Novum Digital Asset Alpha – 4 June 2020

I hope you’re having a terrific Thursday so far because U.S. stocks are on a tear. 

With investors betting that bread and butter issues will eventually trump (no pun intended) social unrest in the United States, shares in the S&P 500 (+1.4%) roared ahead yesterday to close above 3,100 points for the first time since February 21.

Not to be outdone, the Dow Jones Industrial Average (+2.05%) rose over 500 points to trade at 26,269.89.

Wednesday’s advance was driven mainly by stocks in financial services, automakers and durable goods manufacturers, suggesting that the rally is broadening out to other sectors that had previously been left out of the recovery.

With coronavirus news now increasingly below the fold, investors are making bigger bets on the back of record stimulus from the U.S. Federal Reserve and Congress, to keep the American economy afloat.

But Asian stocks were not swept up in gains from the U.S., as investors turned skittish in the wake of renewed tensions between the U.S. and China – with the latest shot coming from Washington, which plans to block flights by Chinese airlines from flying to the U.S.

Shares in Asia were mixed in morning trading, with Tokyo’s Nikkei 225 (+0.08%) and Sydney’s ASX 200 (+0.44%) up slightly, while Hong Kong’s Hang Seng Index (-0.16%) and Seoul’s KOSPI (-0.04%) were down.

Investors shunned safe haven assets, with the dollar falling against a basket of major currencies and the 10-year U.S. Treasury note rising to 0.761% from 0.679% – the highest spike in weeks – yields typically rise as bond prices fall.

Meanwhile oil ticked lower, with WTI Crude Oil (Nymex) (-1.80%) trading at US$36.62 a barrel, but is still at its highest level since early March on the back of a rebalancing between renewed consumption and OPEC production cuts.

Gold rose slightly but is coming within a hair’s breadth of the important US$1,700 level of support, with Comex Gold trading at US$1,707.30.

Bitcoin (+1.82%) traded mostly sideways overnight, between US$9,450 to US$9,550 before making a gradual ascent and is now trading up, at around US$9,650 at the time of writing (GMT 03:30).

Thank God it’s Thursday right?

And with signs that the worst of the coronavirus has abated, there is much to be thankful for. 

Please Sir, May I Have Some More

Give a man a fish, and he eats for a day, teach a man to fish, and he starts buying bait and tackle, hiring other fisherman and launches a fishing fleet.

Just 9 weeks after Congress approved its largest-ever economic measures to counter the coronavirus pandemic, most of the direct cash assistance aimed at keeping the U.S. economy afloat has either been spent or committed.

According to a Wall Street Journal analysis of government data and estimates by the Committee for a Responsible Federal Budget, a bipartisan non-profit group, about 70% of the total US$1.6 trillion in aid, or about 70% has been distributed – an amazing feat of administration.

Direct cash assistance is just one aspect of coronavirus-related spending, but some economists say it has the biggest impact because it helps to fill the void in economic activity created by social-distancing measures.

Checks to households meant that families could head to retailers like Dollar Tree (-2.48%) and Walmart (-0.38%) to buy much-needed essential supplies, adding to revenues which helped save jobs at those companies.

In total, Congress passed four pieces of emergency legislation which authorized about US$3.3 trillion in new spending, as well as tax breaks.

Aside from cash assistance, Congress also approved measures to make coronavirus testing fee, increase healthcare funding for states and subsidized paid sick leave for workers affected by the pandemic.

But the Democrat-controlled House of Representatives say that all that spending isn’t enough and last month approved a US$3.5 trillion bill that includes additional safety-net spending, another round of payments for Americans and roughly US$1 trillion in aid to state and local governments.

Just as the Second World War turned Japan into the world’s largest welfare state, the coronavirus pandemic may be edging America in the same direction.

But between the Democrats giving money away through financial assistance and the Trump administration not taking any money in via tax cuts, there are concerns from some quarters, over the yawning budget deficit.

At a Senate hearing last month, Republican Senator Pat Toomey of Pennsylvania, an important swing state in the upcoming U.S. presidential election, said,

“You can make a pretty strong case that before we rush out and do another spending bill we actually let some of this stuff go to work and understand the consequences of what we’ve already done.”

But faster than you can say “Check, please,” the Trump administration is already mulling over its next coronavirus stimulus package, with the U.S. President set to meet with senior advisors as soon as this week, to discuss policy options.

Advisors have tabled a set of proposals meant to encourage Americans to return to work and resume normal life, including heading out to restaurants and taking vacations, in an effort to jump start the embattled economy as quickly as possible.

With U.S. President Donald Trump up for re-election in November, Trump will no doubt be looking to do as much as possible to ensure the strength of the stock market and a return to employment.

But the President and his cadres will be in for a tough battle on Capitol Hill, with Democrats and Republicans duking it out to control the way that stimulus should be spent.

Democrats want to send another round of stimulus checks to American households and extend the enhanced jobless benefits set to expire soon, while Republicans have called for incentives that encourage people to return to work, as well as liability protections from employers from pandemic-related lawsuits as businesses across the country re-open.

Either way, any measures from Washington will boost stock markets.

Stimulus measures have already opened the floodgates on cheap money, which is flowing into financial markets and boosting asset prices, particularly for stocks.  

And checks and unemployment benefits will help to boost sales, particularly of essential goods, adding to the bottom lines of discount retailers like Dollar Tree and Walmart, two stocks which have proved resilient in the face of the coronavirus pandemic.  

And while the market may be at risk of tanking after November’s presidential election, you can bet your bottom dollar that in the run-up to the election, the Trump administration will do everything within its power to keep markets buoyant. 

Buyers of Last Resort?

With markets behaving the way they are, retail investors can’t be faulted for wondering if now would be a good time to buy some stock of their favorite companies – but there are hidden dangers everywhere. 

In less complicated times, investors could rely on traditional matrices of rising earnings and economic growth to judge a stock’s price and prospects. 

Investors could also rely on the dependable stock buybacks as well. 

But the coronavirus has upturned traditional matrices of share valuation and all but gutted share repurchases, with companies putting a premium on preserving cash. 

According to data compiled by TrimTabs Investment Research, stock buybacks and takeovers fell to US$12 billion last month, the second-lowest level in a decade, while stock offerings exploded, pushing to a record US$94 billion. 

And where companies were once the biggest customers of their own stocks, its been hedge funds and retail investors who have emerged as steadfast buyers to fill the void. 

Trading activity among individuals has almost tripled this year, according to data from retail brokerages, compiled by Goldman Sachs. 

Cash-strapped companies from airlines to cruise companies rushed to issue new stock to shore up their balance sheets and to pay off their ongoing debt. 

And companies including Warner Music Group and ZoomInfo Technologies are taking advantage of market multiples that have rocked to a 20-year high, to conduct their IPOs. 

The result has been that the sale of stock in May was three times more than the 12-month average, according to TrimTabs Investment Research, much of which has come from hedge funds and retail investors. 

But relying on hedge funds and retail investors to soak up the excess stock of companies, is not without risk. 

While companies have been unloading stocks to hedge funds and retail investors, there is a danger that these investors will eventually reverse their stance on stocks as well, but who will they sell to? 

Now that corporate America has relinquished its role as a crucial source of price support, the market is betting that the U.S. Federal Reserve will swoop in and become that buyer of last resort should investors get jittery. 

Talk from Federal Reserve officials and other government officials that basically they will “never run out of ammunition,” has lulled investors into a false sense of security that the Fed will backstop the stock market, when really, there’s no precedent for that and would require a change to legislation governing the Federal Reserve for that to happen. 

Speaking to Bloomberg, Jerry Braakman, Chief Investment Officer at First American Trust said,

“All those things are telling you everything is not OK, and then you look at the S&P 500 – it keeps going up.” 

“The market doesn’t care about valuations. With the Fed continuing to step in, the right bet has been to bet with the Fed.” 

That much has been reflected in the S&P 500’s unrelenting rally from its March low which has defied many business fundamentals. 

The U.S. economy is heading for its worst recession in decades, with factories and stores forced to shutter in the wake of the coronavirus pandemic. 

In a quarter where corporate profits are expected to plunge 44%, the S&P 500 has climbed 21%, on course for its best return since 1975. 

And firms have been riding on the opportunity to issue more stock, at a time when companies themselves are not buying up their own stock – which may expose investors to unforeseeable shocks. 

Because the more shares are in the marketplace, ceteris paribus (all else being equal), the harder it becomes for existing shares to rise in value. 

And because we know for a fact that it’s not traditional measures of valuation that are propelling stock prices, we’re really in a space of speculative fever, which may knock out investors in unpredictable ways. 

With companies no longer soaking up their own stock and with cash balances stripped because of the coronavirus pandemic, companies won’t be there to stop stock price falls from snowballing. 

And because so much of stock is now being held in the hands of retail investors and hedge funds, panic selling is not off the cards. 

As reopening came into focus in recent weeks, investors moved out of typical sectors such as tech to bet on riskier stocks, including banks and small cap counters – companies seen as most likely to benefit from an economic rebound. 

Airlines, cruise companies and hotels which were shunned by investors at the height of the coronavirus pandemic are now starting to appear on the radar again. 

But while major American airlines spent as much as US$19 billion over the last 3 years repurchasing their own shares, airline executives, including those from Delta Airlines (-2.74%) and United Airlines (+12.50%), have committed to halting buybacks for the duration of the federal loans that they received. 

And banks such as JPMorgan Chase (+5.40%), Bank of America (+4.63%) and Citigroup (+4.92%) had already announced in March that they were suspending stock buybacks. 

To be sure, particularly for airlines and banks, buying back their own stock would be politically impossible, given the level of federal assistance they had received.

Which means that investors betting on these companies’ stocks need to know that Washington has already helped out these companies once, it’s less clear if they’ll get bailed out in the markets should their prices tank again. 

Bitcoin Back To The Grind

On Tuesday we warned that short and dramatic surges in the price of Bitcoin – when Bitcoin roared ahead in a matter of minutes to US$10,300 – ought to be treated with a degree of skepticism and restraint. 

True to form, Bitcoin’s rally was unsustained and it retraced its steps in the past two days to trade around US$9,650. 

Yesterday we noted that since Bitcoin was consolidating at US$9,500, we expected it to move broadly within a defined channel of US$9,400 and US$9,600 and that Bitcoin could potentially test US$9,700 again in the short term. 

Bitcoin did trade within the channel over the past 24 hours and made a half-hearted attempt towards US$9,700 without coming close to that level of resistance – volumes however have been significantly more pronounced. 

Yesterday the long trade we suggested would be to enter Bitcoin at US$9,500 and take profit at US$9,700 with a stop loss at US$9,400 – this trade remains open at the entry point, but still in profit. 

The short trade we suggested yesterday was to consider timing an entry at US$9,600 and shorting all the way to US$9,300 with a short cover at US$9,700 – a trade which continues to remain open and is currently out of the money.

In the immediate term, expect Bitcoin to continue trading sideways with a gradual move upwards – another run for US$9,700 remains a possibility. 

Those looking to go long on Bitcoin can consider entering at US$9,650 and selling at US$9,800 with a stop loss at US$9,600. 

Shorts can look to time an entry at around US$9,700 and short to US$9,450, with a short cover at US$9,800. 

Bitcoin is channeling upwards gradually towards US$9,700. (Source: Novum Alpha internal charting tools.)

Ethereum Expectations

Yesterday we noted that Ethereum had now consolidated around the US$235 level and was trending up slightly – always a good sign for those looking to go long. 

The long trade for Ethereum we suggested was an entry at US$235 and taking profit at US$242, with a stop loss at US$230 – this trade was profitable. 

Shorting Ethereum we noted would require waiting for entry at US$242 and shorting all the way down to US$230, with a short cover at US$250 – this trade remains open and is in danger of being stopped out. 

Looking ahead, expect some strength for Ethereum. 

Those looking to go long, can consider entry at US$244 and taking profit closer US$250, with a stop loss at US$242. 

Shorting Ethereum will require timing an entry at US$247 and shorting all the way down to US$240 and a short cover at US$252. 

Ethereum is making a gradual ascent to US$250 with consolidation at these levels suggesting that it ought to at least test the level of resistance. 

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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