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Novum Alpha - Daily Analysis 31 May 2021 (10-Minute Read)

A quiet Monday on the last trading day of the month of May that has seen investors contend with a cryptocurrency crash, a sharp pullback in tech stocks and mounting concerns over inflation.

A magnificent Monday to you as U.S. markets remain closed for the Memorial Day weekend.  

In brief (TL:DR)

  • U.S. stocks finished in form heading into the Memorial Day long weekend, with the blue-chip Dow Jones Industrial Average (+0.19%), benchmark S&P 500 (+0.08%) and tech-centric Nasdaq Composite (+0.09%) all up.
  • Asian stocks retreated Monday as investors continue to weigh inflation risks and the strength of the U.S. economic recovery.
  • The U.S. 10-year Treasury yield declined one basis point to 1.59% Friday as bond yields started to spread and demand for government debt returned (yields generally fall when bond prices rise). 
  • The dollar inched up on the back of economic optimism. 
  • Oil rose with July 2021 contracts for WTI Crude Oil (Nymex) (+0.42%) at US$66.60.
  • Gold rose with August 2021 contracts for Gold (Comex) (+0.27%) at US$1,910.40, with inflation continuing to weigh on investors.  
  • Bitcoin (+2.56%) traded around US$34,814 and looks set to drift most of this week even as outflows from exchanges outpaced inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. Is Job Growth in the U.S. Bad and Should You Care? 
  2. Is there ever a time for Value Stocks?
  3. You Want Cryptocurrency Regulation? You Got It 


Market Overview

A quiet Monday on the last trading day of the month of May that has seen investors contend with a cryptocurrency crash, a sharp pullback in tech stocks and mounting concerns over inflation. 
Perhaps there is some sense to the adage of "sell in May and go away." 
With more Americans vaccinated and taking advantage of more freedom of movement, holidays within the U.S. are taking off and volumes for stocks are noticeably dropping off. 
Nonetheless, some more speculative corners of the market are still attracting attention, for instance AMC Entertainment (-2.17%) - because Americans can't head out to the movies if their cinema chain went into liquidation. 
Asian markets were weaker in the morning trading session, with fresh coronavirus outbreaks weighing on sentiment and with Tokyo's Nikkei 225 (-0.78%), Hong Kong's Hang Seng Index (-0.18%) and Sydney’s ASX 200 (-0.08%) all lower, while Seoul's Kospi Index (+0.04%) was just ever so slightly in the green. 

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


1. Is Job Growth in the U.S. Bad and Should You Care?

  • Last month's U.S. job numbers are providing the data points for both sides of the House to come to diametrically opposite conclusions 
  • Higher wages could lead to a temporary spike in inflation and as long as the U.S. Federal Reserve doesn't do anything to taper asset purchases, investors can breathe easy 
Same data, diametrically opposite conclusions.
Last month, economists, investors and policymakers were shocked when the world’s largest economy showed employment gains just over a quarter what was forecast, with 266,000 new jobs created compared to the 1 million forecast.
Republicans used the opportunity to lambast their Democratic colleagues that prolonged jobs support programs were having the reverse effect, encouraging Americans to stay at home because benefits paid more than wages.
Democrats hit back to argue that the real culprit was depressed wages failing to attract fresh applicants.
Forecasts compiled by Bloomberg suggest that economists anticipate these kinks in the data will eventually work themselves out, with expectations that another 665,000 jobs would have been added in May and with unemployment rates slipping from 6.1% to 5.9%.
But the reality is it’s anyone’s guess and since the odds of job support being withdrawn in the immediate term is slim, the likelihood is that newly re-opened businesses will have to pay more to attract workers – which will necessarily see an uptick in prices and inflation in the short term.
So far, markets have not priced that possibility in, with U.S. Treasury yields relatively stable compared to the volatility seen in previous months.
And while equities saw sharp corrections, they’ve also since clawed back losses.
At its core, the expectation of inflation matters more than actual inflation.
If the U.S. Federal Reserve manages to convince investors that any bout of inflation is temporary, then tech stocks will likely stay buoyant and value, well, under-valued, but if yields start exhibiting tapering tantrums again, then investors can expect a wild ride.
So far, the Fed has managed to convince market participants that it won’t even begin to think about raising rates, and so long as the growth in employment is flat, rising wages will be just what the central bank ordered. 

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


2. Is there ever a time for Value Stocks?

  • Value investors have turned out on top over the past two decades, but they've had to wait a long time and suffered substantial drawdowns in the meantime
  • No simple formula for shifting to value stocks, which is why the majority of investors stay plugged into growth 
The other two periods when stock valuations bordered on the ludicrous was 1999 and 2007, on the eves of the dotcom and housing crashes respectively.
But there is a rumor among the markets that had investors bought value stocks when markets were near their peak, they would have fared alright.
To be sure, value, as measured by the Russell 1000 Value Index, was far better than the bubbly growth stocks in the wake of the dotcom bubble, but investors during the decade thereafter had to have strong constitutions, even though they would have ended positive after the 2008 Financial Crisis.
Far from being a safe haven, value stocks actually underperformed their growth counterparts in the 2007-2017 period, meaning that the simple mantra of “market top = buy value” doesn’t always work.
To be sure, there are several issues with switching to value at this moment – how do we know the market is at its top?
The bulk of eye-watering valuations are being derived from technology stocks, many of which are disrupting existing businesses and for whom still have a large and growing user base.
Many of these growth companies have also yet to monetize their customers or pivot their business models towards profits.
But as evidenced by companies like Facebook (-1.21%) and Amazon (-0.22%), when that pivot is made, the rewards for the faithful will be unsurpassed.
Valuations are currently much lower than their top in 1999, where the Shiller P/E ratio was about 44, it’s currently around 37 at the moment.  
So buy value stocks again?
Not for the faint-hearted.
Historically, value investors would have had to get through a 50% drawdown in order to earn the long-term returns that proponents of value always carp on about, during which time your spouse, clients and perhaps even your dog may have already left you.
The main reason why investors are getting good returns at the moment is because of the flood of liquidity that the U.S. Federal Reserve is pouring into the market.
And if there’s another economic crack-up, are they likely to rinse and repeat?
But praying at the temple of value has proved time and time again that such an investment methodology requires a strong constitution and an unwavering faith to fundamentals – can investors be relied on to stay the course? 

3. You Want Cryptocurrency Regulation? You Got It

  • Biden administration showing more proactiveness to co-ordinate the regulation of cryptocurrencies 
  • Regulators are being seen to work together to carve up jurisdictional boundaries, which should bode well for the longer term development of the industry  
For years, some corners of the cryptocurrency universe have been calling out for regulation, to not just protect investors, but also to provide gates for rent-seeking regulated entities to demand their pound of flesh.
And for years, the world’s most important financial market regulators sat on their hands and left the cryptocurrency space to its own devices.
But that may all be set to change as U.S. financial regulators are preparing to take a more active role in regulating the US$1.5 trillion (and dropping) cryptocurrency market as concerns grow that a lack of proper oversight risks harming savers and investors.
Marking a break from the laissez-faire approach of the Trump administration, the Biden administration is starting to sort out which body has regulatory jurisdiction over which aspect of the volatile digital asset market.
In an interview with the Financial Times, Michael Hsu, who was installed just last month as the acting comptroller of the currency said that he hoped U.S. officials would work together to set a “regulatory perimeter” for cryptocurrencies.
Speaking with the Financial Times, Hsu said,
“It really comes down to co-ordinating across the agencies. Just in talking to some of my peers, there is interest in co-ordinating a lot more of these things.”
Those sentiments could pave the way for a highly sought-after U.S. Bitcoin ETF, something that the U.S. Securities and Exchange Commission is set to decide on June 13, under the supervision of the crypto-savvy Gary Gensler.
This month, officials part of an inter-agency cryptocurrency “sprint” team, including the three leading federal bank regulators, the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corporation held their first meeting.
Regulators globally have been having to play catch-up with the rapid development of cryptocurrencies and some jurisdictions like China, have been cracking down hard on the sector, while others like Europe and the U.S. have adopted a more wait-and-see approach.
The rapid rally in cryptocurrency prices over the past year has seen an increase in urgency by lawmakers to understand the digital asset sector, as well as provide the regulatory framework to protect investors.
Last week, SEC Chairman Gensler told a House committee that there are “gaps in our current system,” pointing to a potential need for legislation to specify which regulators should oversee cryptocurrency exchanges. 

What can Digital Assets do for you?

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May 31, 2021

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