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Novum Alpha - Daily Analysis 1 March 2021 (10-Minute Read)

Beware the Ides of March may have been relevant to Julius Caesar (it was the month when he was allegedly assassinated) but markets seem to be shrugging them off.

 
Welcome to the start of a brand new work week and a brand new month? Don't you just love how the first of the month also starts on a Monday? It's so neat! 
 

In brief (TL:DR)

 
  • U.S. stocks finished a mixed bag last week with the S&P 500 (-0.47%) and blue-chip Dow Jones Industrial Average (-1.50%) down, while the tech-centric Nasdaq Composite (+0.56%) with futures activity in the morning session in Asia pricing in recovery in stocks 
  • Asian stocks are all higher this morning, leading the way as bond yields start to normalize.  
  • The benchmark U.S. 10-year Treasury yield fell two basis point to 1.380% in signs that the initial bond-age looks to be ebbing.
  • The dollar fell as investors rotated back into risk and as the Biden administration inches closer towards passing its ambitious US$1.9 trillion stimulus package. 
  • Oil rose with April 2021 contracts for WTI Crude Oil (Nymex) (+2.05%) at US$62.76 as the dollar weakened. 
  • Gold edged higher with April 2021 contracts for Gold (Comex) (+0.79%) at US$1,742.40 as investors became more comfortable on the retreat of U.S. Treasury yields to shift back into the precious metal. 
  • Bitcoin (-0.31%) fell slightly over the weekend to US$46,394 and appears to have stabilized as inflows into exchanges slowed against outflows (inflows suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

 
  1. Buffett Buffeted by Billions in Excess Liquidity 
  2. Airline Stocks Are Soaring - Too Bad Their Planes Aren't
  3. The More Bitcoin Moves, The More It Becomes Impossible to Ignore

Market Overview

 
Beware the Ides of March may have been relevant to Julius Caesar (it was the month when he was allegedly assassinated) but markets seem to be shrugging them off. 
 
As the northern hemisphere looks forward to spring, a period typically symbolizing new growth, investors are starting to shift away from the carnage in bond markets, where yields have retreated sharply, and hoping to return to some sense of normal market dynamics. 
 
In Asia, markets opened the week higher with Tokyo's Nikkei 225 (+2.25%), Sydney’s ASX 200 (+1.53%), Hong Kong's Hang Seng Index (+1.53%) and Seoul's Kospi Index closed for South Korea's Independence Day.
 
 
1. Buffett Buffeted by Billions in Excess Liquidity
 
  • Warren Buffett's struggle to deploy excess capital at Berkshire Hathaway (-0.88%) consistent with his investment philosophy and signs that the market may have become unnervingly frothy 
  • Buffett's annual letter to investors provides almost no insight as to how markets will trend, as both value and momentum investing has become overtaken by excess liquidity in the markets
 
Like a rising tide floats all boats, excess liquidity is making it more difficult for even the most astute investor to stand out as a tall ship. 
 
And nowhere has this been more evident than in the fortunes of famed value investor Warren Buffett.
 
Investors have been eagerly anticipating Warren Buffett’s annual letter to investors this year and were somewhat disappointed to find few (if any) insights into the Oracle of Omaha’s thoughts on the markets and their outlook.
 
To be sure, the pandemic has not been kind to the cult of value investing, as excess liquidity flooded markets and anything from GameStop (-6.43%) to Dogecoin rallied.
 
Against this backdrop, the seasoned hand of an old-time investor who is more familiar with railroads and soda seems somewhat out of context in our current cryptic (no pun intended) age.
 
Over the past year, Buffett has had to pare down losing bets on everything from airlines to financials, and given his personal investment philosophy, had to sit out most of the upside in everything from tech to other speculative assets.
 
Buffett pared down bets on companies like Apple (+0.22%), having taken some money off the table after investing in the tech sector for the first time in 2016.
 
Instead (and somewhat disappointingly) Berkshire Hathaway has repurchased some US$24.7 billion of its own stock, as Buffett has struggled to find better ways to invest his enormous cash pile.
 
And yet there’s more where that came from – with the conglomerate continuing to buy its own stock since the end of last year, and likely to keep at it. 
 
Writing in his annual letter, Buffett conceded that the firm had “made no sizable acquisitions” in 2020.
 
In many ways, Buffett is being buffeted (pun intended) by the headwinds of excess liquidity, record low interest rates, loose monetary policy and unprecedented fiscal stimulus – and has been unable to find “value” targets.
 
Just as the oceans are full of water you can’t drink, Berkshire Hathaway is increasingly finding itself in a sea of stocks it can’t buy (according to its investment philosophy).
 
The problem though is that just like a passive fund, which must deploy the flows that enter it, and ultimately ends up fueling a self-created feedback loop that causes stocks that it tracks to keep rising, Berkshire Hathaway’s share buybacks are not much better.
 
Even Berkshire Hathaway’s stake in Apple, which Buffett paid just US$31.1 billion for in 2016 and is worth some US$120 billion now, reflects the business models Buffett is most comfortable with – a global brand name with an absolutely addictive product (Coca Cola (-2.35%) anyone?).
 
Buffett has long balked at technology investments, conceding that he doesn’t understand the companies well enough.
 
But the rise of deputies within Berkshire Hathaway has since seen a change from the kitschy investment philosophies of Buffett and into the information and technology age.
 
Outside of Apple, Berkshire Hathaway has also built up substantial positions in e-commerce giant Amazon (+1.17%) and Verizon Communications (-2.12%), a leader in 5G communications, as well as invested in some more speculative corners of the market such as Snowflake (-0.31%), a yet-to-be profitable cloud computing company.
 
Investors more accustomed to the slow and steady method of investing that Berkshire Hathaway has long embodied may now have to contend with a conglomerate that is being pushed into the modern era, as Buffett himself pushes into his 90s.
 
And while not much has been said about Berkshire Hathaway’s succession plans, mistakes are starting to mount.
 
Buffett conceded early on that he had missed out on many opportunities in tech and in this year’s annual letter to shareholders, admitted to overpaying for Precision Castparts five years ago, an investment which cost Berkshire Hathaway investors some US$11 billion.
 
That having been said, Buffett may end up having the last laugh.
 
Investors are increasingly concerned that excess liquidity has created an unsustainable market bubble, which makes absolute sense why Buffett may have sat out the past year.
 
If and when valuations normalize, the value of the investments which Buffett has picked will become obvious.
 
But until that great day of deliverance, the legions of Buffett followers who hang on to his every word will need to keep faith a little longer for the second coming of value investing – because what’s a cult without faith? 
 
 
2. Airline Stocks Are Soaring - Too Bad Their Planes Aren't
 
  • Airline stocks have rallied on the reflation trade, effective coronavirus vaccines and optimism that borders will open up 
  • Lack of progress on vaccine passports, coronavirus mutations and uncertainty over the timing of reopening long haul travel, particularly for business, means that only short haul budget airlines look likely to be safe-ish bets in the immediate term 
 
Craig Stephenson spent the better part of the weekend planning his summer vacation.
 
But no, the resident of Fort Lauderdale, Florida, wasn’t headed Europe as planned or even to New York City, this summer, he’s headed to Miami, several hours drive from his home.
 
And like Stephenson, millions of people around the world, who would ordinarily think nothing of getting aboard a transcontinental flight are now looking at destinations closer to their couch.
 
Yet despite the lack of wanderlust, airline stocks are soaring on optimism over vaccinations restarting travel, but it may take signs of a recovery in long-haul international flights (the kind that Stephenson and millions of others are unable to embark on) before the sector makes further gains.
 
Last month, the Bloomberg World Airlines Index soared 15%, but is 17% below its 2020 peak set in January before the coronavirus outbreak unleashed itself on the aviation sector.
 
But if forward bookings are any guide, leisure travel is set to rebound sharply in the coming months, for those airlines fortunate enough to have a large enough domestic market, because business trips and intercontinental flights have yet to catch up.
 
Borders and tourist attractions remain very much closed and until they reopen, demand for long-haul travel, especially for business, which is where the bulk of profits for full-service airlines lies, is likely to be non-existent.
 
Instead, short haul and budget airlines are coming out on top post-pandemic – benefiting from a focus on cost-conscious holidaymakers rather than business clients.
 
And if the trend of remote meetings and video conferencing proves to be durable (there is every reason to believe that it will), the tables may have turned forever for full-service long-haul carriers.
 
Analysts are already predicting a 40% decline in the major European airlines Lufthansa (+1.78%)  and Air France-KLM  (+1.23%).
 
While Asian airlines have recouped most of the losses from last month, Asian airline stocks are still well off their pre-pandemic levels.
 
If a vaccine passport regime can be implemented in Asia, it could provide a much-needed shot in the arm for Asian carriers.
 
It also helps that airlines have managed to raise a relatively large war chest to tide over the hard times – with shareholders subsidizing at least 17 stock offerings during the pandemic, according to data compiled by Bloomberg.
 
But investors thinking of betting on the airlines may want to be cautious.
 
While an S&P index of airline stocks is now only down 14% since the beginning of 2020, the average 2021 earnings estimate for American carriers has stayed around the same level since May of last year, suggesting that any unexpected shocks (such as fresh lockdowns or coronavirus mutations) could send airline stocks plunging further. 
 
 
3. The More Bitcoin Moves, The More It Becomes Impossible to Ignore
 
  • Bitcoin is best viewed from the lens of networks, they have no value until enough people start using it 
  • Coinbase filing reveals that the handful of Americans who hold court over Bitcoin in the U.S. are also some of the biggest names behind some of the most successful startups 
 
The course of true love never did run smooth, nor did the ascent of Bitcoin.
 
For relatively new participants into the cryptocurrency sector, the past few weeks would have been gut wrenching, with investors who clamored into the crowded cryptocurrency trade as Bitcoin began its wild ascent towards US$58,000, punched in the gut as rising bond yields are believed to have sent it in a tailspin.
 
Bitcoin now trades around US$46,000 (depending on when you’re reading this) and some (especially the new initiates into the space) are wondering if this is the beginning of the end for the Bitcoin bubble, or merely another speed bump in the path of cryptocurrency’s progress.
 
To understand cryptocurrencies, it’s important to first understand that it’s not money – not in the traditional sense at least.
 
If we understand money to be nothing more than the means to control resources, then Bitcoin and its ilk are so much more.
 
There’s no denying that technology runs our lives and cryptocurrencies are an extension of that technology – they are various forms of programmable money - but their true value isn't in the holding, it's in the networking. 
 
And the recent filing by cryptocurrency exchange Coinbase for its direct listing on Nasdaq reveals why the biggest names of the future, will be names that investors may never have heard of, yet.
 
It also reveals a surprisingly small circle of (mostly) men who dominate the incredibly lucrative digital asset landscape in the United States from the now-billionaire CEO of Coinbase Brian Armstrong, to his co-founder, Fred Ehrsam, who went on to create Paradigm Operations.
 
In the regulatory filing for Coinbase, some of the biggest names backing America’s largest cryptocurrency exchange by volume, are also titans of venture capital in their own right, including Fred Wilson of Union Square Ventures and Andreessen Horowitz’s Chris Dixon.
 
Trading Bitcoin from when it was as low as US$6, some of the most influential names in the business, including Dan Morehead of Pantera Capital started out as early on as 2012, believing in the space even when it belied belief.
 
The Pantera Bitcoin fund was created in 2013, just over a year before the Mt. Gox hack of 2014.
 
But perhaps it was Tyler and Cameron Winklevoss, who famously battled Mark Zuckerberg over Facebook (+1.15%), whose experience could provide insight to investors seriously considering this nascent asset class.
 
Speaking to Bloomberg, Cameron Winklevoss noted,
 
“Tyler and I didn’t have 20 years of capital markets experience when we came to Bitcoin.”
 
“We were very open to this possibility and that’s how we’ve always been, driven by curiosity.”
 
“In the early days of Facebook, in watching and being a part of that ride, we saw the power of networks, and so many people dismissing social networks as a fad.”
 
So naturally when Bitcoin came around, the Winklevoss twins recognized the same forces at play,
 
“It’s a money network. What happens when you put an economic incentive around that network? That’s possibly the most effective network in the world.”
 
And for those unfamiliar with Facebook’s history, it started small in 2008, and took many years before it's network expanded to the point where now it’s so powerful, it allegedly can influence election outcomes.
 
Bitcoin could possibly track the same course.
 
Right now, getting some Bitcoin is still relatively clunky, and comfort with dealing in digital payments and wallets is needed to get off the ground.
 
But as service providers level up and comfort grows, people will eventually get used to the birth of new money and a portable store of power, just don’t expect that relationship or progress to be smooth. 
 

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Mar 01, 2021

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