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July 14 is Bastille Day, and we Americans forever owe the French thanks for the youngster Yves du Motier, called the Marquis de Lafayette; and wily veteran Jean-Baptiste de Vimeur, better known as the Comte de Rochambeau, who played key roles in our Revolutionary War. And if you can say those names at all, let alone without stumbling, we owe you an adult beverage.
Turning to market structure, IR folks and execs, one tidbit on Goldman Sachs. Long-time readers, you know we were writing about their dominance years ago, before it was de rigueur. In the quarter, Goldman generated $10 billion from trading and $736 million from underwriting. This is what you get when you separate research and trading. Is the solution better than the problem that “policy” hoped to solve? Ask yourself the same question about the Federal Reserve, created in 1913 to halt the “money trust” monopoly and market panics. And then pick any gigantic solution designed to solve some problem, and pose again the common-sense query: are we better off?
Anyway, let’s switch to Monday’s trading and why the Dow and broad market measures advanced more than 2%. What we write here is always about making you look cool in the IR chair. And you look cool when you have answers. When you know things other people in your company don’t. And when you can arm your executives with information and insulate them from criticism.
Why the markets goosed themselves Monday is anybody’s guess. But for sure it wasn’t because the terrible jobs report for June drove frenzied buying (we couldn’t resist…sometimes the silliest explanations form headlines). Actually, we do believe we know why. For context, the amount of volume executing on what we call speculative platforms – that is, trading systems that facilitate tactics, not investing – continues to creep ever higher. We also saw fundamental money departing last week at double the rate that it showed up in June (which was a tepid pace anyway).
It’s therefore likely that fundamental money was not the driver. What we do know is that 2010 LEAPS converted on Monday from long-term options to buy and sell indexes, stocks and Exchange Traded Funds (ETFs) before January 2010, to regular options. Now stay with me here – no glazing eyes. There’s to me a stark conclusion that no others have mentioned.
The LEAPS tranche that converted yesterday included all the big “Spiders,” the Standard & Poors Depository Receipts. These are ETFs that divide the S&P into nine sectors. Yup, there are LEAPS on SPDRs – derivatives on derivatives. In addition, four other sector SPDRs converted yesterday: Homebuilder S&P, Retail S&P, Gold, and Mid-cap ETFs.
What’s it mean when options expire and markets throttle up for a day? We think demand for shorter-term options increased, creating a run on ETFs (just a couple dominated, especially the financial-sector ETF, and trading jumped late in the day – often an indicator of leveraged ETF-style action). This is in fact not a good sign. Traders want more leverage, more short-term protection, more ability to gamble without committing resources. They’ve positioned themselves yet more aggressively like Goldman Sachs to profit on markets that move up, down and sideways, rather than by steady investing.
So, expect all the above in the short-term, and over the long-term, greater likelihood of market slippage because investors have reduced long-term hedges in favor of ones with narrow windows. These are the marks of uncertainty, not “green shoots.”
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Our weekly Market Structure Map provides unique insights — free — on trading markets, with an exclusive focus on helping investor-relations professionals keep cool in the IR chair.
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