Tagged: Market Structure

Times and Seasons

You need examples.

I was wishing a longtime friend who turns 50 Sep 20 a happy what they call on Game of Thrones “Name Day,” and it called to mind those words. We were college freshmen 31 years ago – how time flies – and I thought back to my Logic and Philosophy professor.

He’d say in his thick Greek accent, “You need examples.  You cannot illustrate anything well with merely theory, nor can you prove something without support.”

In the stock market, examples are vital for separating theory from fact. And for helping investor-relations professionals and investors alike move past thinking “the market is complicated so my eyes glaze over” to realizing it’s just a grocery store for stocks.

With a rigid set of prescribed rules for consumers.  You can watch consumers comply. Some race around the store grabbing this or that. Others mosey the aisles loading the cart.

Timing plays a huge role. It’s not random.

I’ll give you an example.  Monday I was trading notes with a client whose shares are Overbought, pegging ten on our 10-point Sentiment scale, and 65% short.

Okay, here we go. What does “Overbought” mean? Let’s use an analogy. You know I love using spinach, right.  Overbought means all the spinach on the grocery store shelf is gone.  If the store is out of spinach, people stop consuming spinach.

What alone can override an overbought spinach market is willingness to pay UP for more spinach by driving to another store. Most consumers won’t. They’ll buy something else.

All analogies break down but you see the point?  We can measure the interplay of price and behaviors in shares so we know when they’re Overbought, Oversold, or about right — Neutral.

Now let’s introduce timing into the equation.  Monday was the one day all month with new options on stocks and other securities officially trading.  Our example stock was up 4%.  Yet it’s Overbought and 65% short.

What’s “65% short?”  That means 65% of trading volume is coming from borrowed shares. Traders are borrowing and selling shares every day to profit on short-term price-changes. It’s more than half the trading volume.

A quick and timely aside here:  We were in Chicago Friday for the NIRI chapter’s annual IR Workshop and the last panel – an awesome one spearheaded by Snap-On’s Leslie Kratcoski, an IR superstar – included the head of prime brokerage for BNP Paribas.  Among many other things, prime brokers lend securities. BNP is also a big derivatives counterparty.

Those elements dovetail in our example. The stock was Overbought and 65% short yet soared 4% yesterday. Short squeeze (forced buying), yes. But we now know WHY.

News didn’t drive price up 4%.  It was a classic case of big moves, no news. One could cast about and come up with something indirect. But let’s understand how the grocery store for your shares continuously reveals purpose.

The CONDITIONS necessary for the stock to move up 4% existed BEFORE the move.  This is why it’s vital to measure consistently.  If you’re not measuring, you’re guessing.

Why would the stock soar with new options trading?  There is demand for derivatives tied to the company’s stock. Parties short had to buy in – cover positions.  Why? Because the counterparty needed shares to back new derivatives positions (naked puts or calls are much riskier).

The stock jumped 4% because that’s how much higher the price had to move to bring new spinach, so to speak, into the market, the grocery store. Nobody wanted to sell at current prices – the stock was Overbought. Up 4%, sellers were induced to offer shares.

On any other day of the month these events would not have coalesced. I suspect hedge funds behind the bets had no idea their cloak of secrecy would be yanked off.

Once you spend a little time measuring and understanding the market, you can know in a minute or two what’s setting price. And now we know to watch into October expirations because hedge funds have made a sizeable bet, likely up (if they’re wrong they’ll be sellers ahead of expirations – and we’ll watch short volume).

Speaking of timing, options expirations for September wraps officially today with VIX and other volatility trades lapsing. The market has been on a tear. Come Thu-Fri, we’ll get a first taste of autumn.  Next week brings window-dressing for the month and quarter.

Our Sentiment Index marked a double top through expirations. About 80% of the time, an up market into expirations is a down market after, and with surging Sentiment, down could be dramatic say five or so trading days from now.

You’ll have to tell me how it goes! Karen and I are off to mark time riding bikes from Munich to Salzburg through the Bavarian Alps, a way to measure my impending 50th birthday next month.  We call it The Four B’s:  Beer, bread, brats and bikes. We’ll report back the week of Oct 9.

A Big Deal

Tim, I’m listening,” said this conference attendee, “and I’m wondering if I made the wrong career choice.” He said, “Am I going to be a compliance officer?”

We were in Boston, Karen and I, marking our wedding anniversary where the romance began: at a NIRI conference, this one on investor-relations fundamentals for newbies. I was covering market structure – the behavior of money behind price and volume – and what’s necessary to know today in IR (it wouldn’t hurt investors to know too).

It prompts reflection. The National Investor Relations Institute’s program on the fundamentals of IR that Karen and I both attended over a decade ago differed tectonically. Then, most of the money in the market was fundamental.

Companies prided themselves on closing the books fast each quarter and reporting results when peers did – or quicker.  I remember Tim Koogle hosting thousands on the Yahoo! earnings call about a week after quarter-end, the company setting a torrid pace wrapping financial results and reporting them.

Most of the money was buying results, not gambling on expectations versus outcomes. There were no high-frequency traders, no dark pools, limited derivatives arbitrage, no hint yet that passive investment using a model to track averages instead of paying humans to find better companies would be a big deal.

I’ve over these many years moved from student to faculty. I had just described the stock market today for a professional crop preparing to take IR reins, no doubt among it those who years from now will be the teachers.

I explained that the stock market possesses curious and unique characteristics. When you go to the grocery store and buy, say, a bag of spinach, you suppose the price on it is the same you’ll pay at the cash register. Imagine instead at the checkout stand the price you thought you were paying was not the same you were getting charged.

Go another step further. You had to buy it by the leaf, and someone jumped ahead of you and handed you each leaf, charging a small fee for every one.

That’s the stock market now. There is always by law a spread between the bid to buy and offer to sell, and every interaction is intermediated so regulators have a transaction trail.

I explained to the startled attendees unaware that their shares were priced this way that in my town, Denver, real estate is hot. Prices keep rising. People list houses for sale – call it the best offer to sell – and someone will offer a higher price than asked.

In the stock market today, unlike when I began in the profession, it’s against the law for anyone to bid to buy your shares for a price greater than the best offer. That’s a crossed market. Nor can the prices be the same. That’s a locked market. Verboten.

So in this market, I said, trillion of dollars have shifted from trying to find the best products in the grocery store to tracking average prices for everything. This is what indexes and exchange-traded funds do – they track the averages.

By following averages and cutting out cost associated with researching which things in the grocery store are best, money trying to be average is outperforming investors trying to buy superior products. So it’s mushroomed.

And, I said, you can’t convince the mathematical models tracking the averages to include you.  You can only influence them with governance – how you comply with all the rules burdening public companies these days, even as money is ignoring fundamental performance and choose average prices.

That’s when the question came.  See the first paragraph.

I said, “I’m glad you asked.”  Karen says I need to talk less about the problems in our profession and more about the opportunities.  Here was a chance.

“It’s the greatest time in history to be in our profession,” I said.

Here’s why. Then, we championed story, a communications job. Today IR is a true management function because money buying story is only a small part of volume. IR demands data and analytics and proactive reporting to the management and Board of Directors so they recognize that the market is driven as much by setting prices as it is by financial results.

There are $11.5 trillion of assets at Blackrock, Vanguard and State Street alone ignoring earnings calls and – importantly – the sellside.  IR courts investors and the sellside.

It’s time to expand the role beyond the message. Periods of tectonic change offer sweeping professional opportunity. Investors should think the same way: How does the market work, who succeeds in it and why, and is that helpful to our interests?

IR gets to answer that question.  It’s a big deal.  Welcome to the new IR.

Harvey Market Structure

We’ve said many prayers for friends, family and colleagues in Texas and Louisiana and will continue in the wake of Harvey. There’s a lesson from it about stocks today too.

Is paying attention to the weather forecast important?  The weather guessers were eerily accurate and I think most would agree that had Harvey hit without warning, outcomes would be factors more harrowing despite current widespread devastation.

The point of the forecasts was to prepare for outcomes, not to alter the path of the storm. Would that the latter were possible but it’s beyond our control. (Could we have lined up all the portable fans in Texas on a giant power strip fronting the gulf and blown that thing back to sea? No).

Just one thing drives me batty talking to public-company executives about market structure. It’s when they say: “If I can’t change it, why do I care about it?”

If we only measure what we can change, why do we track storms? Why mark birthdays?

In all matters human, measuring is the essential task underpinning correct conclusions, awareness, planning for the future, and separating what’s in our control from what’s not.

I’ll give you another comparative:  The solar eclipse on Aug 21.  Thanks to a rare preserved Mayan book called the Dresden Codex kept in Germany, it’s now been historically proven that Mayans could predict solar eclipses.

Their records written hundreds of years ago projected one July 11, 1991, long after they themselves were gone. Sure enough. It’s impressive that people who didn’t know the sun is 400 times larger than the moon or that the moon is 400 times nearer – creating a perfect match periodically – could do it.

But we can infer from archaeological records that they and others like the Aztecs may have used superior knowledge to dupe the less-informed.

More simplistically, a lack of understanding can produce incorrect conclusions. The fearful masses believed when the sun began to fade that the gods were angry. The rulers likely reinforced the idea to retain power.

If you don’t know an eclipse or a hurricane is coming in your shares, you conclude that a version of the angry gods explanation is behind a fall:  It must be something happening today, some news, misunderstanding of story, miscommunication by the IR team.

That’s generally untrue. Like hurricanes and eclipses, the stock market today is mathematical.  Human beings can push buttons to buy or sell things but trades are either “marketable,” or wanting to be the best buy or sell price, or “nonmarketable” and willing to wait for price to arrive.

Any order that is marketable must be automated, rules say. Automated trades are math. The market is riven with mathematical automated trades for all sorts of things and those trades, unless interdicted by something that changes, will perform in predictable ways, thanks to rules – like the ones that permit us to predict hurricanes and eclipses.

Without knowledge of those rules – market structure – you can be duped. And you are routinely duped by high-frequency traders who claim publicly to be “providing liquidity” when we observe with models all the time that they do the opposite, pushing prices higher when there are buyers and lower (and shorting stocks) when there are sellers.

If you’re routinely checking the weather forecast for your stock, you’re less likely to be duped. That’s Market Structure 101.

You may be dismayed to learn that most of your volume is driven by something other than your company’s fundamentals (unless you have lousy fundamentals, and indexes and ETFs don’t know and so value you the same as superior peers).  But you won’t be fooled again, to borrow as I’m wont to do, a song title.

The good news about market structure versus mother nature is that we can change market structure when enough of us understand that rules have been written to benefit intermediaries at the expense of investors and companies.  Knowing and seeing must come first – which requires measuring, just like satellites that tracked Harvey.

With nature, all we can do is prepare. But preparation in all things including market structure always beats its absence.

Earning the Answers

It’s 8am Eastern Time and you’re in a conference room. Earnings season.

Executives around the table. The serious ones in suits and ties like usual. Others in shorts or jeans. Everybody reading the call script one more time. 

“You think we’ll get that question about inventory levels?” the COO says. 

“What’s the stock gonna do today?” says your CEO. 

All of us who’ve been in the investor-relations chair understand the quarterly grind. We practice, prepare, canvass probable questions, rehearse answers.  Try to get the execs to read the script aloud. We listen to competitors’ calls, seeking key queries.

Yet 85% of the volume in the market is driven by money paying no attention to calls.

“Not during earnings,” you say. “Active money is the lead then.” 

If it is, that’s a victory. It’s an anecdotal observation rather than hard statistical fact, but my experience with the data suggests less than 20% of public companies have Active money leading as price-setter on earnings days. 

I’m reminded of a classic example. One of our clients had screaming Sentiment – 10/10 on our index, slamming into the ceiling – and 68% short volume ahead of results. We warned that without the proverbial walk-off grand slam, nothing would stop a drop. 

Active money led, setting a new Rational Price, our measure of fair value, though shares closed down. In proceeding days the stock lost 8%. It wasn’t the story. It was the sector. Tech tanked. And shorting. And Sentiment.

Which leads us back to the carefully crafted earnings call. We’ve got a variety of clients with Activist investors, and I’ll give you two sharply contrasting outcomes that illustrate the importance of the answer to both your COO’s and CEO’s questions. 

One has been slashing and burning expenses (it’s what you do when somebody horns in with money and personality).  Still, heading into the call shorting was 69% and investors were wary. The company has a history of sharp pullbacks on results.

The only bull bets were from machines that leveraged hard into shares. No thought, just a calculated outcome.

Did you see the Wall Street Journal article yesterday on a massive VIX bet?  Some anonymous trader has wagered about $265 million that the VIX will be over 25 in October.  The trader could win big or lose big.

It’s the same thing. Traders, both humans and machines, bet on volatility, exacerbated by results.  Fast Traders wagered our client would jump about 8% (we could forecast it).  They were right. The buying that drove initial response came from quantitative money. Machines read the data and bought, and shorting dropped 20% in a day.

Rational investors have since been profit-takers.  Price moved so much on bets that buy-and-hold money turned seller.

In the other instance, price fell 15%. Risk Management was 15% of market capitalization ahead of the call because Activism tends to boost the value of the future – reflected in derivatives. But Activists have short attention spans. If you’re two quarters in without any meaningful catalyst, you’re asking for trouble.

Well, that was apparent in the data. They were 60% short every day for 50 days ahead of results, the equivalent of a tapping foot and a rolling eye. If you don’t give that audience a catalyst they’re going to take their futures and forwards and go home. 

Results missed and management guided down, and ALL of that 15% came out of market cap. Investors didn’t sell? No. How does it help long money to sell and slaughter price? They’d wreck months or years of commitment in a minute.

But the future was marked to zero because event-driven money dropped its rights to shares. And 15% of market cap held that way vanished.

The degree of uncertainty in all prices, not just ones at earnings season, are increasing because machines are betting on volatility, long and short, price-spreads.

It’s not rational. It’s gambling. Moral of the story? Prepare well, yes.  But prepare proportionally.  Keep it simple. A minority of the money listens now and cannot overcome the power of arbitrage (we need a better market. Another story.).

You might recoil at the idea. But if the market has changed, shouldn’t we too? Correlate outcomes to effort. Learn market structure. Measure the money. Set expectations. Prepare. But prepare wisely. Efficiently. Don’t confuse busy with productive.  

For your COO, the answer is yes, we’ll get that question, and for your CEO, the answer probably has no bearing on how shares will behave. Keep the answer short. (And yes, we can forecast how shares will behave and what will set price. Ask us.)

Realistic Expectation

How do you set realistic expectations about your shares for management?

I’ll give you examples.  One of our clients had a cyberattack and disclosed the impact, a material one degrading expected quarterly results.  What to expect?

Shares are up on strong volume.

That’s great but it makes execs scratch their heads. And the reverse can happen.

“The division heads tell their teams that growth will translate into share-price gains,” the investor-relations director told me. “They deliver, and the stock goes down 7%.”

I was having this conversation in Silicon Valley.  In fact, I had it twice the same day.

It illustrates a market transformation affecting investor-relations and investors. Fundamentals cannot be counted on to drive corresponding shareholder value.  Active stock-pickers and IR professionals have been slow to adapt, harming outcomes for both.

I was at the whiteboard in a conference room with another technology IR head, who was comparing revenue and margin drivers for his company and its key peers.

“How do I get these numbers to translate into the share price?” he said.

“You’re making the job harder than it has to be today,” I said. “And you might create unrealistic expectations from management for IR and for the company.”

There’s one more implication (we’ll answer them all before we wrap). Things like stocks behaving unexpectedly shouldn’t be ignored or glossed over.

For example, we found water dripping from the air-handler housing in the basement for the central air-conditioning system at our house. Great timing. July.

We could say, “Huh. That’s not what we were expecting.” And go on about what we’re doing.  But that’s a poor strategy, leaving us open to bigger troubles ahead.

When your stock doesn’t act as you expect, it’s water dripping from your air-handler, telling you, IR folks and investors, you’re missing something vital about the market.

Admit it.  Most of us know the market has got a drippy coil. But we go on with what we’ve been doing. We’d rather ignore the leak in the basement than address it.

For whom is that bigger trouble?  Your management team, IR. And your returns, investors. We should change what we’re doing, and revise expectations.

“I don’t want expectations for our stock,” you say. Would a board hire a CEO candidate who said, ‘Don’t expect anything from me’?

Back to our examples. In the cyberattack, Active money bought the news (bad clarity trumps okay uncertainty) but passive investment drove subsequent gains. The IR head appropriately differentiated the two and set expectations about trends and drivers. That’s good 21st century IR.

In the second example, don’t let the notion that growth will drive appreciation become an unmet expectation. Growth may boost the stock. But the IR Officer can go on the offensive with internal presentations showing how the market works and what role Story plays in setting price.

It’s up to IR to help management understand. If 80% of the time something besides Story sets price, doesn’t everybody internally have a right to know?  Don’t disillusion the team by letting incorrect expectations survive. That’s bigger trouble.

At the whiteboard with our IRO wanting to get the market to value results better, what about doing the opposite? It’s easier, less stressful, data-driven. Let the market tell YOU what it values. If 20% of the market values your numbers, measure when that 20% sets price. (We do that with Rational Price and Engagement metrics.)

Then measure how the rest of the money behaves that doesn’t pay attention to Story, and show your management team its trends and drivers. Now you’ll know when it’s about you, your management team will have data-driven views of what the money is really doing, and you, there in the IR chair, will have wider internal value.  And less stress.

That’s the right kind of realistic expectation.

What’s the market’s leaky coil? Two things.  Passive investment is asset-management, not results-driven stock-selection. Prices expand or contract with the rate of capital inflows and outflows for indexes and ETFs. You don’t control it. It controls you.

And over 50% of daily volume comes from fleeting effort to profit on price-differences or protect and leverage portfolios and trades (often in combo). It prices your stocks without wanting to own them.

And speaking of expectations, options are expiring today through Friday. It’s rarely about you when that’s happening. Set that realistic internal expectation (and stop reporting results the third week of each new quarter).

Long and Short

Here’s a riddle for you: What’s long and short at the same time?

Your shares, public companies (investors, the shares of stocks you own too).  You saw that coming, right.  The problem is you don’t know who’s long or short.

Let me rephrase that. You can know in 1975 fashion who’s long.  That year, Congress required investors to report holdings, amending the Securities Exchange Act with section 13F.  Investors with more than $100 million of assets had to report positions 45 days following quarter-end.  Back then, investment horizons were long.

The problem is we have the same standard. Why? Bigger question: Why aren’t more companies asking?  After all it’s your market. You deserve to know who owns your shares, who’s long or short, and where your shares trade.  You also should know what kind of money trades them since a great deal of your volume is for the day, not owned (this part we’ve solved!).

Back to ownership, Exchange Traded Funds post positions every day by law. Why doesn’t everybody else?

“Quast, come on,” you say.  “Investors need some time to buy and sell positions without everyone knowing, if they’ve got longer horizons.”

We’re market structure experts. I can assert: nearly every time investors try to buy or sell in the market, traders know it. That’s why we measure what traders know instead of considering them “noise” like everybody else.

Fast Traders detect buying or selling, often before it happens. I liken it to driving down the road on cruise control. Your exit is coming up so you tap the brakes or take your car off cruise.  Anybody behind you can conclude you’re planning to exit.

Fast Traders observe how behavior slows. It’s how we knew June 5 that the tech sector was about to decline. And they see algorithms accelerating to merge onto the freeway. There’s a buyer. Let’s start lifting the price.  We observe all this in patterns.

Back to the point. If the problem with disclosing positions is a desire to protect investment plans, why is the most popular investment vehicle of our era, ETFs, doing it?

“Those are models,” you say. “They track benchmarks.”

Yes, but all over this country boards and management teams are getting quarterly shareholder reports from 13Fs and concluding that these investors are setting prices.  They’re inexcusably out of step with how markets work.  Isn’t that our profession’s fault? It’s part of the IR job to inform management about equity drivers.

Congress is trying to inform itself. We don’t want to be trailing Congress!  Yesterday there was a big hearing about equity market structure in the House Financial Services Subcommittee on Capital Markets.  They like long titles, you know.

Thanks to good friend Joe Saluzzi of Themis Trading, who testified live – read what he said – we were invited to offer written testimony from an issuer perspective on the state of markets and what would help issuers have fairer and more transparent participation.

It’s the first time ModernIR has been read into the official congressional record and I don’t whether to be elated over the opportunity or melancholy that it’s necessary.

You should read it. It’s how the market works today. In fact, read all the testimony. They say what we write here every week. Everyone’s in the know but the issuer community.

You deserve better, public companies. It’s your market and you’re excluded by those merchandising your shares from having a say in how it functions.

We made three simple proposals:  Move 13Fs up to monthly reports (we didn’t call for daily info!) and make them both long and short.  It’s been proposed before. Maybe this time we’ll get someplace.

We also proposed daily disclosure of trading data by broker. There’s no reason Fast Traders or anyone should be able to hide. Canada requires disclosure. Why do we have a lesser standard (none, in fact)? And we asked Congress to direct the SEC to form an issuer advisory committee so companies have a voice.

What’s central and imperative to this effort at better transparency for the IR job and the management of public companies?  Knowing how the market works.  We’re experts on it. That we were asked to offer an issuer perspective – nobody else from IR was – speaks to it.

The starting point is learning market structure. It’s a core part of the IR job in today’s market.  That’s the long and short of it. Ask us and we’ll help you help your executives.

David Copperfield

The days are getting shorter. We’ve passed the longest one of 2017, Summer Solstice. Imperceptibly now the sun will move off its zenith.

Karen and I marked it here in Minneapolis before the NYSE’s Rich Barry and I talk market structure for the Edison Electric Institute’s investor-relations meeting today at the offices of host Xcel Energy downtown.

Last night in lovely and mild Minnesota at Café Lurcat off Loring Park south of central city, a group of us IR people were talking about measuring IR outcomes today.

“You track your owners in 13fs,” said one utility IR professional. “And you correlate your meetings with them, and we saw this one four times and their holdings went down, and this one over here not at all and they doubled positions.”

The problem isn’t IR.  It’s what’s being measured, and how it’s tracked.

Okay, we could go one step further.  If public companies were half as engaged in monitoring the market as the exchanges and high-frequency traders that have profited enormously from its opacity, we’d persuade officials to improve rules.

In fact, I’ve been invited to submit testimony for a congressional hearing next week on problems with financial markets such as the startling absence of companies from all rulemaking processes. Yes, congressional staffers see it just like we do.

I intend to articulate in the starkest terms how issuers are misled about the nature of their trading.  There’s no excuse for it. It continues because issuers are, paraphrasing that country song, treated like mushrooms. Google that.

Realistically, changing the rules takes time. What can we do right now?  You can know why intensive effort to track outreach and correlate it to ownership-change renders lousy results. What you’re measuring doesn’t reflect how markets work.

First, 13f ownership data is an act of Congress – from 1975. Forty-two years later everything has changed but the data used to measure ownership.  We had circular-dial phones then. Today your phone will talk to you.

Yet the 13f lives on (it’s Section 13f of the Securities Exchange Act, legislation expressly prohibiting discrimination against issuers). The measure was designed for a market where investors bought companies. Today 85% of trading volume daily comes from purposes and machines seeing stocks as products not stories.  About 48% of volume is borrowed every day – which doesn’t show up in ownership data.

Many hedge funds don’t have to report holdings because managed assets fall outside regulatory minimums. Exchange Traded Funds (ETFs) are posting assets daily while settlement data follows four days later – and 13fs post positions 45 days after the end of the quarter.  Half of daily volume has an investment horizon of a day or less.

About 13% of daily trading ties to derivatives, which don’t manifest in 13Fs. To wit, markets surged Monday and pundits declared it a return of enthusiasm for economic outcomes. The data showed a 17% increase in Fast Trading – an investment horizon of a day or less – drove Monday’s gains.

Machines were inflating equities to reprice the new series of options and futures trading Monday.  Yesterday counterparties were selling assets to cover short-term trading losses.

None of that is investment.  Much is sleight of hand. So is data that lacks answers.

What’s more, much trumps story. Interest rates, relative currency values, economic expectations and geopolitics, political elections and housing starts, central-bank actions and inflation and policy speeches, and blah, blah blah.

So what do you do?  First, start measuring the right data.  Ownership information cannot tell you what sets price.  Stop expecting miracles from your surveillance provider.  They’re great professionals but the rules around data make it a functional impossibility for you to find what you’re looking for in that data set.

Second, stop looking backward. Instead, do two things well from a messaging view.  Tell your story to a diverse palette of institutional relationships. Have a good follow-up plan.

Make these ideas science – matching product to consumer – and you’re helping the buyside find opportunities and the buyside in turn is helping you achieve the IR goal: A fairly valued stock and a well-informed market.

We have that science. We know every day what part of your volume is driven by passive investment and active investment. If you want help understanding the market, ask us. We do one thing well. Market structure.

Summarizing: Are the measures you’re using to benchmark your IR efforts a reflection of contemporary financial markets? If not, why not?

And why is your exchange, which makes money from rapid-fire trading, focusing your attention on shareholdings 45 days after quarter-end?  Feels like David Copperfield. Resist the illusion. You can and should have better information. Demand it.

BEST OF: IR Power

EDITORIAL NOTE: Whew! It’s 11pm here in Orlando (this view just off the patio at Highball & Harvest, The Ritz, Grand Lakes), and NIRI National, the annual confab for investor-relations professionals, has wrapped. The bars at the JW Marriott and Ritz Carlton Grand Lakes are full of IR folks — wait, let me rephrase. Post-conference relationship-building is occurring. We’re all about guidance and message, you know.

This is IR Power. It doesn’t mean what you think in a market where Blackrock, Vanguard, and State Street alone have $11.5 trillion of assets ignoring corporate message and sellside research. I’ll give you our view of NIRI National 2017 (and our fact-finding junket in Key West) next week. For now, IR pros and investors, read this. It’s among our most important posts. Cheers from sultry central FL!

First run:  May 17, 2017

“What’s eye are?  I haven’t seen that acronym.”

So said a friend unfamiliar with this arcane profession at public companies responsible for Wall Street relationships.  IR, for you investors who don’t know, is the role that coordinates earnings calls and builds the shareholder base behind traded shares.

Investor Relations is a vocation in transition because of the passive tide sweeping investment, money that can’t be actively built into a shareholder base. Money in models is deaf to persuasion. The IR job is Story. The market more and more is Structure.

But IR underestimates its power. There’s a paradox unfolding in the capital markets.  I liken it to shopping malls and Amazon.  Used to be, people flocked to department stores where earnest clerks matched people to products.

We still do it, sure. But nowadays seas of cash slosh onto the web and over to Amazon without a concierge. It’s passive shopping.  It’s moved by what we need or want and not by service, save that Amazon is expert at getting your stuff in your hands well and fast.

“You were saying we underestimate our power,” you reply, IR pro. “How?”

You’ve seen the Choice Hotels ad?  A guy with an authoritative voice declares that the Choice people should use four words: “Badda-book, badda-boom.”

The advertisement is humorously stereotyping the consultants, high-powered and high-paid pros who arrive on corporate premises to, buttressed by credibility and prestige, instruct managers on what they must do.

Whether it’s marketing and communications or management like McKinsey & Co., they command psychological currency because of real and perceived credibility, and confident assertion.

Might these people be buffaloing us? There’s probably some of that. But the point is they command respect and value with authority and expertise.

All right, apply that to IR.  Especially now, with the profession in a sort of identity crisis. It’s become the ampersand role.  You’re head of IR &…fill in the blank.  Strategy.  Corporate Development.  Treasury.  Financial Planning & Analysis.  Communications.

The ampersand isn’t causing the crisis. It’s the money.  Bloomberg reporters following the passive craze say indexes and Exchange Traded Funds (ETFs) may surpass active stock funds soon for assets under management.

They already crush stock-pickers as price-setters.  Passive investment is nearly twice as likely to set your price every day as your story.  Buy and hold money buys and holds. Your story isn’t changing daily.  But prices are. Sentiment is. Macro factors are. Risk is.  These and more breed relentless shifting in passive behavior, especially ETFs.

And here’s the IR powerplay.  You are the authoritative voice, the badda-book badda-boom on capital markets internally. With the behavior of money changing, you’re in the best position to be the expert on its evolution. To lead.

If you were the management consultant, you would lay out a plan and benchmarks for organizational transformation. If you were the widget product manager, you’d be providing executives regular data on the widget market and its drivers. You wouldn’t wait for the CEO to say, “Can you pull data together on what’s happening with widgets?”

Sometimes IR people pride themselves on how management never asks about the stock.  If you’re the expert, silence is not your friend. Get out in front of this transformation and lead it.  Don’t let them watch the stock, but help them consistently measure it.

What set of vital facts about passive investment should your management team understand? If you don’t have answers, insist on the resources needed to get them.

Don’t be timid. Don’t wait for management to say, “We want you to study and report back.” It’s too late then. You’ve moved from the expert to the analyst.

Instead, set the pace. See it as a chance to learn to use analytics to describe the market.  Make it a mission to wield your IR power as this passive theme changes our profession.

And we’ll catch you in two weeks!  We’re off to ride the tides on the Belizean reef, a weeklong Corona commercial catamaraning the islands.  We’ll report back.

As we leave, Market Sentiment has again bottomed so stocks rose with Monday’s MSCI rebalances and probably rise through expirations Wed-Fri before mean-reverting again. How many mean-reversions can a bull market handle?

Building Signals

We’re back from the Belizean reef, living like pirates among the stars. Refreshing! When your home is this, and your view is that, and sweet critters are resident below, even I can forget about market structure.

But not for long!  While we sailed with phones in airplane mode and minds in Caribbean mode, the Wall Street Journal launched a journalistic barrage about “the quants,” traders using computers.  I counted 18 items in the series May 21-26.

They missed one big thing. We’ll come to it.

Lead writers Gregory Zuckerman and Bradley Hope with support from a cast describe how algorithms have commandeered Wall Street. It’s not just that computerized instructions are behind the largest slice of stock market activity now – developments we’ve been writing about for more than 12 years.

“Everybody in this industry is suddenly saying: ‘Couldn’t a robot do that?’” said Sean McGould, president of Lighthouse Investment Partners, in a story titled This Old School Hedge Fund is Going Quant by reporter Rob Copeland about Magnetar Capital.

Turns out robots can power a retail day trader’s long-short statistical arbitrage portfolio, trade probabilities in deal arbitrage, market Exchange Traded Funds (ETFs) to investors. And a lot more.

“What if we could take what was in our head and our database and make rules out of it?”

So said Magnetar founder and Citadel alum Alec Litowitz in the same piece. (Aside: This is precisely what we do at ModernIR – take cumulative human market knowledge and experience and translate it into software code that infuses measures of market behavior with objectivity and consistency. Meaning is in patterns, rules-based comparatives.)

Investor relations professionals, if you want to understand the market for the product you manage – your shares – you should read them. We also cover the same subject matter in our Market Structure 101 and 201 classes.

Investors, you should read too. And there’s a convergence for both sets of professionals. The WSJ did a nice job here. They’ve demonstrated the correct role for investigative journalism: To uncover facts and arrange them coherently so readers gain knowledge.

The biggie that’s gone missing I’ll set up by casting far back. Walt Kelly for over 25 years wrote a famous comic strip in newspapers called Pogo. It ended in 1975. Among its vast accumulation of one-liners was this, phrased variously: “We shall meet the enemy, and not only may he be ours, he may be us.”

It’s been translated: “We have met the enemy and he is us.”

From smart-beta ETFs to Blackrock to the vast scope of hedge-fund management, investors are relying on mathematicians and computer scientists and Ph.D. data miners to build the next signal by plumbing troves of economic and business data.

They ARE the signals. It’s like wondering what keeps casting shadows on the wall and finding it’s you.

I’ll give you three building blocks for comprehending modern stock-trading. Number one, all trades must meet between the best bid to buy or offer to sell. Number two, all trades wanting to set the bid or the offer must be automated so they can move fluidly around the National Market System.

And number three, algorithms are designed to deceive. Put those together.  The entire stock market is constructed around a single price for any security, which will be set by machines, which will also be trying to deceive others.

Yet everybody mistakenly thinks they’ll find some signal by threshing data. No, signals are trades. Period. Deceptive ones.

Investors, you’re after differentiating fundamentals.  IR professionals, you’re promoting differentiating fundamentals.

And everybody is building signals. It’s a crossroads in both these professions.  If what you’re doing is at loggerheads with how prices are set, what should you do?

I have a full answer but not enough time for it. A key part is you can’t keep doing what you’ve always done while expecting a different result. You’re then just a buoy on the channel. No more open water.

It’s your market, investors and public companies. Are you ceding it to the signal-chasers?

IR Power

“What’s eye are?  I haven’t seen that acronym.”

So said a friend unfamiliar with this arcane profession at public companies responsible for Wall Street relationships.  IR, for you investors who don’t know, is the role that coordinates earnings calls and builds the shareholder base behind traded shares.

Investor Relations is a vocation in transition because of the passive tide sweeping investment, money that can’t be actively built into a shareholder base. Money in models is deaf to persuasion. The IR job is Story. The market more and more is Structure.

But IR underestimates its power. There’s a paradox unfolding in the capital markets.  I liken it to shopping malls and Amazon.  Used to be, people flocked to department stores where earnest clerks matched people to products.

We still do it, sure. But nowadays seas of cash slosh onto the web and over to Amazon without a concierge. It’s passive shopping.  It’s moved by what we need or want and not by service, save that Amazon is expert at getting your stuff in your hands well and fast.

“You were saying we underestimate our power,” you reply, IR pro. “How?”

You’ve seen the Choice Hotels ad?  A guy with an authoritative voice declares that the Choice people should use four words: “Badda-book, badda-boom.”

The advertisement is humorously stereotyping the consultants, high-powered and high-paid pros who arrive on corporate premises to, buttressed by credibility and prestige, instruct managers on what they must do.

Whether it’s marketing and communications or management like McKinsey & Co., they command psychological currency because of real and perceived credibility, and confident assertion.

Might these people be buffaloing us? There’s probably some of that. But the point is they command respect and value with authority and expertise.

All right, apply that to IR.  Especially now, with the profession in a sort of identity crisis. It’s become the ampersand role.  You’re head of IR &…fill in the blank.  Strategy.  Corporate Development.  Treasury.  Financial Planning & Analysis.  Communications.

The ampersand isn’t causing the crisis. It’s the money.  Bloomberg reporters following the passive craze say indexes and Exchange Traded Funds (ETFs) may surpass active stock funds soon for assets under management.

They already crush stock-pickers as price-setters.  Passive investment is nearly twice as likely to set your price every day as your story.  Buy and hold money buys and holds. Your story isn’t changing daily.  But prices are. Sentiment is. Macro factors are. Risk is.  These and more breed relentless shifting in passive behavior, especially ETFs.

And here’s the IR powerplay.  You are the authoritative voice, the badda-book badda-boom on capital markets internally. With the behavior of money changing, you’re in the best position to be the expert on its evolution. To lead.

If you were the management consultant, you would lay out a plan and benchmarks for organizational transformation. If you were the widget product manager, you’d be providing executives regular data on the widget market and its drivers. You wouldn’t wait for the CEO to say, “Can you pull data together on what’s happening with widgets?”

Sometimes IR people pride themselves on how management never asks about the stock.  If you’re the expert, silence is not your friend. Get out in front of this transformation and lead it.  Don’t let them watch the stock, but help them consistently measure it.

What set of vital facts about passive investment should your management team understand? If you don’t have answers, insist on the resources needed to get them.

Don’t be timid. Don’t wait for management to say, “We want you to study and report back.” It’s too late then. You’ve moved from the expert to the analyst.

Instead, set the pace. See it as a chance to learn to use analytics to describe the market.  Make it a mission to wield your IR power as this passive theme changes our profession.

And we’ll catch you in two weeks!  We’re off to ride the tides on the Belizean reef, a weeklong Corona commercial catamaraning the islands.  We’ll report back.

As we leave, Market Sentiment has again bottomed so stocks rose with Monday’s MSCI rebalances and probably rise through expirations Wed-Fri before mean-reverting again. How many mean-reversions can a bull market handle?