March 23, 2010

Does Investment Matter?

This formidable IRO says to me, “Quast, here’s the deal. You say rational, fundamental investment is a tiny fraction of trading now and we’re all bond servants to traders and risk managers who’re disconnected from traditional IR. If that’s the case, IR as we know it is dead.”

You might have had the same thoughts. Well, let’s clear up some confusion. Investor relations is not dead, and real money matters. For example, we see a regular spread between what we call the “rational price” and how programs and speculators trade stocks. When active money buys with slight vigor, we often see a 10% trading premium develop as traders rush toward the action. When the premium shrinks, price has peaked. Traders can’t entice followers.

Likewise, a dab of real money can reset price on the downside. Most times, changes in trends – trading markets are obsessed with trends – come from value money buying and causing a cascading reaction through the whole trading food chain. We see it on 50,000 shares in issues with daily volumes over 30 million. A stock that’s been sliding for several days reverses course.

A little real money goes a long way. It’s more important than ever. We write about the great magnitude of speculative and risk-management activity not to discourage you but hopefully to help you understand modern markets. If 75% of your volume is speculative at the same time your rational price is converging with the trading premium (as we saw for a biotech client today), shares are rotating and your stock has topped out for now. But if real money doesn’t sell, the pullback likely will be brief.

You don’t have to brood over terms or computer screens either. A few minutes a day or a little time each week is enough to keep a good handle on what’s under the skin of price and volume.

It’s great protection when the CFO ambushes you in the hall on a down day and asks you who spooked your stock. You can calmly reply that trading and investing are not the same thing. If there’s a problem, you’ll know from your market structure. Otherwise, traders are like clouds of colorful fish in tropical waters that sway and flash and flit in kaleidoscopes. Neat to see, you don’t want to miss it. But when you know, you won’t confuse them with the Orca lurking in the depths either.

I also believe the investor relations profession can shape policy. We in the issuer constituency have always been on the sidelines waiting for the banks and the traders and the exchanges to determine the nature of our capital markets. Who says we have to do that? IR can define the voice of public companies in policy. That’s not for everybody, I know. But it’s possible and within reach.

Wrapping up, what’s money doing as we leave options expirations behind us again? Money was more leveraged than ever in March – we see it in equity trades that ripple with expirations. We mean that most money in the markets this past month seemed to sport some sort of optimizer or multiplier. We’re being realistic, not pessimistic. Capital markets remain cobbled tenuously by some curious synthetic weave. It’s not dangerous yet. But it’s the Orca under the surface, and it’s closer. The markets are like the dollar: a promise that lacks substance.

Thankfully, we can count on the core IR audience, real money, to ride to the rescue whenever that fateful time comes. You’ll know by your market structure.

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