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Novum Alpha - Daily Analysis 28 May 2021 (10-Minute Read)

The final trading day for the month of May is here and we are well into the swing of summer.

A fabulous Friday to you as markets fudge their way into the weekend. 

In brief (TL:DR)

  • U.S. stocks took a turn for the better on Thursday, with the blue-chip Dow Jones Industrial Average (+0.41%) and S&P 500 (+0.12%) up as economically-sensitive stocks rose on the Biden administration's spending plans while the tech-centric Nasdaq Composite (-0.01%) was slightly lower as U.S. Treasury yields rose. 
  • Asian stocks rose along with U.S. equity futures Friday after solid economic data and U.S. President Joe Biden’s federal spending plans spurred a Wall Street rally in cyclical shares.
  • The U.S. 10-year Treasury yield topped 1.61% amid growth optimism and concerns of more debt supply to fund spending (yields generally rise when bond prices fall). 
  • The dollar inched up.
  • Oil climbed to a more than two-year peak with July 2021 contracts for WTI Crude Oil (Nymex) (+0.57%) at US$67.23 on signs that the U.S. stockpile is decreasing. 
  • Gold was little changed with August 2021 contracts for Gold (Comex) (-0.05%) at US$1,897.50, with the US$1,900 level remaining a key level of resistance and inflation fears rising.   
  • Bitcoin (+1.11%) rose slightly to US$38,177 with seemingly strong resistance at the US$40,000 level and with inflows into exchanges flat (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

  1. Biden Administration Tracks a Dangerous Path Towards Inflation 
  2. Just When You Thought It was Safe to Short Stocks Again 
  3. Are Investors Bailing on Bitcoin to Bet on Bullion?

Market Overview

The final trading day for the month of May is here and we are well into the swing of summer. 
On the pandemic front, things are looking rosier by the day for Europe and the United States, with a steep decline in new infections and a vaccinated (mostly) population out and about again. 
The positive growth outlook has buoyed both U.S. and Asian markets after solid economic data and the Biden administration's federal spending plans spurred a Wall Street rally in cyclical shares, even as U.S. Treasury yields climbed. 
In Asia, stocks were uniformly up in the morning trading session, with Tokyo's Nikkei 225 (+1.97%), Hong Kong's Hang Seng Index (+0.65%), Seoul's Kospi Index (+0.77%) and Sydney’s ASX 200 (+1.14%) all up strongly on expectations that U.S. demand will strengthen these export-led economies. 

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1. Biden Administration Tracks a Dangerous Path Towards Inflation

  • Biden administration unveils US$6 trillion budget which includes massive government spending, even as signs of inflation are growing  
  • Risks of an overheated U.S. economy are heightening, with a confluence of factors and central bank complacency setting up for potential inflationary shocks 
U.S. President Joe Biden has called for corporate America to raise wages for workers even as rising inflation has roiled both bond and equity markets, citing supply chain bottlenecks that could create “bumps in the road” for the economic recovery.
Biden’s call for higher wages came at a visit to Cleveland, Ohio, where he unveiled his sweeping US$6 trillion budget that includes large-scale government investment,
“You can’t reboot a global economy like flipping on a light switch. There’s going to be ups and downs in jobs and economic reports. There’s going to be supply chain issues and price distortion on the way back to stable, steady growth.”
The Biden administration sees salary increases as a solution to current misalignments in the labor market, where some businesses are struggling to fill job openings despite millions of Americans still being out of work.
Republicans are contending that job support programs are disincentivizing certain segments of the American labor force to return to work, where the wages are less than the total amounts of unemployment relief that they’ll receive.
The Democrats are hitting back and arguing that if that is the case then wages need to be raised, with Biden arguing,
“Rising wages aren’t a bug, they are a feature.” 
“Instead of workers competing with each other for jobs that are scarce, we want employers to compete with each other to attract workers.”
Perhaps, but it also raises the possibility that these higher wages will translate to higher costs for companies that will then pass those higher costs in the form of higher prices to consumers.
If higher wages are thrown into the mix of higher levels of government spending, low interest rates and fiscal stimulus, there is a real possibility that inflation may get out of hand.
And to make matters worse, the U.S. Federal Reserve is so strongly committed to its “new monetary policy,” that even if it saw inflation running ahead unchecked, it would tolerate such spikes in the overall scheme of things believing that things will even out over the long term.
But how is anyone supposed to know when that is?
To take the Fed’s argument to its logical conclusion, would ten years of low inflation that was 1% off target rates be an acceptable premise to accepting 10% of inflation in a single year?
Because it’s not possible to measure inflation without the benefit of hindsight, the Fed has essentially given itself carte blanche to dismiss any signs of inflation in the near term as making sense in the grand scheme of things.
If so, investors are now no longer taking things for granted, as seen by the pullback in tech stocks, dramatic rise in U.S. Treasury yields and surge in commodity prices.
The Biden administration’s call for higher wages is like throwing a can of gasoline into an already raging dumpster fire. 

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2. Just When You Thought It was Safe to Short Stocks Again

  • Shares of AMC Entertainment Holdings (+35.58%) surge as retail investors float an attempt to rescue the embattled but beloved movie theater chain
  • Short sellers are nursing up to US$2 billion in losses as some estimates put the public float of shorted stocks of both GameStop (+4.77%) and AMC at one fifth of the public float 
In an ocean of liquidity, it is a brave soul to bet against the market, let alone an individual stock that has come to be seen as the seminal battleground between retail investors (the so-called “dumb money”) and the titans of Wall Street (the alleged “smart money”).
And just when short sellers thought it was safe to come out again, a relentless four-day winning streak in AMC Entertainment Holdings has drawn its pound of blood from short sellers.
Short sellers were eviscerated as the movie theater chain saw a relentless four-day winning streak, pushing the stock up some 120% this week alone and dealing short sellers roughly US$1.3 billion in losses, according to data from financial analytics firm S3 Partners.
A poster child for retail traders trawling Twitter (+0.40%) and Reddit to punish short sellers, AMC Entertainment Holdings soared 36% on Thursday alone, hitting its highest level since May 2017, even as its Chinese owner gives up control over the world’s largest chain cinema.
Amid repeated warnings of insolvency and marking a record loss of US$4.6 billion last year during the height of the pandemic, Dalian Wanda Group capitulated and gave up its majority stake in the embattled AMC Entertainment Holdings.
Dalian Wanda Group, which bought AMC in 2012 for US$2.6 billion cut its stake and voting power in the company to just 9.8% as of March this year, according to AMC’s annual report.
The Chinese conglomerate had acquired AMC in a global splurge on trophy assets, but has been aggressively paring its portfolio since 2017, in an effort to shave off its debt load, and as other Chinese conglomerates came under pressure from Beijing to sort their balance sheets out.
Yet the move by retail investors to punish short sellers has shored up the fortunes of Dalian Wanda Group, with AMC the most heavily referenced asset in social media trading platforms.
Thursday’s rally cost short sellers roughly US$634 million, bringing losses to just under US$2 billion for the year and vaulted the company to a record US$13 billion in market cap.
But AMC Entertainment isn’t just a case of retail investors looking to shaft short sellers, it’s a move by individual investors to save a beloved theater chain, just as millions of Americans are headed out to the movies again.
Key to AMC’s recovery longer term will be its ability to post strong box office number as it reopens in key markets like New York and California.
The revival of AMC’s fortunes by retail investors hasn’t just helped AMC’s stock price, it’s also helped its debt, with its high-yield 12% notes due in 2026 trading at just US$0.05 last November now close to par. 

3. Are Investors Bailing on Bitcoin to Bet on Bullion?

  • Marked fund flows into gold ETFs coincides with decline in Bitcoin's price 
  • Cryptocurrency flash crash because of derivatives more likely the cause of Bitcoin's recent price decline than any sustained shift from digital to physical assets 
After months of losing its luster to its digital cousin, gold is back with a vengeance this month, even as the cryptocurrency rally appears to be faltering, refueling a debate over the correlation between the two alleged stores of value.
Gold SPOT prices are inching closer to the psychologically significant US$1,900 level of resistance and futures prices have already peeked above that level on several occasions, while Bitcoin has since slipped from a peak of near US$65,000.
Some analysts are suggesting that a weaker dollar and declining inflation-adjusted yields are major reasons for the revival in gold, while volatility in Bitcoin has snuffed out some of the speculative euphoria for the cryptocurrency while undermining its ambition to attract an institutional audience.
But are Bitcoin and bullion really so different?
Both gold and its digital cousin are often touted as inflation hedges, commodities in scarce supply that also capture the generational divide between the young and tech-obsessed traders, and their boomer forebears, who seem fixated on physical assets.
JPMorgan Chase (+1.56%) suggests that gold’s recent revival appears to have come at least in part at the expense of Bitcoin’s decline.
Outflows from Bitcoin ETFs did coincide with a rise in inflows to gold ETFs, but correlation is not causation and if nothing else, are causing investors to be confused as to which is the preferred asset to hold in an increasingly inflationary environment.
But flows between gold and Bitcoin aren’t without precedent, and earlier this year Bitcoin funds sucked in institutional cash as money managers extolled a case for cryptocurrencies to creep into gold’s spot in a portfolio, which saw gold fall progressively from the start of this year.
The reverse appears to be happening.
As Bitcoin appears to be trading flat, gold is steadily on the ascent and for some strategists, the gold market is a starting place to figure out where Bitcoin is headed.
According to a JPMorgan Chase analysis, if investors allocated gold and Bitcoin evenly within a portfolio and the two assets converge in volatility, the implied price of Bitcoin would be US$140,000 and well up from where it currently trades.
But the JPMorgan Chase strategists had one important caveat, with Nikolaos Panigirtzoglou writing in a note,
“Needless to say such convergence or equalization of volatilities or allocations is unlikely in the near future.”
On a daily measure however the direct link between gold and Bitcoin is far harder to pin down, reflecting how both asset classes are driven by sentiment and market psychology as much as they are by actual fund flows. 

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May 28, 2021

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