First, we’re delighted to announce a gigantic increase in our brain trust here at ModernIR, with the addition of Sean Finnigan to steer operations and client services. Sean brings more than 15 years of operations experience, Irish gregariousness, and serious competence to functions rudderless and adrift under the bonehead formerly responsible for them: Me.
A word on trading last week as July transitioned to August (which means you folks in Gunnison Colo. will need your Parkas and ice axes in about two weeks): Speculative volume declined several points from norms to roughly 20% of order flow, while broker-dealers like Goldman Sachs out-traded the high-frequency shops getting paid by exchanges and market centers for liquidity. That doesn’t happen often, actually.
What’s it mean? Less institutional rotation than what’s typical at month ends, and more short-term equity trading by serious institutional money. This is clear evidence of cash moving from commodities to equities, but without the intention of hanging around long. And it’s indicative to us that “speculators” is too narrow a term to apply to the money behind commodity pricing. It’s everybody, we shudder to say. It’s probably some of your own company’s pension money or your insurance company’s reserve funds running in a structured product provided by BNP Paribas or Morgan Stanley in search of near-term yields. So remember, IROs and execs, mid-month options expirations may usher this transient dough to the door.
Which brings us to prices. Take a dollar out of your pocket (but keep a tight hold, what with economic challenges these days). What’s it worth? I mean, quantify it. You can’t, right? It’s a facsimile for ethereal value defined by the word and the balance sheet of our government. The whole world’s now on what economists call fiat currency systems, where values are a function of, well, fiat, a Medieval Latin word meaning “arbitrary decree.”
You can largely apply the “arbitrary decree” method of stock valuation to equities today. But lest you throw up your hands and head to the public house for pints in which to drown sorrows, there is hope in this mad market scheme. We call it your “Rational Price.” Our simple definition of Rational Price is “a price level at which order flow predicated on fundamental, human analysis will compete with machine-driven trading.”
Once you understand your market structure, you’ll be able to see it (you must know your environment before you can successfully plot where to go and what to do). It’s surprisingly powerful – and probably not the value you think. Rational Price can help you set reasonable internal expectations for swings in price around earnings misses and makes, know what to expect when planning offerings to raise money, and guide you through separating quantitative and speculative pricing from real, sustainable value.
As we’re wont to say: Market Structure. Learn it, love it, live it. It’ll bring you peace of mind.
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."
