Novum Alpha - Daily Analysis 23 June 2021 (10-Minute Read)
A wonderful Wednesday to you as markets demonstrate that the rebound from a more dovish Fed was not temporary.
In brief (TL:DR)
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In today's issue...
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Market OverviewPhew, the Fed was just talking about the future, not about the present, and that should be sufficient grounds to give investors reason to cheer.
Yes, rates will rise, but not right now.
Yes, tapering will come, but not right now.
And markets are just getting a feel of that and the comments by Fed officials has reiterated that the central bank will withdraw from markets, but it will be orderly, systematic and most importantly, NOT RIGHT NOW.
That was sufficient to buoy risk assets that had otherwise been battered by the prospect of Fed hawkishness being brought forward.
Asian markets were more or less table heading into the midweek with Tokyo's Nikkei 225 (-0.03%) and Sydney’s ASX 200 (-0.42%) down slightly, while Seoul's Kospi Index (+0.28%) and Hong Kong's Hang Seng (+0.65%) were up in the morning trading session.
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1. Hedge Funds Bought Unloved Pandemic Stocks Making Massive Profits
When it became apparent that the coronavirus would be far more serious than the seasonal flu, stocks of some of the most pandemic-exposed companies crashed almost immediately.
And even when Washington introduced unprecedented monetary and fiscal stimulus, companies whose business models required social interaction languished, as tech stocks rallied hard.
Because it was impossible last March to know how long the pandemic would last, or whether a vaccine would be developed, hotels, casinos, restaurant chains, theme parks, cruise companies and airlines all saw their shares plummet.
Even value investors like Warren Buffett had had enough, with the global pandemic being the last straw to break his bet on the airlines (to be fair, Buffett has never had much luck betting on airlines).
Yet even during this time of doom and gloom, some of America’s biggest hedge funds loaded up on these unloved sectors during the depths of the pandemic.
While some professional money managers shifted into tech companies and other firms that would do well in a socially-distant economy, others actually stayed with their earlier bets and some even doubled down on the most badly hit sector stocks.
And the timing of those bets may surprise – April 2020.
When much of the world was in lockdown and very little was known about the coronavirus, its origins or how it would be treated, hedge funds kept a steady hand (diamond hands if you like) and bet on companies like cruise operators Carnival Corp (-2.13%) and Royal Caribbean Cruises (-2.22%) which are both up 220% and 232% respectively since last April.
Casinos have also staged a remarkable comeback for the gambler as well, with MGM Resorts International (+0.48%) returni
And while vaccinated Americans are filling theme parks with 2-hour long lines, cruise operators have yet to set sail in a meaningful way – with many of the traditional routes plied still effectively closed off.
U.S. cruises typically head off to the Mediterranean or Europe, a route which has yet to open, but Carnival Corp and Royal Caribbean are already planning to set sail closer to home, to the Mexican Riviera and to the Caribbean.
Operations continue to be tricky for U.S. cruise operators, especially given Royal Caribbean’s earlier public relations misfire, announcing that it would begin sailing in early July from Florida, where vaccinations will be recommended but not required.
Vaccinations are required for all passengers over 16 for departures out of all U.S. ports, except for Florida, where state law prohibits businesses from verifying the vaccination status of passengers.
And that could present unforeseen setbacks in the cruise industry, just as it’s taking tentative steps to push off from dock again.
Given the steep recoveries of cruise operators since last April, expectations are high for a robust return, which has already been reflected in their share price.
While hedge funds were really good at picking undervalued names during the depths of the pandemic, now that those names are known, investors can be sure that they’re looking elsewhere for returns.
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2. Where is the U.S. Federal Reserve Headed to Next?
To understand the global economy, like it or not, requires some understanding of American politics.
As the U.S. Federal Reserve remains the global interest rate-setter, determining how much borrowers pay on everything from their homes to student loans, it’s important for investors to know the Fed’s at times, ambiguous policy stance.
And while markets were roiled last week on indications that the Fed would be looking to bring forward its timetable for rate increases, things like leadership continuity at the Fed are just as important.
U.S. Federal Reserve Chairman Jerome Powell, whose term at the Fed is set to expire next year hasn’t yet been named by the Biden administration for re-nomination.
To be fair, it’s still relatively early, but some certainty would be appreciated as Powell has led and pioneered bold policy initiatives at the Fed, which a new Chairman might seek to undo.
A Trump administration appointee, unlike his predecessors, Powell is a lawyer by training and helped to push forward the Fed’s “new monetary policy,” that would accept periods of higher inflation to “make up” for periods where price rises were more muted.
And while Powell does vote on interest rates, being one of the 10 members of the powerful Federal Open Market Committee, it was his leadership that enabled the bold quantitative easing (asset purchases) during the depths of the pandemic.
Now that the U.S. economy appears to be recovering strongly, Powell and his colleagues at the Fed are exploring the tapering of the central bank’s US$120 billion-a-month asset purchases, as well as bringing forward interest rate increases in 2023.
But perhaps not as quickly as markets may have given the Fed credit for last week.
Testifying before the House Select Subcommittee on the Coronavirus Crisis, Powell noted with respect to the latest inflation numbers,
“A pretty substantial part, or perhaps all of the overshoot in inflation comes from categories that are directly affected by the re-opening of the economy such as used cars and trucks. Those are things that we would look to, to stop going up and ultimately to start to decline.”
Powell may be right, people don’t typically keep buying cars and trucks after they’ve done it once.
And given how most of America remained homebound during the pandemic’s numerous phases of lockdown, it only makes sense that now that they’re out and about again, they want to hit the road in a new vehicle, driving up prices.
Exacerbating the situation has been a global chip shortage, that has left many vehicles ready, but unfinished, constricting supply and driving up prices in the second hand market, a key constituent of recent price increases.
Importantly, Powell said that the Fed would be patient in lifting borrowing costs,
“We will not raise interest rates preemptively because we think employment is too high, because we feared the possible onset of inflation.”
“We will wait for actual evidence of actual inflation or other imbalances.”
Powell’s testimony was sufficient to kick off a sharp rebound in stocks and his testimony pleased Congresswoman Maxine Waters, the influential California Democrat who chairs the powerful House Financial Services Committee, and who praised the Fed Chairman for his vocal support for fiscal packages and facilities to provide emergency credit to the U.S. economy.
But what’s less clear is whether Powell will still be around next year or 2023, when rates are expected to head upwards.
Powell was nominated to the U.S. Federal Reserve Board of Governors by then-U.S. President Barack Obama, but Fed chairs are picked by the President and confirmed by the Senate.
A Republican, Powell has so far deftly deflected questions about whether he’d serve another four years if asked by U.S. President Joe Biden, but also hinted that he’s keen to stay at the job.
And there are hints that if he stays on, investors can expect a more dovish Fed, at least in the immediate term,
“The very quick job gains of the early recovery, essentially involve going back to your old job.”
Powell noted that the process of workers trying to find new jobs is a process that would take more time.
Given that employment is one of the key metrics by which the Fed is currently using to guide policy decisions, any slow down on that front would continue to provide sufficient justification to keep policy responses status quo.
And other risks remain for the U.S. economy.
While almost half of all Americans are vaccinated, the numbers are insufficient to achieve herd immunity, and there is the worrying development of the far more virulent Delta and Delta-Plus coronavirus variants to contend with as well.
For investors, the conditions can be described as cautiously optimistic for equities, with bets on bonds still too early to call, until the picture on inflation becomes clearer.
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3. Bitcoin Throwdown to Live Another Day
Remember the days when Bitcoin crossing US$10,000 used to be something worth celebrating?
These days however, peeking below US$30,000 is seen as a sign of capitulation.
But for investors who are new to the cryptocurrency scene, these levels, while psychologically significant, seldom form persistent barriers for price movements that are often so violent and move with such velocity, that they can make your neck snap.
In Asian trading on Wednesday morning, Bitcoin rebounded sharply from around US$28,800 to surge to as high as US$33,800 before now hovering in the US$32,500 region (GMT 0300).
Having now shed more than half its value since its high in mid-April, there are signs that Bitcoin’s price should remain choppy in the coming weeks.
Technical analysts point to charts that show Bitcoin failed to sustain a rally over US$40,000 last week, and pointed to US$30,000 being a weak level of support this week – which turned out to be correct.
But traders should also note that this is hardly the first time Bitcoin has pulled back below US$30,000 this year, being the sixth time and rebounding above that level each and every time.
China’s crackdown on cryptocurrencies is affecting sentiment, but it’s also forcing Bitcoin miners to head out of the Middle Kingdom and to effect that move, they need to cash out some of their cryptocurrency holdings, putting a downwards pressure on price.
It’s estimated that China's nationwide crackdown on Bitcoin mining has taken almost a third of the hashrate (that is the mining power for Bitcoin) off the grid, leading to increases in block confirmation times.
Making matters worse, the People’s Bank of China has summoned officials from the biggest lenders as well as payment giants like AliPay and WeChat Pay to reiterate the ban on facilitating cryptocurrency services on their platforms.
Prior to the most recent purge, the ubiquitous WeChat was used as the instrument of choice to facilitate over-the-counter swaps from Chinese yuan to cryptocurrencies, more often than not, dollar-based stablecoins like Tether.
Yet longer-horizon Bitcoin investors will be accustomed to the volatility, with Bitcoin having experienced no less than 17 falls of over 30% in the past decade and 4 drops of over 80%.
Given that Bitcoin rose some 1,000% in 2017 only to lose 75% the following year, and has gained some 300% last year, this most recent correction for the more seasoned Bitcoin investor is relatively benign.
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Jun 23, 2021