Tagged: Investor Relations

Happy Thanksgiving from Austin, TX!  Many of you are out too, seeing family for the holiday. Looking back at 2014, this Market Structure Map from Aug 27 was one of the year’s most widely read. Curiously, some of the same economic data points including the FHFA house-price index and the Case-Schiller Home Price Index were out this week again. 

If we know how many mortgage applications were filed last week, public companies should know what set their stock prices last week too. Every public company deserves good information about the equity market, and it’s not cooler to “just run the business and ignore the stock.” That would be like “just drive the car and ignore the fuel gauge.” Catch you after Thanksgiving!  -TQ

 

Aug 27: Beyond Curiosity

 

Let’s talk about houses.

Let me explain. Twice yesterday I encountered an issue, not a new one though. We were discussing it on a conference call too, preparing for a market-structure session Sept 9 at the NIRI Southwest Regional Conference here in Denver – which if you care about market structure is not to be missed. A highlight, Rajeev Ranjan, central banker with the Chicago Federal Reserve and former algo trader, will explain why the Fed cares whether high-speed traders are gaming equities and derivatives.

Anyway, what issue am I talking about?  I continue to hear executives and investor-relations officers say, “I don’t see why short-term trading matters when we’re focused on long-term investors.”

I hear some of you groaning.  “Quast,” you moan. “We don’t want to keep hearing the same stuff.”  I get that. If you already know the answer, you can cut out of the Market Structure Map early today.  Catch you next week.

The rest of you, if you’ve got a tickling there in the back of your head like a sneeze forming in the nose that you really don’t want the CFO to ask you why market structure matters, then let’s talk about houses.

Big money tracks residential real estate – houses. Just this week we had or will have reports on new home sales, the Federal Home Financing Administration’s housing index, the Case-Shiller Home Price Index, mortgage applications, and pending home sales. Decisions about construction, banking, credit-extension and more depend on these data.  They’re part of certain GDP components. (more…)

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…)

Peer Review

Autumn the past two weeks splashed brilliantly over the Colorado Front Range. It puts everything into perspective.

I recall as a kid my mother saying in retort to my reason for some dunderheaded act, “You did it because ‘everybody else was doing it?’”

Investor-relations professionals have long tracked what everybody else is doing, comparing the company’s trading with a set of peers. Clustering similar things is a time-tested statistical maxim. We practiced it on the ranch of my youth at the auction yard, sorting groups of our steers on display for potential buyers uniformly by color, weight, shape. One weak link could throw off the average per-pound price.

What makes a peer?  Similar characteristics. Yesterday I sent a screenshot to an IRO (investor relations officer, for you newbies) showing startling comportment between her shares and another stock. One is a home-furnishings retailer, the other a technology high-flyer in cloud architecture.

On the surface, no distinguishing features say these two are peers. But machines calculating probabilities see patterns, not sectors. In human physiology, beneath the skin we’re all the same. We’re peers though we may not look alike. In the stock market, physiology is comprised of rules, prices, supply and demand.

It calls into question comparing how you trade versus peers. Yesterday one of our household-name clients asked, “We’re trailing our peers, so how can the cause be macro?” The data were overwhelming: No movement in rational behavior, massive change for indexes/ETFs and hedging. Our client is the “category killer” in that group, the one every index, every ETF, will own – or sell. Macro selling won’t hit peers the same, and either way, pressure wasn’t fundamental.

That’s no absolute either. Another category-killer in a different industry outperformed its peers because safe-harbor money was buying only the biggest. Plus, algorithms executing the same instructions in an industry group can produce different effects on components. (more…)

Double Standard

Humans are often entertained by illustrations of absurdity through reality.

For instance, Treasury Secretary Jack Lew months ago said he’d like to address tax inversions but lacked authority.  Yesterday, Treasury imposed rules to limit inversions. My reading of Section Two of the U.S. Constitution reveals no lawmaking authority vested in the executive branch.

I could compile a book of examples. I won’t.  Instead, I’ll offer one for the IR chair and the public-company executive suite. In 1975, Congress added Section 13f to the Securities Act to “increase the public availability of information regarding the securities holdings of institutional investors.” I was eight years old then and had no idea I’d spend my adult life working in the capital markets with thus far no update to the provision.

NIRI CEO Jeff Morgan said in his weekly note to members yesterday that the Board had held its annual meeting with the SEC to discuss disclosure. “I am not sure we came to any concrete agreement on how we might traverse down the road to improving disclosure,” Jeff wrote.  He was talking about the burden of it.

In August 2000, the SEC imposed Regulation Fair Disclosure (Reg FD) to “promote the full and fair disclosure of information by publicly traded companies and other issuers.” Following and vastly increasing disclosure-costs was The Sarbanes-Oxley Act of 2002 (SOX as we call it), passed by the U.S. Congress to protect shareholders and the general public from accounting fraud and errors and to improve accuracy in corporate disclosures. I remember that my company spent about $2 million as a small-cap NASDAQ-traded firm with $200 million in revenues complying with Section 404 and other requirements the first year.

I recall an ensuing variety of rules through the Financial Accounting Standards Board and SEC Staff Accounting Bulletins, all adding time, effort, cost and disclosure. (more…)

Without Your Knowledge

Facebook collaborated with two respected universities to study your emotional responses when shown different kinds of news. Without your knowledge.

We learned in June, you might recall, that Cornell, the University of California at San Francisco and Facebook delved into the doings and feelings of 700,000 of us folks without so much as a by-your-leave. The aim was unalloyed, as aims often begin when people sit in rooms with statistics and contemplate how to study them.  Do users post negative prose if they’re exposed to adverse news?

It seems innocuous, sure. I’m not knocking the social network and that’s not the point of today’s piece. If you’re sharing your innermost feelings with a community of one billion, your expectation for inclusion on the distribution list for the memo about a psychological study should be a number approaching zero.

Speaking of memos you didn’t get, we wrote two weeks ago that the SEC had in June ordered the stock exchanges and Finra, regulator for brokers, to craft a program for larger tick-sizes in small-caps. The plan is out. Without input from public companies. But you can yet weigh in. We’ll come to it.

There are four groups, not three as we’d initially thought. The three test groups will contain about 400 entities each with prices over $2, volume under a million shares, and market-cap of $5 billion or less, and will study trading in five-cent increments.

Lest you suppose this is the backwater of the market, there are only 754 large-cap companies in the Wilshire 5000.  Not enough to constitute two test groups. Most of the stocks trading publicly fit criteria for this proposed program.

That makes this plan more than a test. It’s a functional repudiation of Regulation National Market System. But instead of admitting its errors, the SEC simply ordered the exchanges to propose an alternative, thus permitting regulators to sidestep responsibility for screwing up 80% of the marketplace. (more…)

Beyond Curiosity

Let’s talk about houses.

Let me explain. Twice yesterday I encountered an issue, not a new one though. We were discussing it on a conference call too, preparing for a market-structure session Sept 9 at the NIRI Southwest Regional Conference here in Denver – which if you care about market structure is not to be missed. A highlight, Rajeev Ranjan, central banker with the Chicago Federal Reserve and former algo trader, will explain why the Fed cares whether high-speed traders are gaming equities and derivatives.

Anyway, what issue am I talking about?  I continue to hear executives and investor-relations officers say, “I don’t see why short-term trading matters when we’re focused on long-term investors.”

I hear some of you groaning.  “Quast,” you moan. “We don’t want to keep hearing the same stuff.”  I get that. If you already know the answer, you can cut out of the Market Structure Map early today.  Catch you next week.

The rest of you, if you’ve got a tickling there in the back of your head like a sneeze forming in the nose that you really don’t want the CFO to ask you why market structure matters, then let’s talk about houses.

Big money tracks residential real estate – houses. Just this week we had or will have reports on new home sales, the Federal Home Financing Administration’s housing index, the Case-Shiller Home Price Index, mortgage applications, and pending home sales. Decisions about construction, banking, credit-extension and more depend on these data.  They’re part of certain GDP components.

Now suppose it was unclear who was buying and selling houses, whether the sales were cash or financed, how much of the volume of new and existing home-sales were simply transactions between brokers trying to pump up volumes (suppose it were half!), whether mortgage applications were real or indications of interest that wouldn’t materialize, and 35% of all home-sales were in the dark with nothing more known about them save the net number. (more…)

Setting Prices

Do you remember that movie, The Island?  The people who every day hope they’re selected to go to a tropical paradise are unwitting machinery for others.

I won’t give it away in case you’ve not seen Scarlett Johansson and Ewan McGregor tearing through the sky on some futuristic motorcycle. Things are not what they at first seem. That’s the point.

Which leads us to Nasdaq OMX PSX.  On August 1, the PSX becomes what it calls “a Price Setter Pro Rata algorithm for all symbols, pending SEC approval.” The PSX once was the Pacific Stock Exchange. Now it’s one of the Nasdaq’s three stock markets.

If it’s an exchange, why do they call it an algorithm? Because it’s less a marketplace than a mathematical calculation designed to do something: Set prices. It guarantees traders 40% of an order so long as size meets requisites.

In its marketing materials, the Nasdaq says the PSX is “a Reg NMS protected quote and runs on proven INET technology.” A quote? A price. Under Reg NMS, protected quotes must be automated and cannot be ignored by the market. So the PSX is a price.

INET was a trading system created by the dark-pool Instinet that merged in 2002 with Island, another electronic communications network, or “ECN.” ECNs slaughtered exchanges in the 90s, taking perhaps 65% of all trading at the peak before exchanges bought them and in effect became ECNs. Nasdaq acquired INET in 2005.

Now stay with me here. This story relates directly to you, in the IR chair. There’s a trading firm called Chimera Securities. We see it in about 75% of our Nasdaq client base. It’s a proprietary trader – no customer accounts. It trades equities and options. It provides a platform for hundreds of professional day-traders to execute diverse speculative tactics, and it runs automated strategies to utilize liquidity its traders hold. It’s a member of the Nasdaq OMX PSX, and the Nasdaq OMX PHLX, the latter the Nasdaq’s options platform. Chimera belongs only to these two markets. (more…)

Tapering Tantrum

EDITORIAL NOTE: We’re right now plying the azure waters off Richard Branson’s Necker Island. The following edition of the Market Structure Map ran May 29, 2013, ahead of last year’s NIRI National Conference (if you’re heading to NIRI in Las Vegas this year, don’t miss my fireside chat about Flash Boys and Broken Markets with famed HFT expert and frequent CNBC guest Joe Saluzzi of Themis Trading. More on that next week!). The Fed continues to be de facto captain of risk assets and the wind beneath their wings. It behooves us all in the IR profession to realize we’re in the process of undergoing separation anxiety. It just hasn’t manifested yet.

 

“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…)

Binary IR

There’s a joke software engineers tell. There are 10 kinds of people in the world. Those who can count in binary and those who can’t.

Nerd jokes (no offense, technology friends!) are often neither immediately nor apparently funny. But the point is binary understanding, a sort of either/or perspective.

Suppose you were planning a vacation. After much research, you decide like Tiger Woods that you’re going to Cayo Espanto, off Belize. You reserve its luxurious accommodations, arrange for transit from the mainland, plan for time out of the office, purchase clothing and other supplies, even get your scuba certification so you can plumb the depths of the Great Blue Hole off Lighthouse Reef while there. Last, as an afterthought, you look for airline tickets.

And there are none.

If you’re Tiger Woods, you don’t need no stinking airline tickets (grammatically impaired colloquialisms are never accidental here). All analogies break down somewhere. But you get the point, right. Reserving rooms and laying plans before determining if the trip is possible is getting the horse and cart confused. And there is requisite order to the effective horse-and-cart combination.

Which brings us to investor relations and market structure. IR has always considered its objective to be singular. In geopolitical parlance, Message enjoys regional hegemony. There are no other considerations. (more…)

Monoliths and Microseconds

“People are getting screwed because they can’t imagine a microsecond.”

Well, how about $1 trillion? Can we imagine that?

If you want context for the quote, read Michael Lewis’s book, Flash Boys (No. 1 now in NY Times nonfiction). Equally relevant and lost in the shadows of microseconds is the magnitude of the monolithic.

There’s a company you’d know that in the past 20 trading days has had intraday volatility of 108%. That is, summing daily spreads between high and low prices – somebody paid both – equals 8% more than a share costs. The entire value of the company in effect turned over the past month, plus an 8% commission. (Do you know your intraday volatility?)

Divided by 20, that 5.4% daily. Compare to overnight borrowing rates near 0.15% for banks, and 30-year mortgages at 4.4%. Yet beneath its skin, behavioral changes for this stock are miniscule. The average recent daily fluctuation in bottom-up investment – the money you talk to – is less than 2.3%.

There was one monolithic change. On March 24, demand from indexes/ETFs dropped 15%. Just once. Since that day, gradual price-erosion tallies eerily to a 15% decline. A one-day shift in asset-allocation cost 15% of market cap over the following month.

Yesterday we ran a dozen models for public companies reporting results today, weighing demographics and sentiment to project price-reactions. Outcomes are an amalgam of purposes. Without data, it’s impossible to know that price-moves reflect rational thought. If share of market did not change for investors, they didn’t set price, didn’t alter their views.

The Fed in 2013 bought $1 trillion worth of US Treasurys and mortgage-backed securities, pinning interest rates on ten-year US bonds near 1.7% until word leaked in May that it might stop. Between May-Dec 2013, Treasury yields rose 75% and average 30-year mortgage rates jumped 30%. (more…)