Tagged: Speculation

Last Year’s Language

Happy New Year!

Last year’s words belong to last year’s language and next year’s words await another voice.

TS Eliot said that. If you need a break from the daily tempest, read my favorite of his, The Love Song of J Alfred Prufrock.

So often what is said of the machinery of the stock market reminds me of a line from it.  In a minute there is time for decisions and revisions which a minute will reverse.

Against that poetic backdrop, let’s review the math of the stock market and look ahead at what it may this time bring.

Stocks were up. Simple math.  Like the $7.4 trillion now on the Federal Reserve’s balance sheet, representing the spread between what we had before and what we next needed. The market valued that intervention more than real production.

Ponder that. Read some TS Eliot.  If you’ve wondered what Modern Monetary Theory is, this is it.  If economic activity decreases, the government manufactures offsetting money to get the collective back to level.

So last year’s language says we can survive a long-term economic idling. But next year’s words subsequently speak of the ebbing value of money and work and time.  Repeated, it will lead to societal collapse because we cannot pay out money without getting something – stocked shelves, harvested crops, cut hair, worked biceps – in return.

Thomas Jefferson said in a 1790 letter to William Carmichael, “The right to use a thing comprehends a right to the means necessary to its use, and without which it would be useless.”

Next year’s words come from a past voice. If governments insist they can shutter the economy, people lose the most foundational right of all: Independent survival through freedom and initiative.  It transcends government and squats at the base of Maslow’s Hierarchy beside food, clothing and shelter, which shouldn’t depend on another’s edict.

The Hegelian Dialectic – the tension of competing ideas – has become stretched cultural rawhide. Yet the stock market merrily courted 50 million online brokerage accounts and a sort of Bacchanal befitting an F Scott Fitzgerald novel.  Party time!

Let’s go, however, to the math.  The graph here compares a number of the core ModernIR quantitative measures of market behavior central to our intellectual property, Market Structure Analytics for stocks comprising the S&P 500.

By the end of 2020, Active Investment – classic stock-picking, the money motivated by long-term financial performance – was down almost 32% year-over-year as a share of trading volume and totaled less than 10% of the total, a historical low.

What prices the market is what transacts in it.  Not who owns the stocks.  It’s the same as a neighborhood. What prices it isn’t who lives there but what’s paid for what sells.

Even Passive Investment was down about 14% year-over-year.  The big surge driving the stock market to all-time highs as the whole globe dove under gargantuan piles of face masks was Fast Trading and Risk Mgmt.  The former is speculation. The latter is using derivatives in place of stocks.  These behaviors are dominated by firms like Citadel Securities, which buys a bulk of all retail trades from those online accounts, and Wolverine Trading, a low-latency firm focused on automating trade-hedges.

It’s not Warren Buffett and Boston-area portfolio managers.  That was yesterday’s language.

It’s worth noting that volatility was up 44%. Short volume at 43% of all trading volume was almost unchanged from the end of 2019.

What did you think drove stocks in 2020? If you watched CNBC like we all do in investor-relations and investing, it was the work-from-home trade, the future of electric vehicles, the horse race in Covid-19 vaccines.

People and machines speculated on those, yes. But you can’t call 2020 an investment market.  It was one of the great speculative soirees in human history. A romp through Dutch tulips (I’ll let you hunt that one down).

So, what’s it mean for 2021?   I’m reminded of another snippet of Thomas Jefferson’s, who observed via letter,  rather than Facebook post, to William Barry, later Andrew Jackson’s Postmaster General, that, paraphrasing, an extensive, corrupt, and indifferent regime would be met by reformation or revolution, the one or the other.

The stock market’s behaviors are extensive and indifferent and have corrupted its purpose.  What follows if people care is reform or revolt.  Both are opportunities, not obstacles.

The revolutionary opportunity for companies and investors is to see the market just as we presented it here. And there’s reform coming to rules and data.  More on that as 2021 unfolds.

Last year’s market language bred 2021 with generational speculative risk.  That doesn’t mean we’ll be measuring our lives out with coffee spoons (see TS Eliot). We have sure heaped a load on ourselves, though, as a new decade begins.

We’re not worried. We’re watchful. Now, if you’ll excuse me, I’ve got some things to read.

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…)

Understanding Markets

You’ve heard that bit of cowboy wisdom on how to double your money? Fold it over and put it back in your pocket.

I hear folks wanting cowboy wisdom on market structure. What do I need to grasp? In that sense, this could be the most important Market Structure Map I’ve ever written.

If you’re at home, get a glass of wine. We won’t belabor the story, but it’s not a simple one. In the beginning, in 1792, when 24 brokers clustered under a New York buttonwood tree and agreed to give each other preference and charge a minimum commission, trading securities was simple. That became the New York Stock Exchange. Most trades were for investing, some few for speculating. People have been gambling since the Garden of Eden, obviously.

Step forward. In the 1860s ticker tape by Morse code sped markets up but didn’t change structure. In the 1930s, the Securities Act formed the SEC and imposed a regulatory framework. Structure remained similar, if more process-driven.

Take another step. When Benjamin Graham wrote “The Intelligent Investor” in 1949 (Warren Buffett called it the best book about investing ever written), he said to first distinguish investing from speculating. Seek safety for principal and an adequate return, through research in business-like fashion to find good businesses at a discount to intrinsic value. Own them for the long term. Graham separated this “active” investment from cautious and generalized passive investment. (more…)

Bourbon Street Market

The equity market is like Bourbon Street.

No, we don’t mean the stock market is home to “Big Daddy’s World Famous Love Acts.” We mean it’s a bit off, a party, somewhat wanton, full of folks in disguise doing things they wouldn’t do anywhere else. Fantastical.

I interviewed Joe Saluzzi at the NIRI Southwest Regional Conference last week in New Orleans. Joe and co-founder Sal Arnuk at Themis Trading are the reason we all know about “high frequency trading.” Their white paper on toxic equity trading went viral in 2008, and the rest is history.

We sat down Charlie-Rose-style at the Hotel Monteleone and talked candidly about Joe’s new book, “Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence.”

If you haven’t done so, buy it for yourself (I have it on my Kindle) and get a copy for your CFO or CEO. Everybody who at some time utters the word “equity” should read it.

If you’re in the IR chair, executives expect you to deliver a story to investors that advances shareholder value. You want a market that supports those efforts by helping risk-taking capital connect to the opportunity in your shares. Most executives generally conclude that it’s working. Stocks seem to be trading comparably to historical S&P 500 earnings multiples.

So why would Joe and Sal argue that markets are broken? (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…)

I read this at an Occupy Wall Street site:

“Let me tell you a wonderful old joke from communist times. A guy was sent from East Germany to work in Siberia. He knew his mail would be read by censors. So he told his friends: Let’s establish a code. If the letter you get from me is written in blue ink, it is true what I said. If it is written in red ink, it is false. After a month his friends get a first letter. Everything is in blue. It says, this letter: everything is wonderful here. Stores are full of good food. Movie theaters show good films from the West. Apartments are large and luxurious. The only thing you cannot buy is red ink.”

Great joke. No doubt scrutinizing your trading data to make sense of it is like something written in red, the code for which is blue.

Speaking of which, chances are, your earnings date is approaching. Your intraday volatility (spreads between high and low prices) is perhaps 4%. Across our client base, it’s now over 4% on average. To help you make sense of your stock price, the exchanges and designated market makers and surveillance firms are giving you columns of data on trading by different brokers and sector or economic news. They tell you so-and-so upgraded the sector, causing a strong rally.

You’re not sure. In your gut you think the euro has got a lot to do with it. Maybe the dollar. It would be nice to know. And it would help if you could assess how money will react to the news you announce next week or the week after. (more…)

High Correlation in Stocks

While Irene splashed Wall Street, we Coloradans reveled in the ridden glory of the USA Pro Cycling Challenge. The 500-mile route hosted 130 of the world’s top cyclists including Tour de France winner Cadel Evans and both runners-up, Luxembourgers Andy and Frank Schleck.

We were there, clanging bells and hooting our hearts out. Here is winner Levi Leipheimer readying for the time trial that put him in yellow. The peloton left Avon here for Steamboat, and Levi is visible midway in yellow. At the finish, some 250,000 jammed downtown Denver for the epic, lapping conclusion. We are proud of American cycling and our state’s awesome organizational effort.

Speaking of peloton, Wall Street Journal reporter John Jannarone wrote Monday in the Heard column called “Traders Seek Salvation from Correlation” about how stocks race in formation. It’s among the best pieces we’ve seen on modern trading. Jannarone says that S&P 500 stocks show 80% correlation in the past month, meaning eight in ten move synchronously.

This is a source of distress for IR folks trying to distinguish a strong company story from the herd. We’d argue that rather than slamming the collective IR noggin into the burgeoning brick wall of macro-focus investing that you instead track program trading and establish what level is acceptable – and use it as an IR success measure. We wrote about this last week, so we won’t retrace the trodden path.

Why a mirror image across so much of the market? One driver Jannarone posits is Exchange-Traded Fund investing. According to Credit Suisse, these drive some 30% of daily stock volume. Jannarone also notes that trading in S&P 500 E-mini futures contracts is more than four times the combined daily volume of the two biggest S&P 500 ETFs, the SPDR, and iShares S&P 500 Index ETF. (more…)

Yin and Yang in Your Stock

Stocks go up and down. Nothing new there.

The dollar dropped for a second straight day today. Stocks are again up, like they were yesterday. The dollar gained ground last Wed-Fri, and stocks fell.

This week marks the end of the month and quarter. We recommend in our IR Calendar that you consider some tactical timing as part of your overall IR strategy. Generally, the last few trading days of a quarter or month aren’t best for releasing good news. But they may be perfect for bad news.

Why? Institutions will be shoring up portfolio returns or managing exposure to market risk. They address risk by offsetting it with something that is inversely correlated. Notice that stocks and the dollar are inversely correlated. Notice that the dollar and other currencies, such as the Euro, are often inversely correlated. (more…)

Why IR Pros Need to Love Some Math

Scheduling note: I’m in Miami Friday for a panel discussion on trading realities for the NIRI Senior Roundtable. Hope to see you there!

Today is the anniversary of Pearl Harbor. Near the end of WWII, my great uncle, Jack, was one of 316 sailors from 1,200 aboard the USS Indianapolis to survive its sinking and days in shark-ridden waters in the south pacific. Tough fellows, those guys.

On that happy note, let’s turn to everybody’s favorite topic: math. Click here for an example of math in action, a chart showing the spot market for the US dollar, called the DXY, and the Dow Jones Industrial Average, the past three months. The two juxtapose like the mirror image of a mountain in a still lake on a clear day. Wherever one goes, the other is equally opposite. (more…)

Actionable

What does the word “actionable” mean to you?

It’s a decent name for a rock band, yes. But it means “what stuff can you do with this?”

Traders want actionable data – something to drive opportunity for profit. Investor-relations professionals want actionable tools – something that’ll improve stock ownership, share price, results of IR effort.

Knowing who owns your stock is good. But what actions can you take? Talk to sellers? That’s uncomfortable. Plus, unless you’re screwing up, selling is a compliment, an investment objective. The sellers should well buy again, when the time’s right. (more…)