Tagged: Fed

Monoliths and Microseconds

“People are getting screwed because they can’t imagine a microsecond.”

Well, how about $1 trillion? Can we imagine that?

If you want context for the quote, read Michael Lewis’s book, Flash Boys (No. 1 now in NY Times nonfiction). Equally relevant and lost in the shadows of microseconds is the magnitude of the monolithic.

There’s a company you’d know that in the past 20 trading days has had intraday volatility of 108%. That is, summing daily spreads between high and low prices – somebody paid both – equals 8% more than a share costs. The entire value of the company in effect turned over the past month, plus an 8% commission. (Do you know your intraday volatility?)

Divided by 20, that 5.4% daily. Compare to overnight borrowing rates near 0.15% for banks, and 30-year mortgages at 4.4%. Yet beneath its skin, behavioral changes for this stock are miniscule. The average recent daily fluctuation in bottom-up investment – the money you talk to – is less than 2.3%.

There was one monolithic change. On March 24, demand from indexes/ETFs dropped 15%. Just once. Since that day, gradual price-erosion tallies eerily to a 15% decline. A one-day shift in asset-allocation cost 15% of market cap over the following month.

Yesterday we ran a dozen models for public companies reporting results today, weighing demographics and sentiment to project price-reactions. Outcomes are an amalgam of purposes. Without data, it’s impossible to know that price-moves reflect rational thought. If share of market did not change for investors, they didn’t set price, didn’t alter their views.

The Fed in 2013 bought $1 trillion worth of US Treasurys and mortgage-backed securities, pinning interest rates on ten-year US bonds near 1.7% until word leaked in May that it might stop. Between May-Dec 2013, Treasury yields rose 75% and average 30-year mortgage rates jumped 30%. (more…)

Great Expectations

Happy New Year! Hope you spent the two-week break from these pages joyfully.

We’ve descended this week from the high Denver backbone of the continent to visit west in Santa Monica and sponsor NIRI’s Fundamentals of IR program. Following our New York trip before Christmas, we’ve marked the turn of the calendar by touching both coasts.

We’ll kick off the year with a story. I’ve just finished Charles Dickens’s Great Expectations on my Kindle. Yes, I realize it was first published in serial form in 1860 (the year the cattle ranch on which I grew up was homesteaded). I have a long reading list. It took me awhile to get around to it.

Lest I spoil excitement for the other three or four of you planning on it still, I’ll say simply that it’s a masterful narrative assemblage of plot points, the connections between which one would never fathom at the outset. Great storytelling never gets old.

The market is like that too. As you begin 2014 in the IR chair, remember that in a market dominated by algorithms – the principal purpose of which is to deceive – things are rarely as they seem.

Take trading from Dec 9-31, 2013. The US equity world it seemed was gathered in knots and pockets like people in an old west town where the gunslinger was expected anytime to ride through. Tones were hushed, gestures animated. A pregnant air of expectation hung like a storm.

Would the Fed finally taper? And if it did, what then?  (more…)

The Short Fed Story

Is the Federal Reserve fueling stock-market gains?

When St. Louis Fed president James Bullard addressed the Bowling Green, KY, Chamber of Commerce in February 2011, he pinpointed correlation between Ben Bernanke’s September 2010 Jackson Hole speech on “QE2,” the Fed’s second easy-money program, and the stock-market rebound that followed. Classical effects of monetary easing include rising equity prices, Mr. Bullard said.

The Fed wanted market appreciation because people feel better when the stuff they own seems more valuable. But I think we’re having the wrong debate. The question isn’t if Fed intervention increases stock prices, but this: Can prices set by middle men last?

Before actor Daniel Craig became the new James Bond he starred in a caper flick called Layer Cake that posited a rubric: The art of the deal is being a good middle man. The Fed is the ultimate global middle man. Since the dollar is the world’s reserve currency, the Fed as night manager of the cost and availability of dollars can affect everybody’s money. After all, save where barter still prevails, doing business involves money. Variability in its value is the fulcrum for the great planetary teeter-totter of commerce. The risk for the Fed is distorting global values with borrowing and intermediation.

In the stock market, we’re told it’s been a terrible year for “the shorts” – speculators who borrow shares and sell them on hopes of covering at a lower future price. The common measure is short interest, a twice-monthly metric denoting stocks borrowed, sold, and not yet covered. Historically, that’s about 5% of shares comprising the S&P 500. (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…)