December 1, 2009

The heart of the IR job

I’m moderating the NIRI Virtual Chapter meeting on modern equity markets tomorrow 12/1 at noon ET. See for details.

As I move the midsection flab from a grand Thanksgiving holiday aside to get at the keyboard (a little humor there), the US equity markets are closing up again. IR folks and executives, what’s proving the most accurate indicator of market direction lately? And what’s it mean to your own market structure?

“Market structure” is your trading environment – what’s setting share price and driving trading volume. In business, there are metrics of health ranging from EPS, to cash-flow ratios, to margins, to operating statistics like subscribers, or phone lines, or manufacturing capacity, or load rates.

The same is true for market structure, except the metrics aren’t financial or operational, but measures of speculation, investment and risk management. Tracking the effects of these forces offers a highly accurate picture of the health of your market structure. As you long-time readers know, we believe market structure measures are fundamental now, the same as MRIs for medical diagnostics or satellite images before sending troops into battle.

Back to our question above, about the most accurate indicator of market direction, have you got your answer in mind? Okay, it’s this: the dollar. Go run a graph. For at least a couple months now, US equities move with inverse correlation to the dollar. When it falls, stocks strengthen. When it rises, stocks drop. Now, why would that be?

As you ponder that, consider this too. Trading data show a steady if subtle migration of volume – lighter now than in the summer – to pure quantitative multi-asset-class systems. It makes sense to us. If financial securities modulate according to US currency, which ripples through various asset classes from bonds, to commodities, to fixed income securities, and then alpha forms between global markets, why wouldn’t you trade on high-speed data rather than financial measures? It’s, as Sherlock Holmes would say, elementary, my dear Watson.

Thus, institutions shift their focus further from business fundamentals to instances of speculation and risk-management. Profits come from brief divergences in asset classes. It becomes a foot race for trading systems. If the dollar strengthens and US stocks fall, where will they rise fastest and where do you trade puts and calls? Probably Asia. And maybe you trade some corporate bonds and some US futures too, knowing the dollar will fall again, positively impacting these asset classes.

Do you see the problem? You will be rewarded less for running a great business. We return to this issue because it’s the heart and soul of our profession. We are the marketing and communications function for the world’s great long-term investments. Let’s fight for markets that reward effort rather than foot speed in very short sprints.

So why does a weak dollar reward stock prices? Give us your thoughts!

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