Tagged: Stocks

Maxine Waters

I knew it would come to this. Rep. Maxine Waters would be on CNBC talking about market structure.

Last week during options expirations, Congress paraded supposed culprits in the Great Gamestop Mania before itself.  And it wasn’t about financial misdeeds, somebody leading shareholders astray. No, it was about MARKET STRUCTURE.

What’s market structure?  The behavior of money behind price and volume, in context of rules.  What makes stocks tick.  How the market works.  Pick your thing.  But it’s got nothing to do with STORY.

The stock market is driven by supply and demand, which are largely governed by rules and machines.  Scrawl that on a mirror.

And Investor Relations in 2021 should be about advising the executive team and board on valuation, strategy, uses of shareholder capital, and capital-formation in this market.

That’s a lot bigger job than “telling the story.”  The story doesn’t directly connect to the supply or demand in your shares and what drives both.

GME didn’t go to $483 because of high short interest.  It skyrocketed because market structure enabled demand far larger than the availability of actual, physical shares to be accommodated at ever-higher prices.

Sure, in the process hedge funds short GME on a rational basis were nearly bankrupted. Had the supply of GME been limited to its shares outstanding, the price would not have risen so high.  Why? There would have been nothing left to buy. If you can’t buy it, the price can’t rise.

Right now, short interest says IFF is the most shorted stock in the market.  But it’s NOT the most shorted stock.  I’ll explain.

IFF Short VOLUME, the part of supply dependent on borrowed stock, has been close to 70% for more than 200 trading days.  Trading machines will find stocks with a predictable propensity to rise or fall.

What’s more, as we’ve explained before, market makers, a fancy name for the person at the airport taxi stand you don’t need who hails a cab for you from the line sitting right there, can manipulate supply and demand by creating shares out of thin air.

Traders, you can never, ever, ever beat them.  Because the regulators said so.  What do we mean?  Well, that market makers are exempt from the rules that apply to you.  It means you can’t win, and it means there isn’t a uniform rule, uniform justice. Why is that okay?

Public companies, the regulators and the rules favor the machines.  So while you spend over $5 billion annually complying with rules, and much more trying to get “governance” and “targeting” right, we might get more purchase, so to speak, from that money by spending it lobbying Congress to make the market fair for us.

So.

What’s really the most shorted stock?  Screening out ones that hardly trade, it’s PRO.  It’s 86% short.  Least shorted is PNM, in a big green deal (good name for a rock band) with AGR.  PNM is 7% short — that is, of its trading volume, a tenth of IFF’s.

Knowing these facts is also part of investor relations in 2021.  And trading stocks.  In the same way that knowing what made your company better fundamentally was key to the job, so now is knowing your characteristics.

Traders, it’s the same as knowing it was time to leave TSLA Jan 22.  You can always come back when TSLA market structure turns.  And if Maxine Waters is asking questions, you should be in cash.

Big Cheese Grater

Good offense beats good defense.

These five words are the heartbeat of the Saban Dynasty in football at Alabama – and the reason for the Gamestop trade in the stock market.

Promise, this piece isn’t about sports. It’s about how retail traders killed institutions.

It takes some history. Go back to 1995, and the spread charged by brokers executing your trade was about 13%, or an eighth of a dollar.  That’s on top of the commission you paid.

Along came Electronic Communications Networks (ECNs) offering to match trades at a fraction of that spread automatically using computers.  They took 50% of trading from exchanges.

The exchanges responded in three ways.

Follow me here. I’m explaining why GME went up 1,000% and why retail money is running circles around institutions.  Everybody in the markets should understand it.

Back to the exchanges.  They first cried foul to regulators and sued ECNs.  Then they bought the ECNs (ECNs Brut, Island and Archipelago became technology engines for the Nasdaq and the NYSE).

And they adopted two ECN pillars:  They began paying high-speed traders to set prices, and they invested in algorithmic technology to help big institutional customers fill trades in a stock market infested with small orders and fast trades.

Step forward.  The SEC sniffed the wind and first required stocks to trade at a penny spread and then forced all the markets together under Regulation National Market System, thinking it would address what the ECNs had highlighted: The market wanted smaller intermediary spreads.

Still with me?  GME went up 1,000% because of what we’re talking about here, and institutions have been left out in the cold (public companies, you need to know this!).  I’m getting to it. Don’t quit!

Back to our story, institutional investors and the brokers helping them execute trades invested billions of dollars in computerized trading systems that would split up big orders – like a million shares – into tiny 100-share trades that, and this is key, wouldn’t chase after deviations in price.

I liken it to seeing the market as a cheese grater and institutional orders as a block of cheese. Technologists figured that a stock market forced into tiny spreads and trades would mean constantly changing prices. So why not fashion algorithms that would position the block of cheese of buys and sells like tiny trades – all the teeth on the grater?

Genius!

And so exchanges crafted order types to help big brokers and their customers match the cheese of orders to the grater of the market.

It was a compromise, not an act of service.  After all, exchanges continued to pay traders to be the best bid or offer – the going rate is around 25 cents per hundred shares still – so the cheese graters for big institutions would sit unseen behind the displayed prices for stocks, grating away and filling trades at midpoint prices.

And then along came the Reddit mob.

The unwitting genius behind the crowd is that it doesn’t know market structure. It just followed greed, a human impulse. That is, the aim of the Reddit gang is to run prices up. The aim of the Big Cheese Grater is to fill orders as prices run up and DOWN.

The whole structure of the stock market, with blessing and help from regulators, encourages prices to move both up and down.

It all fits together.  Traders will always make 100 shares of every stock available if prices move up and down.  If prices move up and down, exchanges make billions selling data. And Fast Traders, the supply chain of the stock market, need prices to move up and down to profit going long and short.

Good offense beats good defense.

Buys are offense. Algorithms are defense. And the former flat out OWNED the latter, because the Reddit traders, without understanding what they were doing, chose only offense. They demonstrated a nervy willingness to chase prices higher that utterly demolished algorithms designed, like cheese graters, to capture up-and-down moves.

Intermediaries wanting to make $0.003 per trade didn’t care if the cheese grater malfunctioned. So they fed the mob frenzy what it wanted. Higher prices.

And this can happen every day, any day. In anything.

The problem for public companies is your big investors need to put $2 billion into the market within a price-range to get a return. A retail trader just needs 10% on 100 shares.

You see? It’s a problem 30 years in the making. Now it’s here.

What fixes it? That’s a topic for another day. But it’s coming. It’s Regulation National Market System II.  We’ll see it within two years.

Metastable

Editorial Note:  A giant thank you to Client Services Director Perry Grueber for penning last week’s Map.  He’ll be back regularly, by popular demand. This week you’re stuck again with me. -TQ

Something is worth what another is willing to pay for it.

That’s the lesson of the maelstrom in financial markets, from wood pulp futures, to bitcoin, to GME, to AMC, to wherever the next Dutch tulip bulb of the 21st century showers the shocked with inflationary sparks.

Before we get to that, we’re back from riding the trade winds around Antigua, where high season in the Caribbean looks like turnout for a vegan tour at an abattoir. Nobody is there.  And the Caribbean has no central bank doling out cash for sitting home trading in a Robinhood account.  We did our best to offer economic support.

I’ve posted some photos of our circumnavigation here.

Oh, and you’ll recall that my Jan 27 Map said, “Congrats, Tom Brady. We old folks relish your indomitable way.”  When you’re going to sea, always bet on the buccaneers. And the old guy.

We were saying a thing is worth what somebody is willing to pay.

Yesterday GME closed at $50.31.  On the Benzinga Premarket Prep Show Jan 25, right before we grabbed our flipflops and duffle bags and bolted with our Covid19 negatives for the airport, I told the audience, “Market Structure shows GME is going to go up.”

I didn’t know it would rise to $483 while we were at sea.  But somebody was willing to pay more. Until they weren’t.

Right now, AMC, BB, BBBY, NOK, and so on, are outliers.  What if the scatterplot gets crowded?

Most of the people on what Karen calls the “What Do You Think of THIS Stock?” TV shows are still talking about the PE ratio. Earnings growth. Secular trends. Economic drivers. You get the idea.

Investor-relations people, are you prepared for a market full of Gamestops – surging highs, avalanche tumbles? How about you, investors? 

In physics and electronics, “metastability” is the capacity of a system to persist in unstable equilibrium. That is, it seems solid but it’s not.  Like the stock market.

Don’t blame Reddit.  I love the flexed muscle of the masses.  I’d like to see it in society elsewhere, frankly.  A horde of people who refuse to be told what to do or told they can’t.  A mob of unruly traders is wholly American.

But all those people, and all the rest of us in the capital markets, ought to understand the metastability that makes a GME or an AMC possible.

Most retail orders are sold to intermediaries trading at extreme speeds.  Those firms aren’t calculating PE ratios. They’ll pay somebody for a trade so long as they know somebody else in the pipeline is willing to pay more.

Hordes of limit orders hit the pipeline, and intermediaries see the whole hierarchy. They race prices up, skipping swaths of limits by raising the price past them. So those traders, if they’re greedy and willing to chase, jump out of line and enter new, higher limit orders.

And mania ensues because somebody is willing to pay more. 

When the high-speed intermediaries see that limit orders to buy and sell are equalizing, they stop filling limit orders, they short stocks, and they skip limit orders on the way down, and the whole cavalcade reverses.

And it’s not just retail flow or big high-speed penny-pickers in the middle. Quant firms do it. Hedge funds do it.

Two factors make a metastable stock market possible.  First, rules require a spread between the bid to buy and offer to sell.  So somebody will always have a split-second motivation to pay more for something than somebody else.

Indeed, it’s what regulators intended. How do you foster a market that never runs out of goods? Give them a reason to always buy and sell (exchanges pay them for best prices to boot). And regulators let those Fast Traders manufacture shares – short them – that don’t exist, and persist at it for weeks.

The market is nearly riskless at any price for the raciest members moving unseen through the Reddit ranks. They bought the trades. They know what everybody is doing.

And that’s why we have a metastable market.

The alternative? You might not be able to buy FB or sell NFLX at times.

Would we rather have a false market with ever-present orders or a real market occasionally without them? Regulators chose the former. So did the Federal Reserve, by the way.

And that’s why everybody in the US stock market better know how it works. We do. Ask us for help, public companies, and investors.

Onward and Upward

The market is always forward-looking, said the pundit.

courtesy Cnet.

We were driving back from Steamboat to Denver and listening to satellite radio.  It was noon coming through Kremmling in Grand County and the temperature was five degrees Fahrenheit, 50 degrees chillier than Denver.

And I thought, “Do these people pay attention?”

I like traditions.  Thanksgiving.  Anniversaries.  Hieratic observances that remind us there are bigger things than ourselves.  Skiing before the riff-raff gets to the slopes.  Reading Federalist 41 periodically and then looking at our government and laughing.

But clinging to traditions like sell in May and go away and the market is always forward-looking while ignoring the geological upheaval in market form and function the past 15 years is inexcusable.

How can you say the market is always forward-looking when Citadel Securities is its largest volume-driver and its investment horizon is a day or less?  Over 52% of all trading volume has an investment horizon of a day or less. It’s machines changing prices and profiting by sitting in the middle.

If you wonder if that pays, have a look at the stuff Ken Griffin owns.  And Doug Cifu. And Vinnie Viola.  Ed Bosarge (that’s quite entertaining, no offense to this innovative high-frequency trader).

The market cannot be forward-looking if the majority of its volume is living in the moment. The market then lives in the moment.

Do you follow?

It’s not just wrong to cast the market as a forward-looking.  It’s dangerous.  Take Transports, a classic subdivision of the stock market long used as a barometer of commerce. They’re trading at all-time highs. The thinking is a strong Transports group predicts economic prosperity.  After all, it’s the machinery and apparatus of the movement of goods.

And how about retail stocks?  I was just saying to the folks at EDGE, the decision-support platform built on market structure that we founded to help mom and pop traders out-think the machines, that retailers looked best.

That’s not because we examined all the data on spending patterns in the USA or concluded that folks would plow their latest Covid cash from the government into garments and furniture.  No, it’s math. The short volume trend was down, and the ramp in Sentiment was the best of any sector or industry.

Son of a gun.  Look at Overstock, Wayfair, pick your component.

But supposing that it’s anything other than math is supposing amiss.  You can no more look at the market and draw a reliable economic conclusion than you can look at a forked stick and hope it leads you to water.

Unless you’ve been touched by the spirit, I suppose.

You get the point.

Transports?  Sure, the stay-at-home pandemic culture enriched distribution channels like trucking and rails.  AMZN isn’t a component of the Dow Jones Transportation Index (DJT).  But a bunch of airlines and a rental-car company are.

You can try like all the pundits to come up with a rational reason for why the future is brighter than ever for Transports. And you can always find one.

That doesn’t make it so.  The reason Transports are up is because they’re volatile. You can make a crap ton – to use an elegant Latin term – trading volatility in the moment.

Speaking of volatile, so is the outlook for Activism in 2021.  It may be INTC is a harbinger of things to come.

If you want to know what that data looks like and how you can see it coming in your own trading, I’ll show you at the NIRI Twin Cities program this Thursday at 11a CT. I’m moderating a discussion on the data, the preparation and the battle – and why 2021 might bring the Viking raiders back ambuscading our ranks.

Back to the present.  I’ve said it before. There are facts apparent to any observer about the stock market.  More assets are passive now than Active.  Citadel Securities dominates.  Options trading is at records.  Volatile is a plague. Short volume is nearly half the total.

When is our profession, the investor-relations discipline, going to adapt? Are these facts part of your regular communication to your boards and executive teams?  If not, why not? If you’re ready, we’ve got the orbit, the data, the tools and the structure to help you keep your relevance in a right-now market. Have for 16 straight, unrelenting years.

The world moves on. We must too. We can’t be the last people on the planet to catch up.  Now if you’ll excuse me, there are three planets upward in the sky I want to see (Jupiter, Saturn, Mercury, this week),  moving onward, like time and the stock market.

Hacky Sack Stocks

“We track everything in our facilities, down to the number of gloves we use. Why wouldn’t we track everything in the market? Our primary purpose is creating

shareholder value.”

So said one of the investor-relations rock stars of the modern era over dinner with executives on a non-deal roadshow.

I learned about it by phone this week. In a non-Pandemic year I visit as many clients as I can.  I don’t miss the airports. I do miss the faces.

In 2020, I’m calling clients, the old-fashioned way to hear these fabulous examples of great IR leadership.

What did the execs think of the answer?  They loved it so much that this person is now in charge of corporate development and other business initiatives.

This IRO introduced market structure to the board of directors.  Nobody had.  They recognize now that story is just one driver of shareholder value, and not the biggest.

Now, maybe you quail at the thought of getting more responsibility by demonstrating value and leadership.  I get it. Most of us are pretty busy already.

But if adding value for your organization is on your list in 2021, IR professionals, here’s a simple way.  Teach your board and executives the basics of the market. Who else is going to do it?

Another person doing a great job teaching execs how the market works is hacky sack expert Clay Bilby, who found a creative use for the ModernIR stress ball from the NIRI Annual Conference box of goodies.

Which reminds me of a story. It’s holiday season, and it’s been a long year!  We could all use a good story, right?

So our friends Peter and Bruce are the faces and feet behind the World Footbag Association here in Steamboat Springs.  Peter said, “Did I tell you about the time I slept with Kevin Costner?”

After we recovered from the surprise, we said no, we had not heard that story. Turns out Peter was hired to teach Kevin Costner how to kick a hacky sack around for the movie Silverado.  There’s a scene in this western packed with Hollywood stars where Costner is in a jail cell.

The plan called for Costner to whack the hacky sack around in his boots behind bars. They worked and worked on it, but according to Peter, Kevin Costner doesn’t have the hacky sack gene.

Weary from the effort and waiting for other scenes to be shot, Kevin says to Peter, “Hey are you tired?  I’m beat.  I’ve got a trailer here.  You want to catch a nap?”

Peter said, “I could use a few winks.”

And so they went to Costner’s trailer and crashed for a couple hours. And that’s how Peter slept with Kevin Costner.

Alas, the hacky sack scene landed on the cutting floor.  But the story lives on.

In a way, your stock is a hacky sack.  It gets kicked all around the stock market, through 15 exchanges and over 30 alternative trading systems because it must constantly move to wherever the best price resides.  That’s the law. Regulation National Market System.

It’s why more than 53% of trading volume in the S&P 500 the past week through yesterday – during huge index rebalances and options-expirations – was Fast Trading. The hacky sack players of the stock market, kicking the bag all over the place.

And they were the top price-setter the past five days.

Investment driven by fundamentals (Active), and flows from indexes, Exchange Traded Funds and quant funds (Passive) actually declined 6% last week, a key reason the market has been down.  More hacky-sacking, less investment, stocks fall.

In fact, if supply and demand were perfectly balanced, stocks would decline.  Why? Because the bid to buy will always be lower than the offer to sell, and 53% of the market’s volume comes from hacky sackers paid about a half-penny at a time to kick it around.

Also rising to over 18% of volume in the S&P 500 last week were trades tied to derivatives (Risk Mgmt). That is, 18% of the time last week in a given stock such as TSLA, a trade occurred because somebody had to buy or sell stock tied to puts or calls.

Add those up. It’s 71% of market volume.  The remaining 29% was investment, about 9% tied to stock-picking, 20% following indexes, models.

That’s market structure. It’s no harder than hacky sack.  Unless you’re Kevin Costner. And we’ll coach you. Just ask.

Resolve to make 2021 the year when your board knows what market structure is.  But before that, we hope your holiday season, however you mark it, is full of joy and gratitude, peace and reflection, and cheer.

We feel those feelings for all of you.  Happy Holidays!  We’ll see you on the other side.

Fearless

How does the stock market work?

That’s what somebody was asking at the online forum for my professional association, NIRI.

By the way, the NIRI Annual Conference is underway.  I enjoyed yesterday’s sessions and seeing the faces of my colleagues in the virtual happy hour.  We’ve got two more days.  Come on! We’ll never have another 2020 Covid-19 Pandemic Annual Conference.

So, I’m not knocking the question. The discussion forum is a candid venue where we talk about everything but material nonpublic information.

Investors and traders, how do you think the stock market works?

My profession exists because there are companies with stock trading publicly. Otherwise, there’s no reason to have an investor-relations department, the liaison to Wall Street. IR people better know how the stock market works.

So it gets better. The question that followed was:  What is IR?

Is that infrared? No, “IR” is investor relations. Liaison to Wall Street. Chief intelligence officer. The department that understands the stock market.

So, why is my profession asking how the stock market works? And why, since we’ve been a profession for over a half-century, are we asking ourselves what our job is?

I think it’s because we’re uncertain. Fearful. Grasping for purpose.

We shouldn’t be. The IR job is knowing the story, governance, key drivers in the industry and sector, and how stock-market mechanics affect shareholder value. Internal politics. External rules. Communications best practices.  We are communicators, data analysts.

That’s it.

So how does the stock market work? Section 502 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which became law in May that year, required the SEC to give Congress an answer.

It did, in this 100-page report released in Aug 2020. The government always takes longer to describe things than the private sector.  No profit motive, you know. But still. Do we think the SEC is making stuff up?

They’re not. I’m a market-structure expert. The SEC presents an exceptionally accurate dissection of how the stock market works, the effects of algorithms, the inherent risks in automated markets.

Did you get that, IR people?  The SEC understands the market. Traders do. Investors do. Shouldn’t we?  It’s the whole reason for our jobs.

If you’re offended, apologies. It’s time for our profession to be a little more David, a little less Saul.  A little more huck the stone at Goliath, a little less cower in the tents.  I studied theology, so if my analogy baffles, see the book of I Samuel in the bible, roughly the 17th chapter.

It’s literature for atheists and believers alike. It’s about knowing what you’re doing, fearlessly.

Here’s the stock market in 120 words, boiled down from 100 SEC pages:

There is a bid to buy, an offer to sell. These are set in motion each trading day by computers. The computers reside in New Jersey. Half the daily volume comes from these computers, which want to own nothing and make every trade. The equations computers use are algorithms that buy or sell in response to the availability of shares, and almost half of all volume is short, or borrowed. Stock exchanges pay computerized traders to set prices. About 40% of volume is Passive or model-based investment, and trades tied to derivatives like options. About 10% is buy-and-hold money. The interplay of these behaviors around rules governing stock quotes, trades and data determines shareholder value. And it’s all measurable.  

If you want to see these ideas visually, here they are.  IR people, it’s a mantra.

What do you tell your executives?  They need to hear these 120 words twice per month. Once a week would be better.  Visually. What part of your board report reflects these facts?

“I don’t describe the stock market.”

Oh? Stop fearing. We’ll help. What do those 120 words above look like through the lens of your stock? Ask. We’ll show you.

Let’s stop wondering how the stock market works and what IR is. IR is the gatekeeper between shareholder value and business execution.  Math. Physics. A slung stone. A board slide.

Let’s be IR. Fearless.

What’s Going On

The most valuable thing is knowing what’s going on.

The country is closing amid Covid cases. Simultaneously, the Shiller PE ratio of earnings in the S&P 500 is 33, a level exceeded in history only at the bursting of the Internet Bubble in 2000.

What’s going on? (The picture here is Howelsen, our beloved Steamboat local ski hill since 1907…a way away from it.)

Stocks are screaming. In contrast, a country jumping in the mummy bag and zipping up suggests sharp impending economic contraction.

Right?

We’re a service society. That is, the bulk of jobs are in doing something for somebody. Bartending to window-washing. Yoga classes to yardwork. Street-sweeping and sanitation, and shearing hair and shearing sheep, and stocking shelves and fixing Internet problems.

Yes, there’s a big spike on the graph from “Information” or whatever you call it.

As income from hairdressing and table-waiting takes a hit, the stock market jumps to eternal highs.  It’s the sort of thing that leads to class envy.

Don’t fall for that.  Follow me here.

Payroll-protection-plan checks are gone, and the mayor or health department or somebody has said you can’t have more than 25% occupancy, everybody working dawn till dusk blending schedules. To make money.

My own stylist says hours are long, pay is down, and taxes are due because there’s not enough for the taxman and the mortgage.

And two weeks ago into the election there was a surge for stocks.

We told you it would happen, nothing to do with the National Haircutting Rate, the Countrywide Window-Washing Ratio. Or whatever.  We call it Sentiment, the way machines set prices.

It’s now topped, smoking cinders falling away.

Jim Cramer said on CNBC, “They just don’t want to sell, Mike.” (Mike Santoli in this case.)

I love Cramer’s iconoclastic verve. He never loses his confidence.

“The open-up trade is back on!” he shouts now to David Faber, who is stoic with a blink and a wan smile.

Who in the markets doesn’t love CNBC?

But they don’t know what’s going on.

Is the Shiller PE right?  Should we wring our hands?

How many body punches from government can the American Economy – hairdressers, restaurateurs, yoga instructors, window-washers, landscapers, on it goes – take before we snap enough ribs to drop to our knees?

It’s like everyone in government is playing craps around that possibility, party affiliation doesn’t matter.

And up goes the market.

Investor-relations professionals tell the c-suite, “We are delivering returns to our investors on superior financial results.”

Everyone shuffles uncomfortably.

Let’s stipulate that if your earnings are accelerating faster than your peers, your stock might do better, even if hairdressers are struggling to pay taxes and other bills.

Couldn’t we all screen for that and make those stocks the most valuable?

Yes. And no.  Yes, you can.  No, it doesn’t work.

A quant fund could screen for all the stocks with 25% annual EPS growth.  That’s got nothing to do with what you do, public companies. Just what you produce. And what if those funds decide to trade your options?

And earnings don’t guarantee stock-appreciation because the market has limited supply. Is GE a great company, BYND a lousy stock?  Explain, please?

I’m making the same point I’ve been making here at the Market Structure Map since 2006, when the whole market was ceded to machines by a rule called Regulation National Market System.

Stop telling your c-suite and Board that you’re flying or falling because of “operating margins.” It’s not true.

The world is math. You need to know what’s going on.

Investors, it’s the same for you. You believe, “Home Depot will be higher because people are buying home-improvement products at record levels.”

That’s not what’s going on.

As for society, we’re deciding if we’ll be a liberal democracy or not. Stock prices won’t decide it.  Knowing what’s going on will.

We can help. Some. (We can help you with knowing what’s going on, IR folks and traders. We have thoughts on society too. But that takes a group effort.)

 

 

On the Skids

If electoral processes lack the drama to satisfy you, check the stock market.

Intraday volatility has been averaging 4%. The pandemic has so desensitized us to gyrations that what once was appalling (volatility over 2%) is now a Sunday T-shirt.

Who cares?

Public companies, your market-cap can change 4% any given day. And a lot more, as we saw this week.  And traders, how or when you buy or sell can be the difference between gains and losses.

So why are prices unstable?

For one, trade-size is tiny.  In 1995, data show orders averaged 1,600 shares. Today it’s 130 shares, a 92% drop.

The exchanges shout, “There’s more to market quality!”

Shoulder past that obfuscating rhetoric. Tiny trades foster volatility because the price changes more often.

You follow?  If the price was $50 per share for 1,600 shares 25 years ago, and today it’s $50 for 130 shares, then $50.02 for 130 shares, then $49.98 for 130 shares, then $50.10 for 130 shares – and so on – the point isn’t whether the prices are pennies apart.

The point is those chasing pennies love this market and so become vast in it. But they’re not investors.  About 54% of current volume comes from that group (really, they want hundredths of pennies now).

Anything wrong with that?

Public companies, it demolishes the link between your story and your stock. You look to the market for what investors think. Instead it’s an arbitrage gauge. I cannot imagine a more impactful fact.

Traders, you can’t trust prices – the very thing you trade. (You should trade Sentiment.)

But wait, there’s more.

How often do you use a credit or debit card?  Parts of the world are going cashless, economies shifting to invisible reliance on a “middle man,” somebody always between the buying or selling.

I’m not knocking the merits of digital exchange. I’m reading Modern Monetary Theory economist Stephanie Kelton’s book, The Deficit Myth.  We can talk about credit and currency-creation another time when we have less stuff stewing our collective insides.

We’re talking about volatility. Why stocks like ETSY and BYND were halted on wild swings this week despite trading hundreds of millions of dollars of stock daily.

Sure, there were headlines. But why massive moves instead of, say, 2%?

The stock market shares characteristics with the global payments system.  Remember the 2008 financial crisis? What worried Ben Bernanke, Tim Geithner and Hank Paulson to grayness was a possibility the plumbing behind electronic transactions might run dry.

Well, about 45% of US stock volume is borrowed. It’s a payments system. A cashless society. Parties chasing pennies don’t want to own things, and avoid that by borrowing. Covering borrowing by day’s end makes you Flat, it’s called.

And there are derivatives. Think of these as shares on a layaway plan.  Stuff people plan to buy on time but might not.

Step forward to Monday, Nov 9. Dow up 1700 points to start. It’s a massive “rotation trade,” we’re told, from stay-at-home stocks to the open-up trade.

No, it was a temporary failure of the market’s payments system. Shorting plunged, dropping about 4% in a day, a staggering move across more than $30 trillion of market-cap. Derivatives trades declined 5% as “layaways” vanished.  That’s implied money.

Bernanke, Geithner and Paulson would have quailed.

Think of it this way. Traders after pennies want prices to change rapidly, but they don’t want to own anything. They borrow stock and buy and sell on layaway.  They’re more than 50% of volume, and borrowing is 45%, derivatives about 13%.

There’s crossover – but suppose that’s 108% of volume – everything, plus more.

That’s the grease under the skids of the world’s greatest equity market.

Lower it by 10% – the drop in short volume and derivatives trades. The market can’t function properly. Metal meets metal, screeching. Tumult ensues.

These payment seizures are routine, and behind the caroming behavior of markets. It’s not rational – but it’s measurable.  And what IS rational can be sorted out, your success measures amid the screaming skids of a tenuous market structure.

Your board and exec team need to know the success measures and the facts of market function, both. They count on you, investor-relations professionals. You can’t just talk story and ESG. It’s utterly inaccurate. We can help.

Traders, without market structure analytics, you’re trading like cavemen. Let us help.

By the way, the data do NOT show a repudiation of Tech. It’s not possible. Tech sprinkled through three sectors is 50% of market-cap. Passive money must have it.

No need for all of us to be on the skids.  Use data.  We have it.

-Tim Quast

Serenity

Moab, UT — photo courtesy Tim and Karen Quast, Oct 2020

On Nov 4, 2020, words commonly associated with a 12-step program come to mind.

Protestant theologian Reinhold Niebuhr, who received the Presidential Medal of Freedom in 1964, sometime in the 1930s during the Great Depression is said to have coined the words we today call the Serenity Prayer.

Ostensibly it might at the earliest have emphasized courage: Give us courage to change what must be altered, serenity to accept what cannot be helped, and the insight to know the one from the other.

It’s a good life rule, a thoughtful notion after elections. And a way to see the stock market.

For public companies, there are things one can change, influence, based on how the market works.  And things you have to accept.  You cannot control the fact that 85% of volume is motivated by something other than your skill at running a business.

You CAN control what, investor-relations professionals, your board and executives understand about the way the market works.  You can know when to accentuate and accelerate your contact with holders because the data indicate conditions are favorable for them. You can avoid wasting time when conditions signal trouble for your stock and the whole market.

I’ve written about it for years, so I ask that you serenely indulge my penchant for repetition.

The stock market ebbs and flows.  It will add to and remove from your shareholder value, and it will do that no matter how much time and money you spend on telling your story and propagating data on your environmental, social and governance achievements.

Why?  Because that’s the gravity of the stock market. It has immutable forces, like this planet, that remain in place and in effect no matter who’s in charge.

Serenity comes from recognizing what you can and cannot change. And being proactive in response to both.

These principles apply to investors and traders too.

Here’s an example.  If you followed simple principles of market structure to buy and sell MSFT between Feb 1, 2020, before the Pandemic slammed us, and Nov 2, 2020, you could have made 46%.

Buying and holding MSFT has produced a 17% return – a redoubtable outcome under any circumstances.  SPY, proxy for the S&P 500, was up 2% over that span.  It covers 191 trading days.

But our 46% return in MSFT came in just 107 trading days. The other 84 days we could have owned something else to add to our returns.

How and why? The market ebbs and flows.  MSFT spent 134 days at or above 5.0 on a supply/demand scale, and 57 days below it.  Owning MSFT when it was over 5.0 produced the gains. Selling it when it dipped back below 5.0 avoided the losses.

That had nothing to do, really, with MSFT’s success as a business. It’s supply and demand.  The product is stock.

Since Sep 1, MSFT is down 11% because it’s spent about as much time below 5.0 as above it.

For you ModernIR clients, that over 5.0/under 5.0 scale we’re talking about is Market Structure Sentiment™, your gauge of the balance of supply and demand for your stock (and we go further and show you the kind of money that’s responsible).

Is the story MSFT tells any different now?  No.  It’s market structure. It’s the gravity of the stock market – the ebb and flow of supply and demand.

I’m not suggesting you stop doing the things you do to drive shareholder value.  I am suggesting that without an understanding of market structure, those dollars and efforts can be Sisyphean.

Same for you, traders and investors. I can prove six ways to Sunday, as the saying goes, that buying and holding is inferior to using market structure to help you keep gains and avoid losses.

It’s just intelligent use of technology.

Sometimes the beginning point for better ways of doing things is the Serenity Prayer. You first must recognize what you can and cannot change – and you have to accept what that realization means.  Then you find the courage to change what you can.

With the election behind us now, Market Structure Sentiment™ is about 4.0. It was on the same trajectory we measured in Nov 2016, and with the Brexit vote in June 2016.  The pressure on stocks was machines, and the surge ahead of it was short-covering.

Now we begin the next chapter.  See you next week.

-Tim Quast

Placid

The data are more placid than the people.

When next we write, elections will be over. We may still be waiting for the data but we’ll have had an election. Good data is everything.  Story for another time.

The story now is how’s money behaving before The Big Vote? Depends what’s meant by “behave.” The Wall Street Journal wrote for weeks that traders saw election turmoil:

-Aug 16:  “Traders Brace for Haywire Markets Around Presidential Election.” 

-Sep 27: “Investors Ramp Up Bets on Market Turmoil Around Election.”

-Oct 3: “Investors Can Take Refuge from Election Volatility.”

Then the WSJ’s Gunjan Banerji wrote yesterday (subscription required) that volatility bets have turned bearish – now “low vol” rather than higher volatility. Markets see a big Biden stimulus coming.

It’s a probable political outcome.

However.

The shift in bets may be about prices, not outcomes.  When there is a probability somebody will pay you more for a volatility bet than you paid somebody else for it, bets on volatility soar.  It hits a nexus and reverses. Bets are ends unto themselves.

On Oct 26, S&P Global Market Intelligence offered a view titled, “Hedging costs surge as investors brace for uncertain election outcome.”

It says costs for hedges have soared. And further, bets on dour markets are far more pronounced in 2021, implying to the authors that the market fears Covid19 resurgence more than election outcomes.

Two days, two diametric opposites.

There’s the trouble. Behaviors are often beheld, not beatified.

One of our favorite targets here in the Market Structure Map, as you longtime readers know, is the propensity among observers to treat all options action as rational. The truth is 90% of options expire unused because they are placeholders, bets on how prices change, substitutes. They don’t mean what people think.

S&P Global says the cost of S&P 500 puts has risen by 50% ahead of the election. Yet it also notes the open interest ratio – difference between the amount contracts people want to create versus the number they want to close out – is much higher in 2021 than it is around the election.

The put/call ratio can be nothing more than profiting on imbalances. And what behavior is responsible for an imbalance, valid or not? Enter Market Structure Analytics, our forte.  You can’t look at things like volume, prices, open interest, cost, etc., in a vacuum.

Let me explain. Suppose we say, “There is a serious national security threat from a foreign nation.”

Well, if the foreign nation is Switzerland, we laugh. It’s neutral. Has been for eons.  If it’s China or Iran, hair stands up.

Context matters. I said the behaviors were more placid than the people. I mean the voters are more agitated than the money in US equities.

Standard deviation – call it degree of change – is much higher in the long-run data for all behaviors, by 20% to more than 130%, than in October or the trailing 30 trading days back before September options-expirations.

Meaning? Eye of the beholder. Could be nothing. Could mean money sees no change.

Remember, there are four reasons, not one, for why money buys or sells. Investment, asset-allocation, speculation, taking or managing risk. None of these shares an endpoint.

Active money is the most agitated and even it is subdued. But it’s sold more than bought since Sep 2.  I think it means people read the stuff other people write and become fearful. It’s not predictive.

The other three behaviors show diminished responsiveness.  Yes, even risk management.

I could read that to mean the machines that do things don’t see anything changing.  The machines may be right in more ways than one! The more things change, the more they stay the same.

One thing I know for sure. I’ve illustrated how headlines don’t know what’s coming.  It’s why investor-relations and investment alike should not depend on them.

The data, however, do know.  And every investor, every public company, should be metering behavior, be it volatile or placid. We have that data.  I just told you what it showed.

Now, we’ll see what it says.

Oh, and this is placid to me, the Yampa River in CO, anytime of the year, and this is Oct 27, 2020.