Tagged: markets

Analyst Day

Why do you hold an Analyst Day? 

Traders and investors, these are what Joel Elconin on Benzinga Premarket Prep this past Monday called “the dog and pony show.”

For the investor-relations profession, the liaison to Wall Street, it’s a big deal, ton of work. We choreograph, prepare, script, rehearse, plan. We’re laying out Management’s strategic vision.

And it’s successful if…what?  The stock jumps?

Analyst Days: Productive, or just busy? Illustration 130957015 © Turqutvali | Dreamstime.com

Before Regulation National Market System in 2007 transformed the stock market into the pursuit of average prices, triggering an avalanche of assets into index funds and ETFs, you could say that.

Even more so before decimalization in 2001 transformed “the spread,” the difference between the prices to buy and sell, into the pursuit of pennies. It’s now devolved to tenths of pennies in microseconds.

The point is, a good Analyst Day meant investors bought the stock. Same with earnings. News. 

Let me take a moment here.  In addition to ModernIR, the planet’s IR market-structure experts and the biggest provider of serious data for serious IR professionals at US-listed companies, Karen and I run a trading decision-support platform called Market Structure EDGE.

Using data from that platform, I bought 200 shares of a known Consumer Discretionary stock this week using an algorithm from my online firm, Interactive Brokers. The order was split into three trades for 188 shares, 4 shares, and 8 shares, all executed at BATS, owned by CBOE, the last trade at a half-penny spread.

Why is this germane to an Analyst Day?  Stick with me, and you’ll see.

Would you go to a store looking for carrots and buy 10 of them at one, then drive to another for 2, and a third for 4?  Idiocy. Confusing busy with productive. So, why is that okay in a market worth $50 trillion of FIDUCIARY assets?

The stock I bought is a household name.  Ranks 463rd by dollars/trade among the 3,000 largest stocks traded in the US market, which are 99.9% of market capitalization. It’s among the 500 most liquid stocks.

Your Analyst Day is a massive target.  And over 90% of volume in the market has a purpose other than investment in mind. My trade in three pieces meant the purpose for the other side was to profit by splitting an order into tiny parts. That’s not investment. It’s arbitrage.

Investor-relations people, you are the market maestros. Your executives and Board count on you to know what matters.  Did it occur to you that your Analyst Day is a giant plume of smoke attracting miscreants? Does your executive team understand that your Analyst Day could produce a vast plume of arbitrage, and not what they expect?  If not, why not?

Look, you say. I run an Analyst Day. Are you saying I shouldn’t?

I’m saying that whether you do or not should be data-driven.  And evaluating the outcome should be data-driven too.  As should be the planning and preparation.

As should the understanding from internal audiences that at least 70% of the volume around it will be profiteers chasing your smoke plume, just like they gamed me for about 2.5 cents.

It’s not the 2.5 cents that matters. It’s the not knowing supply or demand. It’s the absence of connection between price and reality. 

By the way, Rockwell Medical is the current least liquid stock in the National Market System. You can trade $250 of it at a time on average, without rocking the price.  Most liquid? AMZN, at $65,000 per trade (price $3,275, trades 190,000 times per day, 18 shares at a time).

IR does not derive its value from telling the story. Its value lies in serving as trusted advisor for navigating the equity market.  Making the best use of shareholder resources. Understanding the money driving price and volume. You are not a storyteller.  You are the Chief Market Intelligence Officer. 

Think of the gonzo state of things.  I know what revenue every customer generates in our businesses, and what the trends are, the engagement is, the use of our data, what people click or don’t.  Yet too many public companies are spewing information to the market with NO IDEA what creates volume, why they’re traded, what sets price.

Is that wise?

So, what SHOULD we be doing?  The same thing we do in every other business discipline.  Use software and analytics that power your capacity to understand what drives returns. Do you understand what creates your price and volume?

Back to the Analyst Day. Don’t hold one because tradition says so. Do it if you benefit from it!  If your investors are fully engaged, you’re wasting their time and yours. That’s measurable.  You should know it well beforehand.

If they aren’t, set a goal and measure market reactions.  Realize that arbitragers will game your smoke plume.  That’s measurable too. Know what Active stock-pickers pay.  Know when Passives wax and wane. Know what’s happening with derivatives, and why.

Everything is measurable. But not with 1995 tools. Don’t do things just because you always have. Do them because they count.

That’s the IR profession’s opportunity, the same as it is everywhere else.

A Credit Market

In the stock market the beatings have been consistent while we all wait for morale to improve. What’s causing it?

I’m surprised conservatives haven’t blamed midterm elections. Alert reader Pat Davidson in Wisconsin notes CNBC viewers say tariffs, global economic weakness and Fed rate-hikes are behind the stock swoon.

Is it a coincidence that these are what the media talk about most?

I think stocks are down because of market structure. Exchange Traded Funds infect them with characteristics of a credit market.

The big hand pelting backsides of stocks has been uneven. Broad measures have corrected off highs. I tallied the FAANGs (FB, AMZN, AAPL, NFLX, GOOG) and they’re down 20-40% from peaks. Same with small-caps.

We last week launched our Sector Insights reports that compile readings on composite stocks by sector. Surveying them, only one, Communications Services, showed recent Active buying. The rest were uniformly beset by ETFs. As was the broad market. ETFs were favoring Utilities and shedding everything else.

Two sectors had positive Sentiment, Real Estate and Utilities, but both were in retreat. Financials and Industrials were tied for worst Sentiment at 2.2/10.0.

Note that Monday, Real Estate and Utilities were the worst performers, down nearly 4%. Financials and Industrials were best, down less than the rest.

The point is that our measures are quantitative. They are not rational factors like tariffs, global economic weakness, or Fed rate-hikes. Yet they accurately and consistently predict what stocks, sectors and the market will do, short-term.

Therefore, the cause for much of the short-term behavior in stocks cannot be rational.

Sure, we’ve written about our expectation that a strong dollar would be deflationary for commodities and risk assets. Inflation is low interest rates. Excess availability of capital fostered by artificially depressed costs. It’s not rising prices. When excess availability vanishes, prices fall regardless of whether they first rose.

The Federal Reserve has removed nearly $1 trillion from its balance sheet and excess reserves through policies, which translates on a reserve-ratio basis to a reduction in capital of roughly $8-10 trillion. That will deflate prices.

But the problem isn’t deflation. It’s the inflation that preceded it. Fed, are you listening?  How about not creating inflation in response to crises? How about instead letting things that should fail do so by setting rates high and accepting only good collateral? Then human creativity can restore productivity, and economies can soar anew.

A financial instrument that extends reach to an asset class is a form of credit.  Credit creates bubbles that collapse when the extension of credit is curtailed.

Let’s use the Healthcare sector as an example. Year to date, Healthcare before Friday was the top-performing sector (now eclipsed by Utilities, up nearly 8%). From Nov 15-Dec 3, comparative performance for the sector was positive.

Suddenly in December the sector fell apart, with the red tide coming on green and purple bars, signaling ETFs.  It happened before JNJ plunged 14%. The credit bubble burst.

ETFs are a form of credit. Blackrock itself describes ETFs as a tool that equalizes supply with demand. ETFs are collateralized substitutes for buying and selling stocks. They offer artificially low costs. They permit elastic supplies of money to chase finite US shares.

The result on the way up is soaring equities. The consequence on the way down is collapsing stocks.

Here’s an analogy. Suppose you have a line of credit on your house and you buy something with it – say a vacation home.  Your capacity to borrow derives from the rising value of your house, which in turn is driven by demand for homes around you.

What if banks extending credit are out of lending capacity and lift rates?  Suddenly, demand for houses around yours declines. Home prices begin to fall. The value of your house drops.

And the bank that extended credit to you becomes concerned and wants more collateral.

Suppose that’s happening in the wholesale market where ETFs are created and redeemed. It far outstrips any other form of fund-flows — $4 trillion already this year through November (estimated), $400 billion per month.

If the value of the collateral used to create ETF shares – stocks – is of indefinite and unpredictable and falling value, the capacity to extend credit collapses. And prices start falling everywhere.  Those who borrowed must sell assets to cover obligations.

What if that’s the cause, not the economy or tariffs? That should matter to pundits, investors and investor-relations professionals (and CEOs by extension).

We have the data. Use it. We expect markets to jump Dec 19-21 through the final expirations period of 2018. But it’s a credit market subject to credit shocks.

Predictive Knowledge

Why don’t I trade like my peers?

The CEO is sure it’s because investors don’t understand something – how you manage inventory, your internal rate of return targets. Pick something.

Investors ask the same question. Why does that stock lag the group? For answers, they root through financials, technology, leadership, position in the market, to find the reason for the discount (or opportunity).

What if these assumptions are wrong?

At prompting from friend and colleague Karla Kimrey in the Rocky Mountain NIRI chapter (which we sponsor) who knows I’m a data geek, I’m reading Michael Lewis’s The Undoing Project, his latest. It’s a sort of sequel to Moneyball, about how baseball’s Oakland A’s changed professional sports with data analytics (read both and you’ll see that ModernIR is Moneyball for IR).

The Undoing Project focuses on why incorrect assumptions prevail.  I don’t have the punch line yet because I’m still reading. But I get the point already and it’s apropos for both investor-relations professionals and investors in markets that often seem to defy what we assume is the rationale behind stocks and the whole market.

Perception overwhelms reality.

The CEO, the IR professionals, investors, are all focused on the same thing. The collective assumption is that any outcome varying from expectations is a deficiency in story.  Personal perceptions have shaped our interpretation of the market’s behavior.

Yet statistically, rational thought is a minority in market volume – about 14% of it, give or take. When markets surged Monday, the Dow Jones Industrials up 183 points, we were told it was enthusiasm about earnings.

The data showed the opposite – Asset Allocation. Money that pays no attention to earnings. It’s 33% of market volume.

Why would it buy now? Because options are expiring today through Friday (and derivatives directly influence 13% of trading volume marketwide).  Asset Allocation uses options and futures to nimbly track benchmarks, and with markets down it’s probable that derivative positions were converted to the actual stocks.

But then it’s over.  Mission accomplished.  Yesterday the market gave back 114 points to go with 138 points last Thursday. The qualitative assumption – the gut instinct – that earnings enthusiasm lifted stocks Monday was not supported by subsequent data.

Daryl Morey, general manager of the Houston Rockets, gives The Undoing Project a literary push in the early pages. An MIT man and not a basketball player, Morey came into the job because team owner Leslie Alexander wanted “a Moneyball type of guy.”

He sought data-driven results.  And it worked.  Houston is in the top ranks for success with draft picks and getting to the playoffs, and other teams have copied them.

Morey says knowledge is prediction. We learn things to understand what may happen. It’s a great way to think about it. Suppose it works in IR and investing too.

It starts with questioning assumptions.  What gut instincts do you hold about your stock that you can’t support with data?  How do they compare to the data on market volume?

I know there’s a swath of people in every walk including IR and investing who think data is BS. Who cares? they’d say.  I go with my instincts. Besides, what difference does it make if we know or don’t?

Knowledge is prediction. Data align perception and reality. In Undoing, Lewis uses the Muller-Lyer illusion. Your mind perceives one line longer. Nay. Measurements prove it.

I’ll leave you with this data on the market. I wrote last week about volatility insurance.  Now we’ve got volatility.  Insurance policies are expiring right now, with the VIX today kicking off April expirations through Friday. Our Sentiment Index trend is like mid-2014.

We don’t know what may come. But we’re thinking ahead. Assumptions are necessary but should be the smallest part of expectation.

That’s a good rule of thumb in life, investing and IR (and if you want help thinking about what IR assumptions may be wrong, ask us. We may not have the answer. But we’ve got great data analytics to help sort reality from perception).

Split Millisecond

You’ve heard the phrase split-second decision?

For high-speed traders that would be akin to the plod of a government bureaucracy or the slow creep of a geological era.

Half a second (splitting it) is 500 milliseconds. One millisecond equals a thousand microseconds. One microsecond is a thousand nanoseconds, and a microsecond is to one full second in ratio about what one second is to 11.6 days.  Fortunately we’re not yet into zeptoseconds and yoctoseconds.

IEX, the upstart protagonist in Michael Lewis’s wildly popular Flash Boys, has now filed to become a listing exchange with the NYSE and the Nasdaq.  Smart folks, they looked at the screaming pace of the stock market and rather than targeting the yoctosecond (one trillionth of a trillionth of a second), said: “What if we slowed this chaos down?”

It was a winning idea, and IEX soared up the ranks of trading platforms.  Oh, but ye hath seen no fire and brimstone like that now breathed from high-speed traders and legacy exchanges.  You’d have thought IEX was proposing immolating them all on a pyre.

Which brings us back to one millisecond.  IEX devised a speed bump of 350 microseconds – less than half a millisecond – to slow access to its market so fast traders could not race ahead and execute or cancel trades at other markets where prices may be microseconds different than IEX’s.

Speed matters because Regulation National Market System (Reg NMS) which ten years ago fostered the current stock market of interconnected data nodes and blazing speed said all orders to buy or sell that are seeking to fill must be automated and immediate.

Of course, nobody defined “immediate.”  Using only common sense you can understand what unfolded.  If the “stock market” isn’t a single destination but many bound together by the laws of physics and technology, some humans are going to go, “What if we used computers to buy low over there and sell high over here really fast?”

Now add this fact to the mix. Reg NMS divided common data revenues according to how often an exchange has the best available price. And rules require brokers to buy other data from the exchanges to ensure that they know the best prices.  Plus, Reg NMS capped what exchanges could charge for trades at $0.30 per hundred shares.

Left to chance, how could an exchange know if it would earn data revenues or develop valuable data to sell? Well, the law didn’t prohibit incentives.

Voila! Exchanges came up with the same idea retailers have been using for no doubt thousands of years going back to cuneiform:  Offer a coupon.  Exchanges started paying traders to set the best price in the market.  The more often you could do that, the more the exchange would pay.

Now those “rebates” are routinely more than the capped fee of $0.30 per hundred shares, and now arguably most prices are set by proprietary (having no customers) traders whose technology platforms trade thousands of securities over multiple asset classes simultaneously in fractions of seconds to profit from tiny arbitrage spreads and rebates.  Symbiosis between high-speed firms and exchanges helps the latter generate billions of dollars of revenue from data and technology services around this model.

Enter the SEC in March this year.  The Commission said in effect, “We think one millisecond is immediate.” Implication: IEX’s architecture is fine.

But it’s more than that. Legacy exchanges and high-speed traders reacted with horror and outrage. Billions of dollars have been spent devising systems that maximize speed, prices and data revenues.  The market now depends for best prices on a system of incentives and arbitrage trades clustered around the capacity to do things in LESS than a millisecond. The evidence overwhelms that structure favors speed.

Is a millisecond vital to capital formation? I’ve been running this business for eleven years and it’s taken enormous effort and dedication to build value. I would never let arbitragers with no ownership interest price in fractions of seconds these accumulated years of time and investment.

So why are you, public companies? Food for thought. Now if a millisecond is immediate, we may slam into the reality of our dependence on arbitrage.  But really?  A millisecond?

The Vessel

Will markets collapse?

We’re a day late this week, steering clear of election bipolarity marked by the vicissitudes of demography and the barest palimpsest of republicanism, a diaphanous echo of Madison and Jefferson and Hamilton, names people now think of as inner city high schools.

Back to markets. We’ve seen a curious change. A year ago, the top refrain from clients was: “What is our Rational Price?” For those not in the know, we calculate where active investors compete against market chaos to buy shares.

That’s not the top metric now. It’s this: “What’s your take on macro factors?” Management appears to have traded its focus on caring for trees for fearing the forest – so to speak. If so, the clever IRO will equip herself with good data.

We’ve been writing since early October about the gap between stocks and the US dollar. The dollar denominates the value of your shares. As the currency fluctuates in value, so do your shares, because they are inversely proportional.

In past decades since leaving the gold standard in 1971, those fluctuations have generally proven secondary to the intrinsic value of your businesses. But that changed in 2008. Currency variance replaced fundamentals as principal price-setter as unprecedented effort was undertaken by governments and central banks globally to refloat currencies.

Imagine currencies as the Costa Concordia, the doomed luxury liner that foundered fatally off the Tuscan coast. Suppose global forces were marshaled to place around it Leviathan generators blowing air through the ships foundered compartments at velocity sufficient to expectorate the sea and set the ship aright.

Thus steadied on air, the ship is readied for sail again, surrounded by a flotilla of mighty blowers filling the below-decks with air and keeping the sea back from fissures in the ravaged hull by sheer force. Passengers are loaded aboard for good times and relaxation and led to believe that all is again as it was. As seaworthy as ever.

That’s where we are. We are coming off the peak now of our fourth stocks-to-dollars inflationary cycle since 2008. In each case, markets have retreated at least 10%. The cycles are shortening. And despite retreat we right now retain the widest gap between the two since July 2008, right before the Financial Crisis.

Why does the pattern keep repeating? Because central banks keep juicing the blowers as the vessel wilts and founders. That’s what you saw yesterday after the election. The Euro crisis, having gone to the green room for a smoke is back center stage as it a year ago. Money – air – leaves variable securities for the dollar. As air leaves, stocks falter.

We don’t say these things to be discouraging. It is what it is. The wise and prudent IRO develops an understanding of market behavior – so the wise and prudent IRO will be cool in the IR chair and valuable to management and able to retain sanity and job security in markets depending on giant turbines.

If you’re relying on the same information you did in the past, you’re ill-prepared. We are in a different world now.

Don’t pass Go.  I will give $200 to the first person who correctly answers two questions.

Only corporate IROs may answer. Apologies to the rest, but you’ll see why. Corporate IR pros, look up and write down your trading volume on March 4. First question: Where did your shares trade?

Second question: Which brokers executed the trades that, when added up, equaled that volume you wrote down for March 4?

Yesterday, Dow Jones reporter Jacob Bunge wrote about our drive to organize companies to petition Congress and regulators for more transparent data about their share-trading.

There’s a landing page on our website for the letter we’ve drafted. Our goal is to list 100 companies as supporters when we deliver this letter. It should be 5,500. I’ll tell you why in a moment. (more…)