6 BARRON’S February 22, 2021
UP & DOWN WALL STREET
Bank of America’s latest monthly survey of fund
investors found their cash levels atthe lowest
since March 2013,
Yes, Rates Are Rising.
But Equity Investors
Don’t Seem to Care.
W
hy do they
call them
“hearings”?
After five
hours of
testimony
on Thursday
before the House Financial Services
Committee on the recent Robinhood
market mayhem, what emerged was
a lot more talking than listening. The
panel’s inquisitors seemed to have
their points well rehearsed, even if
they were only tangentially related to
the matters at hand. Same for those
offering testimony, who often sought
to answer a different question than
the one asked.
What failed to emerge was any an-
swer about how some stocks could go
from seemingly worthless to billions in
a virtual flash. We’re all taught that se-
curities markets are efficient, instantly
distilling the wisdom of independent
buyers and sellers based on the same
publicly available facts. YetGameStop
shares (ticker: GME) went from a few
bucks to $483 in January before coming
back to below $40 by week’s end—still
double from where they started the year.
Crazy things seem to happen in
every cycle, from Black Monday in
October1987 tothe emerging market
debt crisis of 1998 and the mortgage
meltdown of 2008. All came about
as models undergirding strategies that
proved too clever by more than half.
Perhaps the current craziness in the
so-called meme stocks at the center of
this past week’s hearing more closely
resembles that of dot-com dottiness
in the waning days of the past century.
At least some of them are making
the most of the madness.Sundial
Growers(SNDL), a Canadian canna-
bis company that colleague Connor
Smith reported was among the most
mentioned tickers on the WallStreet-
Bets forum, took advantage of the
attention. Having gone from penny-
stock status to a few bucks in the
process, the company last week an-
nounced plans to issue up to $1 billion
of securities over time. That’s a hefty
financing for a company with a mar-
ket capitalization of just $2.3 billion,
especially one that’s expected to con-
tinue to show red ink.
Easy money, indeed. Minutes from
the most recent meeting of the Federal
Open Market Committee on Jan. 26-27,
which were released this past week,
took note of the situation at the time.
The central bank’s staff “characterized
the financial vulnerabilities of the U.S.
financial system as notable.” “Asset
valuation pressures” were described
as “elevated,” with equity valuations
having returned to prepandemic lev-
els. Corporate bond valuations simi-
larly reverted to the historically rich
levels prevailing before Covid-19.
No surprise that Bank of America’s
latest monthly survey of fund inves-
tors found their cash levels at the low-
est since March 2013, global equity
allocations at a 10-year high, and a
record number of respondents report-
ing taking a “higher than normal”
level of risk. The only reason to be
bearish is the lack of bearishness,
according to the bank’s strategy team,
led by Michael Hartnett.
Not even the steady ascent of bond
yields appears to impinge upon their
positive attitudes. The Treasury 10-
year yield rose 14.5 basis points on the
week to 1.344%, the highest since last
Feb. 24, just before coronavirus shut-
downs took effect. (A basis point is
1/100th of a percentage point.) The
benchmark note yield is up 25.4 basis
points for the month and up 43.1 basis
points year to date.
That hasn’t hampered the equity
market, as most of the rise in yields
By Randall W.
Forsyth
Citadel and Robinhood executives, and others, testified this past week at the “GameStop” hearings.has been from higher inflation com-
pensation amid greater optimism
about the economy, writes John Hig-
gins of Capital Economics in a re-
search note. Of the roughly 80-basis-
point increase in the 10-year yield
from the cycle’s lows, only 20 basis
points have been in the real yield.
The real yield on 10-year Treasury
inflation-protected securities is still
negative, at minus 0.82%.
The interest-rate derivatives market
suggests further increases ahead, says
John Brady, managing director for
global institutional sales at Chicago
futures and options broker R.J.
O’Brien. Put options on rate futures
show higher volatilities than calls, sug-
gesting that hedgers are looking for
more protection from higher yields.
But even an increase in the 10-year
Treasury to the 1.75%-2% area, if it
were to take place gradually, wouldn’t
likely upset the equity market, he adds.
Higher mortgage rates could pose a
threat to the booming housing market,
says Scott Anderson, chief economist
at Bank of the West. Record-low mort-
gage rates last year led to a huge,
13.2% jump in the median price of a
single-family house, to $313,700. The
recent uptick in Treasury yields is
beginning to push up mortgage rates,
which will further hit housing afford-
ability, potentially lowering existing-
home sales by 8.4% in the fourth
quarter from a year earlier. That
would affect lots more folks than
gyrations in meme stocks.
A