SPAQs & CALL OPTIONS SERVE TO DRIVE PRICES EVEN HIGHER
Those geographical regions (Europe, Japan) that have experienced the highest degree of government-imposed mobility restrictions are also witnessing a pullback in economic activity. That said, market-based indicators continue to support the reflation theme. The chart below highlights one of these indicators – the ratio of copper prices to gold prices. This ratio has continued to trend higher and suggests that economic data should regain its positive momentum and that bond yields should continue to rise.
With 91% of S&P 500 stocks still above the 200-day moving average, the simplest description of the ongoing advance is that it remains remarkably broad. Currently there is no major market rotation – that is, investors aggressively pulling their money out of one segment of the market to put it somewhere else. Investors are responding to excess system liquidity (fiscal and monetary stimulus) combined with improving economic data and rising expectations of company profits to drive almost all asset classes higher.
At some point the risk is that “everything goes right,” and a combination of unachievable expectations and bond yields that are too hot may prove to be the wrinkle in the pro-risk tone, but we’re not convinced we’re there yet. That said we are monitoring the increasing froth in certain segments of the market as to whether it could endanger the general market advance. The following two charts show significantly increasing option volume and the rise in SPAC IPOs. These charts directly relate to the growing participation of retail investors in the market and the growing allure of corporate acquisition strategies – both historical indicators of the later stages of a market advance. That said, in the short-term both obviously serve to drive prices even higher.
WHAT IS A SPAC?
Fd explains (15/02/21)
“The financial world has been buzzing with reports all year about these so-called spacs, or special purpose acquisition companies. With this particular form of investment, investors have to rely on the persons behind the IPO to come up with a strong company to merge with – in other words, they give a blank cheque. The purpose of the IPO is to raise money to acquire an unlisted company. That then gets listed, without the costs and hassle traditionally associated with an IPO.
On Monday, LVMH-founder and France’s richest man Bernard Arnault announced that he and three colleagues are bringing the empty investment vehicle Pegasus to the Amsterdam exchange. They are looking to raise several hundred million to put into a fintech company.”
Coming off the market low in 2020, total equity and index call option volume has surged along with the market. With the notable jump in market interest from the retail space as casual market observers are stuck home, it seems possible that their emerging interest has proven to be a tailwind for heightened call option volume.
After skyrocketing in 2020, SPAC issuance remains robust in the first couple of months of 2021. The share of IPO issuance comprised of SPACs now stands at 63%. These companies are now in acquisition mode, thus, the elevated valuations present in current mergers are likely to remain. Not to mention, private equity investors and public companies are flush with cash and looking for acquisitions as well.