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Novum Alpha - Daily Analysis 13 September 2021 (10-Minute Read)

A magnificent Monday to you as stocks continue to show weakness with no clear end in sight for the pandemic.


In brief (TL:DR)

  • U.S. stocks were lower on Friday, with the Dow Jones Industrial Average (-0.78%), S&P 500 (-0.77%) and the tech-centric Nasdaq Composite (-0.87%) all lower as sentiment soured on the lack of a clear path out of the pandemic. 
  • Asian stocks dipped Monday as China’s regulatory curbs and the risk of a slower recovery from the pandemic amid elevated inflation sapped sentiment.
  • Benchmark U.S. 10-year Treasury yields surged to 1.34% (yields rise when bond prices fall) as traders factored in the likelihood of the Fed continuing to intervene to soak up asset purchases in the coming months. 
  • The dollar ticked higher on heightened uncertainty. 
  • Oil rose with October 2021 contracts for WTI Crude Oil (Nymex) (+0.62%) at US$70.15 as winter demand was priced in alongside the slow resumption of production in the Gulf of Mexico in the wake of Hurricane Ida. 
  • Gold was little changed with December 2021 contracts for Gold (Comex) (-0.07%) at US$1,790.80.
  • Bitcoin (+0.54%) was at US$45,174 as traders continue to sell on concerns over a regulatory crackdown with inflows continuing to lead outflows (inflows suggest that traders are looking to sell Bitcoin in expectation of lower prices). 

In today's issue...

  1. Delta Variant Means the Recovery Will Take as Long as It Needs
  2. Eyeing that New BMW or Merc? Prepare to Pay More
  3. Crypto-Stocks Hit the Skids in the Wake of El Salvador

Market Overview

There's nothing that markets hate more than uncertainty. 
And the times are becoming more uncertain. 
With a Chinese regulatory crackdown on what appears to be capitalism coming at a time when it's less clear how the U.S., let alone the rest of the world, will chart a path out of the pandemic, investors are understandably nonchalant about the prospects for stocks./ 
And that's seeping into Asian markets naturally with Tokyo's Nikkei 225 (-0.10%), Hong Kong's Hang Seng (-1.55%) and Seoul's Kospi Index (-0.35%) down, while Sydney’s ASX 200 (+0.20%) was up marginally in Monday's morning trading session. 

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1. Delta Variant Means the Recovery Will Take as Long as It Needs

  • The lack of a clear path out of the pandemic means that stocks will remain volatile for a longer time 
  • Biden administration mandating vaccines may help, but the delta variant is threatening to derail the recovery as it appears to be resistant to the current clutch of vaccines 
The world rejoiced last year when effective vaccines against the coronavirus were developed by a clutch of biotech companies, ushering the prospect of a speedy end to the pandemic and a rapid return to normalcy.
And early data also showed that these vaccines were likely to be effective against any variants as well.
Fast forward massive vaccination campaigns and over ten months and it’s looking less certain that the recovery from the pandemic is anything that anyone had expected.
The U.S. is failing to bring a surge in Covid-19 cases under control, forcing companies to reset business plans and revise forecasts as they also grapple with a new federal vaccine mandate.
Goldman Sachs (-0.27%) has already revised this year’s forecast U.S. GDP growth downwards to 5.7%, from an earlier estimate of 6.2%.
Revenues at a quarter of U.S. small businesses, the backbone of the American economy, have fallen in each of the past three weeks, while just 8% have seen growth, according to an Economic Innovation Group study.
A rapidly spreading delta variant is also causing demand at the largest U.S. airlines to turn sluggish, with United Airlines (-4.81%) revising downwards planned capacity increases ahead of Thanksgiving and Christmas, key travel periods for the country.
American Airlines (-6.19%) and Delta Airlines (-4.21%) are also warning of lower-than-expected revenues for the third quarter.
While U.S. tech continues to ride high, uncertainty over the delta variant has prompted companies like Microsoft (-0.52%) to delay bringing staff back to offices indefinitely this week, joining a list of large employers pushing back their office reopening long past their original Labor Day targets.
But perhaps the most disconcerting is the sharp correction in consumer sentiment, which makes up some 70% of the U.S. economy.
As peak holiday shopping season looms over the horizon, the prospect that Americans may tighten their belts, at a time when they’re already spending less on everything from vacations to office wear, could cause the economic recovery to hit the skids.
The Biden administration isn’t taking developments lying down however, mandating vaccines or weekly testing for 80 million private sector employees before they can return to workplaces.
But as the U.S. heads into winter, which helps with the spread of the coronavirus, the summer’s euphoria has rapidly given way to a quickly cooling sentiment.

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2. Eyeing that New BMW or Merc ? Prepare to Pay More

  • Premium car brands take the supply disruptions to justify maintaining higher prices, which consumers are willing to pay 
  • Investors in European stocks may want to take a closer look at premium car makers, as their ability to generate supernormal profits may be durable 
Bad news luxury car lovers, that shiny BMW or Merc you’ve been eyeing isn’t about to get any cheaper any time soon.
And no, it’s not because of supply chain disruptions or chip shortages although that might be what your dealer tells you, it’s because of the simple economics of supply and demand.
While debilitating chip shortages and supply chain disruptions caused by the coronavirus pandemic did extend delivery times for some of the most coveted BMW and Mercedes Benz models, prices are about to stay higher just because carmakers can command them.
Car makers Daimler, which owns Mercedes Benz and BMW all plan to restrict the supply of their premium models to lock-in the hard-won price hikes they managed to score as a result of the pandemic.
To be sure, Daimler (+0.93%) and BMW (+0.65%) were already moving away from a volume-based business model well before the pandemic, but the willingness demonstrated by customers to pay higher prices has emboldened them to entrench those price hikes.
What premium car makers are discovering is that at the higher end of the model spectrum, buyers are less sensitive to price increases.
While incomes for lower wage workers have increased marginally over the past decade, the wallets of the top 10% have been stuffed and that makes it easier for them to accept price hikes in their discretionary purchases, including for premium automobiles from the likes of Daimler and BMW.
Some analysts believe that even a 1% decrease in the amount of discount given to car buyers could unlock as much as US$20 billion in extra profit for carmakers.  
And discounts for BMWs and Mercs in the developed markets of the U.S. and Europe have come down by over double that amount from their pre-pandemic peak.
At a time when many auto buyers are looking to either electrify their fleets or switch to newer and more efficient models, Mercedes achieved a remarkable 12.2% return on sales in the last reported quarter, up from 8.4% in the same period in 2018, while BMW’s margin reached almost 16%, up from 8.6%.
Given the recent rally in European stocks, investors could see these luxury car brands do even better as Europe emerges from the pandemic thanks to the rollout of vaccines and the reopening of markets.



3. Crypto-Stocks Hit the Skids in the Wake of El Salvador

  • "Safe trade" in listed crypto-related companies turns sour 
  • Reason bearish turn exposes investors in crypto stocks with much of the downside risk, with a capped upside as opposed to delving in the underlying asset itself
Bitcoin too volatile for your portfolio?
Don’t know the difference between Ethereum and Ethereum Classic?
For many investors wanting to participate in the growth story of cryptocurrencies, buying into the underlying assets require a strong constitution to weather the inevitable ups and downs the nascent asset class is infamous for.
Which is why for some investors, a hedged bet by way of a crypto-stock was often found to be more palatable.
Why invest directly in Bitcoin when a bet on MicroStrategy (-3.91%) provides an “equivalent”?
Yet according to some estimates, just US$0.23 out of every dollar invested in MicroStrategy actually reflects an investment in Bitcoin.
And the fortunes of listed companies whose prospects rely entirely on the rise and fall of cryptocurrencies often don’t reduce the volatility in their stock prices, but do cap the upside even when digital assets rally.
Last week, as investors prepared for what was meant to be a new epoch for cryptocurrencies, stocks of some of the companies most closely associated with the space started to rise in anticipation.
As El Salvador declared Bitcoin legal tender, not just accepting the cryptocurrency for taxes but mandating that businesses must accept it as well, companies such as Riot Blockchain (-5.52%) and Coinbase Global were amongst a score of firms that rose alongside the anticipation.
But the rollout of Bitcoin in El Salvador didn’t go as planned, with the country’s Bitcoin wallet called Chivo, crashing within hours of its release.
Not helping matters, Coinbase Global (-3.16%), revealed last week that it might be sued by the U.S. Securities and Exchange Commission as it intended to rollout its “Lend” product that would pay interest on cryptocurrency deposits.
The circumstances have emboldened short sellers who have been looking for new prey to hunt and they appear to have set their sights on the orbit of listed cryptocurrency stocks.
Traders increased bets against MicroStrategy, Riot Blockchain (-5.52%) and Bit Digital Inc (-7.95%), all of which dropped 14% or more during the holiday-shortened week.
But the trade isn’t without dangers. Given how volatile cryptocurrencies are, the sentiment can very rapidly switch from bearish to bullish faster than you can say “Dogecoin.”
And publicly shorting cryptocurrency companies may also raise the ire of retail investors who may yet come to their rescue akin to GameStop (-4.40%) and AMC Entertainment (+3.38%).

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Sep 13, 2021

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