I hope you’re having a great weekend so far, because the markets had a great Friday, to cap off what would otherwise have been a roller-coaster weekend.
Stocks in the U.S rebounded from their biggest rout in 12 weeks as investors “bought the dip.”
Once again, the industries worst hit by the coronavirus pandemic came back in vogue as stocks on the S&P 500 (+1.31%) were led by airlines and cruise operators. Real estate, financial services and energy companies also made a comeback on bargain hunting.
With top officials at U.S. Centers for Disease Control and Prevention warning that states and cities might have to reinstate shutdowns if coronavirus cases surge dramatically, American stock indices still finished lower overall for the week.
U.S. Treasuries fell slightly on Friday as the 10-year U.S. Treasury yield slipped to 0.704% from 0.688% on Thursday – yields typically rise as demand and prices for government bonds fall.
Oil and gold were flat, with benchmark WTI Crude Oil (Nymex) (-0.22%) trading at US$36.26 on Friday and Comex Gold (-0.14%) at US$1,737.30.
Bitcoin traded within a channel for the most part of the weekend, trending sidewards on decreased volumes as the majority of traders reverted back to bot-led trading and is currently at US$9,440 at 0130 GMT.
Looking towards the week ahead, investors can brace themselves for greater volatility and the coronavirus pandemic which for a week at least had failed to make news above the fold is now starting to come back again into sharp focus.
While you enjoy the rest of your Sunday, hang tight because Monday may be a rough ride, so if you’ve got a couple of steaks, throw them on the grill, it’s unclear if we’re all headed back indoors again.
Catching That Second Wave
Experienced surfers know that if they get wiped out by a first wave and are stuck under, they need to wait it out under the water before resurfacing – come up too early in panic and you’ll just get crashed on by another body of water and risk drowning – but timing is everything.
So why is it that when the world hunkered down for all these months, we rose up only to get another gulp of the coronavirus?
A second wave of coronavirus cases is emerging in the U.S. raising alarm as new infections are pushing the overall number of cases past 2 million.
Florida reported 8,553 new cases this week – the most of any 7-day period, while Texas reported the highest 1-ttoal of 2,504 new coronavirus cases since the pandemic started.
And hospitalizations in California are at their highest since mid-May, rise in 9 out of the past 10 days.
Headlines such as these are wont to make investors panic, but they obscure more detailed analysis which show that the overall coronvirus case count rose just 1% this week, the smallest increase since March and on the back of heightened testing and greater awareness of the pandemic.
Though the outbreaks have come weeks into states across America reopening, it’s not at all clear if they’re linked to increase economic activity – and that’s what should matter the most for investors.
Right now stock markets are betting on a resumption of economic activity, sooner rather than later.
In the weeks since the U.S. has reopened, there have been mass gatherings of Americans protesting police brutality in the wake of the killing of George Floyd, an African American, at the hands of white police officers in Minneapolis.
Those protests however have not seen a resurgence in coronvirus cases – but noticeably, a large number of protesters also wear masks, even if social distancing is not observed.
More interestingly, Georgia, where hair salons, tattoo parlors and gyms have been operating for almost 6 weeks, coronavirus cases have plateaued.
And there are variations even within states themselves – San Francisco, California saw zero new cases for 3 consecutive days this week, while Los Angeles County (which includes Los Angeles and its surrounding areas) reported well over half of the state’s new cases.
After a nationwide shutdown that arrested the spread of the coronavirus across America, rising cases had been expected once restrictions were loosened – a trend that has been observed across 22 states in recent weeks, but significantly, the rates are steady and slow.
In this regard, four states in particular stand out like sore thumbs in terms of case spikes after reopening – Arizona, California, Florida and Texas.
But in states and regions which saw spikes after re-opening a trend emerged which showed that mask-wearing and social distancing were abandoned.
The reality is that while the U.S. has long been bracing for another wave of infections, future outbreaks are likely to take on a different character as social distancing and mask-wearing are likely to have staying power even as economies reopen.
Economically-sensitive stocks such as airlines and cruise operators rebounded on optimism of the economy’s reopening but we would warn that it is still early days to get in on that rally.
Shares of American Airlines (+16.41%) and United Airlines (+19.03%) were all up over 15% on Friday, on reports of improving demand, while Delta Airlines (-3.78%) was down on concerns over the S&P Global’s BB rating (below investment grade) for Delta’s proposed issuance of US$1 billion of senior unsecured notes.
Concerns over airline debt will continue to plague not just Delta, but the entire industry for the coming decade. Delta is the first to borrow, on the back of optimism over airline recoveries, but it certainly won’t be the last.
It’s impossible to say at this stage what the long term implication on air travel will be as a result of the coronavirus pandemic, and given the low-margin business of airlines, their exposure to myriad macro factors not within their control, including geopolitical tensions and fuel prices, you may fly on airlines, but why would you want to own one?
Volatility and Rotten Fruit
Last week ended with a choppy trading session, where U.S. stocks recovered some lost ground on Friday after suffering their worst rout since March and there’s no sign that the volatility is likely to end.
The CBoE Volatility Index or “VIX,” a popular gauge of stock market volatility, gained 47% this week – its biggest 1-week increase since February.
Before Thursday’s plunge, U.S. stocks had rallied in recent weeks to erase most of the year’s losses.
The tech-laden Nasdaq Composite even hit new records, closing above 10,000 points for the first time ever and reflecting the resilience of big technology stocks like Apple (+0.86%) and Microsoft (+0.79%).
We continue to remain unconvinced on Apple – the company recently announced that it would be making its own chips for its Mac computers for the first time 36 years, moving away from relying on Intel (-0.62%) chips.
Apple currently has about 10% of the personal computer market.
But after ignoring its personal computer division for almost a decade since the passing of Apple founder Steve Jobs, Apple has allowed competitors to catch up and surpass it in this important division.
Personal computers or PCs had long been written off as the world became increasingly more mobile – with laptops coming to the fore.
At airline lounges and coffee shops across the world the white glow of an Apple laptop was the badge of being “creative,” “cool,” “hip” or even “woke” – pick your adjective.
But that cache and free advertising generated by Apple’s unwitting roving ambassadors has since been erased as airports and coffeeshops across the globe have had to lock up as the world went into lockdown.
Today, it’s impossible to tell if you’re using a Mac or a PC on a Zoom Video Communications (-1.15%) call.
And with more of the world starting to work from home – a trend that has only been accelerated by the coronavirus pandemic – the investment in desktop computers will almost certainly favor PCs over Macs.
For one, PCs can be upgraded by users themselves.
PC feels a bit sluggish? Just snap on some additional sticks of RAM, done.
Try doing that with your Mac.
And more importantly, Windows-based laptops have been mimicking Apple’s sexy design form factor for years, so much so that now some of the latest laptop offerings from Razer (+4.51%) and Dell (+0.67%) look suspiciously like they could have been designed in Cupertino, instead of Irvine or Round Rock.
Apple has also ignored its biggest brand evangelists for almost a decade – creatives and designers who decry the incremental hardware updates and spiraling prices for Macs.
PC makers on the other hand have been offering more powerful graphics cards, better technical specs with the same aesthetic as Macs at a far lower price.
A top of the line Windows-based laptop today (that looks suspiciously like a Mac) will set you back about US$3,000. The equivalent from Apple? Try closer to US$6,700.
Former Mac evangelists have confessed to owning a cheaper, entry-level Mac to take to the coffee shop, but working off a PC from the privacy of their homes and offices.
And ever since Apple abandoned its use of Nvidia (+1.55%) graphics cards, many photo and video professionals have had no choice but to abandon their Macs, which use AMD graphics cards, in favor of PCs.
Nvidia has overtaken AMD (+1.27%) in graphics processing prowess, with the former now leaps and bounds ahead of AMD in terms of technology, in particular with its recent release of its flagship A100 chips.
But Apple’s Macs only come with AMD graphics processors, despite many video processing programs only working with Nvidia’s CUDA technology – meaning that the very people Apple depends on to be brand evangelists have been left, literally, out of frame.
Which is why we’re particularly skeptical about Apple’s push to make its own chips.
For the uninitiated, Apple may be great at design, but designing and manufacturing chips is an entirely different kettle of fish.
The reason why the world essentially has only two major chipmakers, AMD and Intel? Because it is an extremely difficult business.
It’s the same reason why the world only has two major commercial aircraft manufacturers, Boeing (+11.48%) and Airbus (-0.16%).
Decades’ worth of research and development eke out only marginal improvements in chip design and performance.
Over the last decade, AMD and Intel, which have vast troves of experience in chip design and manufacture, have been duking it out to see who could squeeze ever more transistors per square inch, to increase speeds (and performance) before they finally hit a wall.
Today, your average CPU comes out of the box at 3.6 Mhz, roughly what it could do about a decade ago – but the difference, and this is a big one – Intel chips (as well as AMD chips) can be overclocked using software tools and cooling equipment (preferably liquid) to eke out more performance.
But to get that level of overclocking performance – you need to make sure that your PC is customizable to begin with – you should be able to open it and tinker with it.
Try doing that with a US$50,000 Mac that looks like a cheese grater.
And that leads us to our final point – that Apple’s foray into chip making is the final step in a long road similar to that of Icarus, who flew too close to the sun only to see his wings melt away.
Chipmaking is an insanely difficult business and that’s why the companies that are best at it only do one thing – design and manufacture chips.
Does Intel try to design and make its own laptops? No. Seen an AMD smartphone recently? Nope.
That’s because chipmaking is an incredibly expensive and single-minded endeavor – there’s no room for distractions.
Granted Apple has an enormous war chest with which to enter into the fray – but the bigger question is, is it worth it?
You don’t see McDonald’s (-0.16%) try and build airliners or Boeing try to start flipping burgers – companies stick to what they have expertise in.
Apple’s move into chipmaking has been touted as improving “control” over its ecosystem and to allow its own devices within its walled garden of Apple products to work more closely with one another.
That “walled garden” mentality is starting to look a little long in the tooth and doesn’t age well with the move towards openness, integration and a celebration of diversity.
At some stage, consumers are going to ask themselves whether it’s worth it to pay a premium for Apple’s products especially if they don’t sync well or play together with the myriad other products we own that don’t bear the fruit logo.
Investors should ask themselves whether they should be paying a premium for stock with the fruit logo too.
Bitcoin Blahs Over The Weekend
Going into the weekend, Bitcoin trading has pretty much reverted back to its bot-led patterns and we noted Friday that it was inching upwards with strong support above US$9,200.
We also did not anticipate any fall below US$9,000 at the time.
The long trade we suggested for Bitcoin over the weekend was to get in around US$9,350 and sell at US$9,500 with a smaller, more speculative exit at US$9,700 – with a stop loss at US$9,250 – a trade that was in the money and the start of a happy weekend.
The short we suggested required more Bitcoin movement which was not forthcoming.
We suggested shorting Bitcoin if a position could be entered into at all, by waiting for an entry at US$9,700 and shorting all the way down to US$9,400 with a short cover at US$9,800 – this trade never materialized.
In the week ahead, expect Bitcoin to trade range bound for now, broadly between US$9,350 and US$9,500.
Those looking to go long on Bitcoin can consider entering at around US$9,400 and selling at US$9,550 with a stop loss at US$9,350.
Shorts for Bitcoin can time an entry closer to US$9,500 and short to US$9,400 with a short cover at US$9,550.
Bitcoin is likely to move sideways for now, some macro factors may play in over the week, particularly pay attention to a sudden surge in coronavirus cases over the weekend, which could provide an unexpected boost for Bitcoin.
On Friday, we noted that Ethereum was likely to follow the movements of Bitcoin and that has proved enduring. Ethereum more or less tracked the same sideways channel moving into the weekend, trading rangebound between US$235 and US$239, more or less within a similar channel in terms of magnitude as Bitcoin.
The weekend trade we suggested was that those looking to go long on Ethereum could consider getting in at US$233 and exiting at US$236 if Ethereum takes a bullish turn, with a stop loss at US$233 – this trade was in the money.
Shorting Ethereum we suggested needed to time an entry at US$236 and short to US$230 with a short cover at US$238 – this trade was stopped out.
Expect Ethereum to continue tracking sideways just like Bitcoin.
If you’re looking to go long on Ethereum, consider an entry at US$237 and selling closer to US$240 with a stop loss at US$235.
Shorts for Ethereum can wait till it tests US$240 again and short to US$235 with a short cover at US$232.
Ethereum is making a smallish ascent in line with Bitcoin and again, much of its movements in the coming week will depend on how Bitcoin fares.
Novum Digital Asset Alpha is a digital asset quantitative trading firm.
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