Novum Digital Asset Alpha – Daily Analysis 30 June 2020 (8-Minute Read)

Congratulations, we’ve made it to the last day of the month!

And what a month it’s been!

More changeable than Chicago’s weather, markets have been all over the place this month, swinging between optimism to bouts of distress, could investors have been better off not watching their portfolios to begin with? 

In brief (TL:DR)

  • U.S. stocks roared ahead on Monday, clearing off some of the losses clocked last Friday, with the blue-chip Dow Jones Industrial Average (+2.32%) gaining 580.25 points, while the S&P 500 (+1.47%) and tech-heavy Nasdaq Composite (+1.47%) also clawed back lost ground. 
  • Asian stocks rose in the pre-lunch trading session, rounding out their best quarter since 2009.  
  • Chinese industrial companies saw their first monthly increase in profits since November. 
  • U.S. 10-year Treasury Bills were unchanged at 0.636% from last Friday, signaling that investors were not yet prepared to rotate fully into risk assets.  
  • The dollar remained constant, with investors not buying fully into the recovery story as yet. 
  • Crude oil was volatile with WTI Crude Oil (Nymex) (-0.68%) trading at US$39.43, clearing the US$39 level of resistance on increasing optimism of economic recovery. 
  • Gold (Comex) (+0.07%) rose slightly to US$1,782.40 as investors continued to look for hedges against inflation. 
  • Bitcoin (+0.45%) continued to recover, trading just below US$9,200 (GMT 0200) as optimism in stocks and other risk assets returned to buoy cryptocurrency markets.

In today’s issue…

  1. The Fed Bet on These Stocks – Should You? 
  2. Bitcoin Needs To Clear US$9,400 To Head Up Again 

Market Overview

Asian stocks bounced back strongly from Monday’s bloodbath during the pre-lunch trading session with Tokyo’s Nikkei 225 (+1.87%), Seoul’s KOSPI (+1.46%), Sydney’s ASX 200 (+1.32%) and Hong Kong’s Hang Seng Index (+0.92%) all up strongly.

Optimism over economic recovery has continued to trump (no pun intended) concerns over an increase in U.S. coronavirus cases, in what is increasingly being seen as a problem for Americas’s sunbelt and not the rest of the world. 

Gains in Hong Kong’s Hang Seng Index were more muted given lingering concerns over increased tensions between the U.S. and China over the latter’s new national security laws for the financial hub. 

Moving into Tuesday, there was plenty of good news for investors to feed off of, with stronger-than-forecast U.S. pending home sales figures released on Monday, and China reporting on Tuesday improving purchasing-manager indices for both manufacturing and services, which suggest that at least for China, the recovery is broad-based. 

And with the monthly U.S. jobs report due out Thursday, July may just kick off with a bang for stocks. 

For good measure, U.S. Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Steven Mnuchin are due to testify before Congress on Tuesday – look out for comments which hint on the state of the American economy, and the likelihood of another round of stimulus measures.

1. The Fed Bet on These Stocks – Should You?

  • The U.S. Federal Reserve bought US$428 million worth of corporate bonds though mid-June, in companies like Walmart (+0.63%), AT&T (+2.85%), and United Health Group (+1.00%)
  • The bond market used by major firms is getting billions of dollars from the Fed, but the Fed’s main street lending program for smaller companies has yet to make a single loan

“For to every one who has will more be given, and he will have abundance, but from him who has not, even what he has will be taken away.” 

— Matthew 25:29

And that seems to be the story when it comes to the Fed’s lending program, which has been doled out first and foremost to America’s largest and most well-capitalized companies, sending the blue-chip Dow Jones Industrial Average roaring ahead of the S&P 500 and the Nasdaq Composite yesterday. 

1.1 Walmart

Walmart has shown extraordinary resilience throughout the lockdown, being one of a handful of stores that was allowed to remain open and with curbside pickup as well as a developing online store assisting in sales at America’s largest retailer, ensuring robust revenues. 

Digital sales at Walmart soared 74% thanks to ultra-fast fulfillment options like same-day delivery and curbside pickup, and the firm generated US$7 billion in operating cashflow, double its prior-year result. 

Free cashflow, an important measure of a firm’s ability to weather tough times, was also up at Walmart, rising by over US$4 billion in the first quarter of 2020 to US$5.3 billion, during the coronavirus pandemic! 

But shareholders can’t expect that Walmart’s double-digit sales growth will continue once lockdown restrictions are lifted and sales growth is likely to return to its normal level of single percentage points. 

At US$119.06, and with a price-to-earnings ratio of 24, Walmart’s stock is expensive by conventional measures, but because of unprecedented fiscal and monetary policy measures, those conventional measures are less useful in assessing Walmart’s growth prospects. 

Instead, consider that in terms of Walmart’s e-commerce potential, it still has plenty of ways to grow, especially for online groceries, with a clear path to grow earnings by as much as 20% in the next 3-4 years, something that is currently factored into the stock price. 

1.2 AT&T

For a company that seems to be the butt of so many jokes, the amount of debt that AT&T is carrying is no joking matter. 

With revenues of US$42.8 billion, the wireless and media giant is carrying almost US$180.4 billion in debt (some has been paid off) and so the Fed’s soft loans could not have come at a better time. 

Most of the debt has been from costly acquisitions unrelated to AT&T’s core wireless business, spending US$49 billion in 2015 for DirectTV and another US$85 billion for Time Warner in 2018 – both investments have not paid off in recent times. 

DirectTV has lost customers steadily as streaming took hold and customers cut cable cords, with the division losing over 4 million subscribers in 2019, and 1 million in the first quarter of 2020 alone. 

At a time when Netflix (+0.87%) continues to dominate the streaming wars and other competitors are offering compelling alternatives, AT&T rolled out its own AT&T TV Now, and AT&T TV service which wraps cable TV’s multiple package options with live programming, including for sporting events in March – the worst possible time as the coronavirus pandemic caused the cancellation of live sporting events. 

The pandemic has also meant that Time Warner (now called WarnerMedia) suffered the loss of advertising revenue from the cancellation of live sporting events, with a 12.2% year-on-year decline in first quarter revenue dropping a billion dollars from 2019’s US$8.4 billion to US$7.4 billion. 

But despite the challenges, AT&T’s core wireless business remains resilient, with first quarter revenue up 0.2% year-on-year. 

An increase in AT&T’s postpaid subscribers was coupled with an increase in average spend per user as scores of existing subscribers upgraded to more expensive unlimited plans.

And it wasn’t all doom and gloom at WarnerMedia either, with its HBO division bringing in US$1.5 billion in the first quarter of 2020. 

Once the broader economy recovers, WarnerMedia can also expect to recoup its lost advertising and theater revenue and live sporting events which are likely to resume will see a bump in the group’s earnings. 

AT&T also expects to roll out 5G coverage by the end of summer, with customers who want to access 5G needing to upgrade their mobile devices and new revenues for the company can be expected. 

At US$29.91, AT&T is trading near its 5-year low and with the firm committed to its dividend, at around 7%, AT&T is an attractive buy, especially after America eventually opens up. 

1.3 United Health Group

At a time when recovery from the coronavirus pandemic seems somewhat uncertain, United Health Group (“UHG”) can be seen as a defensive play. 

The first thing to know is that UHG pays a quarterly dividend.

In 2019, investors received US$3.93 billion in dividends or the equivalent of $4.14 per share.

The annual dividend payout in 2020 should be US$4.32 per share and based on its current stock price of approximately $289.76 per share, the dividend yields less than 1.5%.

But, UHG also spent US$5.5 billion to repurchase 22.4 million shares in 2019, which equals roughly US$246 per share. At a time when banks have been restricted by the Fed from buying back shares, any company that still possesses the ability to do so should be worth considering. 

In 2018, the board of directors authorized the company to purchase up to 100 million shares without any time constraints. UHG still has 72 million shares available under this program. 

And while this type of stock buy back supports UHG’s stock, it may also artificially inflate the stock price and cannot last indefinitely.

Given that stocks are expected to rise in July and in 2021, it’s likely that UHG will keep buying stock throughout the rest of this year. 

Finally, UHG which owns and manages organized health systems both in the U.S. and internationally, is well placed as the world starts to refocus on healthcare infrastructure and systems, as well as protecting employees, which UHG serves through the administration of its benefit programs. 

Is UHG expensive? By all conventional measures, yes. But these are not conventional times, nor are conventional tools of much use to be assessing stocks anymore. 

More so than ever before, questions surrounding the economy and healthcare costs will continue to be pervasive and healthcare reform rhetoric will likely be heard throughout the coming U.S. election cycle, but over the longer term, UHG is likely to continue to do well.

2. Bitcoin Needs To Clear US$9,400 to Head Up Again

  • Bitcoin trading rangebound between US$9,100 and US$9,200 
  • Optimism in stocks is keeping Bitcoin buoyant for now 
  • Selling pressure may be lessening for now

Bitcoin bulls may want to breathe a collective sigh of relief as Bitcoin balances in cryptocurrency exchanges have now fallen to a 13-month low. Exchange balances tend to run higher when miners or in the case of the PlusToken scam, criminals, prepare to cash out their ill-gotten cryptocurrencies. 

According to data from on-chain analysis resource CryptoQuant, mining pool outflows calmed toward the end of last week after a spike on 24 June 2020, which sent Bitcoin prices to as low as US$8,800 at one point. 

Given that the correlation between Bitcoin and stocks has been uncanny of late, as much as 95% in recent months, movements in the S&P 500 have a profound impact on the appetite for Bitcoin.

And while Bitcoin bulls are no doubt looking for their favorite cryptocurrency to head towards US$10,000, the 200-day moving average needs to finish above US$9,385 for any sincere attempt at US$10,000 and that could take awhile. 

Trading Bitcoin Today

Yesterday we suggested that those looking to go long on Bitcoin and trade the intraday volatility could consider entering at US$9,100 and taking profit at US$9,180 with a stop loss at US$9,060 – this trade was in the money. 

The short for Bitcoin yesterday was to wait till it ran to US$9,180 and then short to US$9,000, with a short cover at US$9,220 – this trade was unfortunately stopped out.  

In the immediate term, don’t expect Bitcoin to turn bullish overnight. 

Trading for the next 24 hours, Bitcoin can be expected to bounce between US$9,050 and US$9,240. 

Longs for Bitcoin can wait till it ducks to US$9,080 and sell at US$9,200 with a stop loss at US$9,000. 

A Bitcoin short could wait till it tries for US$9,200 and take profit at US$9,100 with a short cover at US$9,240. 

Trading Ethereum Today

Ethereum has struggled to clear the resistance at US$230 and currently trades around US$226 (GMT 0530), making it likely to stay rangebound over the next 24 hours. 

Yesterday the long for Ethereum we suggested was to get in at US$224.50 and sell at US$227 with a stop loss at US$224 – a trade that was in the money.  

The short for Ethereum we suggested yesterday was to wait till it made another run towards US$227, short from there to take profit at US$224 with a short cover at US$228 – this trade was stopped out. 

Looking ahead, Ethereum is likely to trade within a range between US$225 and US$227. 

Longs for Ethereum can get in at US$226 and look to cash out at US$228 with a stop loss at US$225.50. 

Shorts for Ethereum can get in at US$228 and short to US$225.50 with a short cover at US$229.50.

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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