Tagged: Speculative Trading

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…)

En Route to Knowing

I got a kick out of that movie, Night at the Museum.

Yes, it’s old, and no, we haven’t seen any of the movies that contended alongside Argo for Best Picture this year. But there were several times yesterday as clients reported results in a restive currency-addled market when I thought how things aren’t what they seem. If you could get below the surface, you’d find a tiny little tough cowboy who looked like actor Owen Wilson.

Just kidding. All analogies break down. But often in the market, what you think you’re seeing isn’t what it seems. One client’s share price shot up in the early going with results, jumping nearly 8%. Then it declined 4%. Imagine if gas prices did that every day. But I digress. The price finished right in line with the Rational level – fair market value from a fundamental perspective.

Why the gyrations? Speculators had bet on weak results (something that can be observed), and results weren’t. Traders covered, driving price up. Passive investors like indexes were Hedged. They’d farmed out risk, but surrendered upside. As price suddenly rose, counterparties with rights to gains above certain levels locked them. They’re not investors. When they sold to keep their collar profits, price reverted to the Rational level.

Market price may or may not reflect an investment purpose. Let’s use an example many can appreciate: An analyst ups her price target and rating on your shares, and price climbs 4%. We assume that investors responded. We explain to management, “Investors liked the Outperform rating and higher price target, and bought.”

But was it investment behavior? What if those gains evaporate three days later when the dollar rises100 basis points because Europeans think Italy will need more help from Germany and rush to buy dollars? That’s risk-management behavior, right? (more…)

Look Around

It’s good to know what’s around you.

En route back from Austin to Denver we traversed the hinterlands including eight miles of dirt track to visit the evocative scene of the 1864 Sand Creek massacre of peaceful Cheyenne and Arapahoe north of Lamar, CO. There’s an eerie stillness yet.

A technology client in a five-day period showed a 14% increase in midpoint price on a 4% rise in Rational investment and a 3% uptick in Speculative trading. It’s not evocative, I agree. You see all those percent signs and you want to watch cartoons or have a cocktail hour. Or drive a deserted road. Any escape from dreaded math!

But it’s telling you as plainly as historical evidence what’s happening. It’s laden to dripping with news you can use. Rational investment occurred. Speculators picked up on it and moved the price. And look how important rational investment is – just a few percentage points can change everything. There’s no better or more immediate proof of the need for IR and sweating the small stuff. One call here, one meeting there, and the whole structure of your equity market transforms.

Think about what web advertisers do with data. Every click, visit, or search is a data point that paints a three-dimensional picture of you, the consumer, and which then lines the margins of your browser with things you might use. And cookies might send you emails offering travel deals, an Overstock auction, or affordable life insurance.

Another client gained 5% around Thanksgiving, on a 7% increase in Program trading – and we even know the brokers responsible for it, and how much they were up or down compared to the preceding period. We use an algorithm for that. We marked Rational and Speculative trading as shares of market this week versus last and both were down. Hedging was the measurable, mathematical price-setter. (more…)

Dividends and Buybacks

Would you rather ride your road bike in the sun or the rain?

What if riding in the sun means peddling across Death Valley in the summer, while the rain is a passing shower in the Italian Dolomites?

Context is essential. Let’s apply the same thinking to decisions about stock-repurchases and dividends. Conventional wisdom has long held that both actions appeal to the kinds of stock buyers who hold securities and count on fundamentals.

No argument there. But ponder the third dimension in the IR chair. The first dimension is your story – what defines and differentiates your investment thesis. The second is targeting the kind of money that likes your story. The third dimension is the state of your equity store.

Your equity is a product, competing with other products, with unique supply and demand constraints. If you suppose that your story is correct for a particular buyer without considering whether the buyer can act on interest in your story, you’re leaving money on the table. So to speak.

For instance, if I want four Keith Urban tickets at Pepsi Center in October for no more than $50 each, I’m already sold on the investment thesis – “Keith Urban puts on a good show.” What if there are only two tickets available at $50? Well, I’m not the right buyer for the investment thesis, then. (more…)

Maybe we should leave more often. Out just one week, and both silver and Osama Bin Laden’s house go on the auction block.

Sunday night after flying back from Antigua by way of Newark, I reviewed a week’s worth of client stock alerts for perspective. Stepping through a side exit and closing the door on life’s cacophony for a week, time stops. The return, the jolt of the madding crowd, is revealing. It’s amazing what you see.

More in a moment, but I promised some of you I’d share what we saw beyond the Truman Show. Apparently you can’t get from Denver to the French West Indies in a day on one airline, (more…)