Equity AnalysisTestimonialsRequest a DemoEvents & ArticlesMarket Structure Map
Happy New Year! And thank goodness those work-hindering holidays are behind us for another year. Enough sitting around watching chestnuts roast and eggnog steam. We’ve got work to do!
Speaking of steam, trading data revealed a market-wide shift of monies from derivatives to US equities beginning December 29. As we’ve said before, watch rebate trading (serving shares up to market centers for payment) for clues on whether money is fresh to the markets are just rotating from one set of securities to another. Rebate trading abounded in the past five trading days.
Any uptick is good news, and far be it from us to look a gift horse in the mouth (an old aphorism that essentially means “checking the age of a horse you got for free, thus offending the giver”). Still, we want you IR folks and execs to be savvy horse traders when you’re standing around the corral discussing the stock therein.
So what should we expect? Remember that risk-management and speculation are responsible for at least two-thirds of equity trades. Options last finished expiring around December 19. The next set starts lapsing January 15. Volatility swaps tied to the VIX go dormant Jan 22 (right after inauguration – so we might see a bounce that has more to do with swaps than sworn oaths). Since money has shifted from derivatives to equities, we can expect stocks to reap gains through this week, get volatile and close up through Jan 21, then begin falling. The pundits will tell you that the markets are beginning to digest lower upcoming earnings reports. In part, it’ll be true. Yet it’ll mostly reflect how money moves in reaction to risk-exposure, and risk-management ties directly to swap contracts and inversely correlated short-term trading activity. (Note: The fact that we can watch it happen is why we advise clients to do things differently, not the same way they did it before this current crisis).
One simple case in point: go look up the components for your favorite iShares ETF (exchange traded fund). While a good number do possess a mix of equity assets, many others rely on synthetic, privately negotiated swap contracts to approximate a mix of comprising assets. In addition, something on the order of 100 of these funds also have actively traded options. You can see which ones at the link below.
What’s the point? That the markets have not forsworn derivatives, and the use of them to manage risk and deploy money in very short-term increments is vast (and well hidden behind swaps). Synthetic vehicles and derivatives are probably in greater play now than when Lehman shut off the lights and turned its party over to the bankruptcy trustees. Derivatives exchanges had record 2008 results, most of which came from Oct-Dec trading.
While the capital-markets mess that persists points us back to basics, we’ve not in fact returned to them. And why should rules and basics be asserted when the authorities vested with upholding them don't? The US government doesn’t abide by the rules of the Constitution (one tiny example: it says Congress should meet at least once per year, on January 3rd…yet it didn’t take session till today, Jan 6, and it'll remain in session much of the year). Plus, the US treasury has churned out more than $2 trillion in new currency precisely as growth slows and unemployment climbs. Should investors then be expected to buy and sell according to rules that applied to a much smaller sea of currency? Money sets the price of things.
So be prudent and informed, IROs, that you may give accurate answers to management when asked. The money is back for a short time, and let’s be thankful. But the value of things has been brought low and will yet go lower before we’re through.
Go to Market Structure Map index
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.
Subscribe via email | 
RSS feed | See the archive >>
RSS feed