Quick Notes from a Conference

Regular readers will notice that I haven’t written any new strategy pieces this week.  (Shame on you if you haven’t!)  I’ve been traveling on business this week to attend the annual Options Industry Conference, where I moderated a panel discussion about volatility as an asset class.  That’s an esoteric topic, and one that will likely get an article of its own in the coming days.  Today, instead, I’ll give a brief recap of some of the many conversations that I’ve had so far.

The key topics of interest to attendees are (1) the ongoing shift to ever-shorter expirations, particularly now that the industry has added sub-weekly single-stock options, (2) the potential expansion of options trading hours to 7:30 to 4:15 ET or beyond, and (3) the explosive growth of prediction markets and the exchanges’ response by proposing to expand their offerings in binary options.

The broad market discussions have a very distinct generational breakdown.  There is MUCH more skepticism among older attendees than younger ones. 

• Folks who’ve been through the global financial crisis (GFC) or the internet bubble lead with questions or comments that express their nervousness that we are at risk of repeating those mistakes.  The huge rally is the type we’ve historically seen only after market bottoms that were brought about by major changes in fiscal or monetary policy.  This one is occurring without fresh fiscal stimulus, amidst higher yields and lower expectations for rate cuts, and of course higher oil.  It is also leaving consumer stocks behind, which raises questions about the sustainability of economic growth.
• Those who came of age post-GFC (meaning 40-ish or younger) have not seen a period where dip buying has failed for a substantial period. Thus, that behavior becomes self-reinforcing.
• Portfolio managers, regardless of age, have to fall on the side of the younger investors.  They can’t run the career risk that underperformance might bring, so they have no choice but to follow the herd, and the bulk of that herd has turned this market into a momentum monster.  Some are buying more stocks; others are using upside calls as FOMO or underperformance insurance.

The vertical move in semis, while quite easily explained by better earnings, also makes many wonder whether the 40%+ rally in SOX in just a few weeks raises the question of whether we were mispriced before, are mispriced now, or some of each.  I say it’s some of each – the earnings and guidance have been very good, but much of the guidance improvement has been for next quarter, not the long term (AMD is an exception).  Remember also that semis are historically quite cyclical.

I just learned a cool fact – current corporate AI budgets are being allocated 93% to IT infrastructure and only 7% to Human + AI Design.  It means that the AI build-out is outpacing our ability to implement this technology properly.  As long as that trend persists, so do the tech rally and the capex boost to GDP.  If that spending mix changes from buying the technology to using it profitably, then we have a problem.