Tagged: Market Structure

Maxine Waters

I knew it would come to this. Rep. Maxine Waters would be on CNBC talking about market structure.

Last week during options expirations, Congress paraded supposed culprits in the Great Gamestop Mania before itself.  And it wasn’t about financial misdeeds, somebody leading shareholders astray. No, it was about MARKET STRUCTURE.

What’s market structure?  The behavior of money behind price and volume, in context of rules.  What makes stocks tick.  How the market works.  Pick your thing.  But it’s got nothing to do with STORY.

The stock market is driven by supply and demand, which are largely governed by rules and machines.  Scrawl that on a mirror.

And Investor Relations in 2021 should be about advising the executive team and board on valuation, strategy, uses of shareholder capital, and capital-formation in this market.

That’s a lot bigger job than “telling the story.”  The story doesn’t directly connect to the supply or demand in your shares and what drives both.

GME didn’t go to $483 because of high short interest.  It skyrocketed because market structure enabled demand far larger than the availability of actual, physical shares to be accommodated at ever-higher prices.

Sure, in the process hedge funds short GME on a rational basis were nearly bankrupted. Had the supply of GME been limited to its shares outstanding, the price would not have risen so high.  Why? There would have been nothing left to buy. If you can’t buy it, the price can’t rise.

Right now, short interest says IFF is the most shorted stock in the market.  But it’s NOT the most shorted stock.  I’ll explain.

IFF Short VOLUME, the part of supply dependent on borrowed stock, has been close to 70% for more than 200 trading days.  Trading machines will find stocks with a predictable propensity to rise or fall.

What’s more, as we’ve explained before, market makers, a fancy name for the person at the airport taxi stand you don’t need who hails a cab for you from the line sitting right there, can manipulate supply and demand by creating shares out of thin air.

Traders, you can never, ever, ever beat them.  Because the regulators said so.  What do we mean?  Well, that market makers are exempt from the rules that apply to you.  It means you can’t win, and it means there isn’t a uniform rule, uniform justice. Why is that okay?

Public companies, the regulators and the rules favor the machines.  So while you spend over $5 billion annually complying with rules, and much more trying to get “governance” and “targeting” right, we might get more purchase, so to speak, from that money by spending it lobbying Congress to make the market fair for us.

So.

What’s really the most shorted stock?  Screening out ones that hardly trade, it’s PRO.  It’s 86% short.  Least shorted is PNM, in a big green deal (good name for a rock band) with AGR.  PNM is 7% short — that is, of its trading volume, a tenth of IFF’s.

Knowing these facts is also part of investor relations in 2021.  And trading stocks.  In the same way that knowing what made your company better fundamentally was key to the job, so now is knowing your characteristics.

Traders, it’s the same as knowing it was time to leave TSLA Jan 22.  You can always come back when TSLA market structure turns.  And if Maxine Waters is asking questions, you should be in cash.

Big Cheese Grater

Good offense beats good defense.

These five words are the heartbeat of the Saban Dynasty in football at Alabama – and the reason for the Gamestop trade in the stock market.

Promise, this piece isn’t about sports. It’s about how retail traders killed institutions.

It takes some history. Go back to 1995, and the spread charged by brokers executing your trade was about 13%, or an eighth of a dollar.  That’s on top of the commission you paid.

Along came Electronic Communications Networks (ECNs) offering to match trades at a fraction of that spread automatically using computers.  They took 50% of trading from exchanges.

The exchanges responded in three ways.

Follow me here. I’m explaining why GME went up 1,000% and why retail money is running circles around institutions.  Everybody in the markets should understand it.

Back to the exchanges.  They first cried foul to regulators and sued ECNs.  Then they bought the ECNs (ECNs Brut, Island and Archipelago became technology engines for the Nasdaq and the NYSE).

And they adopted two ECN pillars:  They began paying high-speed traders to set prices, and they invested in algorithmic technology to help big institutional customers fill trades in a stock market infested with small orders and fast trades.

Step forward.  The SEC sniffed the wind and first required stocks to trade at a penny spread and then forced all the markets together under Regulation National Market System, thinking it would address what the ECNs had highlighted: The market wanted smaller intermediary spreads.

Still with me?  GME went up 1,000% because of what we’re talking about here, and institutions have been left out in the cold (public companies, you need to know this!).  I’m getting to it. Don’t quit!

Back to our story, institutional investors and the brokers helping them execute trades invested billions of dollars in computerized trading systems that would split up big orders – like a million shares – into tiny 100-share trades that, and this is key, wouldn’t chase after deviations in price.

I liken it to seeing the market as a cheese grater and institutional orders as a block of cheese. Technologists figured that a stock market forced into tiny spreads and trades would mean constantly changing prices. So why not fashion algorithms that would position the block of cheese of buys and sells like tiny trades – all the teeth on the grater?

Genius!

And so exchanges crafted order types to help big brokers and their customers match the cheese of orders to the grater of the market.

It was a compromise, not an act of service.  After all, exchanges continued to pay traders to be the best bid or offer – the going rate is around 25 cents per hundred shares still – so the cheese graters for big institutions would sit unseen behind the displayed prices for stocks, grating away and filling trades at midpoint prices.

And then along came the Reddit mob.

The unwitting genius behind the crowd is that it doesn’t know market structure. It just followed greed, a human impulse. That is, the aim of the Reddit gang is to run prices up. The aim of the Big Cheese Grater is to fill orders as prices run up and DOWN.

The whole structure of the stock market, with blessing and help from regulators, encourages prices to move both up and down.

It all fits together.  Traders will always make 100 shares of every stock available if prices move up and down.  If prices move up and down, exchanges make billions selling data. And Fast Traders, the supply chain of the stock market, need prices to move up and down to profit going long and short.

Good offense beats good defense.

Buys are offense. Algorithms are defense. And the former flat out OWNED the latter, because the Reddit traders, without understanding what they were doing, chose only offense. They demonstrated a nervy willingness to chase prices higher that utterly demolished algorithms designed, like cheese graters, to capture up-and-down moves.

Intermediaries wanting to make $0.003 per trade didn’t care if the cheese grater malfunctioned. So they fed the mob frenzy what it wanted. Higher prices.

And this can happen every day, any day. In anything.

The problem for public companies is your big investors need to put $2 billion into the market within a price-range to get a return. A retail trader just needs 10% on 100 shares.

You see? It’s a problem 30 years in the making. Now it’s here.

What fixes it? That’s a topic for another day. But it’s coming. It’s Regulation National Market System II.  We’ll see it within two years.

Metastable

Editorial Note:  A giant thank you to Client Services Director Perry Grueber for penning last week’s Map.  He’ll be back regularly, by popular demand. This week you’re stuck again with me. -TQ

Something is worth what another is willing to pay for it.

That’s the lesson of the maelstrom in financial markets, from wood pulp futures, to bitcoin, to GME, to AMC, to wherever the next Dutch tulip bulb of the 21st century showers the shocked with inflationary sparks.

Before we get to that, we’re back from riding the trade winds around Antigua, where high season in the Caribbean looks like turnout for a vegan tour at an abattoir. Nobody is there.  And the Caribbean has no central bank doling out cash for sitting home trading in a Robinhood account.  We did our best to offer economic support.

I’ve posted some photos of our circumnavigation here.

Oh, and you’ll recall that my Jan 27 Map said, “Congrats, Tom Brady. We old folks relish your indomitable way.”  When you’re going to sea, always bet on the buccaneers. And the old guy.

We were saying a thing is worth what somebody is willing to pay.

Yesterday GME closed at $50.31.  On the Benzinga Premarket Prep Show Jan 25, right before we grabbed our flipflops and duffle bags and bolted with our Covid19 negatives for the airport, I told the audience, “Market Structure shows GME is going to go up.”

I didn’t know it would rise to $483 while we were at sea.  But somebody was willing to pay more. Until they weren’t.

Right now, AMC, BB, BBBY, NOK, and so on, are outliers.  What if the scatterplot gets crowded?

Most of the people on what Karen calls the “What Do You Think of THIS Stock?” TV shows are still talking about the PE ratio. Earnings growth. Secular trends. Economic drivers. You get the idea.

Investor-relations people, are you prepared for a market full of Gamestops – surging highs, avalanche tumbles? How about you, investors? 

In physics and electronics, “metastability” is the capacity of a system to persist in unstable equilibrium. That is, it seems solid but it’s not.  Like the stock market.

Don’t blame Reddit.  I love the flexed muscle of the masses.  I’d like to see it in society elsewhere, frankly.  A horde of people who refuse to be told what to do or told they can’t.  A mob of unruly traders is wholly American.

But all those people, and all the rest of us in the capital markets, ought to understand the metastability that makes a GME or an AMC possible.

Most retail orders are sold to intermediaries trading at extreme speeds.  Those firms aren’t calculating PE ratios. They’ll pay somebody for a trade so long as they know somebody else in the pipeline is willing to pay more.

Hordes of limit orders hit the pipeline, and intermediaries see the whole hierarchy. They race prices up, skipping swaths of limits by raising the price past them. So those traders, if they’re greedy and willing to chase, jump out of line and enter new, higher limit orders.

And mania ensues because somebody is willing to pay more. 

When the high-speed intermediaries see that limit orders to buy and sell are equalizing, they stop filling limit orders, they short stocks, and they skip limit orders on the way down, and the whole cavalcade reverses.

And it’s not just retail flow or big high-speed penny-pickers in the middle. Quant firms do it. Hedge funds do it.

Two factors make a metastable stock market possible.  First, rules require a spread between the bid to buy and offer to sell.  So somebody will always have a split-second motivation to pay more for something than somebody else.

Indeed, it’s what regulators intended. How do you foster a market that never runs out of goods? Give them a reason to always buy and sell (exchanges pay them for best prices to boot). And regulators let those Fast Traders manufacture shares – short them – that don’t exist, and persist at it for weeks.

The market is nearly riskless at any price for the raciest members moving unseen through the Reddit ranks. They bought the trades. They know what everybody is doing.

And that’s why we have a metastable market.

The alternative? You might not be able to buy FB or sell NFLX at times.

Would we rather have a false market with ever-present orders or a real market occasionally without them? Regulators chose the former. So did the Federal Reserve, by the way.

And that’s why everybody in the US stock market better know how it works. We do. Ask us for help, public companies, and investors.

IS REPORTING NOW JUST A SIDESHOW?

“Looking good, Valentine!” “Feeling good, Louis!” A gentleman’s bet. But maybe not so fast.

Farce met Street last week with good reason distracting many in the Finance and public company arenas. Far better chronicled elsewhere (here a good one on Benzinga’s Monday Pre-Market Prep – pls skip the clunky ad), but this weekend I couldn’t resist the parallels to 1983’s Trading Places – I’ll leave you to Twitter, your browser or favorite streaming service and bring the focus to Market Structure.

With all rights to Messrs. Russo, Landis, Harris, Weingrod, Aykroyd, Murphy, Ms. Curtis and Paramount, et al.

We start February with a significant percentage of our clients yet to report quarterly and year-end results and to confirm their forward-looking expectations. Tough challenge in a Market seemingly growing more disinterested.

No question your IR team is working long hours with counselors and non-public facing finance, accounting and marketing coworkers to develop a cogent, clear message, to tie-out results and craft outlook statements and public disclosures; all too often, a thankless job.

It doesn’t help that the Market and the trading in individual equities are seemingly chaotic and unpredictable. But are they? As a subscriber you’re likely conversant in Market Structure – our view of the Market here at ModernIR (if no, read on and please reach out to our Zach Yeager to set up a demo). So like the polar bear swimmers here in Minnesota let’s dive in – we’ll be quick.

Here’s how the Market has evolved in the first month of 2021 – changes in the demographics of trading:

Note the Passive Investment retreat – would have been fair to expect the opposite with all the month-end true-ups for ETFs, Index and Quant Funds – but it’s a repeating month-end behavior recently followed by buying. The surge of volatility arose from increased Fast Trading – machine-driven High Frequency trading, and yes, some Retail day trading.

Both categories are largely populated by algorithmically driven trading platforms; “Passive” (a largely  anachronistic designation – and far from it or the buy and hold strategies the name conjures) today constantly recalibrate collateral holdings with dominate behaviors suggesting little long-term primary focus. “Fast Trading” – pure execution speed, volume-based trading; its goal beyond vast incremental profits – no overnight balance sheet exposure.

Short Volume trading rather than building, declined and Sentiment remained persistently positive (5.0 = Neutral) and never negative. Does this sound disorganized? For forces dominating early Q1/21 equity trading this was a strong, dynamic and likely very profitable period.

The cruel truth – machine trading is no gentlemen’s bet. Brilliant in execution, these efforts have one goal – to game inherent trading advantages over slower moving Market participants – folks that demand conference calls, executive time, build and tie-out spreadsheet models and trade in non-Market-disruptive fashion – the traditional IR audience. The system rewards this – topic for another time.

From a pure trading standpoint, traders behind 9 out 10 trades in the final day of January trading placed minimal value on traditional IR efforts as their bots rocket through Short Seller reports and quarterly management call transcripts, scan real-time news feeds and playbacks for tradable intonation in your executives’ delivery and make mathematical judgments about the first 100 words of each press release.

As IR professionals its incumbent that we, rather than be demoralized by the evolution and dominance of short-term trading, engage, and become intimately versed in these data and these Market realities. The competitive advantage is in understanding and minimizing false conclusions in decision-making. Management and the constituents of long-term investors – yes, they are still legion – and expect no less.

Let us show you how.

Perry Grueber filling in for Tim Quast

  

 

Last Year’s Language

Happy New Year!

Last year’s words belong to last year’s language and next year’s words await another voice.

TS Eliot said that. If you need a break from the daily tempest, read my favorite of his, The Love Song of J Alfred Prufrock.

So often what is said of the machinery of the stock market reminds me of a line from it.  In a minute there is time for decisions and revisions which a minute will reverse.

Against that poetic backdrop, let’s review the math of the stock market and look ahead at what it may this time bring.

Stocks were up. Simple math.  Like the $7.4 trillion now on the Federal Reserve’s balance sheet, representing the spread between what we had before and what we next needed. The market valued that intervention more than real production.

Ponder that. Read some TS Eliot.  If you’ve wondered what Modern Monetary Theory is, this is it.  If economic activity decreases, the government manufactures offsetting money to get the collective back to level.

So last year’s language says we can survive a long-term economic idling. But next year’s words subsequently speak of the ebbing value of money and work and time.  Repeated, it will lead to societal collapse because we cannot pay out money without getting something – stocked shelves, harvested crops, cut hair, worked biceps – in return.

Thomas Jefferson said in a 1790 letter to William Carmichael, “The right to use a thing comprehends a right to the means necessary to its use, and without which it would be useless.”

Next year’s words come from a past voice. If governments insist they can shutter the economy, people lose the most foundational right of all: Independent survival through freedom and initiative.  It transcends government and squats at the base of Maslow’s Hierarchy beside food, clothing and shelter, which shouldn’t depend on another’s edict.

The Hegelian Dialectic – the tension of competing ideas – has become stretched cultural rawhide. Yet the stock market merrily courted 50 million online brokerage accounts and a sort of Bacchanal befitting an F Scott Fitzgerald novel.  Party time!

Let’s go, however, to the math.  The graph here compares a number of the core ModernIR quantitative measures of market behavior central to our intellectual property, Market Structure Analytics for stocks comprising the S&P 500.

By the end of 2020, Active Investment – classic stock-picking, the money motivated by long-term financial performance – was down almost 32% year-over-year as a share of trading volume and totaled less than 10% of the total, a historical low.

What prices the market is what transacts in it.  Not who owns the stocks.  It’s the same as a neighborhood. What prices it isn’t who lives there but what’s paid for what sells.

Even Passive Investment was down about 14% year-over-year.  The big surge driving the stock market to all-time highs as the whole globe dove under gargantuan piles of face masks was Fast Trading and Risk Mgmt.  The former is speculation. The latter is using derivatives in place of stocks.  These behaviors are dominated by firms like Citadel Securities, which buys a bulk of all retail trades from those online accounts, and Wolverine Trading, a low-latency firm focused on automating trade-hedges.

It’s not Warren Buffett and Boston-area portfolio managers.  That was yesterday’s language.

It’s worth noting that volatility was up 44%. Short volume at 43% of all trading volume was almost unchanged from the end of 2019.

What did you think drove stocks in 2020? If you watched CNBC like we all do in investor-relations and investing, it was the work-from-home trade, the future of electric vehicles, the horse race in Covid-19 vaccines.

People and machines speculated on those, yes. But you can’t call 2020 an investment market.  It was one of the great speculative soirees in human history. A romp through Dutch tulips (I’ll let you hunt that one down).

So, what’s it mean for 2021?   I’m reminded of another snippet of Thomas Jefferson’s, who observed via letter,  rather than Facebook post, to William Barry, later Andrew Jackson’s Postmaster General, that, paraphrasing, an extensive, corrupt, and indifferent regime would be met by reformation or revolution, the one or the other.

The stock market’s behaviors are extensive and indifferent and have corrupted its purpose.  What follows if people care is reform or revolt.  Both are opportunities, not obstacles.

The revolutionary opportunity for companies and investors is to see the market just as we presented it here. And there’s reform coming to rules and data.  More on that as 2021 unfolds.

Last year’s market language bred 2021 with generational speculative risk.  That doesn’t mean we’ll be measuring our lives out with coffee spoons (see TS Eliot). We have sure heaped a load on ourselves, though, as a new decade begins.

We’re not worried. We’re watchful. Now, if you’ll excuse me, I’ve got some things to read.

Hacky Sack Stocks

“We track everything in our facilities, down to the number of gloves we use. Why wouldn’t we track everything in the market? Our primary purpose is creating

shareholder value.”

So said one of the investor-relations rock stars of the modern era over dinner with executives on a non-deal roadshow.

I learned about it by phone this week. In a non-Pandemic year I visit as many clients as I can.  I don’t miss the airports. I do miss the faces.

In 2020, I’m calling clients, the old-fashioned way to hear these fabulous examples of great IR leadership.

What did the execs think of the answer?  They loved it so much that this person is now in charge of corporate development and other business initiatives.

This IRO introduced market structure to the board of directors.  Nobody had.  They recognize now that story is just one driver of shareholder value, and not the biggest.

Now, maybe you quail at the thought of getting more responsibility by demonstrating value and leadership.  I get it. Most of us are pretty busy already.

But if adding value for your organization is on your list in 2021, IR professionals, here’s a simple way.  Teach your board and executives the basics of the market. Who else is going to do it?

Another person doing a great job teaching execs how the market works is hacky sack expert Clay Bilby, who found a creative use for the ModernIR stress ball from the NIRI Annual Conference box of goodies.

Which reminds me of a story. It’s holiday season, and it’s been a long year!  We could all use a good story, right?

So our friends Peter and Bruce are the faces and feet behind the World Footbag Association here in Steamboat Springs.  Peter said, “Did I tell you about the time I slept with Kevin Costner?”

After we recovered from the surprise, we said no, we had not heard that story. Turns out Peter was hired to teach Kevin Costner how to kick a hacky sack around for the movie Silverado.  There’s a scene in this western packed with Hollywood stars where Costner is in a jail cell.

The plan called for Costner to whack the hacky sack around in his boots behind bars. They worked and worked on it, but according to Peter, Kevin Costner doesn’t have the hacky sack gene.

Weary from the effort and waiting for other scenes to be shot, Kevin says to Peter, “Hey are you tired?  I’m beat.  I’ve got a trailer here.  You want to catch a nap?”

Peter said, “I could use a few winks.”

And so they went to Costner’s trailer and crashed for a couple hours. And that’s how Peter slept with Kevin Costner.

Alas, the hacky sack scene landed on the cutting floor.  But the story lives on.

In a way, your stock is a hacky sack.  It gets kicked all around the stock market, through 15 exchanges and over 30 alternative trading systems because it must constantly move to wherever the best price resides.  That’s the law. Regulation National Market System.

It’s why more than 53% of trading volume in the S&P 500 the past week through yesterday – during huge index rebalances and options-expirations – was Fast Trading. The hacky sack players of the stock market, kicking the bag all over the place.

And they were the top price-setter the past five days.

Investment driven by fundamentals (Active), and flows from indexes, Exchange Traded Funds and quant funds (Passive) actually declined 6% last week, a key reason the market has been down.  More hacky-sacking, less investment, stocks fall.

In fact, if supply and demand were perfectly balanced, stocks would decline.  Why? Because the bid to buy will always be lower than the offer to sell, and 53% of the market’s volume comes from hacky sackers paid about a half-penny at a time to kick it around.

Also rising to over 18% of volume in the S&P 500 last week were trades tied to derivatives (Risk Mgmt). That is, 18% of the time last week in a given stock such as TSLA, a trade occurred because somebody had to buy or sell stock tied to puts or calls.

Add those up. It’s 71% of market volume.  The remaining 29% was investment, about 9% tied to stock-picking, 20% following indexes, models.

That’s market structure. It’s no harder than hacky sack.  Unless you’re Kevin Costner. And we’ll coach you. Just ask.

Resolve to make 2021 the year when your board knows what market structure is.  But before that, we hope your holiday season, however you mark it, is full of joy and gratitude, peace and reflection, and cheer.

We feel those feelings for all of you.  Happy Holidays!  We’ll see you on the other side.

Deal Art

The Federal Reserve’s balance sheet is 185 times leveraged, and DoorDash’s market cap is $50 billion.  I’m sure it’ll all work out.

Image courtesy Amazon and Showtime.

In some ways the Fed is easier to understand than DoorDash. It’s got $7.2 trillion of liabilities and $39 billion of capital.  Who needs capital when you can create money? The Fed is the intermediary between our insatiable consumption and the finite time we all offer in trade for money.

Speaking of money, DoorDash raised over $2.4 billion of private equity before becoming (NYSE:DASH).  For grins, recall that INTC’s 1971 IPO raised $6.8 million.  Thanks to the Fed’s approach to money, it would be worth at least seven times more today.

Really, it says the 1971 dollar is about $0.14 now.  I suspect it’s less still, because humans find ingenious ways to offset the hourglass erosion of buying power running out like sand.  (And INTC’s split-adjusted IPO price would be $0.02 per share rather than the $23.50 at which they then were offered.)

I’m delighted for those Palo Alto entrepreneurs at DASH who early on both wrote the code and delivered the food. And the movie Layer Cake declared that the art of the deal is being a good middleman.  DASH is a whale of a fine intermediary.

As is Airbnb.  The rental impresario is worth $75 billion. Not bad for sitting in the middle.  ABNB is already in six Exchange Traded Funds despite debuting publicly just Dec 10.

Funny, both these intermediary plays are most heavily traded by…intermediaries.  Both in early trading show 70% of volume from Fast Traders, machines intermediating market prices.  More than 50% of daily volume in each thus far is borrowed too.  That is, it’s not owned, but loaned.

ABNB is trading over 22 million shares daily, over 330,000 daily trades, and 54% of volume is borrowed. DASH is averaging 110,000 trades, 9.4 million shares of volume.  And through yesterday, 57% of those shares, about 5.4 million daily, were a bit like the money the Fed creates – electronically borrowed from nowhere.

How? High-speed traders constructing the market’s digital trusses and girders daily like Legos get leeway as so-called market-makers to trade things that might not exist in the moment, if the moment demands it for the sake of stability.

Do you follow?  When the Fed buys our mortgages, it manufactures money. It’s an accounting entry.  Trade banks $200 billion of electronic bucks residing in excess reserves for the mortgages the banks want to sell, which in turn become digital assets on the Fed’s balance sheet. The country didn’t raise that cash by borrowing or taxing.

Pretty cool huh?  Wish you could do that?  Don’t try. It’s fraud for the rest of us.

Anyway, traders can do the same thing, earning latitude to make liquidity from stock marked “borrowed,” so long as the books are squared in 35 days.

And here’s the kicker.  ETFs are intermediary vehicles too.  Man, this art of the deal thing – being a good middle…person – is everywhere.

ETFs take in assets like ABNB shares, and issue an equal value of, say, BUYZ, the Franklin Disruptive Opportunities ETF.  They manage the ABNB shares for themselves (tax-free too). And you buy BUYZ in your brokerage account instead.

Got that?  ETFs don’t manage any money for you. Unlike index funds.  They sell you a substitute, an intermediary vehicle, called ETFs.

Franklin used to be an Active manager. Key folks there told me a couple years ago that unremitting redemptions from active funds had forced them into the ETF business.

One of them told me, paraphrasing, it’s a lot easier running ETFs. We don’t have to keep customer accounts or pick stocks.

You need to understand the machinery of the markets, folks. And the Grand Unified Theory of Intermediation that’s everywhere in our financial markets nowadays.

It’s the art of the deal.  And reason not to expect rational things from the stock market.

If 70% of the volume in ABNB and DASH is resulting thus far from machines borrowing and trading it, and not wanting to own it, valuations reflect the art of the deal, intermediation. Not prospects (which may be great, but the market isn’t the barometer).

Same thing with ETFs.  The art of the deal is exchanging them for stocks.

The Fed? The more it buys, the more valuable debt becomes (and the less our money is worth). So that’s working too.  Cough, cough.

Here’s your lesson, investors and investor-relations folks. You cannot control these things. But ignore them at your peril (we always know the facts I shared about DASH and ABNB). All deals with intermediaries need three parties to be happy, not two.  And one always wants to leave.

Are You 2.0?

Are you 2.0?

I know.  You’re tired of clichés.

Especially in a pandemic that birthed a lexicography – social distancing, mask-up, nonessential, emergency executive orders, comorbidity.

After all that, you don’t want to hear you’re 1.0, not 2.0.

On the other hand, I’m notorious for not wanting to upgrade. I’ll stay 1.0 rather than risk 2.0 jacking up the performance of some app.  An update downloads, and now I can’t connect to the printer.  Been through that?

So has the investor-relations profession.

Aside:  Investors, you’re getting a ringside seat. IR, as we call it, is the liaison between public companies and Wall Street. A painful evolution from 1.0. to 2.0 is underway.

In the 1970s you had a rotary phone on your desk and you called investors. IR 1.0 is telling the story.

The IR profession formalized by association in 1969 with the advent of the National Investor Relations Institute (NIRI).  I’m currently on the national board representing service providers. A year from now, I’ll hand off that baton to our next emissary.

IR Era 1.0 lasted from 1969 till 2005 when Regulation National Market System changed the market. Telling the story was the chief function of IR for more than 35 years.

If you don’t know Reg NMS, read this.

Continuing, I had the honor of vice-chairing the 50th Anniversary NIRI Annual Conference in 2019, in Phoenix.  Back when people innocently shook hands, hugged, packed conference halls.  We had famed stock-picker Lee Cooperman, market-structure expert Joe Saluzzi of Themis Trading, SEC head of Trading and Markets Brett Redfearn.

We were standing there looking at IR 2.0. Man, that was fun.

I doubt we’ll dispute rotary phones are obsolete.  Sure, we’ve got ringtones that sound like them. But punching buttons is easier.

Speaking of easy, attending the NIRI 2020 Annual Conference is easier than a button. And it’s upon us.  We’ve spent a long time apart.  Socially distanced, I guess. While that continues at the AC, we can still be virtually together. I’ll be there.

Come join me!  It’s simple. Go here and register (you’d spend a lot more on hotel rooms – and we had sponsored your keys at the Miami Fontainebleau, by the way. Sigh. Ah well.) and instead of checking in to a room, check out the schedule.

Come see our Express Talk. See our two-minute video called, “What Do I Do With It?” See the 2021 IR Planning Calendar to help you navigate the minefield of derivatives expirations when you report results (don’t blow a limb off your story. So to speak.).

I just watched our Express Talk.  I look rough in the first clip – like I’ve been through a Pandemic. I’m cleaned up in the next, even wearing a tie. Then I’m settled in by clip three to share what matters about IR 2.0.

Come view them. Support our community.  After all, 2020 is going to end, despite indications at times this year that it never would. We’re almost there!

Back to IR 2.0.  Understand this: Our profession is a data enterprise now. Not a phone-dialer, meeting-setter.  There’s financial data (your story), ESG data (governance), Alt data (what the buyside is really tracking, like jobs, credit card transactions, port-of-entry satellite views).

And there’s Market Structure. This is the only measure that’ll tell you what sets price. If Activism threats exist. When Passive money rotates. If it’s about your story. How to run buybacks. What happens when you spin off a unit. The best time to issue stock. How deal arbs bet on outcomes (and if they think you’re about to do a deal). What drives shareholder value.

I’ll repeat that.  It’s the only measure that tells you what drives shareholder value. Headlines and financials don’t. Buyers and sellers of stock do.

Do you want to pick up the phone and call people?  Or do you want to advise the executive team and the board?

Okay. IR 2.0 is not for everyone. Some of us just belong in IR 1.0. Give me a desk and a phone and let me call people and convince myself that it matters.

Have at it.

But that’s yesterday. It’s an infinitesimal speck (like a virus) of today’s job. And even dialing should be guided by data, measured by data.

It’s almost 2021. I know the mullet is trying to make a comeback. I know I listen to 80s music.  But that’s no reason to do the IR job like it’s 1984.  Don’t do that. It’s not a good look.

Come see ModernIR and the rest of the vendor community (there are 22 others with us in the virtual exhibit hall) at this year’s disruptive event, the NIRI Annual Conference. See you there.

And let’s start 2021 with good hair and good data.

What’s Going On

The most valuable thing is knowing what’s going on.

The country is closing amid Covid cases. Simultaneously, the Shiller PE ratio of earnings in the S&P 500 is 33, a level exceeded in history only at the bursting of the Internet Bubble in 2000.

What’s going on? (The picture here is Howelsen, our beloved Steamboat local ski hill since 1907…a way away from it.)

Stocks are screaming. In contrast, a country jumping in the mummy bag and zipping up suggests sharp impending economic contraction.

Right?

We’re a service society. That is, the bulk of jobs are in doing something for somebody. Bartending to window-washing. Yoga classes to yardwork. Street-sweeping and sanitation, and shearing hair and shearing sheep, and stocking shelves and fixing Internet problems.

Yes, there’s a big spike on the graph from “Information” or whatever you call it.

As income from hairdressing and table-waiting takes a hit, the stock market jumps to eternal highs.  It’s the sort of thing that leads to class envy.

Don’t fall for that.  Follow me here.

Payroll-protection-plan checks are gone, and the mayor or health department or somebody has said you can’t have more than 25% occupancy, everybody working dawn till dusk blending schedules. To make money.

My own stylist says hours are long, pay is down, and taxes are due because there’s not enough for the taxman and the mortgage.

And two weeks ago into the election there was a surge for stocks.

We told you it would happen, nothing to do with the National Haircutting Rate, the Countrywide Window-Washing Ratio. Or whatever.  We call it Sentiment, the way machines set prices.

It’s now topped, smoking cinders falling away.

Jim Cramer said on CNBC, “They just don’t want to sell, Mike.” (Mike Santoli in this case.)

I love Cramer’s iconoclastic verve. He never loses his confidence.

“The open-up trade is back on!” he shouts now to David Faber, who is stoic with a blink and a wan smile.

Who in the markets doesn’t love CNBC?

But they don’t know what’s going on.

Is the Shiller PE right?  Should we wring our hands?

How many body punches from government can the American Economy – hairdressers, restaurateurs, yoga instructors, window-washers, landscapers, on it goes – take before we snap enough ribs to drop to our knees?

It’s like everyone in government is playing craps around that possibility, party affiliation doesn’t matter.

And up goes the market.

Investor-relations professionals tell the c-suite, “We are delivering returns to our investors on superior financial results.”

Everyone shuffles uncomfortably.

Let’s stipulate that if your earnings are accelerating faster than your peers, your stock might do better, even if hairdressers are struggling to pay taxes and other bills.

Couldn’t we all screen for that and make those stocks the most valuable?

Yes. And no.  Yes, you can.  No, it doesn’t work.

A quant fund could screen for all the stocks with 25% annual EPS growth.  That’s got nothing to do with what you do, public companies. Just what you produce. And what if those funds decide to trade your options?

And earnings don’t guarantee stock-appreciation because the market has limited supply. Is GE a great company, BYND a lousy stock?  Explain, please?

I’m making the same point I’ve been making here at the Market Structure Map since 2006, when the whole market was ceded to machines by a rule called Regulation National Market System.

Stop telling your c-suite and Board that you’re flying or falling because of “operating margins.” It’s not true.

The world is math. You need to know what’s going on.

Investors, it’s the same for you. You believe, “Home Depot will be higher because people are buying home-improvement products at record levels.”

That’s not what’s going on.

As for society, we’re deciding if we’ll be a liberal democracy or not. Stock prices won’t decide it.  Knowing what’s going on will.

We can help. Some. (We can help you with knowing what’s going on, IR folks and traders. We have thoughts on society too. But that takes a group effort.)

 

 

On the Skids

If electoral processes lack the drama to satisfy you, check the stock market.

Intraday volatility has been averaging 4%. The pandemic has so desensitized us to gyrations that what once was appalling (volatility over 2%) is now a Sunday T-shirt.

Who cares?

Public companies, your market-cap can change 4% any given day. And a lot more, as we saw this week.  And traders, how or when you buy or sell can be the difference between gains and losses.

So why are prices unstable?

For one, trade-size is tiny.  In 1995, data show orders averaged 1,600 shares. Today it’s 130 shares, a 92% drop.

The exchanges shout, “There’s more to market quality!”

Shoulder past that obfuscating rhetoric. Tiny trades foster volatility because the price changes more often.

You follow?  If the price was $50 per share for 1,600 shares 25 years ago, and today it’s $50 for 130 shares, then $50.02 for 130 shares, then $49.98 for 130 shares, then $50.10 for 130 shares – and so on – the point isn’t whether the prices are pennies apart.

The point is those chasing pennies love this market and so become vast in it. But they’re not investors.  About 54% of current volume comes from that group (really, they want hundredths of pennies now).

Anything wrong with that?

Public companies, it demolishes the link between your story and your stock. You look to the market for what investors think. Instead it’s an arbitrage gauge. I cannot imagine a more impactful fact.

Traders, you can’t trust prices – the very thing you trade. (You should trade Sentiment.)

But wait, there’s more.

How often do you use a credit or debit card?  Parts of the world are going cashless, economies shifting to invisible reliance on a “middle man,” somebody always between the buying or selling.

I’m not knocking the merits of digital exchange. I’m reading Modern Monetary Theory economist Stephanie Kelton’s book, The Deficit Myth.  We can talk about credit and currency-creation another time when we have less stuff stewing our collective insides.

We’re talking about volatility. Why stocks like ETSY and BYND were halted on wild swings this week despite trading hundreds of millions of dollars of stock daily.

Sure, there were headlines. But why massive moves instead of, say, 2%?

The stock market shares characteristics with the global payments system.  Remember the 2008 financial crisis? What worried Ben Bernanke, Tim Geithner and Hank Paulson to grayness was a possibility the plumbing behind electronic transactions might run dry.

Well, about 45% of US stock volume is borrowed. It’s a payments system. A cashless society. Parties chasing pennies don’t want to own things, and avoid that by borrowing. Covering borrowing by day’s end makes you Flat, it’s called.

And there are derivatives. Think of these as shares on a layaway plan.  Stuff people plan to buy on time but might not.

Step forward to Monday, Nov 9. Dow up 1700 points to start. It’s a massive “rotation trade,” we’re told, from stay-at-home stocks to the open-up trade.

No, it was a temporary failure of the market’s payments system. Shorting plunged, dropping about 4% in a day, a staggering move across more than $30 trillion of market-cap. Derivatives trades declined 5% as “layaways” vanished.  That’s implied money.

Bernanke, Geithner and Paulson would have quailed.

Think of it this way. Traders after pennies want prices to change rapidly, but they don’t want to own anything. They borrow stock and buy and sell on layaway.  They’re more than 50% of volume, and borrowing is 45%, derivatives about 13%.

There’s crossover – but suppose that’s 108% of volume – everything, plus more.

That’s the grease under the skids of the world’s greatest equity market.

Lower it by 10% – the drop in short volume and derivatives trades. The market can’t function properly. Metal meets metal, screeching. Tumult ensues.

These payment seizures are routine, and behind the caroming behavior of markets. It’s not rational – but it’s measurable.  And what IS rational can be sorted out, your success measures amid the screaming skids of a tenuous market structure.

Your board and exec team need to know the success measures and the facts of market function, both. They count on you, investor-relations professionals. You can’t just talk story and ESG. It’s utterly inaccurate. We can help.

Traders, without market structure analytics, you’re trading like cavemen. Let us help.

By the way, the data do NOT show a repudiation of Tech. It’s not possible. Tech sprinkled through three sectors is 50% of market-cap. Passive money must have it.

No need for all of us to be on the skids.  Use data.  We have it.

-Tim Quast