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On this episode of On The Tape Activist investors are on the prowl (5:00). Is the market pricing in a “soft landing” (10:00)? What do we make of the bank stocks post-earnings and how does that translate for companies reporting this week ? Is Tesla the most important company reporting earnings this week (24:00)? After the break, Dan and Guy interview Kris Sidial, @Ksidiii on Twitter, of The Ambrus Group (34:55). Kris is the Co-CIO of Ambrus. Before joining Ambrus he was part of the exotic derivatives trading team at Bank of Montreal and the proprietary trading team at Xanthus capital and Chimera Securities. Kris gained an in-depth understanding of volatility trading early on, as the sole junior trader to the CBOE legend, Robert Kanter. Kris is a frequent guest on Bloomberg TV and has been profiled by many financial media publications such as Forbes, Business Insider, Reuters, Nasdaq, and many more.
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Show Transcript:
Dan Nathan: [00:01:21] Welcome to on the tape. I’m Dan Nathan. I am here with my co-host Guy Adami and our special Monday co-host Liz Young EY from SoFi. She’s the head strategist at SoFi. Liz, welcome. [00:01:32][11.4]
Liz Young: [00:01:33] Thank you. Welcome back is what you should say. [00:01:35][2.2]
Dan Nathan: [00:01:36] Welcome back. That’s great. I mean, just correct me on my own podcast. Guy Adami, how you doing here bud, it was kind of a [00:01:40][4.2]
Guy Adami: [00:01:42] I’m strong, I’m feeling so good. EY was out in C what do they call it, the CLA or cal or cal, you’re out in the West Coast back here on the East Coast. My football giants never were in the game Saturday night. Disappointing. But you know what, Dan? As they say, the four best teams are left standing. I’m looking forward to it. But more importantly, i’m looking forward to these Monday conversations with Elizabeth Young. [00:02:05][23.6]
Dan Nathan: [00:02:06] We’re going to cover a lot of ground here today. The market has opened. We are shortly after the opening on Monday here. The Nasdaq is partying. A lot of things going on. There’s some activist action in the Salesforce. I think it’s getting a lot of investors saying, listen, if the big money’s going after these things, maybe we should, too. But we also have a lot of earnings on tap across lots of different sectors. Guy, you and I had the pleasure of sitting down Friday afternoon with Kris Sidial. He is the managing partner and co-founder of the Ambrus Group as a vol fund that employs tail risk strategies. He breaks down what transpired as far as markets relative to the volatility markets in 2022 and how things have changed in 2023. So that’s a great conversation. So stick around for that. Alright guys, let’s just kind of get out of the gate here, man. The Nasdaq is up nearly 8% on the year 8%. It was down, I think at its lows, about 35% last year. Guy, talk to me a little bit about just kind of expectations into earnings season. There’s also kind of this tailwind, I think, of activism where you’re seeing big money go after some of these names I just mentioned Salesforce is the one today. And again, you know, Salesforce is was down, I think, 60, 70% from its all time highs. While that’s not particularly important, we spent some time last year talking about some of the key management departures here. Just as far as the sentiment as it relates to Nasdaq earnings, percent off the highs, all that sort of stuff, valuations, thoughts here because we got Microsoft out of the gate tomorrow, Tuesday after the close. And that’s really going to set the tone for the broader tech earnings. [00:03:34][87.9]
Guy Adami: [00:03:34] Yeah. As we’ve gotten into this year, I mean, this clearly enthusiasm for a lot of these high growth, high valuation tech names that obviously got taken out to the woodshed over the previous 18 months, deservedly so, by the way. And I think also on the back of that, the fact that ten year yields continue to sort of drift lower, I think it’s keep giving people some impetus, some beer muscles, as they say, to get into some of these names, sort of buy first, ask questions later, and we’ll see. I also think there’s a misguided belief out there that, you know, this Federal Reserve is going to pause and then maybe pivot at the back half of this year. I think they’ve made it abundantly clear that although they may pause at some point, rates are going to stay higher for longer, and that’s going to create a bit of a problem for equities. I don’t think, by the way, that we’ve felt at all the impact of the last year’s Fed raising balance sheet reducing, and I think we’re starting to feel it. So I understand what people are looking at. I get it. I think, again, it’s somewhat early in the cycle. I think they’re going to be disappointed. But I see what’s going on here in the first couple of weeks of 2023. [00:04:38][64.1]
Dan Nathan: [00:04:39] Yeah, we want to hit that narrative of kind of the it seems to be consensus now that there’s going to be a soft landing and the probability of recession is declining. Our friend, the macro Alf who has been on our podcast before, that’s Alfonso Peccatiello. He had a great post out over the weekend. We’re going to go through that a little bit. But Liz, I’m curious, you know, like we just mentioned Microsoft and the reporting, you know, after the close and again, you know, here’s a stock that’s basically unchanged on the year. But if I look at my FactSet, you know, my main page here and I’m looking at hundreds of tickers, okay. And I see no shortage of them are up 10, 20, 30%. Now, these are some of the ones that absolutely got massacred last year. We don’t have earnings for a lot of these names. And I think the Guys point I mean, you know, interest rates going higher was one of the major impetuses for valuation contraction started at the end of 2021. It was all of 2022. Fairly relentless. Thoughts on when you see this sort of price action right out of the gate and again, we are not a month into this year and we have an S&P that’s up four and a half percent and the Nasdaq, that’s up nearly 8%. It seems like this might be a hard thing to kind of maintain. At some point, we’re going to have to have a retest of some levels, whether it be at least unchanged. But maybe even again, I know Guy and I I’ve been focused on those October lows, thoughts when you see this sort of sentiment in the new year. [00:05:52][73.1]
Liz Young: [00:05:53] Well, first of all, and I brought my raspy voice there, you know, I said I was in so sounds like I was in Vegas. But Vegas is like my worst nightmare. When you look at what’s happening with rates and then what’s happening in the Nasdaq versus the S&P versus the Dow, like you said, last year, was completely rate driven. And I talked about this on MRKT Call on Thursday. This year is going to be valuation driven. And what I think is happening, you know, the timing of it, first of all, is the Nasdaq fell first and it fell harder and then obviously had a much harder 2022 than the S&P and the Dow did. But you have to also think about the fact that as rates fall, they’re going to probably overshoot, the market’s going to overshoot on the upside and get overly optimistic about some of that stuff. And, you know, I do think that we’re getting maybe a bit ahead of ourselves, but we’re also probably past peak hawkishness in the Fed, right. Past peak hawk commentary. And that’s what some of this is about. So the stuff that got hit the hardest by that hawkish commentary is going to bounce. And look, if you’re down 70%, it probably is going to bounce better than the rest of it. But I don’t think that this is something that is going to last and that we should say, okay, and declare victory. And here we are with this this new theme. [00:07:02][68.9]
Guy Adami: [00:07:02] I don’t think they can get more hawkish than they’ve been and they parade out seemingly somebody new each day to sort of talk that way. But I agree it’s somewhat I think the market has become desensitized to a lot of that rhetoric. And the problem that I think they’re going to face is as the markets go higher, that’s counteracting what they’re trying to do. They don’t want asset prices to go higher, quite frankly. They want them to go the other way. So the higher asset prices go in the form of equities that we’re talking about. I think the more difficult it makes their job. So it’s one of those things where they’ve created this environment and the higher equities goes, the more difficult it gets. And by the way, if the commodity market starts getting back on its horse and you know, not, then we need to get down the crude oil. But OIH those oil services stocks, big cap integrated names continue to do well. Copper has gotten itself off the mat. Base metals have gotten themselves off the mat. Grains have rallied recently. Again, that just makes a difficult job that much more difficult. So I think the equity market to Liz’s point, is really starting to get ahead of itself at these levels. 4000 or so in the S&P as we’re sitting here. [00:08:06][64.3]
Liz Young: [00:08:06] Guy I mean, you’ve seen more cycles than Dan and I combined. [00:08:09][2.4]
Guy Adami: [00:08:13] By the way when you say cycles, you know, I think immediately of like the rinse cycle. I am a master at laundry that’s not for this podcast. But I would tell you if you need anything laundered, I’m your guy. Back to you. [00:08:24][10.7]
Liz Young: [00:08:24] Love laundry. Anyway, you’ve seen all these cycles. What is the activism piece of this tell you? So, for example, I look at if you start to hear things like M&A heating up, number one, the first question I ask is, is it happening for a financial reason or a strategic reason? If it’s happening for financial reasons, not a good sign. What is the activism piece of what’s happening right now tell you. [00:08:44][20.3]
Guy Adami: [00:08:44] I love that question. You would hope that it signals a bit of a bottom here. But to think that these mostly men, but quite frankly, men and women, can time the bottom in terms of when they’re making these activist stakes I think it’s somewhat foolhardy. I understand what they’re looking at, but I also don’t think you can look at it as a timing mechanism. So a lot of people will look at this Salesforce recent activism that we all read about this morning and say, you know, Elliot Group getting behind it. Salesforce has seen the worst. I don’t think it really plays out necessarily that way. I’ll go back and give you a Proctor and Gamble, I don’t know, six or seven years ago when Nelson Peltz announced that he took a stake in Procter and Gamble, he didn’t ring the bell on the bottom. As a matter of fact, in the short term, he rang the bell on the top. So if you think that somehow you can look to activists as a timing mechanism, I think it’s wrong. So to answer your question, I don’t think necessarily it indicates that we’re towards the beginning of something nor towards the end of the something. I think they’re just sort of finding their way in the beginning of the year looking for stocks that they think they can make an impact on and going from there. But if you’re looking at is to trade around it, I think that’s a bit of a fool’s errand. [00:09:52][68.0]
Dan Nathan: [00:09:53] A lot of these firms have been compiling these positions for a while. Right. And they announce them at a certain point because they have to because of the filings when they reach a certain stake or so. I do think that if you put it together with the idea that private equity, to your point, is starting to buy some software companies we’ve seen Thoma Bravos been really active over the last year. They raised a big fund coming into 2022 and they’ve been deploying that capital. They’ve been paying valuations to take companies private that seem probably rich in the public markets right now. The other one I’d say is keep a close eye on when insiders start buying again. We know that that was a big story towards the end of 2021. In 2022, we saw a lot of insiders selling. So I think the combination of activism, the combination of financial buyers, do we see some strategic M&A? And then if insiders start buying, we’re probably out of the woods, at least from a valuation standpoint. But to your point, Liz, and I think it’s important you mention is that a lot of what we saw last year was contraction in valuations because rates going higher. We didn’t really see that some of the biggest companies, let’s say in our markets, they weren’t speaking to a declining demand environment just yet, they were just seeing multiple compression. And I think that’s important. Let’s get to the macro alpha piece. He’s the macro compass and we’ll link to it in the show notes and the title of this piece was Recession or Soft Landing. And it’s interesting because he gives a lot of data here. It just seems the narrative right now is that markets, both the bond market and the stock market, are pricing in a soft landing. Here. And I think this is just kind of important. You know, Guy, you just mentioned that why the Fed governors have been trotted out. We know that they go into a quiet period in front of their Fed one meeting. I just it drives me crazy when I see these headlines. The idea that it’s going to be a surprise that they’re only going 25 basis points at the March meeting. We talk about the CME Fed fund tracker, you know, almost every day on our pods. And it’s pretty accurate about what Fed funds futures are predicting. So like the idea that it’s some surprise that it’s only going to be 25, I mean, we get it. So as it relates to the equity market, he’s saying that the recession probabilities are about 15 to 20%. The soft landing is about 60 to 70%. And then the acceleration of growth is about 15 to 20. Here’s the worst case scenario. The best case scenario, let’s say, or about 20%, the way he’s barbelling this thing. And then the soft landing is like almost a 60% probability. Do you guys think the bond market and the stock market are pricing right now, any of those barbell sort of thing obviously not here [00:12:23][150.0]
Guy Adami: [00:12:24] I don’t think so. I’m not sure the bond market knows what it’s trying to price. I think the bond market and if people that come on air on CNBC and talked about this is one of the most confusing environments they’ve ever seen in terms of interest rates and what the bond market’s been doing. And I got to tell you something, when ten year yields move and we saw this last week down 16 basis points over the course of a couple hours, I mean, I think that still speaks to a bond markets is extraordinarily confused. And I would submit in a moment suggesting I’m right but ten year yields going lower in this environment is not suggestive of a soft landing anything, but it’s suggestive of an economy that continues to deteriorate in the back end with two year yields, in my opinion, probably going to stickier around 4% and sort of trend higher. That speaks to an inflation problem that although probably peaked in June and we’ve said this for quite some time, not probably, you know, more than almost certain at 9.1% prints the highest you’re going to see in a long time. It means that inflation is still persistent and pesky and that’s a conversation we’ve been having. So under that backdrop, I don’t know and I’m not an economist, I don’t understand how one can have a 60% probability of a soft landing. [00:13:30][66.5]
Liz Young: [00:13:31] I’m not a classically trained economist either, but I pretend to play one on TV, so I have so much to say. I listen to this whole thing. I understand his stance in that the bond market isn’t pricing it. So his whole thing about the bond market is that it’s pricing in only 200 basis points of cuts between June 2023 and December 2024. If we end at 5% terminal rate, 200 basis points of cuts only takes us down to 3%. So his point is that the Fed funds rate will never go below neutral. And that’s not what happens in a recession. If you go into a recession, the Fed funds rate goes below neutral. Fair, fair statement. So he’s saying the bond market is not assuming a recession, but there was no mention of the yield curve inversions. There’s no mention of the fact that those are actually signaling quite a bad scenario. And then the equity market, I completely agree the equity market isn’t pricing in a recession, but that’s why I think it’s going to have another drawdown because it has to get there. Right. But I want to do an exercise. You guys tell me what is a soft landing and I’m gonna answer it first. In my opinion, a soft landing is not a recession, right? A soft landing is that GDP growth stays positive. We don’t have a recession. A recession means that we didn’t stick the landing. I don’t care if it’s mild. I don’t care if GDP growth is negative point 8%. That’s not a soft landing. And I think this narrative is like, oh, a soft landing is that we have this kind of mild pullback or we have a contraction in growth. I disagree. I think a soft landing is that we don’t have a contraction at all. And the definitions are different. [00:14:57][86.3]
Dan Nathan: [00:14:57] We haven’t mentioned unemployment yet. You know, we’ve spent some time talking about all these high tech job cuts and it started in the private markets last year. We saw a lot of stuff around crypto and web3. And then over the last couple of weeks, we’ve seen a huge acceleration Salesforce, Google, Amazon, Microsoft. So to me, I think that’s kind of the missing piece of the puzzle here because we’ve been blessed. I want to say this Guy, you know, we get a lot of email, we get a lot of tweets, and we really try to deal with the unemployment part of this in a very sensitive manner you know, when we’re out there talking about it, because we know that these are people’s livelihood. It’s a really sad commentary that we actually have to address this, that the last piece of the puzzle for the Federal Reserve is to cool the jobs market right. At three and a half percent unemployment where we were on the last reading in December that’s a 40 year low. That’s a pre-pandemic low. And it really doesn’t mesh up with a lot of the other things that we’ve seen in the economy. So that’s one thing that they need to see happen. You know, I don’t know if it’s 4%, I don’t know if it’s 5% or whatever. So that’s that. As it relates to GDP, the pre-pandemic average for ten years and GDP growth was about 2.2%. Just think about that. We are literally forever in a low growth environment. And again, this goes back to technology and just we spent some time talking about the A.I. in this chat GPT. I mean, this is just another example of massively deflationary technology finding its way into our economy. So again, a soft landing to me, I don’t really. How about two consecutive negative quarters of growth? The truth is, when we finally know that we have those two consecutive quarters, the markets will have already discounted that. Right. So I guess the question is, is like what is a hard landing? A hard landing is a protracted, you know, economic contraction with high unemployment. The soft landing scenarios are putting to bed that whole theory of stagflation where we’re going to have higher for longer prices. Right. And a low growth environment. And so those arguments have just been kind of wiped out with when you think about where equity markets are, where high yield credit is, where the VIX is, and we’re going to get into more of the VIX with our main man Kris Sidial. You guys will love that conversation. So stick around when we go off the tape here. But to me, I feel like the worst case scenarios are like low probability. They’re like tail risk events right now Guy. [00:17:06][129.3]
Guy Adami: [00:17:06] Soft landing to me is, you know, maybe unemployment ticks up to either side of 4%. There’s no hiccup in the credit markets. The equity markets have bottomed. You know, we saw the bottom in the equity markets in October. You know, maybe we sort of vacillate around 4000 or so. The Fed’s able to reduce their balance sheet with no material impact, and they can basically allow rates to continue at these levels without affecting the underlying economy. To me, that’s a soft landing. I just don’t see. And for the life of me, I don’t see how that can happen in this environment. And I think there’s obviously a hope that that happens. But along the way, something breaks and I think that they’re aware of that as well. I don’t think a possible outcome, by the way, is 5% unemployment, and I don’t think a possible outcome is a recession. I think that is the desired outcome. And I think they’re going to do everything they possibly can to get there because they understand some of the underlying issues that are going on in terms of inflation and how sticky it is. So I’m hard pressed to believe under the guidelines, under the definition I give, how we can get to that soft landing. And everybody seems, well, not everybody, but consensus seems to be sort of grasping and getting their arms around. [00:18:15][68.4]
Dan Nathan: [00:18:15] We’ve also mentioned this, that we’re in the throes of New Year rally here. But if you go back and you look over the last year, going back to, you know, March, April of 2022 than we had the June to August rally in the summer, and then we had that pretty epic mid October to early December rally. I think they average about 15% off of a low. They all were in and around a Fed meeting. They were all in and around earnings season. So let’s just kind of think about what’s going on right here. New Year, new calendar, new money being put to work, new narratives. I think people are just sick of that kind of bear market mentality that they’ve been on. I think the realization. [00:18:53][37.9]
Guy Adami: [00:18:55] I’m interrupting, I apologize. But when you say that people are sick of it, it’s so true when you say that and I can speak. I know, Dan, you probably can as well. I’m not sure if you get the same vitriol we get, but I do response. These are overwhelmingly you guys are way too you know, when are you going to stop being you’re so negative you can’t stand anymore. You’re so negative. I understand that people don’t want to hear the neg. I totally get it. You know, I try to be market agnostic and I don’t want to necessarily hear negative stuff all the time as well, but we’re just trying to, I think, interpret what we see and then spit out our opinions based on that. So to your point though, Dan, there is definitely a fatigue going on around some of the negativity. And maybe to a certain point that becomes self-fulfilling. If people just said, you know, I can’t stand it anymore, I want to be optimistic and they start putting their money where their mouth is. [00:19:46][50.9]
Liz Young: [00:19:47] Hold on so the other thing is, yes, I get the vitriol. I completely do. I get it from all angles. I get it in DMs, I get it in public statements, I get it everywhere. And one of the latest ones was I had gone on CNBC and somebody made a comment on the clip that was posted. Oh, she obviously missed this 500 points in the S&P. Yeah, I did. I missed a 14 day rally. It’s not my job to call a 14 day rally. And if I was trying to tell people to get in the market and get back out 13 days later, what am I doing? I’m chasing my own tail. Right? So that’s not the point. I would never try to do that. And I gladly will miss a 14 day rally because I still believe it wasn’t real and I still believe we’re going to give it back. So if we’re trying to catch that kind of stuff, you know, I’m not the right person to listen to as it is as far as what’s the math that this is the stuff I look at to say, you know, did I miss something? Is there a durable rally here? And then I look at the math and they’re just campy. And I’m a I’ll tell you a couple of things here. So we’re obviously in the throes of earnings season, earnings estimates this year this is bottom line, right? Earnings suggesting three and a half to 4% growth in earnings for 2023. Revenue growth is only supposed to be two and a half to 3%. Mathematically, that means that margins are supposed to expand somehow in an environment where we’re going to keep rates higher for longer. Higher for longer means margins contract. The math just doesn’t math on that. Something’s got to give there in the market’s not pricing that in correctly. The other thing is, and this is what I think is a surprise, could be a surprise curveball that the bond market hasn’t quite digested yet. And this comes from strategics this I’m going to quote what they put out is that this is one of the things that investors maybe don’t know, nearly 50% of all of America’s outstanding sovereign debt matures within the next three years. Yet the weighted average cost of Uncle Sam’s outstanding debt is a mere 1.8%. The cost of three month American paper is currently four and a half percent. So the way that we’re estimating how much our debt is even going to cost us is completely underestimated. Right. And we have to at some point roll that. I think that could be a surprise. [00:21:40][113.3]
Dan Nathan: [00:21:41] It makes the case why ultimately we’re going to see rates come in at some point as soon as the economy does start to weaken. And again, that means inflation’s under control. Unemployment goes up to a certain point. And I guess the point I would just say is about the sentiment of the sort of what we feel from viewers, from listeners kind of push back to try to point out what could go wrong here. We’ve seen this now over the course of the last year in three big instances. Right. And I really do believe that we’re kind of in that mode right now. And I think a lot of people want to say, listen, you know, we’re getting below this is from our friend John Butters over at FactSet. The forward 12 month p e ratio for the S&P 500 of 17 is below the five year average of eight and a half and below the ten year average of 17.2. So if you’re thinking about valuation metrics here, you say that’s fine, but rates are still much higher and that’s a big differential. If you think about the average p e that was predicated on much lower rates over the last five and ten year period. And so again, why earnings this season are really important. We’ve had these big rallies over the course of the last year. Happening now at a time where the Fed is most likely set to pause over the next few months or so. And now what’s being priced for the declines in rates over the next year and a half or so starting mid this year. I mean, that’s going to be a key ingredient to the bull case, I think, for stocks going forward here. I think we’re all in the same camp, though Guy is like, get us back to 3400. Start discounting what the best case scenario is for a soft landing and then we can get a lot more constructive on stocks. I just want to make one point about a sector I know, Liz, you are bullish on. Not at the moment. I think you saw some things in financials earnings that got going and we’re going to see some more stuff on the credit front. We know we have American Express this week. You know, the bank stocks, there were a couple of outliers, but, you know, JPMorgan, after its huge run off its October lows, is trading exactly where it was the day before it reported earnings. You know, so the group in general has gone sideways. And so I don’t love the setup of a rally into earnings at a time where I think the outliers are going to be to the downside. And I think at any excitement about what stocks have done is basically because they’re not as bad as people expected. [00:23:47][126.2]
Liz Young: [00:23:48] How are all of us wrong? How are all of our beautiful statements we make wrong is that if companies had so much time to see this coming that they actually are ready and they’ve cut costs more, maybe more than they needed to, and then things don’t end up in that sort of Armageddon scenario or what a Jamie Dimon call it, an economic hurricane. If it’s not as bad as they prepared for, then there isn’t this big collapse. That’s I think that’s the one way that we’re a that all three of us are wrong. But I think you’re right. I don’t think the right set up for earnings is to rally into it, especially right now in the first quarter. We’re we’re expecting negative earnings growth right the first quarter since 2020. And the financials earnings were kind of all over the place. Right. It really depended on the company. I think that’s probably going to continue to happen, at least for a couple of quarters. But, you know, if you look at earnings and what you can buy in this environment, even though the market doesn’t have a recession baked in, you want to buy stuff that can produce positive results in either scenario. And I still think financials is one of those sectors. [00:24:42][54.1]
Dan Nathan: [00:24:42] One of the reasons why we talk about Tesla a lot a year, maybe 14 months ago it was the fifth largest equity in our stock market, had a $1.2 trillion market cap. There was really no fundamental case to be made at that time. Why it should command $1,000,000,000,000 market cap. And again, we thought this was like the king of the meme stocks guy, right? We thought that it just encapsulated a lot of the speculative frenzy that existed in large parts of the market, in the stock market, but also other markets. And therefore, we started talking about it a whole heck of a lot. Since the start of December, the stock was cut in half at its lows in January. So this was in about a month. The stock went from 200 to 100, down from 400 over a year ago, reporting after the close on Wednesday. Okay. The stock’s up 40% from its lows. Still an important name from a sentiment standpoint, in my opinion. Okay. So like the stock running into it, I don’t care how much is down off of its highs, as our friend Danny Moses likes to say, is this the most important stock reporting this week? And again, we have Microsoft, Boeing, we have American Express, we have Chevron, we have a bunch of other smaller tech names from a sentiment standpoint, how much we’ve rallied into earnings season, what we know from the banks reactions to their earnings. What’s most important to you this week? [00:25:56][73.7]
Guy Adami: [00:25:56] Personally, I don’t think it’s the most important by any stretch imagination. I’m sure the network and a lot of the media outlets will spend a lot of time speaking about Tesla. But I never really thought, in my opinion, the market really viewed Tesla as an earnings story. Maybe this is the quarter that they’ll start. To your point, we’ve gone from 102 to 140 pretty much in a straight line over the last couple of weeks, and we’ve seen other stocks do that as well. And now we’re talking about a company who’s market cap is north of $400 billion again. So personally, I think it’s gotten a little ahead of itself. The company that I think is most important this week, because I think it sort of speaks to a wide range of different things, is Microsoft, which oddly enough, as we sit here, is trading 242. I mentioned that, Dan, because back in June when they reported stock closed that day, that they reported around 256 in the aftermarket on the back of a pretty miserable quarter, the stock was trading 242. They subsequently said that they were not seeing demand destruction along with the broader market. The stock rallied and almost got up to $300. But here we are having traded significantly lower than current levels and significantly higher. But here’s the point that’s interesting. They haven’t talked about demand destruction, given all the layoffs we’ve seen from companies that effectively are clients of Microsoft, I think it’s just a matter of time. And this might be the quarter that they speak exactly about that. And this is the one that I’m watching most closely. [00:27:23][87.1]
Dan Nathan: [00:27:24] This was one of the first mega-cap tech stocks to actually have a negative pre-announcement in 2022. It was the calendar Q2, I think it was late June. And they warned on that FX. And I think it’s really important to remember, like you were talking about margins and you’re going to be really focused on what companies have to say about margins, The cost cutting. We’ve seen a lot of the job cuts ahead of the reports. Okay. But when you think about the US dollar for some of these major U.S. multinationals, you know, it’s trading at levels it has not been at Guy, since June. So the DXY the US dollar index is at 102. It topped out just below 115 in September. And I know that this was on the radar of many, many CFOs at multinationals here. Talk to us a little bit about that, Liz, because, again, I mean, was something that was a massive headwind when these companies reporting their Q2 in the summer or their Q3 in the fall. It’s moderated pretty massively. You know, the US dollar index and that is a huge input, especially now if you’re cutting costs with high value jobs, right? A lot of these job cuts that are happening at these major tech companies, these are engineers, these are kind of white collar jobs. These are not like an Amazon, not a lot of line workers, and they’re readjusting some of the logistics. So is that likely to be like a bit of a cushion for margins as we kind of think about 2023? [00:28:38][74.4]
Liz Young: [00:28:39] You have to split up the sectors into pieces, though. So think about what Microsoft announced they were going to lay off 10,000 by the third quarter, I think was the timing, the timeline of that. Microsoft is a pretty mature company in this space. When the tech layoffs started, there was a lot of conversation about, well, these are younger companies. They they got bloated, right? They invested in order to grow and they don’t know how to cut. And now they’re learning that they have to cut but it’s reactive instead of proactive. Right. I think Microsoft is doing this in a more proactive way. This is also a year where the market is going to reward good stewardship of capital. Right. And good cost controls, especially as we think companies margins are going to be compressed. As far as the Tesla thing, I mean, falling and consumer discretionary, first of all, I made I made a final trade on, I think it was December 1st to sell consumer discretionary. And thanks to Tesla, I looked like a genius that it had nothing to do with Tesla whatsoever. But either way, that had that was not an earnings situation, right? Tesla hasn’t fallen because of earnings. They haven’t fallen because of any of. [00:29:40][61.2]
Dan Nathan: [00:29:40] Well it was a valuation story. I mean [00:29:41][1.2]
Liz Young: [00:29:42] It was valuation, but it was also steward of capital right, it was it was connected to Twitter and there’s all this other stuff that was going on with it. I think in a year like this, especially in the tech sector, you’re going to have to be rewarded for tightening the purse strings, so to speak, in a proactive way. And I think that’s what Microsoft has done. [00:29:59][16.6]
Dan Nathan: [00:29:59] You know, Boeing has had this massive run, this some other industrials. You know, there was a huge rotation in the fall out of Megacap tech into energy and industrials, into staples, into a whole host other that actually kind of got expensive. You know, it’s ironic that people were coming out of tech names on valuation basis and they were moving into some areas that they thought were a bit defensive, but they got really expensive, too. So I’m actually curious to see how some of these industrial names, some of these energy names, chevrons at the end of the week here, thoughts on non-tech earnings right Guy [00:30:32][33.0]
Guy Adami: [00:30:32] In order for Boeing to deserve the valuation that they currently have, they have to grow earnings almost by about 100%. Boeing, believe it or not, has become one of the more expensive stocks out there. And I just don’t see how that’s going to happen again. I understand the run. I talk about free cash flow story. I get it. I get all those things. But right before our very eyes, Boeing’s become extraordinarily expensive. And just to sort of go back quickly to Microsoft, these companies don’t lay people off for the sake of just laying people off, because in order to rehire a lot of these people, I mean, they’re really going to have to probably pay up. It’s a it’s an arduous process. So the question I think you have to ask yourself is what do all these companies see coming that gives them the clarity to have the kind of layoffs that they’re seeing because it just doesn’t all turn on a dime. And that’s the thing that I think we’re going to learn a lot more about over the coming week. I think we have 93 S&P 500 companies this week. We’re going to learn a lot more over the next two. [00:31:33][60.7]
Dan Nathan: [00:31:33] All right. I’m going to give you my sleeper, a name that I want to keep a really close eye on about what they have to say relative to expectations. I want you guys to think about your sleeper, okay that that you have to keep an eye on this week. Mine is Texas Instruments And Guy, you’re going to find this kind of interesting. So this is a name that is not exposed to the smartphone cycles in some of the you know, the PC cycles. A lot of the stuff that we saw a pull forward to there really have a lot of exposure to industrials. So this would be like the perfect early cycle semi play in my opinion. We know that semis in general are early cycle. This is important to me. They’re going to report in a few days here. The stock trades about 23 times 2023 estimates that earnings are expected to be down mid-teens sales, high single digits. So so we’re already expecting to see year over year declines. Okay. Trading above the market multiple, trading above many of its peers. Forget NVIDIA, but throw in Intel and AMD and Micron and a handful other names. I think what this company has to say is going to be really important and I actually think it would probably surprise the upside because estimates are already lower. Guy Do you have something that is under the radar that you think our listeners should focus on this week into earnings? [00:32:45][71.4]
Guy Adami: [00:32:45] So the one that I’m watching, it potentially could be a surprise either way would be American Express which you know topped out I think stock made an all time high, if I’m not mistaken, in February of 2022, somewhere around $200, probably just short of that, currently trading about $154. And the reason why I bring up American Express, if you think about the job cuts that are going on now across a variety of sectors, I mean, it’s effectively American Express as customer and you think about business, travel and those types of things and then layer upon that discovery Financial talking about increasing credit provisions, American Express takes credit risk and you’re going to start to hear more and more about that. So American Express on Friday, I think, could give you a real nice window as to what’s going on with their client. [00:33:31][45.8]
Liz Young: [00:33:32] I’m going to give you a two banger, not specific companies. This is from my world. But the leading economic index came out about an hour ago while we were doing this. Instead of looking at it just as that reading, look at it as the six month annualized percent change. The reason you do that is because it’s pretty predictive of recessions right now and it declined again. Right now, the six month annualized percent change, including today’s reading, is -8.2%. That reading has never gotten below negative three without a recession. So that is screaming, screaming caution. Right. The other thing and this is for next week, but just in case I forget to say it, next Monday is that ISM Services PMI comes out on February 3rd. Okay, everybody watch that, because last month we had the first month of contraction in services PMI. When we have the NBER declare recessions, that recession has almost always, I think maybe always started in the month following a contraction is some services PMI. So watch tha [00:34:29][57.5]
Dan Nathan: [00:34:30] We covered a lot of ground here I think it’s a really big week for the markets here. Again just to recap, we have S&P 4000, we have the ten year at three and a half. We have the VIX just below 20. We have high yield credit doing pretty well. It seems like a pretty decent backdrop. The DXY at 102, as we just mentioned, of what companies have to say is probably going to be the most important thing, whether or not we finally break out of this downtrend that’s been in place in the S&P for a little over a year. All right, Liz Young, thanks for coming in to our studios here. This is a whole heck of a lot of fun, Guy thanks for bringing it on a monday after, you know, Saturday was a difficult night for you. I have to do it now. Now Guy is going to be locked into Rangers. I mean, this is like every market call Liz You better be ready because [00:35:13][43.3]
Guy Adami: [00:35:15] Ranger hockey tonight, Maybe you should. Maybe you should embrace the sport of hockey. And I understand Milwaukee. He currently does not have a professional franchise. My sense is they have dozens of like AHL teams and your local beer league teams, which quite frankly might be fun to go to on some random Thursday night. But you should find yourself an NHL team. I would suggest the Rangers of New York, but whatever you decide why, I think you should run with that. [00:35:41][25.3]
Liz Young: [00:35:41] I think I will. I have no competing interests, so I’m down. [00:35:44][2.6]
Dan Nathan: [00:35:44] All right. Check out Liz. She’ll be on the IC this week. That would be the investment community. Love the halftime report with our good friend Scott Wapner. You’re going to be back with us on Market Call on Thursdays. Check it out on the RiskReversal media YouTube site. That’s where we are broadcasting market call Monday through Thursday at 1 p.m. Eastern from here on out. And just check out our interview with Kris Sidial of the Ambrus Group when we come back. [00:36:09][24.6]
Guy Adami: [00:36:23] Kris Sidial is the co-CEO of the Ambrus Group. Before joining Ambrus, he was part of the exotic derivatives trading team at Bank of Montreal and the proprietary trading team at Zenith Capital and Chimera Securities. Kris gained an in-depth understanding of volatility trading early on as the sole junior traded to the CBOE legend Robert Kanter. Kris is a frequent guest on Bloomberg TV, has been profiled by many financial media publications such as Forbes, Business Insider, Reuters, NASDAQ and many more. Kris, welcome to On the tape. Kris, thank you so much for joining us. Now, you were in Cranes 20 in their 20s, which is impressive. That means 20 people they highlighted in their 20s. Having not remembering my 20s as they were, you know, some four or five decades ago. Speak to me about that, because that’s pretty damn impressive. [00:37:21][57.5]
Kris Sidial: [00:37:21] I mean, I was pretty humbled by it as well. I think a lot of it, it’s a reflection on the path that I’ve had coming to where I got on Wall Street. So that’s pretty humbling. First, I thought it was a joke, believe it or not. Pretty grateful for that. [00:37:33][11.8]
Dan Nathan: [00:37:33] Well, let’s talk about that path, because it’s interesting. You know, when I see somebody Guy and I’ve been on the street for a while and we see that some of these bio that they were exotics derivatives trader, it sounds about as exotic as it gets doesn’t a guy on Wall Street a little bit and you know both of us spending some time on some specialty desks trading some specialty products, we actually realized that these are the smart guys on the street. So people that you hear people say the smart money, you guys are like the smart guys behind it. So talk to us a little bit about how you got into that. You were on some great desks on Wall Street investment banks, but now at Ambrus, you are deploying a bunch of those strategies for investors. We want to get to that, too. But talk to us a little bit about how you got to Wall Street, how you got in the exotic derivatives and then how you pivoted to Ambrus, how you’re employing those for investors rather than for trading for an investment bank. [00:38:18][44.5]
Kris Sidial: [00:38:18] My path to Wall Street is very different. What I would say is that I didn’t have the traditional come out from a target school and get right in. So I actually ended up getting a junior position under the CBO legend Bob Cantor. So Bob ran ETG in the nineties and I was his sole junior trader for his family office in the Hamptons. And that’s really where I started to understand and learn about vol, right? So before that I wasn’t really exposed to volatility. So we really drilled down a lot of core concepts into my head. And from there I went to two different prop desk, Chimera Securities and Santos Capital. On a prop desk you learn a lot about order flow dynamics, trading market microstructure. And then from there I spent three and a half years at a large Canadian investment bank. Most of my time there was on exotic derivatives and listed options desk. And you know, on a desk like that where you’re thinking about all the different paths that these sort of exotics could have, whether you’re trading things like variance swabs, vol swaps, auto call balls, knock in notes, binaries, write all these sort of like, where. [00:39:15][57.0]
Dan Nathan: [00:39:17] Did he lose you? [00:39:17][0.6]
Guy Adami: [00:39:18] He lost me at the Cranes thing, but I’m trying to stay with him. [00:39:20][2.8]
Kris Sidial: [00:39:23] So all these sort of different combinations of structures and pretty much what I started to notice during my time there was that the market microstructure was changing and myself and a couple of my current partners now all believe the same thing, right? So we had this belief that markets were more reflexive now, that there were more options that are being traded. Right. You see a lot of these charts where it’s like zero dt options being traded, you know, weekly options being traded. And pretty much what we said was, well, you know, we could structure a volatility portfolio where if you are faced with some sort of exogenous event or you have this very large return, if not, your goal is to be relatively close to flat. All right. So what this looks like is it serves as a hedge for investors for their overall portfolio. If an investor, let’s just say hypothetically, has a $100 million, they’ll put toward something like $5 million or $10 million. And it’s really a defensive alternative. So that’s really the goal and the focus of what we do at Ambrus. But the roots base back from everything that I’ve learned on these properties and learning under Bob and really cultivating those strategies over time. [00:40:30][66.5]
Guy Adami: [00:40:30] In your career, what do you think has changed? I will tell you and seriousness. So I’ve been doing this now for I think this is my 37th year in the business or thereabouts, and obviously a lot’s changed. But I think in your time a lot has changed and so fast I would imagine the speed with which people get information and how that information is distributed so quickly. That’s got to be something that probably has been very good for your business, but in some ways it’s probably created some headwinds as well. [00:41:01][30.9]
Kris Sidial: [00:41:01] Yeah, absolutely. I think the transition or, you know, the change of information and order flow, it shows itself in the markets every single day, right? There’s times where you’ll take a look at the market and you’ll be like, oh, the S&P is down 2% and you turn your head and the S&P is up 1%. Right? Those are those type of very fast moves that are demonstrating that the micro structure is changing. And, you know, I use this word reflexive because that’s really our belief. And that was one of the reasons why we started this fund, because we said when you look at March of 2020, a lot of people don’t realize that was a byproduct of reflexivity. There was a lot of deleveraging that caused the S&P to go down at the same speed that it went down. Right? It wasn’t that people said, oh, Apple, you know, should be discounted 40% based on fundamentals. Right. It was because people needed to get out because the structure was based so that everybody was holding the same thing and everybody was headed to the exit doors at the same time. So what we said was that over the course of a ten year cycle, you’ll see more of these events. Right. So you guys have been in the business for a long time, right? You know, of the crash of 87. Right. And, you know, we could go on and on and on. But historically, every 5 to 10 years, we’ll have one of these sort of like big blow ups. And what we’re saying is, over the course of that time, you’re more likely to see these sort of big events take place because of the changing micro structure. And you’re seeing it every day, right. Just because the S&P doesn’t go down, you know, 30% in a month doesn’t mean that the systemic risks that exist in it aren’t there. [00:42:30][88.7]
Dan Nathan: [00:42:30] We want to hit some of these other products that maybe people don’t think of as it relates to volatility. A big theme that Guy and Danny have been hitting on for over a year is the volatility in the Treasury bond market. When you think of that. And that’s not something that when we were growing up in the business, a Guy in the eighties and me in the late nineties, that’s not something that most investors had to be focused on too much. But I’m curious to take a step back here. So you were employing some of these strategies that a couple of investment banks, a couple of prop groups and you’re basically using them to make money, right, for the institutions that you work for. What was the impetus to kind of take these strategies and say, we want to create a firm that is basically to employ these strategies on the behalf of investors, right, to help them think about allocations, diversification and risk management. [00:43:14][43.4]
Kris Sidial: [00:43:14] Yeah. So I would say on the investment banking side, the ethos of what drives that trading is very different, right? So not really taking any strategies that were developed there, Right. Because you’re really just trading as a sell side trader, right? So you don’t really trading as a speculator. However, in full transparency, working under Bob and working at those two different properties you learn and and the strategy that you cultivate on desk like that are the strategies that you could look to actually deploy. What we noticed was that when you think of a tail risk fund, the first thing that comes to mind and I’ll explain what a terrorist fund is, it’s very simple. It’s you’re serving as sophisticated insurance. Think about sophisticated insurance for a portfolio. So the same way an individual would have insurance on their car or their watch, their home, you’re in your portfolio so that if the market drops, you’re making this large return that will offset the losses that you have. When you think of tail risk, the first thing that comes to mind is people like, well, you’re going to just bleed for years and years and years and years, right? So we looked at that and we said, okay, it is very suboptimal. If you bleed for years and years and years as a hedge, right? [00:44:19][64.6]
Dan Nathan: [00:44:19] It’s a huge drag on returns, basically. [00:44:21][2.0]
Kris Sidial: [00:44:22] Exactly. [00:44:22][0.0]
Dan Nathan: [00:44:22] But when you’re presenting this to investors, you basically said, yeah, every 5 to 10 years we’re to have an event, right? And they don’t all look like each other. So what sort of percentage of a portfolio are you willing to be a drag on performance to mitigate what percentage of that tail event? And I’m curious if that’s how you think about it. [00:44:41][19.6]
Kris Sidial: [00:44:42] Right. Right. So so this is what I think that we do that’s very different from other tail risk funds. Let’s say you allocate $1,000,000 to a tail risk fund and four years goes by and they don’t return anything and they just bleed, right? So they bleed all the way down to 200,000 and then they return for X, right, during a crash. Well, what does that do you just back to even. Right. So that’s not optimal at all in our view. So what we said was, okay, what if we take these strategies that we understand are exist on the prop side, right? These these smaller capacity constrained strategies but are really core strategies and we use that to offset the bleed. So instead of bleeding, you know, 80% over five years, let’s say you’re flat and then a crash occurs, Well, now you’re compounding at a much higher return rate and now you know you’re returning 4X as opposed to just getting back to break even after five years. Right. Very, very big difference. And I think that that’s a that’s a key thing that we saw when we looked at a lot of the tail risk funds and and a lot of the low volatility funds was that there was not really a fund that stood out that was doing this in an effective way. So we like to believe that we have a bit more of an effective way than doing it, than what the market kind of already had [00:45:52][70.4]
Guy Adami: [00:45:52] At the end of the month we’re going to be at the iConnections conference in Miami. Hopefully, we’re going to see you there as well, Chris. And, you know, it speaks to alternative assets. And what I find really interesting is and you hear this on the network all the time in jargon around the market, the carry trades that people put on. And you know, those to your point earlier, your trades don’t work until they do. I mean, effectively when you’re talking about tail risk involved and exogenous events, their trades work until they don’t. And that’s not meant to be glib. But the point here is they work. But when they don’t work, the giveback is such that you can effectively get back years worth of gains when these carry trades go to shit. Pardon my French. So you are the antithesis, I would imagine, of the carry trade. [00:46:40][47.8]
Kris Sidial: [00:46:41] Yeah, absolutely. When you’re an investor and you’re looking about constructing a portfolio, there’s nothing wrong with these carry trades, right? It’s all a component of sizing. You can have things that are carry trades or quote unquote short volatility, but you need to understand that. You need to have offsetting things in the portfolio that are designed to catch that. Right. And when you think of traditional portfolio construction. A lot of financial advisors are still on the 60 40 bandwagon, which is it’s shocking to me, right, because there are billions and billions of dollars that that are still in this thing. And there’s nothing wrong being at 604 0. But when you’re in a 60 40 with the belief that bonds will serve as a defensive hedge to your equity exposure, that’s wrong. And we saw that this year. [00:47:21][40.7]
Dan Nathan: [00:47:21] You know, you were saying that there’s just the underpinnings of the markets. You’ve seen a lot of changes of late. And so one of the things that the rise of kind of a retail investor. So, you know, Guy asked about information, right. So that’s been democratized. A lot of tools have been democratized. You know, in 2009, how I started doing CNBC, I went on a show. It was just starting out there about options. Right? And it was sponsored by TD Ameritrade. And they wanted to kind of use this program on TV to kind of educate viewers of CNBC, but obviously also their customers or potential customers to how to use options in their portfolio. And I always focused on three main things because spending a time on derivatives, you realize that for the most part, the smartest options traders, market makers, they want to sell premium, right? And so to me, you know, there’s three main usages. One for retail primarily would be yield enhancement, another would be leverage, which seems to be the most popular. Right. And the third would be risk management. And so I’m curious, what has the explosion in retail interest in options done to the markets and how has that changed the markets as it relates to because we’ve seen this remember guy, the period it was August 2020, the melt up in the Nasdaq, right? It was literally driven by, you know, SoftBank. We know now after the fact, we’re just buying, you know, just out of the money calls, anything to get their hands on in every major Nasdaq name. And you remember that guy, Was it 50 Cent? Remember, the guy was buying all those 50 cent VIX calls and it was like that. It just seems like the dynamics have changed. So some of the biggest players that never used to use options from an institutional standpoint have used them to kind of game markets a little bit. And then the explosion of retail interest, it’s created like a bit of a perfect storm, especially at those periods you’re talking about when we see deleveraging or we see these kind of blow off tops in markets. [00:49:05][103.8]
Kris Sidial: [00:49:06] I remember that whole SoftBank thing quite vividly because that was a dynamic where you saw a spot open vol up, right? You saw that correlation break where volatility was up while tech names were rallying to the upside. I think the most important thing when you’re thinking about options currently is the use of leverage and what this means to the financial markets. And I always go back to this example. You know, we were talking about 2008 before we started rolling on this, and 2008 was a very key pivotal point because post 2008 you had Dodd-Frank and Basel, right? So when these regulatory changes were implemented, this added to this quote unquote reflexivity, because what this means is that and I’m sure everybody has heard this term by now, dealer gamma hedging during the whole GameStop thing, we heard we heard a lot about this whole dealer gamma hedging where if an end user buys a call, the desk is now short the call and they need to buy stock and that reflexively drives the price higher. Well, the same thing happens on the downside to puts in the same thing happens on the upside with calls. Right. So think about it like this. If we saw a situation where the Reddit users were buying massive amounts of calls on GameStop and it reflexively drove the price higher. Well, what happens in a situation if you’re faced with some sort of exogenous event and everybody’s buying puts. The same way the derivatives market impacts the underlying, it can have that same sort of effect on the broad market and it could work to the downside as well. So I think the leverage component of what options bring, and especially in a time where you have options that are traded every single day of the week now, right? You have XBX contracts expiring every single day. Now that is really, really crucial when you’re looking at these sort of intraday wild moves that take place because it’s showing you that something is changing. And that is where, again, reflexivity that we talk about is presenting itself more and more in markets. [00:51:04][117.9]
Guy Adami: [00:51:04] It’s interesting as we’re taping this, the VIX is either side of 20, which I can understand yet I’m sort of puzzled by it. And we talk about exogenous events. So obviously have conversations around, you know, what could be that type of event. You know, I’ve posited a number of times that I think potentially China, Taiwan could be that type of event. I think recently this debt ceiling potential crisis could be that and I’ve said it on our podcast and I said it on Fast Money a few times that I don’t think the markets fully comprehending what could transpire there. What are your thoughts around exogenous events and what you guys and gals are looking at? [00:51:40][36.5]
Kris Sidial: [00:51:41] We try not to take macro themes because we’re definitely not macro traders where we look at it as we have a process around trading things and we kind of stick to our process And in order to generate returns on that, you know, we’re more trader focused then as opposed to discretionary taking some sort of view on a macro theme. However, I definitely would say that there are a lot of themes that are presenting itself. 2022 was a year where I feel like every day you woke up and there was some sort of new crazy headline that could potentially drop markets in a big way. To us, the biggest hazard that we see outside of micro structural hazards, like some of the ones that we just spoke about, we think is the knock on effect that private markets will have on public markets. And we saw this briefly with the whole gilt market thing, right, the pension plans in England. And I think there’s a lot of that that actually exists in the US. You know, for over a decade now, a lot of private investors have quote unquote made money on paper right mark to market up 5% every month. Right. These ridiculous insane valuations. And if we are faced with a recessionary environment where people will need liquidity and need cash, I don’t think they’ll be able to get that from private markets the same way that they think. And I think what they’ll do is they’ll sell their public market holdings. [00:52:56][75.2]
Dan Nathan: [00:52:56] Yeah, so that’s a theme that we’ve talked about in the past a little bit too. And just going back to SoftBank in a way, the way that they were trying to mark up their public equities after a crazy volatile 2020, right? So that was kind of in the eighth or ninth month of 2020. I mean, they caused a massive short squeeze. But think about at the time, their most illiquid investments in the private markets that they had been marking up, you know, skipping up $10 billion every year or something, whether it was, you know, all the names that they had been investing in the private markets at some point in 2023, those companies are going to need to be marked lower. So I know that you’re talking about gilts and that’s government bonds in the UK. And there’s a whole host of other assets that we think of away from equity markets that a lot of investors have exposure to. But I guess it’s really important to kind of think about it this way is that if you have these pools of capital that invest in both public and private and the illiquid private stuff has yet to take meaningful marks that mirror what’s going on in the public markets, sooner or later they’re going to sell the stuff that they can sell. And so especially if they have big redemptions and the like. I wanted to kind of talk a little bit about the VIX guy just mentioned it, either side of 20 here, and it’s one that it’s pretty simple for just kind of the layman who follows the markets. You hear people talk about the fear gauge, you know, you hear it on CNBC or Bloomberg or, you know, people like us talk about it a little bit. But last year was kind of interesting. When the VIX got down to the high teens, it was a great opportunity to sell stocks. And when it got up near 30 or above 30, it was really a great opportunity to buy stocks. Is that oversimplifying it? You know, you guys have done a ton of quant work on the VIX and how I think investors look at it, how they use it as an input. What are your general thought process like breaking it down for our listener who here is a lot of people just throw the VIX around, but what does it really mean to you guys? [00:54:45][108.2]
Kris Sidial: [00:54:45] The VIX is one of the most misunderstood products on Wall Street. We wrote a whole paper on how the VIX is changing because of the derivative ecosystem changing as well. That’s on our website. For anybody that wants to take a look at it, it’s important to realize that VIX is a barometer of 30 day implied volatility. People seem to misunderstand that so much. And what this means is that when you look at 2022, it was a year where a lot of investors believed in the slow grind now, not too many people believed that there would be a systemic crash that would persist and the options market reflected that as well. You saw that in the vol pricing, and that’s why VIX never really moved because one month realized volatility I think was up to like 26, 27 or something on the high. So you never really had that big fast crash down that would impact the one month implied vol to really move VIX. So when people are looking at VIX, they have to remember that that’s really a weighted average of one month implied volatility as opposed to, you know, a longer timeframe. And I think that there are tons of other metrics out there that measure volatility outside of the VIX. You know, one of the things that we find that’s so interesting is that you look at VVIX, which is like pretty much VIX on the VIX, so it’s like vol level. And I think about two weeks ago you saw this thing touch new lows from like a five year historical look back, which is insane because what that’s telling you is that the market doesn’t believe that there will be a systemic crash, although there’s such negative sentiment that is persisting right now. So the belief that this slow grind out may continue is outweighing the belief that you’ll see equity markets drop 20% in a month or something like that. [00:56:29][104.3]
Guy Adami: [00:56:30] As you’ve probably come to realize over the last 19, 20 minutes, I’m not the sharpest knife in the drawer and I’m reading some of your research. So please bear with me a second. Is the VIX becoming increasingly, now wait for it, please audience leptokurtic due to the changing derivatives market. Now. No, I didn’t go to fancy schools. I think that word has something to do with bell curves and distribution. I’m not quite sure, but you got to walk me through that piece you guys and gals put out. [00:57:00][30.2]
Kris Sidial: [00:57:01] So leptokurtic Pretty much means fat tailed. So do we believe that the VIX is becoming more fat tailed and fat tail? It doesn’t necessarily mean to one side specifically. We’re more so speaking in relation to both sides. So the interesting thing about VIX this year is we measure something called implied spot bull beta. And really what this means, I know it sounds super complex. It’s not I promise you what this means is, okay, if the S&P moves a certain amount, what should we expect the VIX to move? That’s really what it is in layman’s terms. And we measured this for 2022. We saw one of the lowest relationships that we’ve seen. However, in November, in December of 2021, we saw one of the largest relationships that we’ve seen so clearly, because the derivative ecosystem is changing, what you’re seeing is that this dynamic is changing as well. And our belief is that in the next risk off event where everybody is headed to the exit doors, at the same time, that relationship will show itself. And what we’re saying is that if you go on the street right now and fire a financial advisor and tell them, hey, the VIX to over 100, there’d be no way the VIX, no way the VIX can’t go up much. But what we’re saying is that because the derivative ecosystem is changing, there is a high possibility that the next time you see a really big move in vol, you’ll see the VIX blow out to the higher. [00:58:18][77.1]
Dan Nathan: [00:58:19] Okay and so again, when people talk vol in our universe, right on CNBC or on our podcast, they’re generally talking about equity linked vol. But let’s think about the volatility and again I just kind of references before that we’ve seen in U.S. treasuries that we’ve seen in currencies. I mean the U.S. dollar was the DXY that you know it was trading near 115 just a couple of months ago now is 102. Right. The ten year U.S. Treasury yield was four and a quarter two months ago. Now it’s below three and a half. Right. And we’re seeing it in other commodities. So how do you guys think about vol across different products like that? And I’m assuming that you have models that is kind of weighting all of these risk assets, which is leading you to some of your broader thoughts about what happens on the next tail end [00:59:02][42.8]
Kris Sidial: [00:59:02] When you’re looking at the landscape. You obviously have to assess the way how the bond market volatility will impact equity market volatility as well. Our hedge fund only focuses on equity volatility specifically, however, understanding what’s going on in the rates market, what’s going on in the effects market. That’s that’s really important. And what we saw in 2022 was absolutely this completely different relationship that you’ve seen historically from rates volatility and equity volatility. Usually they would move in tandem. You didn’t see that there was this big dispersion that existed between the two. So I think the important thing for investors when they’re looking at the whole landscape of financial markets is understanding that, okay, rates, volatility is moving, fx volatility is moving and equity volatility is dead. So somebody’s lying. All right. And if this continues, we’ll figure out who’s lying. But for us, yeah, we have certain models that we use to kind of have a good understanding of how the rates market volatility impacts equity market volatility and vice versa. [01:00:04][62.0]
Guy Adami: [01:00:04] Chris, I think would probably really catapulted your business amongst many things. But GameStop, AMC, you know, all the meme stocks, I think a lot of people got into the market saying GameStop is going higher. I’m going to put on a call position, take advantage of the price spikes or conversely, AMC’s going lower. I’m going to buy put positions and directionally they were probably right. But what they found out the hard way is if they don’t understand how options work and premiums that they’re paying, how basically things erode over time, they got themselves smoked. So I think it gave people really introductory lesson to options and options trading, but it lends itself to exactly what you folks are doing there. [01:00:52][47.6]
Kris Sidial: [01:00:52] I think the two big factors in our business was March of 2020. I think a lot of people, allocators and institutional investors, their eyes opened and realized, okay, we have to have something in our portfolio that protects against the disaster. Prior to that, you talk about tail risk. Nobody wanted to hear it, right? 2017 was a year where everybody was just like, If you’re not selling volatility, you’re stupid. The GameStop situation was another one where a lot of people learned the hard way. Even institutional investors, you know, there was there was hedge funds outside of Melvin that got destroyed on trying to partake in the derivatives. And I think the directionality component of it is something that your average investor thinks, right? They’re like, go buy put, the market goes down, you don’t have to make money or vice versa, buy a call. The underlying goes up. I have to make money in understanding volatility in the pricing and some of the second order Greeks and things of that nature are usually laughed at. Right. But there are times where those things become very, very important, right? Where you’re a buyer of a put on something like GameStop, it’s down 15% and the puts are losing money. You’re like, what is going on? Right? Because you didn’t realize that. There was a vol component attached to that. [01:02:03][70.3]
Dan Nathan: [01:02:03] We get these questions all the time. And so I’m just curious, you know, a lot of our listeners are either, you know, fairly sophisticated, self-directed investors. We obviously have a lot of advisors. I know you speak to a lot of very sophisticated investors. A lot of institutions are investing in Ambrus here. But what would you say to like this self-directed retail investor who get valuation, They get individual stock stories, they kind of have a pretty decent risk management framework. They’re not in and out of stocks and they realize the chop can really hurt them, but they want to use options. Right? And we just defined the three ways in which when I speak to retail investors, whether it be on CNBC that I use or what do you think the most common mistake is of self-directed investors using options? [01:02:47][43.7]
Kris Sidial: [01:02:47] I think it’s not having an understanding of what fair value is on some of these things. Right? You go to ten different vol guys and they’ll give you all subjective things on valuation, right? What is rich? What is cheap when you’re looking at an option? But I think the pitfalls come when they try to participate without understanding the intricate details that exist. So usually we’ll try to gravitate towards telling people that they should outsource this. You know, we work with family offices, fund the funds. Individual investors are is because we’ve worked with REs and they’re very good at what they do. However, they’re understanding towards options and the pricing mechanics towards them. They don’t have a good understanding towards this. The same thing like if we wanted to open a division and trade treasuries, I’m not going to go and trade treasuries. I don’t. [01:03:32][44.8]
Dan Nathan: [01:03:32] We call it style shift, right? And so and so when when really smart people start to do things that is kind of outside their lane, you start to question that. And I totally get that. Let’s shift gears for a little bit here. We talked a little bit about what you were seeing in the volatility market in late 2021 and what happened in 2022. And it’s interesting, we’re kind of getting in the meat of Q4 earnings season. We know that implied volatility and individual names kind of gets ramped up because four times a year, every publicly traded company, there’s a date on the calendar where they’re going to speak to the street and they’re going to give guidance or they’re going to talk about their business. And so the uncertainty around that causes market makers in the options market to widen their volatility bands in what they’re willing to sell as far as options are concerned. And then after the fact, we usually see a huge crush. And that’s where I’ve always seen individual investors really disappointed to your point is like they think the stock is going up. The company reports a good quarter and the stock is up. They bought it at the money call and they’re not making any money, you know what I mean? So that’s a really frustrating thing. But talk to us a little bit about how 2022 is this year where the Nasdaq was down about 30%, a little more. The S&P was down about 20%. We haven’t even really officially had a recession yet here. What would you expect if the VIX were to come in? Because Q4 earnings were not as bad as expected and we saw this last year marching to April, June into August and then again October and early December in and around earnings period, we saw the market have these counter trend rallies, big rallies. Right. And that’s when the VIX kind of came down below 20. And those were great opportunities to sell stocks. Are you expecting that sort of pattern to continue in 2023? [01:05:11][98.7]
Kris Sidial: [01:05:12] I don’t think based on the environment that we’re seeing right now, there’s anything that’s making us believe that there’s going to be a dramatic shift. I think what investors may find that maybe more surprising is that if an exogenous event doesn’t present itself right, some sort of weird macro data or something like that, I think you’ll start seeing volatility drop lower and lower and lower. And I think 2022 was the year where a lot of investors were trying to buy volatility and they got smoke. I think a lot of people are saying, well, the VIX four is 20, the VIX, you know, VIX four is 20 and the VIX at 17 would completely throw everybody off guard. I think that’s like the pain trades as some effect. However, when we look back historically, those are some of the open windows that present itself for a true volatility spike happened when everybody’s off guard, right? So what we think is going to happen is a lot of people are going to get tired of the hedging stuff. They’re going to get tired of volatility. Maybe the stuff will underperform and that’s when people may get caught offsides and you have this big leg down and everybody’s like with their hands in the air, it’s really difficult to get a crash when everybody is over hedged but [01:06:20][68.4]
Dan Nathan: [01:06:21] And you think that was a big part of 2022 because again, we had a 35% decline in Q1 of 2020 during the pandemic, and that caught everybody off guard from an all time high. But then months later, we’re back towards those high. In 2022, there was a lot of damage under the surface that was already happening in the stock market, just not in the major indices and the S&P and the Nasdaq. And you think a lot of institutional money, they came in and they were hedged up. And that’s one of the reasons why we had a pretty orderly sell off for most of the year. And we had these really big counter turn rallies when they would kind of take their hedges off. [01:06:56][35.2]
Kris Sidial: [01:06:56] That’s definitely one dynamic as to why Vol reacted the way it did and. And we get this a lot when investors come to us, right? They ask us, what is the next Black swan event? And we’re like, We have no clue. Right. The view is we trade in a certain process and we look to take advantage of certain anomalies that present itself. And if you have something like this in your portfolio over the course of time, it will show the value in itself. It’s the exact same way as insurance. You don’t buy insurance in anticipation your home is going to burn down next week. Right. You’re not trying to time your home burning down, but you buy it and you tuck it away and you say this is going to pay off one day. And that’s how you have to look at something like tail risk or volatility in your portfolio as opposed to I’m going to try to time this because, you know, this guy believes that this is going to happen in England or something like that. You’re trying to do the hardest thing in the world when you’re trying to time a crash and get it down to the T. [01:07:51][54.4]
Guy Adami: [01:07:51] Kris elegantly said what I’ve been trying to say on air for a number of months, if not longer, in terms of why vol hasn’t moved. And I think you’re spot on. And I agree with everything you said in terms of let’s just sort of end it by asking about your client base, about the size of your group, how people can find you, those types of things for people, the audience that might be interested. [01:08:11][19.9]
Kris Sidial: [01:08:11] Yeah, absolutely. So we deal with fund to funds, we deal with RAs, we deal with individual investors, we deal with large allocators. We have three institutional allocators. If anybody wants to reach out, you go to AmbrusGroup.com. feel free to reach out to me on Twitter. Yeah. [01:08:26][14.3]
Dan Nathan: [01:08:26] Where where are you on Twitter. What’s your handle here. I just. I just followed you, but I got to. [01:08:30][3.7]
Kris Sidial: [01:08:30] I’ll follow you back. It’s okay. beware because it’s super weird. I have these like fake imposter bot type things, so they make. [01:08:41][10.8]
Guy Adami: [01:08:41] Like you’ve made it dude. [01:08:42][0.9]
Kris Sidial: [01:08:43] Yeah, I guess that’s one way. Yeah. [01:08:45][2.3]
Dan Nathan: [01:08:45] But Guy, if you look at his pinned tweet from April 2019, live read Eat Sleep trading, nothing else I rather do. This is like the NBA for me. What do you think of that Guy? Is that [01:08:57][11.3]
Guy Adami: [01:08:57] I mean it’s clearly there’s an insinuation there. If I’m reading between the lines, there’s sort of a humblebrag that at one time you had a game, you have a handle and you think you could basically get out there and start draining three years against a lumbering power forward like myself. Is that accurate? [01:09:12][14.9]
Kris Sidial: [01:09:14] No, the truth behind that tweet is I was an okay basketball player in high school. You know, as a young kid, everybody has ambitions and dreams to go to the NBA. Right. But as I grew into myself a lot more over a decade ago, I really fell in love with this game. And truly, you could pay me $5 million more to go do something else and I wouldn’t do it. That the game of speculation, the beautiful game and it’s a beautiful art. I really have an appreciation towards that. [01:09:39][25.7]
Guy Adami: [01:09:39] Well, we’re absolutely fortunate to have you join us. We’re going to be hearing a lot more from you for sure. I look forward to hopefully seeing you at the end of the month down in South Beach. But Kris, thanks for joining Dan and myself. [01:09:49][9.4]
Dan Nathan: [01:09:49] Yeah, thanks, Kris. We can’t wait to have you back. [01:09:51][1.5]
Kris Sidial: [01:09:51] Absolutely. Thank you guys so much. [01:09:51][0.0]
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