Tagged: Market Structure

Suddenly

Things are getting worrisome. 

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

Illustration 179312099 / Ernest Hemingway © Lukaves | Dreamstime.com

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

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

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

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

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

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

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

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

None showed up.

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

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

It gets worse.

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

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

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

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

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

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

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

Elementary, Watson.

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

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

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

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

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

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

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

So what do we do about it?

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

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

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

Starting Point

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

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

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

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

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

That was the seed for ModernIR. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Passive Pitfalls

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

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

Boy, indeed.

Letchworth State Park – Tim Quast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Optional Chaos

So which is it?  

Monday, doom loomed over stocks. In Punditry were wringing hands, hushed tones. The virus was back. Growth was slowing. Inflation. The sky was falling!

Then came Tuesday. 

Jekyll and Hyde? Options expirations.  Only CNBC’s Brian Sullivan mentioned it. As ModernIR head of client services Brian Leite said, there wasn’t otherwise much effort to explain where the doom went. One headline said, “Stocks reverse Monday’s losses.”

WC Fields said horse sense is the thing a horse has which keeps it from betting on people. We could have used some horse sense.  I Tweeted this video.

Anyway. What must you know, investors and public companies, about why options cause chaos in stocks? (I’m explaining it to the Benzinga Boot Camp Sat July 24, 30 minutes at 1220p ET.  Come join.)

It’s not just that options-expirations may unsettle equity markets. The question is WHY?

Let me lay a foundation for you. Global Gross Domestic Product (GDP) is about $85 trillion. The notional value – exposure to underlying assets – of exchange-traded options and futures is about the same, $85 trillion give or take, says the Bank for International Settlements. The BIS pegs over-the-counter derivatives notional value at $582 trillion.

So call it $670 trillion. All output is leverage 8-9 times, in effect.

Now, only a fraction of these derivatives tie to US equities. But stocks are priced in dollars. Currency and interest-rate instruments make up 90% of derivatives.

All that stuff lies beneath stocks. Here, let’s use an analogy. Think about the stock market as a town built on a fault line.  The town would seem the stolid thing, planted on the ground. Then a tectonic plate shifts.

Suddenly what you thought was immovable is at risk.

Remember mortgage-backed securities?  These derivatives expanded access to US residential real estate, causing demand to exceed supply and driving up real estate prices.  When supply and demand reached nexus, the value of derivatives vanished.

Suddenly the market had far more supply than demand.  Down went prices, catastrophically. Financial crisis.

Every month, what happened to mortgage-backed securities occurs in stocks. It’s not seismic most times. Stocks are assets in tight supply.  Most stocks are owned fully by investors.  Just three – Blackrock, Vanguard, State Street – own a quarter of all stocks.

So just as real estate was securitized, so are stocks, into options, futures, swaps.  While these instruments have a continuous stream of expiration and renewal dates, the large portion ties to a monthly calendar from the Options Clearing Corp (our version is here).

Every month there’s a reset to notional value. Suppose just 1% of the $50 trillion options market doesn’t renew contracts and instead shorts stocks, lifting short volume 1%.

Well, that’s a potential 2% swing in the supply/demand balance (by the way, that is precisely last week’s math).  It can send the Dow Jones Industrials down a thousand points.  Hands wring.  People cry Covid.

And because the dollar and interest rates are far and away the largest categories, money could leave derivatives and shift to the assets underpinning those – BONDS.

Interest rates fall. Bonds soar. Stocks swoon.  People shriek.

Marketstructureedge.com – Broad Market Sentiment 1YR Jul 21, 2021

Options chaos.  We could see it. The image here shows Broad Market Sentiment – DEMAND – for the stocks represented by SPY, the State Street S&P 500 Exchange Traded Fund (ETF).  Demand waxes and wanes.  It was waning right into expirations.

In fact, it’s been steadily waning since Apr 2021.  In May into options-expirations, Sentiment peaked at the weakest level since Sep 2020. Stocks trembled. In June at quad-witching, stocks took a one-day swan dive.

Here in July, they cratered and then surged.  All these are signals of trouble in derivatives. Not in the assets.  It’s not rational. It’s excessive substitution.

We can measure it at all times in your stock. Into earnings. With deals. When your stock soars or plunges.

In 1971, the USA left the gold standard because the supply of dollars was rising but gold was running out. The derivative couldn’t be converted into the asset anymore. The consequence nearly destroyed the dollar and might have if 20% interest rates hadn’t sucked dollars out of circulation.

High interest rates are what we need again. During the pandemic the Federal Reserve flooded the planet with dollars. Money rushed into risk assets as Gresham’s Law predicts. And derivatives.

When the supply/demand nexus comes, the assets will reprice but won’t vanish. The representative demand in derivatives COULD vanish.  That’s not here yet.

The point: Derivatives price your stock, your sector, your industry, the stock market. Adjustments to those balances occur every month.  We can see it, measure it. It breeds chaos. Pundits don’t understand it.

It’s supply and demand you can’t see without Market Structure goggles. We’ve got ‘em.

Supply and Demand

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

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

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

I digress.

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

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

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

That is BS.  Plain and simple. 

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

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

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

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

Wow, mouthful there, Quast.

I know it. I’m not kidding.

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

Contrast that with an art auction.

Stay with me. I have a point.

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

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

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

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

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

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

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

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

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

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

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

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

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

Data to Know

What should you know about your stock, public companies? 

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

Simultaneously.

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

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

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

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

Illustration 91904354 / Stock Market © Ojogabonitoo | Dreamstime.com

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

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

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

Maybe we don’t want to know, Tim.

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

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

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

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

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

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

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

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

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

Stock A: 

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

Stock B:

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

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

The difference is Passive money. Leverage with derivatives.

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

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

We can help.

Blunderbuss

Do stores sell coats in the summer? 

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

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

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

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

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

Illustration 165213327 © Dennis Cox | Dreamstime.com

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

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

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

Huh?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But ModernIR can see it in near realtime.

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

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

Get rid of that blunderbuss, pilgrim.   

Your Umbrella

Leaving South Carolina is hard.

It’s captivating. We had not a bad meal from Savannah to Pawleys Beach. Perfect weather (the surprising part). But always know where your umbrella is.

And thanks to Steve Hufford at Blackbaud for the tip about the Angel Oak Tree south of Charleston.  It’s hundreds of years old and growing majestically still (see photo).

It’s rather like the stock market. Time marches on.  Look, there will be a day when the cavalier treatment of money punctuating modern finance will have consequences. Money isn’t a tree and doesn’t grow on them.

There is, though, an opportunity for a lesson here.  Is “sell in May and go away” a thing? How could it be, if the largest managers of investments in US markets now are diversified passive funds?

“Sell in May” is a tradition. Stock-pickers would cash out of equities and leave the city for the cape. Maybe to Coastal Carolina. I’m envious. You?

But it’s a figure of speech, a trope, an anachronism.  Passive models don’t cash out of equities. Index funds track the basket. Diversified target-date money follows the plan.

All the time.

We humans often hew to tradition long past its due-by date.  It’s a feature of our nature that has marked historical epochs, sometimes ignominiously.

We’re doing it in investor-relations. Do we really know what drives shareholder value, or do we do the things we traditionally have because it’s what’s always been done?

What if we didn’t hold earnings calls?  Would it make any difference?  Berkshire Hathaway doesn’t. The company reports results on Saturdays by press release. BRK.A has materially outperformed the SPX the past decade.  The SPX has materially outperformed most stock-picking funds the past decade.

It’s why ModernIR argues that IR should be a data analytics and management function. If the money in the main now follows models, why do we still do all the stuff we did when most of it picked stocks?  I’d argue it’s tradition. It’s certainly not data.

Back to our theme, significant moves in markets in May then are likely to be coincidental.  We had them last week, attributed for one day to inflation fears, until the next day and the day after that stocks soared hundreds of points.

What happened to inflation fears?  Pundits were conspicuously silent those two days. And I get it.  If you’ve just declared that inflation has spooked equities, and the spookiness evaporates, you’re not sure what to say next.

Conventional wisdom, another way to say tradition, argues inflation harms equities. That’s wrong.  Equities absorb inflation. Only one thing – higher interest rates – would alter that calculus, and higher rates are a RESPONSE to inflation, not a consequence of it. And people wrongly mistake inflation to mean higher rates.

Rising rates would bankrupt the United States government.  Not likely to happen.  Yet, anyway.

What WILL arrive at some point is the actual consequence of inflation: deflation.  When prices rise in response to excess supplies of money, they will at some point stop rising (when the excess money is absorbed by risk assets like stocks) and fall.

Did you know that from 1791 to 1913, pay for members of Congress didn’t much change?  Thanks to a sound currency and improving output, money went further as purchasing power rose, giving them 50% more money over the course of a century — without a raise.

It’s why I argue that monetary policy should promote purchasing power – not growth, price-stability (an utter disaster), full employment (not the domain of the central bank) or any other thing.  If our money goes farther, we need less of it. That should be the aim.

We’re doing the opposite. So unless and until money stops flowing to stocks, the equity tree will grow. 

The flow is slowing though. Broad Market Sentiment, our ten-point index of waxing and waning demand for equities, has been stuck around 6.0 for a month. It means supply and demand are equalizing.  A normal market moves down to 4.0, and back over 6.0. Over and over. Because more money flows to equities than leaves them.

It’s as simple as the math of tides. What comes in goes out.  And starts over.  Sentiment cannot stay at 6.0 without reverting to 5.0 or lower.

So.

We MAY be approaching the first period where outflows exceed inflows since the Pandemic. We’re not there yet. Data say stocks could be up modestly into expirations to finish the week.  

But there’s a scent in the air, wetness on the breeze, the first feel of rain like you’re walking down Oglethorpe past square on square in Savannah, this one burying Nathaniel Green, that one with the Mercer House on the north end, and you feel it.  A raindrop.

No need for worry. But know where your umbrella is.

Something Wicked

When I was a kid I read Ray Bradbury’s novel, Something Wicked this Way Comes, which plays on our latent fear of caricature. It takes the entertaining thing, a traveling carnival, and turns it into 1962-style horror.

Not 2021-style of course. There’s decorum. It stars a couple 13-year-olds after all.

The stock market also plays on our latent fear of caricature.  It’s a carnival at times.  Clowns abound.  As I said last week, companies can blow away expectations and stocks fall 20%.  That’s a horror show.

Courtesy The Guardian

Devilish winds have been teasing the corners of the tent for a time.  We told our Insights Reports recipients Monday about some of those.

The Consolidated Tape Association, responsible for the data used by retail brokers and internet websites like Yahoo! Finance and many others last week lost two hours of market data.  Gone.  Poof.

Fortunately, about 24 hours later they were able to restore from a backup.  But suppose you were using GPS navigation and for two hours Google lost all the maps.

So that was one sideshow, one little shop of horrors.  I don’t recall it happening before.

Twice last week and six times this year so far, exchanges have “declared self-help” against other markets.

It’s something you should understand, investor-relations professionals and traders.  It’s a provision under Regulation National Market System that permits stock exchanges to stop routing trades to a market that’s behaving anomalously, becoming a clown show.

Rules require all “marketable” trades — those wanting to be the best bid to buy or offer to sell — to be automated so they can zip over to wherever the best price resides. And exchanges must accept trades from other exchanges. No exceptions.  It’s like being forced to share your prices, customers, and even your office space with your competitors.

The regulators call this “promoting competition.” Sounds to me like a carnival.

But I digress. Exchanges must by law be connected at high-speed, unless declaring self-help.

An aside, I’ll grant you it’s a strange name for a regulatory term.  Self-help?  Couldn’t they have come up with something else?  Why not Regulatory Reroute? Data Detour?

Anyway, last week the trouble occurred in options markets.  First the BOX options market went down. It’s primarily owned by TMX Group, which runs the Toronto Stock Exchange.

Then last Friday CBOE — Chicago Board Options Exchange, it used to be called — failed and the NYSE American and Arca options markets and the Nasdaq options markets (the Nasdaq is the largest options-market operator) declared self-help. They stopped routing trades there until the issue was fixed.

Now maybe it’s no big deal.  But think about the effect on the algorithms designed to be everywhere at once.  Could it introduce pricing anomalies?

I don’t know.  But Monday the Nasdaq split the proverbial crotch of its jeans and yesterday the so-called “Value Trade” blew a gasket.

I’m not saying they’re related. The market is a complex ecosystem and becoming more so. Errors aren’t necessarily indicative of systemic trouble but they do reflect increasing volumes of data (we get it; we’re in the data business and it happens to us sometimes).

And we’d already been watching wickedness setting up in our index of short-term supply and demand, the ten-point Broad Market Sentiment gauge.  It’s been mired between 5.8-6.1 for two weeks.

When supply and demand are stuck in the straddle, things start, to borrow a line from a great Band of Horses song, splitting at the seams and now the whole thing’s tumbling down.

And here’s a last one:  Exchange Traded Funds (ETFs) have been more volatile than the underlying stocks for five straight weeks, during which time stocks had risen about 5% through last Friday. Since we’ve been measuring that data, it’s never happened before.

Doesn’t mean it’s a signal. It’s just another traveling freak show. Clowns and carnivals. ETFs are elastic and meant to absorb volatility. Stocks are generally of fixed supply while the supply of ETFs fluctuates constantly.  You’d expect stocks most times to thus move more, not less.

I think this feature, and the trouble in options markets, speaks to the mounting concentration of money in SUBSTITUTES for stocks.  It’s like mortgage-backed securities — substitutes for mortgages.  Not saying the same trouble looms.  We’re merely observing the possibility that something wicked this way is coming.

Our exact line Monday at five o’clock a.m. Mountain Time was: “There’s a lot of chaos in the data.”

Son of a gun.

I don’t know if we’re about to see a disaster amongst the trapezes, so to speak, a Flying Wallendas event under the Big Top of our high-flying equity market.  The data tell me the probability still lies some weeks out, because the data show us historically what’s happened when Sentiment hits stasis like it’s done.

But. Something is lurking there in the shadows, shuffling and grunting.

And none of us should be caught out. We have data to keep you ahead of wickedness, public companies and traders. Don’t get stuck at the carnival.

Message vs Messages

It’s earnings season. Across the market, companies beat expectations and lift guidance and stocks decline. 

Huh?

I can offer a broad array of cases.  Take TSLA.  Massive quarter, monstrous boost to forward views.  Stock declines.

And yes, I Tweeted before TSLA reported that its price would probably fall.

A Consumer Staples stock beat all the key metrics, lifted guidance. Stock fell 10%, another 10% in following days.

There’s a figure that explains what’s happening: 350 billion. 

That’s the number of order messages processed on a single March day this year by the NYSE, according to head of equities Hope Jarkowski in a TABB Forum interview.  It was a new highwater mark for the exchange, where the previous record in March 2020 was 330 billion.

What’s that got to do with reporting great numbers and seeing your stock swoon? Public companies and investors both deserve to know, and the answer is there in the mass pandemonium of message traffic.

When billions of messages for stock orders are flying around, that’s not rational behavior. That’s money moving near the speed of light.  That’s speculation.

The market is crammed with it.

And what are we doing, public companies (investors, I’ll come to you in a bit)?  We’re prepping our numbers and expecting the stock to reflect what those say, good or bad.

Too many of us are still leading our boards and executive teams to think the numbers drive the stock, even though it’s 2021 and we’ve had this high-speed chaff-winnowing market since 2007 when Regulation National Market System was implemented.

It’s part of the investor-relations job to know the ORDER MESSAGES, not the message, drive the stock. About 350 billion of them on high-traffic days at just the NYSE Group of five stock exchanges and two options markets.

And why does the NYSE operate seven stock and options markets if an exchange is supposed to AGGREGATE buy and sell interest?

Because they’re NOT aggregating buy and sell interest. They want message traffic, a lot of orders.  This is why you need firms like ModernIR, a check and balance on the exchanges, which don’t tell you what the money is doing.

The image here comes courtesy of IEX, the Investors Exchange, and shows how bursts of trades – which flow through messaging traffic – come from proprietary trading firms within two milliseconds of changes in price.

For comparison, hummingbirds flap their wings about 80 times per second, equivalent to about once every 12 milliseconds.  So in a fraction of the flap of hummingbird wings, your entire market structure could shift from positive to negative.  Rational? Nope.

Case in point.  I bought 200 shares of NCLH at the market and it executed at the NYSE RLP.

What’s that?  My broker, Interactive Brokers, is a Retail Member Organization.  It can execute the trade for a tenth of a penny higher than the offer at the NYSE’s Retail Liquidity Program, where a high-speed trader can earn three cents per hundred shares for filling my order.

And if the seller is a NYSE Designated Market Maker (see page 20 here), it’s 20 cents per hundred, 40 cents to sell me 200 shares at one-tenth of a penny better than the best displayed price.

Got that? Sure, I got $30.169 instead of $30.17.  Oh boy. But talk about convoluted.  Why the hell would an exchange do that?

For 350 billion reasons.  Traffic is data. The RLP and my broker set the best bid and offer. That’s money – literally.  Data is money. Best prices are data. We’ve all been buffaloed into believing a tenth of a penny matters. No it doesn’t. We’re being gamed, merchandised.

The more platforms, the more prices, the more data – and especially if five are stocks and two are options on those stocks.    

That’s why your shares implode on results.  Suppose a million of those messages are a bunch of parties shorting, and the market tips the other way in tenths of pennies on hummingbird beats?  In the case of the Staples stock above, over 72% of volume that day was short – borrowed. Not story. Just data. Bets exchanges fill.

So the whole food chain of order-flow messages and order types to take advantage of a retail trade or pay a high-speed trader to be the best bid or offer can cook the market.

Now, why is that all right with you, public companies?

Part of the answer is not knowing enough about the stock market.  We can help.

Investors, this is your market too. I looked at TSLA Market Structure Sentiment. Peaked and falling. Probability is the stock declines. Doesn’t matter what Elon Musk says.

You’re better to trade using Market Structure Sentiment. Stocks can’t be relied upon to behave rationally.  They DO follow supply and demand.

Other than that, everything’s fine.