Tagged: Hedging

The Audience

“I’m going to write a four-letter word meaning intercourse,” my speech-class colleague Jim announced, striding to the chalk board. It was 1986.

Stunned, the rest of us stared open-mouthed.  The chalk clicked.  Jim stepped back and with a flourish gestured at what he’d written.

“Talk,” he declared.

Freshman college speech burned into my mind the importance of knowing your audience.  Seated there in the IR chair, who’s yours?

As you tee up an answer, let me tell you a story. It must’ve been a long last Sunday at Goldman Sachs.  Late Oct 26, with fanfare and after machinating immense quantities of data or perhaps just looking at sliding oil prices since August, the firm pronounced a new view for the energy sector. Oil, it said, would be priced lower than previously thought.

I’m poking fun, yet it was anything but for many in the energy sector Monday as the Goldman Tsunami appeared to crash over its investing audience, driving some energy and chemicals companies down 4-5% on a flat market day.

Okay, stop for a moment. It’s not your sector so you want to move on to your Twitter feed. Right? Stay put.  The same may apply to you and your peers.

Back to our story, the conclusion one would infer is that having waited for the vaunted Wall Street firm to speak, investors, teeth gnashing, doused themselves with ashes, donned sackcloth, and punched out of petroleum. (more…)

Sun and Goggles

Mayday!

That’s the word quarterback Peyton Manning should’ve used Sunday, instead of Omaha! But we congratulate Coach Pete Carroll, a gentleman, and his bruisers from the Puget Sound.

Speaking of bruising, earnings season and macro factors collided like particles in an accelerator as January slopped into February. With just 58% of our client base reporting thus far, it could be premature to deconstruct it. But I know the question burns in IR minds: Can we understand what’s going on?

People sequenced the human genome. We can measure variance in light as finite as a flashlight blinking…on the moon. We can create money from nothing. Surely we can map market behaviors.

I was skiing in Steamboat last week during a whiteout. It was though I was floating. I had no clear sense of where the slope was until I carved, and I could not gauge my speed until I turned. Powder is forgiving so I wasn’t worried.

But this is how the market seems many times, right? It’s amorphous. There’s no definition to movement. No clarity.

The next day in Steamboat, the sun shone brightly and with goggles suited to light, fresh powder took on the rich and textured characteristics of a Wayne Thiebaud painting. Slopes were luxuriant and vivid.

There are two pillars to market movements, like bright light and the right goggles. I’m not suggesting one can perfectly matrix outcomes. But core principles can be observed.

Remember: We said the market reached a statistical top in our behavioral data on Dec 27. We then warned that if institutions shifted from equities with options-expirations Jan 16-22, the first shoe to drop would be Jan 23-24.

That happened.

In the days since we’ve warned that Shoe No. 2 of a process of retrenching from equities and shoring up institutional risk-hedges could occur during January window-dressing, which would mean Feb 3-4 could be ugly.

That happened.

Markets reached a statistical market bottom, behaviorally, on Feb 3. The same sentiment-reading registered in our data-analytics roughly June 28, 2013, and again about Aug 11, 2013, the last two times data indicated market bottoms (markets then rebounded).

(Warning: This time could be different. We’ve never massively removed central-bank support from global risk assets before.).

You must cease viewing the market as just investment and instead see it as risk-management and data. These are the pillars. One is sun, the other goggles. If risk managers shift resources in asset classes, it will impact trading data that machines consume, because movements depend on mathematical models now. (more…)

Great Expectations

Happy New Year! Hope you spent the two-week break from these pages joyfully.

We’ve descended this week from the high Denver backbone of the continent to visit west in Santa Monica and sponsor NIRI’s Fundamentals of IR program. Following our New York trip before Christmas, we’ve marked the turn of the calendar by touching both coasts.

We’ll kick off the year with a story. I’ve just finished Charles Dickens’s Great Expectations on my Kindle. Yes, I realize it was first published in serial form in 1860 (the year the cattle ranch on which I grew up was homesteaded). I have a long reading list. It took me awhile to get around to it.

Lest I spoil excitement for the other three or four of you planning on it still, I’ll say simply that it’s a masterful narrative assemblage of plot points, the connections between which one would never fathom at the outset. Great storytelling never gets old.

The market is like that too. As you begin 2014 in the IR chair, remember that in a market dominated by algorithms – the principal purpose of which is to deceive – things are rarely as they seem.

Take trading from Dec 9-31, 2013. The US equity world it seemed was gathered in knots and pockets like people in an old west town where the gunslinger was expected anytime to ride through. Tones were hushed, gestures animated. A pregnant air of expectation hung like a storm.

Would the Fed finally taper? And if it did, what then?  (more…)

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…)

Holistic IR

Do sharks belong in the ocean?

You might reply, “They certainly don’t belong on land.” But that’s not what I mean.

This isn’t a lesson on catachresis or other obscure grammatical and rhetorical principles, rest assured. But speaking of speaking, if you’re joining IR Magazine for the West Coast Think Tank tomorrow, make a point to find me and say hi, please.

If you miss us, attend the NIRI Silicon Valley chapter session Friday on Market Structure with ModernIR’s good friends Kate Scolnick, Moriah Shilton and Nicole Olson. You’ll get a unique and candid view.

Back to sharks. In Belize, we swam with them (nurse sharks, granted, though while snorkeling I spotted a six-foot reef shark, its fins tipped black, headed fast to sea). Some fear sharks are now endangered, populations shrinking quickly, especially the celebrated Great Whites immortalized by Steven Spielberg in Jaws. It’s hard not to think of them when you’re in Caribbean waters. You wonder what’s there, just out of sight. (more…)

Volatility Implications

Like a billboard reading, “Illiterate? Write for free help,” record demand for VIX futures in a market nearly devoid of volatility seems at best paradoxical and perhaps idiotic. But it’s a touchstone for institutional behavior now.

“The VIX” is the Chicago Board Options Exchange’s index of implied monthly volatility in the S&P 500 index. It’s called the Fear Gauge because ebbs and flows signal waxing and waning market uncertainty.

There are 34 different Exchange Traded Products (ETP) providing risk managers and traders variations on the VIX volatility theme. Record levels of ETP shares outstanding, according to an article yesterday in Traders Magazine, denotes extreme demand for volatility products. (more…)

Maker-Taker’s Mark

Is it diluted?

That’s what everybody wants to know about the market. Are gains for broad equity measures, seemingly epic like my skiing Saturday at Copper Mountain, real or watered down?

That’s actually not our story this week. But we’re so fascinated by what market structure shows that if you huddle in here we’ll share observations. The dollar declined when Japanese Prime Minister Abe said Monday that either the Bank of Japan creates inflation or the government will rewrite its charter. That means more currency devaluations for everyone (if your money buys less tomorrow than it did today, that’s a devaluation whether called one or not).

So stocks rose yesterday. Also helping stocks, money was hedging at options-expirations Feb 15. When investors hedge they tend to invest more funds. Sentiment is okay, too, finishing last week at 5.38 (on a 10-pt scale), up from 5.05 to start the week. Yesterday it was down to 4.71, by far the lowest level all year.

All over, short volumes are down compared to long volumes. That’s a loaded message. Higher short volumes mean more competitive markets. But lower short volumes also mean demand for wholesale short positions is down and shorts are covering. Which is good.

Talk about mixed messages! Investors want stocks to rise but are wary. Lower overall short-interest (bullish) and some short-covering (bullish) also means money is less prepared for the unexpected, and that markets aren’t as competitive as they should be when prices are rising. Pray for no surprises or we’ll have a monumental down day.

Which brings us to our story. Beam, Inc., distiller of Maker’s Mark, said last week that to stretch its oak-aged bourbon it would cut the alcohol content. Drinkers recoiled in horror and disgust. They’d rather do without than do with less for the same price. Beam backed down. (more…)

Who Owns My Shares

Why don’t trading and ownership match?

Sometimes you must change your point of view – put on the Magic Market Structure Spectacles – to see the truth. Say twenty-five institutions own 75% of your shares. From one month to the next there is little change in names or holdings. The remaining 25% of shares must be changing hands every few hours. Right?

In one of the better movies Nicolas Cage made before he became desperate to pay his back-taxes, his character Benjamin Franklin Gates in National Treasure found Ben Franklin’s spectacles and decoded a treasure map on the back of the United States Constitution.

That was in 2004. They were still using flip phones. In the stock market, Regulation National Market System hadn’t yet transformed trading. Yet eight years later with smart phones in most hands, IR teams and executive suites are still looking at ownership data to understand share-prices.

Grab your Magic Market Structure Spectacles. A midcap stock the past 20 trading days averaged 3.1% intraday volatility – the gab between highest and lowest price during the day. The spread in daily closing prices is half that, at 1.6%, and only if you apply absolute value. Net the ups and downs in closing prices and the cumulative price-difference in 20 days is 7%.

Now, add up intraday volatility. Anybody want to take a stab at it? Think of a number. Got it? Okay, the envelope, please. And the winner is…62%.

Yes, you read that right. Total intraday volatility is 62% in a single month when the apparent change in price is just 7%. What does that mean to “market neutral” money that hedges assets every day and trades for yield?

A treasure trove. Yet for that same stock we found Rational Prices (where active investors outraced everybody else to buy shares) on just 14.7% of trading days. (more…)

Stocks and the Fiscal Cliff

CNBC has a Fiscal Cliff countdown clock.

You can’t click a TV remote or a web page without somebody declaring that Congress’s inability to compromise on tax rates and spending cuts before December 31 will incinerate equities.

It’s predicated on sound logic. Higher taxes on investment behavior are likely to impact that behavior negatively. Motivation.

We here in Denver before we found the Holy Grail – Peyton Manning – hailed Tim Tebow, who famously sent a one-word tweet after Eli Manning’s Giants topped the Patriots in last year’s Super Bowl: Motivation.

If what one expects will happen isn’t aligned with motivation, then what one expects is unlikely to occur. That’s true in police work, business, life-goals – nearly everything. Including the stock market.

Suppose I expect that because you are a football fan you’re likely to be at Hanson’s Pub near 6:30 p.m. Mondays in Denver for the weekly NFL game. If “you” means my wife, who likes “Johnny Football” Manziel at her Alma Mater Texas A&M but doesn’t give a hoot about the NFL, my expectation won’t match reality. Monday Night Football does not motivate her.

What motivates the market? Many pundits (not all!) conclude that markets will behave badly unless a deal is in the works. That would be true if money in the markets were all rational. But statistically, Rational Investment – money following fundamentals – is only 15% of daily volume across the major US markets. Technically, we peg it at 14.2% the past 200 days, a bit more in the past five (exactly 15%). (more…)

Look Around

It’s good to know what’s around you.

En route back from Austin to Denver we traversed the hinterlands including eight miles of dirt track to visit the evocative scene of the 1864 Sand Creek massacre of peaceful Cheyenne and Arapahoe north of Lamar, CO. There’s an eerie stillness yet.

A technology client in a five-day period showed a 14% increase in midpoint price on a 4% rise in Rational investment and a 3% uptick in Speculative trading. It’s not evocative, I agree. You see all those percent signs and you want to watch cartoons or have a cocktail hour. Or drive a deserted road. Any escape from dreaded math!

But it’s telling you as plainly as historical evidence what’s happening. It’s laden to dripping with news you can use. Rational investment occurred. Speculators picked up on it and moved the price. And look how important rational investment is – just a few percentage points can change everything. There’s no better or more immediate proof of the need for IR and sweating the small stuff. One call here, one meeting there, and the whole structure of your equity market transforms.

Think about what web advertisers do with data. Every click, visit, or search is a data point that paints a three-dimensional picture of you, the consumer, and which then lines the margins of your browser with things you might use. And cookies might send you emails offering travel deals, an Overstock auction, or affordable life insurance.

Another client gained 5% around Thanksgiving, on a 7% increase in Program trading – and we even know the brokers responsible for it, and how much they were up or down compared to the preceding period. We use an algorithm for that. We marked Rational and Speculative trading as shares of market this week versus last and both were down. Hedging was the measurable, mathematical price-setter. (more…)