Tuesday, February 23, 2021

Quick take from our research thread... And a bit more on this morning's action...

This morning I copied and pasted into our internal research thread a blurb that mentioned a just-placed $30 million 3-day bet on Tesla call options with a strike price of $700...

Here was Nick's response:

"Crazy that a mega-cap stock (TSLA) can have 15% (over $100B) swings in 1 hour on no news, and doesn't seem out of the ordinary. Definitely not retail."

Here's my response to Nick's response:

"Yup... we're seeing huge efforts to hold up a giant house of cards... a legitimate play at these levels would simply have whales coming in long the stock itself... This insane options action, attempting to spark short-term gamma hedging -- like all the emotion over bitcoin -- is essentially the expression of one overriding market emotion right here; most vividly illustrated by the Wall Street Bets/GME, etc., phenomenon... Again, it's one basic emotion expressed in many corners of the market..."

Now, "house of cards" (while I was specifically referring to Tesla, one can make a case about stocks in the aggregate) notwithstanding, the stock market has tremendous, albeit largely artificial, support beneath it. 

This morning was a perfect example:

Stocks, across the board, were selling off bigly when J. Powell -- in day 1 of his semi-annual congressional address -- essentially talked the major averages back into the green. To do so he had to talk down inflation fears, while promising that wild horses couldn't drag the Fed away from ultra-loose monetary policy.

Note: The bond market ain't totally buying it, by the way... So don't hold your breath...

10-year treasury yield today:

Today's action aside, the thing is, a once-unfathomable fiscal spend is going to hit the economy this year. Couple that with the printing necessary to support such largesse and we may very well find that it's more difficult to talk down rising inflation expectations (and interest rates) than "the market" might otherwise think...

Here, one more time, is my take on where the Fed will ultimately have to go, from last week's main message:

"...the question: Will the Fed allow markets to collapse under the weight of rising yields, or will it step in with aggressive yield curve control and, in the process, push real rates (nominal yield minus inflation) deeply below zero? Which would involve either printing yet more money with which to buy bonds, targeting the long-end of the yield curve, or selling the short-end and buying the long-end (Bernanke’s “operation twist”), or both.

Make no mistake, given the systemic risk of rising nominal yields, they have literally no choice but to do one or the other, or both."

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