Posts Tagged ‘Stock market’

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Let’s NOT squash trading

January 20, 2010

As you know from reading the papers, Washington “powers that be” have two impulses when it comes to Wall Street and stock market activity:

  • If it’s an activity where people can lose money, we need to regulate it.
  • If it’s a thing where people can make too much money, we need to regulate it – and maybe just outright squash it.

Following the market’s unfortunate meltdown in 2007-09, and the even more unfortunate fact that Wall Streeters who remain are taking home big bonuses, Congress and the Obama Administration are in full rush to “do something.” You know, do something so “this will never happen again.” No one believes that last part – mostly it’s about casting blame and seeming to punish someone – but they are working on a wave of escalating regulation, which could be very real.

Update: On Jan. 21 President Obama pledged to go after big banks, again using that “never again” language. Among other things he proposed a ban on proprietary trading by banks, curbs on advising hedge funds and limits on involvement in “risky financial products.” Depending on how it’s structured, this might greatly reduce trading – or just drive traders out of mega-banks into smaller firms.

Earlier this week the Kansas City chapters of NIRI and the Security Traders Association put on an educational panel, “Not Your Grandma’s Market Anymore,” on how the new world of trading affects public companies. The Jan. 19 audience was a mix of 50 investor relations people, long-term investors and short-term traders, all in one room.

Speakers were Joe Ratterman, CEO of BATS Global Markets, the No. 3 US equity exchange behind Nasdaq and NYSE; Tim Quast, managing director of ModernIR, an analytics firm that tracks trading patterns for public companies; and Jeff Albright, VP and head of equity trading for mutual fund family Waddell & Reed. I moderated.

In another post, I’ll share ideas from the session on what investor relations people can do amid this new world of trading. But let’s start with Washington – because regulatory excess in trading could do a lot of damage to the markets our public companies depend upon. Some examples of what the power brokers are up to:

  • The Securities and Exchange Commission issued a “concept release” on equity market structure on Jan. 14. It’s a good primer on changes in how stocks are traded. The SEC seeks public comment on how to beef up regulation of market structure, high-frequency trading and “undisplayed liquidity” such as the private markets called dark pools. That’s the start of a push for expanded regulation. I’ll post excerpts in a page called “Not Your Grandma’s Market,” but the full 74-page release is worth reading.
  • Democrats in Congress are proposing a new tax of 0.25% to 0.5% on securities transactions – every trade of stocks, options, futures, etc. Proponents say the tax could raise as much as $354 billion a year for Uncle Sam and curb “speculative excess” by cutting total trading volume, say, 25% to 50%. Those last numbers are, well, speculative – no one knows what the actual impact of lobbing a new tax into the markets would be.
  • The SEC proposes to regulate dark pools, whose very name suggests something sinister – should have sent that one to the branding consultant before going with “dark pools.” They’re generally platforms for securities firms to match orders and do proprietary trades without disclosing price and volume offers. The new SEC rules would bring that trading out into the open.
  • Also targeted by the SEC are flash orders. Flash trading essentially is a way automated traders’ computers can get a peek at pending orders from other investors 30 milliseconds before those orders go to the broader market. The fear is that high-tech trading desks are gaining an unfair advantage.
  • And, of course, the SEC has been tinkering with rules on short selling, a hot button for some companies that have felt victimized on the downside of the market – and another unpopular group of Wall Streeters.

Now, the opinions here are my own – I can’t speak for the other panelists. My takeaway from the discussion was that, yes, technological and regulatory changes of recent years have created a huge new realm that basically is automated trading.

Perhaps two-thirds of the trading volume in US stocks is short-term activity. The traders are math majors who program computers to make or withdraw offers from the market, hundreds or thousands of small trades at a time, in milliseconds. They use algorithms to implement strategies based on tiny anomalies in price, or theories about market movement. The activities go by a bunch of acronyms and names like “high-frequency trading.” They use ultra-fast technology.

And, yes, this trading activity makes life complicated – both for public companies trying to figure out what is happening with our stocks day-to-day, and for individual or institutional investors who may be trying to do a trade for long-term investment but encounter a flurry of “noise” moving the price or spiking volume.

The fact that life has become more complicated, however, doesn’t mean it’s worse – or that trading cries out for a regulatory crackdown. Automated trading certainly was not responsible for the financial meltdown we just came through, and those traders Washington likes to label “speculators” aren’t doing anything wrong.

The societal benefit of short-term trading, as it emerged in discussion, is that when a long-term investor is trying to put a trade on – say, buy 50,000 shares of your stock – the automated traders often are the ones putting up the offers that match that bid and form the other side of the trade. Liquidity comes from more offers, and this lubrication enables people to own stocks less risk of being stuck.

My bottom line: Let’s NOT squash trading. Taxing trades will only add costs, ultimately borne by the people who own equities or mutual funds. And we ought to be very careful about dictating market structure based on an understanding of today’s needs and technologies – which tomorrow will already be changing.

Capitalism thrives in free markets. Rigidity in capital markets will inhibit the flow of money and hinder investment in new technologies yet to be envisioned. And let’s face it, the equity markets (however bumpy) ultimately enable businesses to exist, grow … or in some cases disappear. We don’t want to lock in the status quo.

That’s my two-cents’ worth. What’s your opinion of regulating trading?

© 2010 Johnson Strategic Communications Inc.

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Posted in Capital markets & IR, Regulatory reform & SEC issues | Leave a Comment »

On the bright side

January 8, 2010

Brian Wesbury, chief economist at First Trust Advisors, is seeing V’s everywhere. A strong recovery, he believes, is in full swing for the US economy. The stock market, of course, is up. His graphs all show a V-shaped ascent after the nosedive of 2008.

Yet people everywhere are still worried, intent on reliving the worst of the 1930s:

What I sense is that the panic [Autumn '08] altered a lot of psyches. It’s like people are in the grip of an economic ‘Stockholm syndrome.’ The Stockholm syndrome is when people taken hostage fall in love with their captors. In the panic, people fell in love with pessimism.

The market economist delivered the annual economic forecast today for the Kansas City chapters of the Association for Corporate Growth (ACG) and Financial Executives International (FEI).

Wesbury doesn’t buy into the “pall of pessimism” or the “new normal” idea that has become conventional wisdom. He’s confident that we are fast returning to the “old normal” (except for unemployment, which he expects to improve but stay stubbornly high – largely because government is gobbling resources that might have fueled private businesses). Overall, he’s an unabashed optimist:

I believe we’re in a V-shaped recovery that’s going to take [the market] back to the pre-Lehman levels: 12,500 on the Dow. The question is whether whether we’re going to 13-, 14- or 15,000.

If you want Wesbury’s evidence, check out his book It’s Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy Will Thrive. (Confession – I haven’t read it, so I can’t offer an opinion.)

Let’s hope he is right. My crystal ball is hazy, but a “V” would be a victory for all.

© 2010 Johnson Strategic Communications Inc.

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Posted in Financial crisis & recession | 1 Comment »

R.I.P. Equities?

January 6, 2010

“The equity party is over.”

If this were the lead on a story in Time or Newsweek, it might be a contrarian signal that stocks are heading for a prolonged bull market. But “The Equity Culture Loses Its Bloom” is in the December ’09/January ’10 issue of Institutional Investor.

In a somber but interesting long-term look at the markets, II lays out demographic, psychological and legal reasons for a cooling of the passion for equities that investors felt from the ’80s through the ’00s (with occasional nasty setbacks).

Pundits no less than Jeremy Siegel and Roger Ibbotson weigh in on how aging baby boomers, bruised by two bear markets in 10 years, are fleeing from stocks. On the upswing: funds that invest in bonds, infrastructure and hard assets that produce income, seen as more retirement-friendly.

A few images from the article’s crystal ball:

  • About 68 million Americans reach retirement age in the next 10 years will favor investments less prone to “wild fluctuations” than equities.
  • Pension funds are shifting toward bonds, driven by a 2006 law.
  • A Grant Thornton study shows the number of public companies in the US dropped 38% in the past 11 years.
  • Waning interest in equities will discourage new IPOs, and investment banks will put more emphasis on debt underwriting.
  • “Banks’ equity research departments can expect to feel a pinch,” including continued cutbacks in analyst coverage.
  • Smaller companies will find going public, or staying public, more difficult.
  • Private equity firms will continue to struggle to find profitable “exits.”

Of course, the obituary of equity markets has been written before – and II emphasizes it is talking about a loss of vitality, not the death of stocks. We should never bet too much on taking recent datapoints and drawing a line through them.

And then there are those who see the trend through a contrarian prism. Clifford Asness, head of AQR Capital Management, talks about the long-term decline of IPOs and shift in investor preferences toward bonds. But then he adds:

The decline of the equity culture means, all else equal, it’s time to invest in equities.

So there. What’s your thought on it?

© 2010 Johnson Strategic Communications Inc.

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Posted in Capital markets & IR | 1 Comment »

Psychoanalyzing Goldman Sachs

November 10, 2009

If Goldman Sachs is a star in your investment universe, or even a remote planet you aspire to add to your universe, you ought to read the fascinating company profile (“I’m doing ‘God’s work’. Meet Goldman Sachs”) in The Sunday Times of Nov. 8.

The newspaper’s piece is heavy on pop psychology and a bit overawed by Goldman (in the mode of “Gee, these guys really have a lot of money and aren’t they smart!”). It delves into the bailout controversy and those evil bonuses. But it’s also full of anecdotes and insights into how Goldman works – and gets ahead. A few tidbits:

There’s no name plate on the building, no sign on the front desk and the armed policeman stationed outside isn’t saying who works there. There’s a good reason for the secrecy. Number 85 Broad Street, New York, NY 10004, is where the money is. All of it.

… “I know I could slit my wrists and people would cheer,” [Chairman and CEO Lloyd Blankfein] says. But then, he slowly begins to argue the case for modern banking. “We’re very important,” he says, abandoning self-flagellation. “We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.” To drive home his point, he makes a remarkably bold claim. “We have a social purpose.”

… the bosses work hard to foster a “we’re in this together”, family-style approach. Others say it feels more like a cult, but they mean it as a compliment.

… Goldman staffers are also trained to “brain pick” contacts and clients harder than the other guy. “You ask what’s their best trade. How do they see the market,” says one. “You offer something in return, but you always come back with something. Then you feed it to colleagues …”

… with Lehman Brothers and Bear Stearns off the street, Merrill Lynch a crippled shadow of its former self, and neither Citigroup nor UBS the forces of old, Goldman has a bigger slice of a growing pie. “We didn’t f*** up like the other guys. We’ve still got a balance sheet. So, now we’ve got a bigger and richer pot to piss in,” is how one Goldman banker puts it. Small wonder the bank is on course to set aside over $20 billion for salaries and bonuses.

Even the firm’s IRO comes into the story, commenting on the sublimation of individual egos to the corporate ethos:

Dane Holmes, 39, Goldman’s head of investor relations, is a 6ft 8in tall, 260lb former college basketball player. He looks like he could run straight through opponents — hell, through brick walls! — if he wanted to. But, he says: “That’s not the way Goldman works. You can have a great career in banking as an individual, but it won’t be here. The system weeds out those who can’t play nicely with others.”

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Anthropology of Wall Street

September 24, 2009

If you’ve worked on stock offerings or M&A transactions, you have probably noticed that the smartest guy in the room is always the investment banker. At least in the investment banker’s opinion. (And I say this without any envy or doubts.)

So I perked up when I saw a piece in my college alumni magazine about a new book. In Liquidated: An Ethnography of Wall Street, Karen Ho explores the culture of investment banks. She says the i-bank tribe’s most revered value is “smartness.”

Ms. Ho started researching the culture of Wall Street as a Princeton grad student in Anthropology. Usually, talk of Anthropology conjures images of going to a rain forest to study strange customs. But Ms. Ho, now an Anthropology prof, finds her cultural oddities in the jungle of downtown Manhattan.

At one point she decided field interviews were not enough – she needed to get inside Wall Street by working there. She recalls a Goldman Sachs recruiting session:

“So why should you work here?” asked the recent white male alumnus from Harvard. “Because if you hang out with dumb people, you’ll learn dumb things. In investment banking, the people are very smart; that’s why they got the job. It’s very fast, very challenging, and they’ll teach as quickly as you can learn.”

Sound a little elitist? Repeatedly, Ms. Ho says, Wall Streeters told Ivy League prospects in recruiting sessions for i-banks things like, “We hire only superstars” and “You are the cream of the crop” and ”You are all so smart!” (A few years ago, recall, Wall Streeters had jobs – and even needed to hire more.)

Once inside, of course, the oh-so-smart bankers reinforce the self-image. Ms. Ho says that feeling of smartness is what the Wall Street culture is all about.

Now fast forward to the financial meltdown of 2007-09. The article notes Ms. Ho’s conclusion that Wall Street’s latest downfall resulted not so much from greed or stupidity as from the smartest-guy-in-the-room syndrome:

The crash is the natural result of a Wall Street culture in which the self-proclaimed smartest people in the world came to believe that high share prices trumped all other corporate values and, in doing so, imposed their ethos of live-for-today risk-taking on the economy at large.

Not everyone on Wall Street, of course, embraces an elitist culture. I have worked with i-bankers who are humble, down-to-earth and friendly. And some investor relations and corporate execs play know-it-all. On the other hand, as a stereotype for i-bankers, there is some truth to the image of “smartest guy in the room.”

[Disclosure: I have not read Ms. Ho's book. The magazine version was fine, but I don't think I'm up for an Anthropology tome published by a university press. Her bottom-line conclusion is interesting. Let me know if you read the ethnography.]

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Posted in Capital markets & IR, My two cents' worth | Leave a Comment »

Schoolmarm & the three Rs

September 14, 2009

FederalHall-GovtPhotoPresident Obama commemorated today’s anniversary of the collapse of Lehman Brothers and the ensuing financial panic by going to the Wall Street playground and delivering a schoolmarm’s lecture to the boys who’ve been acting up. (News story here, text of speech here.)

Like many a grammar school teacher, Mr. O lectured all the kids without differentiating much between those who actually misbehaved and those who followed the rules. For example, the president said:

I want everybody here to hear my words: We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

The president retold the brief history of the financial crisis since September ’08. Not delving much into root causes or the cyclical nature of markets, he focused on the misdeeds of Wall Street. He reminded us (twice) that the crisis was already raging when his administration walked in the door. In this lecture, he made it clear that the schoolboys have failed to learn the three R’s.

The first “R” word is risk. And risk, we gathered from the president, is bad. At least, it’s bad when Wall Street fails to properly anticipate or control it – he spoke of risky loans, risky behavior, reckless risk. These may be seen more easily in hindsight, perhaps, but the president definitely wants financial markets to take less risk.

The president also invoked responsibility. We heard the second “R” word 20 times in its various forms. Mostly, he chastised the giants of the financial world for not acting responsibly … and urged them to grow up and embrace responsibility.

Most of all, Mr. O lectured on regulation. He said the financial crisis came about, essentially, because of a lack of adequate regulation from Washington. And he promised the errant schoolboys more regulation – much more – and by the end of this year if he and Vice Principal Barney Frank have anything to say about it.

Don’t get me wrong. I’m not defending executives on Wall Street, or elsewhere, who failed to disclose risks to investors, dodged responsibility for their actions, or found ways to exploit loopholes in regulation. The wreckage of shareholder value is producing recriminations – and malefactors deserve what they get, you might say.

Mr. O offered one admonition to corporate leaders that I think is correct:

The reforms I’ve laid out will pass and these changes will become law. But one of the most important ways to rebuild the system stronger than it was before is to rebuild trust stronger than before — and you don’t have to wait for a new law to do that.  You don’t have to wait to use plain language in your dealings with consumers.  You don’t have to wait for legislation to put the 2009 bonuses of your senior executives up for a shareholder vote.  You don’t have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains.

Those are actions CEOs and boards of directors could begin taking, and if they demonstrate responsibility maybe the powers in Washington will feel less need for severity in imposing all manner of new regulation. Maybe.

President Obama had all the rhetoric right today at Federal Hall. His speech, of course, was short on detail and long on generalities. He really was speaking to people outside the financial markets, those who deeply resent the bailouts and bonuses and (especially) both happening at the same banks. The symbolism of going to Wall Street to deliver the lecture was the main point today.

Whether the new rules that the financial markets eventually do get will actually improve things – or merely shift risks into different forms and sectors while stifling the flexibility (and discipline) of the free market – we will see in time.

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IPOs – not coming back?

September 9, 2009

The market for initial public offerings is drier than a creek bed in Death Valley, but don’t wait around for spring rains to make IPOs start flowing again, two Grant Thornton advisors say in “The Slow Degradation of the IPO Market” in the September 2009 issue of Mergers & Acquisitions.

David Weild and Edward Kim of Grant Thornton write:

Recent signs of life in the IPO market have led some to believe that the worst is behind us and that we’re about to enjoy another bountiful period of IPOs. Don’t be fooled.

While conventional wisdom may say that we are merely experiencing a cyclical downturn in the IPO market, exacerbated by the credit crisis, we assert that the reality is much darker. In fact, we believe that, given its current structure, the market for underwritten IPOs is closed to most of the companies that need it.

Sorry to pass along this gloomy picture, but it’s useful for investor relations practitioners to have a perspective on the overall landscape of our profession.

Weild and Kim say the decline in IPOs arises from long-term causes in the US stock market and regulatory system, not the bear market or recession of 2007-09.

Among the structural factors are regulatory and legislative changes that contributed to a weaker sell side: repeal of Glass Steagall, which coincided with large firms swallowing up i-banks that used to focus on venture-backed IPOs; Regulation FD, which democratized information for investors but reduced the value of sell side research; legal restrictions on conflicts of interest between research and investment banking, which may be good but took more of the reward out of sell side research; a crackdown on use of one-eighth point spreads, which had given market makers an incentive to generate volume in small cap names; and decimalization, which cut spreads in most stocks to $0.01 and further hurt market making.

All this adds up to a structural and legal landscape that doesn’t favor IPOs, especially smaller companies that might want to emerge into the public markets. The market’s big second-quarter bounce brought only four venture-backed IPOs, and the authors don’t expect great things even if the stock market recovers further.

The guys from Grant Thornton do offer up a “solution” – creating a new capital market where stocks might trade in 10 or 20-cent increments, brokerage houses could earn improved commissions, and i-banks might stage a comeback. They propose allowing companies to opt-in for this “Back to the Future” marketplace.

Given the devastating impact of the recent bear market “scandals” on any kind of financial innovation, I wouldn’t wait around for this idea to gain political traction. Instead, I hope the pessimists are wrong and IPOs do recover. Access to capital markets through IPOs has been an important factor in US technological and economic progress, not to mention the growth of industries like tech and biotech.

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PR does matter

July 8, 2009

Media-and-manI know, I know. “It’s all about the numbers.” Investor relations people (and some CEOs and CFOs), steeped in accounting fundamentals and valuation formulas, are skeptical of public relations. We scoff at press interviews, photo ops … the “spin” stuff PR people do. Of course, no respectable fund manager or analyst would admit to being swayed by a press release, or getting an idea from a newspaper. “It’s all about the numbers,” they say.

Trouble is, influencing the market is not all about the numbers. It’s all about the numbers – plus getting the right people to pay attention.

Two recent studies from respected business schools analyze extensive data on the relationship between press coverage and the market for individual stocks – and conclude that broader dissemination of news has benefits in the capital markets.

The more comprehensive study, a doctoral paper by Eugene Soltes at University of Chicago’s Booth School of Business, looks at all US nonfinancial companies traded on NYSE, NASDAQ or AMEX, excluding the 100 largest by market cap. Soltes and his computer programs count and analyze all articles on these firms, 9.3 million bits of news in total, from the Factiva database for 2001 through January 2007. Then he crosses that information with annual trading data on the stocks, looking for long-term effects rather than a daily “pop” in market activity. Soltes concludes:

The press provides an important and highly visible system of communication between firms and investors. … Specifically, greater dissemination of firm news is found to lower bid-ask spreads, increase trading volume, and lower idiosyncratic volatility. …

By increasing the visibility of firms, greater dissemination may also reduce a firm’s cost of capital.

In this paper, “dissemination” has to do with putting news out and getting it covered in the business press. Soltes says the average firm sent out 21 press releases a year, one every 12 trading days, covering deals, earnings and other news. (His tables give a median of 14 releases a year, just over one a month, a figure I like better as the midpoint in a range of small to large companies). For each release, business publications wrote an average of 1.5 articles – obviously, many releases get no coverage, while some get a lot. Soltes did not investigate why some releases get more coverage – being newsworthy probably is the key, although making connections with reporters also helps.

Soltes’ point is that more is better – more frequent issuance of news and broader coverage of it. Consider the impact of news dissemination on bid-ask spreads:

Based on an average sized trade, a 20% increase in press coverage reduces the average cost of a trade by $1.07. With the average firm having nearly 25,000 trades a month, this translates into a significant reduction in trading costs.

Soltes also finds more dissemination of news increases monthly trading volumes and decreases the volatility of individual stocks. Most companies – and institutional investors – value reduced trading costs, increased liquidity and lower volatility.

The other recent study, by Brian Bushee and three accounting colleagues at the University of Pennsylvania’s Wharton School, focuses on quarterly earnings news. This one looks at the three-day window around earnings (earnings release date, plus or minus one trading day) and yields more detail on immediate trading effects.

The Wharton study looks at quarterly announcements by 1,182 medium-sized NASDAQ firms from 1993 to 2004, excluding large cap companies based on an assumption that differences in coverage are more marked among lesser-known names. The authors analyze 608,296 articles on those quarterly results:

Our results indicate that, ceteris paribus, press coverage has a significant effect on firms’ information environments around earnings announcements. We find that greater press coverage during the earnings announcement window is associated with reductions in bid-ask spreads and improvements in depth.

The impact of media attention extends to retail and institutional investors:

We find that greater press coverage is associated with a larger increase in the number of both small and large trades. … For small trades, these results are consistent with the press providing information to a broader set of investors and triggering more trades. For large trades, these results are consistent with press coverage reducing spreads and increasing depth enough to reduce adverse selection costs and encourage more block traders to execute trades.

Both papers take a mechanistic view of corporate processes for disseminating news and how the media respond. These are data mining studies by accounting scholars – focusing on numbers of releases and press stories, word counts and similar measures of dissemination.

No attention is given to the qualitative nature of the news – positive, negative or nuanced. The authors also do not explore why reporters decide to write more, less or not at all. (The Soltes study does analyze “busy news days,” when a flood of business or nonbusiness news overwhelms XYX Company’s little press release, and confirms that issuing news on busy days has little benefit – although companies obviously can’t control when Michael Jackson dies or GM goes bankrupt.)

Neither of these studies venture outside of traditional “news” databases to analyze the impact of using social media, blogs and so on, to disseminate news. My guess is future studies will prove that the impact on markets comes from getting the word out, by any means, as long as you are reaching the investing audience.

Bottom line: Issuing news has a measurable benefit for public companies in the capital markets – increasing volume, reducing trading costs and reducing volatility. More frequent news is better. Getting more reporters or news outlets to write about the company amplifies the benefit. That’s what the quantitative evidence says.

So when PR people speak of “creating visibility,” it does matter in the market.

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Posted in Media & public relations, The value of IR | 4 Comments »

‘Macro’ drives ‘micro’

July 1, 2009

The headline of the day, in my book, comes in a post on the Wall Street Journal Real Time Economics blog marking the arrival of July 1:

It’s The Second Half — So Where’s The Recovery?

Investor relations professionals may feel the same ambivalence today, as we enter the back half of the year wondering about macroeconomic trends and seeing the big picture’s influence on our companies’ fundamentals (and stock prices).

Investors are trying awfully hard to be there waiting on the dock when the good ship Recovery pulls in. So the market rallies … when Ford’s sales drop only 11% (the best of the automakers) … when manufacturing shrinks, but less than it has been declining for the past year … when unemployment keeps rising but probably at a slower pace. In a market eager to be hopeful, exuberance seems to come cheaply.

Anyway, the second half has arrived – and  let’s hope recovery really is at hand.

One of the challenges of investor communication is to explain how the business cycle works its way through industry and company-specific performance. We need to offer insight into how our P&Ls are affected by changes in product demand, sales volumes, pricing power, cost of materials and so on – and the timing of these changes within the economic cycle. Part of this is saying which “macro” metrics matter to our businesses – and providing the data for our shareholders.

IR people should be students of the macro environment (among other things). Three good sources on the dismal science are blogs that aggregate and report the daily economic news: Calculated Risk, The Big Picture and WSJ’s Real Time Economics. Following all three, of course, could be too dismal for most of us.

Another challenge for IR is to understand how our companies diverge from the economy as a whole. We must explain actions we’re taking to outperform, smooth the cycles or propel the recovery of our P&Ls beyond the macro trend.

The next couple of quarters promise to be interesting. Happy H2!

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Who’s doing this to our stock?

June 26, 2009

BlueCandlestickGraphAs investor relations people we should always, always be students of the market. We should keep on digging to understand capital markets as a whole – and specific supply-and-demand dynamics of the stocks we are hired to understand.

I like the perspective offered by Tim Quast, managing director of Modern IR, an equity market analysis and consulting firm, in a post called “Did a Market Strand Snap?” in the company’s online Market Structure Map. He describes the market for your company’s stock as three strands braided together:

If the three-strand cord that constitutes your price and volume braids rational investment, speculation and risk-management, which one just snapped? Anyone? Anyone?

To refresh, we at ModernIR say most buying and selling in the markets comes from those three sources. There are real, rational investors deploying capital and taking profits, and portfolio managers adjusting their asset balances and associated hedges to manage risk. Around those, speculators engage in various trading tactics. We believe at least 95% of volume for a given issue ties to one of these threads. Sometimes human traders drive it and other times computers do. The machines dominate today.

So something dramatic happens to your stock. “Who’s doing this?” Is it real investors, who after all are the target of almost all IR activity – and the people CEOs and CFOs like to think about? Is it a subset of managers putting on a particular hedge, which may move your stock because of industry, index membership or some kind of arcane characteristics? Or are you being swept up in a speculative play?

Not easy questions to answer, at least without support from outside sources. But Quast walks through a scenario for narrowing the causes of a big move in your stock, mostly by elimination, and offers good examples of factors to consider. And he says something important about the role of the IR function:

If your stock suffers declines and your bosses and Board members are pacing outside your office, educate them. Explain that investment drives price but a third of the time, with speculators chasing rainbows and portfolio managers modulating risk, behind the balance.

Here’s the clincher: that means two-thirds of the time, it’s somebody else’s fault. … If you have the power to show execs that selling decisions aren’t about you but are due to portfolio risks, well, that’s valuable. And when you use it to set internal expectations and measure external outreach, it is power indeed.

So IR can be more than cultivating relationships, answering phones, going on road shows – not to minimize these core activities. IR can be the place where people come for knowledge of the markets and understanding of your company’s stock.

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