Tagged: Short Selling

Street Level

“My CEO doesn’t get market structure.”

I’ve heard that more than a time or two! IROs wanting executives to grasp market complexity in order to see share-behavior in an accurate and contemporary fashion run into the buzz saw of The CNBC Mindset.

I’m not criticizing CNBC or CEOs. But some perspective is in order. In my Denver neighborhood, we’ve had a summer-long municipal effort to improve storm drainage. Streets are barricaded for blocks around and getting to our house is a circuitous adventure. The infrastructure is a mess (we hope this plan works!).

What’s market infrastructure like? On CNBC, everything is headlines and earnings. Fast money. Technicals. Stocks are supposed to be simple things – some multiple of discounted cash-flows minus the cost of capital should render fair value. Right?

That’s how it used to be. Simple, like our streets. Follow your GPS to our house right now, and you’ll be navigating awhile, because the tool won’t show you the truth at street-level.

There are $15 trillion of assets at companies in the US running mutual funds, ETFs, and other funds. About 28% are in equities. There are more than one MILLION global indexes, if you add the 830,000 or so that S&P/Dow Jones calculates at least once daily to MSCI’s 100,000, Russell’s 50,000, and Nasdaq’s 21,000-ish. A million slices of the global economy to which you can benchmark a trade or investment for a second or more.

There are 4,300 brokers regulated by FINRA, and every trade must past through one. Yet just 200 execute trades across 17 billion monthly shares in our models, and 30 drive 90% of volume. Vast uniformity yet continuously shifting arbitrage. Convergence and divergence.

About 40% of the typical US stock’s volume comes from borrowed shares. We see megacaps with 55% of all daily volume borrowed – rented shares, short shares. Your top holders lend securities to large broker-dealers who sublet them through margin accounts for daily use. Renting is cheaper than owning. And ownership won’t hold answers.

Most stocks have intraday volatility around 2% — the spread between high and low prices. That’s a great deal more than the basis points of daily movement you see in closing prices. (more…)

Stopping Shorts

We’re in Paris.

After last week’s pelting Hollywood, FL schedule at NIRI National 2013, we’re sight-seeing along the Seine and then wheels-down southward through Provence on bikes. Tell you about it in two weeks.

Back to NIRI. The Westin Diplomat taunts with beckoning views of surf and sand mere yards away while you ride chilly escalators through its immense conference center. One early walk Wednesday up the strand, home to bargain venues like the Manta Ray Hotel and dining establishments where breakfast still goes for $3.90, cured our longing for the outdoors, however. We soaked fast in the sultry air where but degrees of atomization separate sea and sky. We don’t know humid in Denver.

Observations? NIRI ran a solid show, tightening panel-times and offering innovative material to spice up the same stuff you’ve always seen if you’ve gone to fifteen of these like I have. Audience? Seemed light to me, perhaps some under the 1,200-ish we heard. But it’s FL. Maybe a chunk hit boats and links rather than booths and panels.

ModernIR pumped up its presence with a new booth, a bag insert, and a full page in the conference program. And I was on a panel about short-selling (we track short volume with algorithms). In all my NIRI years, I can’t recall one on shorting that featured the head of securities-lending for Franklin Templeton and a real short-selling hedge fund.

The gregarious Kevin Tuttle, CEO of short fund Tesseract Management, entertained us with wide-ranging views interspersed with gems that could slip by if you weren’t paying close attention. (more…)

Equity Supply Chain

Dollar General (NYSE:DG) dropped 9% yesterday, offering a lesson to investor-relations professionals.

Before that, a plug: At NIRI National next week I’m paneling with the CEO of short-seller Tesseract Management and the head of securities-lending for Franklin Templeton on short-selling strategy and practices. Longtime NIRI fixture Theresa Molloy has organized a great discussion and will moderate. And please visit ModernIR at booth 719, our eighth straight year in the exhibit hall.

For Dollar General, revenues were light and guidance lighter, margins weakened due to the products folks were buying last quarter, and inventories rose 21%. Investors and traders can examine facts about the structure of Dollar General’s market, from margins to supply-chain, and make value judgments (which will be distorted by other market behaviors, however).

Have you considered that your equity market is also affected by logistics, supply-chain and who’s consuming the product? We perhaps never imagine that the stock market has the same characteristics and limitations of other markets. Have you gone to the shoe store and they didn’t have your size in the brand you wanted? How come that doesn’t happen in the stock market? (more…)

A Short Story

Happy New Year! Boy, where to begin. With the Fiscal Cliff arrayed theatrically as the curtain rises on 2013, it’s a crapshoot picking what to write in the program notes.

So we’ll take aggressive short sellers. No, we don’t mean market Sentiment favors shorts. As December concluded, Sentiment Indicators for 15 client stocks comprising a market sample included two Negatives, three Positives and ten Neutrals. If it were a political poll, the data show your candidate ahead slightly.

Plus, the dollar is about where it started 2012. The Dow 30 were up 7%. Last year’s Gross Domestic Product (the sum of personal consumption, private investment, net exports and government consumption) likely rose about 2%, while the money supply was up 6%, meaning consumption will cost more, which means 2013 GDP, 92% dependent on personal and government consumption, has a good shot at rising.

So things look good if you don’t scrutinize economic structure (if money in circulation is rising faster than output, growth is a bit of a pyramid scheme).

Which brings us to our short story. Did you hear about Herbalife? Activist William Ackman of Pershing Square, not typically a guy who shorts stocks (borrows and sells them in hopes price declines so shares may be returned at a lower cost, producing a gain), targeted the NYSE-listed network-marketing purveyor of supplements with a public attack precisely as monthly options expirations and quarterly index rebalances were occurring December 19-21.

Ackman called the firm’s sales-recognition practices a pyramid scheme. We can’t assess the merits of his argument. But we want to begin 2013 with a lesson on structure – of the market.

Look around at noteworthy “short attacks,” we’ll call them. Often they happen during monthly options-expirations. Maybe it’s planned, maybe not, but the effect is simple to understand. Big money doesn’t invest today so much as it manages assets and risk. (more…)

“We determined that it was appropriate to re-examine the appropriateness of short sale price test restrictions.”

We copied that sentence from the SEC’s 334-page charter instituting Rule 201 amendments for short sales. While it’s amusing that the authors modified the word appropriate with the word appropriateness, what’s important is that the rule took effect yesterday, Feb 28. What is it and how might it impact investor relations?

It’s hard to summarize a document consuming 60% of a ream of paper in one sentence. But Rule 201 implements an uptick rule – which regulators removed as part of Reg NMS in 2007 – when securities drop 10% from the preceding day’s closing price. If that happens, an uptick rule will be enforced in which long sellers matching at the best bid or offer will be able to sell ahead of short-sellers, and shorts will only be able to sell if the price ticks up above the last bid.

The idea is that if long sellers get called up to the front of the line, it’ll promote investor confidence by reducing the severity of short-driven price swings. And it’ll improve market-efficiency by letting those with long positions off the boat, thus discouraging short sellers from trying to sink the boat. (more…)