Novum Digital Asset Alpha – Weekend Edition 30-31 May 2020

It’s the weekend! Time to kick back relax and take a breather from the madness that is the markets.

And what a way to start the weekend.

On the last trading day of what has been an excellent month for stocks, the S&P 500 (+0.48%) notched up a second consecutive week of strong gains and its best 2-month performance since 2009.

Buoyed by the reopening of much of the United States, investors poured into stocks, helping them rebound from their March lows.

Confidence held together as U.S. President Donald Trump stuck to his script when responding to China’s national security laws in Hong Kong.

As we had noted in previous analyses, Trump may want to pick a fight with China, but Hong Kong will not be that flashpoint.

While Trump blasted Beijing for its actions on the pandemic and in Hong Kong, it was mainly rhetoric rather than real, as he announced no substantial economic restrictions on the autonomous city.

But while stocks rose, some investors are putting money in safe haven assets as well, U.S. 10-year Treasury yields edged down to 0.650% from 0.703% a day earlier – yields fall as bond prices rise – indicating a greater demand for bonds.

Oil rose as optimism that Americans would start flying and driving again, outweighed fears of a supply glut, with WTI Crude Oil (Nymex) (+5.28%) trading at US$35.49, above the support at US$35.

Gold also saw gains as investors pushed Comex Gold (+1.35%) to US$1,751.70 and Bitcoin soared overnight to test US$9,600 on several occasions before pulling back to trade around US$9,550 at the time of writing.

All in, investors have had a great week to cap off what has been an outstanding month, but there are plenty of risks and we’re nowhere close to popping champagne yet.

But for now, enjoy the weekend, and hopefully just a sip of champagne.

C’est la vie!

From Trump’s Worldview, If It’s Not His Problem, It’s Not A Problem

For all the criticisms that have been hurled against Trump, you can’t say that he’s not been consistent.

Analysts who had been expecting sanctions on China or more substantial U.S. moves to censure China in the wake of its national security laws in Hong Kong, may be missing the person that is Trump.

From the very beginning, Trump’s foreign policy objectives have always been inward looking – what’s in it for me and what’s in it for America – have been his guiding principles (and in that order as well).

In the case of Hong Kong, as unfortunate as it is, there’s nothing there that interests him.

Far from a global defender of democracy, Trump has always taken a more “you do you” approach insofar as it doesn’t affect him or what he perceives to be in the interests of the United States.

Lowering sanctions on China at this stage because of Hong Kong, just isn’t in the American economic interest – and the reaction of the stock market – rising when he stuck to his script and didn’t raise tensions with China, will only create a positive feedback loop that he has done the right thing.

With his eyes keenly focused on re-election, what’s happening in Hong Kong hardly features in Trump’s list of priorities – instead it’s how the stock market is doing and his fight with his favorite social media channel – Twitter (-1.99%).

To say Trump uses Twitter a lot is to put it mildly.

It’s almost as if Trump’s Twitter account is hard wired to his brain and every Tweet emanates directly from his subconscious in real time.

If Twitter had filters, Trump hasn’t heard of them.

And while Twitter has long been under pressure to enforce its content rules against Trump, it has long held back – until this week.

For the first time, the social media platform appended a fact-check label to two Trump tweets that said mail-in voting would lead to fraud and also a warning filter to other tweets for violating Twitter’s rules against promoting violence.

But like the patron who complains about the poor service at his favorite restaurant, yet goes back for more, Trump retaliated not by posting on Instagram, he posted even more angry tweets.

Trump’s move soured investors on Twitter’s stock, which fell by almost 2% on Friday, but investors may be selling the company short.

Nothing quite floats social media’s boat like a Twitter fight and this could easily be the mother of all Twitter feuds.

Though Twitter may face serious questions about its approach towards troublesome content, its revenue comes primarily from the ads it can slot between users’ tweets – the more tweets, the more slots Twitter can make money from.

During busier news cycles, such as elections and major sports events, and even during the coronavirus pandemic, new users tend to sign up on Twitter and spend more time on their feeds.

Written off at one stage, it was Trump’s use of Twitter that actually saved the social media platform – because much of what the President thinks or says appears on Twitter first.

And this time, Twitter has really poked the bear.

Nothing spurs engagement quite like controversy and now that Trump is angry at his favorite social media network, it’s only likely to raise Twitter’s cache.

As an added bonus, advertisers may appreciate Twitter for taking a strong stance against misinformation and harmful content, regardless that the chief violator is also the Commander-In-Chief.

But taking a bet on Twitter isn’t without its risks.

Trump is unlikely to abandon Twitter because he’s accustomed to its user interface, it allows him to reach his base, unfiltered and unsupervised and directly.

As the only social media platform that is primarily text-based, Trump is likely to continue using Twitter, albeit with a love-hate relationship, much like Fox News, which is owned by Fox (+0.42%).

But should a new occupant enter the White House in 2021, Twitter may no longer have as much clout as it currently does.

To be sure, Twitter has proved its resilience, much of it of course thanks to Trump’s adoption of the platform – similar to how Trump propelled Fox News to the top over the course of his presidency.

Another term would certainly help the cause of both Fox and Twitter, but that’s akin to taking a bet on Trump’s re-election – one that we would suggest may be too early to call.

Where Have All The Value Investors Gone?

When a cult leader starts to doubt the cult that he helped found, it should come as no surprise when its followers scatter in different directions thereafter.

Nowhere is this more apparent than in the so-called cult of “value investing,” led by that most famous of value investors – Warren Buffett.

Buffett conceded earlier this month,

“I don’t know — and perhaps with a bias — I don’t believe anybody knows what the market is going to do tomorrow.”

It’s unclear if Buffett meant “tomorrow” literally, or in the long run.

Typically, growth stocks are companies that promise to deliver faster than average profit growth in the future, but are more risky.

Whereas value stocks are companies that are slow and steady, but can be found at low multiples of their book value.

And for the longest time, “value investors” and those betting on “growth” have battled for supremacy.

While Buffett and his ilk won out in the aftermath of the dotcom bubble, they also missed out on stocks like Amazon, Apple and Facebook.

Conventional investment theory suggests that value stocks, which include banks, oil companies and industrial conglomerates, tend to do better than growth stocks, when the economy begins to recover from a downturn.

The reasoning is that value stocks are particularly susceptible to ebbs and flows of economic activity and in theory should be among the biggest beneficiaries in a recovery.

Yet in the 12 years since the financial crisis, markets have rewarded risk-taking and “punished” value investors, with growth stocks outperforming value stocks by over 20% – a level not seen since the dotcom bubble.

And while “value investors” have had some brief moments in 2019, they have failed to shine in the decade-long bull market that followed the financial crisis, lagging far behind the shares of technology companies in particular.

For “value investors,” stocks like Best Buy (+2.17%), Oracle (+0.28%) and H&R Block (-1.56%) are trading at lower-than-average valuations, yet despite delivering above average returns on capital, they’ve still languished other “growth stocks.”

Part of the reason value stocks are so undervalued (no pun intended), is of course structural.

For many value stocks, most of the upside is on display for investors to see. It’s literally in the books – and what you see is what you get.

There’s only so much narrative you can build around an oil company, or a bank.

Growth stocks however are the darlings of speculation.

Given their seemingly limitless potential, investors are more willing to pay for growth stock stories.

So companies in “growth” sectors like technology, biotechnology, artificial intelligence and cybersecurity all enjoy premiums far in excess of their “value stock” cousins.

The other reason of course is systemic.

Following the financial crisis, low interest rates have provided ample liquidity to fuel eye-watering valuations.

But without a sexy story, most value stocks were uninvited to the liquidity party.

With more money than investors knew what to do with and with interest rates so low, they borrowed to invest and speculate on stocks with growth stories and markets have not disappointed.

But those betting on a return of value investing may need to wait a little bit longer.

With the U.S. Federal Reserve assuring investors that it is “not going to run out of ammunition,” and with countries only staging tentative openings and recoveries, central bank intervention will likely increase and not decrease.

Well before the coronavirus pandemic, even a hint of hawkishness on the part of the Fed had led to almost kneejerk falls in markets, whereupon the Fed has had to step out and reassure investors that it was not increasing interest rates.

Globally we’ve become so addicted to low interest rates that it’s hard to imagine a scenario when they will ever go up again – and that spells continued underperformance for value investors.

And when even the maestro of all value investors Warren Buffett’s Berkshire Hathaway (+0.26%) , posts a record net loss of nearly US$50 billion in the first quarter of 2020, thanks to the coronavirus pandemic, even the most staunch believers in value investing can’t be faulted for wondering if it wouldn’t be better to just roll the dice.

To be sure, some of Berkshire Hathaway’s largest holdings are in companies most sensitive to the coronavirus pandemic – including American Airlines (-4.37%), Delta Airlines (-1.75%), Southwest Airlines (-1.38%) and United Airlines (-2.94%).

And while Berkshire has since realized losses on its airline holdings, Berkshire Hathaway continues to hold onto legacy companies such as American Express (-3.05%) and Bank of America (-2.98%).

The Russell 1000 Value Index – a measure of America’s value stock of companies – is down 15.65%, year-to-date, compared with a fall of 5.77% on the S&P 500 over the same period.

Does that mean “value investing” is really just for Boomers?

Maybe.

The problem of course is that “value” is more subjective than ever and what a previous generation of investors considered “value” may not have the same “value” as the current one.

Given that stocks are considerably overpriced by every traditional measure of value, rising despite decimated profits and withdrawal of earnings guidance, we can only assume that we’re now in uncharted waters.

No previous investing generation has had these same set of circumstances, ever.

The level fiscal and monetary intervention is unprecedented and we’ve never before experienced a shutdown of the global economy on this scale.

Government debt is currently at levels that make borrowings during the Second World War look like a simple overdraft check.

Against this backdrop, investors need to adapt to the situation and try not to rationalize it using existing matrices or confirmation bias.

The companies that will form the Dow Jones Industrial Average in a decade from now, will most likely not be those companies that constitute it today and in that sense, the only way to grow one’s portfolio is to bet on growth.

That means turning to the sectors which will define the future and not the past – cloud computing, artificial intelligence, graphics processing, deep learning, cybersecurity, digitalization we believe will continue to be strong themes not just now, but in the future as well.

Because ultimately it’s hard to drive forward if you’re constantly looking through the rearview mirror.

Bitcoin Bests All Bets

On Friday we noted that there was some broad resistance for Bitcoin at US$9,500 which was stifling an outright run towards US$9,700, but that ultimately markets were positive.

The long trade for Bitcoin we suggested was to enter closer to US$9,500 and take profit at US$9,700 and US$9,800, with a stop loss at US$9,400 to be safe – this trade was stopped out.

Bitcoin did show some positive push but started to consolidate at the US$9,500 level which was the broad resistance we had noted.

The short trade we suggested however was in the money – shorting Bitcoin at US$9,600, traders would have profited all the way down to US$9,350 and the short cover at US$9,700 was intact.

Over the weekend, we anticipate that Bitcoin will continue to consolidate at US$9,500.

There is sufficient support at US$9,300 but considerable resistance at US$9,700. Expect Bitcoin to continue to trade sideways on more muted volumes as much of America steps out over the weekend.

Those looking to go long on Bitcoin can consider entry on a pullback closer to US$9,450 and taking profit at US$9,650 with a stop loss at US$9,350.

Shorting Bitcoin will require some patience to set up an entry at US$9,650 and a short all the way down to US$9,300 and a short cover at US$9,750.

Expect Bitcoin to track sideways between US$9,350 to US$9,650 in the short term, with at best tentative pushes to break the resistance at US$9,700, which for now, appears to be a strong level of resistance.

Ethereum As Well

On Friday we noted that Ethereum had consolidated above US$220, and expected US$225 to be one level of resistance while US$230 was a much stronger level of resistance.

The trade we suggested for those looking to go long on Ethereum was timing an entry closer to US$221 and taking profit closer to US$225, with a stop loss at US$219 and some speculative money to take profit at US$230 and US$235 – this trade was very profitable, with all profit targets cleared.

We also had a short trade suggestion which we warned was far more tricky, waiting for another push to US$225 and taking profit at US$217 with a short cover at US$230 – this trade was stopped out.

We also noted that Ethereum was consolidating again at US$220 which signaled another move higher.

Ethereum had a far more spectacular run than Bitcoin over the past 24 hours and has soared through several levels of resistance with ease at US$225 and US$230.

Looking ahead, Ethereum is consolidating again at the US$235 level, and another push is probable.

Those looking to go long on Ethereum can wait till it pulls back to around US$235 and take profit at US$238, with a stop loss at US$230.

Shorting Ethereum would require a push to US$238 again and shorting all the way back to US$232 with a short cover at US$230.

Ethereum has had a tremendous ride upwards over the past 24 hours on the back of significant volumes, but there may still be some more upside room.

Should US$235 continue to form a strong support, a push towards US$240 and US$250 is possible, but will require some coordination with Bitcoin.

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

Exclusive access to Novum Digital Asset Alpha’s Daily Analysis is made in conjunction with Bitcoin Malaysia.

The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.

It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.

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