Tagged: Rational Investment

Constituents

Is you is, or is you ain’t, my constituents?

If you know cinema’s Coen Brothers and the epically hilarious 2000 movie “O Brother, Where Art Thou,” you’re smiling. You remember the scene, the southern accent.

In geopolitics, a sweeping referendum last weekend reunited Crimea with Mother Russia but we heard nothing about the Latino vote or the union vote or the male vote. Demographics, we gather, weren’t crucial to Putin’s putsch. The constituents supporting secession were of a cloth.

Say you run a clothing retailer on the cutting edge of young fashion. Slicing your demographics with analytics drawn from your in-store inventory management system, you find that females aged 18-34 drive half your revenues. These are your core constituents, and you’ll concentrate on keeping them happy. But you realize too that growth takes more than one group. You craft a plan with products, advertisements and placement to expand patronage from other demographic segments.

The equity market has core constituents too. Your active holders, the ones who measure story and strategy. We divide them further with growth, value and growth-at-reasonable-price (GARP) characteristics, and often finer still.

Had we a marketplace where consumption of the product – your shares – was only about story and strategy, we’d call it a wrap and the movie would end. Yet this constituency taken together is still just one: Active investors.

Blackrock is the world’s largest investment manager. Most of its $5 trillion in assets are allocated not according to corporate story but around sector, industry and class. So what do we consider this indexed constituency? We at ModernIR call it Passive investment behavior or simply Indexes/ETFs. (more…)

Holistic IR

Do sharks belong in the ocean?

You might reply, “They certainly don’t belong on land.” But that’s not what I mean.

This isn’t a lesson on catachresis or other obscure grammatical and rhetorical principles, rest assured. But speaking of speaking, if you’re joining IR Magazine for the West Coast Think Tank tomorrow, make a point to find me and say hi, please.

If you miss us, attend the NIRI Silicon Valley chapter session Friday on Market Structure with ModernIR’s good friends Kate Scolnick, Moriah Shilton and Nicole Olson. You’ll get a unique and candid view.

Back to sharks. In Belize, we swam with them (nurse sharks, granted, though while snorkeling I spotted a six-foot reef shark, its fins tipped black, headed fast to sea). Some fear sharks are now endangered, populations shrinking quickly, especially the celebrated Great Whites immortalized by Steven Spielberg in Jaws. It’s hard not to think of them when you’re in Caribbean waters. You wonder what’s there, just out of sight. (more…)

Our Best Sentiments

Question: “Would you like more timely information about who owns your shares?”

Answer: Yes!

Question: “Would you be willing to ask for more timely information?”

Answer: Um…

Let’s change that “um” to a yes! You know about NIRI’s effort to shorten 13f reporting windows? Read about it here. All you have to do is fill out NIRI’s prepared template and email it to the address provided. There are 23 comment letters supporting the initiative as of March 5. With 1,600 companies in NIRI, we ought to be able to push the number up. See comment letters here: http://www.sec.gov/comments/4-659/4-659.shtml

This effort illustrates the difference between saying something and doing it (and there’s some serious doing here, which is great news!).

Speaking of which, TD Ameritrade is separating the chatter from the chart in its six million retail accounts with the TD Ameritrade IMX, an index showing what retail investors are thinking by tracking what they’re doing. Sentiment out this week for February was the best in stocks since June 2011.

Of course, one measure doth not a market make. We have an algorithm that looks for relative flows from retail money, and we saw more this period too. But other measures differed. As of March 5, Sentiment was 4.55, just below Neutral. We measure Sentiment by tracking relative changes in market-share for big behaviors and weighting that movement according to midpoint price-changes. It’s like a market-cap-weighted index. Statistically, 23% of clients had Negative market sentiment, 68% were Neutral, and 9% were Positive. (more…)

Instant Replay

Let’s go to the tape.

That’s what we hear in sports now, especially football. Send it to the replay booth. Forget the referee’s call. We’ll check frame-by-frame and – yes, see, right there, his pinky finger holding the ball broke the goal line. TD!

I’m not suggesting instant replay is bad. We want accuracy. But revisiting calls changes the game. There’s a flow and rhythm disrupted by continual play-stoppages. There’s inherent sterility. We introduce a standard of perfection into an atmosphere dependent on imperfection. The game is played by imperfect humans and officiated by other imperfect ones.

With instant replay, the league is decreeing that officiating must be the one perfect element. To effect perfection, somebody loses. Players and the game are deprived of pace. We relieve participants of the opportunity packaged in every missed call to exercise character and behave gracefully. After all, life is neither perfect nor fair.

It’s a tradeoff.

We’ve got the same one in the markets. In fact, as I write, my email dinged with another trading halt, the second inside seven minutes (for NPSP and SCOG). No wait, we just had two more, for symbols SCLP and SGGG. These were all T2 or T12 halts at the Nasdaq, indicating market pauses to assess information, rather than single-stock circuit breakers as we saw multiple times the past five days under trading-halt codes T5-T7.

And yesterday as money gleefully cashed in derivatives ahead of options expirations today-Fri (rarely a good leading indicator for equities), stocks moved wildly all over the place – but just inside circuit breakers. (more…)

Knight Time

Some were forced to do it themselves.

In the wake of Knight Capital’s technology glitch – if you missed it, a linchpin in trading markets was nearly undone Aug 1 by faulty trading software – some brokers who normally route order flow to Knight for handling had to execute their own trades.

They’re not as good at it. No question. But a curious thing happened. We observed a measurable increase in share of market for rational money. More volume acted like rational investment the days following.

Why? How? Today, money often puts compliance before investment considerations. Say you’re a mid-tier broker-dealer whose client is a small Midwest municipal pension fund. The fund puts a modest percentage of resources into a trading portfolio and directs trades to you because your firm’s president golfs Fridays with the mayor.

Before we continue, breaking news: I’m in New Orleans next week to sit down with JOE SALUZZI, co-author of Broken Markets, for a candid chat on what ails markets today. I’m also moderating a wild brawl of a panel discussion on the hot topics in IR today. If you’re not in the Big Easy next week, well…you’re not where you should be.

Back to our story. Market rules require that you as a broker execute trades in something similar to the amount of time that Morgan Stanley does, which is hard to do without more risk to your firm’s capital base (meaning your money takes the other side of trades if nobody else is there). Face it. A family brokerage in Bloomington, IL, isn’t going to host its servers right next to the Nasdaq’s in Trumbull, CT, like Morgan Stanley. (more…)

The 11.1% Occupying Earnings

The One Percent is a catchy phrase. But statistics highlight the 11.1%.

It’s earnings season. Fifty-seven percent of our clients have reported, our data show. In the past five days across the Nasdaq segment, rational investment activity – which means what you think it means – was 11.1% of volume.

Translating, just over one of ten trades in Nasdaq-listed companies (the NYSE was better but could flip-flop next week) resulted from active investment. Statistically, 88.9% of volume – not as cool as 99% but we report what the data show – was driven by something besides thoughtful investment.

Did your stock behave as you expected when you reported?

Our first client to report plunged through hedges and closed down 13%, and we hadn’t hit options expirations (Apr 18-20). A host of clients with calls before Apr 20 beat expectations and gave solid guidance. Half closed up; the other half, down.

Do the 11.1% matter? Unequivocally. So do the 88.9%. I’ll give you examples. A small-cap tech company last week closed down 6% on a miss and weak guidance, but data showed shares trading in what we call the “Midrange,” meaning money had mixed reactions. The stock’s up now.

Wait a minute, you say. How can money have mixed reactions to a miss? A lot of money doesn’t value shares on multiples alone. Any more than world markets peg the US dollar to its redemption value from the US Treasury (zero).

Shares have relative value, and speculative value. Relative value means “what’s this stock worth compared to alternatives in the group or market?” Speculative value means “will this stock help me net a profit in a portfolio of things that fluctuate?” Good answers to both questions can mean stocks rise on – or right after – misses. (more…)

A Blueprint for Modern IR Strategy

There are old guys around a table watching video.

No. They’re not IR professionals. But stay with me for two minutes.

One says, “He’s got a good swing.”

“He’s got the build of a hitter,” adds another.

“Been playing ball his whole life,” a third guy says.

In last year’s Brad Pitt movie, Moneyball, baseball scouts size up players with the right look because that’s the way it’s always been done.

The movie tells how Billy Beane at the Oakland A’s stood that idea on its head and transformed baseball with data-analytics. What wins games? Runners on base. By any means. For the rest of that story, see the movie.

The rest of our story here is a radical IR proposal. For the past 20 years, the investor-relations profession has relied on our industry’s version of “the build of a good hitter.” You do certain things because that’s the way it’s always been done.

What if there’s more to it? As data-analytics has transformed baseball, internet search, how grocery-store shelves are stocked, and the way advertisements connect people and products, it should also transform IR. (more…)

A Rational View of Share Prices

Belated Happy Thanksgiving!

After breaking for a week as an act of giving thanks, we’re back. Karen and I joined 88,622 others in Aggieland at Kyle Field in College Station for the A&M football game last Thursday versus the Texas Longhorns. Disappointing outcome, great Thanksgiving.

There’s something special about Texas. People passing you on the street say hi and the kids say yes ma’am and yes sir. There’s a lot of what Kenny Chesney calls “the good stuff.” What may be the world’s greatest college bar, the Dixie Chicken, sits on the main College Station drag like an Old West saloon. Batwing doors, even.

Speaking of swinging doors, gyrations in markets make it awfully hard to use your stock price to measure investor sentiment (wasn’t that the idea behind exchanges?). In fact, there’s inherent contradiction between the way markets behave now and how the IR profession cultivates holders.

IR folks typically seek buy-and-hold money that does not trade. Yet executives frequently ask about the stock price. The news rushing at us round the clock tries to explain market behavior in rational terms. Yet stock prices are set by the latest fleeting bid or offer. Nine of ten times, those prices are not rational. (more…)