Novum Alpha - Daily Analysis 21 July 2021 (10-Minute Read)
A wonderful Wednesday to you as investors took advantage of the dip to buy up stocks and push markets higher.
In brief (TL:DR)
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In today's issue...
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Market OverviewIt's not how many get infected, it's how many get affected.
For the coronavirus pandemic to become endemic, several things need to happen first - persons who are infected don't develop serious symptoms that weigh down the healthcare system.
The R number, or the transmissibility of the coronavirus also needs to come down - because the more people get infected, the higher the odds that mutations which defeat existing vaccines, will develop.
And finally, vaccinations have to go up, because that will help to undermine the transmission of existing coronavirus strains, without creating a giant human petri dish to develop fresh variants.
But...
That's not likely to happen anytime soon.
Unfortunately, vaccinations are slowing in both the U.S. and Europe and China has shown a demonstrable resistance to accept western vaccines, in favor of its own, whose efficacy is still doubtful, as experienced by Southeast Asian countries which have adopted it.
And even though markets may have recovered from Monday's bloodbath, investors are finding themselves in a Catch-22 type situation, where nothing changes from day to day and the prospects are as uncertain today as they were yesterday.
In Asia, markets reflected that uncertainty with Sydney’s ASX 200 (+0.87%) and Tokyo's Nikkei 225 (+0.54%) up, while Hong Kong's Hang Seng (-0.63%) and Seoul's Kospi Index (-0.37%) were down in the morning trading session.
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1. Netflix Not Chill
The poster boy of the pandemic, Netflix (-0.23%) is facing increasing pressure from a streaming market that has grown more crowded, and a production schedule as long as 18 months behind because of the coronavirus.
Switch on the average smart TV or home entertainment system and a dizzying number of entertainment options exist, from Disney+ to Hulu, Amazon Prime Video to Paramount Plus, and that’s not even considering video games, that are all vying for our attention.
In the past eighteen months, Disney (+2.20%), Apple (+2.60%), WarnerMedia (-0.73%), Comcast (+0.79%) and a host of other companies have launched streaming platforms with data from Ampere suggesting that there are now over 100 streaming services for customers to select from.
And that’s not even counting user-generated streaming content available on Facebook (+1.40%), Twitch and YouTube.
Yet despite the more competitive landscape, Netflix was able to hold its own throughout most of the pandemic’s lockdowns, entertaining us when we were shut off from the rest of the world.
But now that much of the U.S. and Europe has reopened, and a previously captive audience now has places to go, and people to see, the relevance of staying home for some Netflix and chill becomes less apparent.
Instead of waiting for fresh content, subscribers have moved on and Netflix has hemorrhaged subscribers, shedding 430,000 in the U.S. and Canada alone in the second quarter and issued weaker than expected forecasts for later this year, rekindling doubts over how far the streaming giant will fare should the global economy reopen for business.
While Netflix has not taken the challenge from competitors sitting down, the company having reinvented itself successfully before, from a mail-in video rental company, to a streaming giant that came to define an industry, its plan to delve into video games is no sure bet.
The video game industry is notoriously fickle, perhaps even more so than video content, but there is one major difference – it’s also very sticky.
Successful video games can become cult titles whose sequels and following run for decades.
But video games these days are more expensive to make than blockbuster movies, with no guarantee of success.
While Netflix has repeatedly divined the things we want to watch, it’s less obvious that makes a good fit for the games we want to play.
One way of course is for the video streaming giant to partner with established video game publishers to franchise some of its content into video games, including some of Netflix’s most iconic Emmy-award-winning programs and series.
Alas, Netflix has decided to go the other way in an ill-advised foray into perhaps the most challenging sector within video gaming – mobile phone games.
Mobile phone gamers are far more casual than console and PC gamers and less sticky.
While certain cult titles like League of Legends still generate billions to this day, the rise and decline of others like Rovio’s Angry Birds should serve as a grim reminder that finding a winner is only part of the equation, sustaining one is likely to be the bigger challenge.
And unlike Netflix’s current production model, which is to throw as much money at as many projects and hope one sticks, its ambitions in the video game industry are far more conservative, with co-CEO Reed Hastings framing it as a complement to the firm’s existing business.
Investors therefore can’t expect too much from Netflix’s foray into video games, and a bet on the company is really a bet on the content that is coming out in the next eighteen months.
In the meantime, Netflix’s earnings and subscriber growth are likely to disappoint in the coming months, and that’s even if the delta variant gets worse and lockdowns need to be instituted again.
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2. Are You Overpaying for Real Estate?
The Western world’s obsession with real estate hails back to the time of the monarchy, when the landed gentry and royalty, which owned the land, would sit back and enjoy a life of luxury and excess, while the peasantry worked the land for subsistence.
And while the concept of monarchy may have fallen into decline (God save the Queen!), the ideology of achieving excess through real estate has not.
Which is why throughout the developed world, one of the major components of wealth continues to be real estate, an asset class favored to both preserve generational wealth, achieve capital gains and generate rental yield.
With an asset class so sexy, who wouldn’t want to own a piece of their pie in the sky, here on the ground?
The problem of course with real estate is that very few, if any investor, pays for their real estate acquisition completely in cash – it just simply isn’t a very savvy way to deal with your wealth.
Instead, if your real estate asset generates a rental income or is forecast to create a level of capital gain, it’s possible then to simply borrow (leverage) against the value of the property and then make money on the difference.
So with interest rates near zero and liquidity sloshing about in the economy, it’s no wonder that research firm Oxford Economics has identified house prices in the richest nations may be overvalued by as much as 10%, after a decade-long boom that’s one of the strongest since 1900.
According to Oxford Economics, real estate values across 14 advanced economies have risen some 43% in the last decade, and the current boom is on course to become the second-longest and third-largest in terms of price increase in over 120 years.
But where do house prices go from here?
In April, U.S. house prices saw their biggest jump in over three decades while properties across the pond in the U.K. rose the most in almost 20 years.
Across much of the developed world, the same recipe is leading to higher housing costs – low mortgage rates coupled with strong demand for larger properties in suburbs because of a desire for extra rooms for home offices and remote working, have been key drivers.
While high valuations and continued price inflation in real estate raises the prospect of a sharp price reversal in the future, attention has to be focused on the levels of leverage that are being utilized to achieve these fresh highs.
To be sure, mortgage credit compared to the lead up to the 2008 Financial Crisis suggests much reduced risks of a massive blow out and interest rates look set to remain low for the coming years, which should do well to sustain demand.
Beyond that, a combination of rising interest rates in response to higher inflation, against a backdrop of slower economic growth may provide the perfect recipe for housing prices to correct.
Nonetheless, a correction of around 10% shouldn’t be sufficient to cause cascading defaults and foreclosures, but anything above that could have a ripple effect akin to what happened during the 2008 Financial Crisis.
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3. Bitcoin Below US$30,000 time to buy?
“Be fearful when others are greedy and be greedy when others are fearful.”
– Warren Buffett
As with so many other things in life, chasing higher highs often leads to sharper crashes.
Whether it’s drugs or adrenaline, the human race is constantly in a tussle for that next high, only to come crashing down soon after.
So when Bitcoin hit its all-time-high of around US$64,000 in mid-April, many seasoned hands (as opposed to diamond) were gearing up for a sharp correction soon after – the cryptocurrency had simply risen too high, too fast.
Like a drug high, speculators gorged on cryptocurrency fever, betting that Bitcoin could hit US$100,000, only to be disappointed as it corrected sharply soon thereafter.
Yet something curious has happened the past few days.
While Bitcoin did slip below US$30,000, in line with a broader sell-off in the general financial markets because of concerns over a resurgent delta variant of the coronavirus, it didn’t capitulate.
Instead, like an old man slipping into a warm bath, Bitcoin went below the US$30,000 level of support and hovered just below it, to keep hopes alive and to stay breathing.
If nothing else, bargain hunters started snapping up Bitcoin below US$30,000 in line with investors who bought the dip in equities yesterday.
For technicians, Bitcoin’s dip below the Trading Envelope indicator, a tool that smooths moving averages to map out higher and lower limits, the benchmark cryptocurrency has reached a key inflection point.
Depending on the appetite for risk assets, Bitcoin could rebound sharply if there should be a strong rally in financial assets in general, provided that markets grow more confident the recent setbacks from the delta variant are not insurmountable.
Key to the data coming out of fresh coronavirus infections from the delta variant are whether these cases are more serious and draw down more heavily on healthcare requirements, or are simply more transmissible, which raises longer term risks, but has lesser immediate impact.
If Bitcoin rebounds after having breached the Trading Envelope indicator, it could rally to around US$36,000 before staying at that level for a while.
Otherwise, Bitcoin could test US$25,000 and then US$20,000 based purely on technical indicators.
For now though, there is strong reason for the bull case.
While there is no shortage of bearish news, from heightened regulatory scrutiny to China’s crackdown on miners to pressure Bitcoin lower, that it hasn’t collapsed well below US$29,000 in the past 48 hours should be telling.
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Jul 21, 2021