Overnight here at ModernIR’s high Sierra Nevada HQ, the stars sparkled and the temperature dropped to 45 degrees Fahrenheit. Back in California, that’s frigidity found only in the dead of winter, which lasts a couple weeks. We are wearing wool socks.
A little humor there, before we pull on our dour masks and face the markets. We’ll cover two things: a) the behavior of money behind price and volume and its meaning for you, IR folks, struggling for answers; and b) how to know if your stock is nearing a rational bottom.
First, no matter the lip service paid to policies, money disfavors intervention. How can we prove that? For one, our internal look at the top ten platforms trading the most issues in our sample pool last week had desks ranging from the Chicago Board Options Exchange (equity trading related to derivatives), to Millenco (Millennium Capital, a high-frequency derivates strategist), to Automated Trading Desk (a Citigroup facility that automatically matches algorithmic volumes in multiple asset categories) to EBX (dark pool trading system owned by Fidelity, Credit Suisse, Citigroup, and Lehman/Merrill). It’s the interaction that bleated about how speculators were in full control. No rational money. Not even much risk management.
Second, European central banks declined to copy US actions as the liquidity disease spread to the continent, choosing instead only to increase cash liquidity. These are smart people too, and they look at data and draw conclusions. And finally, China went so far as to expand margin and shorting opportunities – in effect doing the exact opposite of the US and take the most free-market approach. Is it coincidence that Asian firms in general (tied heavily to China’s Hong Kong market) are a commanding presence around the i-bank bargain bin now?
Now, how can you know your stock’s at a rational bottom, other than the life boats are all full and the sinking ship’s smoke stacks are at water level? Sure, nobody will sidestep the sweep of the economic arm. But when it’s past, look for pricing parity in categories of trading and declining daily dollar volume (average number of daily trades, times average share price) because these indicate when rational investors become selective about issues they’re SELLING. We haven’t gotten to value buying, and won’t, in our opinion, until we fully capitulate and the government stops intervening and lets value buyers assess the value, or lack thereof, of things.
How do you do this, IR folks? Look beyond your major market makers to the second tier and watch for a good mixture of names, not just opaque trading firms or giant primes. This’ll tell you pricing is evening out…and thus, so is the supply/demand equity balance.
And as always, stay tuned here, where we, yes, flap our own lips, but otherwise ignore the endless chatter and fix our gaze squarely on the money.
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."
