Novum Digital Asset Alpha – 1 June 2020

I hope you had a great weekend!

Whether you had the luxury of being out and about or are anticipating a return to some semblance of normalcy, the good news is it’s June and we’re almost to the middle of what would otherwise be a year we’d all soon rather forget. 

And while the reopening of the United States was always going to be fraught, now cities from New York to Los Angeles are reeling from a wave of virus protests that threaten to derail that reopening. 

Violence erupted in a dozen American cities following the death of George Floyd, an African-American man from Minneapolis who died after a white police officer pressed a knee into his neck for over eight minutes after arresting him. 

Otherwise peaceful protests against police brutality quickly escalated as demonstrators rampaged through shopping districts, already embattled by the coronavirus, looting glitzy stores in Rodeo Drive in Beverly Hills and the high end shopping area of Michigan Avenue in Chicago. 

But if Asian investors were roiled by the chaos in the United States, markets were not reflecting that concern. 

Stocks in all major Asian markets surged in the morning trading session, with Tokyo’s Nikkei 225 (+1.16%), Sydney’s ASX 200 (+0.73%) and Seoul’s KOSPI (+1.34%) all up. 

Shares in Hong Kong’s Hang Seng Index (+3.11%) surged at the open as U.S. President Donald Trump’s Friday statement in response to China’s new national security laws for the autonomous city, was rich on rhetoric but sans specific sanctions on China.  

The dollar retreated against a basket of major currencies and S&P 500 futures (+0.10%) trading in Asia erased earlier declines, as investors shrugged off violent protests in some American cities, focusing instead on the economic recovery.  

While investors may be concerned over the protests rippling through American cities, most were more closely monitoring escalating tensions between the U.S. and China and took the lack of specific measures against China to be a good sign of de-escalation. 

The 10-year U.S. Treasury yield rose to 0.663% as investors took a more risk-on view – yields typically increase when bond prices fall.

Gold slipped slightly with Comex Gold (-0.05%) trading at US$1,750.80 and WTI Crude Oil (Nymex) (-0.59%) fell slightly to trade at US$35.28, as supply gluts still weighed on the tentative recovery. 

Bitcoin (-1.28%) staged a late rally, climbing at one stage to US$9,700 as traders over the weekend saw the shocking images of many of the world’s most famous American shopping districts in flames, but has since retraced to trade around US$9,550. 

With so many risks facing markets, it may sometimes feel like we’d be better off just pulling the covers over our heads and going back to sleep, in the hope that when we can wake up again to better news. 

But there are some bright spots – whilst it’s still too early to say, there are some indications that the worst of the coronavirus pandemic may already be behind us. 

Welcome to June! 

Don’t Ever Bet Against the U.S. Market

As we roll into June and near the halfway mark on what has been a year that the world would soon rather forget, U.S. stocks have proved resilient. 

Not pestilence nor protest seems to be able to temp the appetite for corporate america with U.S. stocks staging a furious rebound since late March, leaps and bounds ahead of other markets. 

Optimism (whether misplaced or otherwise) about state and business re-openings and the potential development of a coronavirus vaccine has lifted the S&P 500 some 36% from the Ides of March, trimming losses in the index to just 5.8%, in a year which many had touted would be the beginnings of a Great Depression.

To be sure, depressions do not make one great and the S&P 500 rallied 3% last week alone, capping off its best two-month stretch since 2009. 

Investors pointed to a booming technology sector and an unprecedented amount of stimulus from the U.S. Federal Reserve as reasons for outperformance. 

And according to a recent Bank of America Global Fund Manager Survey, the percentage of fund mangers who think U.S. stocks are attractive has risen to the highest level in nearly 5 years.

But conventional investing wisdom would caution that markets tend to crash when the last bear becomes a bull.

And because the recent U.S. rally has coincided with projections for the sharpest drop in corporate earnings this year, American stocks the most expensive they’ve been in almost 20 years. 

According to data provider FactSet and Dow Jones Market Data, as recently as last Wednesday, the S&P 500 traded at a 21.85 times expected earnings over the next 12 months. 

In comparison, European stocks in Stoxx Europe 600 trade at 19.24 times and Hong Kong stocks on the Hang Seng Index trade at 10.70 times. 

But that’s really more of an apples to oranges type of comparison because America has been on an economic tear prior to the coronavirus pandemic, while European growth has been moribund and Hong Kong has been besieged with protests and Chinese intervention in the autonomous city. 

And that has been reflected in fund flows as well. 

While investors fled stock funds during the market rout of February and March, during the height of the coronavirus pandemic, they’ve bailed on other regions faster than America.

Since the beginning of 2020, U.S. equity funds have only had cumulative outflows of 0.4% of assets under management, whereas emerging markets saw 3% outflows and Western European equity funds saw a 2.4% outflow, according to EPFR, a data service provider. 

A hunt for yield has drawn many investors to U.S. stocks. 

With government bond yields near record lows, stocks have outperformed. 

Dividend yields on the S&P 500 have been 1.9%, well above the 0.663% of the U.S. 10-year Treasury note and well above negative yields in both Europe and Japan. 

But yield isn’t everything, as there are plenty of high dividend yield stocks in Asia – quality is a major factor as well. 

With the deepest pools of liquidity, indices like the S&P 500 offer sufficient diversification across a broad range of industries while still managing to be significantly tech-heavy. 

Technology ,makes up about a quarter of the S&P 500, compared with just 10% of the MSCI all-country index. 

Stocks of financial services companies in contrast only make up about 10% of the S&P 500, while accounting for 20% of the MSCI all-country index – and that difference in weightage has been a boon for the S&P 500. 

Central bank rate cuts have decimated shares in financial services companies, which have already shed 24% in the S&P 500 in 2020 alone. 

But investors thinking that this is an excellent opportunity to pick up bank stocks on the cheap may want to reconsider. 

The recent stay-at-home orders during the pandemic will only accelerate a move to digital banking and heighten the dominance of technology. 

And the recent U.S. rally has been largely driven by a surge in big tech stocks – with the sector the best performing group in the S&P 500 this year, up 6.7%.  

Microsoft (+1.02%) and Apple (-0.10%), the two biggest U.S. companies by market cap have advanced some 16% and 8.3% respectively.

More importantly, the Fed has made clear that it will not allow the American economy to falter (subtext, it will not allow the American stock market to falter). 

In a prime time interview, Federal Reserve Chairman Jerome Powell said, 

“But I would just say this. In the long run, and even in the medium run, you wouldn’t want to bet against the American economy.”

So expect that the liquidity taps that have made stocks so hot right now to continue flowing. 

Apple to Oranges

And while we remain bullish on Microsoft, Amazon (+1.72%) and Alphabet (+1.08%) (parent company of Google), thanks to their massive dominance in cloud computing, which thanks to a move to work-from-home, will become increasingly more relevant, we remain less so on Apple. 

Despite being one of the biggest companies in the entire world, Apple has ignored its desktop and laptop customers for the past decade, building increasingly overpriced (but stylish) computers, with specifications that fall short of its PC competitors. 

And makers of PCs have also upped their game – mimicking Apple’s aesthetics and offering superior parts and performance at a fraction of the cost. 

Some of Apple’s most loyal fans are creative professionals. 

Whether it’s laying out glossy magazines or designing a gorgeous commercial, a Mac has always been nearby, adding to the cache of the Apple brand. 

But over the past few years, Apple has trashed its prized laptop keyboard, much to the chagrin of a legion of journalists and writers who would otherwise have been advertising for the company, hacking away at their Macs in Starbucks (-0.70%) across the world and turned its back on creative professionals.  

Apple also ditched the SD card slot, with no good alternative for photographers snapping massive RAW files and videographers shooting 4K all day, without having to lug cumbersome dongles – which if you think about it, destroys the clean look that Apple is known for.

Imagine bringing around a gorgeous sleek Mac, only to have a dozen dongles sticking out of it like an octopus. 

And musicians have also been left dongle-less because there still aren’t many audio interfaces and MIDI keyboards that plug into USB-C. 

In recent years, Apple “heard” the criticism of the long-neglected creative professionals who had been moving over to Microsoft’s Surface Studio, a gorgeous slate computer, popular with many creative professionals and with Apple-like qualities but running on Windows. 

Apple launched the one part cheese grater, one part computer Mac Pro last year. 

But at a starting price of almost US$6,000, the Mac Pro was really targeted for the ultimate Apple fan – and this price didn’t include a monitor – Apple recommends the 32-inch 6K Pro Display XDR, starting at US$5,000 – that’s US$11,000 for an entry level Mac Pro. 

Considering that offices are going to become increasingly irrelevant in the coming days, other than as a showcase, we can expect at most one or two of these Mac Pro monstrosities as display pieces in creative offices, while the rest of the creative teams work on more reasonably priced PCs. 

And because Apple hasn’t sold Nvidia graphics cards with its computer for years, favoring AMD’s ‘+3.98%) Radeon cards, which are generally known for being cheaper and less powerful than Nvidia’s (+4.58%) GeForce series, that’s also hamstrung creative pros’ capabilities, leaving 3D rendering software developers in the dark since their GPU accelerated renderers often only work with Nvidia’s CUDA technology. 

So creative pros have been left out in the dark, so what?

Well much of the Apple brand cache derives from this small but exceedingly influential group of consumers – their creativity makes them attractive, with their well groomed goaties and man-buns, Apple fans have often associated the brand with creativity. 

But the reality is that while many creative professionals still use an iPhone, they confess to working on PCs from their homes, while using a Mac when facing clients. 

With more interfacing done with clients via video call than ever before, many of the trappings that add to the Apple brand cache will gradually wane in significance moving forward.

Which is why we’re not sold on the premium that investors pay for Apple’s shares, the same way we’re not sold on the premium that consumers pay for Apple’s products. 

America’s Cities Are On Fire & Why Nobody Seems To Care

The worst civil unrest in decades has unfolded in cities across the U.S. this weekend as anger sparked by the death of a black man in Minneapolis police custody at the hands of a white police officer spurred demonstrations nationwide. 

The mostly peaceful protesters rapidly descended into wanton violence, looting and damaging property, as some demonstrators torched vehicles, smashed windows and raided stores. 

According to the U.S. National Guard, about 5,000 personnel were activated in 15 states as well as the nation’s capital, to aid law enforcement officials in the cities most badly affected by the protests. 

And just as coronavirus lockdowns are being lifted across the U.S., curfews were initiated over the weekend and are being extended in several American cities. 

A recorded video of a white police officer keeping his knee pressed into the neck of George Floyd, the black man who died during an arrest, sparked the dry powder of severe economic stress in the wake of the coronavirus pandemic, against a backdrop of other recent killings of African Americans. 

To make matters worse, a video posted on Saturday to social media showed mostly white police officers hitting mostly black protesters with batons and truncheons, in footage that was verified by Storyful. 

The blow dealt by the coronavirus pandemic has been unequal across the United States. 

Infections and job losses have taken an outsize toll on minorities, particularly the African-American community, where working from home is not a viable option for many of the industries that they are  employed in. 

With millions of Americans cooped up at home, watching their savings dwindle or being made homeless, the video of a white police officer essentially killing a black man on video was the last straw on the camel’s back. 

And at a time when words of leadership and unity are most needed, such needs were left unmet as U.S. President Donald Trump made no public appearances on Sunday, tweeting instead that violence in Minneapolis was caused by left-wing radical groups without offering any evidence. 

To be sure, this isn’t America’s first brush with race riots, nor is it likely to be the last.

The current protests share similarities with the Watts riots in Los Angeles in 1965 and the Rodney King demonstrations in 1992 – both of which took place at times of severe economic and civic distress and helped to fuel the intensity of the unrest in both episodes. 

Data compiled by Johns Hopkins University shows that the coronavirus disproportionately affects African Americans more than any other community, casting a racial overtone on the pandemic, through the fault of no one. 

Unemployment has not helped either. 

The U-3 unemployment rate, the most commonly reported unemployment rate in the U.S., and which represents the number of people actively seeking a job, hit a post-war high of 14.7% in April.

But a household survey by the U.S. Department of Labor also found that the vast majority of job losses were temporary. 

And with the U.S. economy in a tentative reopening phase, job openings are likely to increase in the coming months, as more Americans start returning to work, heading to the stores and taking to the skies. 

If nothing else, investors can look back on previous episodes of racial unrest in the United States and take some comfort that the brighter the spark, the faster the burnout, but this time may be slightly different. 

In past episodes of racial division in the U.S., presidents have stepped in as a unifying and calming force – but the person occupying the White House has long been alleged to be a racist, particularly against African Americans. 

Any attempt at unity by Trump will still be viewed with a degree of skepticism, if any attempt is made at all. 

Protests should taper off, particularly if the economic recovery is faster than anticipated, and jobs, particularly in the service industry, start returning. 

But there is a genuine risk that the coronavirus pandemic has sparked off structural shifts in the economy that will result in some of those jobs being lost forever. 

In a worse-case scenario, America could potentially descend into a police state for a few months until the situation gets under control. 

Insurers are likely to bear the brunt of losses from further civil unrest and the short term outlook for insurance companies, already embattled by the coronavirus pandemic, is likely to be poor. 

And with doubts over law enforcement’s ability to protect people and property, expect that the sales of firearms and ammunition will go up, which should play well for the stocks of American Outdoor Brands (+9.55%), which owns gunmaker Smith & Wesson and Sturm, Ruger & Co. (+2.55%) which have both seen their stocks rise on the back of unrest. 

The trend is likely to continue – with no coronavirus vaccine in sight and with rising unrest in the U.S., sales of firearms is expected to stay robust for some time.

Bitcoin Blasts Through The Weekend

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

We suggested that there was sufficient support at US$9,300 but considerable resistance at US$9,700 and expected Bitcoin to continue to trade sideways on more muted volumes as much of America stepped out over the weekend.

The weekend trade we suggested for those looking to go long on Bitcoin was an entry on a pullback closer to US$9,450 and taking profit at US$9,650 with a stop loss at US$9,350 – this trade was profitable. 

Whereas the short trade we suggested required 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 – again another profitable trade, without necessarily hitting the final target, taking profits at all stages. 

As we had suggested Bitcoin tracked sideways between US$9,350 to US$9,650 in the short term, with an at best tentative push to break the resistance at US$9,700, which we continued to note formed a strong resistance. 

In the next 24 hours, Bitcoin will likely continue consolidating at US$9,500 – another push is possible to US$9,700 but will likely see a retracement back to US$9,300 if unsuccessful. 

A long trade could be taken from US$9,500 and profits can be taken at US$9,700 with a stop loss at US$9,350. 

Shorts can consider shorting Bitcoin again at US$9,700 and taking profit at US$9,450, with a short cover at US$9,800. 

Bitcoin could go either way at the moment, but volumes suggest another tentative push towards US$9,700 followed by a pullback thereafter to US$9,300. 

At least Bitcoin tried. (Source: Novum Digital Asset Alpha charting tools.)

Evergreen Ethereum

Over the weekend, we suggested that Ethereum was consolidating again at the US$235 level, and another push was probable. 

We suggested that those looking to go long on Ethereum could wait till it pulled back to around US$235 and take profit at US$238, with a stop loss at US$230 – a small but profitable trade. 

The short trade we suggested for 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 – also profitable. 

Ethereum had a spectacular run-up and retracement over the weekend, blasting through resistance levels of US$240 and US$245 before retreating to now trade around US$238. 

Those looking to go long on Ethereum can consider entering at US$238 and taking profit again at US$242, with a stop loss at US$236. 

Shorts on Ethereum can wait till another push towards US$242 and then short at various levels all the way back down to US$236, with a short cover at US$244. 

Ethereum is consolidating for now and building up for another run towards US$250. There remains some downside risk and it could test US$230 if Bitcoin shows signs of weakness. 

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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