On Wednesday of this week, the number of Obama campaign fliers arriving daily surpassed the rate of leaves falling from our fading high Sierra deciduous trees. (We’ll leave the, er, leaf imagery behind next week.)
TRAVEL: Come out to the Cleveland NIRI luncheon November 6, where we’ll discuss the current crazed state of equity markets. Same in Washington DC Nov 12. See link to calendar below for details on both. Hope to meet you there!
Let’s talk about the lack of correlation between daily financial news and hourly equity trading. Today, among other things, we had word that corporate bond rates continue to rise, hinting at more failures ahead. Mitsubishi, fresh off its Morgan Stanley cash infusion, is now seeking an infusion itself. Fidelity apparently has joined the raft of Wall Street firms cutting staff. The Fed wrote down its Bear Stearns bailout by over $2 billion. And benchmarking yesterday, $2.8 trillion of equity value has gone the way of the dodo since the Fed injected that life-saving $750 billion into the economy.
And the markets gain several hundred points. Huh? How can that be? Schizophrenia? Drugs? Insanity? Obama? Socialism?
Everybody wishes for the ultimate, the answer-to-end-all-answers. There is one, albeit it bare of detail at its most basic level: the power structure of US capital markets has broken down. Market makers aren’t able to make markets as in the past. The big prime brokerages are a-kilter. Risk-management is an oxymoron. More kinds of players than we’ve ever seen are engaged in various kinds of speculation. Value is without a uniform denominator. And since the sellside over the past five years has been in the business of helping asset-managing buysiders transact efficiently and manage risk…the very basis of that relationship has been shattered.
Sure, it’s a by-product of other factors. But IR folks, this is ultimately why news and trading aren’t correlating – unless there’s a straight and un-dotted line. Thus, more often than not, the markets mirror exploitation of gaps and inefficiencies, not measures of actual value. What’s more, it’s global. The SEC has relaxed rules to encourage more international trading in the States. Overseas, most markets are less regulated than US markets. So everything is in question now, ranging from broker-dealer relationships to the data underlying trading. Until the markets can sift fact from fiction, your business fundamentals are not often going to be the determinants of your equity value.
A last pre-election editorial note: all our hardcore problems arose in our most regulated industries – banking, housing, insurance. By contrast, hedge-fund trading, one of the least regulated, is healing itself, shedding its weak elements and buttressing the strong, and surviving far better than the segments getting all that federally redistributive assistance. This is no political statement (both major US parties are equally complicit in this economic demise).
Free markets are self-healing and better with neither inoculation nor vaccination. We’ll leave you with a great Churchill aphorism: “We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
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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