Reporting Rhythms

Technical analysis of markets often includes the sense of time, or cycle length. As any technical analysis devotee will tell you, the point is to see and predict the effect of the decisions being made by investors without dwelling on the reasons.

More than one stock analyst has noted that bad news from a company will cause an immediate plunge in stock price, but that there is often an “echo” of that plunge three days later. I may have even seen the theory that margin calls, due in three days, are the reason for the echo.

Then there’s the well-known “window dressing” end-of-quarter effect, where stocks that have been on a bull run get another boost just in time for them to appear in mutual funds’ quarterly statements. On the other side of the coin, losers can feel even more selling pressure, purportedly for the same reason, that fund managers don’t want to show that they held the dogs when their investors see the reports.

I think this can be generalized to all investors, and probably in all sectors.

We certainly saw it in the bond market when the subprime meltdown got its kick-off disaster from the Bear Stearns funds that went bust in July of 2007. On a monthly reporting regimen, those funds could only delay the bad news for a while, so it was mid-July when they ‘fessed up.

Prices of subprime bonds plunged immediately, which basically meant every other fund that had meaningful exposure in the sector was going to report terrible numbers in August. It also meant that other hedge fund that used leverage to own these things was facing margin calls the very next day.

Banks and brokerage firms file monthly reports with their regulators, so they would also react to events in July based on how they would look when reporting in August.

On the other hand, public companies and banks or finance companies that held these bonds (or mortgages intended to be part of new bonds) may not have to report until the end of the quarter. Insurance companies with public disclosure wouldn’t need to show the change in value until reporting the next quarter, as well. On top of that delay, the reporting would be with a lag, typically six weeks or so after the end of the quarter.

Then come the slowest rhythms of all – the endowments and pension funds, and insurance companies filing reports of capital compliance. They tend to report once a year, with several months lag.

Another annual cycle would be due to regular rating agency reviews. That cycle isn’t nearly as strong as it once was, because the rating agencies have responded to threats to their existence, and taken the approach of putting any company they rate on a “ratings watch” if the headlines of the day suggest there might be trouble. Even then, the rating agency can’t complete such a review in less than a month.

Still, we can see that an event that moves an asset’s price actually has a number of “echoes”, ranging from one day to as long as fifteen months.

Along with reporting cycles, we should include decision cycles. What I mean is that such restraints as capital adequacy, ratings, and even margin calls force a decision time line onto managers, and they naturally respond in the time frame of the reporting.

A hedge fund facing a margin call has to decide what to do in one day. They may exit the “offending” position, or they may decide to raise money where it’s easier, in an asset that hasn’t taken a tumble.

The same is true with banks, brokerage firms, insurance companies and endowments, but each will make their decisions on a time line dictated by their own next reporting date.

This all comes to mind because the big college endowments are all reporting now, presumably because they are driven by the universities’ need to budget based on academic years.

When I worked for a Japanese broker-dealer, we had to “get down” on our inventory for September 30 and March 31, with March 31 being the biggie – year end, which determined our bonuses. Besides the need to use lower leverage on those dates, we also eliminated huge debates over fair market value by having everything sold that we possibly could.

We used to joke that every trade decision we or our customers made was really based on YTB, not YTM. That is, we acted based on Yield to Bonus, not Yield to Maturity, and cynically believed the same for our customers. There is quite a bit of truth in that, and we’re getting a real-time lesson very publicly this year that Wall Street still lives for Bonus Day, the day we get “our numbers.”

I’m looking at the trends now, and thinking that the university endowments were getting out of trades this summer that weren’t working because they are reporting now. For them, reporting affects their fund-raising, and their well-heeled contributors simply won’t want to throw their money into an organization that wastes it on bad bets in the market. In many cases, that decision process means locking in losses.

I love the Boston Globe’s quote on the decision to let hedge funds and equity managers watch over the cash reserves: “I think that was an interesting way to handle the grocery money,’’ said Harry R. Lewis, a former Harvard dean …

Keep listening. There are bound to be more echoes.


One Response to Reporting Rhythms

  1. Tom Drake says:

    I’ve always wondered (never heard) why Mohammed El Erian left Harvard Management rather precipitously and returned to PIMCO after buying a home in Cambridge for his family. He was, of course, offered a major promotion above his former position in Newport Beach, but there must have been a “problem” in Cambridge. He has several times mentioned the home in Cambridge which underlined his expectation to stay a while, but nothing else have I seen.

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