July 30, 2014

Missing Volume

I’ve made South Dakota jokes – “fly-over state,” “waste of dirt that could have been used making Colorado larger,” etc.  Not again.

It’s but six hours by car from Denver and we love road trips, so we put a junket to Mount Rushmore on the calendar. Turns out there’s more to the “under God people rule” state than chiseled presidents. In Custer State Park (where never is heard a discouraging Ranger word) this fella ambled by while his brethren were at home on the range below Harney Peak and picturesque Sylvan Lake. Loved it. We’ll go back.

Speaking of gone, wither volumes? And should you worry?

A client yesterday asked about splitting the stock. Share volume is tepid, off nearly 75% since 2009, though dollar-volume (more important to us) is down less, about 40%. Should they do something to stimulate it, they wondered?

Weak volumes would seem cause for concern. It suggests a lack of consuming. It’s happening more on the NYSE than the NASDAQ.   In 2009, the NYSE averaged 2.6 billion shares daily, about $82 billion of dollar-flow. In 2014 so far, it’s 1.02 billion shares, about $40 billion daily.  The NASDAQ in 2009 saw about 2.5 billion shares and $60 billion daily compared to 2.0 billion shares and about $73 billion in 2014.

The big companies are concentrated on the NYSE, which has about 70% of total market cap.  Money is trading smaller companies, but not owning them, evidenced this year at least by sustained volumes for small-caps but weakness in the Russell 2000, down almost 2% this year with the S&P 500 up 7.5%.  Plus, shorting – renting – is rampant, with 44% of daily market volume the past 20 days, nearly half of trades, from borrowed shares.

Check the Pink Sheets and it’s stark. Volume is averaging about 14 billion shares daily in penny stocks in 2014, compared to about 2.3 billion shares daily in 2009.  Dollar volumes are small but have doubled in that time to $1 billion daily. KCG Holdings as a market-maker does over a 1.2 billion shares a day by itself in penny stocks.

And derivatives volumes have jumped since 2009. Global futures and options trading according to the Futures Industry Association totaled 21.6 billion contracts in 2013, up from 17.7 billion in 2009. More telling is where. In 2009, equity and equity-index derivatives volume was 12 billion contracts, identical to 2013. But energy, currency and metals derivatives trading has exploded, jumping 125% to 5.3 billion contracts in 2013.

The answer to where equity volumes have gone is into trading small caps and penny stocks and derivatives tied to energy, currencies and metals. Investors are searching for short-term differentiation and safety from uncertain asset values affected by massive currency infusions from central banks.

What’s it mean to you in the IR chair? Volume doesn’t define value. Witness Berkshire Hathaway Class A units trading 250 shares daily (about $47m). What matters is who drives it. Don’t give in to arguments for “more liquidity.” You’ll help short-term money, not long-term holders. We don’t think splitting your stock today improves liquidity or appeal to the money that matters.

Speaking of rational money, it averaged 14.5% of total equity volume the past 20 days. Tepid.  Where are active investors? Watching warily, apparently. What drives equity values right now is asset-allocation – the “have to” money that buys the equity class because the model says to.

And meanwhile that money is offsetting risk with derivatives in currencies, energies and metals. Take care not to draw the wrong conclusion about the value of your shares. It’s tied to things way beyond fundamentals at the moment.

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