Tagged: fundamental investment

Constituents

Is you is, or is you ain’t, my constituents?

If you know cinema’s Coen Brothers and the epically hilarious 2000 movie “O Brother, Where Art Thou,” you’re smiling. You remember the scene, the southern accent.

In geopolitics, a sweeping referendum last weekend reunited Crimea with Mother Russia but we heard nothing about the Latino vote or the union vote or the male vote. Demographics, we gather, weren’t crucial to Putin’s putsch. The constituents supporting secession were of a cloth.

Say you run a clothing retailer on the cutting edge of young fashion. Slicing your demographics with analytics drawn from your in-store inventory management system, you find that females aged 18-34 drive half your revenues. These are your core constituents, and you’ll concentrate on keeping them happy. But you realize too that growth takes more than one group. You craft a plan with products, advertisements and placement to expand patronage from other demographic segments.

The equity market has core constituents too. Your active holders, the ones who measure story and strategy. We divide them further with growth, value and growth-at-reasonable-price (GARP) characteristics, and often finer still.

Had we a marketplace where consumption of the product – your shares – was only about story and strategy, we’d call it a wrap and the movie would end. Yet this constituency taken together is still just one: Active investors.

Blackrock is the world’s largest investment manager. Most of its $5 trillion in assets are allocated not according to corporate story but around sector, industry and class. So what do we consider this indexed constituency? We at ModernIR call it Passive investment behavior or simply Indexes/ETFs. (more…)

Street Level

“My CEO doesn’t get market structure.”

I’ve heard that more than a time or two! IROs wanting executives to grasp market complexity in order to see share-behavior in an accurate and contemporary fashion run into the buzz saw of The CNBC Mindset.

I’m not criticizing CNBC or CEOs. But some perspective is in order. In my Denver neighborhood, we’ve had a summer-long municipal effort to improve storm drainage. Streets are barricaded for blocks around and getting to our house is a circuitous adventure. The infrastructure is a mess (we hope this plan works!).

What’s market infrastructure like? On CNBC, everything is headlines and earnings. Fast money. Technicals. Stocks are supposed to be simple things – some multiple of discounted cash-flows minus the cost of capital should render fair value. Right?

That’s how it used to be. Simple, like our streets. Follow your GPS to our house right now, and you’ll be navigating awhile, because the tool won’t show you the truth at street-level.

There are $15 trillion of assets at companies in the US running mutual funds, ETFs, and other funds. About 28% are in equities. There are more than one MILLION global indexes, if you add the 830,000 or so that S&P/Dow Jones calculates at least once daily to MSCI’s 100,000, Russell’s 50,000, and Nasdaq’s 21,000-ish. A million slices of the global economy to which you can benchmark a trade or investment for a second or more.

There are 4,300 brokers regulated by FINRA, and every trade must past through one. Yet just 200 execute trades across 17 billion monthly shares in our models, and 30 drive 90% of volume. Vast uniformity yet continuously shifting arbitrage. Convergence and divergence.

About 40% of the typical US stock’s volume comes from borrowed shares. We see megacaps with 55% of all daily volume borrowed – rented shares, short shares. Your top holders lend securities to large broker-dealers who sublet them through margin accounts for daily use. Renting is cheaper than owning. And ownership won’t hold answers.

Most stocks have intraday volatility around 2% — the spread between high and low prices. That’s a great deal more than the basis points of daily movement you see in closing prices. (more…)