Novum Alpha - Daily Analysis 24 December 2021 (10-Minute Read)
A Merry Christmas to you as the year draws to a close and stocks continuing to chase further highs.
In brief (TL:DR)
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In today's issue...
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Market OverviewA global stock gauge is up some 3% this month, illustrating the equity market’s resilience in the face of risks from the coronavirus and moves to tighten monetary policy to quell high inflation.
A background of receding central bank liquidity support could test markets next year.
Sentiment has been helped by economic data that painted a picture of solid U.S. growth, and a U.K. study suggesting omicron infections are less likely to lead to hospitalization. But the research cautioned the fast-spreading variant may still produce a significant number of serious cases.
In Asia, markets rose Friday with Tokyo's Nikkei 225 (+0.15%), Hong Kong's Hang Seng (+0.17%), Sydney’s ASX 200 (+0.54%) and Seoul's Kospi Index (+0.53%) all up in the morning trading session.
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A Personal NoteTo all subscribers and readers of the Novum Alpha Daily Analysis and Weekend Edition, thank you for your continued support and feedback, your readership inspires us to do what we do and continue doing what we love.
As the year draws to a close, I would like to humbly thank each and every one of our readers for joining us on our journey in an attempt to decipher markets, understand the macro economic relationship with cryptocurrencies and hopefully help us all make better investment decisions.
The Novum Alpha team will be taking a break until 2022 as we continue to bring you the most relevant financial news, opinions and insights to help your financial journey.
In the meantime and on behalf of all of us here at Novum Alpha who work tirelessly to bring the financial news and insights to your inbox six days a week, thank you and a very Merry Christmas.
Yours faithfully,
Patrick Tan
CEO & General Counsel
Novum Alpha
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1. When Herd Investing Hurts Investing
Herd instinct is at its core about survival. Whether it’s to run away from a predator like a bear, or to escape from a fire, following the herd could mean the difference between longevity and shuffling off one’s mortal coil.
But where herd instinct is perhaps less useful is approaching an investment portfolio.
Constantly chasing that next shiny stock that has been hyped up or that new NFT could lead investors to holding a bag of losers, convinced that their luck will change and things will turn around.
Herds are headed all at once to the same watering hole, and potentially leaving themselves dangerously exposed to the predator of a sharp correction in fabulously expensive growth stocks, real estate and junk bonds.
Which is when the smart investor should be looking for other sources to drink from.
The past few years have not been kind to small cap, value, and overseas markets, while large cap growth stocks are by some measures more expensive than before the dotcom bubble burst.
While small caps, value stocks and foreign markets have been hammered in recent years, they’ve also become cheap and unloved and warrant a second look.
The S&P 500 trades at a price-to-earnings ratio of 21.9, based on expected earnings for the current fiscal year, but in contrast, small caps in the S&P Small Cap 600 Index trade at just 16.4.
But wait, if you act now, there’s more.
In foreign markets, the MSCI EAFE Index, which tracks companies in developed markets outside the U.S., is 6.7 points cheaper than the S&P 500, the widest on record.
The spread between the S&P 500 and the MSCI Emerging Markets Index? 9.2, the widest in nearly two decades.
As it turns out, there are easier ways to still drink from the watering hole without being mauled by a lion – investors don’t have to chase the S&P 500 to capture its profits.
Because the S&P 500 is dominated by some of the most profitable companies in the world, including the usual suspects – Apple (+0.36%), Microsoft (+0.45%), Amazon (+0.018%), Google (+0.34%) and Facebook (+1.45%), accounting for almost 25% of the index’s value, investors can just go ahead and buy shares in these companies while leaving the rest behind.
Most S&P 500 companies fall well short of the index’s headline profitability and that’s if they’re even profitable and many are not cheap, riding on the coattails of the tech fraternity.
By sifting the wheat from the chaff, investors can pay less to track the performance of the S&P 500 without sacrificing profits and one way to do that is to just buy only the cheapest and most profitable companies.
And as for the rest of their portfolio, they can consider picking up bargains in small caps, value stocks and overseas markets.
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2. Don't Believe What You Hear About the Fed
Tightening conditions, interest rate hikes, a pullback in liquidity – all scary stuff for investors puffed up on the loose monetary policies of central banks like the U.S. Federal Reserve, bidding up all manner of assets to levels of ludicrousness.
Yet don’t let the headlines scare you because despite the Fed cinching its belt, accelerating the pace of its exit from pandemic era stimulus measures in a bid to battle elevated inflation, measures of financial conditions are only marginally tighter than before the Fed’s announcement.
According to the learned economists at Goldman Sachs (+0.71%), who produce a closely-followed index that takes account the shifts in the U.S. stock market, borrowing costs for companies, and moves in the dollar and funding costs for the U.S. government, liquidity remains as abundant as ever.
And most investors seem to know this as evidenced by the continued resilience of U.S. equities which have defiantly remained around record highs despite the Fed’s hawkish pivot, while yields on U.S. Treasuries remain stubbornly low compared with historical norms.
That IPOs are still going ahead and junk bonds still can find buyers underlie the extraordinary levels of cash that continue to slosh around the global financial system and presents a puzzle for Fed policymakers looking to cool down the economy and tame inflation.
One of the key reasons that there’s so much money in the markets right now is because the way stimulus was doled out this time was very different from the 2008 Financial Crisis.
In 2008, the federal bailout went almost entirely to banks to shore up the credit markets, and it wasn’t as if there was a huge bout of lending or liquidity flowing outwards, which is why it took years to recover from that crisis.
But this time, almost all of the stimulus and rescue packages have gone directly to businesses and households, including by way of stimulus checks – and naturally some of that has gone into the stock market.
Investors are also betting that the Fed can’t raise rates as much as it would like markets to think it can, especially if economic growth slows more than anticipated.
That growth could possibly slow came into sharp focus this week after the Biden administration’s landmark US$1.75 trillion economic package was blocked by Democratic Senator Joe Manchin of West Virginia, even as the omicron variant ravages the country.
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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. Cryptocurrency's Friend in Cynthia Lummis
While bitcoin may still be somewhat off its all-time-highs, investors (or hodlers if you will) have something to cheer this Christmas in two gifts from the Senate.
Democratic Senator Joe Manchin’s stonewalling of Biden’s economic agenda comes with a silver lining for the cryptocurrency crowd, given that the taxes that would have come along with the Build Back Better bill are now stuck in limbo along with everything else.
This gives politicians and lobbyists on Capitol Hill time to propose amendments alongside those that Manchin will almost certainly demand before he votes in favor of the US$1.75 trillion economic plan.
But wait, there’s more.
Wyoming Republican Senator Cynthia Lummis, one of the crypto industry’s staunchest supporters in Washington is planning to introduce a comprehensive bill next year that could provide a clear regulatory framework for cryptocurrencies.
If enacted, the bill would provide regulators with clear guidance on which assets belong to which different asset classes, for instance security or utility token, offer protections for consumers, regulate stablecoins and create a new organization under the joint jurisdiction of the Commodity Futures Trading Commission and the Securities and Exchange Commission to oversee the digital asset market.
Lummis is a bitcoin-owning member of the powerful Senate Banking Committee, and is seen by industry stakeholders as a key advocate for the cryptocurrency industry.
In October, regulatory filings disclosed a bitcoin purchase worth between US$50,001 and US$100,000 made earlier this year and she’s one of a growing number of U.S. politicians to solicit campaign contributions in cryptocurrencies.
As cryptocurrencies gain greater mainstream adoption and institutional acceptance, the nouveau crypto riche are deploying some of their newfound wealth to pay for what matters – legions of lobbyists on Washington’s K Street to make their voices heard on Capitol Hill.
The cryptocurrency lobby has continued to grow from strength to strength in Washington, on the back of the sharp rally in prices of digital assets and importantly, has won advocates on Capitol Hill on both sides of the aisle.
While plenty of issues divide Republicans and Democrats, the spirit of cooperation extends deeply into one thing they can both agree on – money – and even before the Build Back Better was blockaded by Manchin, a bipartisan group of politicians had attempted to reword some of the provisions of that bill that pertained to cryptocurrencies.
While Lummis’s bill may face a tough path through the evenly-divided Senate that is mostly split on partisan lines on the question of cryptocurrency regulation, that discounts the strength of the digital asset lobby that could make a difference.
If successful, Washington could establish comprehensive rules for the cryptocurrency industry and provide a blueprint for other countries to follow.
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Dec 24, 2021