Tagged: risk-hedging

Great Expectations

Happy New Year! Hope you spent the two-week break from these pages joyfully.

We’ve descended this week from the high Denver backbone of the continent to visit west in Santa Monica and sponsor NIRI’s Fundamentals of IR program. Following our New York trip before Christmas, we’ve marked the turn of the calendar by touching both coasts.

We’ll kick off the year with a story. I’ve just finished Charles Dickens’s Great Expectations on my Kindle. Yes, I realize it was first published in serial form in 1860 (the year the cattle ranch on which I grew up was homesteaded). I have a long reading list. It took me awhile to get around to it.

Lest I spoil excitement for the other three or four of you planning on it still, I’ll say simply that it’s a masterful narrative assemblage of plot points, the connections between which one would never fathom at the outset. Great storytelling never gets old.

The market is like that too. As you begin 2014 in the IR chair, remember that in a market dominated by algorithms – the principal purpose of which is to deceive – things are rarely as they seem.

Take trading from Dec 9-31, 2013. The US equity world it seemed was gathered in knots and pockets like people in an old west town where the gunslinger was expected anytime to ride through. Tones were hushed, gestures animated. A pregnant air of expectation hung like a storm.

Would the Fed finally taper? And if it did, what then?  (more…)

BEST OF MSM – A Movable Feast

Happy Thanksgiving! Here’s a phrase Karen’s grandmother coined that you may find useful this time of year:  “We ate to dullness.” 

Since many of you are appropriately absent this week from the IR chair (or whichever office you occupy), we’ll revisit past turf. Among the most widely read Market Structure Maps of 2013 was this below from July 3. The images from our Provence cycling trip exercised influence, but sort through to the lesson.

I was reminded of it the last few days with three public companies you’d recognize. Each had the same scenario:  Declines in price of magnitude unjustified by news or facts – which had shareholders as flummoxed as the IROs.

What happens between buyers and sellers, before they ever meet each other, can have as consequential an impact as the act of changing ownership. Sometimes more. Witness the so-called Flash Crash of May 6, 2010. Shill bidders disappeared, leaving a vacuum that filled with nothing until a thousand DJIA points evaporated. That’s not selling; that’s the conveyor belt connecting our fragmented market just – poof! – vanishing.

Another major structural fact today is that investors are obsessed with risk. Read on.  Best, -TQ

July 3, 2013

We’re back from touring Provence aboard cycling saddles, weighing heavier on the pedals after warmly embracing regional food and drink. Lavender air, stone-walled villages perched over vineyards, crisp mornings and warm days, endless twilight, chilled Viogniers from small-lot Luberon wineries. If these things appeal, go.

In Avignon we feasted at Moutardier in the shadow of the Palais du Papes, the palace of the Roman Catholic popes in the 14th century. From tiny hilltop Oppede-le-Vieux with roots to earliest AD written in moldering stone and worn cobble we surveyed the region’s agricultural riches. After a long climb up, we saw why Gordes is where the rich and famous from Paris and Monte Carlo go to relax. And on Day 5 I scratched off the master life list riding fabled Mont Ventoux, which will host the Tour de France on Bastille Day, July 14. What a trip.

Meanwhile back at the equity-market ranch, things got wobbly. We warned before departing that options-expirations June 19-21 held high risk because markets had consumed arbitrage upside and new swaps rules would make the process of re-risking unusually testy. Markets tumbled.

The Fed? Sure, Ben Bernanke’s comments unnerved markets. But if we could see it in the data before the downdraft occurred, then there’s something else besides the reactions of traders and investors at work. (more…)

Structural Distortion

“When I talk about this stuff with clients, they’re only half-listening until this phrase appears.”

Thus spake my learned friend Jim MacGregor, at Abernathy MacGregor in New York City, whose views I hold in high esteem.

“What stuff? What phrase?” I said.

“Market Structure. ‘How market structure can distort your price.’ You write about that,” Jim said, “betcha your readers forward that column to their bosses as much as the previous half-dozen combined.”

I’m not sure what that says about my earlier writ but Jim had my attention. He was saying that explaining how share-prices are affected by market behavior carries more substance than intoning “you need to understand market structure.”

“Market structure” is the behavior of money behind price and volume. Could certain behaviors be distorting fair value for shares?

Exchanges say no. Regulators claim there’s no proof. Surveillance providers tell you to ignore noise.

The biggest money manager today is Blackrock, with $3.9 trillion under management. Blackrock is a quantitative investor known for the $850 billion in its iShares ETFs. It allocates resources top-down. ETFs rebalance every day. Is that noise?

Of 4.5 billion shares trading daily in the US stock market, 1.8 billion, about 40%, are borrowed every day (some amount from Blackrock). That’s not owning, it’s renting.

There are 3,600 national-market-system companies in the US when you remove ETFs, investment companies and multiple classes of stock (I bet Blackrock owns every one). There are two million global indexes. Thousands in US equities are calculated every second. There are more ways to slice stocks than there are underlying corporations.

I was explaining market structure last week to the head of a major public brand, who asked why he should care about market structure if price reverts to a rational level over time. After my explanation, he became a client. I’ll come to what I said.

In Paris in June, Karen and I wanted to visit the top of the Eiffel Tower. The line at the north footing stretched dimly into the gloaming. We’d heard access was quicker at the south entrance. We went there. About 25 were waiting. We were elated. Except there are no elevators at the south footing. You climb. Market structure affected our behavior.

ModernIR monitors bottom-up investment behavior as a share of overall market volume (about 16% the past 12 mos.) and as a price-setter over various time-periods. (more…)