Tagged: Amazon

Collateral Recovery

Who remembers EF Hutton?

When EF Hutton talks, people listen.  That slogan crafted by Hutton’s William Clayton, who died in 2013, and now-defunct advertising agency Benton & Bowles, wasn’t about a man but a firm. Ads ran in the 70s and 80s where characters would shout “EF Hutton!” over a din, and all clamor would stop as people leaned in to hear.

Edward Francis Hutton died in 1962. But his firm touched history via its brand, its merger with Shearson Lehman, and its subsequent mutations through Smith Barney, Citigroup and Morgan Stanley. The name lives today, in fact, through HUTN Inc., which owns the EF Hutton moniker.

In a sense the Hutton Effect today in capital markets is Amazon. Every time Amazon speaks, the market holds its breath.  From athletic apparel, to groceries, to pharmaceuticals and healthcare, the market has stopped midsentence, transfixed. Investors realize Amazon is so leviathan (searching for a synonym for “Amazon”) that it can sway the fortunes of industries.

Another mammoth in our midst seems to go unnoticed, a sort of antonym to EF Hutton and Amazon. Exchange Traded Funds.

NOTE: I’m on a panel tomorrow for the NIRI Virtual Chapter on Passive vs Active Investing and will serve as warmup or foil Thursday Feb 22 for NIRI CEO Gary LeBranche here in Denver at the Rocky Mountain chapter, on ETFs.  We’ll talk about ETFs.

ETFs have been loud about attracting $4.8 trillion of global assets and 50% of US trading volume, but dead quiet about what they really do. Were sellers of groceries thrown in a pit with a hulking sword-swinging Amazon, the cries would be shrill. A market tossed together with this beast called ETFs offers not a whimper, let alone a silence-deafening EF Hutton listen.


I’ve come to an answer.  We know how Amazon works.  Whatever you think of the Bezosian Beast, we understand its manners.  It’s among us without guile.

But I don’t think investors and public companies get what ETFs do. They are a permeating market presence of epochal significance and yet an idea persists that their influence is invisible. It’s not true with Amazon, or ETFs.

Suppose ETFs through the use of collateral drove these recent gyrations?  There’s a swamp around the way they work. Read the prospectus – not the summary but the full document – for SPY. Tell me what you learn.  Half of it is about taxes.

But I know this: ETFs don’t invest your money. They manage collateral. Big investors gather up shares in large blocks from who knows where, because there’s no transparency, and exchange them for ETF shares.

They then sell those ETF shares at a profit. Don’t believe me? Read an ETF prospectus.  What’s this got to do with market volatility?  Suppose big investors had pledged stocks belonging to others as collateral to gain access to ETF shares expected to rise in value – and then the collateral dropped sharply in value.

They’d have to sell assets to raise money to buy ETF shares to trade back for collateral that might well belong to somebody else (never pledge the mob’s donkey on your personal horse race).

Boy would that process produce volatility if it were Amazonian in scope. And volatility was leviathan. Collateral damage.

Theorizing this way, we warned clients last week (as those of you reading know): If this is sorting out who owns what, we’ll take a hit Tue-Wed Feb 20-21.

Okay, well, that happened yesterday.  A glancing blow but it was there. If collateral is sorted out, markets zoom anew now. If not, you’ll see trouble again today.

Lesson? We can see what Amazon is doing. ETFs are another story.  We don’t know what they use for collateral. That alone should make us more watchful. ETFs don’t behave like EF Hutton stilling the noisy room.

So stay tuned. If this is a collateral recovery, confidence may be shaken. And we all need to understand the Amazon of the capital markets, ETFs.

Story Versus Store

When you’re in a store, how often do you ask for help finding a product?

Now think about that, investor-relations professionals, and investors.  You former are in the business of telling the story – helping people in the store find a product.  You latter are the shoppers seeking products.

Before I go further, on Mar 10 the IR professionals in Silicon Valley are hosting the annual Spring Seminar with content assembled by crack practitioners Kevin Kessel, Kate Scolnick and friends, and it’s one of the most compelling IR agendas I’ve seen in my 22 years in this profession. We’ll be there (ModernIR sponsors). You should be too.

Back to Story vs. Store.  A hundred years ago farmers came to town and handed a list to the proprietor of the general store, who assembled groceries while buyers were at the livery or the brothel or whatever. 

Today you enter your list at Amazon.com or Jet.com or whatever and a couple days later – we had two shipments yesterday at the office – your stuff shows up (probably not while you’re at the livery or the brothel but follow me here).

Apply to investing. Once long ago, you went to Merrill Lynch and while you were at the livery or the brothel or whatever your financial advisor assembled some stocks for you. Today you go to Wealthfront or Betterment and you enter your criteria and algorithms assemble exchange-traded funds for you. 

The IR profession is founded on effective storytelling. As the impresario for Wall Street, you help it find you.  But the money asking for help finding products is plunging.  Active stock pickers cannot win (a separate story about structure over prowess).  The robots are crushing it. 

The IR profession is at a crossroads. Yes, keep telling your Story. But the STORE is the leviathan today.  Not the Story.  Amazon is massive. Call it The Store. Walmart bought Jet.com for $3.3 billion because people don’t need an impresario, the clerks on the floor.

Blackrock and Vanguard don’t use the impresario of Wall Street: Research from investment banks.  But you can click on the little icon for many Web apps and get customer service, most of it outsourced to somebody outside The Store. 

Do we want to be Amazon, or that little icon? We won’t be the Big Dogs in either IR or investment by being better impresarios. Success in the 21st century is ironically about minding the Store. for IR, that means data analysis is the vital key to the future.

And investors, the secret to success in this market is tracking what’s moving into and out of The Store – Blackrock and Vanguard and ETFs are the amazons of equities. 

I’ll give you a case in point. A big client was a juggernaut for two weeks – nothing but green metrics, hitting the forecasts every day. Then short volume doubled in two days. Investment tumbled.

That’s Store. Not Story. You can say you don’t care about the short-term. Well, the Store does. Management does. Who’s minding the store? IR professionals, that’s you.  Ignore the amazons, the leviathans, the temporal distortions at your own peril.

Let’s not be the “click here for support” icon, IR pros. Let’s be Amazon. How? Your equity is a product used by consumers wanting less help from clerks and impresarios. They’re renting it, sharing it, trading it, leveraging it more than you ever imagined. 

If you’re bewildered, ask us for help. But let’s not become little icons at the bottom of screens. That’s no strategy for Boardroom domination.  Let’s be amazons. Love The Store.

Algorithms Are Pragmatic Chaos

Despite Denver’s rude throttling by the New England Patriots, I am still bound for Boston to panel at the Wednesday NIRI chapter meeting called “A Day in the Life of a Trade: How Can IROs Know What’s Really Happening?” Hope to see you there!

One of our technology geeks shared a link at TED, the place where nerds of a commonly self-aggrandized feather gather to bloviate about culture. In this one, Kevin Slavin, founder of a game-hatching thought shop bought by Zynga, discusses how algorithms run our world. The guy is a good speaker and knows his imagery. Of algorithms, he says: “We’re writing things that we can no longer read.”

Slavin sets up his piquant point this way. He was on a flight with a Hungarian physicist who’s on Wall Street writing algorithms. The Hungarian used to work for the Soviets using math and physics to find American Stealth aircraft. Apparently, technology dissolves the signature of Stealth planes into a million fragments so they won’t look like planes to radar. The Hungarian wrote equations to find electronic tidbits hiding planes. (more…)