00:00You mentioned the Knicks are back in the finals tonight. They played the Spurs the last time in
00:051999. That was the raging bull market in the triple Q. And I think the Qs were up 78 percent
00:12that year. But the manner in which implied volatility on tech stocks is rising now as the
00:20stocks rise even outdoes that period, which was an epic kind of inflation of prices. And so the
00:28point I'm trying to make here is that it is incredibly unusual and unprecedented the extent
00:34to which these chip stocks, memory stocks are rising so strongly and their implied volatilities
00:42are rising. The stat I want to point out is that the Cosby, which is kind of the center
00:47of the storm, it's got SK Hynix in it, it's got Samsung in it, it's up 135 percent this
00:52year. And two-month options, the implied volatility started the year at 28 percent and is now
00:58at 70 percent. There's absolutely no historical precedent to something that is that protracted,
01:04even bringing in the tech bubble from the late 1990s.
01:09I feel like I need to hedge some of that stuff. Are your clients, are they buying risk or are
01:16they buying kind of insurance here?
01:18Yeah. You know, I always go back to the quote from Stan from Soros. He said, when I see a
01:22bubble
01:23forming, I rush in to buy it, further adding fuel to the fire. Don't short the bubble, buy the bubble
01:28and kind of deal with the consequences later. And I feel like I'm not saying that we're in a bubble.
01:34The earnings absolutely justify this. What we've had is this explosion of earnings across the entire
01:42complex, especially in tech. I think S&P earnings are up 28 percent year over year.
01:46These are incredible numbers, but they are underpinning a feedback loop, which is some
01:53function of psychology. It's some function of the products that are created in the market. I
01:57pay a lot of attention to the leverage ETF complex. There is some wild stuff going on in these leverage
02:03ETFs. What's important here, to Paul's point on hedging, do you develop a strategy or is the Dean
02:09Curtin hedge to not own them? That's a great that's a really interesting question. Do you just
02:16go to cash or do you pay some money for actual insurance? And I think it's a little bit of
02:22a
02:22combination of both. I mean, first, I would say, well, it's impossible not to be long, especially
02:28U.S. markets. We have a very benchmarked system. In other words, you can call yourself an active stock
02:34manager. If I look at your returns and sort of correlate them to the S&P at large, you're not
02:41really deviating that much. The cost to deviation from the benchmark can be can threaten your business,
02:48especially when the high flyers are doing what they are. There is some optionality in cash,
02:53a four percent two year note. That's not bad. That's not a bad place to hide out. And but I
03:00like
03:01actually paying some money for insurance. And with the VIX down here at 16, which, by the way,
03:07is I'm not saying it's incredibly low relative to the daily fluctuations. The VIX is at 16 because
03:14the S&P is not really moving. We're down 20 basis points today. The daily swings are 40, 50 basis
03:21points
03:22at best. That's nothing. So it doesn't really argue for a tremendous amount of hedging in terms
03:29of the daily motion. But I would say those hedging costs are down considerably from late March. And
03:38you've had the opportunity to pay for those hedges very easily just via the gains. You're enjoying so
03:43much gains in the market that to me, the prudent thing to do is just take some chips off the
03:52table by spending a little bit of money on puts and put spreads on the S&P. Are you surprised
03:56the
03:56VIX isn't higher? Because as you mentioned, I guess the daily variations aren't that great. But boy,
04:02it feels crazy out there. Right. It is. And so here's what's going on. And this is, again, really
04:07fascinating. The VIX is not that high because the daily swings are not that high. And yet, as you say,
04:14Paul, there's so much going on. These stocks are moving 15, 20 percent on the upside each day.
04:19Intel, Sandus, Micron. Just take your pick. What's happening is this unprecedented amount
04:25of diversification in the index, zigging and zagging. And there's a great function, a little
04:32plug for Bloomberg, VCA, the VCA function. You get all your information on implied volatility.
04:37I'm on that command every day. And it'll tell you that the anticipated correlation of stocks in
04:44the S&P over the next month by way of option prices is six percent. There's never been anything
04:50like this. So even though the stocks are moving, there are so much diversification that it's muting
04:58the overall level of S&P movements. And I think we just have to prepare for the eventuality of a
05:06macro shock that moves everything at once. We had a little bit of that in the oil shock. And I
05:10just
05:10think the market's giving you a chance to hedge that again. I want you to talk to the people
05:15listening to Bloomberg Money this Friday. They don't know alpha from beta. They don't know hedging.
05:21They don't know one month this, three month that. How do they mentally hedge a conservative portfolio,
05:29a retirement plan? Just close your eyes and hope. Well, I think there's the old saying,
05:36timing in the market versus time in the market. You want to be in the market over long periods of
05:42time. That's when compounding of returns really works. So you just don't want to get yourself
05:48trading in and out. I think it's proven to be largely unsuccessful, the ability to time the market.
05:54You want to be risk aware. You also want to understand that this bedrock of institutional
06:00portfolios, 60-40, right? 60 stocks, 40 bonds. That just doesn't work the same way as it used to.
06:08Even as I'm telling you that the correlation across the stock market, these stocks are very
06:13uncorrelated. The correlation between the stock market and the bond market is very high.
06:17And it's very much linked to oil. Oil is throwing a wrench in so many efforts at diversifying your
06:24portfolio because everything is linked to oil. Inflation expectations, the path of interest rates,
06:29and so forth. So from a diversification standpoint, 60-40 doesn't work as well. So you have to
06:36just recognize that. And again, that to me argues a little bit more for being
06:43not fully invested right now. And again, I think that's some combination of just having some cash on
06:48the sidelines, which relative to a decade ago when there was a 0% yield on cash, now you get
06:534%.
06:54That's not bad.
06:55Dean, we're going to get kicking off tomorrow, as has been reported, SpaceX IPO.
07:01And then we're going to have presumably Anthropik and OpenAI behind a gajillion dollar IPOs.
07:07Major impacts on the indexes. What's your understanding of how the indexes are going to
07:12deal with these companies?
07:13Right. So I know that the NASDAQ is kind of fast tracking
07:18the SpaceX IPO, trying to make room for it. There's a lot of game theory around what the
07:25indexes will have to do, where that supply comes from, where the capital comes from.
07:28What do you think they'll do?
07:29You know, I just, I honestly, I can't really say for sure. I think it's hard to,
07:34it's hard to know. I think the SpaceX one, at least as I understand it, you know,
07:38this valuation is so high. I can say that they're going to list options two days after
07:44the IPO, which is really fast. And I think you're going to have a trillion and a half
07:49dollar company with options that have an implied volatility of a hundred. And that's crazy. It just
07:55speaks to, and Anthropik and OpenAI are going to be similarly incredibly volatile companies with
08:02incredibly high market cap.
08:03So when Sweeney gets his 8,000 shares, this puppy pops at what, 175?
08:08Yeah.
08:08Or 135 is the chance, whatever it is. They do the options two days later.
08:14The stock, if the bid goes down and somebody steps in because there's retail enthusiasm or
08:21whatever, how do you play that in the option market?
08:24Right. So again, I'm, what I'm saying is that the uncertainty around where this could go. So you
08:29could get a, there's just not enough supply and the indexers are forced to do what they have to do,
08:35which is being price agnostic and buying that could lead to significant rises in the share price.
08:41And yet the valuation seems so high, and I've done enough reading on it to think that people are
08:46skeptical of the valuation holding, that it could go also down a lot. And that's where you're going
08:50to get this very high volatility level. You could easily see, and perhaps Paul, you're one of them,
08:57that folks are looking at the incredible returns from having been a pre-IPO investor and saying,
09:02you know what, let me take my money if I can. There could be a lot of that. It's just
09:08going to be
09:09extremely volatile. And I think the big picture is that SpaceX, Anthropic, OpenAI, it's a new breed of
09:17company. And these are trillion dollar companies with incredibly volatile daily swings. And again, I think
09:25back to the retail investor, you got to know that today's S&P is just not the S&P of
09:30a decade ago or 20
09:31years ago. The components are just much more volatile and you have to be careful.
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