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Novum Alpha - Weekend Edition 19-20 June 2021 (10-Minute Read)

One swig of Dutch courage, but that was all that the markets could muster. On Thursday, tech stocks rallied to take the Nasdaq 100 and the Nasdaq Composite to fresh all-time-highs, but the prospect of a hawkish Fed was too much for investors to take.  The initial bravado caved on Friday marked by a broad selloff in equities across the board and things look like they could get far worse before they get better. 

 
A wonderful weekend to you as stocks fell sharply heading into Saturday and Sunday. 
 
In brief (TL:DR)
 
  • U.S. stocks fell across the board as the blue-chip Dow Jones Industrial Average (-1.58%) and S&P 500 (-1.31%) and tech-centric Nasdaq Composite (-1.63%) all ended off a volatile week as investors allowed U.S. Federal Reserve hawkishness to rattle their nerves. 
  • Asian stocks ended a mixed bag on Friday as a resurgent dollar made Asian equities cheaper for American investors. 
  • Benchmark U.S. 10-year Treasuries plummeted to 1.438% as investors retreated into safety and demand for long-dated government debt soared (yields fall when bond prices rise). 
  • The dollar gained ground on potential rate hikes in 2023. 
  • Oil firmed up with July 2021 contracts for WTI Crude Oil (Nymex) (+0.47%) at US$71.64.
  • Gold fell further with August 2021 contracts for Gold (Comex) (-0.33%) at US$1,769.00 on the back of a rising dollar and a Fed that is prepared to reign in inflation with rate hikes. 
  • Bitcoin (-5.09%) continued a steady decline into the weekend at US$35,775 (0800 GMT) and inflows into exchanges led outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

 
  1. Where has Value Investing gone?
  2. Big Tech Faces a New Sheriff in Town
  3. DeFining the New ICO? 

Market Overview

 
One swig of Dutch courage, but that was all that the markets could muster. 
 
On Thursday, tech stocks rallied to take the Nasdaq 100 and the Nasdaq Composite to fresh all-time-highs, but the prospect of a hawkish Fed was too much for investors to take. 
 
The initial bravado caved on Friday marked by a broad selloff in equities across the board and things look like they could get far worse before they get better. 
 
But the market reaction heading into the weekend is reflective of a far more serious and endemic problem facing investors - over dependence on central bank intervention. 
 
Nothing has changed for now, but investors are acting like the party's over. 
 
True, the Fed has brought forward its timetable for rate hikes and has started the discussion on slowing asset purchases, but it hasn't done anything yet and that could be set to change. 
 
If markets continue to bleed, the Fed will at some point have to determine if it's comfortable to allow markets to crash as investors continue to shadow box with threats mostly perceived than actual, or will it step in to restore confidence that it is exiting quietly stage left and not yanking the cord. 
 
The sharp pullbacks on Friday are suggestive that investors are voting with their feet and not sticking around to find out, and that could be a problem. 
 
Asian markets can expect a rough Monday at the open, with the earlier close sparing Asian equities the bulk of the carnage on Wall Street. 
 
Tokyo's Nikkei 225 (-0.19%), was down slightly at the close while Hong Kong's Hang Seng (+0.85%)Sydney’s ASX 200 (+0.13%) and Seoul's Kospi Index (+0.09%), were all higher heading into the weekend. 
 

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

 

 

1. Where has Value Investing gone?

 
  • Value investors are disappointed yet again by sharp pullback in cyclical stocks 
  • Shift in investment thesis may force value investors to reconsider their definition of value and what the markets now prize as assets 
 
It wasn’t meant to be this way.
 
As the meme stock frenzy got underway and investors poured into everything from cryptocurrencies to SPACs, long-suffering value investors stood on the sidelines, worshipping at the temple of Warren Buffett and waiting patiently for their day of deliverance.
 
And as pandemic restrictions in the U.S. and Europe were starting to ease, the belief among the value investing crowd that cyclical stocks which have things like factories and inventories, and hard assets like commodities, would race to make a comeback.
 
But all it took was a few dots from the U.S. Federal Reserve to shake the faith of value investors.
 
When the Fed announced that it would potentially bring forward interest rate increases in 2023 and also look to start tapering asset purchases, many value investors would have seen this as the signal of the tide turning.
 
After all, a recovering economy should almost certainly favor the prospects for value investing.
 
Yet somehow, cyclical companies tied to the reopening, and the darlings of the reflation trade, bore the brunt of the reversal this past week, posting some of their worse returns of the year.
 
That the Fed would intervene on inflation saw tech shares soar, while financials and energy all took heavy beatings, sending value-investing diehards into a retreat, just six months after things were looking better for them.
 
The Dow Jones Industrial Average, peppered with big name value stocks had its worst weekly showing since January.
 
For most of this year, concerns over rapidly rising inflation knocked tech stocks off their pedestal as investors fretted that higher bond yields would undermine growth, while energy and financial sector stocks boomed on bets that red-hot economic growth would breathe life into cyclical sectors.
 
There is already evidence that the value stock story may already have been told and the ending may not be what proponents may have wanted.
 
Retail sales in the U.S. are starting to slow and with the Fed showing that it can and will act on inflation, the shift towards technology and other so-called growth stocks may prove to be durable.
 
Value sectors with hard assets that are relatively easy to put a price to may have gone the way of the dinosaur, and investors reviewing their portfolios will need to remember that many of the companies that populate the Dow Jones Industrial Average today didn’t exist several decades ago.
 
This may be a period of introspection for value investors, who will need to ask themselves if their portfolios reflect the economy of the future, or the one of the past. 
 

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

 

 

2. Big Tech Faces a New Sheriff in Town

 
  • Appointment of Lina Khan to head of the U.S. Federal Trade Commission casts a shadow on Big Tech 
  • Antitrust action against Big Tech may be sufficient to rattle them to go slow on acquisitions and pave the way for fresh competitors to rise up and challenge their dominance 
 
Look out tech stock lovers, there's a new Sheriff in town, and she’s not likely to look the other way when it comes to monopolies.
 
It’s no real surprise that investors love tech companies – they’re the ultimate business model in so many ways.
 
They don’t generate any content, but profit off all of it.
 
They have customers globally, but pay taxes locally (often in favorable jurisdictions).
 
They’ve got tons of staff, but hardly any stuff.
 
They’re natural monopolies, the more people use them, the more they need to be used.
 
And no one knows this better than Lina Khan, who’s just been appointed the head of the U.S. Federal Trade Commission.
 
Khan, who’s just 32, knows her monopolies and she isn’t afraid to break them up.
 
In 2013, as a junior policy analyst, she wrote an op-ed in Time magazine after noticing that despite there being 40 brands of candy at her local supermarket, no more than three companies were behind them,
 
“If we want a healthier, more diverse market — and more variety in our Halloween buckets — we could start by reviving some of our antitrust laws.”
 
Khan’s appointment has sent shockwaves through Washington, Wall Street and the Silicon Valley with the prospect of her ushering in a new era of antitrust enforcement, especially against Big Tech, looming.
 
To peek into the mind of Khan, just check out an article she wrote in the Yale Law Journal in 2017, an article that would catapult her to fame, “Amazon’s Antitrust Paradox.”
 
According to Khan, companies like Amazon (-0.07%) have benefited from a general ambivalence towards antitrust enforcement for decades, a period during which low consumer prices were used as justification for looking to other way on what would otherwise be seen as anticompetitive behavior.
 
Khan envisions a different era for antitrust enforcement akin to the early 20th century when the U.S. didn’t hesitate to bust monopolies like Standard Oil, which at its zenith controlled over 90% of all oil production and 85% of all final sales in the United States.
 
But Khan faces several challenges to busting up Big Tech, because one of the biggest defenses that Silicon Valley’s highly paid lawyers have always mounted is that their clients compete not on a local  but global scale.
 
Companies like Amazon are dominant in the U.S., but their monopoly powers are nowhere close to Standard Oil’s, with the e-commerce giant garnering a 40.4% market share this year.
 
Companies like Google (-1.34%) however will have a harder time arguing that they aren’t dominant, with a staggering 92.05% market share for search engines as of February this year.
 
Facebook (-2.04%) is not far behind, accounting for a nearly 71.8% share of social media as of May 2021.
 
Firms like Apple (-1.01%) on the other hand command around 49% of U.S. smartphone shipments, as of last year.
 
Investors would do well to recall the abortive break-up of Microsoft (-0.56%) in the mid-90s, which saw its CEO Bill Gates step down, and the firm enter a period where startups like Google and Amazon came to pick up the tech gauntlet.
 
And that’s what Khan and her colleagues at the Federal Trade Commission will be keeping an eye on.
 
Tech firms have gotten so big that often the easiest way to stay dominant is to either acquire startup competition, or enter into a battle of attrition which the incumbents almost inevitably win.
 
Zappos was acquired by Amazon, Instagram and WhatsApp by Facebook, and the list goes on.
 
And while Microsoft has seen a resurgence of late, it spent the better part of a decade laying low and going slow on acquisitions, or what could potentially be perceived to be anti-competitive behavior, lest the FTC come knocking at its door again - much to the chagrin of its long-suffering shareholders.
 
But Microsoft was alone in the mid-90s.
 
These days a clutch of CEOs are typically summoned to Capitol Hill to testify before lawmakers and Khan will have her work cut out for her, but she’s not likely to shy away from the task.
 
And that makes things particularly testy for Big Tech investors – it’s hard to say who Khan will target first and what effect that will have.
 
Realistically, natural monopolies like search and social media, which enjoy significant network effects, are harder to break-up, but threatened action against them may make them slow their acquisition activity.
 
On the other hand, Amazon, whom Khan has studied intimately since she was in law school, may be a prime target, especially when the firm can be depicted as the big corporate robber baron depriving honest to goodness hardworking American mom-and-pop stores of a livelihood.
 
That sort of David vs Goliath-type characterization would be the perfect centerpiece for the Biden administration’s “we the people” brand of governance and anathema to the legion of shareholders who have gotten rich off Amazon's stock. 
 
 

3. DeFining the New ICO?

 
  • DeFi tokens see sharp pullbacks as general risk-off sentiment sees cryptocurrencies head lower as the Fed unveils hawkish in the coming years 
  • Nascent sector has some of the ingredients of the previous ICO speculative bubble, even as use cases are evolving and being developed 
 
Investors may recall the heady days of the initial coin offering in 2017, where speculators gave in to their greed and punted on all manner of projects (many of which were scams) in an alternative to traditional fundraising methods, betting on digital token offerings that ultimately went bust.
 
As decentralized finance or DeFi came to the fore, offering financial services without the need for a trusted intermediary, the tokens for these DeFi protocols soared, with many hitting market caps of hundreds of millions, and in some cases, billions of dollars.
 
But now that DeFi tokens are coming back down to earth again, some are wondering if this isn’t ICO 2.0.
 
To be sure, a DeFi bust occurred last autumn, but DeFi tokens resurged alongside Bitcoin and Ether in the earlier part of this year, and quickly became one of the hottest sectors in the already volatile cryptocurrency market.
 
Many DeFi tokens however came crashing back to earth last Friday, in the wake of the U.S. Federal Reserve rolling out a timetable for increasing interest rates that were well ahead of analyst expectations, and indicative that the Fed is prepared to do what it takes to normalize markets and reign in inflation should it threaten to get out of hand.
 
While more established DeFi tokens held their ground, and venerable protocols like Uniswap which shed 7% and Chainlink lost 8%, newer projects like Galaxium and Crypto Village Accelerator tumbled by over 60%.
 
Part of the reason of course is billionaire investor Mark Cuban’s highly-publicized losses from an algorithmically-linked stablecoin called Titan, which the poor design of its algorithms was a disaster waiting to happen.
 
For a (relatively) easy to understand explanation of how that happened, head over here and if you’re still confused, imagine how Cuban must have felt.
 
While DeFi is a relatively newer branch of the constantly evolving cryptocurrency space, it is also one of its more speculative corners, akin to the ICO craze of 2017.
 
Untested protocols promising massive annual percentage yields or “APY” in the DeFi lexicon, have lured millions of dollars of investor monies only to be scams or “rug pulls” in the DeFi lingo.
 
Nonetheless, DeFi is still finding its footing and some of the innovations in the space may eventually gain broader appeal and usage beyond speculation.
 
For now though, much of the demand for DeFi services remains borrowing digital assets and speculating on other digital assets, which can make a trader fabulously wealthy, or cause them to lose their shirts.
 
DeFi apps are designed to let people borrow, lend, trade and even take out insurance directly from each other, peer-to-peer, without the need for trusted intermediaries such as banks and financial institutions.
 
Think of it as Napster for Wall Street.
 
But just like digital music had its teething issues, so will a space as nascent as DeFi. 
 

What can Digital Assets do for you?

 
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If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.  
 

 

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Jun 19, 2021

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