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Novum Alpha - Daily Analysis 27 August 2021 (10-Minute Read)

A fabulous Friday to you as stocks look to turn flaccid on concerns over the strength of the economic recovery at at time when the U.S. Federal Reserve may be pulling back on asset purchases.


In brief (TL:DR)

  • U.S. stocks would lower on Thursday with the Dow Jones Industrial Average (-0.54%), the S&P 500 (-0.58%) and tech-centric Nasdaq Composite (-0.64%) all seeing pullbacks as investors deleveraged bets and sentiment turned cautious.  
  • Asian stocks dipped Friday amid hawkish comments from some U.S. Federal Reserve officials ahead of the Jackson Hole symposium and as traders assessed geopolitical tension stemming from Afghanistan.
  • Benchmark U.S. 10-year Treasury yields fell one basis point to 1.34% ahead of the Jackson Hole symposium (yields fall when bond prices rise). 
  • The dollar held a climb.
  • Oil advanced with October 2021 contracts for WTI Crude Oil (Nymex) (+0.74%) at US$67.92 as it headed toward its strongest week since February.
  • Gold was higher with December 2021 contracts for Gold (Comex) (+0.20%) at US$1,798.80.
  • Bitcoin (-3.12%) fell to US$47,267 with risk sentiment in general ebbing and inflows into exchanges pipping outflows (inflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 


In today's issue...

  1. Americans Aren’t Borrowing to Buy as Many Stocks Anymore
  2. Pressure Piles on Chinese Property Developers as the Next Shoe to Fall
  3. Keeping Cryptocurrencies in the Family


Market Overview

Investors are understandably skittish over the looming perfect storm - weak economic recovery against a backdrop of a rapidly withdrawing central bank and that's not a good thing. 
Revelations that U.S. investors are scaling back on leveraged bets that have helped the S&P 500 rally around 19.7% so far this year has also dimmed the mood. 
Asian stocks were a mixed bag on Friday as well, given the uncertainty, with Tokyo's Nikkei 225 (-0.28%) and Sydney’s ASX 200 (-0.05%) lower, while Hong Kong's Hang Seng (+0.66%) and Seoul's Kospi Index (+0.37%) were up marginally in Friday's morning trading session. 

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1. Americans Aren't Borrowing to Buy as Many Stocks Anymore

  • Leverage to buy stocks has dropped the most since last March, when the pandemic first kicked in 
  • Scaling back of leverage could be the result of various factors, including falling retail demand for borrowing, unwinding of Chinese stock positions by institutional investors and general concern that the unprecedented rally in equities could soon hit the skids 
Since the pandemic started, easy credit conditions have enabled American investors to bet the literal farm on equities, a strategy that has paid off in spades.
Whether it’s because of summer, or stock market fatigue, U.S. investors dialed back their use of leverage to the lowest level since March 2020, when the pandemic was raging.
Investors borrowed US$884 billion against their portfolios last month, down from a record US$882 billion a month earlier, according to data from the Financial Industry Regulatory Authority (FINRA).
While FINRA doesn’t disclose the details of who drives the shifts in leverage every month, part of the reason could be that many retail investors who had been day trading during pandemic lockdowns have curbed the use of margin loans to speculate on stocks.
And that’s played out in the clutch of meme stocks like AMC Entertainment (-8.30%) and GameStop (+2.79%), with Vanda Research revealing in a report that the recent spike in prices of 37 stocks popular with retail investors was being driven primarily by professional investors.
But dialing down leverage could also be symptomatic of a wider malaise in the market.
With U.S. equities pushing fresh records, many hedge funds and other professional investors are dialing back bullish bets.
U.S. economic data has also fallen short of expectations, shaking investor confidence in a rally at a time when the U.S. Federal Reserve may be considering a tapering of asset purchases.
Some investors have also dialed back on Chinese stocks listed on U.S. exchanges, which have suffered setbacks recently from sudden moves to censure the sector from Beijing, and that’s led to a progressive unwinding of bullish positions and the leverage that accompanies them.
Meanwhile the delta variant continues to wreak havoc across the U.S. and consumer sentiment and manufacturing indices all reveal a cooling trend.
The recent reduction in borrowing to bet on equities comes on the back of a stellar run for U.S. stocks, with the benchmark S&P 500 up 19.7% so far this year.
But with that rally has come greater risks as well, as regulators grow increasingly concerned that investors may have pushed stocks up with borrowed money that may not be immediately apparent, especially given how some trades like those involving swap derivatives, aren’t captured in the data.
The US$10 billion implosion of Archegos Capital Management on bullish bets that turned sour and hitting counterparties like Credit Suisse (-0.83%) and Morgan Stanley (-0.24%) should serve as a warning as to how these opaque bets can ripple through the markets.
And while the market was unscathed by the Archegos Capital Management debacle, who’s to say the next collapse won’t have far-reaching consequences?

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2. Pressure Piles on Chinese Property Developers as the Next Shoe to Fall

  • Investors dump stocks of Chinese real estate companies and their downstream units on concerns that Beijing may force them to divest loss-making assets and deleverage 
  • China's property market seems primed for a shakeout, especially given how perennially high property prices have long been a bugbear of average Chinese households 
First they came for the tech firms, and I did not speak out – because I was not a tech firm.
Then they came for the afterschool educators, and I did not speak out – because I was not an afterschool education company.
Then they came for the property sector, and I did not speak out – because I own no property.
Then they came for me – and there was no one left to speak for me.
 – Adapted from the words of Martin Niemöller, 1946
As some plucky investors bought the dip in Chinese tech stocks this past week, others were dumping stocks, not just of property developers, but their related entities as well.
Yesterday China Evergrande New Energy Vehicle Group (+33.59%), which is listed on Hong Kong’s stock exchange, plummeted by as much as 22% after reporting losses of around US$740 million.
As recently as mid-April, China Evergrande’s electric vehicle unit was valued at US$87 billion, more than Ford Motor (-2.05%) and about four times the market capitalization of China Evergrande itself.
China Evergrande’s subsidiaries are being routed on concern that the world’s most indebted real estate developer will need to hive off assets at deep discounts over mounting pressure to deleverage from Beijing.
Soaring property prices in China have also long been a bugbear for Beijing and authorities are looking for ways to bring prices down, while not completely crashing its lucrative real estate market.
But subtlety has never been one of the Chinese Communist Party’s strong suits, with its ham-fisted moves in the market recently wiping trillions of dollars in market cap off some of China’s largest companies.
Beijing has been pushing its companies to deleverage as well, as it seeks to achieve a more equitable distribution of wealth.
The rising cost of education has seen a sharp crackdown on the afterschool tutoring market, with profits being banned, the once lucrative sector has been all but wiped out.
Real estate is a particularly sensitive topic in China as well, especially given how perennially high property prices have led to rising levels of resentment in China’s teeming cities.
Forcing real estate developers to deleverage may only be the tip of the iceberg as Beijing seeks to manage the distribution of wealth, which is bad news for China’s hitherto unscathed property giants.  

3. Keeping Cryptocurrencies in the Family

  • Family offices demonstrate a long-term view towards investing in cryptocurrencies 
  • Family offices may be looking to diversify their portfolios to bet on cryptocurrencies to hedge portfolios against inflation and persistently low interest rates 
For the uninitiated, family offices are an opaque world of wealth, where scions have professional managers to ensure that they can focus on the family business, while building up sufficient resources to ensure a strong and sound legacy.
And of late, some of the world’s most prominent family offices are looking to preserve wealth in the most unlikely of places – cryptocurrencies.
For most family office managers, their primary role is wealth preservation, with a view to providing for future generations and given how volatile cryptocurrencies are, it may come as a surprise that some are taking long-term bullish bets on the nascent asset class.
Take for instance billionaire Simon Nixon, one of a handful of family offices that have come out to publicly speak in favor of cryptocurrencies.
Nixon’s family office Seek Capital said in a statement that it is aiming to increase its “allocation to crypto as we feel it is an important area for the future.”
Despite wild prices wings in cryptocurrencies, with Bitcoin soaring to as high as US$64,000 before coming back down again to less than half of that and now trading around US$47,000, family offices have sustained their interest in the nascent digital asset class.
A recent survey by Goldman Sachs (-0.17%) found that almost half of the family offices it serves want to add cryptocurrencies to their portfolio of investments, with the extremely private firms seeing the digital asset class as a possible hedge for higher inflation and prolonged low interest rates.
Last November, Mexican billionaire Ricardo Salinas Pliego revealed that he put a significant portion of his liquid funds in Bitcoin, while Michael Novogratz and Christian Angermayer’s family offices pledged to allocate US$100 million over the next two years to crypto-related funds.

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Aug 27, 2021

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