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Investors under the age 30 'haven’t experienced a bear market': Charles Schwab's Randy Frederick

Randy Frederick, Charles Schwab Vice President of Trading and Derivatives joins Yahoo Finance Live to break down how markets are faring as investors await a stimulus deal and guidance from the Federal Reserve.

Video Transcript

JULIE HYMAN: I am taking a look at the airlines this morning because we're seeing some of them under pressure once again. JPMorgan downgrading airline stocks to underweight from overweight, basically saying there are disappearing demand trends. I mean, obviously these stocks are down quite a bit this year already. Talking about United Airlines, JetBlue, Spirit Airlines in particular. UAL, for example, is down already 46% year to date. So interesting here that you would go still further, more pessimistic from an analyst perspective from those levels. So we're going to be continuing to watch the airlines.

Myles, over the past few days, you have been watching a particular story very closely, and once again there are some developments there.

MYLES UDLAND: I mean, last night I'm hoping that some of our viewers were able to not be checking their emails between 5:00 and 6:00 PM Eastern, but Gmail wasn't working again. Second time in two days, second time within, I guess, 36 hours or so.

And look, on the one hand, sure, the internet is very big, and there's been kind of that side story of, you know, massive Russian hacking within the US government that we haven't really talked about that much. I'm guessing they're probably not related.

But I think it's notable, Brian Sozzi, when the premier service from a company that's worth a trillion and a half dollars just doesn't work twice in one day or twice in two days. And I know that people will say, well, should be diversifying your internet portfolio, blah, blah, blah, this, that, and the other, but I like Gmail. It's great. It's free. We use it here on the business side at Yahoo as well, and I think it's just bizarre that it just stopped working for an hour or so twice.

BRIAN SOZZI: Yeah, well, and you really never find out, Myles what in the world and why it happened. They're not actually putting out a press release saying, hey, look at me. Look at me. Our email service is down.

But besides Gmail not working, guys, I'm also working-- I'm also looking at the Tilray-Aphria deal. That broke over the night. It was confirmed in the morning here. Really essentially you're going to see the creation of the largest cannabis company. And there you have the opening bell on Wall Street.

So just going through the slide deck on this one, guys, very focused on expanding into the German medical cannabis market. Also a lot of focus on bringing cannabis beverages to the US and more so in Canada.

And, Julie, we were talking about this in our morning meeting. Look at the return of Hain Celestial founder Erwin Simon. You know, he joined the board of Aphria about a year ago, and now he's going to be leading this combined company after he got-- really, I think he kind of got the boot from the company he founded, which was unfortunate, but he'll be leading this company as CEO.

JULIE HYMAN: Yeah, and he rolled up a lot of different brands at Hain Celestial. That was kind of his playbook. So maybe this is just the beginning. We will see what happens as he is now the head-- going to be the head of the Aphria-Tilray combination.

All right, let's take a look at the markets here as we get underway this morning. Jared Blikre I know is watching things closely. He's noting that the NASDAQ and Russell 2000 are already at record highs. Bitcoin's at a record high as well, Jared, here this morning. So what are you watching?

JARED BLIKRE: Oh, we've got some thirsty cash in search of markets right now. So Apple is coming off of a really nice day, 5% up yesterday, but down just a little bit today, 16 basis points. As you said, NASDAQ composite at a record high. NASDAQ 100 not quite there just yet, but we are seeing Microsoft and Amazon in the green for about a third of a percent.

And just looking at some of the biggest winners and losers, Moderna is a standout to the downside. It's up-- it's off about 7% right now. You can see it's still up about 40% over the trailing month.

But let's take a look at some of these sectors that we're talking about. We got the cannabis sector. Talking about that Aphria deal, we can see that stock is up about 3.76% right now. Tilray is up nearly 20%, recapturing these highs that it had about a month ago.

And looking at the Bitcoin sector, the crypto space here, Bitcoin at a record high, up another 5%, holding above $20,000 for the first time ever. And if you want to take a look at some of the other crypto plays, we've got a lot of green on the screen with these stocks as well. PayPal, Square, and then some of the other derivative plays-- this is a kind of off-the-radar crypto play here, but we've got Marathon Patent Group up about 17%. You can see it's up 233% over the last month.

Let's take a look at some of the more traditional sectors, though. We've got travel largely in the red right now. So we're seeing Carnival, Royal Caribbean down about, let's see, 69, 37 basis points, respectively. United Airlines down about 2.4%. Guys.

JULIE HYMAN: Jared, thank you very much. Appreciate it.

All right, I want to take a look at the equity put-call ratio. That's because that's something that our next guest is watching very closely. That is Randy Frederick. He is Charles Schwab Vice President of Trading and Derivatives. And Randy, in particular, you're looking at the equity open interest put-call ratio at its lowest level going back, what, to April 2009. So when you get that kind of extreme reading, what are we to make of that?

RANDY FREDERICK: Well, what's really unusual about it right now is generally what you have-- what you see is that put-call ratios, whether they're based on open interest or volume, tend to move up and down with the broader market. So as the market gets higher, the put-call ratios tend to increase, which kind of makes some sense because essentially what it means is people are adding hedges so that if there's a downturn, they'll be prepared.

We see a very unusual thing happening now. As you mentioned, the put-call ratio-- the open-interest put-call ratio on equities right now is about the same level as it was one month after the market bottomed back in March of 2009. So again, typically you would have a very low ratio when the market is very low. And if you track the corrections and pullbacks that we had in the last 11 years, you generally see the put-call ratio either at a bottom or close to a bottom-- or I should say at least at a near-term low when you have those dips in the market.

But right now we have something completely opposite going on. The market is a fraction of a percent-- may even be at an all-time high by the end of the day today, and yet we have this ratio at a record-low level. That is a big concern for me because what it tells me is that equity-options traders, which have a large retail component, are exceedingly bullish right now, and they are not prepared and not ready for and will probably get hurt by another downturn. That doesn't mean that it will cause a downturn, but it means that no one is expecting it, and that's usually something to be worried about.

BRIAN SOZZI: And, Randy, to that end, why do you think traders continue to ignore mounting bad news? We had retail sales data out this morning. Wasn't too good. We've had weakness in consumer sentiment numbers. Hasn't been good. Jobs data, hasn't been good. Why do they keep buying into this bad news?

RANDY FREDERICK: Well, I would say there's two key reasons. The first one is that most investors have been handsomely rewarded for buying the dips, at least over the last 10 years or so. Even when we had a very large dip earlier this year which was actually a bear market, those who bought that bear market and bought anywhere near the bottom have been very handsomely rewarded in less than a year. The market's up 50% in just the last nine months. So there has been good results, and people will continue with those patterns until those turn sour, until something goes wrong, until we go into an extended bear market.

And here's the key-- and I'm not predicting that. But here's the other thing is that because it has been 11 years since we've had an extended bear market, anyone under the age of 30 really hasn't lived through that. If you've been an investor in this market and you're under the age of 30, you really have not gone through a bear market. The bear market we had this last spring was an anomaly because it was a month long. The average bear market lasts about 16 months.

If these investors experience that type of a market-- and again, I'm not predicting that-- then I think they will change their tune. But because they have not experienced that, they become excessively bullish. You could use Alan Greenspan's irrational exuberance if you want. And that's a plan that works and works and works until it doesn't any longer. And I don't know when that will be, but they will also get hurt when these small pullbacks occur. But I suspect once they do, they'll probably just buy the dip one more time.

JARED BLIKRE: Hey, Randy. Great to see you. Just thinking about the bond market, another thing that just about anybody under 30 hasn't ever really experienced, at least as an adult, is interest rates-- 10-year at maybe 4% or 5%.

RANDY FREDERICK: Right.

JARED BLIKRE: I think he headed to the Fed today from the FOMC meeting. It might be a placeholder meeting, but what do you think might happen today at 2:00, to 2:30 PM?

RANDY FREDERICK: Yeah, I think you're right. It is a placeholder meeting. I don't think anyone's really expecting any changes in rates certainly. I think what we might get is a slight change in guidance from the Fed, maybe a little bit of a hint that they might be looking at buying some longer-term Treasurys to keep the long end of the curve from-- rates from going too high on the longer end. We have seen rates creep higher. There are plenty of people expecting them to be somewhere in the maybe 1 and 1/4 to 1 and 1/2 range-- percent range sometime early next year.

So the Fed may be hinting at trying to control the curve a little bit to keep it from getting too steep. That's probably about the biggest news we could expect out of them, but we'll kind of have to wait and see.

I don't know that the markets will react a lot. They probably will react right when the news comes out right when the statement is issued. But generally that lasts like a half an hour or even less, sometimes only a few minutes.

JULIE HYMAN: Randy, finally I do want to ask you about Bitcoin, which seems to be sort of going hand in hand with some of the other trends you've been talking about, younger people sort of driving some of the market action here. Still, I mean, it's not insignificant to see it now push up to $20,000. What do you make of that, and do you think we're-- even though Bitcoin doesn't really seem to correlate consistently with anything, do you think if we see a pullback in equities that some of the same factors will also drive Bitcoin maybe down as well?

RANDY FREDERICK: Yeah, it's possible. Bitcoin's a tough one because, again, there's no CEO. There's no board of directors. There's no dividends. There's no revenues. It's kind of like a precious metal in many ways, although it's not been perfectly correlated to gold either, at least not at the moment. It has been in the past, but it hasn't now. Its value is simply derived on what people think its value is.

One of the things I think that has helped Bitcoin a lot recently is that it has received some pretty solid endorsements from some very long-term, very experienced and successful hedge-fund managers and others who have now said that they have positions and that they think it may be worth buying. Those sorts of things I think do help because then it becomes a little bit more mainstream instead of just a fringe investment.

But it is driven a lot also by, again, younger investors. Many of the older investors out there don't even really understand it or how it's done. I think some people have some knowledge of blockchain and how it all works now, but many people are uncomfortable-- people in my demographic are uncomfortable with the idea of transacting in a currency that isn't really controlled by a bank or a central government because if something goes wrong, what do you do?

But I think that's a big driver, but certainly some endorsements and it's become more credible, I guess. And I think that will continue to at least keep it on people's radar for a while.

JULIE HYMAN: Yeah. I mean, I think some of the younger people probably don't understand it either, but that doesn't stop them from buying.

Randy, thank you so much. As always, good to see you. Randy Frederick, Charles Schwab vice president of trading and derivatives, thank you.

RANDY FREDERICK: My pleasure.