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Novum Alpha - Daily Analysis 15 December 2021 (10-Minute Read)

A wonderful Wednesday to you as stocks wind lower on a confluence of concerns from omicron to debt defaults in China even as central banks contemplate tighter monetary policy.

 

In brief (TL:DR)

 
  • U.S. stocks fell Tuesday with the Dow Jones Industrial Average (-0.30%), the S&P 500 (-0.75%) and the Nasdaq Composite (-1.14%) all lower amid U.S. Federal Reserve policy pull backs and omicron Covid-19 risks.
  • Asian stocks were mixed Wednesday after the latest U.S. inflation data sapped sentiment by reinforcing the case for a faster withdrawal of monetary stimulus as the U.S. Federal Reserve’s policy decision looms.
  • Benchmark U.S. 10-year Treasury yields held at 1.44% (yields fell when bond prices rise).
  • The dollar held gains.
  • Oil extended a decline with January 2022 contracts for WTI Crude Oil (Nymex) (-0.66%) at US$70.26 in part on the possible obstacles to global reopening if omicron leads to wider mobility curbs.
  • Gold inched up with February 2022 contracts for Gold (Comex) (+0.06%) at US$1,773.40. 
  • Bitcoin (+2.15%) recovered to US$48,194 despite uncertainty in other assets and bolstering its portfolio diversification credentials.  
 

In today's issue...

 
  1. Elon Musk Just Got Richer Courtesy of Tesla Investors
  2. The Semiconductor Stock Rally Cools
  3. Crypto’s Meme Trade is Coming Down
 

Market Overview

 
Markets are being tested by a mix of high inflation, diminishing central bank liquidity support and uncertainty about the impact of the omicron strain.
 
The flattening in the U.S. Treasury yield curve this year for some commentators points to a more challenging economic period ahead.
 
Meanwhile, Chinese data are expected to show slower economic activity due to a real-estate downturn and subdued consumption.
 
In Asia, markets were mixed Wednesday with Tokyo's Nikkei 225 (+0.27%) up, while Sydney’s ASX 200 (-0.70%), Seoul's Kospi Index (-0.13%) and Hong Kong's Hang Seng (-1.33%) were down in the morning trading session.
 
 

1. Elon Musk Just Got Richer Courtesy of Tesla Investors

 
  • In the last five weeks, Musk has dumped some US$12.7 billion worth of Tesla (-0.82%) shares, sending the stock price below US$1,000 for the first time in months and the market cap of the company below US$1 trillion.
  • For the legions of investors who have had to bear the brunt of Musk’s selldown, they are no doubt asking themselves the cost of believing.
     
Disruptive technology? Check. Effervescent CEO with an interesting backstory? Check. Ridiculous price-to-earnings ratio? Check.
 
Given the checklist, it’s small wonder that Tesla CEO Elon Musk has elected to shave off his stake in the electric vehicle maker, inching closer to his Twitter pledge to reduce his holdings in the company by 10%.
 
In the last five weeks, amidst a backdrop of macro uncertainty, the prospect of monetary tightening and the omicron variant, Musk has dumped some US$12.7 billion worth of Tesla shares, sending the stock price below US$1,000 for the first time in months and the market cap of the company below US$1 trillion.
 
On Monday, the world’s richest man, offloaded another US$906.5 million worth of shares to cover taxes on the exercise of 2.1 million more options, according to regulatory filings and Tesla’s stock price continues to come under downward pressure.
 
Musk continues to pose a drag on the price of Tesla, which peaked before his Twitter poll over whether he should shrink his holding in the company, having sold about 70% of the stock he would need to reach his goal of lightening his ownership in the company by 10%.
 
To be sure, Musk still owns plenty of Tesla and his recent sales were part of what’s known as a blind trading plan that was adopted in September.
 
Known as a 10b5-1 plan, it is often used by executives to avoid suspicions of insider trading and is frequently used to spread sales over a period of time.
 
At 311 times price-to-earnings, even at under US$1 trillion, Tesla’s valuation defies all convention metrics for determining the company’s potential.
 
While Tesla may continue to be the gold standard in electric vehicles, competitors by way of the legacy car manufacturers are nipping at its heels, as are startups in the space.
 
Cathie Wood, whose Ark Investment Management has struggled of late thanks to downward pressure on Tesla’s stock price, remains a believer.
 
But for the legions of investors who have had to bear the brunt of Musk’s selldown, they are no doubt asking themselves the cost of believing.
 
 

2. The Semiconductor Stock Rally Cools

 
  • There are signs that demand for chips may have finally peaked, after an unprecedented shortage snarled production of everything this year.
  • Global growth in chip sales slowed in October to levels not seen since May this year and have generally declined over the past three months, according to industry data.  
     
For years software trumped the semiconductor hardware that enabled it to function as investors eschewed the capital-intensive makers of the brains behind everything from fridges to Fords, in favor of scalable software platforms.
 
The logic for favoring software companies and platform service providers instead of chipmakers was obvious – whereas increasing production or capacity of software was more the cost of acquisition of a new customer, chipmakers would take years to recoup billions of dollars’ worth of investment in expensive foundries and capital equipment.
 
But when contract manufacturing became more popular, and companies like Advanced Micro Devices (+1.35%) and Nvidia (+0.62%) were able to outsource the costly manufacture of chips to companies like Taiwan Semiconductor Manufacturing Co. (+0.17%) and Samsung Electronics (-0.39%), suddenly they too found a way to supercharge profits from the chipmaking business without making any chips, and investors lapped it up.
 
Highly publicized chip shortages over the past year have also made chipmakers hot property, with Nvidia rising to become the world’s most valuable semiconductor company, despite the firm not actually manufacturing anything itself.
 
Which is why the Philadelphia Stock Exchange Semiconductor Index, better known as the SOX, has seen a gain of 36% this year alone, far outperforming the Nasdaq 100.
 
But there are signs that demand for chips may have finally peaked, after an unprecedented shortage snarled production of everything this year.
 
Global growth in chip sales slowed in October to levels not seen since May this year and have generally declined over the past three months, according to industry data.
 
Nonetheless, demand continues to outstrip supply, particularly from carmakers and other manufacturers, which is why shares of the biggest chipmakers (outside of Intel), continue to ride high.
 
But savvy investors are keeping a keen eye on inventory buildup, increasingly frothy valuations and the threat of a spike in interest rates which could make these “tech” shares less of an obvious value proposition.
 
There are signs that the chipmaker trade may be getting ahead of actual demand, with the SOX priced at about 6.3 times estimated sales for the next 12 months, versus a 10-year average of 3.6 times.
 
And Nvidia, the juggernaut, trades at 56 times forward earnings, while Intel and Qualcomm trade at a more modest less than 20 times.
 
The difference matters.
 
Because demand for graphics processing units and server chips which Nvidia is increasingly specializing in, is reaching near term saturation and supply chain disruptions for graphics processors will eventually be ironed out, the company’s valuation is starting to look a little rich.
 
With the Nvidia’s proposed US$40 billion acquisition of chip designer Arm Holdings hanging in the balance, amidst pushback from anti-competition regulators in both the U.K. and the U.S., there is a near term risk that Nvidia will correct, especially if the U.S. Federal Reserve should tighten policy as widely expected.
 
Even if Nvidia manages to maintain its current standing, the SOX in general and Nvidia in particular, will likely struggle to repeat this past year’s performance.
 

Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...

 

 

 

3. Crypto's Meme Trade is Coming Down

 
  • From NFTs (non-fungible tokens) to decentralized finance or DeFi, the selloff in some of the previously hottest sub segments of an already speculative and volatile asset class has been nothing short of spectacular.
  • So while benchmark cryptocurrencies like bitcoin and ether appear to be holding relatively steady despite the volatility elsewhere, peak beneath the hood and some of the more speculative cryptocurrencies are painting an entirely different picture.
 
While markets in general have been volatile these past few weeks, there are few signs of a come down from the optimism that has come with vaccines and a recovering global economy.
 
But investors are paying more attention to the fact that like Atlas a tragic figure from Greek mythology condemned to hold up the sky for eternity, a handful of stocks are keeping sentiment buoyant on benchmark indices.
 
Take the S&P 500 for instance, where just five companies account for 35% of the index’s gain for the entire year, whereas the selloff in everything from stay-at-home exercise bicycles (no names mentioned here) and speculative SPACs has been brutal.
 
A similar pattern is unfolding in the cryptosphere (as no one should call it) as well.
 
From NFTs (non-fungible tokens) to decentralized finance or DeFi, the selloff in some of the previously hottest sub segments of an already speculative and volatile asset class has been nothing short of spectacular.
 
So while benchmark cryptocurrencies like bitcoin and ether appear to be holding relatively steady despite the volatility elsewhere, peak beneath the hood and some of the more speculative cryptocurrencies are painting an entirely different picture.
 
DeFi stalwarts like Aave, Balancer, Compound, Sushi, Synthetix, Uniswap, Year and Badger have all gotten clobbered and are showing few signs of rebounding, while volumes in the once white hot NFT space have all but fallen off a cliff.
 
And while bitcoin is still down from its all-time-high, it’s still managed to return around 70% for this year, compared with absolute losses in the even more speculative corners of the cryptocurrency market.
 
Part of the reason for this of course is that when risk sentiment comes off the market, traders would rather be in the more “reliable” cryptocurrencies like bitcoin and ether, for which there is an assumption a buyer would exist at a certain price, whereas those same assumptions can’t necessarily be extended to the so-called altcoins, which are just paving their way forward.
 
DeFi also tends to track the broader market sentiment as well, and does particularly well during periods of euphoria and when the cryptocurrency market as a whole rallies strongly, with the use of some of the tools like flash loans, that are peculiar to the DeFi sector.
 
Making matters worse, DeFi tokens also tend to be concentrated in the hands of a very small group of holders (or hodlers if you prefer) and that means that a sneeze by one, results in a pandemic across the space.
 
 

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 third month of trading has seen consistent performance, with a return of +4.19% in November, adding to the +13.22% for October 2021 and marking three straight months of gains with +2.19% recorded in September. 
 
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. 
 
If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.  

Dec 15, 2021

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