Novum Alpha - Daily Analysis 10 March 2021 (10-Minute Read)
It's official, game on again! Tech stocks which many had sounded the death knell for came roaring back and even Tesla's Elon Musk can boast that he covered back US$25 billion in net worth in a single day of trading.
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A wonderful Wednesday to you as we head into the midweek and markets are none the worse for the wear.
In brief (TL:DR)
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In today's issue...
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Market OverviewIt's official, game on again!
Tech stocks which many had sounded the death knell for came roaring back and even Tesla's Elon Musk can boast that he covered back US$25 billion in net worth in a single day of trading.
Highlighting just how volatile the markets can be, Tesla gained so much that it erased all of its losses for the past five days and sent indices, especially those which derive their value from tech shares, sharply higher.
Asian stocks were mostly up at the open, with Tokyo's Nikkei 225 (+0.12%), Seoul's Kospi Index (+0.60%) and Hong Kong's Hang Seng Index (+0.81%) all higher, while Sydney’s ASX 200 (-0.09%) was flat in the morning trading session.
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1. Tesla's Tremendous Turnaround
Wall Street is only cottoning on to what retail investors have been saying on internet message boards for the past two weeks – “buy the dip” – as professional investors rushed back into Tesla and put a screeching halt to its 5-day slump.
Tesla posted its biggest one-day gain in over a year on a steady stream of positive news, including an upgrade of the electric vehicle maker from a Wall Street analyst and a rally in Bitcoin, of which Tesla had earlier purchased some US$1.5 billion worth (and is now probably worth more).
Tesla’s rally yesterday was enough to more than erase declines from the past five trading sessions that saw the company lose as much as US$150 billion off its market cap.
And while some were calling Tesla’s fall as the beginning of the end in investor appetite for growth stocks, retail investors on Reddit forums and Twitter (+6.36%) were calling to “buy the dip.”
That retail-led trade has paid off, and now leading Wall Street analyst New Street Research’s Pierre Ferragu has upgraded Tesla from a “hold” to a “buy” and suggesting that the company has two years of earnings momentum ahead with demand outlook much stronger than supply ever could be.
In the analyst note, New Street’s forecast implies Tesla could deliver earnings per share of US$12 in 2023.
“With such earnings revision, we would expect the stock to remain in the upper end of the 50-100x range, similar to where Amazon (+3.76%) traded for almost a decade, and below today’s multiple of 100x.”
Ferragu’s comparison of Tesla to Amazon is important because many analysts had also dismissed e-commerce juggernaut Amazon for years as it burned through cash to garner market share.
But investors who stuck with Amazon even when it was losing money and its share price was languishing in the aftermath of the dotcom bubble, are laughing all the way to a happy retirement by now, as Amazon founder Jeff Bezos has made them fabulously rich.
Depending on which narrative an investor subscribes to, Tesla is either a vehicle maker, with the same constraints and pressures as any other vehicle maker, or a tech company akin to Apple (+4.06%), which engenders fervent followers.
Should an Apple iPhone really cost that much? Probably not, but more importantly, Apple can charge that much.
Similarly, Tesla has garnered an almost cult-like following for its cars akin to how people feel about Ferraris and that may be all the difference.
Because when was the last time you felt excited about buying a Toyota Corolla? Compare that feeling with the prospect of buying a Tesla and some of the premium the stock is commanding suddenly seems to make more sense.
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2. Bonds Are Not the Safe Haven You Think They Are
“These are not the safe havens you’re looking for,” says the market.
“These aren’t the safe havens we’re looking for,” reply investors.
“Move along.”
“Move along.”
(Adapted from the scene in Star Wars, A New Hope where Obi Wan Kenobi and Luke Skywalker encounter an Imperial checkpoint of stormtroopers.)
For decades, government securities, bonds or Treasuries as they’re often referred to, have formed part of a supposedly balanced and healthy portfolio.
And for decades, they have delivered ballast to volatile portfolios that would otherwise be whipsawed had they only been in stocks.
So when the coronavirus pandemic hit, it was no surprise when investors initially rushed into safe government bonds such as U.S Treasuries, sending their yields plummeting (bond yields fall when prices rise).
And when governments undertook unprecedented fiscal and monetary stimulus, stocks rose as well, but bonds still held their attraction.
So what’s changed?
For starters the Biden administration has just unleashed a flood of fiscal stimulus, some U$1.9 trillion into the economy, and much of that stimulus will come in the form of additional government debt through Treasury sales.
With increasing signs that the U.S. economy is recovering faster than expected, bond repricing has also been feeding into the selloff in safe government securities since the beginning of this year.
Yields on the benchmark U.S. 10-year Treasury Bill have been volatile, pushing past 1.6% regularly before pulling back, but adjusted for inflation, the real yield on Treasuries is still negative, suggesting that investors haven’t thrown all caution to the wind.
More than just a few bad months for bond investors, fixed income may be facing some tectonic shifts as the global economy moves into a new cycle.
As bond yields head up, forty years of expectation that they mostly head down, is being challenged.
And that should change the idea that the perfectly balanced portfolio is made up of 60% equities and 40% bonds.
The problem is that investors' ideas about asset characteristics can atrophy over time.
In the inflation-plagued period after the U.S. abandoned the gold standard (where the value of a dollar was its equivalent in gold), bonds were known for their risk-free rate of return.
Yet if an investor held a 60/40 portfolio during the period from 1970 to 1975 (after the gold standard gave up the ghost), they would have lost 60% of the real value of their money.
And even if investors got their money back on bonds held to maturity, they would have lost the real value away to inflation.
That risk is what’s leading some to at least reassess the viability of the traditional portfolio allocation strategy between bonds and stocks.
And while the 60/40 portfolio strategy is not quite dead, it’s not evergreen either.
Moves in the bond markets over the past two weeks could easily be reversed by central banks (the Fed can simply buy up more Treasuries and act as a buyer of last resort) and intervene to bring yields down.
Even if the bull market on bonds is not completely over, one has to acknowledge that it must certainly be near its end.
With the U.S. 10-year Treasury yield around 1.5%, by historical standards, yields are almost near zero and remain low despite the massive amounts of fiscal stimulus from governments around the world and the pledge by central banks to ignore inflation in favor of employment.
Inflation is generally viewed as good for equities but bad for bonds, because what’s the point in holding something that guarantees you won’t get your money back in inflation-adjusted terms?
But saying goodbye is hard to do.
The past forty years have led to the sunk-cost fallacy – investors are understandably reluctant to abandon the tried and tested 60/40 split.
But anyone still tied to this way of thinking might want to consider looking for new forms of protection, whether it be gold and Bitcoin, or even an equity portfolio more directed towards value stocks, might all be good places to start.
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3. Where is Bitcoin Headed to Next?
There’s a saying on Wall Street that if you want to know what happens next, follow the trail of the money.
It’s why there are some shops which specialize almost entirely on money flows, including retail flows into stocks and options, as well as larger flows handled by the low-profile but influential market makers that dominate trading on the world’s biggest stock exchanges.
So just before Bitcoin rallied yesterday, some corners of the cryptocurrency world had already noted significant capital flows pouring into the system.
And just as money flows can be traced in the traditional financial system, the transparency of the blockchain has meant that large flows headed to buy Bitcoin on exchanges could also be sensed.
These flows are likely to be retail however, the same way that retail investors stocked up on more speculative segments of the market earlier this week, including GameStop (+26.94%) (yes, that’s still happening) and Tesla.
Considering that Bitcoin held up relatively well during the rout in tech stocks, which also saw Tesla lose some US$150 billion in market cap, Bitcoin’s recovery was in line with a broader risk-on sentiment.
Bitcoin prices continue to be buoyed by news that institutional adoption is accelerating and that big financial players are jostling to gain exposure to the cryptocurrency.
Another view of course is that Bitcoin is just another example of a stimulus-fueled bubble destined to end in tears similar to what happened between 2017 to 2018.
Bitcoin and tech stocks are becoming increasingly correlated as well and it doesn’t help that the likes of MicroStrategy (+14.71%), Square (+11.50%) and now Chinese photo-editing app Meitu (-1.10%) have all thrown in their lot with Bitcoin and in the case of Meitu, Ether as well.
Significant flows into cryptocurrency exchanges this past week have been noted, with much of the strongest buying action occurring before Bitcoin recovered above US$50,000.
And while there is growing evidence that institutional investors are seriously considering cryptocurrencies or are already holding them, the flows of the past week have been primarily retail, which some might associate with being volatile, but others will note as providing a more steady hand, or “diamond hands” as they’ve come to be known.
Retail investors poured some US$6 billion into stocks two weeks earlier, which is higher than the typical flow of US$4.8 million, taking the opportunity to “buy the dip,” similar to what has happened for Bitcoin.
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Mar 10, 2021