Topic: Uncategorized

The Trend

Trend-following works only if the trend holds. 

Trends are core to technical analysis, the dark art of studying stock charts to divine whether prices will rise or fall.

Illustration 62281188 © Iqoncept |

Admittedly, I have poked fun at technical analysis, including in the title of my presentation for Interactive Brokers clients at noon ET today, where I ask rhetorically how many rich technical traders do you know?

Technical analysis is the study of patterns to understand prices.  There are moving averages over different periods, and patterns like golden triangles.  The crop circles of the stock market.

I’m kidding about crop circles.

There’s a measure of merit to these strategies. They’re quantitative techniques in a stock market gripped by averages.  That performance tends to be average is a product of the explosive growth of Passive Investment wanting to be average – the benchmark. And of market rules that force all trading toward midpoint prices (which is the average).

Speaking of which, the Nasdaq just launched the first order type powered by Artificial Intelligence. Called cleverly M-ELO, the Dynamic Midpoint Extended Life Order is a trading construct meant to match two parties willing to extend the period over which they engage in buying and selling.

The algorithm will aim to gather a larger portion of the trade near midpoint prices (unsurprisingly).  That’s in part because prices are wildly unstable.  The average stock in the S&P 500 moves about 2% between intraday highest and lowest prices.

Coincidentally, 2% is the outer edge of limits on tracking errors that index funds try to achieve. That is, they don’t want investment performance to vary more than 2% from the index the fund tracks, or regulators may investigate them for failing to deliver the investment objective.

Who cares?  Well, both investors and public companies should know.  Trend-following works only if the trend holds.

One of the largest trend-following funds, AlphaSimplex (owned by Virtus, a publicly traded asset manager overseeing $169 billion), say it’s “developed systematic, quantitative alternative investment strategies that are attuned to changing market dynamics.” The firm aims to help investors “meet their long-term goals in ever-evolving markets by analyzing market behavior and risk.”

We at ModernIR agree with analyzing market behavior and risk, and that the market is ever-evolving and certainly not as it was when technical signals were developed.

Anyway, like most big trend-following funds, AlphaSimplex uses managed futures strategies.  That is, they buy and sell baskets of closely monitored futures contracts to achieve returns.

And to some degree, they work.  Société General runs the SG Index, a benchmark predicated on the returns of the ten largest trend-following investment managers. The Trend Index is down less than a percent YTD in 2023 versus a 17% gain for SPY, the State Street ETF tracking S&P 500 stocks. But since 1999, trend-following strategies are up more than 250%.

That’s still less than the benchmark. More telling, a review of the trailing data shows heavy concentration of returns prior to 2009. It’s been pedestrian since. I attribute it to how Regulation National Market System, the rulebook governing stock trading, painted the market with uniformity and entrenched average prices.

It’s hard now to find outlier trades. There’s a sameness to the money, which is heavily concentrated in the largest thousand stocks.

And over 85% of trades are derivations of midpoint. Why? They follow the trend and track the benchmark. The rub is, you get the market’s performance. Beta. Not alpha.

And technical signals are backward-looking. These measures assume prices creating – pick your period, 50-day, 200-day – moving averages are equal.  What if 75% of the prices are set by behaviors with a horizon of a day or less? How reliable are those prices five days from now?

I conclude that technical signals tracking average prices invariably thus conform to the benchmark.  Public companies, the probability ANY of your stock-picking holders outperform the benchmark is small. Statistically, less than 1%.

(That’s not a bad thing! It means you should shift from trying to deliver alpha, to aiming at beta. It’s a story I’ve told before).

And traders? If you’re trend-following, you’re probably overpaying for market performance. You could just buy beta by trading the S&P 500.  The secret to beating the benchmark is WHEN you buy it, and when you sell it or short it.  And that secret doesn’t reside in long-range moving averages but short-range changes to supply and demand.

Tally the up days and down days in SPY from Jan 3, 2022 through Sep 11, 2023, and the market is down 210%, up 208%, for a net gain of 2%. Volatility destroys returns. Eliminate just 10% of down volatility and you crush the benchmark.

I’ll cover some of this today in my IBKR webinar. Feel free to tune in and heckle!

And public companies, volatility is the enemy of passive money. Guess what happens when you report earnings? Hedge funds and trading machines make directional bets that foster volatility – the very thing that harms shareholder-value.

What to do? That’s another story. The good news is there’s an answer.

The Trends

Artificial intelligence is all the rage, but you can’t rage against the machines, people. You can only message to them. 

That’s not quite how the ModernIR team phrased it at our webinar, Messaging to Machines, yesterday, but here’s a replay.  Great job by the team, solid turnout for the event.

And it gets to something I’ve admittedly fixated on.  Are the board directors and executives of public companies doing ANY research on investment trends?

Photo 182231394 / 500 © Thodonal |

In a sense, they shouldn’t have to.  Investor-relations professionals, bankers, sellside analysts should be doing it.

Again in a sense, the sellside has done it by trying to become investor-relations people.

Used to be, we investor-relations folks wanted to be overpaid sellsiders handing out buy ratings, covering IPOs.  Used to be, 60-70 banks underwrote an initial public offering.

Today, the sellside is a palimpsest of its past, its importance lingering only on CNBC.  There are 3-4 banks backing IPOs. The buyside isn’t using the sellside much save for trade-execution, and nine firms control ninety percent of customer orders.

Quast. I wish you’d stop ranting about the apocalypse for IR. 

I don’t think there’s an existential threat to our profession.  There’s an existential threat to what we define as “investor relations.” 

These slides present the facts on investment trends from the Investment Company Institute, Morningstar and others.

Every industry knows its trends. Ours needs to know these.  They cut to the quick of how we spend time and money.

I’ll summarize.  Stock picking is in steep secular decline.  Less than 30% of stock-pickers, considerably less for large caps, beat the Passive benchmark. That means more than 70% of stock-pickers aren’t raising new money to invest. They’re net sellers.

Statistically, we’re trooping our execs around to see investors who are sellers, not buyers.

We could stick fingers in our ears, go “la la la,” keep doing what we’ve always done.

Not a good strategy.  We should be tracking the trends and communicating them internally so boards and execs know what drives shareholder value.

Back to where we started, the largest demographic in the market is machines.  Machines make buy/sell decisions with software, artificial intelligence.  They’re over 50% of market volume.  Yes, they amplify other behaviors but they’re also a standalone force.

Passive Large Cap Blend is the largest investment category now, with more than 40% of all equity assets.  There are 500 large caps in the Wilshire 5000, about 300 midcaps.  And 2,800 smallcaps and microcaps comprising 5% of market cap.

The Russell 1000 is 95% of US market cap.

Why doesn’t every public company know that?  Why doesn’t every pre-IPO stock?

Unless you go public with more than $5 billion of market cap, you’re trading the efficient private market for the wild inefficiency of machine-fed arbitrage in the public market.

The exchanges and bankers don’t share these data with you.

The $16 trillion benchmarked to the S&P 500, futures for which expire Friday as they do the last trading day of every month, don’t care about business performance. They need a liquid, big product called “stocks” to which to allocate 30-70% of target-date assets.

The job of IR now? Educating the board and c-suite with regular data on what drives shareholder value. Advising them on the Passive characteristics that attract the most money and recommending a plan for allocating shareholder capital that moves the company that direction.

And every company should have a plan for getting into the Russell 1000, which is size and liquidity, the things Passive money needs.

And part of the IR job is messaging to machines because machines are the biggest consumer group.

And yes, IR is telling the story.  But that’s just one of the tasks, not the job.

It’s also part of the job to know what the money is doing in the market.  Have bank fears eased? 

To answer, let’s look at Financials (which anyone can do with our decision-support platform for traders).

Demand among the roughly 530 sector components averages 4.0/10.0. That level must be over 5.0 for stocks to consistently rise. Passive Investment leads as it does every one of the eleven GICS sectors. That’s quarter-end index-tracking.  Not rational thought.

Short Volume – the market’s supply chain – is 51.1% in Financials.

So, no. Bank fears have not eased.

Financials, Healthcare, Technology, Communications Services, Consumer Discretionary are about 75% of total market cap.  Tech, Comm Svcs, are strongest, 6.0/10.0, 48-49% short.

Tech is up about 16% YTD, Comm Svcs, 17%, Discretionary, 9.8%. It means the money went into Passive Large Cap Blend. Exactly as the trend signals.

YTD in 2023, 12% of SPY volume is Active money, 26% is Passive, 19% is options and futures, and 44% is machines. It’s up about 3.5%.

Passive money is 25% higher per day in SPY than in underlying stocks (10% Active, 20% Passive, 52% machines, 18% derivatives).

Knowing what the money is doing is the essence of the IR job. We sure don’t want our boards and execs to learn these statistics some other way than from us. That would be an existential threat.  Holler, and we’ll help.

The Odds

What odds are tolerable to you?

If you’re betting – I don’t but follow me – you might take a longshot.  Low odds, big returns.

Illustration 88895310 © Alain Lacroix |

But in investor-relations we’re playing with house money.  It belongs to shareholders.

The odds that we can grow shareholder-value by talking to stock-pickers are not good. There are vastly better probabilities for us. And if we know, we have house odds.

Let me explain.

Morningstar puts out a semiannual barometer comparing Passive and Active Investment performance.  The most recent is through September 2022.  It looks at whether Active funds beat Passive peers and benchmarks over periods.


Actively managed U.S. large-cap equity funds’ recent woes match a longer trend: They generally succeed less often than active U.S. mid- and small-cap funds over long horizons. In the decade through June 30, 2022, 10.7% of active large-cap funds lived and outperformed their average passive peer, compared with success rates of 24.7% and 31.7% among actively managed mid- and small-cap funds, respectively.

Active managers in the large-growth category have had a particularly difficult time delivering value for investors. Nearly 70% of the active funds that existed in this category 20 years ago have died, and just 2.3% managed to both survive and outperform their average passive peer.


Over the last decade, between 11-32% of Actively managed funds likely attracted capital.

Because you have to beat the benchmark to raise money. In Large Cap Growth, it’s worse. Most of the funds are gone, and just 2% beat the benchmark over twenty years.

Viewed another way, if 70% of Active funds failed to attract flows, targeting investors – without at minimum knowing these data – has a three in ten shot of success.

Acceptable odds?

I’ll hazard most of us don’t think about whether legacy IR – targeting investors – has reasonable odds of success.  Yet that’s the whole basis of risk capital. Right?

So, what’s going on?  Money over the past two decades has shifted dramatically from seeing stocks as individual stories to treating them like products in a diversified model.

Tying in how the market works, rules push prices toward the midpoint, which Passives need.

EDITORIAL NOTE: New proposals from the SEC (there’s a NIRI Virtual Program on them Mar 8 at noon ET) will magnify the migration toward midpoints.

Here’s a better idea than kicking against the goads. Investor Relations pros need to understand and report to execs what the money is doing. It’s a key way we add value in a market dominated by Passive Investment.

Odds are, we’re blowing money otherwise.

To those weeping and gnashing teeth, stop.  It’s not the end. It’s a new beginning. We have to adapt. Let’s redefine the value of IR.

What are the odds that a company with $700 million of market cap can organically grow to become a large cap (call it $20 billion)?  Statistically, 1%.  The Board and the c-suite should understand where the best odds of shareholder returns lie.

Conclusion? M&A on a big scale is vital for small caps.

And it’s also the path to liquidity.

Passive money, a giant complex that routinely rejiggers weightings in equities and bonds through macroeconomic models, needs strong odds that it can get into and out of stocks.

It’s why Passive and Active investors alike own SPY, the State Street S&P 500 Exchange Traded Fund, at rates almost 20% higher than the underlying stocks. Heck, activist Jana Partners in its December 13F owned SPY. You’d be surprised how many do.

I noticed yesterday that KO had about 300 shares at the bid, 700 at the offer.  At the same time, SH, an inverse S&P 500 ETF that rises when the index falls, had over two MILLION shares at both the bid and ask.

There you go. KO wasn’t even trading at a penny spread.

Quast, you’ve lost me. Your point?

I’m saying that before we do anything in the IR chair, we need to understand how the market works and what the money is doing. And we should know the odds, the probabilities, that our actions and budgetary expenditures will produce returns.

It’s not that hard. I’ve done it here.

Keep telling the story, sure. But let’s make a determination.  A chunk of our time, 30-50%, should be spent understanding how the market works, what the money is doing, and communicating important and ever-changing facts about both to the c-suite and Board.

That’s IR.

Then we can help them stack the odds of success as a public company in the favor of shareholders.

That’s our job.

Ask:  How many top 25 holders are beating the passive competition?  What are the rules that govern how and where your stock trades?  What kinds of investors can get into and out of it?  What are your Passive characteristics?

The odds are, if we’re seeing IR as only “telling the story” we’re going to fail.  Let’s not fail!  Let’s win – by understanding the money, the market, the odds. (And we can help you.)

Market Palio

Maybe we should have a horse race to decide our elections. 

In Siena, the whole region gathers July 2 and August 16 annually, thronging the Piazza del Campo (the city square you see behind our beverages in the photo here, shot Sep 26) for The Palio, pounding equine competitions involving the city’s contrade, the 17 districts of Siena.

View of the Piazza del Campo from the best bar seat in the square (photo Tim Quast Sep 26, 2022).

After Siena succumbed in a 150-year war with Florence (talk about endurance), competition turned inward. The city’s uniquely designated districts redirected their energies to competitive horsemanship instead of Florentine raids.

Each year, horsemen from ten of the contrade race each other, three furious laps around the square. The other seven automatically qualify for the next race, with three others added by lottery.

I’ll skip the finer details but it’s full of intrigue, chicanery, sordid deals, massive sums spent on jockeys, who may conspire and cheat, and tears and cheers and meals and wine.

In short, it’s just like politics. 

But in The Palio, while victory is everything, it really means nothing. It’s just Sienese culture.  That seems like a much better outcome than modern politics.

The stock market lately too has felt like The Palio.  A drumming, entertaining, heartbreaking, chaotic mess pelting around turns and slamming into walls, with little logic or purpose.

Can we make sense of it?  Of course. But not logically.  It’s the Palio of Siena.  It only makes sense if you understand the underlying story and purpose.

Public companies and investors, your best friend amid the churning dirt of the market’s Palio is market structure. It’ll help you make sense of what seems to be random disorder.

The best-performing S&P 500 stock year-to-date is OXY, up about 88%.  Ranked second is ENPH, up about 55%.  Both are energy stocks, one the old-fashioned kind with a D rating for planet-friendliness, whatever that means.  The other is a clean-energy stock.

Active money is 9% of OXY’s daily volume, 10% of ENPH’s. Both perform well financially but not more so than other Energy stocks. But both are darlings of Passive money, receiving outsized allocations. Over 40% of trading volume in both traces to Exchange Traded Funds.

It’s like the two stocks were the winning horses in The Palio (where the horse wins, even without a rider).

It’s a lesson about the stock market. There’s still a lot of clinging to the notion that you own “good companies.”  As defined by what?  OXY and ENPH are good companies as defined by the amount of volume from ETFs.

If that’s the money driving the stock market, then they’re both good companies.

And it illustrates the importance of understanding what kind of money creates good companies.  And it may not be revenue and profits.  It may be Demand vs Supply.

OXY has spent 130 of 183 days since Jan 4 at 5.0 or higher Demand on the ten-point scale we use to measure buying and selling by investors and traders, called Market Structure Sentiment.  ENPH has spent 118 days at or over 5.0. 

The more time stocks spend over 5.0, the better they do. There’s no direct connection to financial results.  It’s about whether there’s greater Demand for the stock from any purpose or time-horizon.

Did anyone pick OXY and ENPH as the 1-2 ranked S&P 500 stocks for 2022 when the year began?  I don’t know.  Not based on financial performance. Those winners would have come from the Tech sector. Which has been brutalized.

The math is clear.  Winners in the stock market are not determined by financial performance but by Supply/Demand balances. Strong demand, constrained Supply, prices rise.  It’s a much better predictor of winners than is the bottom line.

For better or worse.

In that sense, the stock market is The Palio. It’ a horse race built around culture, where “culture” is market structure.

We tell users of Market Structure EDGE to always know the Supply/Demand balance of stocks they like, and to buy divergences.

And for public companies, the Supply/Demand balance is critical to predicting what stocks will do at any time, but especially into earnings.  After all, Supply and Demand are measuring every input – fundamental, quantitative, long/short, global macro, hedged, high-frequency, leveraged, you name it.

So how do you win the stock market’s Palio?  It’s a lottery.  You can improve your chances of a shot at victory by first being BIG.  Get into the Russell 1000 and do it with M&A if you must. You’ll be where 95% of the money and the market cap is.

And then it depends on your contrada, your segment of the stock market.  Then you hang on till the three laps are done. The good news is we can measure your odds of winning.


Well, that answers that question. 

The question?

If over 50% of volume in the S&P 500 is short for the first time ever and investment declines 3% despite a 5% rise for stocks the week ended Sep 9 driven by trading machines, could the market implode?

By the way, the ModernIR team is hosting a webinar for clients Monday Sep 19 at noon ET (copy this link to your calendar at that time) titled Incorporating Market Structure Into Daily IR Activities. It features two IROs in panel format. We’re opening it to the public.

I don’t think it would have mattered if Consumer Price Index data had been better rather than worse.  The market would have tanked and the pundits would have said, “Investors fear the Fed will kill the economy.”

As it was, they said, “Inflation is killing the economy.”

Illustration 135950410 © VectorMine |

The economy and the stock market are not the same things.  In fact, the fundamentals of investing and how the stock market works are not the same thing. 

The stock market is 100% electronic, about 97% algorithmic and dominated by computerized models. Over half of all trading has an investment horizon of a day or less – and that behavior drove stocks up but shorted them too.

Investors with horizons of about 400 milliseconds were prepared for the market to tip over.  Everybody else was not.

Supply/Demand imbalances have the same effect in the stock market that they do in any market.  Weak demand, high supply, prices fall. They go on sale, like when a store overstocks goods and brays that “everything must go!”

Inflation reflects one thing: Overstocked dollars. Inflation means your money buys less. Inflation causes consumption to decline. It’s a mathematical fact.

So, it’s fatuous twaddle for Federal Reserve officials to claim they need to “slow the economy down” to stop inflation.  No, inflation slows an economy down. 

The Fed does not need to stop people from buying houses and cars and fuel and groceries. That won’t solve inflation.

Inflation will fall when dollars are removed from circulation.

That’s what higher interest rates do.  Paul Volcker in the 1970s lifted rates near 20% to induce people like my grandparents to buy laddered certificates of deposit paying 15-18% from banks.

Consumers sucked the supply of dollars out of the market. Prices came down.  Savers had something to show for it.

The trouble now is that businesses have been induced to pay sharply more for labor at the same time that the Fed needs to sharply increase the cost of capital.

What happens if the cost of people and the cost of money rise at the same time?  Businesses either go broke or have to suddenly slash output or employment, or both.

Businesses first cut output, hoping higher prices will offset higher costs.

And that slams headlong into the very thing the Fed claims to be trying to tamp down by discouraging consumption, which inflation is already doing.

The Hebrew words for “without form” and “void” in the biblical book of Genesis chapter 1 verse 2 are “tohu” and “bohu.”

I would describe Fed policy as tohu and bohu. I’m for higher rates. But not lower rates in the first place. That was the disaster. It’s too late to fix it without big pain.

Surprisingly, the stock market is not without form or void.  It’s got behaviors and rules, which combine to produce prices.  The behaviors are measurable, the rules are knowable.

And thus, so are prices.  If we measure prices according to the time-horizons setting them, in context of rules, the market’s behavior makes sense.

But listening to CNBC pundits trying to describe how stocks trading at 17 times earnings are fairly valued and ones trading at 30 times are not reflects no comprehension of how the stock market works.

That would be true if most of the money was motivated by multiples of earnings.  Statistically, there’s a one-in-ten chance that your stock, public companies, is priced by that motivation.

And no, it’s not true over time. Prices are set by whoever buys and sells.

(EDITORIAL NOTE: I’m speaking to the AGA IR Workshop in New York Sep 19 on what really prices stocks – hope to see you there.)

I mentioned in the August 24 blog that a study (by BNY Mellon and Accenture covering 9,000 respondents) found that people think cryptocurrencies are less complicated than stocks and bonds.

Flabbergasting. Whose fault do you suppose that is?

I’d be utterly confused too if my understanding of the stock market – and I have about 85,000 professional hours dedicated to it, 60,000 of those aimed at market structure – derived from the view of pundits.

We need a basic grasp of economics, so we’re not fooled by inflation (or economists).  Money is the foundation of commerce.

And investors and public companies should understand the stock market. That does NOT mean how businesses are valued – cash flows, sum of the parts, comparables.  That works in PRIVATE equity.

Those don’t determine the preponderance of prices in the stock market. If anything, relative value does.  It’s what made Ken Griffin and Jeff Yass rich, among a host of other fast-trading folks. And they invest in PRIVATE equity.

If you want to know more about the stock market, put this link in the noon ET block on your calendar Sep 19.

Like Switzerland

We’re back after a month-long absence!  And it’s not the same as it was. 

That’s a line from Harry Styles’ new hit. Wistful tune.  He said he wrote it about the way the world won’t be the same, after the Pandemic. Seems to me it’s got a variety of messages but I’ll take that one.

I’d never listened to Harry Styles before.  But in Switzerland we turned the TV at times to a music channel to get away from the depressing stories on BBC World News.

Illustration 21248165 © Oxlock |

There’s some good German rap. I’m not a rap fan but a language with a lot of consonants lends well to the medium.  And we heard Harry Styles. I don’t mean Switzerland isn’t what it was. Harry sings this:

In this world, it’s just us
You know it’s not the same as it was

And I think it won’t be the same, at least for awhile, for us, having spent the last month in Switzerland (with side trips to France and Italy). We flew back Saturday from Zurich and I found myself humming in my head “it’s not the same as it was.”

I was wistful. I fell for Lucerne. And Zermatt. And places between.  No wonder Audrey Hepburn never left.

As a people, we could learn a thing or two from the Swiss. There’s no trash in the gutters. No homeless camps. No crap roads. No junk. The trains run like Swiss watches.

Switzerland works.

A report out from the Downtown Denver Partnership laments the loss of the energy, vitality and activity that typified pre-Pandemic Denver. Homelessness shot up, workaday traffic that fed the downtown economy is 51% of past levels.

We lost our mojo. A lot of America did. Can we get it back?

We were riding bikes in the Emmental region and we stopped for Swiss cheese from Doris the Cheese Apprentice (it takes three years to become a cheesemaker). She told us her parents own cows that produce milk for cheese.

We were eating Emmental – the cheese with holes, classic Swiss – with bread. We said, “Who makes the bread?”

“The baker two houses down,” Doris said.

Almost everything in Switzerland is Swiss.  The country doesn’t undercut its own jobs and industries by importing cheap goods.  You can buy imported stuff but it costs more.

Switzerland works because everybody pulls the same direction. The Swiss aren’t splintered into identity politics cliques bent out of shape over how wronged they are. 

True, Switzerland, which Monday marked the 731st year of its constitutional confederation dating to 1291, is just 8.6 million people.

It’s not a giant empire. Most of humankind’s devastating conflicts trace to empires. For small states like Switzerland that make great infrastructure and culture top priorities, who needs a war?

And it’s worth noting that James Madison, John Adams, Alexander Hamilton and others studied the confederacies of Europe including the Cantons in Switzerland and wrote about them in the Federalist Papers.

And we’re not doing that – studying what’s working and what’s not. We just keep telling ourselves here in the USA that we’re the greatest country in the world as we destroy what made us so.

It wouldn’t hurt us to understand what makes Swiss culture harmonious. It wouldn’t hurt us to be honest about what’s working and what’s not, sort out why the conditions exist, and figure out how to achieve as much harmony as possible.

Even if that means making major changes.

Those are my observations from a great country in the center of Europe.  We could apply them to the stock market and public companies.

To pull in the same direction, we have to understand and value the same things. Using our decision-support platform, EDGE, I will only trade about 800 of the companies in the market. The rest aren’t liquid enough.

Those 800 are over 90% of market cap. The remaining roughly 2,800 are left out.  The stock market should work for 100% of public companies. And it would. If 100% of them had more than $5 billion of market cap.  Maybe companies shouldn’t go public if they don’t have market cap of $5 billion?

And what are our priorities? What actually works?  We go through a lot of motions, do public companies, without understanding if these motions and actions enhance shareholder value.

I think the most essential action for investor-relations professionals is making certain the Board and the c-suite understand how the market works, what helps or harms shareholder value, and what the money is doing.  That’s governance. We’ve got that data.

Everything else may be superfluous. Superfluity won’t fly in Switzerland.

My challenge for public companies is that we ask what are we doing that’s the same as it was 15, 20 years ago? And should we still be doing it? Because the fact is, nothing is the same as it was. 

Now, if you want some fun, here are a bunch of photos from our trip!  Catch you next week.


It’s good to get yourself a long way away from things. You might find you’ve been missing the forest for the trees. 

So we’re in Europe, halfway through our longest junket away from Clyde the Cavalier (great name for a medieval court jester but he’s a hound dog). Thank you to our friends and family babysitting him!

This photo is us with gracious Basel hosts Kevin and Tammy (and fabulous hound dog Dakota) in the Alps in Kandersteg, Switzerland.  A panorama will change your perspective.

Photo courtesy Tim Quast. Kandersteg Switzerland.

Here’s a perspective. US stocks swooned Monday into the close. I read it was Apple slowing hiring.  Somebody made that up, a correlation unsupported by math.

A tree in the forest.

The algorithms we write, machines crunching data like the Roomba lawn mower on its programmed rounds at Castello di Spaltenna in Gaiole Italy where we stayed last week, said this about S&P 500 stocks:

Down 7% on selling tied to derivatives like options. Sentiment signals gains, while short volume is up 1% and above the 5-day, 20-day, 50-day and 200-day trend.

It means stocks fell 7% the past week through Monday on derivatives like options. That fits the context. It’s more panoramic than you think.  Options expired and reset.  I didn’t read a word in any business media about lapsing and resetting options.

And Short Volume, the supply chain of the stock market, is above trailing averages. In fact, it’s 49% of trading volume. That’s a 1% spread between long and short volume.

And while Sentiment now signals gains (as we saw Tuesday), a backlog in the supply chain will mute them.

Public companies and investors, THIS is seeing the whole forest, not a random tree.

Yeah, you say. But I can’t control it. 

Controlling outcomes is an illusion. It was possible when 80% of the volume and 90% of the assets were focused on Story. You could court the buyside and sellside and separate yourself.

That was 20 years ago.

Now, the new money in the market is Passive, and large-cap Passive is the biggest asset category, and 90% of the volume is doing something other than buying and selling Story.

Stocks fell Monday because the cost for using substitutes and hedges rose, so demand for new derivatives Monday was down. Lower implied demand hurt prices.

The market is a Roomba running around on a programmed path, demarcated by options-expirations, the ebb and flow of passive money, machines sifting the price data.

What about earnings?  Sure, those affect programmed activity, rather as the lawnmower Roomba at Spaltenna runs in planned circles around swales to even out the grass.

But they’re not the determinants of whether stocks rise or fall. The Roomba running in circles is.

Discouraging? No, a fact. Do we want to matter, or become obsolete?  Ignoring reality is not a strategy for promoting occupational longevity.

Someone asked the online investor-relations community for advice on which investment conferences to attend to garner analyst research (what’s called sellside coverage).

The company has $18 million of market cap. It doesn’t trade enough to generate a return for any market-making desk. Seeking coverage is missing the forest for the trees.

But you know what happened:

CEO: “Get us into some conferences. Get some analyst coverage.” 

IRO: “Yes.” 

Among the trees, you don’t see how the market works. It’s the investor-relations officer’s job to know, though. You can’t provide sound counsel if you don’t.

What should that company do?  Well, 99.8% of the money in the stock market is in larger stocks.  The IR person should give the team and the Board a clear-eyed view:

  1. Take the company private.
  2. Merge with others in the industry to create the largest player possible.
  3. Keep doing what we’re doing but it won’t matter.

Those are the unvarnished facts. You can’t create shareholder value by telling the Story, because that’s not what drives most of the money. You’ll never come to understand what you can and cannot do as a public company without first getting above the trees, seeing the whole picture.

If you’re a serious public company, the roadmap to all the things you want – coverage, share

holder value, liquidity – is understanding how the market works and what the money is doing and figuring out how to get in front of it.

And that’s simple: Size. Have a strategy for joining the 20 largest companies in your industry or sector.

That’s the view from up here.  With that, we’re off to Zermatt (in fact, I’m writing on the train)!  Catch you in a couple weeks after we’ve ridden bikes through the Alps.

Interest(ing) Rates

Cathie Wood says don’t do it.

Raise interest rates, that is.  The founder of Ark Investment Management and guru to retail traders of Tech stocks says the Federal Reserve is playing with fire.

Why?  Because growth is fragile and consumer confidence is woeful.  Hike rates, and we plunge into recession.

Illustration 44644519 © Tashatuvango |

I enjoy economics almost as much as market structure. I’ve got observations.

What’s the big threat Ms. Woods sees in higher rates? US Gross Domestic Product is 70% consumption – the stuff we buy.  The consumption linchpin is home equity.

As homes increase in value, consumers borrow equity to fuel both the confidence to go out and buy stuff, and the means to consume big-ticket items like cars and appliances.

If interest rates rise, people stop buying and refinancing homes, and the torrent of cash driving consumption shrivels.

I think the Federal Reserve knows it’s going to muzzle the economy. But The Fed will try to rapidly raise interest rates so it can hack them back to zero as the economy slips. Maybe that’ll juice consumption anew, forestalling recession.

The whole concept is jacked. The Fed shouldn’t be manipulating consumer behavior at all, because then it’s artificial.

The Fed touts its dual mandate – stable prices, low unemployment – as an unassailable hieratic purpose. Well, why should the Fed allocate labor and capital? You’d expect that from a despotic politburo, not a free country.

Yet nobody questions it.

Listen to a Fed press conference and all you’ll hear is how many times will you hike rates?  Do you support 25 or 50 basis points?  Is the Fed too late in the curve?  Will higher rates choke off growth?  Will higher rates bring inflation to heel?

In my entire adult life, not one economist at a Fed presser has asked a good question.  

So here’s one.  Why set rates so low in the first place that they discourage savings and promote borrowing and spending? Isn’t that the opposite of sound financial strategy?

Or how about this?  The US Constitution directs Congress to fix exchange rates for our currency and to back it with just weights and measures, which means with gold and silver. Why does the Fed defy the Constitution?

Because, Tim, gold and silver are stupid antiquated notions about money.

Well, it’s the law in black and white, hasn’t been changed. But government has decided its opinions are superior to the law. In many instances. But I digress.

John Maynard Keynes, the father of deficit spending, said, “The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

You can’t suck all the value out of money backed by metal.

How does inflation debauch capitalism? Businesses struggle to deploy labor and capital to produce goods and services at predictable returns. Consumers who trade time for money can’t make ends meet and become state dependents.

Yes, hourly workers are hurt most. Then the government has the audacity to blame capitalism for the growing wealth gap. No, the Fed does it. Rich people can surf the inflation wave. Poor people can’t.

The problem isn’t higher rates. It’s LOW RATES to begin.

Low rates increase the supply of currency faster than output, which means everybody’s money buys less. The money supply the last two years rose from $16-$22 trillion.

The definition of inflation should be “low interest rates,” because the inevitable consequence is more money chasing the same goods instead of getting saved, invested.

If we wanted people to save, we’d reward them for it. Why don’t we? Because the Fed exists – no matter its pronouncements of independence – to keep the federal government and its policies afloat. Which requires CONSUMPTION. Not saving.

Even if it’s contrary to the interests of the citizenry.

What if we lifted rates to 10% and left them there?  A bunch of stuff would go broke.  Probably our government.

Too high a price? If we want money that buys more over time rather than less, that generates a return when you save it so we become less indebted, less dependent, we have to either bankrupt the government or take away its printing press.

Maybe both.

We will never be financially responsible as a society so long as the Federal Reserve uses interest rates to allocate labor and capital, and the government is printing money.

That is the problem to solve. Everything else is a failure to address the problem.

So, will we?  I’d wager all that Fed paper blighting the fruited plain that it’ll continue until nobody wants dollars (we’re helping Russia, in fact).

Or we could instead fix it.  Anyone?


“Looking good, Valentine!” “Feeling good, Louis!” A gentleman’s bet. But maybe not so fast.

Farce met Street last week with good reason distracting many in the Finance and public company arenas. Far better chronicled elsewhere (here a good one on Benzinga’s Monday Pre-Market Prep – pls skip the clunky ad), but this weekend I couldn’t resist the parallels to 1983’s Trading Places – I’ll leave you to Twitter, your browser or favorite streaming service and bring the focus to Market Structure.

With all rights to Messrs. Russo, Landis, Harris, Weingrod, Aykroyd, Murphy, Ms. Curtis and Paramount, et al.

We start February with a significant percentage of our clients yet to report quarterly and year-end results and to confirm their forward-looking expectations. Tough challenge in a Market seemingly growing more disinterested.

No question your IR team is working long hours with counselors and non-public facing finance, accounting and marketing coworkers to develop a cogent, clear message, to tie-out results and craft outlook statements and public disclosures; all too often, a thankless job.

It doesn’t help that the Market and the trading in individual equities are seemingly chaotic and unpredictable. But are they? As a subscriber you’re likely conversant in Market Structure – our view of the Market here at ModernIR (if no, read on and please reach out to our Zach Yeager to set up a demo). So like the polar bear swimmers here in Minnesota let’s dive in – we’ll be quick.

Here’s how the Market has evolved in the first month of 2021 – changes in the demographics of trading:

Note the Passive Investment retreat – would have been fair to expect the opposite with all the month-end true-ups for ETFs, Index and Quant Funds – but it’s a repeating month-end behavior recently followed by buying. The surge of volatility arose from increased Fast Trading – machine-driven High Frequency trading, and yes, some Retail day trading.

Both categories are largely populated by algorithmically driven trading platforms; “Passive” (a largely  anachronistic designation – and far from it or the buy and hold strategies the name conjures) today constantly recalibrate collateral holdings with dominate behaviors suggesting little long-term primary focus. “Fast Trading” – pure execution speed, volume-based trading; its goal beyond vast incremental profits – no overnight balance sheet exposure.

Short Volume trading rather than building, declined and Sentiment remained persistently positive (5.0 = Neutral) and never negative. Does this sound disorganized? For forces dominating early Q1/21 equity trading this was a strong, dynamic and likely very profitable period.

The cruel truth – machine trading is no gentlemen’s bet. Brilliant in execution, these efforts have one goal – to game inherent trading advantages over slower moving Market participants – folks that demand conference calls, executive time, build and tie-out spreadsheet models and trade in non-Market-disruptive fashion – the traditional IR audience. The system rewards this – topic for another time.

From a pure trading standpoint, traders behind 9 out 10 trades in the final day of January trading placed minimal value on traditional IR efforts as their bots rocket through Short Seller reports and quarterly management call transcripts, scan real-time news feeds and playbacks for tradable intonation in your executives’ delivery and make mathematical judgments about the first 100 words of each press release.

As IR professionals its incumbent that we, rather than be demoralized by the evolution and dominance of short-term trading, engage, and become intimately versed in these data and these Market realities. The competitive advantage is in understanding and minimizing false conclusions in decision-making. Management and the constituents of long-term investors – yes, they are still legion – and expect no less.

Let us show you how.

Perry Grueber filling in for Tim Quast



In Control

This is what Steamboat Springs looked like June 21, the first day of summer (yes, that’s a snow plow).

Before winter returned, we were hiking Emerald Mountain there and were glad the big fella who left these tracks had headed the other way (yes, those are Karen’s shoes on the upper edge, for a size comparison).

A setup for talking about a bear market?  No.  But there are structural facts you need to know.  Such as why are investor-relations goals for changes to the shareholder base hard to achieve?

We were in Chicago seeing customers and one said, “Some holders complain we’re underperforming our peers because we don’t have the right shareholder mix. We develop a plan to change it.  We execute our outreach. When we compare outcomes to goals after the fact, we’ve not achieved them.”


The cause isn’t a failure of communication. It’s market structure.  First, many Active funds have had net outflows over the last decade as money shifted from expensive active management to inexpensive passive management.

It’s trillions of dollars.  And it means stock-pickers are often sellers, not buyers.

As the head of equities for a major fund complex told me, “Management teams come to see my analysts and tell the story, but we’ve got redemptions.  We’re not buying stocks. We’re selling them. And getting into ETFs.”

Second, conventional funds are by rule fully invested.  To buy something they must sell something else.  It’s hard business now.  While the average trade size rose the past two weeks from about 155 shares to 174 shares, it’s skewed by mega caps.  MRK is right at the average.  But FDX’s average trade size is 89 shares.  I saw a company yesterday averaging 45 shares per trade.

Moving 250,000 shares 45 at a time is wildly inefficient. It also means investors are continually contending with incorrect prices. Stocks quote in 100-share increments. If they trade in smaller fractions, there’s a good chance it’s not at the best displayed price.

That’s a structural problem that stacks the deck against active stock pickers, who are better off using Exchange Traded Funds (ETFs) that have limitless supply elasticity (ETFs don’t compete in the market for stocks. All stock-movement related to creating and redeeming ETF shares occurs off-market in giant blocks).

Speaking of market-structure (thank you, Joe Saluzzi), the Securities Traders Association had this advice for issuers:  Educate yourself on the market and develop a voice.

Bottom line, IR people, you need to understand how your stock trades and what its characteristics are, so you and your executive team and the board remain grounded in the reality of what’s achievable in a market dominated by ETFs.

Which brings us to current market structure.  Yesterday was “Counterparty Tuesday” when banks true up books related to options expiring last week and new ones that traded Monday.  The market was down because demand for stocks and derivatives from ETFs was off a combined 19% the past week versus 20-day averages.

It should be up, not down.

Last week was quad-witching when stock and index options and futures lapsed. S&P indexes rebalanced for the quarter. There was Phase III of the annual Russell reconstitution, which concludes Friday. Quarterly window-dressing should be happening now, as money tracking any benchmark needs to true up errors by June 28.

Where’d the money go?

If Passive money declines, the market could tip over. We’re not saying it’s bound to happen.  More important than the composition of an index is the amount of money pegged to it – trillions with the Russells (95% of it the Russell 1000), even more for S&P indices.

In that vein, last week leading into quad witching the lead behavior in every sector was Fast Trading.  Machines, not investors, drove the S&P 500 up 2.2%, likely counting on Passive money manifesting (as we did).

If it doesn’t, Fast Traders will vanish.

Summing up, we need to know what’s within our control.  Targeting investors without knowing market structure is like a farmer cutting hay without checking the weather report.  You can’t control the weather. You control when you cut hay – to avoid failure.

The same applies to IR (and investing, for that matter) in modern markets.