Monthly Archives: April 2014

Member Social with a Twist Notes: Using Social Networks like Twitter for Investment Research

· · Leave a comment

We recently held a member social at Lyons Pub on April 17 where we informally discussed if social networks such as Twitter serve a purpose for investment research and if so how is it used? Here are some of the key points that were gleaned from our discussion.

  • Twitter and other social networks work well if you follow a wide variety of opinions and markets.
    • You should attempt to follow a variety of investment worlds, such as equities, fixed income, alternative investments, and the like.
    • However, larger firms usually are not a good repository for information—it’s overly scripted and regulatory considerations dilutes the voice and therefore the impact.
  • Are social networks a serious part of the due diligence process or is it just a way to delineate short-term trends?
    • It actually does both, but where you often get good information are from the links various posters provide.
    • Others mentioned that it can be used to challenge your investment thesis and keep you from investing in something you will later regret.
  • Sites that do a good job of curating links and information were popular with the group.
  • Twitter and other social networking sites are great for timeliness of information.
    • It works for finding out about a security that is moving strongly, as Twitter usually has the information well before the mainstream press.
    • For example one person found out why a biotech stock was moving because of a publication in a relatively obscure German scientific journal that was referenced on Twitter.
  • Many people in the conversation watched how many followers a person or company has and look at the trend analysis—are they getting more or less followers. However be careful of sponsored sites (i.e. sponsored sites usually get revenue if you “follow” them or visit their site), they are not as useful and their trend analysis is less meaningful.
  • One person thought that it was interesting that more sell-side analysts follow Twitter closely, but often are not followed as much for their opinions themselves.
  • Regulatory issues with Twitter and others?
    • Legally one can talk about general investing issues but not anything specific, like opinions on companies—especially on the sell side. Investment managers need to be very careful to avoid advertising issues with their firms.
    • One could be tempted to use a pseudonym, but firms do check cell phones, computers, etc. Investment managers should assume that all correspondence and communication can be monitored by their compliance department or securities regulators.
    • Can people tweet about their participation as a patient in a clinical trial? This concept is being discussed legally. The concern being that a sponsor of a clinical trial would not want participants leaking information about the trial before the sponsor could publish or announce the results to the entire market or scientific community. Leaks of results could create insider trading issues.
    • The key is knowing if the person is being paid for this information or not
    • Social sites might be difficulty to regulate in practice.
    • Higher level executives usually know when they are in possession of material nonpublic information and know not to tip such information to parties who might trade or tip such information to others who might trade or engage in social media or chatroom commentary. Lower level employees of organizations might not know that they possess material nonpublic information and might not know that they have a duty not to disclose company information on social media sites.                             .
  • One person said there are some that use Twitter as a weapon against companies but many thought that at times it is easy to determine where those tweets are coming from, decreasing their impact.
  • There are even social network sites that have aggregated company estimates from users, such as estimize.com.
  • Someone mentioned that Twitter and other sites would be better for option investors as these sites do a good job in assessing volatility, which could translate into assessing option volatility.

Here’s a list of people and organizations that some follow on Twitter:

Stocktwits, Zerohedge, SeekingAlpha, NotableCalls, and here’s a good site listing interesting Twitter feeds.

 

To Buy or Not To Buy

·

Investment Grade new issue was dominated by bank and finance this week. The primary market saw $26.5 billion in supply, over 50% of which came from financial issuers – and within that, 5 year bank paper was the most popular. USBank, Capital One, Fifth Third Bank, and Suntrust all came to market with 5 year bonds post-earnings. That seemed to put a bit of pressure on financial spreads. Overall, spreads were relatively unchanged all week, but bank names were a touch weaker as accounts were trading positions to make room for supply.

Away from 5 year space, Morgan Stanley had one of the week’s larger transactions, with a $3 billion new issue 10 year bond. It priced at +130, and seemed to be well received, but is now trading a few basis points wide vs new issue levels. Spreads in general gave up some ground on Friday in the face of Russia/Ukraine, heavy supply, and what feels like a real lack of conviction about market direction.

And this brings us to the crux of the matter. Investment Grade credit spreads are trading at their post-crisis tights – still a bit wide compared to pre-crisis levels, but for some very good reasons. We find it hard to support a significant move tighter. On the other hand, spreads remain well-supported by fundamentals, and market appetite has been insatiable. The economy is in solid shape, interest rates are under control, and volatility is low. This period of tight spreads could easily carry on for many months. Going short credit seems like a suicide trade. But it is the dread of something after the spread tightening comes to an end that causes us to raise the question.

Computer Forensics Help Fall Accused Insider Trader

· · Leave a comment

Guest Contributor: Mark S. Enslin

A former Bristol-Myers finance executive pleaded guilty earlier this year to an insider trading charge, admitting to buying stock options in a biotech company that Bristol-Myers was preparing to buy. As part of the plea, the executive agreed to forfeit $311,361 in allegedly illegal profits, and he now faces a maximum of 20 years in prison and $5 million fine when he is sentenced later this year.

This relatively innocuous insider trading case is interesting for at least two reasons. First, it’s a good reminder that insider trading remains a high priority for the SEC and other regulators. In fact, over the past three years, the SEC has filed more insider trading cases than in any three-year period in the agency’s history. Many of these actions involved registered representatives, hedge fund managers, corporate insiders, and other financial professionals who conspired in various forms to trade on non-public information.

The second interesting aspect of this case is what investigators revealed was one of their key pieces of evidence: they were able to trace the fact that the executive had run a series of Internet searches on insider trading detection just prior to some of his trades, including a review of an article entitled “Ways to Avoid Insider Trading.” Technology continues to evolve at an astounding pace, and the effects of that evolution on the securities industry will continue to be significant. When the SEC is able to utilize such technology on the back end to apprehend those who violate the securities laws, it’s only a matter of time before the SEC and other regulators will expect those in supervisory positions to utilize that same technology on the front end to attempt to stop the violations before they occur. Supervision of Internet usage, so called “social media” websites, and other electronic media remains a “hot button” issue and will only continue to grow in importance.

CFAMN Compensation Survey Follow-Up: Buy-Side Analyst

· · Leave a comment

With the 2014 Financial Compensation Survey now open, over the course of the next few weeks we will look back at some of the most highly reported positions from the 2013 survey to provide a snapshot of their compensation breakdown.

We previously highlighted the data for equity portfolio managers. Today we look at buy-side analysts. Detailed analysis breaks down compensation, including base and bonus, desired compensation structure and a compensation comparison for those with and without a CFA charter. Are the results in line with what you expected? Anything striking that jumps out at you?

Social Media Sites and Investing

· · Leave a comment

Twitter and other social media sites clearly have exploded in popularity, being the preferred method of communication for teenagers–even more than talking or sudden random acts of incredible drama. However, are social media sites such as Twitter good for investment research?

Certainly many think so as there are many websites that are specifically geared to the investment community, such as stocktwits.com, tweettrader.net, and SeekingAlpha.com. Additionally investors have used Twitter, Facebook, and other mainstream social media sites for years now. These sites and others have become so ubiquitous that the SEC has OK’d the use of social media sites for disclosure under Reg FD, if companies meet certain guidelines. Often times these social sites get news disseminated faster than traditional news outlets, which add to their appeal. Social media sites are also a great repository for usually anecdotal data on companies, people, events, etc. Therefore mainstream media sources have taken note and incorporated sites such as Twitter into their news services. For instance, last year Bloomberg incorporated tweets into its terminals so investors could see if companies they are interested in are trending strongly on Twitter.

However, is this investable data or just more noise? There are firms that have developed computer algorithms to track social media sites in order to help make investment decisions in real time. Not all have been successful, however.

The bigger question, in my opinion, is how should investors use the unstructured data these sites produce? There are a lot of impactful insights one can glean off of sites like Twitter, but do most investors have the time to peruse yards of data or have the millions of dollars likely needed to develop effective artificial intelligence algorithms? Probably not. Are Twitter and other social media sites something investors should totally ignore? Probably not, and sites like this are not exactly new to investing. Back in the day when people actually wore “The Rachel” haircut in force me and countless others would peruse stock chat boards, such as Yahoo’s, for data nuggets. Was this the primary basis of any of my investment decisions? No, but it did occasionally make me think of a stock differently than I otherwise would have and I continue to use sites like this as part of the due diligence process. This is especially true with small cap companies that have a limited amount of tweets and other data one has to wade through.

If you want to tell us your opinion live, join us at the CFA “Monthly Social with a Twist” this Thursday April 17 where we will be discussing social media and investing in an informal atmosphere. Click on this link for more information if you are interested in joining us.