Tagged: US dollar

Bad Forecast

There’s a mistake in last week’s Market Structure Map. We never made it to Boston!

The forecasters missed it and snow walloped us with a ferocity that shut Denver International Airport by air and land and we were stranded for nine hours before daring “impassable” Pena Boulevard and four-wheeling home.  We felt like Loggins and Messina: Please come to Boston in the springtime and she (Mother Nature) just said no.

Speaking of ferocity, yesterday Janet Yellen yelled the dollar down a percentage point. One would expect to see in response stronger equity indexes (SPY rose the inverse of the dollar’s move) and emerging markets (EEM up 1.4%), gold bear bets crushed (DUST dropped 16%), gold bull bets up (GDX up 5.7%), growth stocks up (IWM up 2.8%) and VIX volatility trades taking a beating (VXX off 5.7%, UVXY off 10.7%).  The only thing that didn’t rise that should have is oil – but all the leveraged oil exchange-traded products, which dominated equity volumes Jan 7-Mar 11, have vanished from the most active stocks. Oil trading-stocks like MRO and WLL did jump.

Save for the two stocks – which are influenced heavily by arbitrage – these are all derivatives. ETFs are proxies for assets – instruments derived from but not comprised of stocks. Assets didn’t change hands, just paper. We could call ETFs stock currencies. They are flexible, mutable simulations of investment behavior.

Similarly, monetary policy has become a flexible, mutable simulation of economic behavior. The supply of dollars didn’t alter. Currency relative-values are metered through futures contracts, which are derivatives. Futures on bucks devalued, so relative dollar-value dropped.  Economic growth or contraction was not changed by Yellen’s speech.  You can’t talk tires and trucks and jobs into existence.

Compare to stocks. What’s changed since Jan 20 or Feb 10? Money simulating investment behavior through ETFs and options and futures were a whistling inhalation that then reversed and exhaled and the bellows of derivatives blew and a fiery market manifested, charging up about 12%.

If anything, fuel for the market has diminished. The Atlanta Fed’s model for first-quarter economic growth is at 0.6%, less than half a revised 1.4% for Q4 (compared to the first read of 0.9% that’s a 56% revision, worse than a coin flip or a weather forecast). Earnings expectations are meager.

But the strong dollar is crushing others. Brazil is on the brink of collapse. China could run out of cash in a year. It’s convenient to cast blame for money manipulation but dollars are the reserve currency, the Big Kahuna. The Fed has thrown the world akimbo and infected equities with its policy susurrations.

Economies and markets work when currencies don’t move and supply and demand do. Instead the rest of us humans not in charge of monetary policy are like kids stuck in a room with a bipolar parent off the meds. After all, functionally the Fed tightened policy last week by reducing excess reserves and borrowing from banks through reverse-repurchase agreements. Which is it, Ms. Yellen?

For public companies, yesterday’s trading is an archetype of the modern era.  Our growth clients with higher Risk Management (derivatives) sharply outperformed the market. Tech soared (lumped with growth and a recent laggard). But utilities jumped too.

It’s not rational. The whole market depends on derivatives. The ultimate planetary derivative is money – currency. Central banks have taken to manipulating it in unfathomable ways to create the appearance of things they desire.

I don’t know how it ends but from a structural standpoint in the stock market, the influence of derivatives has reached a fever pitch. It happened in real estate too.

The Vessel

Will markets collapse?

We’re a day late this week, steering clear of election bipolarity marked by the vicissitudes of demography and the barest palimpsest of republicanism, a diaphanous echo of Madison and Jefferson and Hamilton, names people now think of as inner city high schools.

Back to markets. We’ve seen a curious change. A year ago, the top refrain from clients was: “What is our Rational Price?” For those not in the know, we calculate where active investors compete against market chaos to buy shares.

That’s not the top metric now. It’s this: “What’s your take on macro factors?” Management appears to have traded its focus on caring for trees for fearing the forest – so to speak. If so, the clever IRO will equip herself with good data.

We’ve been writing since early October about the gap between stocks and the US dollar. The dollar denominates the value of your shares. As the currency fluctuates in value, so do your shares, because they are inversely proportional.

In past decades since leaving the gold standard in 1971, those fluctuations have generally proven secondary to the intrinsic value of your businesses. But that changed in 2008. Currency variance replaced fundamentals as principal price-setter as unprecedented effort was undertaken by governments and central banks globally to refloat currencies.

Imagine currencies as the Costa Concordia, the doomed luxury liner that foundered fatally off the Tuscan coast. Suppose global forces were marshaled to place around it Leviathan generators blowing air through the ships foundered compartments at velocity sufficient to expectorate the sea and set the ship aright.

Thus steadied on air, the ship is readied for sail again, surrounded by a flotilla of mighty blowers filling the below-decks with air and keeping the sea back from fissures in the ravaged hull by sheer force. Passengers are loaded aboard for good times and relaxation and led to believe that all is again as it was. As seaworthy as ever.

That’s where we are. We are coming off the peak now of our fourth stocks-to-dollars inflationary cycle since 2008. In each case, markets have retreated at least 10%. The cycles are shortening. And despite retreat we right now retain the widest gap between the two since July 2008, right before the Financial Crisis.

Why does the pattern keep repeating? Because central banks keep juicing the blowers as the vessel wilts and founders. That’s what you saw yesterday after the election. The Euro crisis, having gone to the green room for a smoke is back center stage as it a year ago. Money – air – leaves variable securities for the dollar. As air leaves, stocks falter.

We don’t say these things to be discouraging. It is what it is. The wise and prudent IRO develops an understanding of market behavior – so the wise and prudent IRO will be cool in the IR chair and valuable to management and able to retain sanity and job security in markets depending on giant turbines.

If you’re relying on the same information you did in the past, you’re ill-prepared. We are in a different world now.

Relativity and Dollars

How do you prove relativity?

When Einstein proffered the preposterous suggestion that all motion is relative including time, people clearly had not yet seen Usain Bolt. Or what happens to stocks after options-expirations when the spread between the dollar and equity indexes is at a relative post-crisis zenith.

Let me rephrase that.

As you know if you get analytics from us, we warned more than a week ago that a reset loomed in equities. Forget the pillars on which we lean – Behavior and Sentiment. Yes, Sentiment was vastly neutral. Behavior showed weak investment and declining speculation –signs of dying demand – all the way back in mid-August.

Let’s talk about the dollar – as I’m wont to do.

There is a prevailing sense in markets that stocks are down because earnings are bad. No doubt that contributes. But it’s like saying your car stopped moving because the engine died, when a glance earlier at the fuel gauge on empty would have offered a transcendent and predictive indicator.

Stocks are down because money long ago looked a data abounding around us. From Europe clinging together through printed Euros, to steadily falling GDP indicators in the US and China, to the workforce-participation line in US employment data nose-down like it is when economies are contracting not recovering, there were signs, much the way a piercing shriek follows when you accidentally press the panic button on your car’s key fob, that stuff didn’t look great.

We know institutional money didn’t wake up yesterday, rub its eyes, and go, “Shazzam! Earnings are going to be bad!” (more…)

Macro Factors and IR

Congratulations, IR profession! It’s happened.

One of our ranks stepped up to the stock-exchange rule-filing plate, planted, and cracked that fastball out of the park. Thank you, Katie Keita, for commenting on the Nasdaq’s proposal for ETF sponsors to pay market-makers.

I hope it’s a trend. Your stocks underpin everything else. These are your markets.

More on that later. But speaking of trends, yesterday the dollar rose and stocks fell. When the greenback gains on other major currencies, things valued in dollars often decline. Stocks are stores of value, and value ebbs or flows according to the measuring tape – currencies. The dollar fell in April (after an early buck spike garroted equities), so stocks rose proportionally. Then as April ended, the dollar strengthened on mounting global worries (especially from Europe). Stocks shrank. It’s a macro effect that trumps stories.

How should you view macro factors from the IR chair? “Macro factors” is jargon for “how appraisers view the global neighborhood.” There was a good article on the Big Picture (page R9, “How the Big Picture Affects Stock Picks”) in the Wall Street Journal Monday May 7. Writer Suzanne McGee says macro factors shouldn’t make investors reflexive but can’t be ignored either.

You’re not investing, of course. But you’re selling to investors. If your target market is influenced by macro factors, and you’re not, you may be striking discordant notes. (more…)

Stocks, dollars and Newtonian physics

Isaac Newton posited 334 years ago in his third law of motion that mutual forces of action and reaction between two bodies are equal.

I wonder what he’d think of the relationship between the US dollar and equities, where this small action produces that decidedly unequal reaction.

After the Federal Reserve acted to shore up bank balance sheets by buying long bonds and mortgage-backed securities last week, the dollar trampolined and markets dropped like Newton’s apple.

Pundits blamed dismal economic data. Yet we saw money market-wide shifting from equities September 16 with quad-witching. Before the Fed offered a dim economic portrait. If money was reacting, it sure had a funny, proactive, organized way of showing it.

Today and Monday, the dollar weakened and stocks zoomed skyward in a Newton-flummoxing frenzy to reclaim paradise lost. How many believe this is rational investment behavior? If you do, there’s a solar-panel plant in California that might interest you. (more…)

The heart of the IR job

I’m moderating the NIRI Virtual Chapter meeting on modern equity markets tomorrow 12/1 at noon ET. See nirivirtual.org for details.

As I move the midsection flab from a grand Thanksgiving holiday aside to get at the keyboard (a little humor there), the US equity markets are closing up again. IR folks and executives, what’s proving the most accurate indicator of market direction lately? And what’s it mean to your own market structure?

(more…)