The Melt-Up After the Meltdown

of duos now. Honestly, Mike, I was expecting coming into this week's show that you weren't even going to bring it up. So the fact that you're even admitting it, we'll give you something at least. But next week I'm holding you to it. We'll have a new one. All right, good, good enough. But this week on the show, we've discussed it before. Coronavirus cases continue to rise across US hotspots and other countries to get financial markets seem relatively unbothered.

Our guest was on the right side of the stock rebound earlier this year, but now she's starting to talk about the potential for a market melt up. And as always, will close out this week's episode with our tradition the craziest thing I saw in markets this week. And of course, if you see something crazy, give us a call on the Bloomberg Podcast hotline at six four or six three to four three four nine, oh, and leave us a

voicemail and maybe we'll play it on the show. Or if you just have a suggestion or some feedback on the show, we'd like to hear it. Hear that too, Sarah, I hope you came prepared for with the crazy thing. I've got a pretty good one. You have a pretty good one. I do, I do, I do. It's true, It's true most of the time. It's true. It's the one the one thing I'm good at. My my career highlight is is crazy things. Take take that for what it's worth, exactly exactly. So joining us for the first

time a new guest. Were very excited to have her. Her name is Anna and she's an equity strategist at Wells Fargo Security and uh again, first time on the show, and welcome to the show. I hope you brought a crazy thing too. I did. Thanks for having me, Mike and Sarah Glad to be here. Okay, good, Well, don't give us your crazy thing yet. We'd like to save that for the end. It's like the dessert after a nice nutritious meal, as I like to say, after you

eat your vegetables. That's that's right. But and I wanted to start by asking you about this whole notion of a melt up. Um, you know, the way I would think of the definition of a melt up, I'm I guess there's not really a textbook sort of definition of it as far as what kind of percentage gain and then subsequent pullback we'd be talking about. But to me, it just means sort of, uh, an irrational sudden lurch higher in the equity market that typically would be would

be followed by a meltdown. I guess, um, uh, you know, sort of retracement of a lot of that game. UM, So correct me if I'm wrong on any of that as far is how you define it. But also what would that look like in this scenario. I mean, I think the problem with sort of entering what would be considered a melt up phase of the market is really not having any idea how far it could go or when it would reverse. Um, So how would you sort of approach that type of scenario that we we we

seem seems like we very well could be entering. Well, Mike, you sort of hit that on the head already. When when you get a melt up, it's hard to characterize or exactly put your finger on it, but the way I would describe it is, it's this exuberance. It's an investor risk seeking that sort of gets ahead of itself.

And when it does, like you said, you're not sure exactly how long can it go, but you know that it's more of a destabilizing push up higher and equities rather than a a positive, you know, encouraging move on

the equity market. So we've been suspecting that the risk of a melt up is getting higher because look, when you've got at zero rates, you've got massive accommodation, both monetary and fiscal, and you know you have improving sentiment, and you're seeing data economically, jobs, manufacturing, not just domestically but globally improving. It's gonna spur that sort of risk seeking, and we're worried that's getting a little ahead of itself.

So I remember back in ten, also in twenty nineteen hearing people talk about this phrase a melt up, and usually when people talk about a melt up, it comes with a negative connotation that that people are scared of this spooky, spooky melt up and stocks are going to be rising for no fundamental reason that people can really pinpoint. But the way you look at it is that, I mean,

you can play this gap. Stocks are going up. That's not necessarily a bad thing, right, Absolutely, It's not something where you should be so fearful that you feel like you need to sit on the sidelines and you know, head for the cash. Um. I would put it more as you can ride that rally, but know what you're getting into and look for those signs and when you think that melt up or that rally is really losing steam.

So for us, we think one of the catalysts that's gonna push this melt up higher is probably going to be the second quarter earning season. We expect a generally constructive tone, and that can make investors a little too hopeful that really the worst is over, not just the worst, but hey, things are going to get better sooner than expected.

So if that happens and you see this massive urge in equities, we think won't necessarily be followed by a full toppling down, perhaps a melt down, like Mike you were mentioning, but it could come to an abrupt halt, and that could be a concern if it does pull back, that can spook investors, because you know, when you go from this exuberant high to a sudden, scary exuberant low, that shock that can really spook investors. Can I imply

from that? Or and for from that that have the earnings estimates for the second quarter been cut too low? Do you think? Is that? Is that what you mean by construction constructive earning season? That sort of the hurdle is so low now that it will be a pretty easy beat for a lot of companies. And where would you suspect those beats to to mainly be. Is it across the board or were you know, in the growth stocks,

in sort of the cyclical stocks. Is there any sort of sort of way to get ahead of what you think is coming in the earning season? You bring up a great point, Mike, it's that expectation, because really equities,

that's a game of expectation and risk perception. So with the earning season there are going to be pockets or certain sectors in the economy that investors and analysts on you know, the cell side, like myself, are going to lower their estimates expecting really that they got decimated because of the coronavirus um. But as we've seen already, you've seen some of this value style resurgence. Some of the

really beaten down names have recovered quite decently. Now you're also seeing the opposite side of the trend, the high growth, high momentum names that were steady all through the downturn in March and April. They continue to be those outperformers. So the question becomes, as the bar gets higher, can you continue to leap over that um? And when you have a very low bar, is it enough just to

kind of, you know, barely hop over that. I'm suspecting that really in the value pockets, you're gonna see some beaten down expectations. But that's why we actually think that that's an opportunity for us, because the bar is lower, you can have that kind of positive reaction after you get an earning speed. And then on the growth side, I just say, you know, again, these growth players, they've done very well through the turmoil um, but whether they're going to be able to hop over that high hurdle

and what the expectation is. It's really a next of the short term expectation versus our investors perhaps looking already to Before we get to talking further about this disparity between value and growth, I do want to talk about the factors of a melt up just a little bit more, because you mentioned earlier on that it's something that you can take part in, but you really want to be on the lookout for the factors, the signals that might point to a blow off top or the end of

a melt up. I mean, what are those factors that you actually look for? And what's to say that maybe we haven't seen a melt up already? And I know that sounds so crazy because we're in the middle of a recession, but some might look at this rally that we have seen and say, wait, where are the fundamentals behind this? You know, that's a common pushback we've gotten from investors and clients is look at this massive rally, isn't it too expensive already? Should I really be playing

in equities? And and has this is this gonna you know, run out of steam. When we think about it, it's easy to look at where equities and valuations are now and to think this is expensive, especially when you don't know what that denominator earnings should be given all this turmoil. But for us, the situation is different this time because you've had so much monetary and fiscal stimulus, and you've had it come bigger and badder and faster than we've

had it ever in history. So we're in an unprecedented time of liquidity and stimulus. So that is going to make multiples be able to reach higher and be in what I would say a different regime really than you've seen in the past. That being said, one of the indicators, like you said factors to watch out for, we like to look at risk really again, equities are the story of what investors perceived risk to be in the upcoming couple of months. Now. As risk you can measure in

different ways, but think about the VIX indicator. The index. The VIX is telling us what investors believe equities, how risky they think they are. And you saw it spike massively in March and then rapidly decay, and with that decay from the loads of March smp rallied, right, So that goes hand in hand. Now we've seen that VIX start creeping higher. It was in the low twenties, now

it's flirting with thirty this Thursday. And with that moving forward, as you see this risk creep back in this system and yet equities be able to push higher, if not leg up significantly, that could be one of the big signals that this rally is getting ahead of itself. I'm glad you brought up the vix and know you're you were a derivatives trader and a former life right is that right? Yep, that was a former life for sure, Mike. So there has been a lot of talk about exactly

what you're talking about. The the VIX has receded, but still lingering in that sort of you know, high twenties, the thirty level, which, um, you know, when you think back, maybe given the vixes lifetime average I think for a long time was right around twenty. But wait for a while there we were looking at a single digit VIX you know, um, you know again another lifetime pre pre

covid um. But I I wonder if that sort of suggests that you know that the professional hedge fund class is pretty well hedged against, you know, the meltdown, uh, and side of the melt up, you know what I mean that the sort of coming back to earth and that that might actually provide a bit of a cushion that would prevent that, you know, that sort of return to the rationality if you will, after a melt up

from getting out of hand. You know, if if you're if you're well hedged, maybe the need to to sell out will of your of your long positions will not be as strong. I mean, is that a fair way to think of a high VIX in this type of environment. Yeah, I think that is a fair way. And Mike, you know, the one way I would characterize it is fool me once, you know, shame on you. Fool me twice. That's on me.

So after a lot of investors got burned by this sudden thirty percent drop in March, they realized, I have to have that downside protection. So there are more people who are out there prepared for that and better heshed. But that's not to say that there isn't also upside seeking where people are buying called and taking those wagers on the market. So you do see better downside protection that may provide some cushion were we to see a further slide down. But our view, really we're not too

fearful of a huge pullback here. We don't think we're going to see a massive drop in the SMP hive hundred. Really, it's more of a risk to the upside and that surge higher. Now that being said, we do have a lot of risks on the horizon. And if you look again in the options market, what's interesting that I found is that it looks like investors are more worried about the next six months, so the rest of this year, than the first half of next year. And that's odd

to think. Usually it's the other way around, further out more uncertainty. You know, the options are priced with higher uncertainty. That's not the case now, and part of that could be because of the lingering effects of the coronavirus and perhaps maybe that domestic political risk that's getting priced in. But it's a bit surprising just considering the fact that, okay, the next six months, it is very very difficult to

understand what's going to come our way. I mean, first, we're potentially dealing with the fiscal cliff, this month, we have the earning season coming up. We don't know what's going to happen with the trajectory of the virus, what that means for the economic recovery. Then we've got a

presidential election. I mean, the list just goes on. But with that said, how much do you think the expectations for volatility in one being lower than they stand now is just people throwing their hands up and saying, I have no clue. I mean, if you can't predict the next six months, what's to say you can predict the following year. Now that's a good point, San, there's a lot of focus, and then in short term because so much is going on, so much crammed in the next

six months. But if you think about that, that should still make the whole next year be higher up in uncertainty. But if you're expecting a drop after the next six months, that's telling as well. The shape of the vixed curve, as you alluded to, is just very unusual right now. Um, you know, you do have this spike sort of in October and in the fall. There's always kind of been least the last I don't know most of there's been that sort of weird kink in the VICS curve where

there was elevated uh futures in say November October. I wonder, you know, I would have thought that would have gotten smoothed out when you sort of eliminated the Bernie Sanders Elizabeth Warren uh risk from the election. Uh as Biden sort of ascended to the point where he's the nominee.

It really hasn't smoothed out though, So I wonder is how much of of that hedging for that time frame is political risk as far as maybe not even Biden, but um, the idea of a blue sweep, you know, uh Senate and House and White House controlled by the Democrats and sort of the roll rollback of the massive Trump tax cuts or is some of it that and some of it the worry about that second wave of the virus? I mean, is it you know, from someone

who's traded this type of stuff, is it? Is it possible to sort of suss out and talking to clients, what is you know, what is causing that odd shape in the VIX curve. It's hard to really pick it apart just from looking at just the VIX curve or just SNP options market, but you talk to investors, and I think there really is the growing threat of what's

going to happen this uh, this presidential election. Like you mentioned, let's say we get a blue sweep, but you have to realize that the platforms and the economic proposals that candidates have been running on, what we thought they were back in January and February, they're not the case anymore. You're seeing them adapt to the situation given the economic recession we're in, and right now we're not sure what

form they're gonna take. So even as you see one party or another gaining momentum, we know that perhaps were you to see a sweep, you might see changes enacting much faster. But what are those changes? That's what is that big uncertainty that people are still fuzzy on, and I think that's why you're seeing that that kink in the curve. Like you said, m alright, so Anna, bringing it back to how you and your team are advising

client's position. It was back on March that you guys said you believe that seven was the market low, which it has been, but at that time you still favored high quality um names also growth. But then it was mid April that you guys shifted and you started to say that you wanted to pick up on this rotation, particularly into value and cyclicals, and that really did pay off through May and early June. But lately it's unbelievable the resurgence that we have seen in growth names, mega

cap technology, the things. I mean, many at record highs since June eighth. I believe the NASDAC is beating the SNP by ten percentage points or so are a hefty margin. Are you guys sticking with this call that you believe that value with cyclicals are a good opportunity right now and what would it take for that to turn back around? Yeah? So far, Sarah, we are still on that value camp and we are on that risk on play. And that's not to say that this growth and momentum don't work.

We do think that's one trend you've seen through the markets. But where the opportunity is is really where the value is. Where is the where is the I wouldn't say bang for your buck, but where's the trade where you can see a bigger multiple expansion than you would get with these growth names. And that's really in the value camp because that opportunity came when you had that massive sell off the value names, A lot of them got really

destroyed because the higher risk. Naturally, when you have stress in the economic environment inequities, those higher risk names are

going to be the first to go. But we take sort of a first and first out approach that those names that got really beaten down, if they are able to continue accessing capital, which, thank you to the FED, they are because of that credit liquidity, then that discounting should actually in a way get reversed as they're able to access capital and continue to take advantage of the opportunities in liquid markets. We think that these companies have a chance of coming back. Now we are seeing that

rally back. We saw a lot of that action. We think there's more left to it. But again, what we're watching carefully is to make sure that trade doesn't get too heated. Yeah, if I think of a rotation from growth to value, I'm thinking of a pretty messy market, you know, given the dominance of the big oath names. But in your opinion, it sounds like you think it could sort of just be a rotation that doesn't really hurt the growth growth names as much as just sort

of prop up up the value end of things. Um. And what I keep going back to I've been drowning on and on a lot about is the bank stocks. Uh. If you look at the KBW Bank Index, I mean the p is like single digits, I think it's like nine points something. Uh, dividend yield is like four and a half and above percent. I mean pretty amazing. Is

the assumption? Um, do you think just that these dividends aren't going to survive given the the sort of uh strenuousness of this year's stress tests and the mandates that that came with it about cap You know, obviously they have to cap their dividends, but you know, I think there's a suspicion that we might see some dividend cuts. Um boy, if that happens, I I that seems like it's gonna be a weird day on the stock market

if we start to see a big bank dividend cut. Um. Maybe I'm just shell shocked from the two thousand and eight experience, But how do you look at the bank sector as far as a value play, um, as well as sort of you know, being integral to to the financial system as a whole. Well, banks certainly are integrals to the financial system. And like you said, you know, in the Great Financial Crisis, bank dividends and banks were the problem. They were what broke. And now today and

the virus crisis, it's a different story. The banks are not the source of the problem, but they are one of the hardest hit, especially when you bring rates to zero. You know, the net interest margins on banks, they just get decimated. It's hard for banks right now. So they our value play and the question is are they a

value trap? Now regarding dividends, you realize that they are already paid their first two quarters of dividends and many banks are approved to pay their third quarter as expected. Like you mentioned their caps, but that was expected. I don't want to I don't think cell side analysts were

expecting a raise this year given the environment. And mind you that they actually stopped all their buy back repurchasing, so with that they have extra cash on hand to handle dividends and also any other potential bank growth sea crisis that come around. But going forward, it's not that

they had to cancel the rest of their dividends. They were asked by the FED to revalue by quarter and so far it's our view that they will be able to pay out the rest of their dividends, but as an investment, as a whole of the financial sector, it's certainly taken a beating. Well. Lucky for you, Mike, the banks kickoff second quarter earning season next week, so I'm sure there will be plenty of fodder for you to

obsess over, right. You know, I like a good earnings conference called from the bank CEOs, but it really isn't you know? It's interesting. I think a lot of people are waiting to hear what the bank CEOs are obviously in a position to know more about the consumer and credit trends than anyone else, so it should be interesting, to say the least. But you know what else is interesting? Sarah?

What's interesting? Mike? Well's let Charlie Pellett tell us stand clear of the craziest things we saw in markets this week. That's right, it's time for the craziest thing. And since I hyped mine up so much, Sarah, I'll start with mine. Uh, if you don't mind, don't mind at all. It's once again making appearance in this segment is none other than Elon Musk. Now, obviously, Tesla and Elot have been tormented for years by the short sellers of the world out

to get him. Um, and he had for a long time, Sarah. He had joked that he was gonna buy a bunch of short shorts. You know, remember the old hot pants we used to call him in the seventies, that the very short short shorts, like you know what I'm talking about. I know you're talking about. Okay, right, he was gonna, he said, he's gonna buy some and send them as gifts to two short sellers. Um. Sure enough, he went one for further than that, and he actually had a

line of Tesla short shorts produced. They are super skimpy red satin shorts. On the front, they have the Tesla logo and then on the back it says s three x y, which if you sort of glance at it looks like sexy but the right but the short say that they do. But obviously that is also the four models of Tesla's available on the market. Let me just reado the description of these shorts. Celebrate summer with Tesla Short Shorts, run like the winder, entertained like Liberacci with

our red satin and gold trim design. Relax poolsider Lounge indoors year round with the limited edition Tesla short shorts featuring our logo blah blah blah, enjoy exceptional comfort from the closing bell. So he we have we have any idea what sales for these Tesla short shorts are looking like? Well, they are sold out. They are sold out, So I think, um,

I think, yeah, well how too? And hey the stock spent up since he introduced them, So, um, I don't know what the factor them into your Tesla Valt evaluation models going forward. I think he should he should restock there selling like hotcakes. Well, do we know how many they made in the first place? What they made? Five and they're sold out? Kid could be could be sixty nine dollars and forty two cents listed as six nine

point four to zero on the website. So to sort of uh juvenile numeric jokes, they're in the price of the shorts. You're telling me that these shorts self for nearly seventy dollars. That's right, that's right. It's higher than uh Lulu Lemon price tag workout shorts. Sounds we can get away with a lot these days, or they'll get a lot of blowback that I forgot about the big Sea through Lulu Lemon scandal that was that was that

was a big one. That was a big one. I've they've gotten past that now they fixed their products up. But Mike, I'm gonna I'm gonna have to piggyback off of you because Tesla has just been on a terror this week. And I know we constantly come back to the likes of Tesla or Nicola on this show for our crazy things that we see in markets, but sometimes

you just really can't avoid it. I mean, in the six days through July seven, Tesla was up, so so maybe we'll attribute that to sold out Tesla short shorts now that we know that that that is going on in the world. But I mean, this is a stock that's up two percent year to date and over the last twelve months up close to five. Uh. And we know the company has a lot of haters, uh, but it's still pretty amazing to see it, really is, Anna, what what do you come with? This is more on

the economics side. I was thinking about the influence of how testing and knowing whether you're sick or not is on consumer spending. So when you look at testing, availability, across the states. I was shocked. I just read today that in Arizona, one of the nation's biggest drive through testing centers, guess how long it takes people to get tested.

Their cars are lined up, I kid you not for eight hours, eight hours in over a hundred degree he cooking like a rotisserie chicken in line while you're waiting for this test. So that compared to my buddy in New York City told me he hopped in and out of the of the next door emergency care testing down

thirty minutes. So that disparity to me, you know, while I you know, make light of it, is also extremely concerning when it comes to how will this way on consumers spending in sentiment, even if we don't have official lockdown orders on a state and federal level, just that that meant whole you know, weight of it. That could actually be a big factor going forward. It's a great point. I've heard similar stories down here in Florida, people waiting

in extremely long lines in Miami to get tested. At the same time, I know someone who recently got tested and didn't get his results back for eight days. So the wait time, at least from that picture doesn't seem to be getting shorter because there's just so much volume right now, right right. Yeah, And you know, you wonder how many people actually catch it from waiting in line in these things to stay in your car, keep your mask on, keep I guess the drive throughs probably are

the safest, safest way. I've seen some long foot lines around here. I went for a bike ride last weekend and uh decent distance from my house. I passed two testing sites with just enormous foot lines at like I was like eight thirty nine in the morning. So um, yeah, it's a good it's a good one. And that's uh got away on your mind. I think just wait waiting out those results and then you know, you go out to the store again, and then you're worried if you

have to get tested again after that. Yeah, what a world we're living. And actually have a bonus one to share, but this one, this one, because it was hyped on Twitter, I have to bring it up because yeah, it's crazy over the weekends. This last weekend Kanye going on Twitter and saying that he is announcing his official presidential bid. And I'm bringing this up because one of our listeners at Jordan Rutner said, this better be featured on the

Craziest Things I saw this week. You know, Anna, I'm just waiting um for the Wells Fargo note to hit my inbox that lays out what markets are going to do should Kanye West win the presidency in I'm hoping that boost they are are are waiting on the consumer discretionary sector. Now, the Birthday Party. I do like his party name, the Birthday Party. It is a good one, like it, But I wonder if he'll even be able

to get on the ballot. You know, he's run up against the deadlines on the ballot on getting on the ballots. But well, you know that's twenty I think that's for you in a nutshell, right, there is the surprise entrance of Kanye West into the into the presidential race. I'm waiting for something more not I am surprised every time something like this happens in but it is beginning to

be very difficult to become surprised by anything anymore. Yeah, I will say, among my daughters who were teenagers and preteens, that was the biggest political news of the year to them. That and Trump possibly banning TikTok if they banned TikTok. The preteens and the teens of the world are gonna riot. It's gonna be starting in my house. Yep, starting in my house. All right. Well, with that said, Annahn, it was so great having you on the show this week,

and we would love to have you on again. Thanks so much, Sarah, Mike What Goes Up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple podcast so more listeners can find us, and you can find us on Twitter, follow me at at Sarah pan Sec Mike is that ygan Aonymous and you can also follow Bloomberg Podcast at podcasts.

Of course, another thank you to Charlie Pellett of Bloomberg Radio and the voice of the New York City Subway System as well. What Goes Up is produced by Jordan Gospore. The head of Bloomberg Podcast is Francesca Levie. Thanks for listening. See you next time.