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Novum Alpha - Weekend Edition 30-31 October 2021 (10-Minute Read)

U.S. stocks capped their strongest month since last November, despite weaker earnings at two tech stalwarts, Apple (-1.81%) and Amazon (-2.15%). Despite investors being on high alert for months about economic disruptions and contending with inflation, labor shortages and shipping woes, these concerns were put firmly on the back burner on Friday to push U.S. stocks to a strong finish for October. 

A wonderful weekend to you as U.S. equities finished their strongest month since last November.  
 
In brief (TL:DR)
 
  • U.S. stocks finished fantastically on Friday with the Dow Jones Industrial Average (+0.68%), the S&P 500 (+0.98%) and tech-centric Nasdaq Composite (+1.39%) all up as investors shrugged off broader market concerns. 
  • Asian stocks fell Friday as traders weighed bond-market gyrations on concerns over inflation and monetary tightening and ended the session down. 
  • Benchmark U.S. 10-year Treasury yields slipped to 1.56% (yields fall when bond prices rise) in a relatively quiet session. 
  • The dollar held a gain. 
  • Oil continued to rise with December 2021 contracts for WTI Crude Oil (Nymex) (+0.92%) at US$83.57.
  • Gold slipped with December 2021 contracts for Gold (Comex) (-1.04%) at US$1,783.90. 
  • Bitcoin (-1.43%) was mostly flat into the weekend on lower volumes at US$61,389 in the middle of the weekend as flows were mainly led by retail chasing other cryptocurrencies or altcoins. 

 

In today's issue...

 
  1. Microsoft Masters the New Meta
  2. Is Taking More Risk the Intelligent Investor's answer to Inflation? 
  3. Bitcoin's Rally Pinned on Whales

 

 

Market Overview

 
U.S. stocks capped their strongest month since last November, despite weaker earnings at two tech stalwarts, Apple (-1.81%) and Amazon (-2.15%)
 
Despite investors being on high alert for months about economic disruptions and contending with inflation, labor shortages and shipping woes, these concerns were put firmly on the back burner on Friday to push U.S. stocks to a strong finish for October. 
 
In Asia, finished Friday's session mostly lower with only Tokyo's Nikkei 225 (+0.25%) holding up, while Hong Kong's Hang Seng (-0.70%), Sydney’s ASX 200 (-1.44%) and Seoul's Kospi Index (-1.29%) all ended lower. 
 
 

1. Microsoft Masters the New Meta

 
  • Microsoft (+2.24%) overtakes Apple (-1.81%) to become the world's most valuable company by market cap
  • Shift in fortunes shows how Microsoft's software-first approach has put it in a good position to take advantage of shifts in work and greater use of cloud computing and productivity tools
 
In multiplayer first person shooter games like Call of Duty’s Warzone, players are always looking to find the new “meta” or winning strategy and when it comes to tech, it looks like Microsoft has found it.
 
Pages, Keynote and Numbers – heard of them? Then chances are you’re a Mac user. But for the billions of other workers around the world who use productivity tools, chances are they’re using something from Microsoft and not Apple.
 
While Apple tried to eat into Microsoft’s massive market share in its productivity suite, it’s been Google that has made inroads, with its seamless suite of tools via Google Cloud.
 
And that’s seen Microsoft regain the crown as the most valuable publicly listed company in the world on Friday, taking over from Apple whose shares slumped on weak quarterly earnings.
 
In many ways, Microsoft’s approach, which was led by software, with some hardware on the side, is vindication of Satya Nadella’s long turnaround of the company that not so long ago had seen itself on the ropes.
 
Today, some of Microsoft’s tech tools are just as sought after as Apple’s.
 
From the Surface Studio to the Arc Mouse, some of Microsoft’s finest hardware pieces could just as easily have been mistaken as coming out of the house of Apple.
 
Yet as the world is digitalizing rapidly, which company would ultimately be better positioned to take advantage?
 
For all the dominance Apple has enjoyed atop the tech food chain for so long, it increasingly appears to be responding to changes in the market environment, rather than leading them.
 
While rivals Microsoft, Google and Amazon all pushed ahead to offer greater cloud computing services that would link seamlessly with their existing hardware offerings, Apple’s iCloud remains as clunky as ever and strictly consumer, as opposed to business focused.
 
During a time when remote work has become a trend that appears durable, the prospect of dishing out healthy premiums for a Mac seem less justifiable and has seen Apple slash prices across its range, putting pressure on margins.
 
That Microsoft and Google ran ahead of Apple this past quarter also demonstrates the vulnerability of Apple to the world’s supply chains and reinforces that the company is still very much a tech hardware provider, with software on the side.
 
And that will prove challenging on the road ahead. 
 
 

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2. Is Taking More Risk the Intelligent Investor's answer to Inflation?

 
  • No silver bullets when it comes to finding "perfect" hedges against inflation 
  • Investors may have little choice but to take on more risk given the market circumstances 
 
With headline inflation in the U.S. pushing over 5% for five consecutive months, and the highest level since 2013, there’s more than a handful of investors wondering if now may be the time to take on more risk to deal with the changed market circumstances.
 
Interest rates are near zero, despite all the saber rattling from the world’s major central banks, even as commodity prices are soaring and supply chain snarls are driving up the prices of everything from bread to bedding.
 
Investors are understandably concerned and turning to everything from bullion to bitcoin in an attempt to lessen the impact of inflation on their investment portfolios.
 
But unlike previous bouts of inflation, where forecasts tended to fall far short of reality, the inflation numbers being recorded now are in real time – consumers globally aren’t imagining rising prices, they’re happening already.
 
Where the debate stems from is what happens next – will supply chains miraculously heal themselves and prices return to normal, as central bankers would have investors believe, or will the inflation genie escape into the global economy, wreaking havoc on even the most well-intentioned policymakers?
 
Investors are not waiting to find out and pouring into a variety of assets in the hopes that they can perform the role as a hedge against inflation, but a closer examination of these strategies yields mixed results.
 
Gold for instance has failed to keep up with the cost of living for decades and is down 5% this year alone, despite actual inflation soaring.
 
While value stocks as a hedge against inflation have struggled to prove their mettle in the current age. Value stocks are less reliant on future earnings than growth stocks and the further off profits are in the future, the more inflation gnaws away at their present value.
 
Yet tech stocks which are commonly associated with growth, have benefited from durable shifts in work practices and a growing reliance on technology, ensuring that investors have priced in robust expectations years into the future and are scarcely more expensive than their value counterparts.
 
Tech giants including Apple (-1.81%), Facebook (+2.10%) and Google (+1.51%), trade at roughly the same multiples of their current earnings as the S&P 500 overall, suggesting that if investors are concerned about inflation hitting their tech darlings, they’re not voting with their dollars.
 
In other words, even if prices do spike, it’s not a given that growth stocks would underperform or that value stocks would outperform.
 
Big bets on energy stocks and commodities have also yielded patchy results in protecting portfolios against price rises.
 
U.S. consumer prices rose in 1998, 2001, 2008, 2014, 2015, 2018 and 2020, but energy stocks and commodities lost money in all those years.
 
Unfortunately, when it comes to inflation, there are no silver bullets, and instead, investors are better of managing risk and responding accordingly to market conditions.
 
With few signs that the world’s major central banks are intent on raising rates aggressively, it’s little wonder that investors are taking on more risk – there are few options outside of that.
 
And with correlations across the board between assets increasing because of the unusually elevated levels of liquidity in the financial system, there’s no unbeaten hedge against inflation – investors will only be able to tell with the benefit of hindsight.
 
But over longer periods of time, stock markets have tended to outpace moderate costs of living.
 
In a study by Dimensional Fund Advisors, from 1927 to 2020, U.S. stocks as a whole outperformed inflation by an average of 4.9% annually in years when rises in the cost of living were above the median.
 
If your stock portfolio is already well diversified, it may actually make sense to do nothing at all if you just want to beat inflation.
 
Investors can also consider adding TIPS or U.S. Treasury inflation-protected securities and while they aren’t cheap, they still offer protection against unexpected spikes in consumer prices down the road.
 
But ultimately, if an investor’s goal is simply to hedge against inflation, there are options, albeit at the cost of opportunity, which may explain why so many investors are punch drunk on risk instead.  
 
 

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3. Bitcoin's Rally Pinned on Whales

 
  • Kraken Intelligence pins the recent rally in bitcoin on so-called whales with over 100 BTC in their wallets 
  • Stronger buying by institutional investors and family offices may also be responsible for rebound in bitcoin over the past week 
 
It’s been said that when a butterfly flaps its wings in the Amazonian jungle, a storm ravages half of Europe.
 
This so-called “Butterfly Effect” is, according to Chaos Theory, one way to explain apparently random and unconnected outcomes in a dynamic and ever-changing world.
 
And nowhere is Chaos Theory seen to be more prevalent than in the cryptocurrency markets, yet fortunately, some are suggesting there is an explicable reason for bitcoin’s most recently rally.
 
After hype from the launch of the ProShares Bitcoin Strategy ETF died down, bitcoin corrected sharply, falling to as low as US$57,000 at one stage before rebounding just as rapidly.
 
Now Kraken Intelligence, a branch of the cryptocurrency exchange Kraken, is suggesting that they may have the answer for the most recent rally.
 
According to Kraken Intelligence, holders of 100 bitcoin or more, so-called whales actually put on more positions since early October, and coupled with a supply shock, helped to see a good bout of bargain hunting as bitcoin was battered this past week.
 
Kraken Intelligence claims that the average holdings of bitcoin whales rose by 0.25% in early October to reach a record US$724.4 billion, with the number of whales increasing in absolute terms by 1.6% to 16,156, the highest level since May.
 
In the report, Kraken Intelligence wrote,
 
“Larger market participants have grown increasingly more confident, preferring to accumulate further than to take profit.”
 
“With the number of whales and whale holdings rising, it is clear that whales are a driving force in this latest run-up and remain optimistic.”
 
Because public blockchains are transparent, data about accumulation of bitcoin within a handful of wallet addresses is relatively easy to determine, but also reinforces earlier concerns over market concentration.
 
The U.S. National Bureau of Economic Research recently reported that the top 10,000 investors in bitcoin hold over a third of the cryptocurrency in circulation, which some analysts argue sparked the sell-off last week. 
 
 

What can Digital Assets do for you?

 
The flagship Novum Alpha Global Opportunity Digital Asset Fund ("the Fund"), a capital growth fund that offers a regulated and familiar investment vehicle for accredited and institutional investors to participate in the digital asset universe is pleased to announce its first month of trading has gotten off to a good start, with a return of +2.19% for September 2021, a month which saw the benchmark Bloomberg Galaxy Crypto Index decline by -11.31%
 
With almost a decade trading both digital assets and financial instruments, the Fund represents a blend of our best quantitative strategies melded with a discretionary overlay that provides investors with the most comprehensive and holistic approach to digital assets on the market today. 
 
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Oct 30, 2021

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