Novum Alpha - Daily Analysis 26 January 2021 (10-Minute Read)
Terrific Tuesday to you as the markets are whipsawed by conflicting news and drift rudderless in a sea of uncertainty.
In brief (TL:DR)
In today's issue...
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Time for a Tuesday tipple as the glacial pace of fiscal stimulus out of Washington serves as a stark reminder that if there are two constants in America, it's the pandemic and politics.
And right now, both are conspiring to send markets shimmying with no discernible direction.
In Asia, stocks were almost uniformly down across the board with Tokyo's Nikkei 225 (-0.79%), Hong Kong's Hang Seng Index (-1.05%) and Seoul’s KOSPI (-1.47%), all lower in the morning trading session, while Sydney’s ASX 200 (+0.36%) bucked the trend on expectations of stronger demand for commodities from an economic recovery in China.
1. Is Value Investing Back in Vogue?
Like any proper cult, value investing has no shortage of preachers, from the affable Warren Buffett to the inscrutable Ted Aronson.
Value investing propounds the profitability of finding cheap and unloved stocks – hence “value” investing, ahead of the market, and raking in those profits when the rest of the market finally catches up to the value hidden in these gems.
The simplicity of the value investing mantra is seductive – that if investors are willing to put in enough homework, they can find these “secret stocks” that are troves of value no one else has discovered.
But a rally in tech stocks and other more speculative segments of the market has seen risk-takers overtake value investors in returns for the past year.
So much so that even Aronson, a celebrated high priest of value investing, has thrown in the towel.
Last October, Aronson’s AJO Partners saw assets under management collapse from US$30 billion in 2007 to US$10 billion, as value stocks by one measure suffered their worse run of underperformance in over two centuries.
Like a cult leader committing seppuku, Aronson wrote in a farewell letter to his investors,
“The drought in value — the longest on record — is at the heart of our challenge. We still believe there is a future for value investing; sadly, the future is unlikely to arrive fast enough — for us.”
Perhaps Aronson ought to have kept the faith for just a few more months.
Ironically, in the last quarter of 2020, just as Aronson was heading for the exit, value stocks were heading for the moon, as MSCI’s index of global value stocks surged 16%, well ahead of the benchmark gain of 11% in growth stocks.
And value stocks have even beaten the tech-heavy Nasdaq Composite since last October.
Could this be the “Come to Jesus” moment for value investors?
If the reams of investment research being churned out by Wall Street are anything to go by, it appears everyone is now attending the Church of Value Investing.
A recent survey of fund managers by Bank of America (-1.24%) reveals that there are a growing number of investors who believe the value investing uptick is the start of a durable and potentially powerful renaissance in the fortunes of value stocks.
But much rests on expectations (whether justified or misplaced) for a massive U.S. fiscal spending splurge, including infrastructure measures, as well as the global economy regaining its footing in 2021.
And of course, there’s the small detail of a raging pandemic and botched vaccination roll outs.
Bond yields will also need to climb significantly to dent the luster of rate-sensitive growth stocks, which given that the U.S. Federal Reserve has pledged to maintain interest rates near-zero to 2023, may cap how high U.S. Treasury yields can rise, even though they have peeked above 1%.
Many stars must align for value investing to witness a Second Coming, for airlines to start filling up again, for hotels to be packed and for shops to be full.
But for diehard proponents of value investing, keeping the faith, even in the worst of times, is precisely what their cult calls for.
2. GameStop? Game On to be Precise
Remember the last time you stepped into a store to pick out a new video game? Neither can I.
The advent of high speed internet made it possible for gamers to buy games directly through their consoles or computers, which had a deep impact on physical retailers such as GameStop, which counted on customers to walk in through the door.
And a raging coronavirus pandemic has also seen a shift in how gaming content is consumed, with a growing number of gamers now choosing to download their video game content instead of buying physical discs.
One limitation which has prevented the entire collapse of video game discs of course has been the limited storage capacity of most gaming consoles, but even when such games are bought, they're more likely to come via Amazon (+0.05%) than GameStop.
And as companies like Microsoft (+1.58%) and Google (+0.09%), roll out gaming subscriptions, that allow gamers to play as many video game titles as they like for a monthly subscription, GameStop's fortunes look even more dire.
The way Netflix (-1.48%) decimated Blockbuster (what’s that?), shifts in the way that gaming content is being consumed, should theoretically have rung the death knell for GameStop, one of the last surviving physical retailers of video games and peripherals.
Yet somehow, GameStop’s shares have defied sensible analysis, in a dizzying rally that has seen its shares peak close to US$77, or over US$63 above the average forecast of equity handicappers tracked by Bloomberg.
Before 2020, GameStop had seen its stock fall steadily for six straight years as earnings shrank and it wasn’t projected to turn a profit anytime before 2023.
And while fundamentals may one day matter, GameStop is a lesson in how powerful retail investors can be.
Surging as much as 145% yesterday, no fewer than nine trading halts were called for GameStop, and shares in the company have risen by over 300% since the start of the year, beating out Bitcoin.
And that has seen institutional investors (the so-called “smart money”) eviscerated, including high-profile short sellers that were caught in a short squeeze betting against GameStop.
According to financial analytics firm S3 Partners, shorts have seen more than US$6.1 billion in mark-to-market losses betting against GameStop in the first three weeks of this year alone.
In what felt like an almost grassroots movement, Twitter (-0.46%) feeds and Reddit boards were alit with day traders talking up GameStop and investors poured into trading apps such as Robinhood to buy up shares of the firm.
To be sure, the appointment of Ryan Cohen (of Chewy (-2.46%) success and fame) to the board of GameStop has some investors betting on the company’s recovery.
But the fundamentals moving forward appear weak, regardless of Cohen’s capabilities.
Tech giants like Microsoft and Google are getting in on the gaming subscription business in a big way through streaming gaming content.
And the pandemic has changed how games are purchased and content consumed, a shift that is likely to prove durable.
But betting against retail investors is a tricky business as even the most sophisticated investors have discovered, and for GameStop, it’s game on, for now at least.
3. Can Bitcoin Scale to US$40,000 Again?
Doubts are emerging whether Bitcoin can rally to US$40,000 again as the key level of resistance has failed to be tested in any meaningful way since it scaled those heights in the early part of January.
Fueling those doubts, JPMorgan Chase (-1.25%) has noted that demand for the biggest fund tracking Bitcoin has faltered in recent days,
In a note last Friday, JPMorgan Chase strategist Nikolas Panigirtzoglou wrote that the pace of flows into the US$20 billion Grayscale Bitcoin Trust “appears to have peaked” based on four-week rolling averages.
Grayscale Bitcoin Trust slid 22% over the past two weeks, outpacing a drop of 17% in Bitcoin over the same period.
To be fair, the steeper decline in Grayscale Bitcoin Trust was merely the erosion of the “Grayscale Premium” that many investors pay for in exchange for the institutional protections of Grayscale’s Bitcoin Trust, above the purchase price of the underlying asset Bitcoin.
Ideally, a derivative that represents an underlying asset should track the price of the underlying asset as closely as possible.
A disconnect between the tracker and the underlying asset suggests inefficiencies in an immature market, which justifies the premium that clients are paying.
But the appointment of Janet Yellen as U.S. Treasury Secretary as well as the impending confirmation of crypto-savvy Gary Gensler to head up the U.S. Securities and Exchange Commission are contributing to the erosion of the Grayscale Premium.
Increased expectations of more comprehensive regulation directed towards digital assets is raising the possibility that investors, specifically institutional investors, will also have more choice.
Last week, BlackRock, the world’s largest asset manager, added Bitcoin futures as an eligible investment for two funds, the first time the money manager is offering clients exposure to cryptocurrencies.
And last year, Fidelity launched its inaugural Bitcoin Fund for wealthy investors.
In other words, rich investors now have more choice than ever before, when it comes to participating in Bitcoin and helps to explain to some extent why the Grayscale Premium is evaporating.
But the risk is that the momentum caused by unwinding bullish Bitcoin futures position will act as a downward pressure for Bitcoin in the short term at least.
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Jan 26, 2021