Novum Alpha - Daily Analysis 22 July 2021 (10-Minute Read)
A terrific Thursday to you as investors shrug off concerns over the pandemic to continue pushing shares higher on the back of robust earnings.
In brief (TL:DR)
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In today's issue...
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Market OverviewThere's no escape from amazing earnings and markets are responding strongly to record profits as firms mark stellar second quarter results.
Concerns over the delta variant took a backseat towards optimism over earnings growth as sentiment turned bullish.
In Asia, markets reflected positive sentiment with Sydney’s ASX 200 (+0.92%) and Tokyo's Nikkei 225 (+0.58%), Hong Kong's Hang Seng (+1.63%) and Seoul's Kospi Index (+1.00%) all up in the morning trading session.
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1. Another Term for Powell Should Keep Markets Well Fed
While the role of the U.S. Federal Reserve Chairman is an important one, he (or she) alone does not determine interest rates or asset purchases.
As is the case with so many other things in a democracy as large and complex as the United States, matters of import are determined in committee.
Together with ten other members of the Federal Open Market Committee, U.S. Federal Reserve Chairman Jerome Powell and his colleagues set interest rates, that help determine everything from how much the U.S. government pays on its debt to how much you pay on your mortgage.
And it was Powell’s steely hand at the wheel of the world’s foremost central bank that helped guide the U.S. out of the worst of the pandemic’s economic shocks, rolling out loan packages and touting its “new monetary policy” that could be used to justify periods of higher inflation to make up for past undershoots.
Unflinching in the face of increased inflation data of late, Powell has helped the Fed keep policy consistent, choosing not to raise rates and keeping asset purchases consistent even amidst signs that the U.S. economy is heating up.
Up for renomination later this year, some investors are understandably concerned that the Biden administration might pick someone else to head up the Fed, even though Powell, a Trump era nominee, enjoys broad support from top Biden administration officials.
Like the U.S. Supreme Court, Biden may also be seeking to put his stamp on the central bank through personnel selection, with the Trump administration having appointed Richard Clarida and Randal Quarles, who sit on the FOMC together with Powell and who denied current U.S. Treasury Secretary Janet Yellen a second term as Fed Chair.
Powell’s four-year term ends in February next year and historically sitting presidents have decided in the late summer or fall whether to renominate the incumbent Fed Chair or put forward a fresh pick.
Some analysts suggest that current U.S. Federal Reserve Governor Lael Brainard could be a potential replacement should Biden decide to replace Powell.
Brainard at least is a known entity, who is a proponent of the Fed’s New Monetary Policy and her pursuit of full employment should at least keep the central bank status quo.
But investors loathe uncertainty, and Powell’s commitment to maintaining the Fed’s loose monetary policies until the labor market recovers further has seen a buy-in from financial markets, with even U.S. Treasuries soaring despite signs of heightened inflation.
That credibility and continuity is crucial because it’s not a given that a fresh-faced Fed chair could get the same buy-in or lead the central bank in the same direction and that uncertainty could cause markets to waver.
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Did you miss us at the Super Crypto Conference 2021? Watch it here... |
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2. Chances Are There's an ETF for That
When you come along a free lunch, the only logical thing to do is eat.
And while ETFs are not the equivalent of a free lunch, they come extremely close to filling that role.
Low fees and ample liquidity, against a backdrop of retail investor interest have helped propel exchange traded funds to a record US$659 billion in inflows in the first six months of 2021, compared with US$767 billion for all of last year.
Compared to more expensive structures, investors have saved millions of dollar in aggregate fees compared with more expensive structures.
Part of the triumph of ETFs have also been their relative outperformance against active instruments.
And ETFs are seductive in their value proposition – since it’s difficult to consistently beat the market, why not just be a part of it?
In an era of low interest rates, and markets which defy gravity, active managers have struggled to beat the market, and investors, less accepting of the sometimes exorbitant fees for the prospect of outperformance.
So should investors just go all in on ETFs?
To paint ETFs with a broad brush would be overly simplistic.
For starters, not all ETFs are built the same.
Some synthetic funds are really nothing more than the debt obligations of banks.
And last year, commodity funds that rolled over futures contracts on the assumption that towards expiry, nothing much would be expected to change, found themselves flatfooted when oil prices briefly turned negative.
Highly sophisticated and complex ETFs also hamstring the ability of regulators to determine if they’re suited for retail investors, and in most cases, many are not.
Beyond the plain vanilla ETFs, retail investors may be gaining exposure to structures and incentive mechanisms that are not immediately apparent, and which at times may be in conflict with their own portfolio objectives.
And while active managers may have had a hard time may be precisely why they’re worth a second look.
As the global economy claws its way out of the pandemic, and the prospect of higher interest rates and tapering of asset purchases looms, markets are likely to get more challenging and the possibility of an astute asset manager to shine increases.
Investors might want to reconsider their approach to fees, because it might be possible to buy-in to some of the most talented active managers on the cheap, in preparation of more challenging times in the near future.
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3. Bitcoin's Rebound or a Dead Cat Bounce?
After ducking below US$30,000, Bitcoin bounced off its lower Trading Envelope indicator to rebound as both financial markets and the cryptocurrencies recovered with investors shrugging off concerns over the virus and buying the dip.
Buoying sentiment, Elon Musk has revealed that SpaceX holds Bitcoin and has no intention to sell it.
Speaking at “The B Word” conference hosted by the Crypto Council for Innovation, Musk discussed the outlook for Bitcoin with fellow backers Cathie Wood, head of Ark Investment Management, and Jack Dorsey, chief executive officer of Twitter (+2.36%) and Square (+4.37%).
According to Musk,
“I would like to see Bitcoin succeed. If the price of Bitcoin goes down, I lose money. I might pump but don’t dump.”
Musk even went as far as to say that Tesla (-0.79%) might start accepting Bitcoin once mining became less environmentally taxing.
The recent purge by Beijing of its cryptocurrency miners, a unique opportunity to remake what sort of energy is used to mine Bitcoin arises.
As Bitcoin miners have moved out of China, there is the prospect that miners can select renewable sources such as hydroelectric or geothermal.
Musk has acknowledged that Bitcoin is improving on its renewable energy credentials,
“It looks like Bitcoin is shifting more toward renewables. I would want to do a little bit more diligence to confirm the percentage of renewable energy usage is at or above 50%.”
Fellow Bitcoin advocate Wood suggested, corporations should consider adding Bitcoin to their balance sheets, partly as a hedge against deflation.
Wood added that the Financial Accounting Standards Board should reconsider how it classifies Bitcoin since institutions currently have to write off holdings when the price declines. Listing it as an intangible asset could help remedy that.
“Think about how explosive growth could be.”
For technicians wondering where Bitcoin could head to next, the Trading Envelope indicator suggests that US$36,000 is the next level to look out for.
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Jul 22, 2021