Novum Alpha - Daily Analysis 22 October 2021 (10-Minute Read)
A fantastic Friday to you as tech stocks rebounded sharply from an initial selloff on concerns over a drop in digital ad spending while blue chips were flat in the U.S.
In brief (TL:DR)
In today's issue...
Global stocks are set for a third weekly advance, helped by the ongoing global recovery from the health crisis.
The rally is being shadowed by the prospect of a faster-than-expected tightening of monetary policy to curb inflation, which is being stoked by an energy crunch and creaking supply chains.
Equities advanced in China, Hong Kong and Japan. Local media said Evergrande transfered interest on a dollar bond before the end of a closely watched grace period.
In Asia, markets were mostly steady Friday with Tokyo's Nikkei 225 (+0.64%), Hong Kong's Hang Seng (+0.33%), Sydney’s ASX 200 (+0.03%) up, while Seoul's Kospi Index (-0.04%) was down in the morning trading session.
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1. China Cracks Down on Financial Media
First they came for the tech companies, and I did not speak out –
Because I was not a tech company.
Then they came for the afterschool educators, and I did not speak out –
Because I was not a tutor.
Then they came for the property developers, and I did not speak out –
Because I was not a property developer.
Then the came for the media, and there was no one left to speak for me.
Despite growing signs that Beijing is pulling back its ill-advised crackdown on certain sectors of the Chinese economy, it’s pushing ahead to reign in other seemingly innocuous areas, like financial media.
One of the most prominent and trusted Chinese business publications Caixin, has recently been subject to censure by China’s top internet watchdog, and its articles can no longer be republished by other online news services.
In the latest blow to journalism and what passes off as free speech in China, the Cyberspace Administration of China or CAC, removed Caixin from a list of over 1,300 media sources approved from domestic republishing.
Caixin has long built up a reputation for independent journalism, while treading a fine line with Beijing’s increasingly overbearing censors, and was a beacon of hope for freedom of speech in the otherwise oppressive media landscape that is China.
One of the last bastions that has survived a progressive assault on critical journalism, Caixin had built up a formidable reputation for its investigative work and exposure of financial malfeasance, never shying away from covering companies with links to high-ranking officials.
To be sure, the CAC’s restriction on republishing Caixin’s content is more of a shot across the bow than a direct assault on the publication.
But given that Caixin’s audience is almost exclusively Chinese, the restriction will serve as a warning for the publication to self-censor and take on a more circumspect approach to its reporting, especially when it comes to news that is “inconvenient” for the Communist Party.
Ahead of Chinese President Xi Jinping’s move to take on an unprecedented third term in office next year, Communist Party officials are tightening the reigns on news and media to ensure that every outlet sings from the same song sheet.
The bulk of Caixin’s content is mostly protected by a paywall, with the outlet not encouraging wider distribution through Chinese social media, so Beijing’s move will have limited impact on its revenues and readership, but nonetheless could be an existential warning to the publication and dramatically affect the ability to receive reliable economic data from within the Great Firewall.
Although Caixin’s main readership is based in China, its independent journalism also made it a source for foreign media, with investors and economists in China and abroad now warning that it may become even more difficult to retain reliable data on the world’s second largest economy.
The timing could not be more unfortunate.
With China facing an economic slowdown of Beijing’s own making, and real estate developers staring down a debt crisis that threatens to become China’s Lehman Brothers moment, reliable data, and clarity about what Chinese officials intend to do to alleviate the situation is more critical than ever.
But without independent journalism to help understand what the true situation on the ground is in China, overseas investors are essentially having to feel in the darkness to find their way out.
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2. WeWork's Public Debut Shows It's Hard to Shake Off Founder's Influence
Six billion dollars burned up over the eighteen months to June and nary a sign of profits, WeWork has entered the public markets with its shares humping on Thursday with a market capitalization of around US$9 billion, well short of its loftier US$47 billion IPO ambitions.
But in many ways, it’s nothing short of a miracle that WeWork was ever able to enter the public markets, albeit through a SPAC acquisition on the New York Stock Exchange.
After opening its first office in 2010, WeWork neared the brink of collapse just ahead of its attempt to go public in 2019, when mandatory disclosures revealed the conflicts of interest with CEO Adam Neumann and his profligate ways at the company.
Neumann was said to have purchased office space which WeWork subsequently rented and the company bought a private jet which he used almost as his own.
Despite these allegations against Neumann, the listing of WeWork will make Neumann as much as US$1 billion richer, as he retains a roughly 11% shareholding, though he cannot sell the shares for nine months.
Neumann no longer has any official role at the office-sharing company that he helped co-found, following a bitter legal battle with the Japanese investment group SoftBank, its largest investor, which had invested over US$10 billion into the company.
But Neumann is the least of WeWork’s troubles as the company continues to bleed cash.
WeWork’s offices were emptied out when the pandemic struck and it had to rationalize many locations, cutting staff and costs, after its failed IPO in 2019.
The company also came with a hair’s breadth of running out of cash after the botched IPO, needing a bailout from SoftBank to continue running.
But current WeWork CEO Sandeep Mathrani, a real estate veteran, may be just the man to help turn things around.
Under Mathrani’s leadership, WeWork has closed many locations and slashed costs by almost US$2 billion annually, negotiated more flexible lease arrangements and reduced administrative expenses.
Gone are the freebies that WeWork members previously enjoyed, including breakfasts and beer.
The company aims to be profitable by next year, according to Mathrani and durable shifts in work practices may help it along.
Companies are downsizing their office footprints and catering to a more mobile and flexible workforce.
Whereas a large company may have preferred to take out an entire office building, they may now take out a floor and then provide for their employees to use WeWork facilities wherever may be convenient.
Hot desking, more powerful mobile computing solutions and a generally more flexible approach to work are trends that may all serve in WeWork’s favor.
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3. All that Glitters Is Bitcoin, Not Gold
Despite headline inflation over 5% for the past five months in the U.S., investors are increasingly turning to cryptocurrencies and not gold to hedge their portfolios.
Citigroup (-1.82%) and Goldman Sachs (-0.074%) analysts had both forecast gold to hit US$2,300 this year, on the back of rising inflation, but so far, there is little sign that gold is anywhere close to that.
And investors aren’t just slowing their gold purchases, they’re selling it too.
Over US$10 billion has been pulled from the world’s biggest gold ETF this year, according to Bloomberg data while the price of spot gold is down over 6% so far this year.
Bitcoin meanwhile has more than doubled in price and investors are increasingly open to the nascent asset class, especially as a bitcoin ETF started trading in the U.S. this week.
Although the ProShares Bitcoin Strategy ETF has CME Group’s bitcoin futures as its underlying asset, the ease of exit and entry has piqued more than the curiosity of investors, as flows into the product were overwhelmingly higher than forecast.
Veteran gold traders are conceding that the writing may be on the wall.
While gold has long been promoted as a safeguard against diminished purchasing power of fiat currencies such as the dollar, pent-up demand, inflation, and snarled supply chains, coupled with central bank stimulus have failed to deliver a revival in the precious metal’s market.
Instead, the dollar has strengthened alongside the U.S. economy and the price of gold has dropped as investors pour into real estate and alternative assets, including bitcoin.
According to Fidelity’s latest Institutional Investor Digital Assets Study, which surveyed 1,100 professional investors, bitcoin’s lack of close correlation with other asset classes and perceived potential as a hedge against inflation is boosting its popularity among mainstream investors.
JPMorgan Chase (-0.78%), whose CEO Jamie Dimon has long been a vocal critic of bitcoin, said earlier this month,
“Institutional investors appear to be returning to bitcoin, perhaps seeing it as a better inflation hedge than gold.”
Nonetheless, some goldbugs are keeping the faith, betting that the precious metal’s fortunes will change as inflation remains persistent and eroding faith in the U.S. Federal Reserve’s narrative that price pressures are transitory.
But unlike gold, bitcoin has the prospect of being spent, as do other currencies.
While many lament that cryptocurrencies have limited use as a medium of exchange, being digital, systems can be configured to eventually accept them if so desired.
Even a developing country like El Salvador was able to roll out an app to allow its citizens to spend bitcoin, which is legal tender in that country, what more the rest of the developed world?
Gold on the other hand has been with us for thousands of years, and yet there has scarcely been a push to make it more spendable.
Could cryptocurrencies then become the killer currency app? Some like bitcoin serving as a store of value and hedge against inflation, and others serving as digital money?
While the jury may still be out on the latter proposition, there’s more than a handful of investors at least betting that bitcoin is not just as good as gold, it’s better.
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Oct 22, 2021
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