Novum Alpha - Daily Analysis 23 November 2021 (10-Minute Read)
A tremendous Tuesday to you as tech stocks tumble in the U.S. on the prospect of tighter monetary policy sooner than expected.
In brief (TL:DR)
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In today's issue...
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Market OverviewPresident Joe Biden opted for continuity at the Fed, selecting Powell for a second term as chair and elevating Lael Brainard to vice chair.
They face the task of curbing inflation while nurturing the pandemic recovery and averting financial-market dislocations as ultra-loose monetary settings are tightened.
In Asia, markets slipped Tuesday after Treasury yields and the dollar jumped as Jerome Powell’s renomination to head the Federal Reserve fueled bets on quicker monetary-policy tightening with Hong Kong's Hang Seng (-0.97%) and Seoul's Kospi Index (-0.42%) down, while Tokyo's Nikkei 225 (+0.09%) and Sydney’s ASX 200 (+0.73%) were up in the morning trading session.
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1. Short Sellers Give Up Betting Against Tesla
At the beginning of last year, almost one out of every 5 shares in Tesla reflected short positions, a number that has since fallen to 3.3%, according to S3 Partners, a specialist data provider.
Never mind the bizarre Twitter polls to determine if Elon Musk should sell a 10% stake in the electric vehicle maker and talk of stock market bubbles with the S&P 500 rising and ebbing along with the fortunes of Tesla, investors can’t seem to get enough of the company’s shares.
Some short sellers are (for now) throwing in the towel, with the number of shares in the company shorted collapsing by 80% to 27 million since the start of last year.
Musk’s unorthodox leadership of the company, where a single tweet can whipsaw Tesla’s share price, and the lack of profits at the 18-year-old company until this year, have made it a favorite target for short sellers, who profit when a stock falls in value.
But with the meteoric rise of Tesla, many of these short sellers have exited their positions, nursing millions of dollars in losses.
The gamification of trading from retail brokerage apps like Robinhood Markets (-3.97%), have helped to propel Tesla into the 30 most popular retail stocks since the second quarter of 2021, according to data from Breakout Point.
Not all short sellers have given up the ghost though, part of an investment strategy is to stick to your thesis, even in the face of adversity.
In a recent letter to investors, hedge fund manager Crispin Odey maintained his bet against the carmaker, lamenting that “many shares are now ridiculously valued.”
“Even if you do all the numbers and are very generous and give them 10 per cent of the total market in eight years and put that all through, you end up on about 35 times 2030 earnings.”
The problem with such a view is that it assumes traditional metrics of valuation and market share.
By that logic, Toyota (-1.29%), which delivers millions of vehicles more than Tesla, should be worth somewhere in the region of ten trillion dollars.
While earnings and market share are one thing, investors are increasingly pricing in intangibles into a firm’s share price, and in the case of Tesla, treating the company more like a tech firm that an electric vehicle manufacturer.
Several factors that play to Tesla’s favor at the moment are the prospect of a consistent U.S. Federal Reserve with the renomination of Chairman Jerome Powell, which is likely to be slow to hike interest rates, as well as a focus on ESG investment themes.
Against this backdrop, retail investors continue to view Tesla not just as an aspirational stock, but an aspirational product as well, but there are signs that Musk’s social media tirades are beginning to grate on some investors.
Nevertheless, Tesla’s shares have risen about 30% in the past 30 days and short sellers are vacating the space faster than retail investors are entering it.
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2. Continuity at the U.S. Federal Reserve
During times of uncertainty, it’s nice for investors to know that they have a friend at the Fed.
With prices soaring and supply chains snarled, Sino-U.S. tensions simmering and economic growth slowing in China, investors who are sitting on assets which are potentially pushing stratospheric valuations can sleep a little easier knowing that U.S. Federal Reserve Chairman Jerome Powell has been nominated by the Biden administration for another 4-year term.
A patchy labor market recovery in the U.S. and persistently high prices with headline inflation sitting at over 5% for the past six months, has seen the Biden administration opt for continuity instead of court controversy with a change at the helm.
Lael Brainard, who was considered Powell’s main competitor for the top job at the Fed, was selected for the role of vice chair, a position currently held by the dovish Richard Clarida.
The decision ends months of speculation of the Biden administration’s appetite to reshape the Fed, and comes as policymakers continue their debate over how to fine-tune monetary policy to combat supply chain disruptions and persistent inflationary pressures.
Powell still needs to be confirmed by the Senate, but given his broad bipartisan support, is likely to have an easy confirmation process through the upper house.
Investors however remain unconvinced that it will be business as usual at the Fed, despite the continuity of leadership.
Eurodollar futures, a closely watched market measure of interest rate expectations indicated at least three 0.25% interest rate rises being fully priced in by December 2022.
And the two-year Treasury yield, which tends to move in line with interest rate expectations, rose to its highest level since March 2020.
Thus far, Powell has stuck to his guns, and communicated clearly to the market the pace and size of policy shifts, including the November dial back of asset purchases by the Fed and that in and of itself should be a welcome move by investors.
Powell has long made plain that he intends for the Fed to remain accommodative in its policy, at least until further gains are made with respect to the labor market.
Although there is a shortage of workers in the U.S., there has been a simultaneous patchiness when it’s come to the jobs available and unemployment, particularly among specific racial groups, remains stubbornly high.
That may be set to change as job support runs out and if the pandemic winds down, which may lure more workers back towards people-facing frontline service jobs, which are in most demand.
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Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...
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3. China's Bitcoin Mining Purge Has Beefed Up the Bitcoin Blockchain
In a stroke of luck for the bitcoin industry, the crackdown by Beijing on China’s dominant cryptocurrency mining industry has helped secure the blockchain in completely unforeseen ways.
One of the elephants in the room when it came to bitcoin mining specifically, was that so much of it was concentrated in China.
Given that one of the few vulnerabilities of the blockchain is a 51% attack, where a majority of the nodes that secure the bitcoin blockchain validate fraudulent transactions such as a double spend, the prospect that a non-economic actor such as a government could takeover bitcoin mining capability to attack its blockchain was always a constant worry.
But China’s ban on cryptocurrency mining in May was exactly what the industry needed to trigger an exodus of miners and a global race to relocate millions of the ASIC (application specific integrated circuit) machines that secure the blockchains of cryptocurrencies.
That exodus has helped the bitcoin blockchain to become more decentralized and seen mining machines moved hastily to places such as the U.S., Canada, Kazakhstan and Russia.
The move out of China may also help to normalize the mining economics of bitcoin – in China, it was not uncommon for mining facilities to literally steal electricity from the power grid, with corrupt provincial officials looking the other way on the practice in exchange for a piece of the action.
And the frenzied liquidation by Chinese miners provided an incredible opportunity for miners overseas to stock up on equipment at fire sale prices.
Take for instance the Antminer S19, a popular model among industrial cryptocurrency miners which fell by 41.7% from May to July, according to an analysis by mining company Luxor mining.
More importantly, cryptocurrency mining, specifically bitcoin mining, has become more decentralized than ever.
The U.S. has emerged as the leader in industrial scale cryptocurrency mining, but Russia, Kazakhstan and Canada are all significant as well.
More distant locations where cheap electricity is abundant have also risen up, including Venezuela and Paraguay, which owing to their abundance of energy, can afford to use the older machines that are being released from China.
The crackdown by Beijing, far from undermining bitcoin, has probably done more to secure the integrity of its blockchain.
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Nov 23, 2021