Novum Alpha - Daily Analysis 16 August 2021 (10-Minute Read)
A brilliant start to the week for you as we're staring down the second half of August and with stocks starting to waver as Wall Street punches through new highs.
In brief (TL:DR)
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In today's issue...
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Market OverviewWere the pandemic lockdowns of the past year-and-a-half all for naught?
Did we breathe heavily through masks, sanitize our hands till we developed calluses and pour liquidity into the markets only to have to do this all over again thanks to the delta variant?
Maybe.
Or at least that's what's keeping investors jittery heading into mid-August.
Early gains made in fighting the coronavirus have all but been used up and there are increasing signs that the world is either ill-prepared or overly fatigued to deal with another round of pandemic lockdowns.
There are signs that all is not well with the Chinese economy either.
A continuing crackdown by Beijing on its various industries is just the tip of the iceberg, there are growing signs that Chinese growth may be plateauing and sending investors heading for cover as reflected in Asian stocks on Monday's morning session with Tokyo's Nikkei 225 (-0.14%), Seoul's Kospi Index (-1.16%), Hong Kong's Hang Seng (-0.48%) and Sydney’s ASX 200 (-0.46%) all uniformly lower.
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1. Déjà vu as Stocks Turn More Bullish Than Ever
“Be greedy when others are fearful and be fearful when others are greedy.”
– Warren Buffett
The last time Wall Street analysts were this upbeat was in the aftermath of the dotcom bubble bursting.
Investors can seemingly do no wrong in the markets as analysts are recommending a full 56% of all firms on the S&P 500 as a “buy” – the most since 2002 after the dotcom bubble burst.
And to be fair, those analysts in 2002 were right, because after the dotcom crisis, stocks took off on a tear, fueled by rampant amounts of liquidity as the U.S. Federal Reserve shored up the markets.
But could this time be different?
While analysts are generally a bullish bunch, with some secretly receiving payments for writing ebullient reports on stocks in their purview, as revealed by the 2008 Financial Crisis, corporate earnings are providing at least some justification for the positive sentiment.
Despite all the concerns over the delta variant, China’s regulatory crackdown or the prospect of the Fed pulling back its stimulus, stocks are still rallying hard.
And it’s not just U.S. equities either, across the pond in Europe about 52% of recommendations on the Stoxx 6000 are “buy” or the equivalent, the highest in a decade, while in Asia, 75% of stocks are shoe-ins as well according to analysts.
To be sure, earnings are coming off a low pandemic base from last year, but momentum is still far over most analyst expectations and some suggest that the full extent of the recovery hasn’t even been factored in yet, with borders still closed and the reopening only partial, leaving further room for a continued and sustained rally.
But the almost uniformly bullish sentiment may be somewhat disconcerting, especially as this would hardly be the first time that investors were collectively wrong-footed – there may be more than a handful of good reasons why Buffett is paring down positions and rotating into cash.
With more money chasing fewer good deals, value investors like Buffett and his ilk are sitting on the sidelines, as valuations near eye-watering levels.
Nonetheless, markets appear to be in no mood for correction.
The continued crackdown by Beijing was generally met with indifference outside of Chinese stocks and the last time the S&P 500 saw a peak to trough decline of over 5% was over 193 days ago, almost double the long-term average.
One difference between previous rallies however has been the presence of retail investors in overwhelming numbers.
Like the Sand People (Tusken Raiders) in Star Wars, retail investors scare easily, but they come back, and in greater numbers.
Unlike previous rallies, retail investors now make up an average of 20% to 25% of trading volume on U.S. stock exchanges and have been increasingly active in trading options.
Their presence has enabled stocks to rebound at practically every corner as investors “buy the dip,” a phrase popularized by the retail investing crowd.
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Did you miss us at the Super Crypto Conference 2021? Watch it here... |
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2. Hedge Funds are Expensive and That's a Good Thing
The decade and a bit since the 2008 Financial Crisis has been one that hedge fund managers would soon rather forget.
A return in popularity of index investing against a rising tide of liquidity that floats all manner of securities has prevented hedge funds from demonstrating their prowess and justifying their fees.
Melvin Capital, the hedge fund backed by Citadel, was all but decimated when it shorted the stock of video game retailer GameStop (+0.10%), and highlighting the challenges the hedge fund industry has continued to face, especially in the face of one of the longest bull runs on record.
Making things worse for hedge funds, cheap, passive index funds are now promising the use of sophisticated algorithms, accessible to any manner of investor, but at a fraction of the price.
But hedge fund returns may be on the mend – with the industry as a while returning a decent 11.8% last year, according to data from HFR, the best year since the aftermath of the 2008 Financial Crisis, but well off the S&P 500 of 18.4% over the same period.
To be fair, the hedge fund industry represents an entire gamut of strategies and asset classes and to paint them with a broad brush is like trying to find the “typical” American – there’s no such thing.
Because hedge funds can undertake sophisticated strategies and invest in all manner of assets, even though their returns are short of global stock markets, with equity valuations now at or beyond record levels, there are few who think that gains of that sort can continue unabated.
And that’s where the value of hedge funds could come in.
After withdrawing over US$170 billion over the past five years, investors have put in a net US$18.4 billion in the first half of 2021 alone, according to data from HFR.
The smart money is betting that just like trees do not grow to the sky, stock prices won’t rise to infinity either.
And unlike index investing or buying stocks on apps like Robinhood (+5.26%), hedge funds are accessible only by the so-called “smart money,” sophisticated or accredited investors who have sufficient net worth to avail themselves of the services of more bespoke investment services.
The result has been a swelling of the hedge fund industry’s overall assets under management to a record US$4 trillion this year.
Hedge funds are a little “cheaper” than they used to be as well, with the average management fee now down to 1.38% from 2% and the average performance fee coming in at 15.9% from 20%, according to data from Eurekahedge.
But fees also differ depending on the asset class, with equity-focused hedge funds charging far lower fees and cryptocurrency hedge fund fees well in excess of their traditional counterparts.
As stocks become increasingly more expensive, well-heeled investors are pushing into hedge funds, convinced that simply surfing the tide of liquidity through cheap, passive index funds, will not work as well in the coming years.
According to investment group AQR Capital Management, a typical 60/40 balanced portfolio of stocks and bonds is expected to return just 2.1% annually after catering for inflation over the next 5 to 10 years, well off the 7% to 8% that pension plans or insurance policies need to deliver to make payments.
And with bond yields hitting record lows, with their historical ability to buffer stock market losses severely impaired, many investors are looking for a substitute to fixed income, that should be able to weather, or perhaps even thrive, during periods of market volatility.
For investors caught in that predicament, they may have little choice but to turn to hedge funds, if they can even get in.
Top players such as Millennium, Two Sigma, D.E. Shaw and Citadel remain largely shut to new clients, preferring to preserve their performance by staying nimble.
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3. Cryptocurrencies Are Worth Over US$2 Trillion Again
The weekend is a tricky time to trade cryptocurrencies.
While many traders use automated bots to ply the digital asset markets, there are just as many who manually enter or exit trades and as a result, volumes are typically lower over the weekend, despite cryptocurrency markets never sleeping.
Nonetheless, over the past weekend, cryptocurrency markets cleared a major milestone, crossing over the US$2 trillion in market cap for the first time in months, despite lower volumes.
Cryptocurrency markets were at their nadir in April, when Bitcoin was pushing US$64,000, but have since lagged other traditional asset markets and stayed below US$2 trillion.
On Saturday, helped by gains in altcoins like Cardano, XRP and Dogecoin, cryptocurrencies pushed past the US$2 trillion total market cap according to data from CoingGecko, which tracks over 8,800 different cryptocurrencies.
While Bitcoin is still well down from its all-time-high of US$64,000, it managed to push over US$48,000 on thinner volumes on Saturday and chart watchers will note that the benchmark cryptocurrency has managed to stay above its 200-day moving average, a key bullish marker.
Cardano also roared ahead to become the world’s third-most valuable cryptocurrency by market cap, up by almost half over the past week.
Not to be outdone, XRP gained over 60% and the meme coin Dogecoin clocked in at 18% over the same period.
Cardano has been helped recently by a flurry of investment and development, which has seen the cryptocurrency rise sevenfold this year alone.
While supporters point to Cardano’s relatively low energy usage compared to Bitcoin, and upcoming projects in areas like identity management and governance, detractors question its utility and community support.
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Aug 16, 2021