Tagged: IR Magazine

Flying Machines

While France roasts on both the heat of the US women’s soccer strikers and mother nature’s summertime glow, in Steamboat Springs Lake Catamount sits alpine serene, and it was 46 degrees Fahrenheit (about the same read in Celsius in France) on our early bike ride yesterday.

In the USA, we join figurative thankful hands with you across the fruited plain to mark this amazing republic’s 243rd birthday.  Long may the stars and stripes fly.

What’s flying in markets are a bunch of machines.

Joe Saluzzi, one of our marquee panelists at the NIRI Annual Conference last month, spoke to IR Magazine on how the market works and why investor-relations professionals need to educate themselves. As Joe says, much of your volume isn’t investment but trading. It distorts perceptions of real supply and demand.

Why does that matter?  Because your board, your executive team, your investors, see your stock as a barometer of fundamentals. You need to know when that’s true – and when it’s not.  Misunderstanding what the market is doing can lead to big mistakes.

What if your stock declines sharply with results and management believes it has miscommunicated key messages (and blames you)?

Suppose market structure shows Active money bought in the preceding two weeks – because you’ve been talking regularly over the quarter about what you’re trying to do strategically. Then before the call, they stop buying to pay attention to what you say.

The absence of what had been present will be patently apparent to Fast Traders. They will sell and short you.  Whoosh! The flying machines take you down.

Every IRO should understand, and observe, and report internally to the executive team and the board, the starkly apparent data demonstrating these facts. We have that data. For anyone traded in US markets.  Including your peers. And yes, you can see that data.

Story is vital, sure.  But the way we think about the influence of story, fundamentals, strategy, should be predicated on facts, not a perception diverging from reality.

Illustratively, CNBC ran a headline last Saturday reading “80% of the stock market is now on autopilot.”  Referencing a JP Morgan client note, the reporter said about 60% of assets are in passive indexes and Exchange-Traded Funds (ETFs), with another 20% following systematic strategies.

An aside, I think Morningstar is behind the curve on measuring the pervasive and endemic shift to passive in stocks. It’s not just assets under management but the composition of volume.

A WSJ article (registration required) last December describing the “herdlike behavior of computerized trading” also quoted JP Morgan officials estimating that 85% of market volume was something other than Active investing.

Those of you using our analytics know we track the facts with precision. Currently, it’s 87%, with just 13% of market volume the past week from Active investment.

Does it render IR obsolete?  Of course not!  Stop thinking your job consists of talking to investors.

That’s part of the job, sure. But IR is a strategic management function. Your job is to know what all the money is doing, all the time, and communicate important facts about trends and drivers to the board and executives so they’ll have realistic expectations.

And your job is to manage the market for your shares, which includes sorting out what’s controllable and what’s not, and providing important metrics on equity health and drivers around news, earnings, and non-deal road shows – and on a regular basis, proactively, as all good business managers do.

That’s IR today. The market is not full of “noise.” It’s full of flying machines, amazing sensors feeding back vital data to observers like us, who in turn help you take command of the equity-market battlefield as trusted strategic advisor to your executive team.

Ponder that with a cold beer (or a cold Rose from Provence!) and a flag this holiday week.  Happy birthday, USA!

Lulled by Markets

Palo Alto is a great town.

While there sponsoring IR Magazine’s West Coast Think Tank last week we feasted at Evvia and Fuki Sushi. Denver’s got fine sushi. Our Sushi Den on South Pearl Street flat demoralizes Bryant Park’s Koi. Proprietors Toshi and Yasu Kizaki each day fly in hand-picked selections from the Tokyo fish market. You gotta get up pretty early to beat our fish. Fuki Sushi apparently rises at dawn. We ate to dullness.

Speaking of lulled, exchanges began introducing new SEC-approved Limit-Up/Limit-Down (LULD) single-stock circuit breakers Monday, smartly easing the program into effect. More will be added until the largest 2,000 are covered by late May and the rest of the market through August.

“It sounds simple, but for firms managing thousands of customer orders, you have to program how you’ll manage them, how you’ll deal with quotes and trades across 50 destinations, routing decisions and execution quality,” Chris Concannon, partner at high-frequency trading firm Virtu Financial, told Bloomberg reporter Nina Mehta.

Under LULD, stocks won’t be permitted to trade more than a certain percentage from their rolling five-minute average prices. The SEC mandated these changes after the Flash Crash of May 6, 2010, sent the S&P 500 plunging over a hundred points and the Dow Industrials a thousand points, before both rebounded, all in roughly twenty minutes. (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…)

Market Structure Matters

“I get out and meet investors. Tell the story. The rest is noise.”

That’s what an IRO I’ve known since the 1990s said last week over a web meeting about Market Structure Analytics.

Speaking of which, we’ll be discussing this notion with two investor-relations officers who make Market Structure part of complete and exciting IR programs at IR Magazine’s West Coast Think Tank April 4 in Palo Alto. Space is limited. If you want to join our conclave, email me for an invitation.

There are three big reasons why telling the story and ignoring the market is a bad idea. First, anybody can do that (I know – I used to do it!). It’s IR measured by setting meetings, which is like monitoring the success of an advertising campaign by counting the ads you’ve run. It’s clerical.

IR is not a clerical function. It’s not about setting meetings. It’s a strategic effort with direct implication to the reason your business exists: To deliver shareholder value. As I once contended with my CFO when I was in the IR chair, if we’re not willing to spend the price of one non-deal road show on tools to measure what we’re doing, then why are we doing it? (I got the tool, by the way, but it didn’t do what we needed…and that’s why Market Structure Analytics exist today).

A decade ago when I was an IRO, rules were swiftly swinging into place that now have transformed trading. Enron and Worldcom and Elliott Spitzer’s contention that research and trading should be separated and an SEC decision to replace vibrant and unimpeded commerce with a National Market System were just flaring like dust devils in plowed Midwest fields. Fundamental investment hadn’t yet been routed from public markets to private equity by the Indy Racing version of equity-trading, and a majority of volume still had bottom-up roots. (more…)

En Route to Knowing

I got a kick out of that movie, Night at the Museum.

Yes, it’s old, and no, we haven’t seen any of the movies that contended alongside Argo for Best Picture this year. But there were several times yesterday as clients reported results in a restive currency-addled market when I thought how things aren’t what they seem. If you could get below the surface, you’d find a tiny little tough cowboy who looked like actor Owen Wilson.

Just kidding. All analogies break down. But often in the market, what you think you’re seeing isn’t what it seems. One client’s share price shot up in the early going with results, jumping nearly 8%. Then it declined 4%. Imagine if gas prices did that every day. But I digress. The price finished right in line with the Rational level – fair market value from a fundamental perspective.

Why the gyrations? Speculators had bet on weak results (something that can be observed), and results weren’t. Traders covered, driving price up. Passive investors like indexes were Hedged. They’d farmed out risk, but surrendered upside. As price suddenly rose, counterparties with rights to gains above certain levels locked them. They’re not investors. When they sold to keep their collar profits, price reverted to the Rational level.

Market price may or may not reflect an investment purpose. Let’s use an example many can appreciate: An analyst ups her price target and rating on your shares, and price climbs 4%. We assume that investors responded. We explain to management, “Investors liked the Outperform rating and higher price target, and bought.”

But was it investment behavior? What if those gains evaporate three days later when the dollar rises100 basis points because Europeans think Italy will need more help from Germany and rush to buy dollars? That’s risk-management behavior, right? (more…)