Why next week is very important for the bond market
Julian Emanuel, chief equity and derivatives strategist and managing director at BTIG, joins Yahoo Finance to discuss the outlook of the market and Wall Street’s most crowded trades.
Video Transcript
- You're watching "Yahoo Finance Live." We got futures pointing to a lower open on balance this morning. Although, it looks like the Dow futures now are poking into the green. We continue to watch. Or they were poking into the green. I guess not anymore.
We are continuing to watch the fallout from Archegos happen here this morning. And Julian Emanuel is joining us now to walk us through some of the aftershocks, BTIG managing director, chief equity and derivatives strategist. And as you were talking over the break, Julian, you know, you've been in the industry long enough that you lived through LTCM, Long Term Capital Management, and that blow up, which Brian Cheung brought up at the top of the show to illustrate that this is not that. But you know, as we look at the history of various market blowups like this, how do we put it in perspective? How are you thinking about it in perspective?
JULIAN EMANUEL: Well, there is a systemic aspect to it. Although, as you said, it is nothing like LTCM. But what the systemic aspect is is that there's sort of a collective lack of due diligence on the part of a number of the prime brokers involved. Essentially, they seem to have been under collateralized versus the positions.
So from that regard, it's not dissimilar to the idea that going back to the end of January in some of these meme stocks, you had short interest in excess of the available traded float. That's just sort of a cumulative oversight. But when you think about the stresses in the system, they simply aren't there because these are a very concentrated number of stocks that, essentially, have not been sort of, call it, in the public consciousness. It isn't like this happened to one of the FANG names or something like that. But it does point out this notion that, going forward, there is likely to be more regulatory oversight based on what we've seen.
- So you said it's not like it happened to one of the FANG stocks. But could it? Or are they too large and have too little short interest for something like this to happen with them?
JULIAN EMANUEL: It is unlikely that something like that could happen to the FANG stocks. It's simply again because it is they are too large, both in terms of market cap and trading volume and so on. But again, this is one of these things that, in hindsight, there's no question about the fact that there are discussions going on in senior management at all of these shops in terms of how to increase internal oversight of the prime brokerage function. And part of that likely involves a reduction in the leverage that's given to select clients.
- Julian, for the past few days after this has really come to light and these funds blew up, I'm reading about secret meetings among the banks about him taking swap positions that aren't so readily apparent. What's the message to the average investor that's just trying to make a couple bucks buying a few shares in Viacom?
JULIAN EMANUEL: Leverage has been part of the industry for, you know, forever and, certainly, very much an aspect of the industry during the last 30 years of declining interest rates. But as an individual investor, I think it reinforces the idea that you need to understand your risks. And particularly, in some of these stocks that moved up 200%, 300%, 400% over the course of, call it, less than six months, you need to think about taking profits in stocks like that because what we've seen over the last three years and particularly over the last year is that we're in this higher volatility environment. And frankly, nothing moves in a straight line forever. That's part of the story of sort of the FANG stocks cooling off, as it were, the last several months and these old economy stocks, the ones that have gotten sold so heavily over the last week and a half, having those incredible runs until the last week and a half.
- And to sort of flip on over to the volatility that we've been seeing, bond yields again this morning, 1.75%, 1.76%. And that seems to be-- I'm actually a little surprised NASDAQ isn't down more with the yields at those levels. How are you thinking about the interplay here between them? Do you think yields will sustain themselves at these levels? And is that going to spell more trouble coming ahead for the NASDAQ?
JULIAN EMANUEL: The next week or so is very important for the bond market. Because you have this dynamic where the expected month end and quarter end rebalances should favor bonds over stocks. And so we'd expect to see some buying today and tomorrow.
But yet, on the other hand, what the Fed did a week and a half ago by allowing the SLR exemption for big banks to lapse on March the 31st, we think is causing a bit more residual selling. We had a respite for a week or so after the first day or so after the Fed meeting. But now we're seeing the end-- the tail end of that selling. We would expect that, barring an absolute incredible blow out number in the payrolls on Friday, you know, something on the order of a million and a half jobs, that bond yields would likely start to moderate here.
- And, Julian, on that point, we have a lot of-- we also have a legion of sophisticated traders on the Yahoo Finance platform. And all morning long, we've been talking about Wall Street's most crowded trades. How would you go about trading some of those crowded trades now that some of them have, in fact, gotten blown up? What strategies do you play?
JULIAN EMANUEL: Well, look, as having had a career prior as a proprietary trader, monitoring the short interest is really one of the most effective ways of doing that. And frankly, to the credit of, you know, people that trade over social platforms and so on and a lot of the traders that are new to the last year or two, they took full advantage of those types of situations in January. But part of the message of the last week is that both the stocks that can move to the upside and stocks that can move to the downside, you need to be very cognizant of short positions and the concentration with regard to the number of holders in the stock, which is, again, public information.
- So, Julian, just a quick follow up on that then. So you're monitoring the short interest. And you say you can break it either way. As an investor, how do you make the determination of then what to do if you see high interest in a-- high short interest in a particular name?
JULIAN EMANUEL: Well, again, that goes back to understanding your risk and sort of, you know, trading within your discipline limits. Because similar to the situation we have now in the markets overall, we are at leveraged levels, margin debt levels that have been spiking for the last six or seven months and are at all-time highs. That often can be a contrary signal for, call it, over ebullience in the markets and can lead to setbacks.
But timing these things is very, very difficult. We would say that if you're interested in making contrarian plays like that with the VIX down around 20, you can often find cheap, limited risk, theoretically unlimited reward option plays to express those views.
- But as you say, timing these things is never easy. All right, Julian Emanuel, BTIG managing director, chief equity and derivatives strategist, always good to get your insight on these very tricky and complex situations. Appreciate it.