Novum Alpha

Novum Alpha - Daily Analysis 17 February 2021 (10-Minute Read)

Markets are moving away from growth to value, in what has been called the "re-flation" trade that is powering assets tied to economic growth and inflation, including commodities and sectors more exposed to the broader economy as bond yields edged up.

Welcome to your Wednesday and I hope it's turning out wonderful for you.

In brief (TL:DR)

U.S. stocks pulled back from a record rally with the S&P 500 (-0.06%) and tech-centric Nasdaq Composite (-0.34%) down while the blue-chip Dow Jones Industrial Average (+0.20%) was up slightly as investor assessed the effect of a cold snap across the U.S. on coronavirus vaccinations.
Asian markets were a mixed bag, taking their cue from Wall Street.
The benchmark U.S. 10-year Treasury yield touched 1.330%, the highest since February 2020 (yields rise when bond prices fall) as investors grew confident of the Biden administration's ability to pass fiscal stimulus.
The dollar strengthened against most of its major peers.
Oil slipped overnight, with the earlier turmoil caused by the cold snap starting to wane as March 2021 contracts for WTI Crude Oil (Nymex) (-0.58%) fell below US$60 to US$59.70.
Gold fell with April 2021 contracts for Gold (Comex) (-0.58%) at US$1,788.50 and crucially below the US$1,800 level again as the dollar gained.
Bitcoin (+3.36%) recovered some lost ground after it fell below US$50,000, settling at US$49,334 with inflows into exchanges leading outflows on the back of greater profit taking (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices).

In today's issue...

What is Warren Buffett Betting On?
Just When You Thought It Was Safe to Take Flight
Bitcoin Blasts Past US$50,000, But are CFOs Biting?

Market Overview

For millions of Americans in the midwest, someone must have left the freezer door open because Texas is colder than Alaska right now and the region is suffering a confluence of unfortunate circumstances.

Yet somehow the cold (which is great for storing but not transporting Pfizer-BioNTech's coronavirus vaccine) has not turned investors off of economically-sensitive stocks, which rely more heavily on the economy to be open again.

The impact of that shift is noticeable on indices, with more tech-heavy and reliant indices such as the S&P 500 and the Nasdaq Composite losing out the venerable Dow Jones Industrial Average.

In Asia, markets were mostly lower in the Wednesday morning session with Tokyo's Nikkei 225 (-0.69%), Sydney’s ASX 200 (-0.74%), Seoul's Kospi Index (-1.32%) all down slightly and Hong Kong's Hang Seng Index (+1.90%) up as Chinese investors were back in the game.

1. What is Warren Buffett Betting On?

Buffett has pared bets on tech firms like Apple (-1.61%), likely taking some profits off the table and putting it into 5G and insurance service providers (one of his favorite sectors)
Banks and financial firm holdings were also pared down as persistently low interest rates compress profitability in that sector

As goes Buffett, so goes the value investing world.

Followers of Warren Buffett are often on the edge of their seats to find out which companies the legendary value investor has bet on through his holding firm Berkshire Hathaway (+1.23%), to hopefully gain some insight as to where he sees value in the stock market.

Revealed in an updated regulatory filing yesterday, Berkshire Hathaway pared stakes in Apple at a time when investors are growing increasingly worried about frothiness in the market, particularly in tech.

Berkshire Hathaway's sale of Apple in the third quarter of 2020 would make sense, especially as Apple split its shares, making it more accessible to retail investors (speculate much?) and may have been the signal to Buffett that it was time to take some money off the table.

Buffett had previously been slow to embrace tech stocks, conceding from early on that he did not understand the business and Apple was the first tech firm that was added to Berkshire Hathaway’s substantial portfolio in 2016.

Berkshire Hathaway also cut holdings in financials, including JPMorgan Chase (+2.41%), PNC Financial Services Group (+4.71%), M&T Bank Corp (+4.53%) and significantly slashed its holdings in Wells Fargo & Co. (+3.76%) by a staggering 59%.

While banks did surprisingly better than expected during the pandemic, recovering sharply in the third quarter of last year, concerns over a prolonged period of low interest rates, which reduces profitability at banks, may have influenced the decision to pare stakes in the sector.

And considering that financials were up sharply at the time, shareholders of Berkshire Hathaway would be happy with the decision.

Berkshire Hathaway also dumped Barrick Gold (-2.03%), but to begin with, the investment in the gold miner came as a surprise when it was revealed last year, given Buffett’s years of criticizing gold as doing nothing more than sitting there and “staring at you.”

So much for what Buffett sold, but what did he buy?

Berkshire Hathaway stocked up (no pun intended) on Verizon Communications (+3.05%), a telecommunications firm which has gone all in on 5G at a time when the world has realized just how essential digital communications have become.

Far from diversifying, Verizon Communications has doubled down on 5G, having recognized ahead of competitors that it is not an expert in the media business through its painful (and expensive) lessons with AOL and Yahoo.

Berkshire Hathaway also went big on insurance broker Marsh & McLennan (+1.51%) and considering that Buffett has long favored insurers for their free cashflow, the bet on the insurance services firm is a move along that vertical, to complementary businesses in that value chain.

Finally, Buffett’s bet on Chevron (+2.05%) seems somewhat prescient now, given the spike in energy prices as cold weather in the U.S. has wreaked havoc in the Permian Basin and sent the prices of oil and natural gas soaring.

2. Just When You Thought It Was Safe to Take Flight

Airlines hoping for a summer boost to for travel have been disappointed as borders remain locked down and new coronavirus variants threaten the tepid recovery
Short haul carriers and budget airlines likely to recover faster as long haul, international and full service carriers continue to languish, airlines may need to go hat in hand to raise more money

So you got together your “go bag,” your vaccination (and certification of course) and your bookings, ready to head to the airport for that long-awaited summer vacation – except that vacation never occurred and you never booked the flight.

Because a sharp summer turnaround in the fortunes of embattled airlines has failed to materialize as the coronavirus pandemic drags on for another year.

Hopes for a vaccine-led recovery in the airline industry are looking increasingly dim and with less than two months into the new year, the danger facing airlines is like death by a thousand pinpricks as countries around the world tighten travel restrictions.

For a US$800 billion industry built around moving people, airlines globally have endured the largest decline in flying since the Second World War when airliners were powered by rotating windmills.

Europe and the U.S. have tightened travel restrictions and Australia’s borders are expected to stay closed till the end of the year.

And even though airlines globally believe that this year will be better than last year (because could it get any worse?) pressures on airlines are increasing steadily.

The number of flights in European airspace has plunged to its lowest level this month since lockdowns were first imposed last spring and despite much ado about China’s domestic air travel market remaining a bright spot in an otherwise bleak landscape, that too has faltered as Beijing discouraged travel over the Lunar New Year, typically the busiest season for Chinese skies.

Even IATA, the global body that represents airlines, is conceding that there is a growing risk passenger numbers this year will fall far short of projections.

And while many airlines have received support from governments, investors can’t be faulted for wondering when that gravy train is going to dry up, with myriad fiscal demands from a variety of needs that are arguably more urgent than a weekend at Benidorm.

American Airlines (+3.18%) has already warned 13,000 of its employees that they are at risk of furlough, blaming fresh restrictions on international travel and the glacial pace of vaccine distribution – the cold snap across the U.S. is also not helping matters.

In a note to staff, American Airlines CEO Doug Parker was candid in his assessment of the situation,

“We fully believed that we would be looking at a summer schedule where we’d fly all of our aeroplanes and need the full strength of our team.”

“Regrettably, that is no longer the case.”

From Gulf carriers to European airlines, the hope was that mass vaccinations would unleash a pent up surge in demand for summer holiday bookings that would bolster battered balance sheets.

While Europe’s five biggest airlines, Ryanair (+2.39%), British Airways owner IAG (+1.54%), Lufthansa (+0.27%), Wizz Air (+0.04%) and easyJet (+0.83%) have collectively raised over US$20 billion from a mix of governments, shareholders and bond markets, there is concern that that may not be enough.

Making matters worse, new coronavirus variants are already threatening the efficacy of existing coronavirus vaccines and complicating any attempt to achieve cross-border co-ordination on travel rules between governments.

The MSCI World Airlines index has already recovered some of its losses since coronavirus vaccines emerged last November, but may be due for a downgrade in light of the latest developments.

Even when the recovery comes, it’s likely to be uneven, with low-cost carriers such as Southwest Airlines (+1.21%) best-placed to capitalize on short-haul business rather than airlines that rely on long-haul international flights such as legacy carriers British Airways and Air France-KLM (-0.18%).

The U.S. majors are all anticipating a slower recovery in long-haul international travel than domestic, but America’s massive domestic market at least offers operators a respite not available to European and Asian long-haul providers.

3. Bitcoin Blasts Past US$50,000, But are CFOs Biting?

As many as 5% of CFOs and finance executives plan to add Bitcoin to their balance sheets this year
Concerns over volatility of Bitcoin and regulatory uncertainty still weigh on firms looking to put Bitcoin on their books

Bitcoin cleared another major milestone yesterday, blasting past US$50,000 for the first time ever and captivating investor attention globally, before paring back gains to trade just below that level.

The 400% rally in the world’s largest cryptocurrency by market cap comes against a backdrop of near-zero interest rates from central banks and unprecedented fiscal stimulus by governments in the wake of the coronavirus pandemic.

Bitcoin’s proponents are arguing that the relentless money printing poses a threat to the financial system even as inflation remains muted.

Yet if CFOs are concerned that governments could undermine the value of their cash reserves, they’re not expressing those concerns publicly for now at least.

Because you don’t get to be in-charge of the purse strings by being profligate or provocative, it’s no surprise that a recent Gartner Survey showed most financial executives are not planning to invest in Bitcoin as a corporate asset this year.

Considered the asset of choice for the tech fringe from the perspective of many corporate CFOs, only a handful of companies have come out to publicly announce their purchases of Bitcoin on their balance sheet, including Tesla (-2.44%), MicroStrategy (-7.67%) and Square (+1.20%).

But interestingly, the Gartner Survey which was conducted this month, showed that of the 77 finance executives including some 50 CFOs surveyed, 5% are planning to hold the world’s largest cryptocurrency on their books this year.

And considering that the market cap of Bitcoin is just over US$920 billion, with the public float of available Bitcoin considerably lower, even a small allocation by a handful of S&P 500 constituent companies could go a long way to boost Bitcoin higher.

The Gartner Survey comes hot on the heels of Tesla’s CEO Elon Musk announcing that the firm had purchased some US$1.5 billion worth of Bitcoin from the company’s cash pile.

And on Tuesday, MicroStrategy invested some US$600 million into Bitcoin via a convertible bond offering, with the intent of using those proceeds to buy more Bitcoin.

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Feb 17, 2021