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Novum Alpha - Daily Analysis 14 May 2021 (10-Minute Read)

Cooler heads prevailed in the markets today as investors realized that what they should be focusing on is the economic recovery, as opposed to the "prospect" of inflation.

A fantastic Friday to you as markets recover ahead of the weekend. 

In brief (TL:DR)

  • U.S. stocks turned sharply on Thursday, with the S&P 500 (+1.22%), blue-chip Dow Jones Industrial Average (+1.29%) and tech-centric Nasdaq Composite (+0.72%) all up as investors focused on the economic recovery and appreciated the decline in commodities as a sign that inflation was not all that it's being hyped up to be.  
  • Asian stocks climbed after U.S. benchmarks halted a three-day slide, with investors migrating to value from growth companies as signs of a strengthening labor market tempered inflation worries.
  • The U.S. 10-year Treasury yield was steady at 1.66% despite a lackluster auction of 30-year bonds (yields generally rise when bond prices fall).
  • The dollar took a breather on Friday but looks set to post weekly gains against a basket of currencies as investors try to assess the risk of U.S. inflation rising faster than expected.
  • Oil edged down with June 2021 contracts for WTI Crude Oil (Nymex) (-0.42%) at US$63.55 as the oil crisis on the U.S. east coast subsides and in line with a broader decline in commodities. 
  • Gold was little changed with June 2021 contracts for Gold (Comex) (-0.03%) at US$1,823.40. 
  • Bitcoin (-0.71%) fell to US$49,984 as the benchmark cryptocurrency struggles amid continued criticism from one-time proponent Elon Musk and as inflows to exchanges charged ahead of outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 


In today's issue...

  1. Is Inflation Good or Bad for Stocks? 
  2. Streaming Starting to Sink
  3. Coinbase Income Beats Wall Street Estimates 

Market Overview

Cooler heads prevailed in the markets today as investors realized that what they should be focusing on is the economic recovery, as opposed to the "prospect" of inflation. 
Sure, Wednesday's U.S. CPI data saw the highest rise in prices since 2009, but that came off a very low base and the reality is that the U.S. Federal Reserve has pledged to keep interest rates lower for longer and accept higher inflation until full employment is met. 
The past few days were more a reflection of traders second-guessing circumstances than any meaningful acknowledgment that rates are expected to rise. 
Which is why in Asia stocks were up in the morning trading session with Tokyo's Nikkei 225 (+1.33%), Seoul's Kospi Index (+0.62%) and Sydney’s ASX 200 (+0.81%) and Hong Kong's Hang Seng Index (+0.03%) all in the green before lunch.

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1. Is Inflation Good or Bad for Stocks?

  • Analysts remain divided on whether or not inflation is a good thing or a bad thing for stocks 
  • Investors should pay closer attention to the U.S. Federal Reserve's posturing, because ultimately it's fear that inflation will force rates northwards that makes a difference, not expectations
Even Wall Street can’t agree if inflation is good or bad for stocks, how are investors expected to react?
At the nub of the problem is that there are as many opinions on inflation and stocks, as there is data that you can cherry pick to validate your view.
As economists debate about the more academic aspects of whether the U.S. is in store for a more durable bout of inflation, or recent inflation data is merely a speedbump, equity analysts have turned their attention to what either case would mean for stocks.
In a note yesterday, Credit Suisse (+1.81%) strategists wrote,
“In contrast to the market’s recent pullback, stock prices tend to increase in periods of higher inflation.”
And the Credit Suisse strategists also pointed out that every sector on the S&P 500 has on average gained on days when concerns over inflation were also on the uptick, with energy and financials seeing the biggest jumps, while utilities and consumer staples were flat.
In contrast, Leuthold Group looks at the MSCI U.S. Index and comes to an entirely different conclusion, writing in a report on Thursday,
“Equity investors might feel it’s too hot, as higher inflation has historically been associated with lower equity valuations.”
“Admittedly, this relationship has weakened over the past two years but, given the heady valuation level today, it wouldn’t take a big increase in inflation to trigger a derating move.”
The answer is probably somewhere in between.
Actual inflation, while it matters, is less relevant for stocks than expectations and interpretation of data.
Inflation isn’t a single, all-encompassing number that everyone can refer to, much of it depends on the core metrics used to measure inflation, the goods and services that go into a specific basket used to measure inflation, and the market’s reactions towards inflation.
Instead, macro and sentiment factors are probably more relevant for investors considering how inflation affects equities, and more specifically which ones.
Expectations of higher inflation typically come with the expectation that the central bank will raise rates.
So if investors are of the view that the U.S. Federal Reserve lies through its teeth, and despite pledging to keep rates low till 2023, it will raise rates if inflation gets out of hand, then yes, going short on the tech sector would seem like a logical thing to do.
But that would be premature.
U.S. Federal Reserve officials have repeatedly sung from the same song sheet, assuring markets that the central bank would accept higher levels of inflation for longer, until U.S. employment fully recovers.
And last Friday’s jobs data reveals that job growth is slowing, providing precisely the pretext to keep rates low.
In other words, the Credit Suisse report which notes that stocks generally tend to do better on expectations of inflation is probably closer to more objective reality.
Any increase in rates will be communicated well beforehand.
Yes, inflation matters, but expectations of it matter far more. 

Did you miss us at the World Family Office Forum? Watch it here...


2. Streaming Starting to Sink

  • Disappointing numbers from Disney+ reflect the growing challenges faced by streaming services  
  • Streaming services coming under increasing pressure, with both competitors, as well as a reopening U.S. economy offering other entertainment options 
The business model was unassailable in the pandemic - with so many people around the world stuck at home, streaming services were making a mint, with both a captive audience and limited entertainment options.
But now that vaccines have allowed much of the U.S. to reopen, newer streaming service offerings like Walt Disney Co’s (+0.28%) Disney+ have struggled, even as incumbents like Netflix (+0.35%) have warned of slowing user growth.
Yesterday, the entertainment giant, which also owns and operates theme parks, reported just 103.6 million Disney+ customers at the end of the last quarter, well shy of the 110.3 million projected in the Bloomberg Consensus, and a sign that streaming growth overall is slowing.
Even as Disney’s theme parks were closed during lockdowns, Disney+ saw explosive growth, providing a source of respite for harassed parents working from home with kids doing home-based-learning, as well as Walt Disney investors.
But in recent months, issues that have plagued all the major streaming services, including Netflix, have started to hit Disney as well.
A lack of new programming and production delays because of the pandemic, have all taken a toll on streaming content producers.
Add to the mix the rise of YouTubers, TikTokers, Twitchers and other user-created content platforms and the more box-format streaming services are facing serious challenges.
Unlike YouTube, which probably already lives on every phone, Netflix and Disney+ do not offer a “freemium” model. 
On YouTube, users can watch as much content as they want for free, paying for YouTube Premium only if they want to get rid of those annoying ads.
And the quality of the content on YouTube has been reaching near-production levels, with consumers appreciating the intimacy and the authenticity of the content creators.
Against this backdrop, and as the U.S. opens up, streaming services, like many of the favored pandemic stocks such as Zoom Video Communications (+0.16%), can be expected to come under increasing pressure, regardless of inflation roiling markets. 

3. Coinbase Income Beats Wall Street Estimates

  • Despite not yet having Dogecoin listed on its exchange, cryptocurrency exchange Coinbase Global beats analyst estimates for net income 
  • Coinbase will need to move fast to acquire greater institutional investors, if it is to stand out in an increasingly competitive space 
Not bad for a cryptocurrency exchange that doesn’t list Dogecoin.
After market hours on Thursday, Nasdaq-listed cryptocurrency exchange Coinbase Global (-6.53%), the largest U.S. cryptocurrency exchange, reported net income above Wall Street estimates.
Reporting total sales of US$1.8 billion, in line with its April guidance, Coinbase Global’s net income of US$771 million fell into the middle of the guidance range of between US$730 million to US$800 million, but exceeded analyst estimates of US$762.6 million.
Coinbase reported first quarter earnings just a day after Elon Musk announced that Tesla (-3.09%) would no longer be accepting Bitcoin as payment for its electric vehicles, citing concerns over the use of fossil fuels to support the mining of Bitcoin.
Bitcoin has since fallen below the US$50,000 level of support and continued to show weakness in Friday’s Asian morning trade.
Coinbase shares, which debuted at US$381, have struggled since its direct listing on Nasdaq.
Some analysts suggest that by not listing Dogecoin, Coinbase missed out on the rally in the meme cryptocurrency as well, but the cryptocurrency exchange has already announced plans to include Dogecoin on its exchange within the next six to eight weeks. 
Regardless, Coinbase Global increased its expectations for the full year for monthly transacting users, as the number of such customers rose to 6.1 million in the first quarter, more than double the prior quarter.
In the current, second quarter, Coinbase Global expects its total trading volume to meet, or slightly exceed its first-quarter trading volume.
But investors should anticipate that profitability at the cryptocurrency exchange will drop, with the company warning that it will be focusing on expansion and investing in sales and marketing,
“We seek to operate the company at roughly break even in terms of profitability, smoothed out over time, for the time being.”
With over US$2 billion in cash and equivalents, Coinbase Global has a substantial war chest for acquisitions and as many cryptocurrency startups grow, more than a handful will be ripe to be folded into Coinbase Global.
Nonetheless, Coinbase still faces strong headwinds, both from competition – there is more than an outside chance that Binance, the world’s largest gray-market cryptocurrency exchange, could seek to be regulated in multiple jurisdictions – as well as investors who were actively trading during the pandemic, dropping off.
Whilst other cryptocurrency exchanges are very nimble, listing fresh assets and non-fungible tokens or NFTs at a drop of the hat, offering decentralized finance or DeFi listings on the turn of a dime, Coinbase moves far more slowly.
Even its Dogecoin listing is expected to take as long as two months, which in the cryptocurrency space is an eternity.
One way that Coinbase could set itself apart from other cryptocurrency exchanges though is its ability to appeal to institutional investors.
While most of Coinbase Global’s current revenues come from retail users, institutions still account for most of the assets that it holds under management.
But if Coinbase wants to appeal to the institutional-side of the market, perhaps it’s understandable if it’s not in a rush to list Dogecoin.  

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May 14, 2021

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