Tagged: economy

Experience

“The market structure is a disaster.”

That’s what Lee Cooperman said in a CNBC conversation yesterday with “Overtime” host Scott Wapner.

What he thinks is wrong is the amount of trading occurring off the exchanges in so-called dark pools and the amount of shorting and short-term trading by machines.

I’m paraphrasing.

Mr. Cooperman, who was on my market-structure plenary panel at the 2019 NIRI Annual Conference, decries the end of the “uptick rule” in 2007. It required those shorting stocks to do so only on an uptick.

To be fair to regulators, there’s a rule. Stocks triggering trading halts (down 10% in five minutes) can for a set time be shorted only at prices above the national best bid to buy. It’s called Reg SHO Rule 201.

But market-makers are exempt and can continue creating stock to fill orders. It’s like, say, printing money.

Mr. Cooperman has educated himself on how the market works. It’s remarkable to me how few big investors and public companies (outside our client base!) know even basic market structure – its rules and behaviors.

Case in point.  A new corporate client insisted its surveillance team – from an unnamed stock exchange – was correct that a big holder had sold six million shares in a few days.

Our team patiently explained that it wasn’t mathematically possible (the exchange should have known too).  It would have been twice the percentage of daily trading than market structure permits.  That’s measurable.

Nor did the patterns of behavior – you can hide what you own but not what you trade, because all trades not cancelled (95% are cancelled) are reported to the tape – support it.

But they’re a client, and learning market structure, and using the data!

The point though is that the physics of the stock market are so warped by rules that it can’t function as a barometer for what you might think is happening.  That includes telling us the rational value of stuff.

You’d expect it would be plain crazy that the stock market can’t be trusted to tell you what investors think of your shares and the underlying business.  Right?

Well, consider the economy.  It’s the same way.

Illustration 91904938 © Tupungato | Dreamstime.com

The Federal Reserve has determined that it has a “mandate” to stabilize prices.  How then can businesses and consumers make correct decisions about supply or demand?

This is how we get radical bubbles in houses, cryptocurrencies, bonds, equities, that deflate violently.

Human nature feeds on experience. That is, we learn the difference between good and bad judgement by exercising both.  When we make mistakes, there are consequences that teach us the risk in continuing that behavior.

That’s what failure in the economy is supposed to do, too.

Instead, the Federal Reserve tries to equalize supply and demand and bail out failure.  

Did you know there’s no “dual mandate?”  Congress, which has no Constitutional authority to do so, directed the Fed toward three goals, not mandates: maximum employment, moderate long-term interest rates and stable prices.

By my count, that’s three. The Fed wholly ignores moderate rates. We haven’t had a Fed Funds rate over 6% since 2001.  Prices are not stable at all. They continually rise. Employment? We can’t fill jobs.

From 1800-1900 when the great wealth of our society formed (since then we’ve fostered vast debt), prices fell about 50%.  The opposite of what’s occurring now. 

Imagine if your money bought 50% more, so you didn’t have to keep earning more.  You could retire without fear, knowing you wouldn’t “run out of money.”

Back to market structure.

The catastrophe in Technology stocks that has the Nasdaq at 11,700 (that means it’s returned just 6% per annum since 2000, before taxes and inflation, and that matters if you want to retire this year) is due not to collapsing fundamentals but collapsing prices.

How do prices collapse?  There’s only one way.  Excess demand becomes excess supply.  Excess is always artificial, as in the economy.

People think they’re paying proper prices because arbitragers stabilize supply and demand, like the Fed tries to do. That’s how Exchange Traded Funds are priced – solely by arbitrage, not assets. And ETFs permit vastly more money to chase the same goods.

It’s what happened to housing before 2008.  Derivatives inflated the boom from excess money for loans.

ETFs permit trillions – ICI data show over $7 trillion in domestic ETFs alone that are creating and redeeming $700 BILLION of shares every month so far in 2022 – to chase stocks without changing their prices.

And the Federal Reserve does the same thing to our economy.  So at some point, prices will collapse, after all the inflation.

That’s not gloom and doom. It’s an observable, mathematical fact.  We just don’t know when.

It would behoove us all to understand that the Federal Reserve is as big a disaster as market structure.

We can navigate both. In the market, no investor, trader or public company should try doing it without GPS – Market Structure Analytics (or EDGE).

The economy?  We COULD take control of it back, too.

Dalhart vs Artifice

Texas is booming. We road-tripped it June 28-July 6, giving y’all a break from market structure.

We rolled the I35 corridor from frenzied Frisco north of Dallas, to Austin, now home to 950,000 people, to San Antonio, the fastest-growing Texas city last year, pushing 1.5 million.

From there on July 5 following fireworks the night before in three directions from Hotel Emma, our favorite in the country, we were up in Amarillo by evening (an oblique musical reference back past George Strait to Chris LeDoux, God rest him), and in Denver the next day.

You’d suppose Texas would be taking it in the nose on low oil prices. Yet bergs like Dalhart on the reaches of the Llano Estacado (yaw-no esta-kahdo), the vast plain staked over north Texas, bustle on Main Street and prosper on the boulevards.  If the world blows up, hunker between Texline and Masterson on Highway 87.

What’s Texas tell us about investor-relations, the stock market, investing, the Federal Reserve, the economy?  The farther you get into the heartland the less the things the people in charge think matter, matter.  Life goes on.

Of course, all of us gathered right here at this moment are rooted deep in the market, the Fed, the economy – even those of you in the heartland. We don’t have the – what’s the way to put it?  Convenience.  Of slipping off into the quiet purple of the fruited plain.

Looking from Dalhart, this strikes me:

The stock market.  Passive Investment depending on average prices is carrying the market beyond fundamentals, producing superior outcomes. Can average breed superior, sustainably? Malcolm Gladwell and reality both say no. So prepare for mean-reversion between fundamentals and prices.

When? Nobody knows.  It’ll come with no VIX signal, maybe as the Fed sells assets and spikes the dollar (The Fed trades bonds for dollars, so fewer dollars means higher dollar-value). It’s not that I’m pessimistic. I’m opposed to artifice in the economy, the market. I don’t think Dalhart would accept it. We don’t like it in people, politicians. Right?

Speaking of artifice, our estimable central bankers at the Federal Reserve have determined that after eight years of mediocre output we are ready to rock – though curiously weak inflation, they call it, vexes.

Say Sammy Hagar contended there were several ways to rock. We’d laugh. If I hear one more time that inflation is good, I’m heading to Dalhart.

Inflation is rising prices, which trims both buying power and productivity, the pillars of prosperity. The Fed might be underwhelmed by the increase but we’re paying more. For the same stuff. And calling it growth.

That’s artifice. A treadmill offering the illusion of forward progress, like confusing volume and liquidity (we’ll return to market structure next week so stay tuned).

The Fed should never have institutionalized economic mediocrity with eight years of training wheels. The Tour de France is underway coincidentally, drama on wheels turned by superlatives. You don’t reach the Tour on training wheels. You don’t become an economic tour de force by moseying.

Yet we can’t have an economic adult riding on training wheels. It just looks bad. So we’ll soon have the financial equivalent of a biker barreling into the shrubbery head over handlebars. Dalhart. Life goes on. We’d be better off without Fed artifice. Period.

Same with the stock market. The pursuit of average has become superior there, thanks to big training wheels (a good name for a rock band) from central bankers. Yet we value companies the same, engage in the same IR work. Why do we accept artifice?

Now pedaling toward the economic sludge, the training wheels are coming off the market. Central bankers believe they need only make a pronouncement that all is well and we’ll skim the muck.

The mistake we make is legitimizing it. But there’s reason for good cheer!  The quicker these things mash in a big dustup (and they will), the sooner we get back to Dalhart, and a prosperous global boulevard free of artifice where what’s real matters.

We’ll have to cross the Llano first. Put’er on cruise control, and keep driving.

Happy Thanksgiving from Austin, TX!  Many of you are out too, seeing family for the holiday. Looking back at 2014, this Market Structure Map from Aug 27 was one of the year’s most widely read. Curiously, some of the same economic data points including the FHFA house-price index and the Case-Schiller Home Price Index were out this week again. 

If we know how many mortgage applications were filed last week, public companies should know what set their stock prices last week too. Every public company deserves good information about the equity market, and it’s not cooler to “just run the business and ignore the stock.” That would be like “just drive the car and ignore the fuel gauge.” Catch you after Thanksgiving!  -TQ

 

Aug 27: Beyond Curiosity

 

Let’s talk about houses.

Let me explain. Twice yesterday I encountered an issue, not a new one though. We were discussing it on a conference call too, preparing for a market-structure session Sept 9 at the NIRI Southwest Regional Conference here in Denver – which if you care about market structure is not to be missed. A highlight, Rajeev Ranjan, central banker with the Chicago Federal Reserve and former algo trader, will explain why the Fed cares whether high-speed traders are gaming equities and derivatives.

Anyway, what issue am I talking about?  I continue to hear executives and investor-relations officers say, “I don’t see why short-term trading matters when we’re focused on long-term investors.”

I hear some of you groaning.  “Quast,” you moan. “We don’t want to keep hearing the same stuff.”  I get that. If you already know the answer, you can cut out of the Market Structure Map early today.  Catch you next week.

The rest of you, if you’ve got a tickling there in the back of your head like a sneeze forming in the nose that you really don’t want the CFO to ask you why market structure matters, then let’s talk about houses.

Big money tracks residential real estate – houses. Just this week we had or will have reports on new home sales, the Federal Home Financing Administration’s housing index, the Case-Shiller Home Price Index, mortgage applications, and pending home sales. Decisions about construction, banking, credit-extension and more depend on these data.  They’re part of certain GDP components. (more…)

What Would a Bookie Do?

We have good news and bad news.

The good news is that investors have put more funds to work in equities during January. We track behaviors – investment, speculation, the crowd following trends and managing risk. We’ve seen increased investment behavior in the past twenty trading days for clients. That’s good, even if your stock or sector wasn’t on the receiving end. It means more competition for shares, and that generally is a boon to stock prices.

What’s the bad news? We see wide disparity between prices investors think are correct for shares, and the prices the market sets. We’ve developed measures for looking at how trades execute in context of others to separate what we might call intermediation from where the orders that attracted intermediaries were priced when they entered the market.

Aren’t these prices one and the same, what with the efficient market and all? Au Contraire. That would be too simple. (more…)