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HE SAID IT

 

HE SAID IT

Courtesy of Grant's Almost Daily

Here’s Berkshire Hathaway vice chairman Charlie Munger, describing the Nasdaq in an interview with Caltech president Thomas Rosenbaum on Monday:  

Nobody knows when bubbles are going to blow-up. . . [but] this has been unbelievable. There has never been anything quite like it. . . It’s been the most dramatic thing that has almost ever happened in the entire world history of finance.

THE MOST DANGEROUS GAME

Enter the unwashed masses. Thanks in part to the proliferation of commission-free trading, Joe- and Jane-Six Pack have carved out a prominent position in the Wall Street food-chain of late, as retail investors accounted for upwards of 25% of trading volume over the summer, Joseph Mecane, head of execution services at Citadel Securities, told Bloomberg TV last week. That compares to about 10% in 2019.  

That influx of greenhorns helped spur the revival of one bygone financial innovation: fractional share trading.  The Wall Street Journal reported Monday that digital custodial firm Apex Clearing Corp. has processed some 17 million fractional trades per month this year, accounting for 47% of total trading volume through the platform. 

In tandem with that retail renaissance comes an explosion in options activity.  Bianco Research noted yesterday that some 1.94 million call options have changed hands using the CBOE’s rolling 22-day average, the most since 2011.  The ratio of 2.37 calls per put over that period is the highest in at least 20 years. 

That exuberance is helping facilitate some doubletake-inducing price moves. The 50-odd private equity-backed companies that have come public this year have achieved total market value increases of 660% (not a typo) on the first day of trading compared to their most recent private market valuations, Bloomberg reported over the weekend.  “There is no doubt that the emergence of a much larger cohort of retail investors-slash-traders [is] moving markets,” commented Art Hogan, chief market strategist at National Securities Corp. “There seems to be an entire subculture of people that sort of follow the same things, talk to each other on social media and drive enthusiasm for individual issues. And sometimes it makes no fundamental sense to anybody.” 

Those retail hordes have company. Bullish sentiment predominates in the December Bank of America fund manager survey, with managers allocating their highest exposure to emerging markets since 2010, while simultaneously maintaining overweight positions in U.S. and European equities with a net 52% of respondents overweight technology. Unsurprisingly, in light of that positioning, managers are now underweight cash for the first time since May 2013 with a 4% holding.  That depleted “dry powder” has historically augured a pullback, as BAML strategists find that back-tested S&P 500 one-month returns average minus 3.2% when cash holdings drop that low. 

While retail whips itself into a frenzy and institutions ratchet up their exposure, other constituencies look for the exits. Citing data from analytics provider The Washington Service, Bloomberg reports today that the proportion of corporate insider purchases to sales fell to 0.29 in December, matching the lowest such ratio in nearly three years.  By contrast, that cohort was increasingly bulled up as markets collapsed in March, as that month saw the heaviest insider buying since 2009. 

Meanwhile, the avatar of retail investors’ current feeding frenzy is now facing unwanted attention.  The Wall Street Journal reports today that the Massachusetts Securities Division’s enforcement arm accused the platform of exposing investors to “unnecessary trading risks,” and “falling far short of the fiduciary standard” requiring brokers to act in the best interest of the customer in providing investment advice.  

According to the complaint, Robinhood permitted one novice punter to place more than 12,700 trades over a six-month period (or 101 trades per business day), while most in-state users who had engaged in options trading had either no experience or limited experience with the derivatives.  Rather than framing its platform as “serious investing with substantial risk,” Robinhood is “presented as some sort of game that you might be able to win,” William Galvin, Secretary of the Commonwealth of Massachusetts, told the Journal.

Then again, you can’t win if you don’t play, as the following Twitter exchange demonstrates:

RECAP DEC. 16

Stocks fluttered slightly higher, with the S&P 500 rising 20 basis points to the cusp of another fresh high and the VIX falling to 22.5 to continue its pullback.  Treasurys held steady for a second day, with the long bond ticking to 1.66%, while fresh 32-month lows on the Dollar Index spurred a gangbusters day for other benchmark assets:  WTI crude rose to near $48 a barrel for the first time since February, gold rallied back to $1,867 an ounce and Bitcoin jumped 7% to a record $20,800, more than double its mid-September levels. 

- Philip Grant

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Pictures via Pixabay. 

 


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