11 Dec A QUIET DAY
It was a relatively quiet day as prospects for a stimulus deal remained elusive while COVID cases increases. The NASDAQ closed nominally higher and the Dow nominally lower. Treasuries were essentially unchanged. Oil topped $50 for the first time since March, an incredible turnaround few predicted would occur this soon.
The reason for the unexpected turn around…” robust” Asian demand and reduced capital spending that has perhaps created an environment of “tight supplies” early in 2021.
The mania in technology-based IPOs continued with many drawing analogies to the dot.com era of twenty years ago. The capitalization of recent IPOs far exceeds the total capitalization of the leaders in their respected industries, an environment which at best suggests many years of future revenues and earnings have already been fully discounted. Moreover, according to Bloomberg 80% of the technology firms that went public in 2020 are not making money, a level only nominally exceeded in 2000.
Speaking of mania, Bloomberg confirmed suspicions that retail investors are largely behind the shift in how options are being used, which has helped considerably helped the stock market recovery since March.
Options are traditionally a hedging tool but Bloomberg definitively states that options are used more for speculative bets by retail investors on rising share prices, especially in the megacapitalized and high dollar securities.
Oppenheimer came to similar conclusions as it wrote “small lot call options being bought have a shorter duration, thus supporting the view that retail traders are now playing more significant role in the options market.”
It is widely accepted when there is a spike in call options it creates incremental demand for shares from the options dealers who move to hedge their positions by buying shares of the underlying stocks, creating an unsustainable feedback loop that in time will collapse.
The question is when and to what degree?
Changing topics, late yesterday and as widely expected the FDA granted emergency approval for a COVID vaccine. Will there be the proverbial “buy on rumor and sell on fact” environment unfold?
What will happen today?
Last night the foreign markets were down. London was down 0.95%, Paris down 1.0% and Frankfurt down 1,65%. China was down 0.77%, Japan down 0.39% and Hang Sang up 0.36%.
The Dow should open moderately lower on stimulus impasse. The 10-year is up 5/32 to yield 0.90%.