Tagged: Equities

Structural Distortion

“When I talk about this stuff with clients, they’re only half-listening until this phrase appears.”

Thus spake my learned friend Jim MacGregor, at Abernathy MacGregor in New York City, whose views I hold in high esteem.

“What stuff? What phrase?” I said.

“Market Structure. ‘How market structure can distort your price.’ You write about that,” Jim said, “betcha your readers forward that column to their bosses as much as the previous half-dozen combined.”

I’m not sure what that says about my earlier writ but Jim had my attention. He was saying that explaining how share-prices are affected by market behavior carries more substance than intoning “you need to understand market structure.”

“Market structure” is the behavior of money behind price and volume. Could certain behaviors be distorting fair value for shares?

Exchanges say no. Regulators claim there’s no proof. Surveillance providers tell you to ignore noise.

The biggest money manager today is Blackrock, with $3.9 trillion under management. Blackrock is a quantitative investor known for the $850 billion in its iShares ETFs. It allocates resources top-down. ETFs rebalance every day. Is that noise?

Of 4.5 billion shares trading daily in the US stock market, 1.8 billion, about 40%, are borrowed every day (some amount from Blackrock). That’s not owning, it’s renting.

There are 3,600 national-market-system companies in the US when you remove ETFs, investment companies and multiple classes of stock (I bet Blackrock owns every one). There are two million global indexes. Thousands in US equities are calculated every second. There are more ways to slice stocks than there are underlying corporations.

I was explaining market structure last week to the head of a major public brand, who asked why he should care about market structure if price reverts to a rational level over time. After my explanation, he became a client. I’ll come to what I said.

In Paris in June, Karen and I wanted to visit the top of the Eiffel Tower. The line at the north footing stretched dimly into the gloaming. We’d heard access was quicker at the south entrance. We went there. About 25 were waiting. We were elated. Except there are no elevators at the south footing. You climb. Market structure affected our behavior.

ModernIR monitors bottom-up investment behavior as a share of overall market volume (about 16% the past 12 mos.) and as a price-setter over various time-periods. (more…)

Infinite Money Theorem

“What do you see out there?”

Out here in Crested Butte, CO, where the overnight temperature was 35 degrees, we see vast beauty, perhaps unparalleled on the planet.

As for the other “out there,” it’s the No. 1 question we’ve gotten the past two weeks, even with clients reporting financial results. They’re most concerned with the macro view: What do we think will happen to the stock market if and when the Fed stops buying government-backed securities?

Some observers predict doom. If the Fed quits printing money, the helium goes out of the balloon and down it comes. Others see the opposite. Just yesterday Jim Paulsen at Wells Capital said the Fed’s exit means markets can normalize, shifting from arbitraging data to investing in economic growth. He says stocks will rise.

It’s important to understand what the Federal Reserve is doing. The Fed isn’t printing money per se. It’s in effect engaging in a massive derivatives swap – trading one thing for another, neither of which is a hard asset. The Fed buys about $85 billion of Treasury securities and government-backed mortgage derivatives every month. Since these instruments are backed by US taxpayers and derive from either future tax receipts or underlying mortgages, both are derivatives. (more…)

Don’t pass Go.  I will give $200 to the first person who correctly answers two questions.

Only corporate IROs may answer. Apologies to the rest, but you’ll see why. Corporate IR pros, look up and write down your trading volume on March 4. First question: Where did your shares trade?

Second question: Which brokers executed the trades that, when added up, equaled that volume you wrote down for March 4?

Yesterday, Dow Jones reporter Jacob Bunge wrote about our drive to organize companies to petition Congress and regulators for more transparent data about their share-trading.

There’s a landing page on our website for the letter we’ve drafted. Our goal is to list 100 companies as supporters when we deliver this letter. It should be 5,500. I’ll tell you why in a moment. (more…)