Novum Alpha - Daily Analysis 6 December 2021 (10-Minute Read)
A magnificent Monday to you as retail investors buying the dip last Friday helped to slow the bleed in U.S. equities.
In brief (TL:DR)
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In today's issue...
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Market OverviewU.S. consumer prices in November are expected to show the largest annual advance in decades, keeping pressure on the U.S. Federal Reserve to deliver swifter policy tightening.
Fed Chair Jerome Powell has signaled faster tapering of asset purchases amid elevated inflation. That assessment is unlikely to change after U.S. jobs had the smallest gain this year.
China’s securities watchdog on Sunday tried to play down delisting fears after a slump in Chinese tech stocks on Wall Street sparked by Didi Global Inc.’s plans to switch its listing to Hong Kong from New York.
In Asia, markets mostly fell Monday with Tokyo's Nikkei 225 (-0.58%), Sydney’s ASX 200 (-0.34%) and Hong Kong's Hang Seng (-0.92%) up, while Seoul's Kospi Index (+0.13%) was down in the morning trading session.
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1. Facebook is on Sale, But No One's Buying the Meta
During the depths of the pandemic, the so-called FAANG trade, or Facebook, Amazon (-1.38%), Apple (-1.17%), Netflix (-2.33%) and Google (-0.67%) was almost a sure-win bet.
But now as markets get roiled by a combination of uncertainty over the omicron variant as well as U.S. monetary policy, investors, particularly the retail crowd, just aren’t biting into Meta Platforms, the company formerly known as Facebook.
Posting its worst week since June 2020, soon after the pandemic crashed stocks, investors have fled riskier assets following an apparent hawkish turn by the U.S. Federal Reserve.
Meta’s decline of 7.9% for last week far outpaced the pullback in its megacap tech peers, and the unlike previous selloffs, retail investors weren’t there to pick up the slack.
Unlike other major stock markets (particularly in Asia), retail investors only very recently made up a record one quarter of all investment flows, a level which has since fallen to a fifth.
And unlike institutional flows, retail flows are far more fickle and concentrated, but net purchases, according to data from Vanda Research that mom and pop investors barely moved the needle on Meta, hovering around US$40 million, despite just five weeks ago a similar drop in shares of the social media giant triggered inflows of US$150 million, over three times.
Meta, long the cheapest of the megacap stocks keeps getting cheaper and is less expensive than about 40% of the stocks in the Russell Value Index, based on the price to trailing profits, according to data compiled by Bloomberg.
Yet are investors mispricing Meta?
Trading at just 22 times earnings, down from 28 in September, when Meta shares were at a record high, the company is cheap relative to peers, but that was before a whistleblower released a trove of internal data that alleged Facebook put profits over user safety.
The whistleblower set off another round of intense scrutiny and more angst among investors about the regulatory risks that Meta’s shares could be exposed to.
Rebranding as Meta may take some heat off, but given the allegations that Facebook swayed the 2016 election and may have facilitated some of the more insidious outcomes of social media, investors are understandably reticent to pour good money after bad.
Yet investors also need to ask themselves, what are the substitutes?
What are substitutes for WhatsApp, Instagram or Facebook at the moment?
Even when all three services went down for several hours just two months ago, users who had to rely on alternatives very quickly resumed their normal usage soon thereafter.
Because social media and messaging tends to be sticky, especially for older demographics, who increasingly form the core of Meta’s user base, shares in the company are trading at levels which appear to provide a good opportunity.
The average of analyst estimates compiled by Bloomberg suggest that Meta is expected to expand 19% next year, faster than Google, Apple, Amazon and Microsoft (-1.97%), yet it’s priced much cheaper relative to earnings.
Based on the average price target of analysts surveyed by Bloomberg, Meta has the biggest return potential at 31% versus the rest of the FAANG stocks, and that maybe something investors could sink their teeth into.
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2. Volatility Stokes Investor Appetite
Missed the boat on some hot tech stock action? Saw the rally but held in reserve?
No matter as investors took advantage of the carnage last week in U.S. markets to buy the dip, pouring US$10 billion into equity funds holding U.S. stocks and building on a 10-week inflow streak according to data provider EPFR.
Once again, retail investors picked up the gauntlet, soaking up some US$2.2 billion in U.S. equities including Apple, Advanced Micro Devices (-4.43%) and Microsoft, after a series of hawkish comments by U.S. Federal Reserve Chairman Jerome Powell.
The retail buying activity mimicked similar trading patterns that followed the emergence of the delta variant earlier this year, when stocks around the world fell in response to concerns about rising infections.
Recent bursts of share buying among retail investors suggests that buying the dip, investing in stocks that have recently fallen in value, remains an evergreen strategy among the mom-and-pop crowd.
Nonetheless, retail volumes were “materially lower” than in the early stages of the pandemic, according to data from VandaTrack, largely due to a decline in the number of day traders using retail brokerages since the beginning of this year.
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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. Cryptocurrencies Tumble in Correlation with Equities
Although financial markets remain closed, bitcoin tumbled on Saturday, taking down other cryptocurrencies with it, in another indication of risk-off sentiment as well as deleveraging.
According to analysis of flows from Glassnode, a blockchain data service provider, an estimated 4,000 bitcoin were sold on Saturday, over the course of an hour, worth approximately US$208 million.
Given that bitcoin’s market cap is well in excess of US$1 trillion, that amount shouldn’t have moved the needle, but it did for two main reasons.
First, weekend volumes typically tend to be lower for cryptocurrency markets even though they run 24/7, which means that even a slightly elevated sale could crash through already thin order books.
Second, the sale would have triggered cascading margin calls on the copious amounts of leverage that the cryptocurrency markets are notorious for.
Given that many derivative exchanges are unregulated, the levels of leverage on offer are well in excess of what’s available in traditional financial markets and traders use these instruments to goose profits, but when unwinding happens, which is relatively often, often see margin calls that wipe out value.
An estimated US$2 billion worth of positions were automatically liquidated over the course of an hour on Saturday, similar to what was witnessed in August and May of this year.
The wild swings in cryptocurrencies come amid a volatile period for financial markets.
Soaring inflation is forcing central banks to reconsider their otherwise accommodative policies, which lifted a wide range of assets, including cryptocurrencies.
Against this backdrop, the omicron variant is threatening to derail the economic recovery and supply chain disruptions are continuing to put upwards pressure on prices.
Nonetheless bitcoin is still up by over 60% this year, a return that far exceeds other assets and El Salvador took the opportunity to buy the dip, adding 150 coins to its coffers.
Haven assets like U.S. Treasuries soared amidst the uncertainty, but key to what happens next is whether the Fed turns rapidly hawkish and there is reason to believe this may be the case.
With a second term more or less firmly in the bag (pending Senate confirmation), U.S. Federal Reserve Chairman Jerome Powell looks set to accelerate the Fed’s taper at the central bank’s policy meeting towards the middle of this month.
As has happened before, Powell has not been one to U-turn suddenly on policy shifts, instead choosing to stick to his guns and communicating with the market in clear and comprehensible language.
Notably, Powell has dropped the term “transitory” to describe inflation and has said on numerous forums, including at a testimony before Congress, that the central bank intends to accelerate the pace of tapering its asset purchases.
Last month, the U.S. Federal Reserve cut its US$120 billion-a-month asset purchases by US$15 billion, implying that they would stop altogether by the middle of next year and paving the way for interest rate hikes to reign in inflation.
Powell has repeatedly said that the Fed won’t raise rates until asset purchases come to a halt.
Nevertheless, it’s not a given that the Fed will turn hawkish.
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Dec 06, 2021