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Novum Alpha - Daily Analysis 9 March 2021 (10-Minute Read)

The stimulus check is so close you can almost spend it. And millions of Americans are already doing just that. With the prospect of another US$1,400 stimulus check headed to American households, investors are betting that the more targeted distribution of fiscal stimulus will spur a resurgence in consumer demand.

Terrific Tuesday to you and I hope that you're having a wonderful week so far. 

In brief (TL:DR)

  • U.S. stocks opened the week a mixed bag with falls in tech taking the S&P 500 (-0.54%) and tech-centric Nasdaq Composite (-2.41%) lower, while the reflation trade saw the blue-chip Dow Jones Industrial Average (+0.97%) up slightly as investors bought into more cyclical sectors. 
  • Asian stocks had a muted open and were mostly down in the morning trading session. 
  • The benchmark U.S. 10-year Treasury yield held at 1.59% with investors watching upcoming auctions for renewed upward pressure.
  • The dollar steadied against major trading partners. 
  • Oil edged lower with April 2021 contracts for WTI Crude Oil (Nymex) (-0.35%) at US$64.82, despite continued bullishness on the demand side as the U.S. economy recovers. 
  • Gold steadied from its slide with April 2021 contracts for Gold (Comex) (+0.16%) at US$1,680.70 mainly on the back of inflation concerns. 
  • Bitcoin (+1.04%) roared back to US$52,009 as investors bet on increasing inflation concerns fueling the Bitcoin narrative. Inflows to exchanges slowed against outflows (outflows suggest that traders are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. What's a SPAC and Should You Invest in One?
  2. Inflation's Not a Problem Until It Is
  3. Chinese App Meitu Betting on Cryptocurrencies

Market Overview

The stimulus check is so close you can almost spend it. 
And millions of Americans are already doing just that. With the prospect of another US$1,400 stimulus check headed to American households, investors are betting that the more targeted distribution of fiscal stimulus will spur a resurgence in consumer demand. 
But persistent fears over inflation remain and while U.S. Treasury yields have steadied for now, there is every risk of them blowing up again. 
Which is why Asian stocks fed into a mostly mixed morning trading session, with Tokyo's Nikkei 225 (-0.18%), Seoul's Kospi Index (-1.24%) and Hong Kong's Hang Seng Index (-1.92%) were all lower, while Sydney’s ASX 200 (+0.89%) was the sole standout on expectations of rising prices for commodities. 
1. What's a SPAC and Should You Invest in One?
  • SPACs are a blank-check vehicle for acquisitions to help private companies get listed on an exchange without having to go through an IPO 
  • Difficult to write off SPACs given that retail investors have driven other more speculative investments to lofty returns, but with more speculative segments of the market, caution and regular profit-taking discipline are needed
In many parts of the rich world, it’s not uncommon to buy a house “off the plan” meaning a realtor shows you a bunch of glossy brochures as well as a scale model of the home that you’ll be putting real dollars behind (“this isn’t a house for people, it’s a house for ants! Cf. Zoolander).
These days, prospective building plots have full scale mock-ups of the prospective homes and even virtual tours using VR technology to simulate what the future purchase ought to look like should it ever materialize.
But now imagine plonking down money on something that doesn’t exist now, and its organizers aren’t even sure will exist, just that it will “someday.”
Cue ominous music and welcome the SPAC, or Special Purpose Acquisition Company.
As its name may or may not imply, a SPAC is basically a listed vehicle that provides a backdoor stock exchange listing for a private company that would otherwise struggle or want to avoid the laborious and more costly IPO process.
So how does it work?
Quite simply, investors buy shares in the SPAC based on the themes that its arrangers are touting and the arrangers of the SPAC essentially have a “blank check” to go about acquiring companies that they deem fit.
SPACs typically have no more than two years to find target acquisition companies, failing which, they’ll need to return whatever money they’ve collected, to investors.
And over the past 15 months, a total of 474 SPACs have raised an estimated US$156 billion and that’s not even counting how the shares of these SPACs have skyrocketed once the acquisitions have been made.
Sounds reasonable right? If the SPAC finds a target, everyone wins and if not, investors get their money back.
Not so fast Gordon Gecko, terms and conditions apply.
Let’s begin with how SPACs got started, because everyone loves a good origin story. 
SPACs are hardly new – they’ve been around since the 1980s, but were considered one of the dodgier corners of the financial markets, relegated to pink slips or over-the-counter trading venues where penny stocks and snake oil salesman lurk.
All that changed of course because of the coronavirus pandemic.
With historically low interest rates and mountains of liquidity flooding into the financial markets, the “everything rally” saw SPACs become a suddenly viable way to raise capital.
Almost overnight “everything” that couldn’t have been funded using traditional routes, was viable via a SPAC – from the most ambitious flying taxi companies to literal moonshots, like Virgin Galactic (-2.78%), which helped to popularize the fundraising vehicle.
The problem is because there’s a pecuniary pressure on SPACs to acquire companies before their timelines run out, they may acquire and potentially overvalue companies that they wouldn’t, under normal circumstances.
How do you value a flying electric taxi company that’s never carried a single pilot, let alone passenger? You tell me, cause chances are your guess is as good as mine.
Which is why as many as three quarters of SPACs have not made a single acquisition, and even if they don’t, it’s no sweat off the backs off their arrangers backs because in many cases, they just need to raise enough from investors to cover their costs and return what’s left over.
So is it sustainable?
As with so many things during this pandemic, probably not, but we can deal with that later.
In the meantime, consider Exhibit A, GameStop (+41.21%).
To write off SPACs entirely would be hubris.
Just as most people don’t know the complicated feats of engineering that go into making an electric car move, they’re more than happy to put down money on a Tesla (-5.84%) or buy its stock.
Similarly, investors have been minting fortunes because SPACs sell stories first, stocks second.
SPACs have a breadth of latitude in valuing the businesses they buy and unlike traditional IPOs, where financial results are in focus, SPACs can base entire deals on projections (conjecture).
That provides SPACs plenty of fuel for speculation – take DraftKings (+1.65%) which launched its SPAC in 2019 and is now up some 450%.
For the plucky investor who made a fortune on the likes of GameStop and AMC Entertainment (+15.40%), the SPAC is just another spin at the roulette table of risk.
And like the GameStop investor, the place to look for information isn't Barrons or Bloomberg, but Reddit and Twitter.
Historically, 60% of SPACs trade below their launch price - which means the odds aren't all that bad, there's a 40% chance that a SPAC investor will make money out of the gate, on something which is wildly speculative.
And SPACs with high-profile personalities at their helms tend to do better than those which are thematic. 
But investors looking to wade into this space need to know that the window of opportunity on SPACs may fast be closing with U.S. regulators looking more closely at the space. 
2. Inflation's Not a Problem Until It Is
  • U.S. Treasury Secretary Janet Yellen's dismissal of inflation concerns have sparked genuine concerns over inflation 
  • Spare capacity in the labor market does not mean that inflation can't resurface because of durable shifts in the means of production 
Oftentimes things are a problem especially if someone tells you that they're not – it’s just a problem that they don’t want to talk about right now.
Which is why U.S. Treasury Secretary Janet Yellen’s dismissal of fears of inflation from the Biden administration’s US$1.9 trillion pandemic relief bill is worth noting.
The top priority for the Biden administration is to push the recovery deeper into the U.S. labor market and address long-standing economic disparities - in other words, use money to right past wrongs - nowhere is there a mention of maintaining market stability. 
Speaking with MSNBC, Yellen’s primary concerns weren’t inflation, but that the impact on women and monitories from the pandemic were “absolutely tragic,” repeatedly rejecting concerns that Biden’s stimulus was excessive.
Yet despite criticisms that the stimulus would spur runaway inflation, just as the economy was recovering, Yellen was quick to dismiss such concerns,
“I really don’t think that’s going to happen.”
“If it turns out to be inflationary, there are tools to deal with that.”
U.S. Treasury yields have soared over the past month as investors built into their outlook a faster trajectory for economic growth and prices, as the Biden administration’s spending bill was higher than expected past the line.
The bill is set to be voted on the floor of the House of Representatives on Tuesday and House Majority Speaker Nancy Pelosi is predicting that it will be passed.
Investors have already turned bullish, pushing up the prices of crude oil, and sending Asian stocks higher in the morning trading session.
The problem with inflation though is that it’s a bit like a genie – once you get it out of the bottle, it’s tough to stuff back in.
And while the spare capacity in the labor market is often touted as an example of why inflation shouldn’t result in higher prices – that assumption is based on an industrial age assumption that labor forms the bulk of costs when it comes to the economy.
As a share of the economy, labor’s share of income has been in a postwar decline for decades, thanks to the increase in automation and globalization.
If nothing else, raw material cost and deglobalization are the real risk factors for inflation.
And if the Biden administration is looking to onshore more jobs in the U.S. from overseas manufacturing bases, then prices could well rise.
The problem with just dismissing inflation off the bat is that the Biden administration still needs to clear the last hurdle in Congress before passing its massive US$1.9 trillion stimulus package.
Forget about spare labor capacity and think in terms of simple economics – when more dollars chase the same amount of goods, what should happen to prices?
And that’s why inflation is a concern.  
3. Chinese App Meitu Betting on Cryptocurrencies
  • Hugely popular Chinese photo-editing app that is popular with vloggers and social media influencers has bought Bitcoin and Ether
  • Hong Kong-listed firm looks to be expanding to writing decentralized apps or dApps on the Ethereum blockchain
How do those Chinese vloggers and social media stars always appear to have dewy soft flawless skin? It’s Meitu (+11.81%).
Because whatever mother nature didn’t provide, technology certainly can.
Meitu is a Chinese company that makes an addictive photo editing app that touches up photos before they’re posted with a simple stroke of the finger.
And it appears that Meitu is now touching up its balance sheet as well, buying Bitcoin and Ether, and becoming the latest high-profile firm to buy into cryptocurrencies.
Listed in Hong Kong, Meitu announced on Sunday that it bought some US$22.1 million worth of Ether and US$17.9 million worth of Bitcoin last week.
Meitu’s bet on cryptocurrencies is a lot less than the likes of Tesla (-5.84%), Square (-6.73%) and MicroStrategy (+0.64%) but is no less significant considering that it’s a Chinese company, especially at a time when Beijing is betting on its own digital currency and appears to be less accommodating to cryptocurrencies.
Importantly, Meitu didn’t just bulk up on Bitcoin either, but took a bigger position on Ether, the world’s second largest cryptocurrency by market cap and its blockchain Ethereum, which continues to serve as the base for a plethora of decentralized applications called dApps.
In a statement, Meitu said,
“Blockchain technology has the potential to disrupt both existing financial and technology industries, similar to the manner in which mobile internet has disrupted the PC internet and many other offline industries.”
“The Board believes cryptocurrencies have ample room for appreciation in value and by allocating part of its treasury in cryptocurrencies can also serve as a diversification to holding cash (which is subject to depreciation pressure due to aggressive increases in money supply by central banks globally) in treasury management.”
The announcement sent shares of Meitu immediately higher on Monday, popping by over 14%.
And while Meitu noted that cryptocurrency prices are “still highly volatile” the company said that it's “evaluating the feasibility of integrating blockchain technologies to its overseas businesses.”
Which may help to explain why the photo-editing application took a larger stake in Ether, because it is considering launching Ethereum-based apps or investing in other blockchain businesses.
Cryptocurrencies are gaining wider institutional acceptance and Meitu is just the latest firm in a growing list of companies which are either getting exposure to cryptocurrencies or are considering the same.
Bitcoin and Ether are both higher today. 

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Mar 09, 2021

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