Novum Alpha - Daily Analysis 26 July 2021 (10-Minute Read)
A magnificent Monday to you as we get into the last week of July and with few signs that the coronavirus pandemic is in the rearview mirror.
In brief (TL:DR)
In today's issue...
It ain't over till the fat lady sings.
And right now the fat lady is all masked up because even though vaccines seem to be slowing the spread of the coronavirus, a far more virulent delta variant is threatening to derail the economic recovery.
While investors are bullish thanks to second quarter earnings reports, some are concerned that the recovery story may be overtold, especially as these reports are lagging indicators.
Nonetheless, retail investors have shown an incredible propensity to "buy the dip" and have the wherewithal to do so, with at least some US$400 billion in instantly deployable dry powder that can soak up any dips.
If this week is anything like last week, equities may waver at the start of the week before kicking into high gear towards the end.
In Asia, markets were a mixed bag with Sydney’s ASX 200 (+0.21%), Tokyo's Nikkei 225 (+1.22%) up while Seoul's Kospi Index (-0.32%) and Hong Kong's Hang Seng (-2.41%) were down in the morning trading session.
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1. Intel Inside?
Build it and they will come, but first, you have to build it.
It’s no secret that Intel has struggled over the past few years to catch up with competitors AMD and in recent times, Nvidia, which have both stayed away from the complex and expensive job of building the factories that make the chips, to just focus on designing those chips.
But one area where Intel has still held a stranglehold on chip demand has been the highly lucrative server market, where its Xeon chips have long been the industry standard.
That stranglehold however has since become more of a loosely held hand as Nvidia, a leader in graphics processing units, that has since moved into server chips as well, uses its considerable expertise in artificial intelligence processing to challenge incumbent Intel in the server market , while AMD has been nipping at Intel’s heels with its enhanced server chip offerings for years.
Following quarterly earnings last week, Intel slumped even though the rest of the tech industry gained as its server chip division dished up a 9% year-on-year decline in sales, with sales to cloud providers like Amazon’s AWS and Google Cloud falling by over a fifth.
Intel, which for the longest time had been a leader in the chipmaking business has struggled over the past decade, as competitors like AMD have launched comparable or superior chips at better price points while companies like Nvidia look to eat into some of Intel’s market share with their new offerings.
Intel CEO Pat Gelsinger, who took the helm of the chipmaking giant in February this year, will have his work cut out for him, but geopolitics may be in his favor.
Intel has lagged Taiwan Semiconductor Manufacturing Co. and Samsung Electronics in chipmaking prowess, but with the Biden administration pledging to onshore the production of certain crucial industrial products such as semiconductors for national security reasons, American companies may either be obliged or compelled to buy American.
TSMC also faces challenges from competition in China and concerns over Beijing’s increasing assertiveness over Taiwan may force it to also move its manufacturing base, or at least diversify to other countries, a costly endeavor that could take years to yield results.
Intel is up only 6.38% this year, compared to the Nasdaq 100 which is up 17.25% and while semiconductor demand shows no signs of slowing, it’s less clear if Intel will be the biggest beneficiary of that demand.
For a company with over 99% share of the server chip market, the only real way for Intel was to head down as competitors, eyed and then moved in for a piece of the pie.
Investors looking for upside with Intel will need to be prepared for a long slog.
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2. Stocks Can't Go Up Indefinitely Can They?
Some of the biggest names in the hedge fund industry can attest to the strength of retail flows – after all they were almost completely obliterated by them.
What started off as the GameStop short squeeze, has very rapidly evolved into a retail investing movement that has so far faced off every macro threat that has been thrown at it.
Inflation? Buy stocks. Coronavirus variant? Buy stocks. Unemployment data? Buy stocks.
But when will it end and surely it must?
Between all the stories about a resurgent coronavirus delta variant, the one that may be missed is the mountain of money piling up in individual investment accounts.
Termed “dry powder” in some circles, money market accounts, often seen as a reserve for deployment into equities, sit at just under US$4.5 trillion, while a lesser-known balance, the U.S. Federal Reserve’s count of money on deposit with commercial banks has surged by a third from 2019 to US$17 trillion.
To be sure, none of this money is completely unencumbered and it isn’t quite “cash” in the strictest sense yet somehow investors are somewhat hell bent on making sure that markets don’t tank and they’ve got the cash to do it.
Take last Monday for instance, when concerns over the delta variant saw the S&P 500 slip by as much as 2.2%, investors who “bought the dip” not only covered that slide, but by the end of the week the benchmark was up almost 2%, even as coronavirus infections continue to surge.
Last Monday alone, retail investors bought a record US$2.2 billion worth of equities, with the biggest ETF tracking the S&P 500, the SPY, soaking up a record US$482 million in retail purchases, according to data from Vanda Research.
Part of the reason that equities keep rebounding off dips is also because there aren’t a lot of options right now for that dry powder to be deployed.
With bond yields so low that real yield is negative and even cryptocurrencies flatlining, the flood of money just doesn’t have a lot of places to go right now.
Until and unless bond yields head northward, equities will continue to do well, if investors desire to make their money work.
These retail flows aren’t likely to dry up anytime soon either, with data from DataTrek suggesting that retail money fund balances are still holding some US$1 trillion, versus US$643 billion in 2015 and analysts estimate that there’s at least US$400 billion ready to “buy the dip.”
Robinhood, the digital brokerage that launched the investing careers of more than a handful of retail investors added 13 million more funded accounts than it did before the pandemic.
At some point of course, the party must end, determining when however, is perhaps trickier, but for now at least, there’s little risk that the music will stop anytime soon.
3. Bitcoin Might Batter Earnings of Its Biggest Corporate Backers
As balance sheet items go, it’s completely understandable why most CFOs and financial executives might balk at putting large amounts of something as volatile as Bitcoin on the books.
And CFOs looking for justification to their boards as to why they thought it might have been a bad idea to add Bitcoin to their coffers may soon get it, as some of the biggest corporate backers of the benchmark cryptocurrency turn in their quarterly earnings reports.
From Tesla to MicroStrategy, some of Bitcoin’s biggest backers will have to account for their holdings as Bitcoin fell some 41% in the second quarter, after chasing a high of as much as US$64,000 in April, before tumbling in May.
While many analysts expect sharp write-downs, there’s also the potential that more than a handful of companies that had Bitcoin on their books also clocked big gains if they managed to offload their cryptocurrency holdings at higher prices than what they bought it for.
For companies like Tesla, its Bitcoin holdings are more of a distraction than anything else, with investors more interested in its quarterly sales numbers, especially after the massive recall of vehicles sold in China, the same can’t necessarily be said for firms like MicroStrategy.
Until recently, few, if any investors had even heard of MicroStrategy, the enterprise software company that has had middling sales and results for years, until its founder and CEO Michael Saylor decide to go all in on Bitcoin.
Since then, the gains made by MicroStrategy on its Bitcoin holdings, as well as the bond issuances that it’s conducted backed by Bitcoin have made the company look more like a cryptocurrency firm than a software enterprise.
As of May 18, MicroStrategy has spent over US$2.25 billion on Bitcoin, but less than three week later, warned of an impairment of at least US$284.5 million on those holdings, a quarterly write down that could end up being much higher after the software company raised US$500 million in a private offering to boost its Bitcoin holdings at a time when the price of Bitcoin was continuing to slide.
Companies that hold cryptocurrencies write down the value of their digital assets if the price falls below the acquisition price, but they aren’t allowed to recognize gains until there is a sale so even if the average price paid for Bitcoin could be well below current prices, companies would have to record impairment charges when the market dips.
Tesla already wrote off US$27 million on its US$1.3 billion Bitcoin holding for the quarter ended March 31 but could face a much higher mark down for the end of the second quarter, as Bitcoin dipped below US$29,000 by the end of June.
But early corporate backers may end up having the last laugh, write downs notwithstanding, because every investor knows that you buy when the price drops and not when it’s at its peak.
And while it’s more likely than not that most companies holding on to Bitcoin will need to make significant write downs for the past quarter, a quarter does not an investment make.
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Jul 26, 2021
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