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Novum Alpha - Daily Analysis 9 December 2021 (10-Minute Read)

Investors are holding on to dry powder as the global equity rally gets tested with more volatility expected until there is greater clarity on the omicron variant's threat to the economy. Key U.S. consumer inflation numbers will be out later this week and a U.S. Federal Reserve meeting next week will provide some clues as to monetary policy. 

A terrific Thursday to you as markets continue to trend upwards. 

In brief (TL:DR)

  • U.S. stocks continued to rise Tuesday with the Dow Jones Industrial Average (+0.10%), the S&P 500 (+0.31%) and the Nasdaq Composite (+0.64%) all adding to the rebound from Wednesday. 
  • Most Asian stocks rose Thursday as traders bet the global recovery will be resilient to the omicron variant. 
  • Benchmark U.S. 10-year Treasury yields were stable after soaring and leveled at 1.527% (yields rise when bond prices fall) with risk sentiment back on.
  • The dollar was firmer. 
  • Oil inched held a gain above US$72 with January 2022 contracts for WTI Crude Oil (Nymex) (+0.64%) at US$72.52.
  • Gold slipped with February 2022 contracts for Gold (Comex) (-0.12%) at US$1,783.30. 
  • Bitcoin (-1.29%) ducked below US$50,000 again to level at US$49,869 as continued weakness in the benchmark cryptocurrency has seen it struggle to maintain ground over the key resistance level. 


In today's issue...

  1. Could Evergrande be China's Lehman Moment? 
  2. GameStop, the Meme Stock That Wouldn't Stop
  3. Wall Street is Pitting Crypto for a Correction Even as it Buys More


Market Overview

Investors are holding on to dry powder as the global equity rally gets tested with more volatility expected until there is greater clarity on the omicron variant's threat to the economy. 
Key U.S. consumer inflation numbers will be out later this week and a U.S. Federal Reserve meeting next week will provide some clues as to monetary policy. 
Expectations are high amongst analysts that inflation numbers in the U.S. will be significantly higher than forecast and some of those calls have been baked into bond and equity prices, and these numbers will no doubt have significant impact on the Fed's deliberations next week on tapering. 
In Asia, markets were mostly higher on Thursday with Tokyo's Nikkei 225 (-0.15%) the only exception, while Sydney’s ASX 200 (+0.09%) and Seoul's Kospi Index (+0.56%) all up, while Hong Kong's Hang Seng (+1.07%) were all up in the morning trading session. 


1. Could Evergrande be China's Lehman Moment?

  • Beijing unlikely to allow China Evergrande Group (+2.89%) to end in a messy collapse
  • Bondholders are likely to take significant haircuts, as a lesson dealt to creditors 
A heavily levered real estate sector rife with speculation, liquidity and outright fraud and securitized and packaged into investable products for mom-and-pop.
Whilst this may sound like the stuff of the Lehman Brothers crisis, it’s the reality on the ground in China, made infamous by China Evergrande Group.
That has led some to wonder if Evergrande won’t become China’s Lehman moment.
Yet for all the bang and the clatter the western press has given the Evergrande crisis, Monday’s failure to make good on bond payments by the embattled property giant has barely registered in the Chinese financial markets.
On the contrary, the Chinese benchmark CSI 300 index climbed yesterday to a six-week high while Chinese dollar junk bonds actually rose 2 cents on the dollar.
The yuan strengthened and the risk-on mood in all things Chinese continued even as bondholders of an Evergrande unit failed to receive overdue interest payments.
For the rest of the Chinese economy, it’s still been pretty much business as usual.
The main reason for this of course has been an implicit stopgap from Beijing, with the People’s Bank of China recently reducing the reserve ratio requirement by 0.5% for Chinese lenders, in a sign that the powers that be have no interest in tanking the economy.
Speculation is growing as well that Beijing could ease property restrictions further as well.
There are also signs that Beijing may take the point on a potential debt restructuring of Evergrande, easing investor concerns over a disorderly collapse.
Given that the real estate sector makes up some 70% of the Chinese economy and accounts for 29% of GDP, the last thing Beijing wants to have to deal with is a collapse of one of the most systemically important pillars of the economy.
But that doesn’t mean that there aren’t problems.
Holders of some US$19.2 billion in Evergrande dollar-denominated notes face the prospect of deep haircuts.
Kaisa Group Holdings, another heavily indebted property developer which has US$11,6 billion in outstanding dollar debt may have possibly failed to repay a US$400 million dollar bond that was due Tuesday, with trading shares of the firm halted on Wednesday.
But for all intents and purposes, it looks like Beijing may already have accomplished its goal to teach debt-laden companies and the foreign investors that bankrolled them a lesson without necessarily crashing China’s financial markets.
Similar to the China Huarong Asset Management bailout earlier this year, Beijing has managed to challenge the assumption that there will always be some companies too big to fail, without actually having to prove the point, challenging creditors to be more circumspect before doling out the cash. 


2. GameStop, the Meme Stock That Wouldn't Stop

  • GameStop (-2.31%)  shares have not become worthless despite the meme stock craze having died down
  • Evidence that some retail investors are still holding on to GameStop stock that was purchased during the meme stock frenzy 
Eleven months after the rally in GameStop shares came to define an entire class of equities known as “meme stocks,” shareholders are still sitting on substantial gains long after others have fallen by the wayside.
Hovering close to US$200 per share, GameStop has defied all expectations that gains would be short-lived.
Although well off its all-time-high of US$483, GameStop has been trading within a range of around US$170 to US$220 since the September this year, at least nine times the stock price at the end of 2020.
And while Redditors may have saved GameStop by banding together to buy shares in the company and bring maximum pain to the hedge funds which shorted the company, it will take a lot more than community to support to dampen volatility that will inevitably ensue as the company looks set to report quarterly earnings.
Having reported a profit in just one of its past six fiscal quarters and posting a loss of US$61.6 million in the quarter ended July 31, it would be nothing short of delusional to expect that GameStop would suddenly make a turnaround in the third quarter of 2021.
GameStop’s relative stability has been surprising, especially given that other meme stocks have risen and fallen and even Tesla has been blasted with volatility.
Many retail investors who bought GameStop have continued to hold the shares they bought earlier this year, betting that the new chairman Ryan Cohen can turn the fortunes of the company around.
And for now, the short sellers have left the building.
Whereas by early February this year, 42% of GameStop stocks were sold short, that figure has since dwindled to around 10%. 

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3. Wall Street is Pitting Crypto for a Correction Even as it Buys More

  • Money managers managing some US$12.3 trillion in assets are pitting cryptocurrencies as ripe for a major correction next year 
  • Number of money managers moving into the cryptocurrency space or increasing their allocations is rising even as they suggest cryptocurrencies are unsuited as an investment for retail investors 
“Do as I say, not as a I do.”
– Every bad boss, ever
According to a survey of money managers done by Natixis Investment Managers, nearly three quarters of institutions polled say that cryptocurrencies are not an appropriate investment for retail investors, while suggesting that they are a “top contender” for a “major correction” next year.
Yet 28% of the same institutions surveyed currently already invest in cryptocurrencies, and of those, nearly a third say they plan to increase their allocations next year.
Overall 8% of all institutional investors surveyed, plan to increase their allocations to cryptocurrencies next year.
The irony is palpable.
Considering that no so long ago, Wall Street was also touting the very same asset-backed securities that it was betting against to go sour, it would be naïve to assume that money managers would reveal their strategies in a survey.
A number of big fund managers and pensions have already dipped their toes in the cryptocurrency waters.
Some of Wall Street’s biggest names have already tossed their hat in the ring, suggesting that bitcoin could act as a good inflation hedge in an already stimulus-heavy environment, so it would be somewhat surprising if more didn’t follow suit.
Crypto-skeptical financial institutions have been filling out “digital asset” trading desks, because using the term “cryptocurrency” would be too vulgar, while offering some of their most prized clients, exclusive, institutional-grade access to the nascent asset class.
Nonetheless, and as evidenced by the sharp correction of over 20% in the span of a few hours on Saturday, bitcoin and its ilk remain highly volatile, susceptible to competing narratives and subject to speculation.
And while dire predictions for the demise of cryptocurrencies have been a constant running theme, most have come out short, much to the chagrin of the likes of Nouriel Roubini, an economist with a long-standing axe to grind against bitcoin.
Since breaking into the mainstream consciousness, bitcoin has soared by more than 5,000% over the past five years, well above any other asset class.
And it’s also important to interpret the Natixis survey contextually – encompassing 500 institutional investors across multiple countries, including four central banks, twenty sovereign wealth funds and more than 150 corporate pension plans, these are hardly a cross section of swashbuckling risk-taking investors. 

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Dec 09, 2021

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