Karen and I caught the PBR rodeo at Denver’s National Western Stock Show. I grew up on a ranch and Karen likes four-footed creatures. So we support cowboys and their furry fellow athletes. Those bull riders are tough guys, but what got me thinking was the team-penning competition.
It reminds me of the challenge IR folks face. We’re in the middle of earnings, with options expiring Wednesday through Friday and capital moving like a herd loping from one corner of the corral to the other while riders try to cut one here and there.
In team-penning, that’s what you do. You’ve got three folks on smart horses and a herd of calves with numbers on them, and a clock. Tom Bailey, founder of Denver’s Janus Capital, is in the sport. The announcer might say, “Four, four, four,” and the team of riders tries to cut three calves with the number four on them from the herd and pen them at the other end of the arena in about 45 seconds. If one of the herd that shouldn’t be cut gets by, you’re disqualified.
The hardest part is getting the few away from the many. Calves don’t want to leave the herd. It’s like stocks (aptly named). There’s a great herd of equities. If investors are cowboys and cowgirls on horses trying to cut the few from the many, it’s a tall task. The herd sways the behavior of the ones they want to single out.
When the herd is rattled and scattered, it’s nearly impossible to get the three you want without mixing in others you don’t want and getting disqualified. One thing that can scatter and rattle the entire equity herd is options expirations. This week, these include the VIX and RVX volatility measures Jan 19, stock and index options with morning expirations (often favored by European and Asian structured products) Thursday Jan 20; and the whole kit and caboodle Friday from stock and index puts and calls, to treasury, bond, currency and interest-rate derivatives.
Let’s say you report today. Your stock may be the member of the herd that someone is trying to cut out, but the herd around expirations includes indexes, currencies, treasuries and bonds. Not just your peer group. So even though your stock could respond well for a day, if the massive herd moves tomorrow, it may suck you along with it.
Even Google. GOOG jumped 15% today on higher targets at several sellside firms. Right ahead of expirations. We’d like to credit real money with thinking shazam! This stock is worth 15% more. But it’s traders and counterparties with leverage about to expire.
Today GOOG benefits from the movement of the herd. But now straddles around earnings Thursday will be enormous and the herd comprised of markets with trillions of dollars of daily activity could gallop to the far end of the arena.
Lesson: Don’t roller-skate in buffalo herds, as singer/songwriter Roger Miller long ago advised. You can be happy if you’ve a mind to, he sang. And you can choose to report results outside the expirations window when the herd isn’t careening madly round you.
