Novum Alpha - Daily Analysis 8 April 2021 (10-Minute Read)

While investors continue to price in an earlier than expected rate rise, the Fed's meeting minutes demonstrate that the central bank's priorities may have shifted from the economic to the social, including such stated goals as income equality and full employment.

 
Top of the Thursday to you as markets found their footing, bolstered by the U.S. Federal Reserve's commitment to supportive policy. 
 

In brief (TL:DR)

 
  • U.S. stocks were flat Wednesday with the S&P 500 (+0.15%) and blue-chip Dow Jones Industrial Average (+0.05%) all slightly higher as investors edged into value stocks while the tech-centric Nasdaq Composite (-0.07%) was more or less unchanged. 
  • Asian stocks were steady Thursday.
  • The U.S. 10-year Treasury yield held around 1.67% as the U.S. Federal Reserve meeting notes revealed that the central bank would continue to support asset purchases (yields fall when bond prices rise). 
  • The dollar held on to gains. 
  • Oil fell with May 2021 contracts for WTI Crude Oil (Nymex) (-0.64%) at US$59.39 as demand remained flat despite the uptick in economic prospects.  
  • Gold slipped with Jun 2021 contracts for Gold (Comex) (-0.27%) at US$1,736.90 on the back of a strengthening dollar. 
  • Bitcoin (-1.75%) slipped to US$56,688, mainly on dollar strength, with inflows into exchanges leading outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices).

In today's issue...

 
  1. What's Next for Global Equities? 
  2. Investors are Borrowing Heavily to Bet Bigly 
  3. Are Cryptocurrency Stocks Set to Pop?  
In case you missed the World Family Office Forum 2021, here's a link to the video...

Market Overview

 
Much ado about the meeting minutes has revealed a U.S. Federal Reserve that is committed to the course. 
 
Review of the U.S. Federal Reserve's meeting minutes from last month showed that the central bank remains dismissive over inflation and committed to an accommodative policy until the U.S. economy is firmly back on its feet. 
 
While investors continue to price in an earlier than expected rate rise, the Fed's meeting minutes demonstrate that the central bank's priorities may have shifted from the economic to the social, including such stated goals as income equality and full employment. 
 
Unlike economic targets such as a 2% inflation rate or a 2% rate of GDP growth, social targets are more amorphous and provide plenty of leeway for markets to rally even higher till these ideals are achieved. 
 
Asia was mainly higher on Thursday bag with Tokyo's Nikkei 225 (-0.33%) and Seoul's Kospi Index (-0.02%) down marginally, while Sydney’s ASX 200 (+0.95%) and Hong Kong's Hang Seng Index (+0.43%) were up.  
 
1. What's Next for Global Equities?
 
  • Investors are taking a pause out of the action even as major indices set new record highs
  • Where stocks head from here is less clear, with excess amounts of liquidity sloshing about the financial system and a U.S. Federal Reserve that shows no signs of relenting on both asset purchases or raising rates in the immediate term 
 
You don’t ever want to be the first one to wake up after a massive house party, because the odds are you won’t like what you see.
 
Whether it’s panties or used condoms, empty bottles or drug paraphernalia, stepping over the littered landscape of excess can be an affront to the senses, when you’re still very much hungover.
 
And so it is for investors who are now watching to see what happens next for global equity markets.
 
Punch drunk from the massive amounts of liquidity that have been sloshing around the financial system, investors are now at that point where the party’s not over yet, but are wondering if they should bail before the cops arrive.
 
Yesterday a rally in stocks fueled by optimism over a rapid rebound in global economic growth took a pause, and while major indices did eke out new records, the pace of that increase has started to slow.
 
The benchmark U.S. 10-year Treasury yield was also somewhat stable, reflecting the increasingly pensive rally in equities (yields rise when bond prices fall), as a recent review of U.S. Federal Reserve meeting minutes suggested the central bank was mostly dismissive over inflation.
 
But investors are holding on to dry powder, with the bar for each successive record-setting rally in equities set higher because investors are already poised to receive good news.
 
To that end, the Fed may provide some clues where investors could seed their money next.
 
Although a rotation into value stocks was in the offing at the start of this year, that gap between so-called “value investments” and growth stocks like tech firms, has narrowed of late.
 
Part of the reason of course was the collapse of the heavily-leveraged trades in firms such as ViacomCBS (-1.04%) and Discovery Communications (+0.02%) that collapsed after Archegos Capital Management had its credit pulled from under it, the other of course is that the Fed has promised to keep asset purchases up until there is actual proof that unemployment and other social goals have hit targets.
 
Investors are understandably nervous over how much of recent value stock bets was as a result of leverage, and how much was real, which is why they’re retreating back into growth stocks for now until more clarity emerges.
 
Whether that shift proves to be durable is more debatable.
 
For as long as the Fed shows no signs of losing its appetite for asset purchases and continues keeping interest rates low, growth stocks have just as much a play as value stocks, even as the global economy reopens. 
 
In case you missed the World Family Office Forum 2021, here's a link to the video...
 
2. Investors are Borrowing Heavily to Bet Bigly
 
  • Rising stock markets are also fueling a wave of borrowing, both to bet on stocks on margin as well as using stocks as collateral to borrow cash 
  • True leverage picture less clear, with uncertainty whether or not the bulk of the borrowing to bet on stocks is by retail or institutional investors, but elevated levels of liquidity are providing some degree of buffer that any correction is unlikely to be systemic at this stage 
 
Your credit’s always good here, until it’s not.
 
If investors took anything away from the collapse of Archegos Capital Management, the family office that imploded under the weight of highly leveraged bets on a handful of stocks, it’s that leverage is a double-edged sword, it can both supercharge winners and disembowel you when you’re down. 
 
But record low interest rates have led both individual investors and big investment firms to borrow heavily and bet on practically anything.
 
The “everything rally” that started in stocks last year received a strong shot in the arm by investors betting using borrowed money, with day traders punting on zero-fee trading apps like Robinhood, to stealthy behemoths like Archegos Capital Management, the investment firm that triggered a meltdown in companies like ViacomCBS and Discovery Communications, as well as a handful of Chinese tech firms.
 
According to data from the U.S. Financial Industry Regulatory Authority (Finra), the self-regulatory arm of Wall Street (because who can police better than the policed?), up to as recently as late February, investors had borrowed a record US$814 billion against their portfolios.
 
Up 45% from a year earlier, the last time investors had borrowed so much was during the dotcom bubble of 1999.
 
But correlation is not causation, and investor borrowing is only one of a myriad of factors that has fueled the epic rally in stocks – record low interest rates, fiscal and monetary stimulus and low yields have all led to the “everything rally.”
 
And Finra data in and of itself isn’t a perfect gauge for how much investors are trading on margin – when they pledge securities in exchange for loans from brokerages to make further investments.
 
Some investors, especially those for whom their stock portfolios have risen significantly, are borrowing to buy yachts and mansions as well as buy more stock.
 
And it’s only natural that investor borrowings against stock rises as the value of their collateral rises – so in and of itself, the Finra data isn't the smoking gun that markets are in a bubble.
 
But leverage, as demonstrated by the Archegos Capital Management fallout, can exacerbate wild swings in the market – fueling bull markets just as much as dumping on bear markets.
 
And as stocks keep trending higher, each new high will bring along margin debt with it.
 
Margin trading is a double-edged sword – borrowing money gives investors more buying power, but it also puts them at greater risk because when stocks fall, lenders can ask investors to put up more collateral or worse, sell the shares, which is what happened at Archegos Capital Management.
 
Fortunately, Archegos Capital Management’s margin call was across just a handful of shares and had limited effect on other equities, but no one knows for sure whether another Archegos lays hiding in the depths because Finra’s data doesn’t break down the proportion of margin held by large investors versus that held by small ones. 
 
Leverage in and of itself isn't bad, it's what happens when that leverage is suddenly removed that can be. 
 
3. Are Cryptocurrency Stocks Set to Pop?
 
  • Prospective Coinbase IPO has provided fuel for the listed companies which have stakes in South Korea's largest cryptocurrency exchange operator to rally 
  • Coinbase IPO may spark a wave of cryptocurrency company IPOs, including exchanges and other service providers 
 
With the mad ascent of Bitcoin over the past year, public awareness, interest and investment in cryptocurrencies have provided a fertile ground for the direct listing of Coinbase, the biggest cryptocurrency exchange in the U.S. by volume.
 
But the upcoming Nasdaq listing of Coinbase has also had spillover effects, sparking a frenzy among South Korean investors to pile money into the country’s cryptocurrency stocks listed on its bourse and boosting the fortunes of a local broker with a minority stake in a South Korean cryptocurrency exchange.
 
Hanwha Investment & Securities Co. a traditional brokerage, has rallied by over 210% so far this year, the best performance among South Korean stocks with over US$1 billion in market value.
 
Shares of Hanwha Investment have popped from its 6.15% stake Dunamu, which operates the leading South Korean cryptocurrency exchange Upbit, according to a regulatory filing in February.
 
And while Hanwha Investment appears to be South Korea’s biggest beneficiary from the bullishness in Bitcoin and other cryptocurrencies, off the back of Coinbase’s Nasdaq listing, there are rumblings that Dunamu itself may look to list on Nasdaq next.
 
According to a Herald Business Newspaper report last month, Dunamu is exploring a possible listing on Nasdaq as well.
 
But Hanwha Investment is hardly the only firm to have capitalized on the recent interest in cryptocurrency-underlying stocks.
 
Shares of Woori Technology Investment (-1.43%) surged 140% while Kakao (+1.85%) gained some 38% - each have about 8% stake in Dunamu as well.
 
In the U.S., there are talks of Coinbase rival Kraken also considering a listing.
 
Coinbase had a record quarter this year, on the back of renewed interest in both cryptocurrencies as well as larger institutional participation.
 
With just a week to go before its listing, Coinbase said it expects first quarter profit for 2021 to be between US$730 million to US$800 million, over double the amount that it earned in all of 2020. 
 

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Apr 08, 2021