Novum Alpha - Daily Analysis 25 June 2021 (10-Minute Read)
Investors sent U.S. equities to fresh records as a US$579 billion infrastructure bill received bipartisan support, helping to make America's crumbling infrastructure great again.
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A fantastic Friday to you as markets appear to be roaring into the weekend.
In brief (TL:DR)
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In today's issue...
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Market OverviewBuild it, and they will come. But in any event, build it anyway.
Investors sent U.S. equities to fresh records as a US$579 billion infrastructure bill received bipartisan support, helping to make America's crumbling infrastructure great again.
Roads, bridges, ports, airports and utilities across the U.S. have suffered from years of neglect and cuts in federal, state and county budgets.
And while Biden's infrastructure bill is somewhat modest, it is the first step in a long road to rehabilitating America's weather-beaten infrastructure, potentially ushering in a new golden age for the U.S. akin to former President Franklin Roosevelt's "New Deal."
Asian markets were sharply up on Friday's morning trading session with Tokyo's Nikkei 225 (+0.51%), Seoul's Kospi Index (+0.81%), Hong Kong's Hang Seng (+0.49%) and Sydney’s ASX 200 (+0.26%) all well in the green.
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1. Biden's Infrastructure Deal Has a Silver Lining for Wall Street
First-time international visitors to Melbourne, Australia may be surprised for the time it takes their aircraft to land.
Despite being home to over 5 million people, Melbourne’s sole international airport is served by a single major runway that can land wide-bodied airliners, and as air traffic boomed for the city, what did the airport do to cater for the massive increase in air traffic?
It built more shops of course, because runways don’t make nearly as much money as duty free boutiques.
Australian airports, unlike almost all U.S. airports, are owned and operated by private companies, more often than not massive hedge funds, that lease and maintain the facility from the Australian government.
With airports like Melbourne bursting at the seams, its moneyed owners have little to gain from building an expensive additional runway to improve conditions that could add to the local economy.
And that seems to be precisely the opportunity that the Biden administration is offering Wall Street.
Because tucked away at the bottom of a massive infrastructure plan are two words that sparked joy in the eyes of investing titans who had been waiting for this day of deliverance for years – “asset recycling.”
“Asset recycling” provides for massive U.S. government projects to be funded by private wealth – for instance building a highway and charging tolls on it for years to come, or better yet, leasing an airport and reaping guaranteed revenue for decades.
For over a decade, the push to allow private enterprise to take over public infrastructure like road, rail and air transport, was stymied by lawmakers who were concerned that taxpayers would get the raw end of the deal and ultimately face poorer service and higher prices.
Despite investors and sovereign wealth funds lining up billions of dollars to take over some of America’s most coveted assets, including the Ronald Reagan Washington National Airport and power companies like the Tennessee Valley Authority, bipartisan support to pass such bills were elusive.
“Asset recycling,” like the didgeridoo, boomerang and Hugh Jackman, was made in Australia and features the sale or leasing of infrastructure such as roads, airports and utilities to private operators, but as many Australians will tell you, the results have been mixed.
Yet the prospect of the U.S. government not having to issue fresh debt to finance new infrastructure is seductive.
The U.S. though, has had a poor track record when it’s come to the privatization of public services.
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2. Google's Cookie Jar is Safe for Now
It’s common knowledge by now that when you search for something on the internet, ads for whatever you searched for will follow you around as you go about your time in cyberspace.
The lynchpin of that technology is the innocuous-sounding cookies that live on your browser and keep a record of your preferences, sending that data back to third parties that manage them.
For the most part, cookies make the internet more convenient for users, but also raises privacy concerns.
Google, which had initially planned to end support for third-party cookies in its popular Chrome browser, has now decided to delay the move by almost two years, much to the relief of digital advertisers.
The tech giant said it was holding off, to allow more time for discussion with regulators and companies involved in digital advertising and to “avoid jeopardizing business models of may web publishers which support freely available content.”
Google’s move was greeted with a collective sigh of relief from the digital advertising world which had faced uncertainty with the looming end of one of its main ways to deliver targeted ads.
The timeout will provide digital ad companies a badly needed opportunity to develop alternatives to cookies, and has already helped shares in Trade Desk (+16.04%), a U.S. firm working on delivering targeted ads without relying on cookies.
Google’s Chrome browser remains one of the last holdouts for cookies, with Apple’s (-0.22%) Safari browser and Mozilla’s Firefox already blocking cookies by default.
But Chrome accounts for over two-thirds of the browser market, and unlike Apple, Google relies heavily on digital ads, through both search and ad placement on third party websites.
More importantly for digital ad companies that are involved in both placement and reach, Google is working on a cookie replacement system that it will use in Chrome giving it a considerable advantage over rivals.
The European Commission has announced an antitrust investigation into Google’s ad technology business this week, including its proposed ending of cookies.
Google’s new ad technology known as Floc will replace cookies, by aggregating user data inside a user’s browser, rather than have that data sent out to third parties.
Users would then be sorted into cohorts based on their interest and the digital ad industry would then use this aggregated data to target their ads.
But critics have questioned whether Google would have an unfair advantage with Floc, especially given that it has full control over how cohorts are designated and sorted, while making targeted advertising less efficient.
Whereas in the past, it was possible for third party advertisers to have direct access to individual data, now only Google would have that data, and overall, targeted ads would be less effective.
Google has contended that Floc is 95% as efficient as cookies, but why would an advertiser want something that’s less effective when an obviously more effective option exists?
Perhaps that's how the cookie crumbles.
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3. De-Fi in the Dumps - Opportunity or Capitulation?
It was the hottest trade of last summer – decentralized finance or DeFi was winning over traders and minting millions for investors.
The value proposition was seductive – the ability to access financial services without a trusted intermediary, smart contract code plus the security of immutability of the blockchain would enable users to borrow, lend, trade and insure, all without barriers to entry or exit.
But DeFi has not been immune to the recent rout in the cryptocurrency market in general.
Part of that of course has to do with market forces.
During periods when cryptocurrencies rally, DeFi benefits because it facilitates another added layer of speculation, for instance, it’s possible to borrow, trade and return the loan all within a single block, allowing traders to essentially bet without any skin in the game.
But now that prices of cryptocurrencies have slipped across the board, the number of new DeFi users looking to speculate has also dropped dramatically, hitting its lowest level in months.
Over the past week, just a few thousand new users were logged, down from nearly 40,000 in mid-May.
And that could prove to be a damper for some of the triple-digit yields that DeFi protocols were touting.
The bulk of DeFi apps let users lend out their cryptocurrencies and receive interest, often in the form of the project’s tokens,
But if the number of borrowers declines, the interest rate on loans declines, and the pressure to sell the existing tokens received as yield, for instance SushiSwap or Compound tokens, increases, leading to a perfect storm.
DeFi yields are a function of new buyers supporting token prices, because the actual yield cryptocurrency lenders receive is determined by the exchange rate between the yield tokens paid out, and some other cryptocurrency, like Ether or a dollar stablecoin.
While DeFi may not be going away, it needs to develop some new use cases outside of speculation and in the immediate term, token holders are likely to suffer.
Already the amount of funds locked into DeFi applications has fallen by around 40%, although a large portion of that decline can also be attributed to the recent correction in cryptocurrency prices.
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Jun 25, 2021