Tagged: investor relations

Panorama

It’s good to get yourself a long way away from things. You might find you’ve been missing the forest for the trees. 

So we’re in Europe, halfway through our longest junket away from Clyde the Cavalier (great name for a medieval court jester but he’s a hound dog). Thank you to our friends and family babysitting him!

This photo is us with gracious Basel hosts Kevin and Tammy (and fabulous hound dog Dakota) in the Alps in Kandersteg, Switzerland.  A panorama will change your perspective.

Photo courtesy Tim Quast. Kandersteg Switzerland.

Here’s a perspective. US stocks swooned Monday into the close. I read it was Apple slowing hiring.  Somebody made that up, a correlation unsupported by math.

A tree in the forest.

The algorithms we write, machines crunching data like the Roomba lawn mower on its programmed rounds at Castello di Spaltenna in Gaiole Italy where we stayed last week, said this about S&P 500 stocks:

Down 7% on selling tied to derivatives like options. Sentiment signals gains, while short volume is up 1% and above the 5-day, 20-day, 50-day and 200-day trend.

It means stocks fell 7% the past week through Monday on derivatives like options. That fits the context. It’s more panoramic than you think.  Options expired and reset.  I didn’t read a word in any business media about lapsing and resetting options.

And Short Volume, the supply chain of the stock market, is above trailing averages. In fact, it’s 49% of trading volume. That’s a 1% spread between long and short volume.

And while Sentiment now signals gains (as we saw Tuesday), a backlog in the supply chain will mute them.

Public companies and investors, THIS is seeing the whole forest, not a random tree.

Yeah, you say. But I can’t control it. 

Controlling outcomes is an illusion. It was possible when 80% of the volume and 90% of the assets were focused on Story. You could court the buyside and sellside and separate yourself.

That was 20 years ago.

Now, the new money in the market is Passive, and large-cap Passive is the biggest asset category, and 90% of the volume is doing something other than buying and selling Story.

Stocks fell Monday because the cost for using substitutes and hedges rose, so demand for new derivatives Monday was down. Lower implied demand hurt prices.

The market is a Roomba running around on a programmed path, demarcated by options-expirations, the ebb and flow of passive money, machines sifting the price data.

What about earnings?  Sure, those affect programmed activity, rather as the lawnmower Roomba at Spaltenna runs in planned circles around swales to even out the grass.

But they’re not the determinants of whether stocks rise or fall. The Roomba running in circles is.

Discouraging? No, a fact. Do we want to matter, or become obsolete?  Ignoring reality is not a strategy for promoting occupational longevity.

Someone asked the online investor-relations community for advice on which investment conferences to attend to garner analyst research (what’s called sellside coverage).

The company has $18 million of market cap. It doesn’t trade enough to generate a return for any market-making desk. Seeking coverage is missing the forest for the trees.

But you know what happened:

CEO: “Get us into some conferences. Get some analyst coverage.” 

IRO: “Yes.” 

Among the trees, you don’t see how the market works. It’s the investor-relations officer’s job to know, though. You can’t provide sound counsel if you don’t.

What should that company do?  Well, 99.8% of the money in the stock market is in larger stocks.  The IR person should give the team and the Board a clear-eyed view:

  1. Take the company private.
  2. Merge with others in the industry to create the largest player possible.
  3. Keep doing what we’re doing but it won’t matter.

Those are the unvarnished facts. You can’t create shareholder value by telling the Story, because that’s not what drives most of the money. You’ll never come to understand what you can and cannot do as a public company without first getting above the trees, seeing the whole picture.

If you’re a serious public company, the roadmap to all the things you want – coverage, share

holder value, liquidity – is understanding how the market works and what the money is doing and figuring out how to get in front of it.

And that’s simple: Size. Have a strategy for joining the 20 largest companies in your industry or sector.

That’s the view from up here.  With that, we’re off to Zermatt (in fact, I’m writing on the train)!  Catch you in a couple weeks after we’ve ridden bikes through the Alps.

What We Do

We’re about to decamp for Switzerland for the month of July.  It’s an example of time and experience changing what we do. 

We’re blessed to have the freedom and means to do it.  But that’s not the point.

The Pandemic and observation – seeing our aging relatives, aging friends, no longer able to do what they’d want, right at the point they’ve got the time and money to do it – have prompted us to seize the day.

Illustration 121184273 © Noree Saisalam | Dreamstime.com

We won’t always be able to ride bikes from Montreux to Zurich.  But we can now.  So we’re doing it now.

Which gets to the question I hear most from investor-relations people.  They’re intellectually interested in “market structure,” the way the market works.

After all, we’re the professionals (a line critical to the great Denzel Washington movie, “Man on Fire”).  We’re supposed to know how the stock market works.

And so often I hear, “What do I do with it?”

If you were to learn through God or some miracle of science (oxymoron purposeful) that you had ten years to live, what would you do?  Keep on doing what you’ve always done?

Here’s what the data show irrefutably about the stock market.  And for backdrop, I think we’ve written more about market form and function than anybody in the USA, right here on this page.  About 800 words per week, nearly every week, since 2006.

I’ve testified to Congress (in writing) about how to improve the market for issuers and investors.  Been on CNBC talking about market structure.  Done it in our profession for two decades.

And I summed up the Essentials last week. Three things every public company should be doing.

If you’re a smallcap, go big or go home. You can’t stay small. If you’re a public company, you should understand the cadence and rhythm of the stock market – its context, let’s call it – and don’t put out earnings, important news, during its violent thunderstorms (options-expirations, rebalances).

And your principal job now is using data to help your executive team and Board of Directors make good decisions about deploying shareholder capital. 

It’s not telling the story to a diminishing audience.

Look, I don’t mean people aren’t showing up at Non-deal Road Shows, sellside conferences. I mean stock-pickers are an endangered species that doesn’t set prices.

I don’t know a profession less data-driven than ours. We do a bunch of things out of tradition, not data demonstrate returns.

Many a time I’ve sat in meetings with IR people who argued that “we’ve got a pretty good sense of what’s going on.”  And they don’t even know what Reg NMS is. 

Would you run a business that way – got a pretty good sense of what’s going on? How the can a professional pursuit like IR, which has a certification program?

You could be the Zoom Video Communications (ZM) investor-relations team talking to investors in 2020 – by web meeting – and think you’re just killing it. And that was before anyone had heard of ZM.

And you could be the ZM IR team now, a ubiquitous brand name and a massively larger business, talking to investors and the 30-odd sellside analysts covering the stock, and it trades below where it did in Mar 2020.

Because telling the story to this crowd doesn’t create shareholder value.

Asset allocation – the earmarking of money to parts and groups and slices of the market according to a model – and speculation, furious trading, and leverage with derivatives, create and dispel shareholder value.

You can measure your Engagement with stock-pickers quantitatively (we do it) but they don’t set prices more than about 10% of the time.

At this moment, it’s a great time for ZM to call on holders. Because the Supply/Demand balance – every public company should know that balance (and you can, just ask) – is favorable.

What you do with it is you ground your company in reality and make the most of an equity market that’s not driven anymore by stock-pickers.

How much money do you spend on targeting, tracking interaction with the buyside and sellside, keeping up with what your peers are doing? About $50,000 annually?

And how do you tie that to shareholder value with data? 

You can’t. It doesn’t.  You CAN use data to help your company make the most of the market.  Just not that data. 

What we come to understand about life should affect how we participate in it.  And it’s all about what we do with the time we’re given.

The same applies to the IR profession, or any endeavor for that matter. Knowledge should change what we do and how we do it.

Investor-relations is the data-driven mission to maximize listing in public equity markets, which starts with understanding the stock market.

And with that, we’re off to Switzerland.

The Essentials

Skip meals, give up beer, burn calories. 

That combination lowers my weight.  The essentials.  In fact, depending on the amount of meal-skipping and skipping-rope (well, riding bikes), I drop pounds in days.

Illustration 186661760 © Balint Radu | Dreamstime.com

What’s the equivalent for creating shareholder-value, public companies?  We ought to know if we’re in the investor-relations profession (as I’ve been for 27 years).  And investors, you’d do well to know, too.

I could give you a list as long as an election ballot of people on TV telling investors to “buy the stocks of great companies.” 

Nvidia is a great company. Zscaler is a great company.  Heck, Netflix is a great company that made $3.53/share last quarter and trades at 15 times earnings.  It’s down 71% this year.

Occidental Petroleum is the best performer in the S&P 500 this year, up 92%.  Over the four years ended Dec 31, 2021, OXY lost $10 billion.  It paid so much for Anadarko that Carl Icahn fought a vicious battle to stop the deal.

You can’t just say “buy good companies.”  You can’t just be a good company and expect shareholder-value to follow.

That would be true if 90% of the money were motivated to own only great companies.  Energy stocks are up 38% this year – even after losing 18% last week.  You don’t have to be great. You just have to be in Energy.

That’s asset-allocation behavior, trading behavior.

Do you know that OXY and ETSY have exactly the same amount of volume driven by Active Investment?  About 9%. Etsy is profitable, too.  But its short volume – percentage of trading from borrowed or manufactured stock – has been over 50% all year and at times over 70%.

And 52% of Etsy’s trading volume comes from machines that don’t own anything at day’s end. Well, there you go. Heavily short, heavily traded. Recipe for declines.

Occidental?  About 44% of its trading volume ties to ETFs and derivatives.  Just 47% is machines wanting to own nothing. Short Volume in OXY had been below 50% until last week, when it jumped to 60% right before price dropped from $70 to $55.

Small variances in market structure are reasons why one is down 65%, the other up 92%. 

In sum, value in the stock market is about Supply and Demand, as it is in every market.  And Supply and Demand are driven by MONEY. And 90% of the money is trading things, leveraging into things via derivatives, allocating according to models.

And it pays to be big.  Occidental is among the 20 largest Energy sector stocks by market capitalization, Etsy is on the small side of a sector dominated by Amazon, Tesla, Home Depot, Alibaba, McDonald’s, Nike.

Callon Petroleum is a darned good company too, but where OXY is over $50 billion of market cap, CPE is under $3 billion, in the Russell 2000 instead of the Russell 1000 where all the money is. It’s down 7% this year.

How about Campbell Soup, Kellogg, General Mills?  Similar companies in Consumer Staples. Which is biggest?  GIS.  Which stock is up most the last year? GIS.

So Occidental did it right.  It got bigger. 

If Kellogg splits into three companies, there will be three choices rather than one for asset-allocation models.  In case you missed that news.  Maybe that’s good for business. It’s bad for size, and size matters (I think increasing operating costs and decreasing synergies is stupid but the bankers don’t).

Mondelez?  Big company. But it was bigger before shedding Kraft. It trades about where it did three years ago.

Lesson? Be the biggest thing in your industry that you can be.  If you’re Energy, become one of the 20-25 largest.

If quitting beer didn’t cut my weight, why would I do it? I love CO beer.  I want to do things that count, not things that go through the motions, form over substance.

Here are your essentials, public companies.  If you want to be in front of as much money as possible, become the biggest in your business.  You can tell your story till you’re blue in the face and it won’t matter if you’re $2 billion and the big dogs are $50 billion.

Another essential to shareholder value, public companies, stop reporting earnings during options expirations, because three times more economic value ties to derivatives paired with your stock than tie to your story.

Are we playing at being public, or taking it seriously? Stop drinking beer and expecting to lose weight.  So to speak.

And Essential #3.  Know your market structure. Investors, understand where the money is going (if you don’t know, use EDGE. It’ll show you. And it works.).  Market Structure, not story, interprets enthusiasm and determines your value.

Do those things, and you’ll be a serious public company, just like it takes three things for me to seriously lose weight. And it’s not that hard. 

Understanding

How do I attract more investors? 

It’s the key question from investor-relations people, the liaison to Wall Street for public companies. The answer, though, isn’t what you think.

And I have to share.  Come in closer, I need to keep my voice down.

I am cracking up over these ex-sellsiders at the IR profession’s online community, who are now investor-relations people, asking how to attract more sellside coverage.

Well, didn’t you used to do that job?  Why are you asking other IR people how to get what you gave?

Anyway, back to my normal voice, for you investors and traders wondering what the hell I’m talking about, let me explain.  There’s the buyside.  That’s investors who buy stocks. Retail investors, you’re generally excluded because you’re a wild and fragmented audience.

(Also, we IR people have a professional association and an online community where we discuss stuff. That’s what I’m talking about, for you folks in other professions.)

The IR job revolves around the buyside and the sellside.  Investors. And stock-research analysts at firms ranging from Goldman Sachs to JMP Securities who cover stocks – write research and make buy/sell recommendations.

The sellside created the stock market. The Nasdaq was the National Association of Securities Dealers – brokers – who devised an automated quotation system.  NASD-AQ.  Nasdaq.

And 24 brokers agreed in 1792 to give each other preference on buy and sell orders. That agreement laid the foundation for the NYSE.

Today, the buyside does its own research.  Hedge funds like Millennium and Point72 buy every conceivable form of data from social-network sentiment to satellite images of parking lots at factories and shipments at ports, and God only knows what else.

They know more about you, public companies, than you do.

And way more than sellside analysts.  The sellside is so yesterday (but Top Gun: Maverick, a reprise from 36 years ago when I was in college, is very much today, very awesome. We saw it, loved it.).

Sure, stocks move on upgrades and downgrades, but that’s mostly machines doing latency arbitrage – trading at different prices in different places but way faster than you can blink.

For the sellside, the result has been a great rout, a diaspora, a scattering.  Demand for their views has collapsed, even though you see analysts all day on CNBC.

So they want IR jobs.  As I’ve said before, when I started in the profession in the 1990s, we wanted to be Mary Meeker and Henry Blodget, making the big bucks. Internet analysts.

Now the Meekers and Blodgets want to be us.  Well, Henry Blodget launched Business Insider, reinventing himself.  Mary Meeker is a venture capitalist.  The point is, the sellside is a dead end.

Tim, you haven’t answered the question. 

I know it.  I’m keeping you waiting.

I was providing an overview of ModernIR Market Structure Analytics to a new investor-relations guy.

He said, “How do these analytics help me attract more investors?”

I said, “You can’t. Not the way you think.”

I said, “The trouble is, unless or until someone – say, you – shows the Board and the executive team what the money is doing today, they will expect you to attract more investors. But Active money is on the same growth trajectory as payphones.”

Now, you CAN attract investors. But you do that with your CHARACTERISTICS, not your story. You do it principally with capital-allocation.

Tim, I don’t get it.  I just go talk to investors, and they buy our stock, and our price goes up.

Would that it were!

See the image here?  In 1995, more than 80% of market volume traced to stock-picking. And over 90% of institutional assets were actively managed. Easy to tell the story.

Copyright Modern Networks IR, LLC, 2022. Image from ModernIR product demo. Data courtesy ModernIR market-structure models.

Now, Active assets are nearing 40%, and falling. One category dominates: Passive Large Cap Blend, approaching 40% of assets. Trading volume is 90% something besides story.

Public companies can’t tell the corporate story to a shrinking audience and get a higher stock price. They CAN determine how to get in front of the money – which is Passive Large Cap Blend. 

If your market cap is under $5 billion, the probability you can become a large cap stock is about 1%. Every investor-relations officer should tell that to every c-suite, every boardroom.

It’s not to discourage you, but to get you focused on what matters. Your story, public companies, doesn’t determine your value.  Your characteristics do.

If 40% of the money is Passive Large Cap Blend, you have at least a 40% chance of being in front of it by achieving those CHARACTERISTICS.  That’s way better than 1%. Go big, or go home.

You want market cap? Go where the money is, by becoming what it wants. We always know where it’s going. If you want to more fully understand what I’m saying here, hit reply (or ask for a Demo through the ModernIR website at upper right).

Snapped

SNAP broke yesterday. I’ll explain two reasons why.

Yes, the company blew the quarter. Dramatic swings in guidance don’t instill joy.

But the losses occurred before anybody talked about them.  SNAP closed Monday at $22.47 and opened Tuesday for trading at $14.49 and closed at $12.79.

It lost 36% when most couldn’t trade it and shed just $1.30 during official market hours.

Illustration 135866583 © Jm10 | Dreamstime.com

How is that fair?

Regulations are meant to promote a free, fair and open stock market. I think premarket trading should be prohibited because it’s not a level playing field.

Who’s using it? Big institutions with direct access to brokers who operate the markets running around the clock. Hedge funds could dump shares through a prime broker, which instantly sells via so-called dark pools.

And the hedge funds could buy puts – and leverage them – on a whole basket including the stock they dumped, peers, ETFs, indices.  All outside market hours.

Something unfair also happens DURING market hours. I’ll explain with my own experience as a retail trader using our decision-support platform, Market Structure EDGE.

It’s not that my trade was unfair.  I understand market structure, including how to use volatility, trade-size, liquidity and stock orders to best effect.  I made money on the trade.

But it’s instructive for public companies, traders, investors.

I sold 50 shares of NXST. Small trade, with a reasonable return. I pay a modest commission at Interactive Brokers to observe how trades execute.

Most times I buy and sell 100 or fewer shares, often 95 or 99. The average trade-size in the market is less than 100 shares so I don’t want to be an outlier. And you’re looking for blocks? Forget it. The market is algorithmic.

And I know the rules require a market order, one accepting the best offer to sell, to execute immediately at the best price if it’s 100 or fewer shares.

Stay with me – there’s a vital point.

NXST trades about $7,300 at a time (a little under 50 shares), the reason for my trade-size. And it’s 2.1% volatile daily. Since it was up 2% during the day, I knew it was at the top of the daily statistical probability, good time to sell.

I checked the bid/ask spread – the gap between the best bid to buy and offer to sell.  Bid was $176.01, offer was $176.25. A spread of $0.25. That’s big for a liquid stock.

So I used a marketable limit order – I picked a spot between them, aiming to the lower side to improve the chance it filled: $176.05. I was wanting to leave.

The trade sat there for a bit, and then filled.  I checked. It split into two pieces, 45 shares at “Island,” which is Instinet, the oldest Electronic Communications Network, now owned by Nomura. I paid a commission of $0.19.

And the other piece, five shares, also executed at Instinet at the same price.  And I paid $1.02 in commission. For five shares!

What the hell happened? 

This is how the ecosystem works.  And this rapid action can smash swaths of shareholder value, foster wild and violent market swings – especially during options-expirations (yesterday was Counterparty Tuesday, when banks square monthly derivatives books, and it was a tug-of-war) – and, sometimes, work masterfully.

It’s market structure.

My broker sent the trade to Instinet, determining by pinging that undisplayed shares there would fill it.

And one or more Fast Traders hit and cancelled to take a piece of it, permitting my broker to charge me two commissions, one on five shares, another on 45 shares.

And now my one trade became ammo for two. The going rate at stock exchanges for a trade that sets the best offer is around $0.25 per hundred shares – the exact spread in NXST.

Yes, that’s right. Exchanges PAY traders to set prices. I traded 50 shares, but since the order split, it could become the best national offer two places simultaneously, generating that high frequency trader about $0.15.

What’s more, my order originated as a retail trade, qualifying for Retail Liquidity Programs at stock exchanges that pay an additional $0.03.

So my intermediary, Interactive Brokers, made $1.21. Some high-frequency trader probably made another $0.18 for breaking the trade up and buying and selling it at the same price two places. Zero risk for an $0.18 return.

Do that 100,000 times, it’s big, risk-free money.

It didn’t cost me much. But suppose it was 500,000 shares or five million?  Every trade navigates this maze, public companies and investors, getting picked and pecked.

Not only do costs mount for moving any order of size but the market BECOMES this maze. Its purpose disappears into the machination of pennies. Oftentimes it’s tenths of pennies in liquid stocks.

And you’re telling your story, spending on ESG reports, a total approaching $10 billion for public companies complying with rules to inform investors.

And the market is the mass pursuit of pennies.  Yes, there are investors. But everybody endures this withering barrage that inflates on the way up, deflates on the way down.

And it’s wrong that the mechanics of the market devolve its form into the intermediated death of a thousand cuts. Is anyone going to do anything about it?

Rise and Fall

The stock market last week posted its best day since 2020 and gave it back.

Why?

And why does your stock rise while another falls, and how do stocks trade today?

I’m glad you asked!

A week ago on Feb 23, the market moved clear of February derivatives-expirations.  Stocks surged. Then index futures expired Feb 28. Stocks swooned (the event isn’t neat but spills over the vessel either side).

The mechanics of those moves are forms of arbitrage. There are two parties to both, and at least one hedges exposure, compounding both market volume and volatility.

Tim, it’s Ukraine, you say.

Has your investment plan changed?

In my adult life, never have TV images of invading forces been other than Americans.

Hm.

All money tracking a benchmark or model depends to some degree on futures contracts. Using futures, passive money transfers responsibility for holding the right components in the right amounts at month-end to banks.

Banks like Goldman Sachs in turn mitigate exposure by buying, selling, shorting, stocks.

That tumult just happened.

Ukraine? The Federal Reserve? War? Inflation? Earnings?

Illustration 67216931 © Thelightwriter | Dreamstime.com

Risk and uncertainty affect markets, yes. But gyrations aren’t the juking and jiving of investors. It’s hedging and arbitrage.

(Editorial note: For more on that topic, here’s a list from The Map).

What you get from your stock exchange daily, public companies, is the same wherever you’re listed. It’s peer, sector, industry, performance; broad measures, market commentary, the dollar, gold, oil. Now maybe crypto. When appropriate, stuff on wars and rumors of wars.

Same that I received as an investor-relations officer in 2001.  Why no change? No reason. No one cares.

Anyway, it’s only possible for your stock to behave the same as your peers if the characteristics are the same. Liquidity, supply, demand, behavior.

CEOs think, “My stock’s down, my peer is up, investors are buying them, not me.”

The math says no. The stock market is like every market. There are supply-chain disruptions. Demand fluctuations.

The average trade-size in S&P 500 components last week was 98 shares – less than the regulatory minimum bid or offer of 100 shares, lowest we’ve marked. So prices are unseen till afterward.

If a market order – a trade without a price – is 100 or fewer shares, the law of the stock market says it must be filled. Now.

So. Either the broker receiving the trade can automatically route it away to somebody else, or they’ve got to buy or sell the stock.

Don’t ponder the risk implications. Your head will explode. Stay with me here.

It gets to why the stock market does things you don’t expect, why your stock doesn’t trade as you suppose.

That trade I just described? It’s filled even if no actual buyer or seller exists (part of the reason you can’t track what sets your price with settlement data. Doesn’t work anymore.).

It’s the law. Market-makers are exempt from locating shares to short.

The machines, the algorithms, are programmed to know this fact. They change the price.

Tim, I don’t get it. What are you saying?

That it’s most times not about you. And you should know what it IS.

Your CEO asks, “How come our stock was down and so-and-so, our closest peer, was up? What investor is buying them and not us?”

Statistically, 90% of the time it’s supply/demand or liquidity differences and not some investor picking your peer.

Last week in the S&P 500, the average stock traded 60,000 times daily, up 50% from long-term averages.  Intraday volatility – spread between high and low – was 3.6%.  Average dollars/trade was $17,000 and index stocks traded $1 billion daily.

The median is about $9,000/trade. To be in the top thousand marketwide, where 95% of the money is, you’ve got to trade $4,200 at a time.

Back up 200 days and it was $5,000.

You got that, IR people? It speaks to what investors can BUY. Or sell. What are your stock’s liquidity characteristics?

The best three S&P 500 stocks the past five days:

ETSY the last five days: 130,000 trades/day, $9,000/trade, dollars/day, $1.2 billion. Computerized speculation led gains, and Demand was bottomed, Supply was extreme and created a short-squeeze.

ENPH:  66,000 trades/day, $8,000/trade, dollars/day was $530 million. Computerized trading led ENPH too. Demand was bottomed, Supply was on trend.

MOS: 90,000 trades/day, $6,000/trade, dollars/day, $530 million. Active Investment was the lead behavior, and Demand rose while Supply fell.

Wouldn’t you want to know this stuff? We have more, including all the trends.

Why isn’t every public company measuring these data? Dunno. Mystery.

But. We’re going to democratize it. All public companies can and should know these data, and we’ll open that door.  Stay tuned.  

No Excuses

There’s no excuse. 

It’s 2022.  Not 1934, when Benjamin Graham wrote Security Analysis.

Back then, the timeless notion of buying profitable companies with undervalued growth opportunity took firm shape. But its interpretation would have to be shaped by the Securities Acts of 1933 and 1934, which birthed the SEC and part of the market’s structure that prevails still.

In 2022, the stock market has been operating under Regulation National Market System for 15 years.  Anybody in the stock market – investor, trader, public company – who doesn’t know what Reg NMS is and does is without excuse.

And any company reporting financial results during options expirations is without excuse. Like NFLX. Shareholders should rightly be upset.  There is no excuse for a public company to be ignorant of market form and function in 2022.

Monthly options expirations. Illustration 23855600 © John Takai | Dreamstime.com

Isn’t that a bit harsh, Tim?  No excuse? 

It’s been 15 years. We’ve watched meme stocks. Surges and collapses in prices. No connection to reality.  And we’re here to help you. You need not go through an NFLX experience.

Here’s some perspective. In 1995, well before Reg NMS when Yahoo!’s earnings call was an event attracting tens of thousands of retail investors as CEO Tim Koogle, who called himself “the adult supervision,” discussed financial performance, you didn’t need to worry about the options calendar. Options trading was a blip on the equity radar.

The goal then was to show you could close the books fast.  Koogle and team reported Q4 outcomes within ten days of year-end.  Remember that?

Today, the daily notional trading value in options is greater than the dollar-volume of stocks.  The latter is $600 billion. 

Derivatives comprise close to 20% of all market-capitalization. Derivatives are a right but not an obligation to do something in the future.

Suppose, public companies, that 20% of your sales at any given moment were a bet – a possibility but not a certainty.  You’d have to account for that when setting internal and external expectations for results. Right?  That’s very material.

And that’s the stock market.  If 20% of your value depends on something that might not happen, should you take that into account?  And are you irresponsible if you don’t?

I don’t know this stuff, you say.  Well, learn it! It’s a primary part of the investor-relations job in 2022. The calendar is here, and here, and here and here. It’s public information.

And we can help you measure and understand behaviors and see what the money is doing BEFORE you report results, before expirations.

Options expire all the time, but the RHYTHM of the stock market moves with monthly expirations.

Weeklies are too short a timeframe for indexes and Exchange Traded Funds that use them for substitutes, too unstable for the market-makers driving colossal trading volumes to keep ETFs aligned with underlying stocks – while profiting on directional options plays.

In 1995, most of the market’s volume tied back to the 90% of institutional assets that were actively managed.  For NFLX, between Dec 1, 2021 and Jan 24, 2022, Active money averaged 9%of daily volume.

Eighteen percent of volume tied to derivatives, which expired last week as NFLX reported financial results.  And 55% of NFLX trading volume is driven by machines that exploit price-changes and want to own nothing.

Fast Trading.  High Frequency Trading. Whatever you want to call it.  Firms that are exempt from having to locate shares to short, under Reg SHO Rule 203(b)(2).

Investor Relations Officers, it’s your job to know the market’s risks and advise your executive team and board on how best to maximize shareholder value and minimize risks to shareholder interests.

Shareholders should, can and will expect it of you, public companies. You shepherd money, time and resources belonging to other people.

MSFT is reporting on the RIGHT side of expirations. Same with IBM.  Doesn’t mean stocks aren’t volatile with new options. But they haven’t time-decayed yet. Bets are much more expensive.

Yesterday was Counterparty Tuesday when banks squared the books on wins and losses related to last week’s January derivatives and the new February derivatives that traded Monday and prompted one of the epic 21st century trading days.

Don’t report results in the middle of that.

Oh, we have an internal calendar from the General Counsel. Well, tell the GC to change it!  Stop acting like it’s the 1990s.  It’s not.

Your priority, your job, your responsibility, is to be an informed participant in 21st century American public equity markets.  To your credit, IR community, a meaningful part has adapted, changed behaviors, learned how the market works.

If you’re ready to drag your executive team into the 21st century, tell them there’s no excuse.  It’s time to change behavior, reduce risks for shareholders. Come join the market structure family.

Human Nature

Science and the stock market both aim for outcomes data don’t support.

I’m going to take you on a short but intense journey, with ground rules. I’ll ask that you check politics at the door.  Keep an open mind.

I’ll take Science first.  Suppose it was a business plan.  You craft an objective, and the path to achieving it.  It’s something I know after roughly 30 years in business.

Science said it aimed to flatten the Covid curve. That we could create a vaccine that would immunize us all, and we’d be free.

Now pelting toward two years of Covid, a great bulk of the population is vaccinated, many boosted too, and Covid abounds.

I’m vaccinated but not boosted and I had it.  Karen and I heard CNBC’s Jim Cramer, perhaps the World’s Most Vaccinated Person, Friday, and looked at each other and said, “He’s got Covid.”

Sure enough.

Here’s the point. Science has known for decades that coronavirus vaccines don’t work because the viruses constantly mutate.

I think mRNA research will be a boon for treating pathologies from cancer to respiratory disease. But Science did what science shouldn’t do.  It gambled.  Dismissed known data, central tendencies, facts. Proclaimed it would eradicate the virus.

You’d expect that from inveterate optimists like entrepreneurs, cowboys riding the bull that’s never been ridden, politicians, the Cinderella team playing the reigning champs.

That’s hope.  Hope isn’t a strategy.

Religion is in the hope business.  Science is supposed to be in the data business.  If we’re objective, stripped of politics, zeitgeist, predilections – shall I say hope – we have to say Science failed.  We didn’t conquer Covid. Our immune systems did.

Can we admit we were wrong?

Yeah, but vaccines lower severity.

That’s an assumption. A hope. And it wasn’t the objective.

Let’s shift to the stock market.  Regulation National Market System is 524 pages dictating a mathematical continuous auction market that works only with pervasive mandatory intermediation and a market-maker exemption from short-locate rules.

It is by design not rational but mathematical.  Yet everywhere, in everything we hear, read, see, is a thesis that the stock market is a constant rational barometer.

The stock market was declining because the Fed was tapering.  Then on the day the Federal Reserve met, stocks soared. Oh no wait, markets like rising rates because it means the economy is better.

Then stocks plunged. It’s Omicron.  Then stocks soared. Omicron fears have faded.

For God’s sake.

The problem is the explanation, nothing else. We know how the market works. It’s spelled out in regulations.  If you want a summary, read the SEC’s Gamestop Memo.

Options expired last week, while the Federal Reserve was meeting. You should expect bets. Indexes rebalanced Friday and demand was down.  So with new options trading Monday, the market fell.

Then Counterparties squared books yesterday, and one would naturally expect a big surge in demand for options at much better prices.  Stocks surged.

VIX volatility hedges expire today. If money sees a need for volatility hedges, stocks will rise.  If not, they’ll fall.  But that’s not humans reacting to Omicron. It’s programmed.

Weather forecasts are predicated on expert capacity to measure and observe weather patterns.  It’s data science.

The stock market is data science. 

If we have vast data science on weather, coronaviruses, the stock market, why would we hope rather than know? 

It happened to Copernicus too.  The sun is the center. No, shut up or die.

Science thought so much of itself that it believed it could do what they say can’t be done.  Save that for Smokey and the Bandit.

What happened?  Human nature. No matter how much one claims to be objective, there is confirmation bias, a belief – hope? – in one’s desired outcome.

Is the investor-relations profession able to let go its predilections, its hope, and shift to objective data science on what drives shareholder value?

What matters is the whole picture. Do you know if Story, Characteristics and capital allocation mesh, or contradict each other? If you’re a long or short trade?

Math. Measurable.

Illustration 131408341 © Zybr78 | Dreamstime.com

It’s of no help to your executive team and Board to paint an unrealistic picture that says Story drives value when the data tell us the opposite. Who cares what drives price? So long as we understand it.  That should be the view.

Humorously, there is hope.  Hope is like faith, a belief in things unseen, in outcomes no data yet validate. There’s hope we’ll come around to reality.  We can help you get there.

And with that, we hope your reality for the Holiday Season 2021 is blissful, joyful, thankful. Merry Christmas! We’ll see you on the far side. 

Most Important

The most important thing this week is gratefulness. 

We at ModernIR wish you and yours everywhere happiness and joy as those of us here in the USA mark a long and free tenure with Thanksgiving tomorrow.

Karen and I saw the Old South Meeting House in Boston, and the Exchange Building in Charleston last week.  For history buffs, it’s a remarkable juxtaposition.  The former gave root to the Boston Tea Party, the latter anchored South Carolina’s revolutionary role.

Mel Gibson’s character in The Patriot is based on Francis Marion, for whom a square and a hotel and much more are named in town.

Charleston, SC. Photo Tim Quast.

And on June 28, 1776, brave souls bivouacked at Fort Moultrie in Charleston Bay behind palmetto logs (why South Carolina is the Palmetto state) took shells lobbed from British warships that stuck in the soft wood and pried them out and fired them back, sinking two and disabling two more, and the Brits withdrew, the first defeat in a long war.

And the battle of Cowpens in Jan 1781 stopped the British in the south, cementing an American victory at Yorktown.

We walked miles and marveled at history on quaint sidewalks under live oaks. Also, we consumed unseemly amounts of grits, seafood and charming southern hospitality. We arrived concave and left convex.  Stay at the Zero George and dine there.

So, what’s most important to investor-relations officers, and traders, as we reflect this late November 2021?  While in Boston, I had opportunity to join a panel about alternative data for the Boston Securities Traders Association.

I told them I could summarize my twenty years of market structure with three words: Continuous auction market. At my advancing age, I think it’s the most important thing to grasp, because it gives rise to everything else.

I’ll explain.

In a continuous auction market, buying and selling are uninterrupted. It’s not really possible. At the grocery store, a continuous auction market would suggest the store never runs out of anything, even with no time for re-stocking. At least, in a declared amount.

Had you thought about that, IR folks and traders?  There isn’t a continuous stream of stock for sale. That condition is manufactured.

The SEC declared the stock market would never run out of at least 100 shares of everything.  Why? So the little guy’s trade would always get executed.  Consequences? It’s like that scene near the end of Full Metal Jacket where they huck a bunch of smoke grenades to go find the sniper.

The stock market is a confusing smoke cloud.  Let me give you some stats, and then I’ll explain what they mean. First, 70% of market volume in the S&P 500 is either Fast Trading, machines changing prices, or equity trades tied to derivatives.

So only 30% is investment. Yet over 40% of market volume is short – manufactured stock intended to ensure that 100 shares of everything is always for sale. So what’s fake is larger than what’s real.

Plus, 80% of all orders don’t become trades, according to data from the SEC.  And 60% of trades are less than 100 shares (odd lots).  The stock market is mist, a fine spray of form over substance.

What does this mean for all of us?  You can’t tell the Board and the executive team that investors are setting your price, IR people. Yes, it happens. But it’s infrequent. Most of your volume is the pursuit of something other than investment, principally price as an end unto itself (TSLA trades a MILLION times per day and moves 5.5% from high to low daily, on average).

And traders, it means technical signals work poorly.  They don’t account for how many prices are false, how much volume isn’t investment.

Thankfully, there’s a solution. If you understand the PURPOSE of the stock market – to create a continuous auction – then you can understand its behaviors and sort one from the other to see actual supply and demand.

Public companies, there is no other way to delineate Controllables from Non-Controllables. We can help. We’ve done the time, the thinking, the work, so you don’t have to.

And traders, you can trade supply and demand, rather than price.  Vastly more stable, less capricious, duplicitous, cunning.

I’m grateful to know that. And I’m grateful for rich and rewarding time on this planet. All of us have travails, trials. It’s part of life. But it’s vital to consider what’s most important. 

Happy Thanksgiving.

The Inferiors

One of the penalties of refusing to participate in politics is that you end up being governed by your inferiors.

So, purportedly, said Plato. That’s our sole word on current elections.

Illustration 209532110 / Plato © Naci Yavuz | Dreamstime.com

Now let me tell you how my order to buy 50 shares was internalized by my broker, but my limit order to sell it split into two trades at Instinet, and what that’s got to do with the Federal Reserve and public companies.

Sounds like a whodunnit, right? 

Let me explain. I trade stocks because of our trading decision-support platform, Market Structure EDGE. It’s a capstone for my long market-structure career: I know now what should matter to public companies, what should matter to traders, how it ALL works.

Continuing, the Fed today probably outlines plans to “taper.” Realize, the Fed has been buying US mortgages at the same time nobody can build houses because there isn’t any paint, no appliances, you can’t find glass, wood went through the roof (so to speak).

So the Fed inflated the value of real estate.  Why?  Because it prompts people to spend money. To the government, economic growth is spending.  Mix surging balance sheets with gobs of Covid cash, and it’s like taking the paddles and telling everybody, “Clear!” and hitting the economy with high voltage.

The Fed has concluded the heartbeat is back and it’s putting away the paddles. Its balance sheet, though, says tapering is a ways off.

What’s that got to do with my trade? The Fed is intermediating our buying and selling to make it act and look like more.

But it’s not more.  And the economy rather than looking like an elite athlete – trimmed, toned, fit – is instead just off the gurney.

Put another way, the economy reflects multiple-expansion, a favorite Wall Street explanation for why stocks go up. It means everybody is paying more for the same thing.

We should have let it get tough, trim, fit. Ah well.

Did you see the Wall Street Journal article (subscription required) this week on payment for order flow in stocks and options?  I’m happy market structure is getting more airplay.  It will in the end be what gets discussed when everyone asks what happened.

Everything is intermediated. The Fed buys mortgages. Traders by trades.

I bought 50 shares of a tech stock at the market. That is, I entered the order and said, “I’ll take the best price available for 50 shares.”

I know my 50 shares is less than the minimum 100-share bid so it MUST be filled at the best price.  I also know the stock I bought trades about $16,000 at a time, and my order for 50 shares is just under that.

I’m stacking the deck in my favor by understanding market structure (I also know the stock has screaming Demand, falling Supply, a combo lifting prices, as in the economy, so I’m adding to my advantage, like a high-speed trader).

I had to confirm repeatedly that I understood I’d NOT entered a “limit” order, a trade with a specified price.

Brokers don’t want us traders using market orders because they can’t sell them. So my own broker sold me shares. That’s internalizing the trade, matching it in-house.

I sold via limit order because I was in a meeting. My broker sold it to somebody like Citadel, which split it into two trades at Island (Instinet, owned by Nomura) and took a penny both times. Then price rose almost a dollar more.

Wholesalers see all the flow, everywhere. They buy limit orders only on high odds of rising prices, making a spread, and buying and selling several times over to make more than the $0.08 they paid for my trade. I know it, and expect it.

But the purpose of the market, public companies – you listening to me? – becomes this intermediation. It’s over half of all volume. You think investors are doing it.

And this is the problem with the Fed. It manipulates the capacity to spend, and the value of assets, and manipulation becomes the purpose of the economy.

Markets cease to be free. Outcomes stop serving as barometers of supply and demand.

Actually, we see supply and demand in stocks (ask us). Too many public companies still don’t want to believe the data and instead go on doing pointless stuff. I don’t get that.  Why would we want our executives to be ignorant?

Apply that to the economy (maybe to Plato’s observation).  Let’s be honest. Rising debt and rising prices are clanging claxons of folly, like my 50 shares becoming two trades. They’re not harbingers of halcyon days.

Why be public for arbitrage? Why trade to be gamed?

We should face facts both places. The sooner, the better.  Elsewise we’re governed by our inferiors.