Novum Alpha - Daily Analysis 16 July 2021 (10-Minute Read)
Another week and equities rise and fall as predictably as the tide, setting new watermarks and receding from them as predictably as the moon's gravitational pull.
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A fantastic Friday to you as markets continue to drift rudderless into the night.
In brief (TL:DR)
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In today's issue...
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Market OverviewWith each week that passes and so much to do, realize that in our busyness the market is too.
We kick down the cans and bid up our shares, their value's too high, but nobody cares.
The Fed will save us, surely someone will,
till investors finally taste, reality's bitter pill.
That stocks aren't cheap, nor do they cost an arm or a leg.
That they're perfectly priced, according to someone else's peg.
Pay what you will, sell when you must,
whether the market's up or down, just don't kick a fuss.
This is what we asked for, traders and investors alike,
waiting on someone else, to buy up our portfolios, psych....sucker.
Another week and equities rise and fall as predictably as the tide, setting new watermarks and receding from them as predictably as the moon's gravitational pull.
For investors, it can seem a bit like Groundhog Day, with every week a rinse-and-repeat of the previous one - inflation and the coronavirus.
Like two paddles on a pinball machine, concerns over inflation and the coronavirus, battle around the silver ball of the global economy racking up fresh highs without realizing that just like in pinball the score doesn't matter anymore at some point.
Ultimately, this period of drifting upwards will be seen either as the "phony rally" or the "phony pause."
For as long as central banks continue to wield such immense influence in the markets, it's hard to say for sure whether or not equities even resemble the economy, let alone are reflective of it.
In Asia, stocks were weaker on Friday morning taking their cue from Wall Street with Sydney’s ASX 200 (-0.03%), Seoul's Kospi Index (-0.52%), Hong Kong's Hang Seng (-0.03%) and Tokyo's Nikkei 225 (-1.05%) down.
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Did you miss us at the Super Crypto Conference 2021? Watch it here... |
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1. Tired of Paying High Fees for Investments? There's an ETF For That
Although over three decades old, ETFs or exchange-traded funds only really came into their own after the 2008 Financial Crisis.
Vehicles that pool investor cash, ETFs trade all day like stocks and also swap assets with an intermediary, helping them defer tax liabilities, but also making it possible for them to change up their assets often and quickly.
Investors favor ETFs for their transparency and low fee structure and to date, flows are on track to outpace 2020’s record with a whopping US$659 billion of inflows in the first six months of 2021, compared with US$767 billion for all of last year, according to data from ETFGI.
While the boom reflects a strong rebound in asset prices from their pandemic lows of last year, it also reflects how some professional money managers are using ETFs as an important instrument in their portfolios, in some cases even going as far as using them in place of individual securities.
For individual investors, it opens the possibility of gaining access to thematic investments with potentially far smaller entry prices.
While a modest retirement portfolio might not be large enough to sufficiently diversify across different industries, themes and instruments, model portfolios comprising of a combination of ETFs each with their own specific themes have the potential to do just that.
ETFs are also far more liquid instruments and provide even retail investors access to instruments that would typically be out of their reach, such as bond portfolios.
While bond ETFs have been slower than their equity counterparts, they’re an important ingredient in the typical 60/40 stock/bond portfolio mix.
Before the launch of new ETFs that cover fixed income and even asset-backed securities and bank loans, such instruments were completely inaccessible for retail investors.
And unlike hedge funds which tend to keep their secrets close to their chest, younger investors have cottoned on to Cathie Wood’s ethos of transparency and bought into her vision of the future, with her firm ARK Investment Management hoovering up some US$15.3 billion in fund flows this year alone, building atop trends like robotics, artificial intelligence and electric vehicles.
For the vast majority of retail investors, the boom in ETFs is worth exploring, and for those who are wondering which ETFs to pick, a cottage industry of robo-advisers that automatically allocate funds to various ETFs are increasingly available.
ETF track records also look pretty good, having only lost money in two months over the past three years, and that’s even after including the period when the pandemic wreaked havoc on markets.
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Did you miss us at the Super Crypto Conference 2021? Watch it here... |
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2. All the World's a Chip so why not own the factory?
The logic behind the trade was simple.
With soaring global demand for microchips, the brains for everything from a kettle to a car, shares of Taiwan Semiconductor Manufacturing Co. (-4.07%) were in hot demand.
But shares of TSMC, one of the world’s largest chipmakers, plunged the most in two months recently after its gross margins disappointed investors who had banked on massive demand for chips lining their pockets with fat profits.
Yet it’s not that demand has softened, not by a longshot.
Production queues for chips still stretch well into the horizon and with resurgent demand and reopening economies, the need for semiconductors is only expected to continue rising.
What’s disappointed investors however is that TSMC’s gross margins, the difference between revenues and the costs of goods sold (how much it costs to make the stuff) is expected to fall below 50% in the third quarter of this year based on second quarter earnings.
TSMC’s gross margins for the second quarter was 50%, below the roughly 51% average predicted by analysts.
But is that necessarily such a bad thing?
There are few (if any) companies which have gross margins of 50%.
By way of comparison, before the pandemic, the airline industry had an average gross margin of 3%.
With demand surging, TSMC has had to invest in the future, boosting capacity to alleviate a supply crunch that has plagued the automotive and other industries and pledging to spend US$100 billion over three years to build new fabs and invest in more advanced nodes, including plans to possibly build a plant in Japan.
And with geopolitical tensions between the U.S. and China ratcheting up, as well as Taiwan continually coming under threat from Beijing, it makes absolute sense for TSMC to redistribute its means of productions to other jurisdictions.
But that may be costly.
Yet as the world’s foremost contract manufacturer for chips, and no sign that either Nvidia (-4.41%) or AMD (-2.38%) are interested to make their own chips any time soon, those investments will eventually pay off in spades.
TSMC’s gross margins were whittled down in the second quarter at least in part from a stronger Taiwanese dollar.
And relocating, especially to more expensive jurisdictions with higher material and labor costs could see gross margins compressed in the long term.
But given that TSMC still maintains a lead in designing and raising cutting-edge chip foundries, and that it’s cracked one of the most complex and difficult industrial problems of our age – making sophisticated chips at scale, its longer-term prospects remain bright.
To be sure, it’s not even clear if it’s such a good idea for gross margins, particularly for a contract manufacturer to even be this high.
Considering that at some stage, Chinese investment in chipmaking, as well as competitors like Intel (-1.26%) and Samsung Electronics (-0.87%) are catching up, chipmaking margins were bound to come down anyhow.
TSMC occupies a unique position in having been able to crack some of chipmaking’s seemingly intractable problems and yet churn a massive profit, an achievement few other manufacturers can claim to have accomplished.
Which is why this short-term pullback in TSMC is unwarranted and out of proportion to the company’s longer-term prospects.
In the next several years, TSMC can be expected to invest heavily in new chip foundries and also diversify its manufacturing base, but until and unless other chipmakers like Intel start to crack the tricky manufacturing problems and processes that the incumbent has already, there’s no reason to turn bearish on TSMC on the basis of gross margins alone.
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3. Does making currency digital make it worth more?
During the 1970s, the turbocharging craze in cars spilled over into popular culture. Seemingly overnight, the “turbo” label was slapped onto everything from toilet paper to towels.
Making something “turbo” in the minds of consumers just made it better.
And in the 70s, few consumers even knew what “turbo” meant, let alone appreciated that it was simply using the waste exhaust gases from the combustion process to spool a compressor that was increasing the amount of air that was heading into the combustion engine of a car and therefore increasing its power (more air, bigger bang, more power).
But labelling something "turbo" doesn't make it any better than labelling something "digital."
According to some analysts, Bitcoin’s most recent slide was based on the prospect of central bank digital currencies, or CBDCs, undermining the raison d’etre for cryptocurrencies.
CBDCs came back in the spotlight again after U.S. Federal Reserve Chairman Jerome Powell said in a hearing before Congress this week that it was important the central bank get its digital dollar project right.
In the same vein, the European Central Bank took a major step forward this week by beginning its “investigation phase” for its own digital euro.
But investors looking at CBDCs and worried that they’ll eat Bitcoin’s lunch are missing the point altogether.
Just because a dollar, euro or yen is digital, doesn’t change a single thing about what it represents – an inflationary currency that is ruled by fiat and backed by diktat.
Bitcoin on the other hand is often viewed by investors as the digital equivalent of gold, a foil against the foibles of the body politic to print so much of a currency that it in effect becomes worthless.
A dollar, cotton or otherwise, doesn’t fundamentally change any of the principles from which it is born into existence.
Bitcoin has been struggling of late, drifting sideways and trending lower, but a closer inspection of the cryptocurrency markets will reveal that NFTs or non-fungible tokens have been increasing and pockets of value in specific cryptocurrency projects can still be found.
If nothing else, the cryptocurrency market appears to have become more mature, with Ether’s relative stability and “decoupling” from Bitcoin a sign that traders may no longer be as obsessed with Bitcoin’s headline numbers.
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Jul 16, 2021