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Next Tuesday is high day for firs and pines affixed to stands in homes across the fruited plain and around the emerald orb (in other words, it's Christmas). We'll be taking a break from ourselves and the Market Structure Map (well, at least one of those) then, which means you get the 2007 retrospective by quarter today.
Aside: for laughs you cannot top humorist Dave Barry's annual rear mirror view (see 2006's at the link below and look for 2007's in January).
Q1 2007. Our first Market Structure Map last January 4 talked about algorithms incorporating real-time headline-reading robots to find trading divergences from norms (also called "alpha"). Oh, and the Boise State vs. Oklahoma State Fiesta football Bowl that still had us shaking our heads that first Tuesday of 2007 just this past week earned the #1 spot in ESPN's top 2007 finishes. But in Q1 as a whole, we featured Regulation National Market System—The SEC's Reg NMS—and its effect on your quest, IROs, to understand your company's share price. On the surface an effort to make the marketplace more fair, Reg NMS thus far has been a boon for "dark pools" and alternative trading systems, exacerbating buyside fixation on short-term returns (ask why and we'll elaborate) and making your IR job to attract investors more exacting. On the other hand, it's forced the exchanges to compete better.
Q2 2007. By June 30 we'd passed another Russell Index rebalancing season. Options-trading relative to rebalances hit jaw-dropping heights. We thought then that traders wanted to power the Dow through 15,000. Boy, was that awhile ago, huh? The lesson for IROs, we noted, was that investor outreach can't offset these imbalances…so maybe you don't want to plan any around index rebalances.
Q3 2007. The big news was the Great Credit Crisis of 2007, which first surfaced in the data July 26, and which continues to plague investment-bank income statements in a fashion similar to the $10 billion writedown at UBS last week (no material effect on bonuses, however). Favorite quote, courtesy of Marcel Rohner, CEO of UBS (Union Bank of Switzerland): "Risk control and finance had the numbers but failed to recognize what they meant." IROs, it's fundamentally affected asset-management, and we believe you must learn to think like them. After all, you are in charge of a core asset, the shareholder base.
Q4 2007. It's not over yet, but the quarter by our estimation reflects intensifying pursuit of short-term returns—despite what one might think. Where a year ago 100/30 funds (leveraging a 30% short position) were mainstream, hundred of billions of dollars are flowing into 130/30 funds—there's even an S&P 500 130/30 index—leveraging not just short positions, but borrowing for bigger long returns. It seems unwise. But we just follow data.
What's ahead in 2008, IROs? More buyside global behavior. More leverage. More derivatives. We'll say, er, more in January.
Dave Barry's (2006) Year in Review
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