but what’s paid for what sells.

Even Passive Investment was down about 14% year-over-year.  The big surge driving the stock market to all-time highs as the whole globe dove under gargantuan piles of face masks was Fast Trading and Risk Mgmt.  The former is speculation. The latter is using derivatives in place of stocks.  These behaviors are dominated by firms like Citadel Securities, which buys a bulk of all retail trades from those online accounts, and Wolverine Trading, a low-latency firm focused on automating trade-hedges.

It’s not Warren Buffett and Boston-area portfolio managers.  That was yesterday’s language.

It’s worth noting that volatility was up 44%. Short volume at 43% of all trading volume was almost unchanged from the end of 2019.

What did you think drove stocks in 2020? If you watched CNBC like we all do in investor-relations and investing, it was the work-from-home trade, the future of electric vehicles, the horse race in Covid-19 vaccines.

People and machines speculated on those, yes. But you can’t call 2020 an investment market.  It was one of the great speculative soirees in human history. A romp through Dutch tulips (I’ll let you hunt that one down).

So, what’s it mean for 2021?   I’m reminded of another snippet of Thomas Jefferson’s, who observed via letter,  rather than Facebook post, to William Barry, later Andrew Jackson’s Postmaster General, that, paraphrasing, an extensive, corrupt, and indifferent regime would be met by reformation or revolution, the one or the other.

The stock market’s behaviors are extensive and indifferent and have corrupted its purpose.  What follows if people care is reform or revolt.  Both are opportunities, not obstacles.

The revolutionary opportunity for companies and investors is to see the market just as we presented it here. And there’s reform coming to rules and data.  More on that as 2021 unfolds.

Last year’s market language bred 2021 with generational speculative risk.  That doesn’t mean we’ll be measuring our lives out with coffee spoons (see TS Eliot). We have sure heaped a load on ourselves, though, as a new decade begins.

We’re not worried. We’re watchful. Now, if you’ll excuse me, I’ve got some things to read.

Hacky Sack Stocks

“We track everything in our facilities, down to the number of gloves we use. Why wouldn’t we track everything in the market? Our primary purpose is creating

shareholder value.”

So said one of the investor-relations rock stars of the modern era over dinner with executives on a non-deal roadshow.

I learned about it by phone this week. In a non-Pandemic year I visit as many clients as I can.  I don’t miss the airports. I do miss the faces.

In 2020, I’m calling clients, the old-fashioned way to hear these fabulous examples of great IR leadership.

What did the execs think of the answer?  They loved it so much that this person is now in charge of corporate development and other business initiatives.

This IRO introduced market structure to the board of directors.  Nobody had.  They recognize now that story is just one driver of shareholder value, and not the biggest.

Now, maybe you quail at the thought of getting more responsibility by demonstrating value and leadership.  I get it. Most of us are pretty busy already.

But if adding value for your organization is on your list in 2021, IR professionals, here’s a simple way.  Teach your board and executives the basics of the market. Who else is going to do it?

Another person doing a great job teaching execs how the market works is hacky sack expert Clay Bilby, who found a creative use for the ModernIR stress ball from the NIRI Annual Conference box of goodies.

Which reminds me of a story. It’s holiday season, and it’s been a long year!  We could all use a good story, right?

So our friends Peter and Bruce are the faces and feet behind the World Footbag Association here in Steamboat Springs.  Peter said, “Did I tell you about the time I slept with Kevin Costner?”

After we recovered from the surprise, we said no, we had not heard that story. Turns out Peter was hired to teach Kevin Costner how to kick a hacky sack around for the movie Silverado.  There’s a scene in this western packed with Hollywood stars where Costner is in a jail cell.

The plan called for Costner to whack the hacky sack around in his boots behind bars. They worked and worked on it, but according to Peter, Kevin Costner doesn’t have the hacky sack gene.

Weary from the effort and waiting for other scenes to be shot, Kevin says to Peter, “Hey are you tired?  I’m beat.  I’ve got a trailer here.  You want to catch a nap?”

Peter said, “I could use a few winks.”

And so they went to Costner’s trailer and crashed for a couple hours. And that’s how Peter slept with Kevin Costner.

Alas, the hacky sack scene landed on the cutting floor.  But the story lives on.

In a way, your stock is a hacky sack.  It gets kicked all around the stock market, through 15 exchanges and over 30 alternative trading systems because it must constantly move to wherever the best price resides.  That’s the law. Regulation National Market System.

It’s why more than 53% of trading volume in the S&P 500 the past week through yesterday – during huge index rebalances and options-expirations – was Fast Trading. The hacky sack players of the stock market, kicking the bag all over the place.

And they were the top price-setter the past five days.

Investment driven by fundamentals (Active), and flows from indexes, Exchange Traded Funds and quant funds (Passive) actually declined 6% last week, a key reason the market has been down.  More hacky-sacking, less investment, stocks fall.

In fact, if supply and demand were perfectly balanced, stocks would decline.  Why? Because the bid to buy will always be lower than the offer to sell, and 53% of the market’s volume comes from hacky sackers paid about a half-penny at a time to kick it around.

Also rising to over 18% of volume in the S&P 500 last week were trades tied to derivatives (Risk Mgmt). That is, 18% of the time last week in a given stock such as TSLA, a trade occurred because somebody had to buy or sell stock tied to puts or calls.

Add those up. It’s 71% of market volume.  The remaining 29% was investment, about 9% tied to stock-picking, 20% following indexes, models.

That’s market structure. It’s no harder than hacky sack.  Unless you’re Kevin Costner. And we’ll coach you. Just ask.

Resolve to make 2021 the year when your board knows what market structure is.  But before that, we hope your holiday season, however you mark it, is full of joy and gratitude, peace and reflection, and cheer.

We feel those feelings for all of you.  Happy Holidays!  We’ll see you on the other side.

Deal Art

The Federal Reserve’s balance sheet is 185 times leveraged, and DoorDash’s market cap is $50 billion.  I’m sure it’ll all work out.

Image courtesy Amazon and Showtime.

In some ways the Fed is easier to understand than DoorDash. It’s got $7.2 trillion of liabilities and $39 billion of capital.  Who needs capital when you can create money? The Fed is the intermediary between our insatiable consumption and the finite time we all offer in trade for money.

Speaking of money, DoorDash raised over $2.4 billion of private equity before becoming (NYSE:DASH).  For grins, recall that INTC’s 1971 IPO raised $6.8 million.  Thanks to the Fed’s approach to money, it would be worth at least seven times more today.

Really, it says the 1971 dollar is about $0.14 now.  I suspect it’s less still, because humans find ingenious ways to offset the hourglass erosion of buying power running out like sand.  (And INTC’s split-adjusted IPO price would be $0.02 per share rather than the $23.50 at which they then were offered.)

I’m delighted for those Palo Alto entrepreneurs at DASH who early on both wrote the code and delivered the food. And the movie Layer Cake declared that the art of the deal is being a good middleman.  DASH is a whale of a fine intermediary.

As is Airbnb.  The rental impresario is worth $75 billion. Not bad for sitting in the middle.  ABNB is already in six Exchange Traded Funds despite debuting publicly just Dec 10.

Funny, both these intermediary plays are most heavily traded by…intermediaries.  Both in early trading show 70% of volume from Fast Traders, machines intermediating market prices.  More than 50% of daily volume in each thus far is borrowed too.  That is, it’s not owned, but loaned.

ABNB is trading over 22 million shares daily, over 330,000 daily trades, and 54% of volume is borrowed. DASH is averaging 110,000 trades, 9.4 million shares of volume.  And through yesterday, 57% of those shares, about 5.4 million daily, were a bit like the money the Fed creates – electronically borrowed from nowhere.

How? High-speed traders constructing the market’s digital trusses and girders daily like Legos get leeway as so-called market-makers to trade things that might not exist in the moment, if the moment demands it for the sake of stability.

Do you follow?  When the Fed buys our mortgages, it manufactures money. It’s an accounting entry.  Trade banks $200 billion of electronic bucks residing in excess reserves for the mortgages the banks want to sell, which in turn become digital assets on the Fed’s balance sheet. The country didn’t raise that cash by borrowing or taxing.

Pretty cool huh?  Wish you could do that?  Don’t try. It’s fraud for the rest of us.

Anyway, traders can do the same thing, earning latitude to make liquidity from stock marked “borrowed,” so long as the books are squared in 35 days.

And here’s the kicker.  ETFs are intermediary vehicles too.  Man, this art of the deal thing – being a good middle…person – is everywhere.

ETFs take in assets like ABNB shares, and issue an equal value of, say, BUYZ, the Franklin Disruptive Opportunities ETF.  They manage the ABNB shares for themselves (tax-free too). And you buy BUYZ in your brokerage account instead.

Got that?  ETFs don’t manage any money for you. Unlike index funds.  They sell you a substitute, an intermediary vehicle, called ETFs.

Franklin used to be an Active manager. Key folks there told me a couple years ago that unremitting redemptions from active funds had forced them into the ETF business.

One of them told me, paraphrasing, it’s a lot easier running ETFs. We don’t have to keep customer accounts or pick stocks.

You need to understand the machinery of the markets, folks. And the Grand Unified Theory of Intermediation that’s everywhere in our financial markets nowadays.

It’s the art of the deal.  And reason not to expect rational things from the stock market.

If 70% of the volume in ABNB and DASH is resulting thus far from machines borrowing and trading it, and not wanting to own it, valuations reflect the art of the deal, intermediation. Not prospects (which may be great, but the market isn’t the barometer).

Same thing with ETFs.  The art of the deal is exchanging them for stocks.

The Fed? The more it buys, the more valuable debt becomes (and the less our money is worth). So that’s working too.  Cough, cough.

Here’s your lesson, investors and investor-relations folks. You cannot control these things. But ignore them at your peril (we always know the facts I shared about DASH and ABNB). All deals with intermediaries need three parties to be happy, not two.  And one always wants to leave.

Fearless

How does the stock market work?

That’s what somebody was asking at the online forum for my professional association, NIRI.

By the way, the NIRI Annual Conference is underway.  I enjoyed yesterday’s sessions and seeing the faces of my colleagues in the virtual happy hour.  We’ve got two more days.  Come on! We’ll never have another 2020 Covid-19 Pandemic Annual Conference.

So, I’m not knocking the question. The discussion forum is a candid venue where we talk about everything but material nonpublic information.

Investors and traders, how do you think the stock market works?

My profession exists because there are companies with stock trading publicly. Otherwise, there’s no reason to have an investor-relations department, the liaison to Wall Street. IR people better know how the stock market works.

So it gets better. The question that followed was:  What is IR?

Is that infrared? No, “IR” is investor relations. Liaison to Wall Street. Chief intelligence officer. The department that understands the stock market.

So, why is my profession asking how the stock market works? And why, since we’ve been a profession for over a half-century, are we asking ourselves what our job is?

I think it’s because we’re uncertain. Fearful. Grasping for purpose.

We shouldn’t be. The IR job is knowing the story, governance, key drivers in the industry and sector, and how stock-market mechanics affect shareholder value. Internal politics. External rules. Communications best practices.  We are communicators, data analysts.

That’s it.

So how does the stock market work? Section 502 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which became law in May that year, required the SEC to give Congress an answer.

It did, in this 100-page report released in Aug 2020. The government always takes longer to describe things than the private sector.  No profit motive, you know. But still. Do we think the SEC is making stuff up?

They’re not. I’m a market-structure expert. The SEC presents an exceptionally accurate dissection of how the stock market works, the effects of algorithms, the inherent risks in automated markets.

Did you get that, IR people?  The SEC understands the market. Traders do. Investors do. Shouldn’t we?  It’s the whole reason for our jobs.

If you’re offended, apologies. It’s time for our profession to be a little more David, a little less Saul.  A little more huck the stone at Goliath, a little less cower in the tents.  I studied theology, so if my analogy baffles, see the book of I Samuel in the bible, roughly the 17th chapter.

It’s literature for atheists and believers alike. It’s about knowing what you’re doing, fearlessly.

Here’s the stock market in 120 words, boiled down from 100 SEC pages:

There is a bid to buy, an offer to sell. These are set in motion each trading day by computers. The computers reside in New Jersey. Half the daily volume comes from these computers, which want to own nothing and make every trade. The equations computers use are algorithms that buy or sell in response to the availability of shares, and almost half of all volume is short, or borrowed. Stock exchanges pay computerized traders to set prices. About 40% of volume is Passive or model-based investment, and trades tied to derivatives like options. About 10% is buy-and-hold money. The interplay of these behaviors around rules governing stock quotes, trades and data determines shareholder value. And it’s all measurable.  

If you want to see these ideas visually, here they are.  IR people, it’s a mantra.

What do you tell your executives?  They need to hear these 120 words twice per month. Once a week would be better.  Visually. What part of your board report reflects these facts?

“I don’t describe the stock market.”

Oh? Stop fearing. We’ll help. What do those 120 words above look like through the lens of your stock? Ask. We’ll show you.

Let’s stop wondering how the stock market works and what IR is. IR is the gatekeeper between shareholder value and business execution.  Math. Physics. A slung stone. A board slide.

Let’s be IR. Fearless.

Are You 2.0?

Are you 2.0?

I know.  You’re tired of clichés.

Especially in a pandemic that birthed a lexicography – social distancing, mask-up, nonessential, emergency executive orders, comorbidity.

After all that, you don’t want to hear you’re 1.0, not 2.0.

On the other hand, I’m notorious for not wanting to upgrade. I’ll stay 1.0 rather than risk 2.0 jacking up the performance of some app.  An update downloads, and now I can’t connect to the printer.  Been through that?

So has the investor-relations profession.

Aside:  Investors, you’re getting a ringside seat. IR, as we call it, is the liaison between public companies and Wall Street. A painful evolution from 1.0. to 2.0 is underway.

In the 1970s you had a rotary phone on your desk and you called investors. IR 1.0 is telling the story.

The IR profession formalized by association in 1969 with the advent of the National Investor Relations Institute (NIRI).  I’m currently on the national board representing service providers. A year from now, I’ll hand off that baton to our next emissary.

IR Era 1.0 lasted from 1969 till 2005 when Regulation National Market System changed the market. Telling the story was the chief function of IR for more than 35 years.

If you don’t know Reg NMS, read this.

Continuing, I had the honor of vice-chairing the 50th Anniversary NIRI Annual Conference in 2019, in Phoenix.  Back when people innocently shook hands, hugged, packed conference halls.  We had famed stock-picker Lee Cooperman, market-structure expert Joe Saluzzi of Themis Trading, SEC head of Trading and Markets Brett Redfearn.

We were standing there looking at IR 2.0. Man, that was fun.

I doubt we’ll dispute rotary phones are obsolete.  Sure, we’ve got ringtones that sound like them. But punching buttons is easier.

Speaking of easy, attending the NIRI 2020 Annual Conference is easier than a button. And it’s upon us.  We’ve spent a long time apart.  Socially distanced, I guess. While that continues at the AC, we can still be virtually together. I’ll be there.

Come join me!  It’s simple. Go here and register (you’d spend a lot more on hotel rooms – and we had sponsored your keys at the Miami Fontainebleau, by the way. Sigh. Ah well.) and instead of checking in to a room, check out the schedule.

Come see our Express Talk. See our two-minute video called, “What Do I Do With It?” See the 2021 IR Planning Calendar to help you navigate the minefield of derivatives expirations when you report results (don’t blow a limb off your story. So to speak.).

I just watched our Express Talk.  I look rough in the first clip – like I’ve been through a Pandemic. I’m cleaned up in the next, even wearing a tie. Then I’m settled in by clip three to share what matters about IR 2.0.

Come view them. Support our community.  After all, 2020 is going to end, despite indications at times this year that it never would. We’re almost there!

Back to IR 2.0.  Understand this: Our profession is a data enterprise now. Not a phone-dialer, meeting-setter.  There’s financial data (your story), ESG data (governance), Alt data (what the buyside is really tracking, like jobs, credit card transactions, port-of-entry satellite views).

And there’s Market Structure. This is the only measure that’ll tell you what sets price. If Activism threats exist. When Passive money rotates. If it’s about your story. How to run buybacks. What happens when you spin off a unit. The best time to issue stock. How deal arbs bet on outcomes (and if they think you’re about to do a deal). What drives shareholder value.

I’ll repeat that.  It’s the only measure that tells you what drives shareholder value. Headlines and financials don’t. Buyers and sellers of stock do.

Do you want to pick up the phone and call people?  Or do you want to advise the executive team and the board?

Okay. IR 2.0 is not for everyone. Some of us just belong in IR 1.0. Give me a desk and a phone and let me call people and convince myself that it matters.

Have at it.

But that’s yesterday. It’s an infinitesimal speck (like a virus) of today’s job. And even dialing should be guided by data, measured by data.

It’s almost 2021. I know the mullet is trying to make a comeback. I know I listen to 80s music.  But that’s no reason to do the IR job like it’s 1984.  Don’t do that. It’s not a good look.

Come see ModernIR and the rest of the vendor community (there are 22 others with us in the virtual exhibit hall) at this year’s disruptive event, the NIRI Annual Conference. See you there.

And let’s start 2021 with good hair and good data.

Mean Plus

The stock market is high on tryptophan, hitting records.

Right ahead of Thanksgiving, 2020 looks to deliver the best November in 30 years.  We’re grateful!  You don’t expect it in a pandemic

Courtesy shutterstock

.  You’d think amid a plague we’d find bitcoin trading near $20,000.  Oh, sure enough.  Check.

Where is all the money coming from that’s pounding things to heights right along with real estate, speculative Electric Vehicle stocks from China with no revenue (NYSE:LI), and Elon Musk’s net worth (he is, however, putting people on the space station and recovering first-stage rockets for repeated use by landing them on a barge called “Of Course I Still Love You”)?

Here’s where it gets interesting.

Data from Morningstar, which reports monthly on fund flows, show US equity outflows in October near a monthly record of $46 billion, and over the trailing twelve months (TTM) topping $265 billion.

Active stock-pickers in US stocks have seen outflows of about $270 billion the past twelve months, including $35 billion in October.  The spread in Active versus totals reflects a small net TTM gain for Passive equity funds.

Bonds crushed it, adding over $500 billion TTM taxable and municipal assets.  But the biggie is the swing from Active to Passive across stocks and bonds, in total a $600 billion delta, with about $300 billion into Passive funds and out of Active ones.

Morningstar, always most conservative in gauging Active versus Passive assets, showed the latter overtaking the former in 2019.

Stripping data down, we’ve added a couple billion dollars, net, to US stock funds and hundreds of billions to bond funds, and the stock market is setting records.

You can’t say stocks are soaring on a flood of money. The data don’t support it.  Nor can one say it’s “stock-picking.” Those assets are down another $300 billion the past year, a 12-year-long trend.

So what’s doing it?  Clearly, something else.

To mark Thanksgiving last year, we presented Sentiment data in a piece called Blurry.  As we observed then, stocks have spent the majority of the past half-decade above 5.0 on our 10-point Market Structure Sentiment scale, averaging about 5.4.  That’s a GARP – growth at a reasonable price – market.

And son of a gun, Growth has outperformed Value.

In 2020, stocks have spent 62% of the time over 5.1/10.0 (GARP), and about a third of the time above 6.0/10.0, “Overbought” from a market-structure view.

Demand has exceeded supply. Yet we’ve just seen from Morningstar that money is flat in US equities. The inflows near $300 billion rushed not to stocks but bonds.

One thing so far is sure. Passive money will pay more for stocks than Active money. There are more Passive assets than Active ones now. Any net inflows go to Passive funds.  The average price for all stocks in the S&P 500 was about $127 a year ago. Today it’s about $146, up 15%.

Well, it can’t be stock-picking, can it.  And it’s thus circumstantially evident that Passive Investment is the reason why Growth has beaten Value.

It also explains the market’s relentless propensity to remain over 5.0.  That’s the mean.  Passive money tracks the mean. And, Passive assets are growing – so the outcome is Mean Plus, let’s call it.  A little better than the mean.

ModernIR data show two more factors contributing to these outcomes.  Fast Trading, machines pulverizing trade-size as intermediaries, are 54% of volume the past 200 days.

If your aim running algorithms is changing prices all day and finishing flat, and the market is 5.4/10.0, and Passive money is trying to peg the benchmark, what do you get?

A market that relentlessly rises.

It’s Mean Plus till the next time something like a Pandemic or a currency crisis, or something we haven’t thought of yet, rattles that cage.

Look, all of us want rising markets. It’s great for net worth.  But as we’ve been saying to public companies, you can’t continue to make My Story the principal explanation.  Somewhere in your quarterly board deck there’s got to be more than that.  I’ve just given you some good data.

Energy companies, this is what’s happened to you.  Back up 20 years and you were 15% of the market, even as we imported fuel.  Today amid US energy independence you’re 2.5% of the market.  AAPL is worth more than the whole sector. And AAPL is the most loved of all ETF stocks.

Investors, it’s why market structure matters.  It’s a Mean Plus market for now. We’re grateful this Thanksgiving for it.  But we might say a prayer for protection from its consequences too.

What’s Going On

The most valuable thing is knowing what’s going on.

The country is closing amid Covid cases. Simultaneously, the Shiller PE ratio of earnings in the S&P 500 is 33, a level exceeded in history only at the bursting of the Internet Bubble in 2000.

What’s going on? (The picture here is Howelsen, our beloved Steamboat local ski hill since 1907…a way away from it.)

Stocks are screaming. In contrast, a country jumping in the mummy bag and zipping up suggests sharp impending economic contraction.

Right?

We’re a service society. That is, the bulk of jobs are in doing something for somebody. Bartending to window-washing. Yoga classes to yardwork. Street-sweeping and sanitation, and shearing hair and shearing sheep, and stocking shelves and fixing Internet problems.

Yes, there’s a big spike on the graph from “Information” or whatever you call it.

As income from hairdressing and table-waiting takes a hit, the stock market jumps to eternal highs.  It’s the sort of thing that leads to class envy.

Don’t fall for that.  Follow me here.

Payroll-protection-plan checks are gone, and the mayor or health department or somebody has said you can’t have more than 25% occupancy, everybody working dawn till dusk blending schedules. To make money.

My own stylist says hours are long, pay is down, and taxes are due because there’s not enough for the taxman and the mortgage.

And two weeks ago into the election there was a surge for stocks.

We told you it would happen, nothing to do with the National Haircutting Rate, the Countrywide Window-Washing Ratio. Or whatever.  We call it Sentiment, the way machines set prices.

It’s now topped, smoking cinders falling away.

Jim Cramer said on CNBC, “They just don’t want to sell, Mike.” (Mike Santoli in this case.)

I love Cramer’s iconoclastic verve. He never loses his confidence.

“The open-up trade is back on!” he shouts now to David Faber, who is stoic with a blink and a wan smile.

Who in the markets doesn’t love CNBC?

But they don’t know what’s going on.

Is the Shiller PE right?  Should we wring our hands?

How many body punches from government can the American Economy – hairdressers, restaurateurs, yoga instructors, window-washers, landscapers, on it goes – take before we snap enough ribs to drop to our knees?

It’s like everyone in government is playing craps around that possibility, party affiliation doesn’t matter.

And up goes the market.

Investor-relations professionals tell the c-suite, “We are delivering returns to our investors on superior financial results.”

Everyone shuffles uncomfortably.

Let’s stipulate that if your earnings are accelerating faster than your peers, your stock might do better, even if hairdressers are struggling to pay taxes and other bills.

Couldn’t we all screen for that and make those stocks the most valuable?

Yes. And no.  Yes, you can.  No, it doesn’t work.

A quant fund could screen for all the stocks with 25% annual EPS growth.  That’s got nothing to do with what you do, public companies. Just what you produce. And what if those funds decide to trade your options?

And earnings don’t guarantee stock-appreciation because the market has limited supply. Is GE a great company, BYND a lousy stock?  Explain, please?

I’m making the same point I’ve been making here at the Market Structure Map since 2006, when the whole market was ceded to machines by a rule called Regulation National Market System.

Stop telling your c-suite and Board that you’re flying or falling because of “operating margins.” It’s not true.

The world is math. You need to know what’s going on.

Investors, it’s the same for you. You believe, “Home Depot will be higher because people are buying home-improvement products at record levels.”

That’s not what’s going on.

As for society, we’re deciding if we’ll be a liberal democracy or not. Stock prices won’t decide it.  Knowing what’s going on will.

We can help. Some. (We can help you with knowing what’s going on, IR folks and traders. We have thoughts on society too. But that takes a group effort.)