FIVE MINUTE FINANCE: WHY ZERO-DAY OPTIONS ARE SURGING, MORTGAGE RATES SEE 23 YEAR HIGH, MORE
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The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s see what’s going on this week:
- Nvidia Beats Market Expectations, Again
- Stock-Bonds Divergence Feedback Loop
- Friend Tech or Fiend Tech?
- Bitcoin Outflows Ongoing But Light on the Horizon
- Will High Mortgage Rates Spark a Buyer’s Market?
Is Betting Against Nvidia Just Plain Stupid at This Point?
- NVIDIA Announces Financial Results for Second Quarter Fiscal 2024 (source)
AI Boom Is Not Abating
NVidia continues to break stock performance expectations, courtesy of the latest Q2 earnings.
Given their dominance in the AI sector, you would think that, it would be enough to cross the $1 trillion market cap milestone in late May. But no, Nvidia’s market cap, now at $1.16 trillion, exceeds the value of the entire crypto market, at $1.05 trillion.
Yes, that includes Bitcoin and all stablecoins. There is no better illustration to this topping than if we denominate BTC against Nvidia (NVDA).
It’s a non-stop downward slide this year!
Despite gaining +57% this year, Bitcoin is a slouch contrasted to Nvidia’s +229% roll. Image courtesy of TradingView.
So, what did the latest Q2 2023 earnings reveal?
- Revenue skyrocketed by 101% from the previous year, reaching $13.51 billion.
- In contrast, the growth for FAANG companies varied, with Facebook at 11% and Apple at a slight decline of -1%.
- Data center demand surge is the culprit, responsible for $10.3 billion, signifying the ongoing AI boom.
AI boom in one image, courtesy of Seeking Alpha.
Nvidia’s historic bread & butter, gaming, also did well with a 22.5% YoY rise, at $2.5 billion.
In essence, Nvidia not only met but greatly exceeded market anticipations. The announced $25 billion stock buyback further solidified investor confidence, bringing NVDA to its yearly peak at $518 on Wednesday.
Skepticism around Nvidia’s success appears ill-advised. For instance, S3 Partners highlight that short-sellers faced paper losses of $11.36 billion this year.
On a single Thursday, these losses amounted to $826 million. Even tech enthusiasts underestimated this burgeoning market.
Case in point is when Cathie Wood’s ARK Innovation Fund (ARKK) sold the bulk of NVDA shares in November, at $137 per share ($45 loss).
The bearish attitude had a steep price tag for Cathie’s clients, losing them potential $300 million in profits. Image courtesy of TradingView
Despite once labeling NVDA as “overpriced” and significantly reducing stock holdings, many financial institutions have now revised their outlook on Nvidia upwards:
- Citi revised from $520 to $630
- Goldman Sachs revised from $495 to $605
- HSBC revised from $780 to $800
- Bank of America (BofA) revised from $550 to $650
- JPMorgan revised from $500 to $600
- Deutsche Bank revised from $440 to $560
With that said, short sellers may end up having their way if a recession comes to town.
Or, maybe not.
After all, the realm of generative AI is relatively new, and historical data is scant.
However, sectors like Hollywood are embracing AI innovations, suggesting Nvidia might continue its upward trajectory for some time.
Image courtesy of Lucidworks.
Stock Market Sees Surge in Zero-Day Options — Here’s Why That Matters
- What the Surge in Demand for Zero-Day Options Means for the Stock Market (source)
Uncertainty Leads to… More Uncertainty
If you’ve been paying attention, you may have noticed something weird.
The stock market has been moving in the opposite direction of the government bond market (monetized government debt). This is a divergence in mentality.
Image courtesy of Bloomberg
On one hand, bond investors seek reliable yields. On the other hand, stock investors chase higher performance peaks, which is an inherently riskier strategy.
Moreover, bonds are a different investment beast because they tend to be inverse. If there is high demand, the yield goes down because the annual interest payment is divided by current bond price.
With looming uncertainties and potential inflation on the horizon, bonds are emerging as a safe-haven asset. This means that investors are presently expecting the Fed to keep interest rates longer, which pushed 10-year US Treasury yields to their highest yearly level last week.
At the same time, the broad stock market index, S&P 500 (SPX) kept falling.
The latest 10-year US Treasury (green) move against SPX (purple). Image courtesy of CNBC.
In other words, if the safe haven asset is surging, it signifies a bearish economic outlook. And historically, it tends to be correct.
Image courtesy of MillStreetResearch.
Traveling back in time to 1987 — the year of the notorious Black Monday — offers more context.
The stock market crashed in a single day on October 19. Just a few days earlier, the 10-year Treasury peaked at 10.05% yield, only to sharply crash to 8.90%, ushering in Black Monday.
These percentages may seem tiny, but it was the largest single-day yield decline since the stock market crash of 1929.
So, what does all this mean?
Stock investors, while eternally optimistic, are largely aware how volatile the market is. Recognizing this volatility means strategies must be more calculated.
This is why we are now seeing a surge in zero-day options (0DTE). They expire on the same day they are traded, allowing investors to hedge against intraday risk.
For instance, last Thursday Nomura Securities International recently reported 1.86 million zero-day contracts tied to S&P 500 -a staggering 55% of the index’s total volume, mostly favoring a bearish outlook.
Such an increased demand can be interpreted as a defensive strategy, highlighting the often unerring foresight of the bond market.
But here’s the tricky part: Market-makers maintain a market-neutral stance, known as gamma hedging. This means they need to buy and sell stocks alongside the prevailing market trend.
In turn, once zero-day options expire, market makers unwind their hedges, muddying the waters with a potential stock turnaround. A recent example was observed last Friday when decline-bet options (puts) turned profitable, leading to an S&P 500 bounce.
“There is not enough liquidity on the screens to handle market makers delta hedging such a dramatic move over a short 20 minute period,”
-Goldman Sachs Group managing director Scott Rubner
So yes, hedging against volatility from bond-stock divergence is further amplifying investor uncertainty.
Friend Tech or Fiend Tech?
- Friend.Tech Climbs DeFi Charts But Has Some Massive Red Flags (source)
Tokenization Continues to Expand its Boundaries
Move aside Worldcoin with your eyeball scanning. Friend.Tech is here.
The newcomer on the DeFi stage debuted on Coinbase’s Base network, presenting itself as a decentralized social network.
In the brief span since August 10th, Friend.Tech racked up 300,000 transactions across 23.72k unique users. To put this into perspective, Friend.Tech’s activity surpassed that of the to DeFi giant, Ethereum.
Image courtesy of Messari.io
Why the rush? What is so important to have generated nearly $3 million in ETH fees on a weekly basis?
Image courtesy of DefiLlama
While Worldcoin tokenizes iris scans to ensure future human verification, Friend.Tech tokenizes social clout access.
Imagine following a prominent social media influencer, yet being lost in the vastness of their following. With Friend Tech, direct interaction becomes tangible.
By purchasing shares of their tokenized presence, users gain private chat privileges via the platform’s app.
Out of top 10 personalities, Cobie (737k Twitter followers) is at the top, at 1.65 ETH average share. Image courtesy of Dune analytics via @cryptokoryo
When personalities become social tokens, you get a tradable asset. If their popularity rises, the demand for their access rises, boosting the value of the token itself.
Plus, personalities have a stake in their success, receiving 5% from their shares’ trading volume.
The problem is, there are some red flags to be aware of.
The brains behind Friend.Tech is Twitter user 0xRacerAlt, known for initiating viral projects that unfortunately have a pattern of… well, imploding under controversy.
For instance, TweetDAO, launched in December 2022, which centered around NFTs as a representation of tradeable tweets.
It was abandoned shortly after receiving criticism that wealthy users (NFT holders) could take over Twitter and exert censorship.
In addition to TweetDAO, 0xRacerAlt is behind Stealcam.
VC Paradigm’s Charlie Noyes to 0xRacerAlt. Image courtesy of Twitter.
Stealcam, launched in March 2023, revolves around tokenizing photos or videos. The twist is that they are initially pixelated so no content is discernible.
No need to guess what is behind this one. Image courtesy of Stealcam.com
Users then have to bid on the tokens to “steal” the image, tying their wallets to the site. Once the auction bid is accepted, the content is revealed.
You get the one-sided track of 0xRacerAlt here?
Every project is about gamifying social clout. In the case of Stealcam, it leans on the side of monetizing private photos, which could be pilfered.
Breaking down Friend Tech, one can’t help but notice a few patterns that echo classic financial pitfalls:
- An initial surge driven by the allure of personality access and speculation.
- That speculation hinges on reselling shares at a profit, rather than the access itself.
- Once the initial enthusiasm fades, share prices could plummet.
In short, Friend Tech has the hallmarks of NFT rug-pulling all over again.
Even worse, when you interact with Friend Tech, you tie your wallet address to your Twitter profile, potentially exploitable by every malicious, bot-harvesting actor out there.
Image courtesy of @SpotOnChain
With all this seedy baggage, Friend Tech is looking more predatory than friendly in the lense of a lot of users so far.
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Crypto Market Still in Limbo Zone
- Crypto Market Still in Limbo Zone (source)
Short-Term: Stagnant; Long-Term: Fundamental
While many champion Bitcoin as ‘sound money’, institutional perspectives still lean towards viewing it as a high-risk asset.
The recent upheavals in China drained crypto liquidity last week, as Bitcoin dropped -10%, from $29k to $26k. The SEC also contributed by postponing the decision to allow Bitcoin ETF to Grayscale Investments.
The latest Digital Asset Fund flow report confirms the trend, highlighting outflows from digital asset investment products amounting to $55.4 million outflows. Most of these coming from Bitcoin ($42.3M) and Ethereum ($9M).
Image courtesy of Coinshares
Despite these headwinds, Bitcoin shorters are still exiting their positions, marking a 17th consecutive outflow streak.
Canada is the main outflow mover, at $35.9 million, with Switzerland the only region recording significant inflows, at $3.5 million.
On the long road to sound money, however, Bitcoin’s main obstacle appears to have fizzled out.
Image courtesy of Financial Times
We will likely see a complete shutdown of Bitcoin’s proof-of-work carbon footprint narrative.
This would undoubtedly be welcomed by staunch Bitcoin proponents, who might be relieved from drawing comparisons to tumble dryers and data centers to debunk that narrative.
The Silverlining of Unaffordable Homes
- US 30-Year Mortgage Rate Climbs to Highest Level Since 2000 at 7.48% (source)
Who is Going to Buy Houses at These Rates?
It’s not a good sign for the housing market when Zillow Home Loans launches a 1% down payment program.
This is far down the ladder from the 20% norm. Even so, it is questionable if there will be a surge of takers.
Paying for a fixed 30-year mortgage now is more expensive than in the last 23 years.
Image courtesy of the Federal Reserve, source: Freddie Mac
Rewind to pre-lockdown days, before the surge in M2 money supply and the subsequent inflation fallout. The 30-year mortgage rate was holding at 2.99%, with the median home price at $294,000. Now the median home price is $410,000.
This puts the real estate developers in an awkward position. With most of the market benefiting from rates below 5%, the demand for new homes is poised to take a significant hit.
Image courtesy of Fortune
While this would be a loss for developers, the buyer’s market would have the upper hand.
But…if inflation reheats again, eating up savings, this may be enough pressure to unlock those locked-in homes at under 5%, via mortgage refinancing.
Tweets of the Week
* Meme stock traders are investing heavily in distressed companies like AMC Entertainment and American Airlines Group, leading to a 58% increase in the Solactive Roundhill Meme Stock Index this year.
* The Solactive Roundhill Meme Stock Index tracks meme stocks, which have gained attention through online communities like Reddit. Notable stocks include $GME, $AMC, and $BB.
* Launched in 2021, the index comprises 25 equally weighted US-listed securities influenced by online chatter and short interest. The index’s earnings and growth have risen significantly, driven by companies like AMC and Tupperware Brands. The MEME ETF tied to the index has gained over 36% this year.
Community Alert: Magnate Finance on Base will likely exit scam in the near future currently with over $6.4M TVL.
The deployers address is directly linked to the Solfire $4.8M exit scam.
Largest companies globally:
📱 $AAPL
💻 $MSFT
🛢️ $ARAMCO
🔍 $GOOG
📦 $AMZN
⚙️ $NVDA
💼 $BRK
🌐 $META
🚗 $TSLA
💊 $LLY
What do you think is the US dollar backed by?
Saudi oil.
That was the birth of Petrodollar in the 1970s.
Now, Saudi Arabia trades 3x as much with China as with the US.
Thus, BRICS membership paves the way for Petroyuan!
Without commodities traded in USD, the global reserve currency status dies.
And thus the end of American unipolar hegemony.
Still one of the most important market dynamics to watch: inflation-adjusted Treasury yields (magenta, inverted) are at cycle highs, yet valuations (blue) remain lofty. No knowing how/when the lines converge again, but the gap is not likely sustainable.
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