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Novum Alpha - Daily Analysis 29 June 2021 (10-Minute Read)

A terrific Tuesday to you as markets wade into the end of the month clocking new highs but with risks ever present on the horizon.


In brief (TL:DR)

  • U.S. stocks came out the week with the blue-chip Dow Jones Industrial Average (-0.44%) down as the reflation trade lost steam while the S&P 500 (+0.23%) and the tech-centric Nasdaq Composite (+0.98%) ticked higher as tech lead the charge on news that Facebook (+4.18%) won dismissal of two monopoly lawsuits.
  • Asian stocks dipped Tuesday amid concerns a more infectious Covid-19 strain will derail an economic recovery.
  • Benchmark U.S. 10-year Treasuries held at 1.48% (yields fall when bond prices rise).
  • The dollar was steady after gains.
  • Oil fell with August 2021 contracts for WTI Crude Oil (Nymex) (-0.26%) at US$72.72 after dropping with the market expecting OPEC+ producers to increase supply at an upcoming meeting.
  • Gold was lower with August 2021 contracts for Gold (Comex) (-0.34%) at US$1,774.70. 
  • Bitcoin (+0.92%) was steady at US$34,689 as Cathie Wood of ARK Investment Management lends her firm's name to another U.S. Bitcoin ETF application and as outflows from exchanges have overtaken inflows significantly (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. What Does Gold Say About How Investors Really Feel?
  2. Cruising Takes a Bruising
  3. Who better to launch a Bitcoin ETF than Cathie Wood?

Market Overview

The odds of surviving a Covid-19 infection depend very heavily on where you are living. 
If you're living in a developed country with a resilient healthcare system, the odds of survival are extremely high, otherwise, the mortality rate of your infection increases dramatically. 
And with new Covid-19 variants threatening to derail one of the most unvaccinated regions in the world, the global economy looks increasingly likely to separate into winners and losers, with the richer countries of the Western hemisphere pulling away from the rest of the world. 
While Asia had handled the coronavirus pandemic relatively well in the early stages, it's been a laggard both in terms of securing adequate vaccine supplies as well as administering the vaccines. 
In Australia, barely 4% of the population is fully vaccinated, while the number increases dramatically to 36% in Singapore, it falls to 10% for Japan and less than 5% for Thailand and the Philippines. 
And that could pose to be the biggest risk to the region as even more virulent stains of the coronavirus weave their way through Asia, a factor that is weighing on market sentiment this Tuesday morning as Tokyo's Nikkei 225 (-0.91%), Seoul's Kospi Index (-0.42%), Sydney’s ASX 200 (-0.76%) and Hong Kong's Hang Seng (-0.32%) all dipped on the prospect of renewed lockdown pressures.

Did you miss us at the Super Crypto Conference 2021? Watch it here...


1. What Does Gold Say About How Investors Really Feel?

  • S&P 500-to-Gold ratio is nearing its highest level in 15 years 
  • Last time S&P 500-to-Gold ratio was this high was on the eve of the dotcom bubble bursting, a time which coincided with high levels of optimism 
“What you do speaks so loudly I cannot hear what you are saying.”
– Ralph Waldo Emerson
A glance at the S&P 500’s latest record finish would suggest that investors could not possibly be any more optimistic on the economy and on growth.
When investors are optimistic on the future, they bet on humans and companies, the uncertain versus the certain.
But when investors turn fearful, they reverse into things like cash, U.S. Treasuries and often, gold, seen as a store of value for thousands of years.
Which is what makes the ratio of the S&P 500 to the price of gold so significant.
The last time the S&P 500 to gold price ratio peaked was on the eve of the dotcom bubble bursting, when investors were brimming with confidence.
But that was also the end of the millennium, when dramatic new technologies like the internet were promising to usher in a new era of prosperity.
Until of course the dotcom bubble burst.
To be sure, the internet did change the world, but it would take the course of the next decade for the fledgling technology to recover from the ruinous irrational over exuberance of the 90s, and for improvements both in internet speeds and the development of applications like social media and e-commerce to remake markets and lives.
After that period, the S&P 500-to-Gold ratio all but bottomed out, going into freefall during the 2008 Financial Crisis and only marking a turnaround in late 2011, when gold prices spiked again.
But what was so significant about 2011 anyway?
Well for starters, it was the time of the Arab Spring, and investors were jittery that fresh instability in the Middle East (never known for its inherent stability anyway) would affect oil prices and lead to inflation.
Investors bet on gold as a store of value during this period, pushing up the ratio of S&P 500-to-Gold.
Adding to concerns over power generation, it was also the year that Japan’s Fukushima nuclear power plant was ripped apart by an earthquake and threatened to cool interest in nuclear power generation, leading to heightened demand for fossil fuels.
So why didn’t anything happen then?
For one, improvements in renewable energy technologies meant higher efficiency in harnessing power from wind, solar and even waves.
More investment was put into renewable energy resources from the rich countries of Europe and the United States.
So how about now?
While concerns over inflation are a likely factor in the recent spike in gold prices, unprecedented fiscal and monetary policy, couple with technological advancements like blockchain and central bank digital currencies are precipitating similar conditions to when the S&P 500-to-Gold ratio last reached its peak.
Real wages are also rising as is the cost of housing, all of which portend to higher prices of assets such as gold, which generate no yield.
Investors are not necessarily optimistic or pessimistic, but more likely than not, pragmatic.
With so much liquidity sloshing around the financial system, just like in the 90s, gold may simply be rising along with every other asset.
But the uncanny coincidence of a crash after the last time the S&P 500-to-Gold ratio peaked is somewhat disconcerting.

Did you miss us at the Super Crypto Conference 2021? Watch it here...


2. Cruising Takes a Bruising

  • Cruise operators face fresh setbacks as the first pre-pandemic cruise almost immediately registers Covid-19 infections in unvaccinated minors 
  • Cruise operators will continue to face challenges as their business model relies on cramping thousands of people into confined spaces lending itself to the perfect conditions for outbreaks not just of Covid-19, but other pathogens as well  
Many saw it as a disaster waiting to happen, a slow-motion train wreck if you will, because no sooner did the Royal Caribbean’s (-6.47%) Adventure of the Seas push off from dock, were the first two passengers discovered to have Covid-19 – both were under 16 and couldn’t be vaccinated.  
That segments of the cruising population would always be at risk in the floating human petri dish that is the cruise sector was always going to be a challenge facing cruise operators.
Cruise stocks, which up till yesterday had been a part of the reflation trade, fell sharply after industry leader Carnival (-7.04%) announced an additional stock sale while Walt Disney (-1.00%) has delayed a trial sailing.
Carnival’s stock sale could not have come at a worst time.
It was always a matter of “when” rather than “if” someone would test positive for Covid-19 on a cruise.
Cruise ships are notorious for being breeding grounds for all sorts of pathogens, from Salmonella to H1N1, boarding a cruise ship is a bit like playing Russian roulette, except that often, all the chambers of the gun are loaded.
Sensing that the going could get tougher and looking to sell stock while the sun shines, Carnival is looking to sell as much as US$500 million in stock, joining the growing list of unprofitable companies selling stock to equity markets awash with cash.
Walt Disney, which has seen its theme parks fill up thanks to pandemic restrictions being lifted in California and Florida, has indefinitely delayed a trial cruise of its Disney Dream, which was initially due to launch today, because of Covid-19 test inconsistencies.
After over 15 months of being at harbor, Royal Caribbean successfully launched its first revenue-generating cruise out of the U.S. this past weekend, and while bookings remain robust for cruise operators, challenges remain.
And it may not be government restrictions that threaten to torpedo the American cruise sector, the prospect that a mass infection, particularly with new Covid-19 variants, could see cruise passengers adrift at sea again for weeks, may dissuade customers from coming aboard again.
Whilst investors may have poured into the U.S. cruise sector in earnest, betting that they would be part of the reflation trade that saw economically-sensitive stocks resurging again, they may be buying into the re-infection trade more than anything else.   

3. Who better to launch a Bitcoin ETF than Cathie Wood?

  • Cathie Wood lends her name to fresh U.S. Bitcoin ETF application 
  • U.S. Securities and Exchange Commission has been reluctant to approve a Bitcoin ETF over concerns of manipulation and oversight 
That the age of the average analyst at Cathie Wood’s ARK Investment Management is under 35 should say everything about the ethos of the workplace she's created.
Although she’s pushing 65, Cathie Wood whose role is almost that of a den mother at ARK Investment Management, has arguably created one of the most visionary investment platforms of the past decade, nurturing young talent and contrarian views to generate enviable returns. 
Taking big bets early on some of the biggest names in the tech industry, including Tesla (+2.51%), Wood has also been a vocal supporter of Bitcoin.
So, it should come as no surprise that Wood will now lend ARK Investment Management’s name to a proposed U.S. Bitcoin ETF.
The ARK 21Shares Bitcoin ETF will trade under the name ARKB and track the performance of Bitcoin as measured by the S&P Bitcoin Index.
21Shares US LLC is an affiliate of the Zug, Switzerland-based 21Shares AG, a prolific issuer of cryptocurrency exchange-traded-products in Europe.
Wood sits on the board of 21Shares and the regulatory filing makes sense, given how vocal she’s come out in support of Bitcoin, even clashing swords with Elon Musk over the alleged carbon footprint from mining the cryptocurrency.
The U.S. Securities and Exchange Commission has already delayed making a decision on whether to approve the listing of VanEck’s Bitcoin ETF and said in mid-June that it was seeking more public feedback on the matter.
While many Bitcoin bulls were optimistic that the SEC’s new head Gary Gensler would be more sympathetic to the Bitcoin ETF cause, having taught classes on digital assets and blockchain at the Massachusetts Institute of Technology prior to his current appointment, there are little signs of that.
Since his appointment in April, Gensler’s SEC has continued to express concern about manipulation in cryptocurrencies, the lack of oversight, especially with regards to cryptocurrency exchanges, and issued fresh warnings to mutual funds over investing in Bitcoin futures which are listed on the CME (-1.33%).
Wood’s effort with 21Shares joins a long line of Bitcoin ETF hopefuls, including Fidelity Investments, Grayscale Investments and WisdomTree Investments. 

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Jun 29, 2021

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