In the past week, the leaves on the aspens and birches and elms and maples and ornamental plums festooning Reno here at ModernIR HQ have turned all manner of autumn awesome.
Which stands in stark contrast to equity markets last week. We warned of high volatility during options expirations. We were not disappointed, were we. New 2011 LEAPs were added October 13, and stock, exchange-traded-fund, index, treasury, interest-rate and currency options expired from there to Friday afternoon, 10/17. Volatility derivatives expire tomorrow, 10/22, and maybe then we’ll get a better rational read on things.
Important lesson: the bulk of volume around expirations was about managing risk to investment portfolios ranging from ones run by Frank Russell Co., to high-frequency Fox River, Millennium, DE Shaw and Renaissance trading baskets. With historical data not reliable now, it was a wildly inefficient and exploratory endeavor for risk managers that producing vast swings in prices of all manner of financial instruments. This will likely occur next month, too, although expiries fall in one week rather than two, thankfully.
Rational order flow was on the whole very small, except for 10/16 when money marketwide did make an effort at setting some rational prices again. But it was colored by dramatic derivatives price swings. So, it’s crucial, execs and IR professionals, that you recognize that these conditions do not reflect the value of your stock, but rather, the perceived and presumed risk to portfolios and strategies.
Sometimes perceptions and assumptions are entirely wrong, too. For instance, over the past ten trading days, sales of equities by European banks with exposure to Lehman and AIG (and many, many other) credit-default swaps, and equity-shedding by hedge funds that perhaps took derivatives baskets or swaps last month against margin loans for trading contributed to pressure on stocks and created chaos for the modest group of bargain hunters and the large mob of risk managers and speculators acting on equities. And margin capacity has shrunk, thanks ironically to the government’s bailout plan that soaked up most of the available cash capital lately.
But suppose (as some have written already) the CDS risk isn’t as large as first thought when banks and funds were jettisoning equities. That money could come back for bargains between now and the end of October, and the effects of earnings this season could be more pronounced than we’ve come to observe in the age of algorithms and institutional asset-allocation order-management systems.
Translation, IROs: your rational story may rate better than speculation and risk management for the first time since Lehman assumed room temperature in September. This by no means discounts last week’s semi-humorous Clingers, Powders and Footracers. But hey, as the old Anne Murray song goes, we sure could use a bit of good news today, and there just might be some. But November…well, another story.
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."
