What investors can learn from strong bank earnings
Steve Sosnick, Interactive Brokers chief strategist, joins Yahoo Finance to discuss market volatility, bank earnings, and cryptocurrency.
Video transcript
MYLES UDLAND: The Dow, the S&P coming off of record closes, and set for gains at the open. Let's stay on the markets and talk about everything that's been happening this week, and some trends to watch going forward. Joining us now is Steve Sosnick, he is the chief strategist over at Interactive Broker. Steve, always great to talk with you. Let's start with something that I know is near and dear to your heart, and that's the VIX. We have really started to see some of the steam come out of the vol index. We're now kind of solidly below 20. How are you seeing that trade, and how does it play into the overall set up for market?
STEVE SOSNICK: Well, good morning, Myles. What we've seen is, I guess, to be expected somewhat. We've gotten back into one of these patterns where we just seemingly go up every day on relatively light volume. That is not something that bodes well for VIX. Traders who trade volatility like to see a little more volatility than that.
And what's fascinating to me is, the biggest reason for the decline in VIX is really a lack of hedging activity. To get a bit more-- what we all like to call the skew, and that's basically, if you plot all the implied volatilities versus the moneyness, out of money, into money. We've seen the biggest declines in out of the money puts, meaning that people just don't want to hedge, and right now, I guess if you haven't been hedging, it hasn't hurt you for the most part, because we've been up pretty steadily.
What's very interesting also is, we're not seeing any declines, really, in out of the money calls, despite the fact that volume in those calls has tended to ease off quite a bit. I think that the memory that writers and market makers have is still there, and realize that we weren't charging enough for some of these calls, let's keep our offers relatively high, and what volume is there seems to be still buying them.
So it's calmed down, I think it's to be expected, although we're starting to get into an era of complacency, potentially, but I don't see it there yet.
BRIAN SOZZI: Steve, we got some pretty-- we have gotten some pretty big earnings beats this week from the banks to kick off earnings season, but the stocks haven't done much. If anything, in some cases, they have sold off. How big a red flag is that for you, from a trading perspective?
STEVE SOSNICK: Well, Brian, in this case, actually, zero. I was a market maker in bank stocks, bank stock options for the better part of my career. And there was one more or less truism, and that was that banks rarely blew up higher after earnings. It took a quarter, like you saw from Goldman Sachs, where they hit literally on all cylinders to get that stock moving.
Otherwise, the problem with the banks is that the analyst crowd tends to be a bit fussy. I'll blame it on them. As a trader, it always bothered me that trading results more or less get pushed aside. Oh, you guys made however much money trading this month? Yeah, try doing that again next quarter. So that doesn't really count. You tend to see that over time.
Plus, in a quarter like this, where you had big expectations built in, I think you would have had to have been fairly crazy not to think that they would be some good results. I think that's partially why you also didn't see much of a reaction.
To me, the most interesting reaction was Wells Fargo, which had its-- that one actually finally rallied for the first time in ages on earnings. So I'm not reading too much into it. The banks always go first, but the banks, I found, can be a pretty weird bellwether, and I don't like to read too much into earnings season based on what we see in the first three days of bank earnings.
MYLES UDLAND: We'll leave the conversation for whether trading or asset management is quote unquote real banking for another time, Steve. Let's talk a little bit about crypto, of course, flavor of the year, flavor of our lives, it seems. Coinbase comes public this weekend, and I'm just curious how you're thinking about what that does to the crypto market in the context of some of these assets getting a larger slice of the pie in traditional, institutional type applications?
STEVE SOSNICK: Well, I think Coinbase listing its stock doesn't really change any of that. I think if you were inclined to trade crypto, you would have done so already. I got an email yesterday from PayPal saying, hey, you could buy crypto in your PayPal account. So there's ways to do it. I just think Coinbase is doing a great job right now at monetizing that.
One thing that does kind of raise an interesting little question is by revealing how much they actually make per transaction, does that invite competition? Is that a case sometimes of being careful what you wish for? But I think, my thing about Coinbase is, it sort of fully legitimizes, I guess, going public, sort of fully legitimizes crypto as a legitimate asset. And when you think about it, it was really-- had a very sketchy beginning, sort of something only done by weird computer geeks, and then adopted by people trading illicit stuff on the dark web and using that as your means of payment. And now we've really come full circle in terms of adoption.
I found the biggest irony was that it went public and became fully legitimate on the day that the most legitimate guy, turned sociopathic criminal, died. So I think that was an interesting coincidence. But I think crypto, it's here to stay. Is it here to stay at $60,000 a coin? Well, that's a different story. But I think it's here.
BRIAN SOZZI: Steve, is it inevitable that trading fees goes to zero and Coinbase gets hit?
STEVE SOSNICK: I'll refrain from calling it in terms of the stock price, but let me just say, yes, I think the valuation of Coinbase, putting it on a par with some of the biggest exchanges, CME and things of that nature, ICE, in terms of market cap, is because of two factors.
One is because people are projecting all kinds of crazy stuff onto crypto. I don't necessarily see that, but they really do, their exchange fees are enormous compared to the other exchanges. Their volume, of course, is a minor fraction of that. And what happens in these situations a lot of times is if there's a business that's spectacularly profitable, that can be replicated, once you've gone public, you've given your competitors a roadmap for how to replicate your results, to the extent that there are competitors who can beat Coinbase at their own game. I'm not enough of an expert in that part of the mechanics of crypto market to say that, but that would, to me, be the biggest risk, is actually that they become a victim of their own success by going public and releasing results.
MYLES UDLAND: And Steve, finally, let's talk a little bit about the rates trade now, and the state of that trade. When we've talked over the last few months, it has been about the speed with which we are seeing a steepening on the long end of the curve. This week, interestingly, we've started to see a bit of a rally there. How are you thinking about the status of that trade, which, again, really defined major market moves. Let's leave the meme stocks out of it. It really defined the market flavors we got through the first quarter.
STEVE SOSNICK: Yeah, well, I think that the rise in rates was somewhat inevitable. When you see what's happening with commodity prices, when you see the rebound in the economy, sure, it makes complete sense that longer term interest rates, which are essentially-- reflect inflationary expectations, you'd expect them to move up higher. The fact that we did it so fast also means that you're more likely to get sort of a snapback of the sense we got yesterday. I think the trade got very stretched, particularly going into quarter end, I think you had asset allocations, I think you had factor trades going in, I think there was some freak out about SLR, which I won't define the term, because I think you did it with Brian a few minutes ago. And I think that all combined.
And I think this week, you hit a resistance area, markets more or less traded in the 175 range for months prior to the COVID crash. And I think we ran into some natural resistance, I think the Huarong story out of China, which didn't get a lot of thought in the US, I think that did put a lot of demand into the market. Yesterday was sort of that snap, because it moved completely counter to what you'd expect.
And now this morning, at least when I last looked at it, we were giving back some of those gains. I think that's a normal course of events, when you've had a market, any market, bonds, stocks, commodities, move that far that fast, catching that many people offside, and yesterday was the sort of day where you resolve the people who were caught off sides to a certain extent.
MYLES UDLAND: I think I could ask Brian Cheung to explain the SLR to me every day, and I still would not be exactly sure what he's talking about, but I'll try, and maybe we'll get there someday. All right, Steve Sosnick--
STEVE SOSNICK: That's why I've [INAUDIBLE] it.
MYLES UDLAND: Yeah, that's right. Who really knows, right? Who could really say? Steve Sosnick is the chief strategist at Interactive Broker. Steve, thanks for jumping on, we'll talk soon.
STEVE SOSNICK: Take care, Myles.
