June 10, 2015

It Aint So

The equity market is like Mark Twain said. The trouble ain’t what people don’t know, it’s what they know that ain’t so.

Thus did Sam Clemens articulate the difference between the price of ignorance and the consequence of arrogance. I thought about this distinction a number of times after reading a late-April article on proposed SEC policies for pay-versus-performance.

Now, don’t worry. I’d rather have a hole drilled in a molar than ruminate on SEC regulatory recipes. We’re a data-analytics firm tracking equity-market behaviors. No, what happened was that stories ran in press outlets, a number of which said these rules affected 6,000 public companies.

I was curious where the number came from and asked reporters. They referred me to the SEC.  I reached out to the Division of Trading and Markets, which after a couple weeks sent me to Corporation Finance, who in turn routed me to the Division of Economic Research and Analysis.

It’s June. I’m still waiting for an answer. It’s curious that a body responsible for articulating compliance to a swath of businesses would have difficulty determining how it tabulated the swath.

Which leads me to something you may not know.  The German equity market corrected. On April 10 the DAX hit 12,374 and yesterday closed at 11,001, a 12% drop. Retrenchment of 10% is a correction.

Over the weekend, Deutsche Bank, one of the world’s largest derivatives counterparties, fired its co-CEOs.  HSBC, the erstwhile Hong Kong and Shanghai Banking Corp., another global derivatives backer, Monday declared a shakeup that axes 50,000 and rebrands its UK outlets.

Whenever there’s an earthquake now somewhere in the world, I’m wondering about consequences.  Invariably if a temblor rocks Indonesia there’s a volcano soon erupting on some island, a quake in another region. The planet is interconnected – and so are markets.

Your smart phone today knows you, and the providers of the apps you use can triangulate your contacts, your patterns, your calls, texts, schedule, your travel. It’s at once startlingly efficient and disturbing that Something knows Everything.

Do you get alerts on stocks? Maybe you have Google or Yahoo or somebody else ping you when shares move a certain amount or volume is up some percentage. If you surf the web, whatever you search from Cadillacs to underpants will be served up in advertisements. Yet stocks are still bland price and volume as though what’s behind both is homogenous and disconnected – the exact opposite of all else around us from nature to finance to web apps.

Today we launched the first-ever Market Structure Alerts for public companies that reveal not price and volume but what kind of behavior is driving them and whether it’s buying or selling and when it changes meaningfully for just you. Nobody has ever done it.

I see Bloomberg is offering companies technical analysis, something 30 years old. We agree that you should consider it a fundamental fact and duty of IR to know your equity market. What we know that ain’t so, however, is that technicals are not setting prices. What sets price is what money is doing, and it’s following models today.

Tuesday, we publicly unveiled Gamma™, our proprietary measure for knowing if your marketplace is well-informed, your investors engaged, not through what they say but how they spend money competing to buy shares.

The SEC is still trying to figure out how it counts companies. Here’s another fact: There are fewer than 3,850 public companies in the National Market System, with massive money concentration in them through a decade-long explosion of indexes and ETFs.

ETFs are derivatives, part of a big cast of them now. There’s more than $700 trillion of notional-value in currency and interest-rate swaps, which are impacted by asset-class volatility.

German bunds in the past two months have risen from 0.05% to 0.99%, a gain of 1,880%.  Institutions use big firms like Deutsche Bank and HSBC for risk-transfer – assigning the consequences of the unknown to someone else through derivatives.

When global risk-asset revaluation got underway in Sept 2014 – a process that continues now with intensifying risk – we theorized that one or more major global derivatives counterparties would run into financial trouble.

Everything is connected today.  Your shares are connected to derivatives and counterparties, indexes and ETFs, currencies, and all manner of options, futures and swaps. Quad-witching looms next week, with Russell rebalances.

We can do something for you that not even Goldman Sachs can manage:  We know what behavior sets your price, and how it connects to the big picture. What investor-relations professionals have to confront in this environment is both what you don’t know and what you know that ain’t so. We can help on both counts.

Challenge your assumptions – and all the tools that haven’t changed in 30 years. The informed IR professional is a powerful expert to whom management will turn.

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