First, a tip of hats to Jay Davis, head of IR at Macquarie Capital Funds, who wrote us after our Market Structure Map two weeks ago:
"…Rather than developing bony fingers, I might argue that, in addition to having the answers when necessary, the IR guy could add value by looking inward and helping subsidiary/divisional or other personnel understand and appreciate the drivers of value (as perceived by investors), improving communications with line-staff/customers, and refining presentation skills and materials among internal audiences. Take what we already know and do and utilize it in a way that will help avoid emaciated digits and flattened foreheads...."
Not only did Jay outwit our wittiness (no big challenge for Jay, we realize), but he offers good advice to boot.
Speaking of good…it's good to be shed of January. We warned in December that January would end dismally. Still, on a positive note, it ended.
Which brings us to month-end transitions. Window-dressing at the ends of months isn't new. Funds have long measured and been measured in monthly increments. Persons and computer programs responsible for performance size up risks, rewards, and costs and try to do what maximizes the good things and minimizes the bad things. If stocks have gained, there's likely to be profit-taking. In strong markets, they might allocate more money to bargains, or to issues with relative strength. In bad markets, they'll isolate for least risk and best transaction cost.
But like other formerly routine events, your month-end transition isn't what it used to be. Program trading seems to run no more than four or five trading days now. Nearly every action in an equity market is accompanied by an offsetting reaction in some other kind of market, such as bonds or derivatives, designed to reduce risk and produce yield. Thus, how money moved in the first part of the month and at mid-month around options expirations bears on month-end transitions. In January this year, money moved into equities, then into leveraged positions, then out of equities, essentially in thirds.
We've noted before that three forces drive daily price and volume: speculation, risk-management, and rational thought, which respectively mean "buying and selling predicated on trading tactics, not investing strategies;" "volume driven by portfolio decisions rather than business value;" and "human decision-making for investment purposes." All three generally manifest themselves in revealing fashion in the final three trading days of a given month.
An interesting supporting point: The Financial News (a Wall Street Journal publication) of London noted today that short volumes have hit 52-week lows. They attribute it to declining fund hedging. Studying data, we see that shorting guards against risk but lacks acceptable contemporary risk-return ratios for yields. Futures and other forms of derivatives mixed with equity-trading tactics is the new short-selling for 2009 and beyond. So take care when using your short ratio as a read on investor sentiment. Far better to understand the desks that drive various forms of speculation, including high-frequency trading (many times per second), rebate trading (selling shares on market centers for pay) and arbitrage (engaging in two or more actions simultaneously to game spreads).
These tell you so much more about what investors think and how money is ebbing and flowing around your equity price – and often more explicitly at month-ends. We observe that big asset-allocation money shuffles and switches chairs to manage risk. Fundamental investors still take profits and buy bargains, but in smaller increments that often get gamed by speculators. And these speculators – such a huge force now, as we noted last week – shed light on whether new money is coming, old money is leaving, or if program strategies are changing are just shifting gears.
Two rules of thumb: First, don't conclude that trading in the last three days of the month is about your business. And second, if your shares have done well in the five days before month-end transition commences, call value investors because they might have buying opportunities.
Tip: read the link below on transition-management and how the sellside supports the buyside.
About transition-management at JP Morgan
Margaret E. Wyrwas - Knight Capital Group, Inc. (Nasdaq: NITE)
Senior Managing Director, Corporate Communications & Investor Relations
Equity Analysis™ subscriber since March 2007
"In global markets driven by automation, changing market structure regulation and dynamic investment objectives, today's investor relations professionals require new data points in order to remain relevant and add value in their company's quest to reduce its cost of capital."
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