Tagged: Earnings

Turnover

Earnings season.

Late nights for IR professionals crafting corporate messages for press releases and call scripts. Early mornings on CNBC’s Squawk Box, the company CEO explaining what the beat or miss means.

One thing still goes lacking in the equation forming market expectations for 21st century stocks: How money behaves. Yesterday for instance the health care sector was down nearly 2%. Some members were off 10%. It must be poor earnings, right?

FactSet in its most recent Earnings Insight with 10% of the S&P out (that’ll jump this week) says 100% of the health care sector is above estimates. That makes no sense, you say. Buy the rumor, sell the news?

There are a lot of market aphorisms that don’t match facts.  One of our longtime clients, a tech member of the S&P 500, pre-announced Oct 15 and shares are down 20%.  “The moral of the story,” lamented the IR officer, an expert on market structure (who still doesn’t always win the timing argument), “is you don’t report during options-expirations.”

She’s right, and she knew what would happen. The old rule is you do the same thing every time so investors see consistency. The new rule is know your audience. According to the Investment Company Institute (ICI), weighted turnover in institutional investments – frequency of selling – is about 42%.  Less than half of held assets move during the year.

That matches the objectives of investor-targeting, which is to attract money that buys and holds. It does.  In mutual funds, which still have the most money, turnover is near 29% according to the ICI.

So if you’re focused on long-term investors, why do you report results during options-expirations when everybody leveraging derivatives is resetting positions?  That’s like commencing a vital political speech as a freight train roars by.  Everybody would look around and wonder what the heck you said.

I found a 2011 Vanguard document that in the fine print on page one says turnover in its mutual funds averages 35% versus 1,800% in its ETFs.

Do you understand? ETFs churn assets 34 more times than your long-term holders. Since 1997 when there were just $7 billion of assets in ETFs, these instruments have grown 41% annually for 18 straight years!  Mutual funds?  Just 5% and in fact for ten straight years money has moved out of active funds to passive ones.  All the growth in mutual funds is in indexes – which don’t follow fundamentals.

Here’s another tidbit: 43% of all US investment assets are now controlled by five firms says the ICI. That’s up 34% since 2000.  The top 25 investment firms control 74% of assets. Uniformity reigns.

Back to healthcare. That sector has been the colossus for years. Our best-performing clients by the metrics we use were in health care. In late August the sector came apart.  Imagine years of accumulation in ETFs and indexes, active investments, and quantitative schemes. Now what will they do?

Run a graph comparing growth in derivatives trading – options, futures and options on futures in multiple asset classes – and overlay US equity trading. The graphs are inversed, with derivatives up 50% since 2009, equity trading down nearly 40%. Translation: What’s growing is derivatives, in step with ETFs. Are you seeing a pattern?

I traded notes with a variety of IR officers yesterday and more than one said the S&P 500 neared a technical inflection point.  They’re reporting what they hear. But who’s following technicals? Not active investors. We should question things more.

Indexes have a statutory responsibility to do what their prospectuses say. They’re not paid to take risk but to manage capital in comportment with a model. They’re not following technicals. ETFs? Unless they’re synthetic, leveraging derivatives, they track indexes, not technicals.

That means the principal followers of technical signals are intermediaries – the money arbitraging price-spreads between indexes, ETFs, individual stocks and sectors. And any asymmetry fostered by news.

Monday Oct 19 the new series of options and futures began trading marketwide. Today VIX measures offering volatility as an asset class expire.  Healthcare between the two collapsed. It’s not fundamental but tied to derivatives. A right to buy at a future price is only valuable if prices rise. Healthcare collapsed at Aug expirations. It folded at Sept expirations. It’s down again with Oct expirations. These investments depended on derivatives rendered worthless.

The point isn’t that so much money is temporary. Plenty buys your fundamentals. But it’s not trading you.  So stop giving traders an advantage by reporting results during options-expirations. You could as well write them a check!

When you play to derivatives timetables, you hurt your holders.  Don’t expect your execs to ask you. They don’t know.  It’s up to you, investor-relations professionals, to help management get it.

Patterns

Happy Tax Day!  Don’t you wish you could be somewhere else?

Sit at Saba Rock looking north where beyond the earth’s curvature lies Anegada and you know why Richard Branson embraced the British Virgin Islands.

We did too, abandoning electronics including in my case a shaver. From the Soggy Dollar on Jost Van Dyke (named for a Dutch privateer) to Sandy Spit and Sandy Cay and into the azure chop around The Indians off Norman, we let time run a delightful course.

Norman Island is among the reputed inspirations for Robert Louis Stevenson’s “Treasure Island” (which gripped my young imagination), ostensibly eponymous for the pirate Captain Norman, a Briton caught and hung by Puerto Ricans.

Today Norman Island is owned by billionaire Henry Jarecki who in his youth fled anti-Semitic Nazi Germany and later pioneered commodity-futures investing in the USA. His son Andrew recently made film headlines with HBO’s The Jinx on accused killer Robert Durst, the black sheep of the New York real-estate family managing Freedom Tower.

Dr. Jarecki, for years a practicing psychiatrist (still a Yale medical school faculty member) before switching to quantitative futures-trading at his firm Gresham Investment Management LLC, told Wall Street Journal reporter Cynthia Cui in a 2010 interview that both trading and psychiatry are about recognizing patterns. So armed, Jarecki said, you can “transform a modest effort into a grand result.”

How you announce your earnings-date is a recognizable pattern for traders.  One of our clients wrote while I was out, “I know you’re still floating among the virgins but when you reconnect thought you might like to see this exchange I had recently with the quant shop (name removed for privacy but we know and track them)…”

Our client had gotten inquiry from these traders asking when the company would report results. Our client said you’re quants so why do you ask? An analyst there with a Ph.D. thoughtfully responded:

“We are indeed a quantitative firm, focusing in options market making…. Options are typically priced based on the current stock price, a volatility component which characterizes the typical stock price movements possible, and a time component which characterizes how much time the volatility component has to act on the stock. The wrinkle in the problem of option pricing is that volatility doesn’t act uniformly in time; after earnings the stock prices tends to move more than on a typical day. Therefore it is important that we have the correct earnings date in our trading system as soon as it’s publicly available…”

This trading group is profiting in options-volatility, which depends on eliminating price uncertainties including questions about the timing of your earnings. What your company does, your financial results, are irrelevant to the grand opportunity. What matters is the volatility pattern.

This is why we track patterns everywhere in your trading.  We know a great deal about the patterns and we’ve been telling you for ten years now that if you move differently from your peers it’s not about your results but standard deviation, arbitrage, spreads. (more…)

Leakage

How often do traders know news before you release it?

I was in the car listening to a business program on satellite radio, and they were talking about crazy moves in shares ahead of news.  The host, a trader and money manager, said, “Even with Reg FD and all the disclosure rules, I swear 85% of the time there’s leakage.”

In this age of mandatory dissertation in television ads of pharmaceutical side-effects, one approaches the term “leakage” with caution.  But in market-structure, the behavior of money behind price and volume today, leakage is a functional fact.  Routinely a day before important news, high-frequency trading jumps, signaling impending change and oftentimes distorting price ahead of material information.

Recently a client had a secondary offering for a big holder. Two weeks before it, the broker who would later underwrite the offering led in what we call influential order flow. Two other brokers had matching increases. Yet the company hadn’t yet determined a manager.

Both examples imply leakage. Maybe the fast traders picked up a nugget of information?  Word worked around to broker trading desks?  Both are possible. But we doubt shenanigans played a role. The tipster in both these instances and in much of what appears predictive in stock-moves is the same: Math.

High-frequency traders, the ones signaling money-moves – the reason ignoring fast trading the way so many do is like yanking the fuel gauge from your car and hucking it in the trash – aren’t people.  It’s not somebody on phone calls or in meetings. No channel-checks have been made or hedge funds plied for leads. They’re machines programmed to respond to data.

Therefore, Watson, the elementary conclusion is that the math changes before news. Now could somebody in the know be the trigger?  Sure. Machines seek central tendencies and departures from standard deviation (as do our algorithms) and a trader unaware could unwittingly tip them to a directional shift with orders that don’t look like the others.

The machines spit feeler orders like tiny drones. For example, a utility with market cap around $2 billion trades 225,000 shares daily.  Over a third of the roughly 2,000 trades yesterday were for less than 100 shares. Ten percent were 10 shares or fewer.  Once we saw six hundred-share trades move CSCO $6 in one second. High-speed trading algorithms feather the markets with the smallest possible commitments seeking directional tips.

Suppose a computer metered human traffic at New York’s Penn Station.  The computer would know that before the 2:07 to Bay Head on a westbound track, people are going to fill the station.  Now imagine the computer can determine how many cars should comprise the train, using algorithms that measure human traffic the half-hour leading into 2:07 pm.  If today the standard deviation in the pattern is up and foot traffic down, the computer will peg demand as exceptionally light and order up a very short train for the long trip down the north shore.  What if people were just late arriving? (more…)

Who Is Selling

“Who’s selling?”

It was 2001. I’d look up and there’d be the CEO leaning in the door of my office. This was back when my buns rode the gilded surface of the IR chair. I’d look at my computer screen and our shares would be down a percent or so.

“Somebody, apparently,” I’d say. “Let me make a few calls.”

Today we have Facebook, Twitter, Pandora, iPhones, and Tesla. None of these existed in 2001. The Intercontinental Exchange, formed a year earlier to trade derivatives, now owns the NYSE. What’s remarkable to me is that against this technological wave many issuers, not counting the growing horde with Market Structure Analytics, are still making calls to get answers.

Why wouldn’t everybody be modeling market behavior and measuring periodic change? But that’s another story.

So. What if nobody’s selling and your price is down?

Impossible, you say. For price to decline, somebody has to sell.

Let me tell you about two clients releasing earnings last week.

But first, say I’m a high-frequency trader and you’re reporting. I rent (borrow) 500 shares of stock trading at $25 apiece. Say the pre-open futures are negative. At the open, I explode ahead of all others by three microseconds to place a market order to sell 500 shares. My order plunges the market 8%. I immediately cover. And for the next six hours I and my HFT compatriots trade those 500 shares amongst ourselves 23,000 times. That’s volume of 11.5 million shares.

The huge move in price prompts swaps counterparties holding insurance policies for Blackrock and Vanguard into the market, spawning big block volumes of another 6 million shares. Now you’ve traded 17.5 million shares and your price, after dropping 8%, recovers back 3% to close down 5% on the day.

So who’s selling? Technically I, an HFT firm, sold 500 shares short at the open. I probably paid a $200 finance fee for them in my margin account.

You’re the IRO. You call your exchange for answers. They see the block data, the big volumes, and conclude, yup, you had some big-time selling. Conventional wisdom says price moves, massive volume, block trades – that’s institutional.

You’re getting calls from your holders saying, “What’s going on? I didn’t think the numbers looked bad.”

Your CEO is drumming fingers on your door and grousing, “Who the HELL is selling?!”

Your Surveillance firm says UBS and Wedbush were moving big volumes. They’re trying to see if there are any clearing-relationship ties to potential institutional sellers.

The truth is neither active nor passive investors had much to do with pressure or volume, save that counterparties for passive holders had to cover exposure, helping price off lows.

Those clients I mentioned? One saw shares drop 9% day-over-day. In the data, HFT was up 170% day-over-day as price-setter, and indexes/ETFs rose 5.3%. Nothing else was up. Active investment was down. Thus, mild passive growth-selling and huge HFT hammered price. Those shares are already back in line with fair value because the selling was no more real than my 500-share example above (but the damage is done and the data are now in the historical set, affecting future algorithmic trades).

In the other case, investors were strong buyers days before results. On earnings, active investment dropped 15%, passive investment, 8%, and HFT soared 191%. These shares also coincidentally dropped 9% (programmers of algorithms know limit up/down triggers could kill their trading strategies if the move is 10% at once).

They’re still down. Active money hasn’t come back. But it’s not selling. And now we’re seeing headlines in the news string from law firms “investigating” the company for potentially misleading investors. Investors didn’t react except to stop buying.

This is the difference between calling somebody and using data models. Don’t fall in love with models (this is not a critique of Tom Brady, mind you). But the prudent IRO today uses Market Structure Analytics.

En Route to Knowing

I got a kick out of that movie, Night at the Museum.

Yes, it’s old, and no, we haven’t seen any of the movies that contended alongside Argo for Best Picture this year. But there were several times yesterday as clients reported results in a restive currency-addled market when I thought how things aren’t what they seem. If you could get below the surface, you’d find a tiny little tough cowboy who looked like actor Owen Wilson.

Just kidding. All analogies break down. But often in the market, what you think you’re seeing isn’t what it seems. One client’s share price shot up in the early going with results, jumping nearly 8%. Then it declined 4%. Imagine if gas prices did that every day. But I digress. The price finished right in line with the Rational level – fair market value from a fundamental perspective.

Why the gyrations? Speculators had bet on weak results (something that can be observed), and results weren’t. Traders covered, driving price up. Passive investors like indexes were Hedged. They’d farmed out risk, but surrendered upside. As price suddenly rose, counterparties with rights to gains above certain levels locked them. They’re not investors. When they sold to keep their collar profits, price reverted to the Rational level.

Market price may or may not reflect an investment purpose. Let’s use an example many can appreciate: An analyst ups her price target and rating on your shares, and price climbs 4%. We assume that investors responded. We explain to management, “Investors liked the Outperform rating and higher price target, and bought.”

But was it investment behavior? What if those gains evaporate three days later when the dollar rises100 basis points because Europeans think Italy will need more help from Germany and rush to buy dollars? That’s risk-management behavior, right? (more…)

Macro IR

We’re a day late this week in deference to an important birthday yesterday. After 236 years, there are lines and age spots but the countenance still juts, resolute.

Do people send you group emails sometimes with those images where if you stare at them, suddenly you see something else? Here are two verbal versions, headlines I saw Tuesday:

“European stocks rallied for a third day as hope mounted that central banks in Europe and the U.S. will act to bolster economic growth.”

“U.S. stocks extended a rally for a third day on Tuesday as sharp gains in oil prices lifted energy shares and traders factored in increased expectations for central bank stimulus.”

Do you see what’s freakishly wrong with these? Stocks rose despite conditions that should depress stocks. Because central banks might offer free money.

Markets have always been barometers of economic health. Now they’re moving on money alone, disaffected from the factors that once could be relied upon like the piers and stanchions of a venerable republic.

IR folks, think about this. It cuts to the quick of the job. We’re heading into earnings season. We’re planning call scripts and press releases. We’re thinking about discussion and analysis for quarterly filings.

Yet the markets we use as a mirror for the value of these efforts are doing the exact opposite of what they have always done. They are valuing supplies of currency rather than its commercial use. (more…)

The 11.1% Occupying Earnings

The One Percent is a catchy phrase. But statistics highlight the 11.1%.

It’s earnings season. Fifty-seven percent of our clients have reported, our data show. In the past five days across the Nasdaq segment, rational investment activity – which means what you think it means – was 11.1% of volume.

Translating, just over one of ten trades in Nasdaq-listed companies (the NYSE was better but could flip-flop next week) resulted from active investment. Statistically, 88.9% of volume – not as cool as 99% but we report what the data show – was driven by something besides thoughtful investment.

Did your stock behave as you expected when you reported?

Our first client to report plunged through hedges and closed down 13%, and we hadn’t hit options expirations (Apr 18-20). A host of clients with calls before Apr 20 beat expectations and gave solid guidance. Half closed up; the other half, down.

Do the 11.1% matter? Unequivocally. So do the 88.9%. I’ll give you examples. A small-cap tech company last week closed down 6% on a miss and weak guidance, but data showed shares trading in what we call the “Midrange,” meaning money had mixed reactions. The stock’s up now.

Wait a minute, you say. How can money have mixed reactions to a miss? A lot of money doesn’t value shares on multiples alone. Any more than world markets peg the US dollar to its redemption value from the US Treasury (zero).

Shares have relative value, and speculative value. Relative value means “what’s this stock worth compared to alternatives in the group or market?” Speculative value means “will this stock help me net a profit in a portfolio of things that fluctuate?” Good answers to both questions can mean stocks rise on – or right after – misses. (more…)

Don’t Roller-skate in Buffalo Herds

Karen and I caught the PBR rodeo at Denver’s National Western Stock Show. I grew up on a ranch and Karen likes four-footed creatures. So we support cowboys and their furry fellow athletes. Those bull riders are tough guys, but what got me thinking was the team-penning competition.

It reminds me of the challenge IR folks face. We’re in the middle of earnings, with options expiring Wednesday through Friday and capital moving like a herd loping from one corner of the corral to the other while riders try to cut one here and there.

In team-penning, that’s what you do. You’ve got three folks on smart horses and a herd of calves with numbers on them, and a clock. Tom Bailey, founder of Denver’s Janus Capital, is in the sport. The announcer might say, “Four, four, four,” and the team of riders tries to cut three calves with the number four on them from the herd and pen them at the other end of the arena in about 45 seconds. If one of the herd that shouldn’t be cut gets by, you’re disqualified.

The hardest part is getting the few away from the many. Calves don’t want to leave the herd. It’s like stocks (aptly named). There’s a great herd of equities. If investors are cowboys and cowgirls on horses trying to cut the few from the many, it’s a tall task. The herd sways the behavior of the ones they want to single out.

When the herd is rattled and scattered, it’s nearly impossible to get the three you want without mixing in others you don’t want and getting disqualified. One thing that can scatter and rattle the entire equity herd is options expirations. This week, these include the VIX and RVX volatility measures Jan 19, stock and index options with morning expirations (often favored by European and Asian structured products) Thursday Jan 20; and the whole kit and caboodle Friday from stock and index puts and calls, to treasury, bond, currency and interest-rate derivatives. (more…)

Options Expirations and Earnings Reports

If you want a belly laugh and a breath of fresh air, read John Cochrane’s oped on the treasury secretary in today’s Wall Street Journal.

Speaking of news, a common headline in web news strings for clients is: “Preparing for (fillintheblank’s) Earnings Announcement with an Option Straddle.”

Seen that? Traders wait for companies to say when they’ll report results. They prefer if you do it a few weeks ahead so they can get cheap puts and calls. Just days between your announcement and earnings, and options may be in high demand and limited supply. It’s a lesson, IR professionals, about modern markets. (more…)