Novum Alpha - Daily Analysis 4 November 2021 (10-Minute Read)
A wonderful Thursday to you and to all who are celebrating Diwali, may the bright lights of the season guide you on every journey you undertake.
In brief (TL:DR)
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In today's issue...
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Market OverviewStocks have been bolstered by solid corporate earnings, the prospect of a gradual reduction in monetary policy largesse and the view that supply-chain and labor disruptions will eventually be resolved.
The risk to the sanguine view is more enduring inflation and faster rate hikes, a possibility that has whipsawed bond markets.
U.S. companies added the most jobs in four months, suggesting employers are making progress in filling a near-record number of open positions.
In Asia, markets were higher Thursday with Tokyo's Nikkei 225 (+0.92%), Seoul's Kospi Index (+0.64%), Hong Kong's Hang Seng (+0.59%) and Sydney’s ASX 200 (+0.30%) all up in the morning trading session.
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1. Tesla Whips up the FOMO Trade
Missed out on bitcoin at US$35,000? No worries, there’s dogecoin. Missed out on that too? How about some Tesla (+3.57%) stock? Too late? Start over, check again and prepare excuses for the irate investors who were counting on their managers to outperform the market.
For stock pickers who hadn’t been overweight on electric vehicle maker Tesla, October was a particularly rough month.
Shares of Tesla gained some 44% last month alone, delivering the second best performance in the benchmark S&P 500 and as much as 11% of the index’s overall gains despite accounting for just 2.5% by weightage.
According to one estimate by Wells Fargo & Co. (+1.36%), large-cap fundamental and quant funds lost anywhere between 1% and 0.65% in terms of relative performance because they had limited or no exposure to Tesla.
For years, the so-called FAANG trade, Facebook (+1.10%), Amazon (+2.15%), Apple (+0.98%), Netflix (+1.56%) and Google (+0.80%), put enormous pressure on active money managers because of their breakneck pace of growth, and now as Tesla increasingly confuses the line between tech and automakers, it too is becoming too large to ignore.
Tesla’s gain last month has seen it vaulted into the exclusive US$1 trillion market cap stratosphere, a rarified altitude where only a handful of companies exist.
By way of comparison, Toyota (+0.90%), with a market cap of just US$295.1 billion delivered 7.6 million vehicles in the fiscal year ended March 31, while Tesla managed around 500,000 vehicles.
Some will argue comparing Tesla with Toyota, is like comparing the Gap (+5.41%) to Louis Vuitton (-0.34%), it’s not about volume, but margins.
Given that investors are living in the meme stock era, it’s safe to say that any narrative, provided sufficiently followed can be considered valid.
Tesla’s outsize gain in October was attributed primarily to its mashup with Hertz Global Holdings (-9.30%), a company that was not so long ago bankrupt, but has like the phoenix, risen from the ashes and put in an order for 100,000 Tesla vehicles.
Since then, traders have had to contend with greater volatility in Tesla’s stock after CEO Elon Musk threw some doubt on the Hertz deal.
Investors wondering if now is too late to get in on Tesla should perhaps at least take a peak at the numbers.
At current valuations, Tesla is trading at 190 times forward earnings. To put that simply, a shareholder’s “share” of the profits of Tesla is 1/190 for every unit of stock owned.
Forward earnings are an estimate of the next period’s earnings for a company and in other words, investors are suggesting that Tesla will become immensely profitable.
That may sound like crazy talk, but it is theoretically possible.
Not so long ago, investors bet that Facebook, which was far from profitability would one day achieve it, the same as with Amazon, which for years hemorrhaged money in the pursuit of market share, to almost overnight switch on the profit taps.
It is entirely possible for Tesla to achieve the same.
Whereas electric vehicle technology is now being co-opted by a slew of other vehicle manufacturers, retooling their manufacturing lines and processes is both expensive and time-consuming.
Many legacy vehicle manufacturers also have to deal with unions who will be slow to accept the downtime for workers as they redo their production lines.
Tesla however has a network of charging stations which it owns and operates and had a highly automated production line that was tooled to make electric vehicles from the get-go.
Which is why the numbers don’t paint the entire story and how many traditional money managers found themselves flat-footed.
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2. Inflation Shakes Down U.S. Federal Reserve
“Inflation fought the Fed, and inflation won.”
In line with market expectations, the U.S. Federal Reserve announced yesterday that it would begin its massive US$120 billion-a-month bond-buying program as soon as this month, in the face of surging prices and stubbornly persistent inflation.
The decision by the foremost central bank comes after months of debate among policymakers about the level of support that the world’s largest economy needs even as the economic recovery gets underway in earnest and price pressures mount.
By scaling back its quantitative easing, the Fed now joins the ranks of other central banks including the Reserve Bank of Australia and the Bank of Canada, in tightening monetary policy.
Expectations are increasing that the Bank of England will raise interest rates this week as well as the European Central Bank to eventually also dial back its asset purchases sooner than expected.
So far, the ECB has remained steadfast even as other central banks have caved to inflationary pressure.
Supply chain disruptions, rising wages and soaring consumer demand has seen headline inflation in the U.S. top 5% over the past five months, for the first time since 2013.
To be sure, the Fed is slowing down asset purchases and not stopping them altogether, reducing its purchases of U.S. Treasuries by around US$10 billion a month and mortgage-backed securities by US$5 billion a month.
Nonetheless, the Fed also provided sufficient leeway to adjust the rate of tapering if it so chose, with U.S. Federal Reserve Chairman Jerome Powell noting at a press conference that the central bank was “prepared to adjust the pace” of the tapering process “if warranted by changes in the economic outlook.”
The market response to the Fed’s move was muted, given that most investors had already priced in expectations of a taper, and based on the recent announcement, suggests that quantitative easing will cease altogether sometime in June next year.
Trading in U.S. government debt was choppy in the initial response to the taper, but evened out as tapering was well within most expectations, while stocks soared to fresh highs, suggesting that investors for now are focusing on earnings and recovery rather than stimulus.
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3. A Tenth of China's Population is Using the Digital Yuan
According to the Chinese central bank, the People’s Bank of China, over 140 million Chinese have created digital yuan accounts, or roughly a tenth of the entire population.
More significantly, transactions in e-CNY, as the central bank digital currency is officially know, reached a sizeable US$9.7 billion in trials rolled out in just a dozen regions, according to Mu Changchun, head of the PBoC’s Digital Currency Institute, in comments made at the Hong Kon Fintech Week yesterday.
With over 80% off central banks globally either issuing their own digital currency or actively studying the case for one, according to the Bank of International Settlements, the Chinese experience could be instructive.
One of the major concerns from other central banks is that directly issuing currency to citizenry could undermine the role that commercial banks play in the financial system, especially during periods of financial stress, when individuals and companies may find it “safer” to deposit their digital currency directly with the central bank.
Issues over the appropriateness of central bankers determining who should gain access to loans and how much, as well as administration of other commercial bank functions raised the prospect of moral hazard and increased the potential for corruption, which have all been factors slowing down the development of central bank digital currencies for other countries.
China however has less of an issue as almost all banks are state-owned.
In comments at the Hong Kong Fintech Week conference, the PBoC’s Mu revealed that digital yuan operators can open four types of e-wallets for customers, with those having the lowest transaction limits capped at around US$782, with an annual cap of around US$7,820 only needing a phone number, ensuring some anonymity, even from the PBoC itself.
Those digital yuan wallets with the highest levels of privileges and requiring no transaction cap would need to be opened with a bank with personal identification.
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Nov 04, 2021