Tagged: investor relations

Growth vs Value

Are you Value or Growth?  

Depends what we mean, I know. S&P Dow Jones says it distinguishes Value with “ratios of book value, earnings and sales to price.”

It matters because Growth is terrorizing Value.  According to data from the investment arm of AllianceBernstein, Growth stocks outperformed Value stocks by 92% between 2015-2020.  Morningstar says it’s the biggest maw on record, topping the 1999 chasm.

If you’re in the Growth group, you’re loving it.  But realize.  By S&P Dow Jones’s measures, anybody could be a Value or Growth stock at any time.  It’s all in the metrics.

The larger question is why the difference?  AllianceBernstein notes that the traditional explanation is earnings growth plus dividends paid.  That is, if your stock is up 50% more than a peer’s, it should be because your earnings and dividends are 50% better.

If that were the case, everybody would be a great stock-picker. All you’d need do is buy stocks with the best earnings growth. 

Well, turns out fundamentals accounted for just ten percentage points of the difference.  The remaining 82% of the spread, as the image here from AllianceBernstein shows, was multiple-expansion.  Paying more for the same thing.

Courtesy AllianceBernstein LP. https://www.alliancebernstein.com/corporate/en/insights/investment-insights/whats-behind-the-value-growth-performance-gap.html

Put differently, 90% of the time Growth stocks outperform Value stocks for no known reason. No wonder stock-picking is hard.

Take Vertex (VRTX) and Fortinet (FTNT), among the two very best and worst stocks of the past year.  I don’t know fundamentally what separates them. One is Tech, the other Healthcare.

I do know that running supply/demand math on the two, there’s a staggering behavioral difference.  FTNT spent 61 days the past year at 10.0 on our ten-point scale measuring demand called Market Structure Sentiment.  It pegged the speedometer 24% of the time.

VRTX spent five days at 10.0.  Two percent of the time.  You need momentum in today’s stock market or you become a Value stock.

We recently shared data with a client who wondered why there was a 20-point spread to the price of a top peer.  We ran the data.  Engagement scores were about the same – 85% to 83%, advantage to our client. Can’t say it’s story then.

But the peer had a 20% advantage in time spent at 10.0.  The behavioral patterns were momentum-style. Our client’s, GARP/Value style.

Okay, Quast.  Suppose I stipulate to the validity of your measure of supply and demand, whatever it is.  Doesn’t answer the question. Why do some stocks become momentum, propelling Growth to a giant advantage over Value?

I think it’s three things. I can offer at least some data, empirical or circumstantial, to support each.

Let’s call the first Herd Behavior.  The explosion of Exchange Traded Funds concentrates herd behavior by using stocks as continuously stepped-up collateral for ETF shares.  I’ll translate.  ETFs don’t invest in stocks, per se.  ETFs trade baskets of ETF shares for baskets of stocks (cash too but let’s keep it simple here). As the stocks go up in value, ETF sponsors can trade them out for ETF shares. Say those ETF shares are value funds.

The supply of Value ETF shares shrinks because there’s less interest in Value.  Then the ETF sponsor asks for the same stocks back to create more Growth ETF shares.

But the taxes are washed out via this process. And more ETF shares are created.  And ETFs pay no commissions on these transactions. They sidestep taxes and commissions and keep gains.  It’s wholly up to traders and market-makers to see that ETF shares track the benchmark or basket.

The point? It leads to herd behavior. The process repeats. Demand for the same stuff is unremitting.  We see it in creation/redemption data for ETFs from the Investment Company Institute. ETF creations and redemptions average over $500 billion monthly. Same stuff, over and over. Herd behavior.

Second, there’s Amplification.  Fast Traders, firms like Infinium, GTS, Tower Research, Hudson River Trading, Quantlab, Jane Street, Two Sigma, Citadel Securities and others amplify price-moves.  Momentum derives from faster price-changes, and Fast Traders feed it.

Third is Leverage with derivatives or borrowing.  Almost 19% of trading volume in the S&P 500 ties to puts, calls and other forms of taking or managing risk with derivatives. Or it can be borrowed money. Or 2-3x levered ETFs. The greater the pool of money using leverage, the larger the probability of outsized moves.

Summarizing, Growth beats Value because of herd behavior, amplification of price-changes, and leverage.

By the way, we can measure these factors behind your price and volume – anybody in the US national market system.

Does that mean the Growth advantage is permanent?  Well, until it isn’t. Economist Herb Stein (Ben’s dad) famously said, “If something cannot last forever, it will stop.”

And it will. I don’t know when. I do know that the turn will prompt the collapse of leverage and the vanishing of amplification. Then Growth stocks will become Value stocks.

And we’ll start again.

Suddenly

Things are getting worrisome. 

It’s not just our spectacular collapse in Afghanistan less than a month before the 20-year anniversary of Nine Eleven.  That’s bad, yes.  Inexcusable.

Illustration 179312099 / Ernest Hemingway © Lukaves | Dreamstime.com

It’s not the spasmodic gaps in supply chains everywhere – including in the stock market. 

It’s not bond yields diving as inflation spikes, which makes sense like accelerating toward a stop sign.

It’s not the cavalier treatment of the people’s money (do you know we spent $750 million of US taxpayer dollars on the Kabul embassy, the world’s largest, then left the keys on the desk?).

It’s all of it.  Stuff’s jacked up, and it should bother us.

Karen and I went to a concert at Strings, the performing arts venue in Steamboat Springs.  If you want to feel better about yourself, go to the state fair.  Or an Asleep at the Wheel concert in Steamboat.

People are showing up with walkers, oxygen tanks, doddering uncertainly up the walkway.  I’m joking!  Mostly.  You get the point. (Lord, I apologize for my poor taste.)

And Asleep at the Wheel is awesome. I grew up on Hotrod Lincoln and The House of Blue Lights.

Anyway, covid mania continues so the hall serves no food or drink inside.  We’re dependent on food trucks outside for snacks.

None showed up.

There was a big bike ride this past weekend, three thousand gravel riders.  The food trucks were there. But there’s not enough staff working to cover more than one base. We and the oldsters were out of luck for tacos and cheesesteak.

But we were told they’d be there, and they weren’t. That kind of thing happened in Sri Lanka when I lived there for a year in college. But not in the World’s Superpower.

It gets worse.

The bartenders were shaking their heads. They couldn’t restock beforehand because the supplier was closed.  No staff.  A major liquor store – the biggest in the region with normally 3-4 registers running simultaneously – had to close because they had no staff to run the shop.

If you can’t stock your bar, you’re in trouble of collapsing as an empire. I say that in the barest jest only.

Back to the stock market.  The supply chain for stocks is borrowed shares. I’ve explained it before.  Dodd Frank basically booted big brokers from the warehouse business for equities.

Used to be, if you were Fidelity you called Credit Suisse and said, “I need a million shares of PFE.”

Credit Suisse would say, “We’ve got 500,000. We’ll call Merrill.”

And the wholesale desk there, the erstwhile Herzog Heine Geduld, would round the other half up.

Not so in 2021.  The banks now are laden to creaking with “Tier One Capital” comprised mostly of US Treasuries.  You’re the government and you need a market for debt, you just change the rules and require banks to own them, and slash interest rates so fixed income funds need ten times more than before.

Elementary, Watson.

What’s more, the stock market is a continuous auction. Everything is constantly for sale in 100-share increments. 

Except there aren’t 100 shares of everything always available. Certainly not 100,000 shares. So the SEC requires – they mandate it – brokers to short stock, create it in effect, to keep the whole continuous auction working.

Well, it’s getting wobbly.  There are sudden surges and swales in short volume now.  And the average trade size in the S&P 500 is 104 shares. Lowest on record.  Almost half that – 44% currently – is borrowed. In effect, the supply chain in the stock market is about 60 shares.

Depending on that tenuous thread is about 75% of three MILLION global index products.  Thousands of ETFs.  And $50 TRILLION of market cap.

The 1926 Ernest Hemingway book The Sun Also Rises has an exchange between two characters.  One asks the other how he went broke.

“Gradually,” he said. “Then suddenly.”

Afghanistan’s sudden collapse was 20 years in the making.  The same thing is happening around us in a variety of ways, products of crises fomenting in our midst that we ignore or excuse.

So what do we do about it?

The societal question is tough.  The market question is simple: Understand the problem, engage on a solution.

Public companies, it’s you and your shareholders sitting at the head of this welling risk.  We owe it to them to understand what’s going on. Know the risk of fragility in your shares’ supply chain. That’s a start. We have that data.

Solving the whole problem will require a well-informed, prepared constituency that cares.  Or all at once it’s going to implode. Not hyperbole. A basic observation.

Starting Point

The starting point for good decisions is understanding what’s going on. 

I find it hard to believe you can know what’s going on when you’re authorizing trillions of dollars of spending.  But I digress.

Illustration 22981930 / Stock Trading © John Takai | Dreamstime.com

Investor relations professionals, when was the last time you called somebody – at an exchange or a broker – to try to find out what’s going on with your stock? I can’t recall when the Nasdaq launched the Market Intelligence Desk but it was roughly 2001.

Twenty years ago.  I was a heavy user until I learned I could dump trade-execution data from my exchange into my own Excel models and see which firms were driving ALL of my volume, and correlate it to what my holders told me.

That was the seed for ModernIR. 

Today, market behaviors and rules are much different than they were in 2001. Active money back then was still the dominant force but computerized speculation was exploding.  What started in the 1990s as the SOES Bandits (pronounced “sews”) – Small Order Execution System (SOES) – was rapidly metastasizing into a market phenomenon.

Regulation National Market System took that phenomenon and stamped it on stocks. What was a sideshow to ensure retail money got good deals now IS the stock market.

Nearly all orders are small.  Block trades are about a tenth of a percent of total trades.  For those struggling with the math, that means about 99.9% (not volume, trades) aren’t blocks.  The trade-size in the stocks comprising the S&P 500 averaged 108 shares the past week.  All-time record low.

Realize, the regulatory minimum for quoting and displaying prices is 100 shares.  Trades below that size occur at prices you don’t even see.  I have a unique perspective on market machinery.  I’ve spent 26 years in the IR profession, a big chunk of that providing data on market behaviors to public companies so they know what’s going on (the starting point for good management).

Now I run a decision-support platform too for active traders that gives them the capacity to understand changing supply/demand trends in stocks – the key to capturing gains and avoiding losses when trading (we say take gains, not chances).  And I trade stocks too.  I know what it means when my NVDA trade for 50 shares executes at the Nasdaq RLP for $201.521.

Yes, a tenth of a penny.  It means my broker, Interactive Brokers, routed my trade to a Retail Liquidity Program at the exchange, where a Fast Trader like Citadel Securities bought it for a tenth of a penny better than the best displayed price, and was paid about $0.015 for doing so.

For those struggling to calculate the ROI – return on investment – when you spend a tenth of a penny to generate one and a half pennies, it’s a 1400% return.  Do that over and over, and it’s real money.  Fast Trading is the least risky and most profitable business in the stock market.  You don’t have to do ANY research and your investment horizon is roughly 400 milliseconds, or the blink of an eye.  Time is risk.

For the record, NVDA trades about 300,000 times per day. Do the math. 

Which leads to today’s Market Structure Map singularity – infinite value.  Trades for less than 100 shares sent immediately for execution – that’s a “market order” – must by law be executed.  The Securities Exchange Commission has mandated (does the SEC have that authority?) a “continuous auction market” wherein everything is always buying or selling in 100-share increments or less.

So algorithms almost always chop trades into pieces smaller than 100 shares that are “marketable” – meant to execute immediately.  And retail traders are browbeaten relentlessly to never, ever, ever enter marketable trades.  Only limit orders. That ensconces information asymmetry – an advantage for machines.  Every time I send a marketable trade for execution, I have to check a box acknowledging that my trade is “at the market.”

That’s the truth.  Algorithms pulverize orders into tiny pieces not to make them look like tiny trades, but because tiny trades are required by law to execute.  Large trades are not.  Limit orders are not.  Those both may or may not match.  But tiny trades will. There’s one more piece to that puzzle – the market-making exemption from short-locate rules.  For more on that, go to the youtube channel for sister company EDGE and watch my presentation on meme stocks at The Money Show.

Moral of the story:  The entire structure of the stock market is tilted toward the people and the machines who actually know what’s going on, and away from those who don’t.

Now.  What do you know about the stock market, investor-relations professionals?  You are head of marketing for the stock.  Got that?  Do you know how the stock market works?

If you don’t, you need us.  We know exactly how it works, and exactly what’s going on, all the time.  You should have that information in your IR arsenal. 

Nothing is more important. It’s the starting point.

Passive Pitfalls

We’re back!  We relished upstate New York and Canandaigua Lake. 

If you’ve never been to Letchworth and Watkins Glen parks, put them on your list.  See photo here from the former, the Upper Falls there. Alert reader Deb Pawlowski of Kei Advisors, a local resident, said in pragmatic investor-relations fashion, “Beautiful area, isn’t it?”

Boy, indeed.

Letchworth State Park – Tim Quast

And it was month-end.  Companies were demolishing earnings expectations, a thousand of them reporting last week, sixteen hundred more this week.  Most big ones pile-driving views and guidance saw shares fall.

But how can that be?  Aren’t markets a reflection of expectations?

Tim.  Come on.  You buy the rumor, sell the news.

If that’s how you’re describing the market to your executive team and board…um, you’re doing IR like a caveman.  Rubrics and platitudes ought not populate our market commentary in this profession.

Use data.  Everybody else does (except certain medical-science organizations, but let’s just step lightly past that one for now).

Last week across the components of the S&P 500, Active Investment was up 0.0%. Unchanged.  Passive Investment – indexes, Exchange Traded Funds, quants, the money following a road map – fell 7%.  The use of derivatives, which should be UP during month-end when indexes use futures and options (quarterly options and monthly futures expired Jul 30) to true up tracking instead fell 2%.

No biggie? Au contraire.  A combined 9% drop in those behaviors is colossal. In fact, Passive money saw the steepest drop Jul 30 since Aug 3, 2020.

I’ll come back to what that means in a moment. 

Finishing out the Four Big Behaviors behind price and volume, the only thing up last week besides short volume, which rose to 45% Friday from a 20-day average of 44% of S&P 500 volume, was Fast Trading. Machines with an investment horizon of a day or less. Up 4%.

Think about all the economic data dominating business news.  The Purchasing Managers Index came in at 55 versus expectations of 56. Jobless claims unexpectedly jumped above 400,000.  Inflation came in hotter than expected at a seasonally adjusted 5.4%, annualized. Egads!

As Ronald Dacey in the Netflix series Startup would say, “You feel me?”

I’m just saying data abounds and so do reactions to it. Yet we talk about the stock market like it’s got no measurable demographics or trends driving it.

Well, of course it does!  Why is there not a single report Monday – except mine on Benzinga’s “Market Structure Monday” segment on the Premarket Prep Show – driven by data?

By the way, on Monday Aug 2, Passive Investment surged more than 14%. New month, new money into models.  The reason the market didn’t goose into the rafters was because it filled the giant Friday Passive hole I just described.

Broad Market Sentiment at Aug 2 is 5.4 on our 10-point market-structure scale of waxing and waning demand. That’s exactly what it’s averaged for more than ten years.  The market is not a daily barometer of reactions to data.  But it IS a reflection of what money is observably doing.

And what it’s observably doing to the tune of about 90% of all market volume is not picking stocks. The money follows models.  The money speculates. The money transfers risk. Because time is risk. The riskiest of all market propositions is buying and holding, because it leaves all the price-setting to stuff that’s much more capricious.

The least risky thing to do in the stock market is trade stuff for fractions of seconds, because your money is almost never exposed to downside risk. This is how Virtu famously disclosed in its S-1 that it made money in 1289 of 1290 days.  Stock pickers just want to be right 51% of the time.

What’s the lesson? Everything is measurable and trends manifest precisely the way money behaves.  It’s darned well time that boards and executive teams – and investors – understand the market as it is today.

Oh, and why is the Jul 30 drop in Passive money, the biggest in a year, a big deal? Because the market corrected in September 2020. The so-called FAANG stocks (FB, AAPL, AMZN, NFLX, GOOG/L) fell 35% in three days.

There is Cause. Then a delay. Then the Effect.  There is DEMAND and SUPPLY.  If DEMAND declines and SUPPLY rises, stocks fall.  In fact, those conditions uniformly produce falling prices in any market.

We measure it. Sentiment is demand. Short Volume is supply. 

So. The stock market is at 5.4. Right at the average. But if the supply/demand trends don’t improve, the market is going to correct.  Can’t say when. But the data will give us a causal indication.

If you want to know, use our analytics. We’ll show you everything!

Supply and Demand

Happy Bastille Day!  Also, Goldman Sachs made $15 per share, 50% over expectations. The stock declined.

JP Morgan earned $12 billion on revenue of $31 billion, doubling views. Shares fell.

Why are banks making 36% margins when you can’t earn a dime of interest?

I digress.

Illustration 98288171 / Goldman Sachs © Alexey Novikov | Dreamstime.com

I told the Benzinga Premarket Prep show July 12 on Market Structure Monday (which we sponsor) that falling demand and rising supply in the shares of JPM and GS predicted the stocks would probably perform poorly despite widespread views both would batter consensus like Shohei Ohtani on both sides of the plate (baseball humor for you).

Sure, you could say everybody already knew so they sold the news. This is the kind of copout we get from people who want to tell us stocks are always expectations of future outcomes while simultaneously telling us “they were down because growth wasn’t quite good enough to get past the whisper number.”

That is BS.  Plain and simple. 

ModernIR can measure supply and demand in JPM and GS and observe that demand is falling and supply is rising.  Even amid the farcical characteristics of the modern stock market, that means prices will fall.

We can meter these conditions in your stock too, by the way.

The best thing about the stock market today is how well it reflects supply and demand.  Currency markets don’t. The Federal Reserve continuously jacks with currency supplies in such manipulative ways that almost no economic measure, from growth to inflation, can be believed.

But in the stock market, the math is so sacrosanct that it’s impervious to the ubiquitous interference by Congress and regulators with the mechanisms of a free, fair and open market. No matter how bureaucrats assail the battlements, nothing disguises the stark supply/demand fluctuations apparent in the data.

Wow, mouthful there, Quast.

I know it. I’m not kidding.

Look, regulators REQUIRE brokers to buy and sell stocks even when there are no buyers and sellers.  That’s called a “continuous auction market.”  That’s what the US stock market is.

Contrast that with an art auction.

Stay with me. I have a point.

The first requirement of an art auction is actual ART.  Even if its pedigree is suspicious, like Nonfungible Tokens (NFT).  There’s still art for sale, and an audience of bidders pre-qualified to buy it.  No shill bidders allowed.

Nothing so provincial impairs the stock market. While you can make stuff up such as always having 100 shares of everything to buy or sell, even if it doesn’t actually exist, you STILL HAVE TO REPORT THE MATH.

Think I’m joking about shares that don’t exist?  Educate yourself on the market-maker exemption to Reg SHO Rule 203(b)(2). Or just ask me. 

Anyway, everything is measurable. Thanks to rules dictating how trades must be executed. In GS trading the day before results, Short Volume (supply) was rising, Market Structure Sentiment (demand) was falling.

Unless stock-pickers become 300% greater as a price-setter than they’ve been in the trailing 200 days – a probability approaching zero – the stock will decline.

I don’t care how good your story is.  Story doesn’t change supply or demand. Only ACTIONS – to buy or sell or short or leverage – do.

This math should be the principal consideration for every public company. Were we all in the widget business, selling widgets, we wouldn’t say, “I hope the CEO’s speech will juice widget sales.”

Now maybe it will!  But that’s not how you run a widget business.  You look at the demand for widgets and your capacity to supply widgets to meet demand. That determines financial performance. Period.

The stock market is the same.  There is demand. There is supply. Both are measurable. Both change constantly because the motivation of consumers differs. Some want to own it for years, some want to own it for 2 milliseconds, or roughly 0.05% of the time it takes to blink your eyes.

Both forms of demand set price, but one is there a whole lot more than the other. If the only behavior you consider is the one wanting to own for years, you’re not only a buffoon in the midst of courtiers. You’re wrong.  And ill-informed.

Thankfully, we can solve that social foible. And sort the data for you.

The stock market is about supply and demand. Earnings season is upon us again.  The market will once more tell us not about the economy or earnings, but supply and demand.

Ask us, and we’ll show you what your data say comes next.

Data to Know

What should you know about your stock, public companies? 

Well, what do you know about your business that you can rattle off to some inquiring investor while checking the soccer schedule for your twelve-year-old, replying to an email from the CFO, and listening to an earnings call from a competitor?

Simultaneously.

That’s because you know it cold, investor-relations professionals.  What should you know cold about your stock?

While you think about that, let me set the stage. Is it retail money? The Wall Street Journal’s Caitlin McCabe wrote (subscription required) that $28 billion poured to stocks from retail traders in June, sourcing that measure from an outfit called VandaTrack.

If size matters, Exchange Traded Fund (ETF) data from the Investment Company Institute through May is averaging $547 billion monthly, 20 times June retail flows. Alas, no article about that.

You all who tuned to our Meme Stocks presentation last week (send me a note and I’ll share it) know retail money unwittingly depends on two market rules to work.

Illustration 91904354 / Stock Market © Ojogabonitoo | Dreamstime.com

This is good stuff to know but not what I mean. Can you answer these questions?

  • How many times per day does your stock trade?
  • How many shares at a time?
  • How much money per trade?
  • What’s the dollar-volume (trading volume translated into money)?
  • How much of that volume comes from borrowed stock every day?
  • What kind of money is responsible?
  • What’s the supply/demand trend?
  • What are stock pickers paying to buy shares and are they influencing your price?

Now, why should you know those things?  Better, why shouldn’t you know if you can? You might know the story cold. But without these data, you don’t know the basics about the market that determines shareholder value.

Maybe we don’t want to know, Tim.

You don’t want to know how your stock trades?

No, I don’t want to know that what I’m doing doesn’t matter.

What are we, Italians in the age of Galileo? What difference does it make what sets price?  The point is we ought to know. Otherwise, we’ve got no proof that the market serves our best interests.

We spend billions of dollars complying with disclosure rules. Aren’t we owed some proof those dollars matter?

Yes.  We are.  But it starts with us.  The evidence of the absence of fundamentals in the behavior of stocks is everywhere.  Not only are Blackrock, Vanguard and State Street the largest voting block for public companies and principally passive investors, but the majority of trading volume is executed by intermediaries who are not investors at all.

Stocks with no reason to go up, do.  And stock with no reason to go down, do.  Broad measures are not behaving like the stocks comprising them.  Over the whole market last week, just two sectors had more than a single net buying day:  Utilities and Energy. Yet both were down (0.9%, 1.3% respectively). Somehow the S&P 500 rose 1.7%.

You’d think public companies would want to know why the stock market has become a useless barometer.

Let me give you two examples for the questions I asked.  Public companies, you should be tracking these data at least weekly to understand changing supply/demand conditions for your shares.  And what kind of money is driving shareholder-value.

I won’t tell you which companies they are, but I’ll tweet the answer tomorrow by noon ET (follow @_TimQuast).  These are all 5-day averages by the way:

Stock A: 

  • Trades/day:  55,700
  • Shares/trade: 319
  • $/Trade: $4,370
  • Dollar volume:  $243 million
  • Short volume percent: 51%
  • Behaviors:  Active 9% of volume; Passive, 36%; Fast Trading, 32%; Risk Mgmt, 23% (Active=stock pickers; Passive=indexes, ETFs, quants; Fast Trading=speculators, intermediaries; Risk Mgmt=trades tied to derivatives)
  • Trend: Overbought, signal predicts a decline a week out
  • Active money is paying:  $11.60, last in May 2021, Engagement is 94%

Stock B:

  • Trades/day:  67,400
  • Shares/trade: 89
  • $/Trade: $11,000
  • Dollar volume:  $743 million
  • Short volume: 47%
  • Behaviors:  Active, 8% of volume; Passive, 24%; Fast Trading 49%; Risk Mgmt, 19%
  • Trend: Overbought, signal predicts declines a week out
  • Active money is paying:  $121, last in June 2021, Engagement is 81%

The two stocks have gone opposite directions in 2021.  The problem isn’t story for either one. Both have engaged investors. Active money is 8-9%.

The difference is Passive money. Leverage with derivatives.

Would that be helpful to boards and executive teams?  Send this Market Structure Map to them.  Ask if they’d like to know how the stock trades.

Everybody else in the stock market – traders, investors, risk managers, exchanges, brokers – is using quantitative data.  Will we catch up or stay stuck in the 1990s?

We can help.

Fab Problem

The world relies on one semiconductor company. 

How did an economic ecosystem let itself get boxed in like that?  About the same way it happened in the stock market.  There’s a lesson for public companies and investors.

Yang Jie and colleagues at The Wall Street Journal June 19 wrote a thorough treatise (subscription required) on the extraordinary rise of TSMC, as it’s known, under founder and Texas Instruments veteran Morris Chang.

Courtesy Dreamstime.com

And how 92% of the world’s most sophisticated chips depend on it. And nearly 60% of all chips, including all the ones for iPhones, the chips for cars, for PCs, for a vast array of devices operating on microcircuitry.

The company is a juggernaut and Morris Chang, 89 and now retired, is a genius.  But a different term comes to mind for participants in the semiconductor industry who let themselves become so perilously dependent.

And what about the consumers of the products?  Was no one aware that the boulevard ferrying technological essentials had a sign on it saying “not a through road?”

There was a failure of hindsight and foresight, a fixation on discrete objectives at the expense of broad comprehension of its mechanics and structure. Seems to me, anyway.

What’s this got to do with the stock market?

There’s a similar lack of imagination over the past 15 years among public companies participating in it.  Finra says it regulates about 3,400 brokers.  But 30 of them execute nearly all trading volume, data we’ve observed ourselves as the leader in Market Structure Analytics for public companies.

If you want to know how the stock market works, join ModernIR June 24 to learn how the Great Meme Stock Craze of 2021 happened – and can happen to you. 

Back to the point, it’s far worse than 30. About ten firms handle nearly all customer orders, and another ten set most of the prices but have no clients and aim to own nothing.

And $500 billion daily dances delicately through that machinery.

It happened the way it did for TSMC.  Once, there were many designers and fabricators.  Then designers discovered they could cut costs and burdens by leaving the fab business, outsourcing it to TSMC.

It made sense operationally. It’s a lot cheaper not building and running factories.  The WSJ article says a single fab may cost $20 billion to build.

And by the time you finish, maybe the technology has moved on, and now what?  TSMC will spend $100 billion the next three years staying current.  Hard to compete with that.

The same thing happened in the stock market, though for somewhat different reasons.  Among the thousands of broker-dealers buying and selling securities for investors, the great majority got out of the fab business, so to speak.

They don’t clear their own trades. They don’t even execute their own trades. They’re introducing brokers.  They sell to customers but outsource trading and account services.

It’s an operational decision. You can’t make money owning the infrastructure.  But the reason is market rules created by Congress and regulators.  First, stocks were decimalized. Brokers counted on the spread between buying and selling for profits.  Poof, gone. There went the fabs.

Then regulators in 2007 implemented the 1975 Congressional vision of a “national market system” connecting all markets electronically and setting in motion a rigorous rules matrix on handling trades. It forced most firms to send their trades to a handful capable of making the equivalent of a $20 billion investment in chip fabrication.

And intermediary profits didn’t vanish. Oh no, they’re larger than ever. But where big spreads between stocks in the past supported sellside research and deep arrays of stock-trading by firms with customers, now tiny spreads accrue colossally to a handful of firms you’ve barely heard of.

Read the Front Month Newsletter piece called Jane Street and the Arbitrage Royal Family.  Sounds like a vocal group from the 1960s. If Gladys Knight ran a market-making firm, she’d call it PipTrading LLC.

Jane Street is killing it. Arbitragers. Should that not raise eyebrows?

The Stock Market has the very same supply-chain issue that besets chips.  We only learned about Chip Trouble through the 2020 Pandemic. We shut down the global supply chain.  Now it can’t get back to level.

Supply-chain flaws will show in the stock market when a fab fails, the supply chain stalls. I’m not worried about it. You should be!  Public companies. Investors.  You’ve let parties with no vested interest in the market – regulators – hang it on a fragile wire.  Like the kind etched by Extreme Ultraviolet Lithography.

Look that one up.

Will we ask for a report on the stock-market supply chain before it’s our undoing?  Or is it TSMC all over again?

Money Highway

Is Jay Powell the new Investor Relations Officer for all public companies? 

Before we answer, the tranquil image at right free of the Federal Reserve and all the travails of modern economics and politics (and investor relations) is Catamount Lake near Steamboat Springs.  I love this time of year, the way the mountains glow verdant and lakes lie full among the meadows.

Back to the Fed and IR, the gaping deficit in investor-relations today is an application of quantitative and behavioral analytics. We have them. You can use them.  They tell us just about everything one would want to know about the equity market.

For the hermitic amongst us, the Fed chair takes the mic today to end a two-day policy meeting. Some have asked about the impact of monetary policy on Market Structure Sentiment, our ten-point gauge for share supply and demand in your stock, peers, industry, sector, and the whole market, so we’ll address it briefly.

For those not reading the Fed’s balance sheet, you should know it’s $7.993 trillion currently, and includes commitments to buy mortgage-backed securities running north of $200 billion continuously (no wonder mortgage rates are low despite a dearth of homes), reverse repurchases are a record-shattering $720 billion, and excess reserves are nearing $4 trillion.

In 2007, excess reserves averaged $10 billion. It’s 400 times more now, money with no place to go save begging for 10-12 basis points of interest from the Fed, which gave it to banks to begin.

Yeah, weird, right?  Why would you create money and then pay interest on it? Because your models have convinced you this is “good for the economy.”

The Fed’s yearly calendar typically includes four meetings with policy statements in March, June, September and December. The Fed doesn’t convene in May or October and calls an abbreviated November conclave ahead of the US election cycle.

Central banks were considered lenders of last resort under the Thornton-Bagehot (badge-it) model from the UK. They took only good collateral for monetary support (limited by gold and silver) and charged high interest rates.  Central banks were not seen as the fiscal pantheon but a lifeline for only those capable of surviving.

Thus, economies washed out failure.  Economic crises throughout history always trace to the overextension of credit. They are normal parts of the tension between human fear and greed.

Today, central banks take bad collateral and offer low rates. They prevent failure. That truncates the market mechanisms wanting to remove excess capacity when credit is overextended. It obviates competition and promotes monopolism (then government decries business practices).

Failure transfers from economies to the public balance sheet (and citizens bemoan these bailouts that are only possible through the central bank). I’m sure it’ll all work out.  Cough, cough.

Market Structure Sentiment is a constant meter of human fear and greed, through stock-picking, macroeconomic musings, quantitative models and speculation.  We don’t need to make monetary policy a separate input. The behavior of money already tells us what people think.

Money is the drug. The Fed is the dealer. 

Broad Market Sentiment told us in April the monetary party was over. That’s when money stopped flooding to equities and Broad Market Sentiment stopped rising toward 7.0 and stalled near 6.0.  Broad Market Sentiment is falling at an accelerating rate now.

We like to track daily behavioral change in the S&P 500.  Most times it runs from basis points to a few percentages. June 14, with Sentiment accelerating down, behavioral change mushroomed to 14%.

Not good.

We’re all on the Money Highway, public companies. You can have the best strategy for driving 55 (Sammy Hagar notwithstanding! Musical humor for you oldsters like me.). But if the Fed governs the freeway to 30mph, you’ll be stuck in the traffic, no way out.

And you should be measuring the behavior of money because it will tell you what everyone is doing. It’ll tell you what your stock pickers think. It’ll tell you if Passive money is coming or going. If you’re in deals, it’ll tell you if that deal gets done or gets competition.

So, is the Money Highway crumbling? The dollar is rising despite the Fed’s best efforts.  It gets hoarded into assets, and then prices stop rising. I don’t know if we’re about to tip over. I do know that every market correction in the modern era has been preceded by the same data we see now.

I wish we could all get off the Money Highway and take the backroads.

Blunderbuss

Do stores sell coats in the summer? 

No, they sell bathing suits. They match product to consumer.  Do you, investor-relations professionals?

I’ll tell you what I mean.  First, here’s a tease:  I recorded a panel yesterday with the Nasdaq’s Chris Anselmo and Kissell Research Group’s Dr. Robert Kissell on How New Trading Patterns Affect IR.

It airs at 4p ET June 22 during the 2021 NIRI Annual Virtual Conference.  Root around in the couch cushions of your IR budget and find some coins and join us.  We’ll be taking questions live around the panel.  Sling some heckling if you want!  It’s a great program.

Now, back to matching product to consumer.  The IR outreach strategy for maintaining relationships with investors often resembles a blunderbuss. Unless you went to elementary school when I did and saw pictures of pilgrims sporting guns with barrels shaped like flugelhorns, you probably don’t know what I’m talking about.

You threw some stuff in the barrel and loaded it with powder and ignited it and hoped some of what belched out went in the general direction you were pointing.

Illustration 165213327 © Dennis Cox | Dreamstime.com

If you don’t have anything better I guess it works. But the IR profession shouldn’t be blunderbussing wildly around.

I get it, Tim.  Be targeted in our outreach.

No, I mean sell your product to consumers who’ll buy it.  Your product is your stock.  Your story is a narrative that may or may not match your product.

Huh?

Stay with me.  I’ll explain.  This is vital.   

Think of it this way. REI is an outdoors store.  It’ll sell you cycling stuff and camping gear in the summer, and skiing gear and coats in the winter.  The data analytics they use are pretty simple: The season changes.

In the stock market, the seasons are relentlessly changing but the temperature doesn’t rise and fall in predictable quadrants to tell you if igloos or swimsuits are in. But the BEHAVIORAL DATA wax and wane like many small seasons.

The Russell 2000 value index is up 30% this year. The Russell 2000 growth index has risen just 3.8%.  Is value more appealing than growth?  No, as both Benzinga and the Wall Street Journal reported, GME and AMC rank 1-2 in the index.

The crafters of the indices didn’t suppose that movie theaters in the age of Covid or a business built on selling games that have moved online were growth businesses.

They’re not. But the products are. These are extreme cases but it happens all the time.

CVX, market cap $210 billion, is in both Value and Momentum State Street SPDR (S&P Depositary Receipts) Exchange Traded Funds. It’s got both characteristics AT DIFFERENT TIMES.

AAPL, in 299 ETFs, is used for focus value, dividend strategies, technology 3x bull leveraged exposure, high growth, luxury goods, risk-manager and climate-leadership investing, among a vast array of other reasons.

Look up your own stock and see what characteristics are prompting ETF ownership.  That’s data you can use.  Don’t know what to do? Ask us. We’ll help.

How can ETFs with diametrically opposed objectives use the same stocks? That’s something every investor-relations professional needs to know. ETFs control $6 trillion in the US alone. They’re not pooled investments and they don’t hold custodial accounts like mutual funds.

Should the IR profession understand what the money is doing in the stock market?

Set that aside for now. There’s an immediate lesson to help us stop behaving like blunderbusses.  Stocks constantly change. I think rather than targeting specific investors, you should build a big tent of folks you know.

And you should RECONNECT with them in highly specific, data-driven ways.  If you just call investors you know to follow up, you’re doing IR like a cave man. Stop doing that.

The deck is already stacked against investors focused on story.  They need all our help they can get! I’ve explained it many times.  Rules promote average prices and harm outliers.  Passives want average prices. Stock pickers want outliers.

If we want investors interested in our stories to succeed, use DATA to help them.

Like this. We met with a Financials component yesterday.  The data show a big surge in Passive money in patterns.  You won’t see it in settlement data.  It never leaves the custodian because it the same money moving from indexes to ETFs and back.

But ModernIR can see it in near realtime.

The IR department should be calling core GROWTH names, even though it’s a value story.  That wave of Passive money is going to lift the stock. Growth money buys appreciation. Value money buys opportunity.

You want to move from blunderbuss to data expert in modern markets?  Ask us.  You don’t have to be way behind like the Russell indices.  You can be way ahead, like a modern IRO.

Get rid of that blunderbuss, pilgrim.   

Rewards of Risk

Investor relations involves risk.  And that’s good. 

Don’t you mean investing involves risk, Tim? And why is it good?

Well, yes, investing is a risky endeavor. But I mean the role of “investor relations,” the liaison to Wall Street at public companies, requires taking risk.

It’s not a “yes” job.  You’ll need the courage and occasional temerity to tell your executive team and board what each needs to understand about the equity market – and occasionally what not to do.

Time would fail me to tell you about all the times I’ve had conversations with IR folks who say, “I’m not sure my Board is willing to….” Pick your thing.

In my case, it happens when I explain that 10% of trading volume is rational stock-picking.

Some recoil in horror.  What am I going to do if the executives know 90% of our trading volume is something we can’t control?

If they don’t know, you’ll face unrealistic expectations.  Considered that possibility?  If your board and executive team don’t know how the stock market works, is that a good thing or a bad thing?

We’re still getting to what’s good about risk.

It’s our job to know how the stock market works and to be able to articulate what’s controllable and what’s not. Take the so-called meme stocks like AMC.  I credit AMC leadership for raising capital while the market embraces the stock.  They didn’t make the rules that permit crazy trading. They’re adapting.

And do you know how a stock with 450 million shares outstanding can trade 650 million in a day?  Yes, Fast Trading, in part.  Machines moving the same shares over and over.

But the big reason reaches back to the basics of how today’s stock market works under contemporary rules.  All shares must pass through a broker-dealer. All stocks must trade between the best bid to buy and offer to sell.  And all brokers who are registered to trade stocks must make a minimum bid and offer, both, of 100 shares.

Well, what if there aren’t 100 shares available?  There are no appliances available to install tomorrow in your house.  The electrical market is running out of GFCI outlets. Sherwin Williams is running out of paint.  You may not be able to get a load of lumber.

Yet somehow, magically, there is always 100 shares of your stock for sale. 

It’s not magic. It’s rules.  Rules require brokers and stock exchanges to connect to each other electronically. If they’re registered and not using “Unlisted Trading Privileges” to bid or offer rather than do both, brokers must commit to 100 shares each direction.

Well, it’s impossible. There aren’t 100 shares of everything available at every moment without artificial intervention.

So the SEC let’s brokers create shares under Rule 203(b)(2), the market-maker short-locate exemption, in order to assure 100 are always available.  Well, technically they’re shorting it without having to locate it.  Those trades have to be marked short.  And AMC has had short volume of 50-60% of total trading for two weeks running.

Brokers are manufacturing stock. That’s how the meme stocks scream. Brokers are selling buyers shares that don’t exist. If you’re in the IR profession, should you know these things?

So, why is risk good?  Mitch Daniels, President of Purdue University and ever a ready source for well-turned phrases, told graduates last month, “Our faculty has determined that data analysis, as we now call it, should be as universal a part of a Boilermaker education as English composition.”

We IR people are good at English composition. We need to be great at data.  Because, quoting President Daniels, certainty is an illusion. Just like those shares of AMC, and a swath of the whole market.

But leaders offer the capacity to understand the knowns and unknowns and make confident choices and recommendations.

I think data analytics are as vital to the IR job now as knowing Reg FD and Sarbanes-Oxley. The market translates our companies into digital value.  We need to understand it.

Otherwise we’ll be too fearful to lead our execs and boards boldly through the market we’ve got today.  Sure, there’s risk.  But the rewards of bold leadership never go out of style.  And we need that now more than ever.