Novum Alpha - Weekend Edition 5-6 June 2021 (12-Minute Read)

You get a job! And you get a job! And you get a job! The U.S. economy has turned into Oprah's favorite things handing out jobs to everyone who wants one with employers adding some 559,000 jobs last month. 


A wonderful weekend to you as stocks soar on the back of U.S. jobs data. 
 
In brief (TL:DR)
 
  • U.S. stocks fired up on Friday, with the blue-chip Dow Jones Industrial Average (+0.52%), S&P 500 (+0.88%) and tech-centric Nasdaq Composite (+1.47%) all soaring and tech stocks rallying even as employment data was highly favorable out of the U.S. 
  • Asian stocks ended a mixed bag on Friday, having closed before Wall Street hit near a fresh all-time-high and look set to shoot out the gates on Monday. 
  • Benchmark U.S. 10-year Treasuries gained with yields slipping to 1.554% (yields generally fall when bond prices rise) as investors bet on a recovering U.S. economy. 
  • The dollar slipped against all major trading peers. 
  • Oil rose with July 2021 contracts for WTI Crude Oil (Nymex) (+1.18%) at US$69.62 on signs of the U.S. economic recovery and a softening dollar. 
  • Gold rose with August 2021 contracts for Gold (Comex) (+1.00%) at US$1,892.00 on inflation concerns and a fall in the greenback. 
  • Bitcoin (+1.75%) rebounded slightly into the early part of the weekend at US$37,577 as outflows from exchanges continued to outpace inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

 

In today's issue...

 
  1. What Better Markets to Emerge from the Pandemic? 
  2. Can't Short a Meme Stock if No One Will Let You
  3. Elon Musk May be Losing his Grip Over Bitcoin's Price Swings

 

 

Market Overview

 
You get a job! And you get a job! And you get a job! 
 
The U.S. economy has turned into Oprah's favorite things handing out jobs to everyone who wants one with employers adding some 559,000 jobs last month. 
 
But to be fair, analysts had already predicted the rise in job numbers as part of a normalization when April's numbers were far below expectations at 266,000 versus the forecast 1 million fresh jobs. 
 
More disconcerting was the fact that hourly wages rose sharply, particularly in food services, which is adding to inflation worries. 
 
What happens next will be critical for where markets go from here. 
 
If the initial boost of jobs is simply the result of evening out the kinks in data collection and job creation, there is a possibility that job growth will start to taper off in the third quarter of 2021, especially as the peak summer hiring season in the U.S. starts to cool into the autumn months. 
 
And many of the jobs created weren't more permanent manufacturing jobs, but in the far more fickle and therefore less stable food services and hospitality industries, soaking up the labor force that had been furloughed during the pandemic. 
 
Which is why even though hourly wages have soared, those increases may be more a seasonal factor than a durable shift in wages. 
 
The longer term test is if jobs can go back to their pre-pandemic levels, and that will test the resolve of the U.S. Federal Reserve in tapering its asset purchases. 
 
Asia missed most of the action closing earlier than U.S. markets with Tokyo's Nikkei 225 (-0.40%), Seoul's Kospi Index (-0.23%) and Hong Kong's Hang Seng Index (-0.17%) all down in at the close on Friday, while Sydney’s ASX 200 (+0.48%) continued its rise on the back of a commodities rally. 
 

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

 

 

1. What Better Markets to Emerge from the Pandemic?

 
  • Investors are looking to emerging markets for opportunities as stocks in both the U.S. and Europe start becoming more expensive 
  • Emerging market indices provide more growth opportunity but are not all built equal and risks remain especially in heavily indebted markets 
 
U.S. tech stocks too expensive? Not sold on cyclicals? Then what about emerging market equities?
 
Even as the U.S. and Europe emerge from the pandemic ahead of the rest of the world thanks in large part to mass vaccination exercises, emerging market stocks may emerge from the malaise of the pandemic faster than their populations.
 
And there are signs that this turn may already be occurring, with the MSCI Emerging Markets Index last month outperforming the MSCI World Index.
 
As stocks in both the U.S. and Europe start reaching the higher end of their valuation ranges, investors globally have been looking at emerging market equities which have lagged their global peers.
 
Resurgent global demand, particularly from the U.S. and Europe, a weaker dollar, and expectations that global supply chains will be gassed up again have seen emerging manufacturing hubs like Vietnam soar.
 
Vietnam’s VN Index is up 23.59%, while Taiwan has seen stocks rise 15.07% and South Korea has enjoyed a chip-starved rally of 10.07% this year alone.
 
And a rally in global commodity prices has investors betting that the cyclical stocks in emerging markets should also do well.
 
Investors who had missed out on the pandemic’s stimulus-fueled equities rally may now be looking for opportunities further ashore and may be comforted by the fact that unlike in previous emerging market rallies, flows by retail investors are strongly supporting local companies.
 
During the 1997 Asian Financial Crisis, fickle foreign flows sucked the air out of buoyant markets in emerging markets like Thailand and South Korea.
 
But in the decades since, these countries have retooled, restructured and made investors of their own populations, with retail flows the primary driver of rallies in emerging market stocks.
 
According to data compiled by Bloomberg, analysts forecast the MSCI EM Index (an emerging market measure), which is trading at 14 times forward earnings, to rally by about 20% over the next 12 months, almost double the advance for a similar developed markets index, which trades at 20 times future earnings.
 
Vaccinations are also starting to pick up speed in emerging markets, with Taiwan receiving vaccines from Japan and the U.S. pledging to donate millions of doses as well to countries in the region. 
 
But just like 18th century John Law’s Mississippi Company, emerging market investments are not without risk – higher inflation, increasing debt loads and a pullback in commodity prices could very rapidly unwind any progress made so far.
 
To that end, Russia, South Africa and Brazil would be far more speculative bets, but value stocks in China, Taiwan and South Korea, particularly technology and manufacturing would be relatively safer wagers.
 
Countries like Thailand, while brimming with potential, have also headed to the bond markets hat in hand to shore up their moribund markets, saddling their economies with heavy debt burdens that could precipitate the next debt crisis. 
 

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

 

2. Can't Short a Meme Stock if No One Will Let You

 
  • Prime brokerages are reviewing their risk management measures and curbing the expansion of short selling, requiring higher levels of collateral or restricting access altogether
  • Short squeeze opportunities may have been the primary driver for the meme stock frenzy, but an ideological edge may alter that dynamic in the medium term  
 
Think that stocks can only travel in one direction? Depends on who you trade with, because that may be your only option as Wall Street’s top prime brokers are quietly tightening the rules on who can take on the retail mob’s most popular meme trades.
 
Last week Jeffries Financial Group, was the latest in a string of prime brokerages including Goldman Sachs (+0.70%), Bank of America (+0.05%) and Citigroup (-0.18%) that adjusted risk controls and stopped accepting short bets against the likes of AMC Entertainment (-6.68%), GameStop (-3.80%) and MicroVision (+12.38%).
 
A prime brokerage is a bundled group of services that investment banks and other financial institutions offer to hedge funds and other large institutional investors who need to borrow securities or cash in order to engage in netting investment positions to achieve absolute returns.
 
Instead of entering the markets to short a stock, institutional investors like hedge funds can borrow that stock from prime brokerages (for a fee) and net the difference between the underlying and the bearish bet on those stocks.  
 
Changes at prime brokerages mean that hedge funds and other institutional investors who want to take bets against the Reddit and Twitter-fueled retail horde will need to post larger amounts of collateral or are disallowed entirely from shorting certain stocks altogether.
 
And that may change the dynamics of the meme stock trade, hastening the short squeeze that retail investors had previously rushed to capitalize on, or worse, see hedge funds stop shorting altogether.
 
Prime brokerages, some already stung by the billions of dollars lost in the collapse of family office Archegos Capital Management, have watched with alarm as stocks in loss-making companies like cinema chain AMC Entertainment skyrocketed by 2,000%, while video game retailer GameStop soared over 1,000% this year alone.
 
And the practice by some hedge funds of naked short selling, which can see bets exceed the market value of some companies, became magnets to retail investors looking to cash in on a short squeeze.
 
Unlike the price of oil (which briefly went negative), the absolute price of a stock can’t be less than zero (even if its value is). 
 
But the move by prime brokerages to curb institutional short selling appetite may also be a means to shake out retail investors because if short squeezing opportunities are no longer available, it may be hoped that small-time investors might lose interest altogether.
 
Yet such a view may fail to take into consideration that meme stocks have moved beyond pure profit-and-loss and taken on an ideological motivation.
 
Many retail investors grew up with some of the brands that they are now supporting and flush with cash from stimulus checks and savings during the pandemic, might be voting with their dollars to keep these nostalgic names alive.
 
From Hertz (-4.18%) to AMC Entertainment, there is some method to the apparent meme stock madness.
 
Far from being solely short squeezing opportunities, part of the narrative on Reddit forums and Twitter (+3.49%) feeds has been to “stick it to Wall Street” and judging by the decreased appetite to facilitate short selling from prime brokerages, retail investors may have already done so. 
 
 

3. Elon Musk May be Losing his Grip Over Bitcoin's Price Swings

 
  • Cryptocurrency markets shake off Elon Musk's tweet that seems 
  • Investors focused on other moves in digital asset markets and volatility is at its lowest since earlier this year
 
While many mainstream media outlets observed how Bitcoin slipped (about 2.8%) when Elon Musk apparently hinted via Twitter that he was contemplating a breakup with the cryptocurrency, what may have been missed is how other cryptocurrencies responded – by not responding.
 
Like the boy who cried wolf, as more institutional participants wade into the digital asset waters, Musk’s tweets, while not altogether irrelevant, are also (somewhat thankfully) becoming less significant.
 
As Bitcoin takes on a more macro implications, making central bankers uncomfortable and sitting at the nexus of “asset” and “not asset,” it’s not altogether unexpected that it should also increasingly become less susceptible to the irreverence of any single voice.
 
And to be sure, vocal criticisms of anything from stocks to commodities by influential figures in the financial industry have long had an impact on asset prices.
 
That cryptocurrency markets were able to shrug off the tweet from what many had heralded as a digital asset evangelist should be seen as reassuring.
 
Bitcoin volatility has already plunged to its lowest level since the beginning of this year and activity in the options market suggests a healthy premium to protect downside risk, just like in the financial markets, all of which point to an ecosystem that is increasingly more measured.
 
Just weeks ago, a tweet from Musk would have been enough to send Bitcoin plummeting, instead, traders shrugged off the noise and Bitcoin continued to trade mostly rangebound.
 
In his latest tweet, Musk wrote “#Bitcoin” with a broken heart emoji and a reference to a lyric from the popular song “In the End” by Linkin Park and if that roiled Bitcoin traders, it wasn’t immediately apparent by the price and volume action.
 
Focus instead was on Musk’s pet cryptocurrency Dogecoin, which soared by over 30% on its initial listing on U.S. cryptocurrency exchange Coinbase.
 
Dogecoin has since given up some of those early gains but is still well up from where it was before Musk put it on the global radar and the market cap of the Shiba Inu-themed cryptocurrency is larger than most S&P 500 companies.
 
Despite May’s rout, Bitcoin is still up some 280% over the past year and Ether is up over 1,000%. 
 

What can Digital Assets do for you?

 
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Jun 05, 2021