Tagged: investor relations

Tulips

When you’re amid the tulips you don’t know it. 

Much has been written about the Great 17th Century Dutch Tulip Bulb Mania.  I’m not going to dredge the channel anew.

Photo 6042009 / Tulips © Pindiyath100 | Dreamstime.com

But taking a skiff back to skim over the surface is worth doing, to remind us humans that what we think we know at a given time is incomplete at best and perhaps way off.

In the 1630s, tulip bulbs became the biggest financial market in history in Holland.  People thought the sky was the limit for the value of tulip bulbs.

Like the Winklevoss twins saying bitcoin was headed to $400,000. Scott Minerd of Guggenheim Partners, a man of gravitas and reputation, concurred.  FTX was worth $32 billion.

We didn’t know we were amid tulips again. 

I’m sure that people in The Netherlands thought that if somebody was willing to pay as much for tulips bulbs as they paid for a house that somebody else would pay the value of two houses.

The trouble always is that forecasting higher prices for things supposes someone can and will pay a higher price. 

And what causes higher prices?

The same thing always.  Money. Seventeenth-century Holland was awash in gold from the new world. Inflation.

What about supply-chain issues, wars, basic enthusiasm? None of these can gain – pardon me – purchase unless there’s money available to spend.

Oil is back below where it was when Russia invaded Ukraine so all the talk about that war causing energy inflation is bogus. It was just tulips. Look, Ukraine’s economy is the same size as Denver’s. To suppose the use of fuel in Denver will price the global commodity market is just. Dumb.

Here’s a timeline using oil to illustrate the arc of tulips.  On Mar 15, 2020, the US dollar as measured by the “dixie,” the DXY index, shot up to nearly 103. Call 108 parity with the euro. In Feb 2018 the DXY was near 89.

By Jan 2021, the dollar was back to 90 as floods of greenbacks sapped its value.  Had not the whole rest of the planet also been hosing their economies in currencies, it might have been 70.

Meme stocks soared, oil soared, prices everywhere soared.

Then that stopped.

Between June 2021 and Sep 2022, the DXY rose from about 91 to 114. 

That’s why oil fell and inflation has eased some.  And why the stock market hit post-Pandemic lows. Everything becomes a tulip when it rains currency.  Everything returns to earth when the rain stops.

But it’s not synchronized. One thing happens, the other follows.

The DXY dipped near 104 last week.  Oil prices move inversely with dollars, as do stocks. So oil is headed back up. It’s messy but you can always find the currency inverse correlatives.

We just know exactly when or where. If the Federal Reserve sells assets off its balance sheet, trading them for dollars and removing dollars from circulation, the DXY will rise again.

And tulip prices will fall anew.

It behooves us to understand the characteristics of fields of tulips and the probability of wandering into and out of them.

Which leads us back to the stock market.  I’m in Wilmington DE for a Board meeting where the Investor Relations Officer and the CFO have called together experts like ModernIR to help the Board understand how the market works.

It’s laudable. Every public company should do that – not so ModernIR can parade but so Board directors understand what’s controllable and what’s not.

The stock market is unique in history in its capacity to be insular for extended periods to the presence or absence of money.

If a machine wants to buy something now and sell it in less time than the blink of an eye for a tenth of a penny more, the presence or absence of money manifests differently than in tulip bulbs or cryptocurrencies.

Someone might well pay a tenth of a penny more. You don’t know you’re overpaying when the unit of measure is a tenth of a cent.

Compounded over time and through acceleration by machines manifesting vast seas of tenth-penny buys and sells, the market creates an illusion of efficiency and correctness.

It leads public companies to believe that over the long term, stocks reflect cash-flows.

No, over the long term, your stock reflects imbalances in Supply and Demand translated to the presence of money and the degree of comfort traders feel spending it on things.

I’d rather that wasn’t true!  I’d like to tell you your stock’s value is a prudent read on the difference between your revenue and your expenses.

But it’s really a tulip bulb, in today’s stock market.  It’s a thing that’s assigned a value based on the willingness of people with varying horizons from a few microseconds to years, to trade dollars for it.

And the purpose of the stock market is setting prices of everything in 100-share increments. It’s no longer a market matching equity investors with equity investments.

So, what are you paying for, issuers?  Do you know that just 20% of trading in your stock, or less, occurs at your listing venue?

Tiptoeing through tulips sounds fun.  It is till it isn’t.  To see the tulip effect in the stock market, know how it works. This is the field of gold for investor-relations. And investors.

If you want to know more, the ModernIR team has a client educational session Dec 14 at 130p ET. Send me a note and I’ll share the invitation.

Decline and Fall

We’re just back from Rome, where the empire is no more but its imprint enthralls. 

And yes, that’s like the stock market.  We’ll get to it.

Do the Scavi tour under St Peter’s Basilica.  It’s breathtaking and not just because it’s underground.  It’s an archaeological marvel establishing that Christian traditions about the burial of the Apostle Peter have merit.

As with the stock market, there are no absolutes, just high probabilities. But it’s powerful to see the origin, replete with excavated walls and crypts and stairs and mosaics and plaques, of the largest church in the world.

At the Colosseum in Rome (photo courtesy Tim and Karen Quast) Oct 2022.

And at the colosseum (see us at right) there was merchandise, and seating sections, and concessions, and sophistication rivaling anything we’ve got today in the NFL.  Moving Nero’s statue, which the builders did after draining Nero’s private lake, would challenge our modern machinery. They did it with 24 elephants.

In the Pantheon you walk the same multi-colored marble floor that Marcus Agrippa did, a convex design with subtle drains that wick away rain falling through the open oculus. How many floors exist after 2,000 years open to the air? This one’s perfect still.

Rome was built to last but didn’t. 

The stock market that used to be on the corner of Broad and Wall streets in New York is now on servers in Mahwah, NJ, connected to the Nasdaq’s servers in Carteret, and CBOE and IEX and other servers in Secaucus.

That alone should be telling. The market isn’t in the city that talks about it.

The broadcasting about the stock market – endless chatter about Sellside upgrades and downgrades and whether a stock trading at ten times earnings is a good buy – continues apace from downtown New York.

But the stock market is on fiberoptic cable in New Jersey.

Speaking of disconnects, analysts decided this week that expectations for Ford and GM should be cut.  After the stocks are down 46%.  How is that helpful?

And it’s the essence of the disconnect. The market’s anachronistic trappings are way behind the times. The empire of the Buyside and Sellside long ago became hunks of broken marble strewn amid a remnant of pillars along The Forum.

So to speak.

Patterns show Active and Passive money left Ford and GM back in February.  What continued were the machines, and derivatives. And nine months later, the Sellside cuts ratings and price targets.

Hm.

One cannot help but think of the Federal Reserve.  We’ve had two quarters of declining GDP but there’s no recession.  Way behind. Living in the past.

Rome dissolved into its excesses.  So did the Buyside and Sellside, leaving the looting to the Goths, Visigoths and Vandals.  The Fast Traders (no offense, computerized market machinery).

Declines and falls are products of losing touch with reality. 

The stock market isn’t motivated by the Buyside and Sellside. It’s motivated by spreads and models.  And the machines making the money are happy that we all just continue watching the hand.

The trappings, the marketing materials, the talking heads, the lavish show, haven’t kept up.  Like Rome.

I relished modern-day Rome.  It’s full of delightful people who will patiently help you say things like dopo di te (after you, per favore), and a presto (see you soon!).  The pastas are addictive (cacio a pepe, amatriciana, and up north in Tuscany, pici). The cobbled streets are a storybook. The Lazio wine from Habemus is delectable.

Leaving, I felt an ache.  It’s just so…fabulous. 

And there’s your upshot, investors and public companies. The stock market today is a riveting confabulation of marvelous machinery. It’s just not what it was.

Like yesterday. Future were down steeply before the open.  I told users of our decision-support platform EDGE that you can’t believe the futures. They’re not market reality.

The DJIA at one point was up nearly 400 points.  It finished flat because most of the market didn’t keep pace, and the computerized machinery in New Jersey that really is the stock market knew the money pegging average prices would have to be a lot lower.

And so the market gave up its gains. It was a whole Roman Empire in a day, rising, flourishing, declining, falling.

So, what are we supposed to do?  First, enjoy the stories and traditions but don’t confuse them with reality. We need to be alert and informed members of the equity-market community, not a bunch of tourists.

We can’t succeed as investors, traders and public companies without a solid grounding in reality. Know how the darned thing works.

Now if you’ll excuse me, I need to go eat some salad.  For a change.

Objectivity

The marvel is that people keep buying it. 

Buying what?

That the stock market goes up and down for rational reasons.

The market plunged in the first half of 2022, worst start in 50 years.  Yet jobs numbers remain strong, the dollar is strong, blah blah.

Then the stock market soared. While we didn’t get back to all-time highs, the breadth and depth of the rebound rocked.  AAPL stormed from $130 to $175, back near where it was in March.

Now, maybe there’s justification.  We humans, and especially stock analysts, come up with reasons why something is worth X or Y times forward earnings.  As if it’s the answer.

You know it’s trading at 11 times 2023 earnings. That’s way undervalued.

Really?  What about the cost of everything? The value of the currency? The relative value of everything, the amount of debt, interest rates, on it goes?

Do you know turtles come out of the surf at Ho’okipa Beach in Maui to sleep?

Tim and Karen at Fleming Beach, Maui, north of Kapalua at sunset, Sep 6, 2022. Photo courtesy Tim Quast.

There are people saying it’s because the temperature of the ocean is rising. They’re driven out of the water to cool off, we’re led to believe.

You can come up with a reason and hold it with religious fervor, for anything. But that doesn’t make it so.

There are people who say the turtles have been doing it since one particularly wise one told the others, “You know you can go onto the sand and get an uninterrupted eight hours of sleep and then haul off into the ocean again?”

Animals aren’t stupid.  I offered George the Miniature Horse some hand-pulled grass down near the black lava rocks at Keanae on the road to Hana in Maui.

George looked at what I was offering and at the pile of fresh-cut better grass in front of him and said, “Naw, I’m good man, thanks.”

He didn’t say it out loud but I got it.

Animals and nature make you question your assumptions, if you’re willing.

And humans make a lot of wrong assumptions. Books have been written, Nobels awarded, about the human tendency toward “confirmation bias,” the ceaseless pursuit of things that reinforce what we believe is true.

Like the stock market plunged because people feared a recession and soared because they stopped fearing it.

I’m guilty of confirmation bias, too.  There are no doubt times when the data may say something different than I think. But unless we change the way the data are measured – which requires subjectivity – the data are what they are.

There’s a passage in the bible about how God makes the sun rise and the rain fall on the good and the evil alike.  Maybe it’s the basis for Hemingway’s title, The Sun Also Rises.

Causal relationships are hard. So often they carry confirmation bias, subjectivity.  This happened because of that.

I saw a headline yesterday after stocks continued down that the reason was energy concerns in Europe, interest rate concerns in the USA.

Says who? A reporter?

I can tell you definitively in the data that stocks in the S&P 500 fell 3% last week because Exchange Traded Funds sold off about 3% of holdings, and Short Volume – the market’s supply chain – topped 50% of all trading volume for the first time ever.

The sun rises and sets, because of math.  Stocks rise and fall because of math.  Rain falls or doesn’t fall because of math. 

Humans make subjective decisions because of emotion. 

So do animals in the sense that they see this and the see that and they make a choice.  The turtles realized they didn’t have to jack with sharks, breathing, drift, etc., if they hauled out of the water overnight.

And this is why math matters in investor-relations and investing as it does in every other aspect of life. It’s the only way to sort objectivity and subjectivity.

Neither thing is fully right. Math isn’t motivated. It just…is.  But you need it to understand motivation. 

We have the math for public companies and investors, while everybody else obsesses all day long about emotion.

Humans including those in the c-suite are emotional. We need a gauge. Ask us, and we’ll show you what actions should depend on math. The rest is up to you.

Why Yass Wins

I get a kick out of Jeff Yass and not just because he’s a libertarian. 

And when did “libertarian” became a bad word? We used to love liberty.

Anyway, Jeff Yass started Susquehanna International Group in Bala Cynwyd, PA.  He’s roughly Number 184 on the Forbes richest list. 

SIG, as the firm is called, says it “thrives at the intersection of trading, quantitative research, and technology.”

By the way, this photo is the ModernIR client services team dining at Mountain Standard during our retreat in Vail this week.  Thank you, Arrabelle, for taking good care of us!

ModernIR client services team at Aug 2022 Vail retreat dining at Mountain Standard. Great job, team! Photo courtesy Tim Quast

In 2020 SIG traded about 25% of all options volume in the USA, the equivalent of 1.8 TRILLION shares of stock.

SIG’s website says, “As one of the largest proprietary trading firms in the world, we trade our own capital at our own risk.”

Mr. Yass traffics in probabilities. It’s arbitrage – buying and selling the same things at different prices. All short-term trading is arbitrage.  It’s 53% of US market volume, our metrics show.

Mr. Yass makes billions trading imbalances in the options market. But he invests in private companies like Bytedance and TikTok.

If you’re an expert on market mechanics, why would you invest in some other market?  Because Mr. Yass – and I’m surmising here – understands market mechanics. 

They don’t work long-term.  Short-term trading returns crush long-term buy-and-hold results.

It’s math. Mr. Yass arbitrages public equities and invests in private businesses, where he can get away from his own arbitrage.

Interjection:  This photo is the group that hiked the Berrypicker trail to the Eagle’s Nest at 10,400 feet, an elevation gain of 2,300 feet. No small feat!

Intrepid ModernIR team hiking 2,300 feet up from Vail Village to the Eagle’s Nest, Aug 23, 2022. Photo courtesy Tim Quast

The founders of another proprietary trading firm, Jane Street, came out of SIG.  In 2020, Jane Street traded $17 trillion of stocks, keeping about $7 billion in earnings. The math suggests Jane Street makes gobs of tiny, profitable trades.

Jane Street says, “We are a global liquidity provider and trading firm, using sophisticated quantitative analysis and a deep understanding of market mechanics to help keep prices consistent and reliable.”

Some still describe SIG’s and Jane Street’s trading as “noise.” It’s the same kind that Citadel, Virtu, Hudson River Trading, Tower Research, Infinium, GTS, Two Sigma, Quantlab, Optiver, and so on, do.

It’s not noise. It’s quantitative investment.  It dominates the stock market and it’s got nothing to do with corporate fundamentals.  The richest investors now are these quants.

Unless investors are making money, they will leave the stock market.  This is what happened to a great many stock-pickers the past 20 years.

By and large, profits in the stock market come from arbitrage – different prices for the same things. You can disagree. The facts won’t change.

And the majority of stock-pickers don’t outperform passive funds. If you can’t beat your competition, you go out of business.

Everything we write here is meant to make public companies and investors more intelligent participants in the market that has made Citadel and SIG and Jane Street wildly wealthy. 

Investor-relations professionals, you need to sit at the intersection of quantitative data and market mechanics and technology, too. Because that’s what THE MONEY is doing.

It’s easier than calling stock-pickers and trying to generate shareholder value.  That doesn’t work. That’s Sisyphus.

Yes, we do it still. But it should be 30% of your time, not 95%.    

Here’s what does work.  Ahead of earnings, know the last time stock-pickers bought, and what they paid. That’s measurable. Know what percentage of your trading volume they drive.  Give those data points to the c-suite and the board.

Why? Because otherwise they won’t understand the stock market. (One study shows retail investors understand cryptocurrencies better than stocks, a disaster for public companies.)

If Demand is falling into earnings and Supply is rising, make the subheading in your earnings release a VALUE message – “bolstered our balance sheet in the quarter.”

Machines will read it.  Your Supply/Demand balance says your stock will fall, so tee up the money that buys dips. Value money.

And after earnings, report what kind of money set price, and how patterns changed, and if Active money bought and changed its percentage of trading volume.

IR in a quantitative market should know when to emphasize value or growth or other characteristics in external communication. And IR should provide regular, cadenced data on what drives or hurts shareholder-value that reflects how the market works.

The market is quantitative because the mechanics and rules of the market are mathematical.

Just a fact.

If we could be coldly analytical, we’d stop wasting time and money on things that don’t matter. We’d own the data. It starts with understanding who’s making money in the stock market, and why.  Ask Mr. Yass what he does. 

Big Little Things

Never underestimate the big importance of small things.  

It’s a line from a book called The Midnight Library that we listened to while driving from Steamboat Springs to Austin this week.  The character in the book who uses it in turn got it from Henry David Thoreau, who said, “The little things in life are as interesting as the big ones.”

Illustration 37902156 / Choices © Alain Lacroix | Dreamstime.com

It’s a thought-provoking and clever novel. So there’s our book recommendation.

The big little thing this week in the stock market is options-expirations. And the big little thing for investor-relations professionals – and CNBC commentators – is 13Fs are out.

Options-expirations though gets little attention from observers. Brian Sullivan and I talked about it some months ago, but otherwise it goes largely unnoticed, this big thing.

The stock market bottomed powerfully – at least the way we measure the data – at June options-expirations.

July expirations dropped the hammer on the Growth trade. For Tech stocks it was like that Ludicrous Mode button in the Tesla Plaid.  Explosive.

This week those instruments that set the market on fire are done. The market cannot sustainably rise without Tech.  And it didn’t. Then Tech took off with one little thing: Leverage from derivatives.

I’m not saying it’ll end this week or with new options trading Monday Aug 22. But it sure won’t surprise me. I can give you a list of data points that signal it.

It’s not a little thing.  But people treat it that way and underestimate the big importance.

But 13Fs? Surely I’m not suggesting these are little things.  (For you few wondering what I’m talking about, it’s the quarterly report on shareholdings derived from Section 13f of the Securities Exchange Act, added in 1975.)

Well, in the sense that if you add up the puts and takes each quarter and get a net number for ownership change, it is. You’ll find it’s about two or three days of trading volume.

And there are 67 trading days in each quarter.

Think about what’s happened in 2022 so far.  Worst half-year in a half-century for stocks. Most consecutive market declines in roughly 100 years. Record-high Short Volume. Volatility over 3% daily for much of the year in S&P 500 stocks. Pandemic winners down 80%.

It’s been dramatic. Executive teams have longed for guidance.

Without giving away the punchline of The Midnight Library, it’s about choices.  One small choice can  change the outcome of one’s life. Paraphrasing David Thoreau, every small decision is interesting.  We could choose to say hi to the stranger passing us, or not. What if your one act of kindness altered that person’s view of life?

Pick your small thing.  I’ll let you read the book.

Now, let’s apply it to investor-relations for public companies and our role as givers of guidance, doers of little things.  We have no idea, really, if the June 30 13Fs reflect what institutions own now (settlement data won’t close that gap – they catch about 5% of trading volume, folks).

It’s just what we’ve always done, since 1975.

You have a chance to change that cadence, with a decision, guidance. Both things are happening this week. Will your CEO know about both? And which is likely to affect the stock market more? 

Suppose you decided to tell your c-suite at June expirations that Demand for stocks had plunged to the same level measured in Mar 2020, and Short Volume (not Short Interest, which is even older than the 47-year-old 13Fs) was at a record 49.4% of S&P 500 trading volume.  In Mar 2020, the same conditions marked a bottom.

That’s just a little thing. But wow. What a difference.  It might change the way your executive team and Board think about the stock market. And what drives it.

The beautiful thing about decisions is that they’re ours. We’re not forced into them. Every day is a chance to choose to DO SOMETHING DIFFERENT.

Which could lead to the next little thing.  What about moving your earnings date outside the options-expirations period?  What about sending your c-suite a weekly pie chart reflecting 100% of the money behind price and volume?

What about measuring Active money as a constituency before you report results, and again a week afterward, and sharing how it changed – and what that means?

These are all little things of very big importance – that are vastly more interesting than waiting for the 13Fs 45 days after the quarter ends. At a point that’s meaningless versus what the market has done.

I’m not saying don’t use 13Fs. But they’re backward-looking and incomplete and offer no explanation about the behaviors that have exploded and prevailed since 1975. And you can be giving little metrics every week, every day even.

The little things can be what makes a bigtime difference.

Yes, I was philosophically moved by the book!  And sure, I think public companies should be measuring all the money, all the time. 

But it’s invigorating too, to know you can choose to do something new, something different, every day.  If you’re intrigued, holler.  We’ll help.

And if not, give the book a read.  It might change the way you think about life.

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?