Tagged: Federal Reserve

Tapering Tantrum

“If something cannot go on forever, it will stop.”

This witty dictum by Herb Stein, father of Ben Stein (yes, from Ferris Bueller’s Day Off, The Wonder Years, Win Ben Stein’s Money and TV in general), is called Stein’s Law. It elucidates why stocks and dollars have had such a cantankerous relationship since 2008.

Last Wednesday, May 22, Ben Bernanke told Congress that the Federal Reserve might consider “tapering” its monetary intervention called quantitative easing (QE) “sometime in the next several meetings.” You’d think someone had yelled fire in a crowded theater. The Nikkei, Japan’s 225-component equity index, plunged 7%, equal to a similar drop for the Dow Jones Industrial Average at current levels. On US markets, stocks reversed large gains and swooned.

Why do stocks sometimes react violently to “monetary policy,” what the heck is “monetary policy,” and why should IROs care?

Let’s take them in reverse order. Investor-relations professionals today must care about monetary policy because it’s the single largest factor – greater than your financial results – determining the value of your shares.

By definition, “monetary policy” is the pursuit of broad economic objectives by regulating the supply of currency and its cost, and generally driven by national central banks like the Federal Reserve in the United States.

Stay with me here. We’ll get soon to why equities can throw tantrums. (more…)

Our Best Sentiments

Question: “Would you like more timely information about who owns your shares?”

Answer: Yes!

Question: “Would you be willing to ask for more timely information?”

Answer: Um…

Let’s change that “um” to a yes! You know about NIRI’s effort to shorten 13f reporting windows? Read about it here. All you have to do is fill out NIRI’s prepared template and email it to the address provided. There are 23 comment letters supporting the initiative as of March 5. With 1,600 companies in NIRI, we ought to be able to push the number up. See comment letters here: http://www.sec.gov/comments/4-659/4-659.shtml

This effort illustrates the difference between saying something and doing it (and there’s some serious doing here, which is great news!).

Speaking of which, TD Ameritrade is separating the chatter from the chart in its six million retail accounts with the TD Ameritrade IMX, an index showing what retail investors are thinking by tracking what they’re doing. Sentiment out this week for February was the best in stocks since June 2011.

Of course, one measure doth not a market make. We have an algorithm that looks for relative flows from retail money, and we saw more this period too. But other measures differed. As of March 5, Sentiment was 4.55, just below Neutral. We measure Sentiment by tracking relative changes in market-share for big behaviors and weighting that movement according to midpoint price-changes. It’s like a market-cap-weighted index. Statistically, 23% of clients had Negative market sentiment, 68% were Neutral, and 9% were Positive. (more…)

The IR Goal

Ever set an unrealistic goal?

There’s the joke about the Bedouin wandering the desert lost and parched who finds a genie. She grants three wishes. He asks to always have water, to be surrounded by females, and to be clothed in raiment as fine as porcelain. He’s turned into a toilet in a women’s airport restroom.

Lesson: goals matter.

I joined my Denver NIRI colleagues yesterday for an economic assessment from Alison Felix, head of the Denver branch of the Kansas City Regional Federal Reserve Bank. We saw lots of slides on economic data. We in the IR profession know data. We sort good charts from bad ones.

I don’t care how you spin it, those charts left us thinking that the Fed may have unrealistic goals. Notwithstanding the economists who claim that money for nothing isn’t only a good name for a rock tune but a model for modern monetary policy, you can’t cure what ails by giving everybody a dollar and a genie. It’s wishful thinking. Genies are fictitious. Money for nothing is a line Mark Knopfler and Sting wrote on Montserrat, an island made rather less hospitable by volcanic eruption (a lesson, monetarists).

I’m sure you’ve pondered how to measure the worth of IR. I spent four years in the IR chair working for a CFO who expected goals. Measuring worth in IR is our whole goal at ModernIR. (more…)

Reality or Fantasy

Don’t forget to write your letters, folks!

Which letters? See last week’s Market Structure Map on prompting the NYSE or the NASDAQ to file a rule for better data.

Speaking of rule-filings, here’s an example. Last week ahead of an SEC review deadline, NYSE Arca, an automated facility focused on ETFs and global derivatives-trading, withdrew a proposal permitting ETF sponsors to pay market-makers to trade ETFs.

Filed in April last year, the proposal is similar to one from the NASDAQ on which we commented. We opposed it because these plans distort prices and true supply and demand. If you were paying brokers to buy and sell your shares, would your share-price reflect the views of investors or the market-incentive offered by payments to brokers?

At best, it would be hard to tell. Plus, if a party with a financial incentive to create demand for its product can manipulate outcomes for its own gain, it’s sometimes called racketeering when prosecuted criminally. Why would we permit something that in one place is considered criminal to in another one serve as a barometer for market demand?

Despite this logical conundrum, word is that NYSE Arca will reformulate and re-file the proposal. The NASDAQ’s proposal supporting sponsor payments for ETF traders is still matriculating, and the SEC must decide on it by March 8, according to Traders Magazine. (more…)

Relativity and Dollars

How do you prove relativity?

When Einstein proffered the preposterous suggestion that all motion is relative including time, people clearly had not yet seen Usain Bolt. Or what happens to stocks after options-expirations when the spread between the dollar and equity indexes is at a relative post-crisis zenith.

Let me rephrase that.

As you know if you get analytics from us, we warned more than a week ago that a reset loomed in equities. Forget the pillars on which we lean – Behavior and Sentiment. Yes, Sentiment was vastly neutral. Behavior showed weak investment and declining speculation –signs of dying demand – all the way back in mid-August.

Let’s talk about the dollar – as I’m wont to do.

There is a prevailing sense in markets that stocks are down because earnings are bad. No doubt that contributes. But it’s like saying your car stopped moving because the engine died, when a glance earlier at the fuel gauge on empty would have offered a transcendent and predictive indicator.

Stocks are down because money long ago looked a data abounding around us. From Europe clinging together through printed Euros, to steadily falling GDP indicators in the US and China, to the workforce-participation line in US employment data nose-down like it is when economies are contracting not recovering, there were signs, much the way a piercing shriek follows when you accidentally press the panic button on your car’s key fob, that stuff didn’t look great.

We know institutional money didn’t wake up yesterday, rub its eyes, and go, “Shazzam! Earnings are going to be bad!” (more…)

You Never Know

An ode to erudition in professional sports, these pearls of wisdom overheard on sidelines come thanks to ESPN’s halftime report during the unfortunate demise of our Denver Broncos in Monday Night Football:

“If you hadn’ta been where you was, and did what you did, we wouldn’ta got what we got.”

“You can sum it up in one word: You never know.”

“You never know” is a good way to describe markets. And reason why market-structure analytics are essential to IR. Paul Rowady at TABB Group, the top market-structure authority today, wrote extraordinary commentary at TABB Forum yesterday saying monetary intervention by central banks poisons market data.

What’s the real price of your stock? As you ponder, Rowady says, “At any moment in time, one could argue that there simply cannot be true price discovery in any market where intervention occurs – which is most of them.”

Why? Because central banks, unlike the rest of us participants, can use unlimited money and unrestrained access to information – the Federal Reserve is not bound by “insider trading” constraints like you – to affect prices of every asset, every commodity, every currency. (more…)

Big Tick Talk

We all love soaring markets. When were you last dead sure what drove your stock up?

Today, a German court will decide if German taxpayers must back last week’s European Central Bank plan to buy Eurozone debt, which powered US equities to multi-year highs Sept 6. Stocks have moved higher since, with the dollar at May lows. What that court says may prompt stocks to swoop or swoon.

Thursday the 13th, Ben Bernanke speaks after the Federal Reserve’s monthly Open Market Committee meeting. That may boost stocks too, or disappoint them.

By the way, Friday I speak (having zero macro impact) to the IR council for MAPI, the manufacturer’s alliance, on “what lies beneath” market structure today. See you at the Intercontinental in Chicago.

Next week is huge. Options expire, quarterly rebalances to S&P indexes take place, and important European bond auctions go off – all between Sept 19-21. Correlation between the US dollar index and the S&P 500 is nearly symmetrical to late April’s when we warned clients of an imminent market retreat. Stocks then declined a thousand points over several weeks until the dollar in July began its longest slide since the Flash Crash. Beware risks.

In the data, evidence abounds. We’ve seen stocks curiously leap ex-dividend, whole peer groups shoot up 15%, and random shares move double digits up or down in two days without regard to the market or the peer group. Global statistical arbitrage – using math to calculate trading spreads globally – is rampant in behaviors, including the normally “rational” slice. As high as we’ve ever seen. (more…)

Predictable Outcomes

It was 85 degrees Sunday in Denver when Karen and I rode up local landmark Lookout Mountain on bikes to pay respects at Buffalo Bill’s grave. We woke to snow Tuesday.

Speaking of hot and cold, we told clients to expect a good start Monday for the new quarter, followed by the strong likelihood of a big move Tuesday or Wednesday as imbalances from the quarter exited broker-dealers. The Dow was down more than 100 points intraday Tuesday.

Why are these outcomes predictable?

In answer, ever heard of Mexican film maker Alejandro Gonzalez Inarritu and writer Guillermo Arriaga? The duo sadly parted ways after making Babel (Brad Pitt, Cate Blanchett), the third film following Amores Perros (Benicio del Toro) and 21 Grams (Naomi Watts, Sean Penn) with disparate threads woven into haunting themes on life and meaning.

Markets have recently given us disparate threads that can be loomed into predictive thematic raiment. Rumblings continue about the dramatic BATS Exchange IPO debacle March 23. The market-structure bugs at Zero Hedge advanced a theory that a deliberate algorithmic tactic torpedoed the IPO. (more…)

Did You Carry the One?

Suppose the chairperson of the national central bank strode from the organization’s Gothic façade on Maiden Lane and said, “Job growth is likely temporary, and folks are going to have to borrow money and buy stuff just to keep the economy running like a used Yugo.”

How would you expect stocks to react? Exactly. They would soar, as they did Monday March 26.

Speaking of bizarro-world, if you missed the BATS Exchange IPO drama Friday, you must have been on a monastic sojourn in the hinterlands. It showed several things. You can run a great business. You can raise money from investors. You can be quality folks who are nice to boot, as our friends at BATS are.

But if somebody forgets to carry the one in that mathematical equation for the opening auction, the incredible shrinkage occurring in the dollar can immediately translate to your shares, speeded up to nanoseconds.

Humor aside, we were asked by various members of the media (and quoted by the WSJ Saturday for the lead article on page one) and many clients about BATS. Should you worry about trading markets because the IPO for a technology-driven stock exchange failed?

Not for that reason. BATS will be fine. They will be back, and soon. Mark it.

But something should concern you. We’ll come to it in a moment. (more…)

Arbitragers Love Monetary Intervention

Say you were playing poker.

I don’t mean gambling, but real cards. You’re engaged with some seriousness. You’re watching how you bet and when, reading the players ahead and after you.

Then The House starts doling out stacks of chips. Would you play more or less cautiously if you had free chips?

Apply this thinking to equity markets, IR folks. In trading data, we saw European money sweeping into US equities Nov 28. Why did markets trembling Nov 25 decide by the following Monday to up the ante in risk-taking? Primary dealers implementing policy for global central banks also drive most program-trading strategies.

Thus, European money surmised that central banks would intervene, and their behavior reflected it. The rest caught on, and markets soared Nov 30 on free chips from central banks. It was short-lived. By Dec 2, we saw institutions market-wide assaying portfolio risk and locking in higher derivatives insurance. The chips were gone.

Money sat back expectantly. On Dec 8, The House delivered chips as the European Central Bank lowered interest rates. That’s devaluing the euro. At first, cheapening the euro increases the value of the dollar – which lowers US stocks (a la Dec 8). But if you’d hedged with derivatives as most of the globe did, you bluffed The House. Plus, the Fed will likely have to follow Europe’s bet up with a see-and-raise to devalue the dollar back into line with the euro (expect it next week, but before options expirations).

In poker, having “the nuts” is holding the best cards, and knowing it. Central banks have given arbitragers the nuts. (more…)