Novum Alpha – Daily Analysis 14 December 2020 (10-Minute Read)

A magnificent Monday to you and I hope you’re having a brilliant start to the week!

In brief (TL:DR)

  • U.S. stocks ended the week a mixed bag with the S&P 500 (-0.13%) and tech-centric Nasdaq Composite (-0.23%) down slightly, while the blue-chip Dow Jones Industrial Average (+0.16%) was up marginally.  
  • U.S. stocks look set to rise this week on the possibility of fresh stimulus out of Congress. 
  • Asian stocks kicked off the week mostly higher on the prospect that stimulus from Washington might provide an early Christmas 
  • U.S. 10-year Treasury yields rose one basis point to 0.910% at the end of last week but look set to rise further on the back of stimulus and increased risk appetite (yields fall when bond prices rise). 
  • The dollar slipped in Asian trading as investors rotated into emerging market currencies and risk assets. 
  • Oil rose slightly with January 2021 contracts for WTI Crude Oil (Nymex) (+0.15%) at US$46.64 from US$46.57 as sentiment on stimulus improved. 
  • February 2021 contracts for Gold (Comex) (-0.29%) fell slightly to US$1,838.30 from US$1,843.60 with gold expected to see further weakness this week. 
  • Bitcoin (+1.41%) reversed losses to rise to US$19,019 as flows into exchanges slowed (inflows typically suggest that investors are looking to sell Bitcoin in anticipation of price falls). 

In today’s issue…

  1. What does Tesla have in common with Bitcoin?
  2. IPO Fever an Unexpected Side Effect of the Coronavirus 
  3. Invested in Bitcoin? No Need to Keep it a Secret Anymore 

Market Overview

When people talk, there’s always hope. Whether it’s couples agreeing to see a marriage counselor or contractual negotiations, as long as the lines of communication remain open, there’s always hope. 
Or at least that’s what investors are banking on as markets look to be buoyed this week on extended bipartisan negotiations for a fresh stimulus package in Washington as well as an extended round of talks between leaders in Europe over Brexit. 
The British pound rose sharply as Brexit negotiations were extended past their Sunday deadline and U.S. stock futures point to a positive open to the week on fresh stimulus prospects.  
In Asia, markets entered the week mainly up with Tokyo’s Nikkei 225 (+0.63%), Sydney’s ASX 200 (+0.47%) and Hong Kong’s Hang Seng Index (+0.09%) higher, while Seoul’s KOSPI (-0.06%) was down slightly. 

1. What does Tesla have in common with Bitcoin?

  • Both Tesla (-2.72%) and Bitcoin have prices more reflective of investment narratives than balance sheets 
  • Being an unconstrained asset, Bitcoin is unbounded and unburdened by profitability, whereas Tesla will ultimately be scrutinized on that level 
As an unconstrained asset that lends itself to several narratives, Bitcoin enjoys the privilege of being all things to all investors – whether as a hedge against inflation or as a store of value, a medium of exchange or portfolio protection against government profligacy.
But who would have thought that Tesla stock would enjoy that same privilege?
Although Tesla is an electric vehicle maker, it is valued like a high-growth tech stock, with a stock price many times that of earnings.
And this month Tesla thumbed its nose at naysayers by entering that most exclusive club of American companies, by joining the S&P 500 index, achieving the veneer of blue-chip status.
But like a chimera, what exactly is Tesla? An automaker or a technology company and consequently, how should it be valued?
Analysts at Goldman Sachs (-1.80%) think that the answer is closer to US$780 while JPMorgan Chase (-0.59%) believes it is somewhere around US$90 – but they can’t both be right, at least not at the same time.
So far, skeptics who had predicted the downfall of Tesla have been licking their wounds and bled dry by loss-making short positions on the electric vehicle maker.
With profits of five consecutive quarters and a 7-fold increase in share price this year alone, Tesla has returned to investors some 18,000% since its IPO in 2010.
Yet investors who have held on to Tesla stock during this entire time have paid a high emotional price, enduring production troubles, delivery missteps, mounting losses and an erratic CEO whose tweets have led to volatile swings in its stock price.
But now that Tesla is a component stock of the S&P 500, scrutiny of the firm’s valuation will intensify, with investors struggling to make sense of how an electric automaker is valued like a tech firm despite vastly different business models.
Tesla now trades at some 1,000 times earnings, compared with General Motors, that trades at just 14 times.
And while Tesla aims to deliver just 500,000 vehicles this year, it is worth more than General Motors (-2.22%) (7.7 million vehicles in 2019), Ford (-1.10%) (5.4 million vehicles in 2019), Toyota (+5.54%) (8.8 million vehicles in 2019), Volkswagen (-2.63%) (10.8 million vehicles in 2019) and BMW (-1.19%) (2.5 million vehicles in 2019) combined!
Tesla CEO Elon Musk has already made clear that the automaker’s shares are “too high” and that the stock can “get crushed like a souffle under a sledgehammer” if investors at any point conclude that it cannot achieve the profits they are expecting it to deliver in the future.
While Bitcoin and Tesla both enjoy the benefit of feeding into various narratives which both drive up their prices, only the latter needs to be profitable at some point, and therein lies the real danger for investors who believe that shares of the electric automaker can only go up. 

2. IPO Fever an Unexpected Side Effect of the Coronavirus

  • Captive retail investors kept home by pandemic lockdowns have provided ready fuel for rocket IPOs 
  • Whether such IPO fervor is sustainable is anyone’s guess especially when valuations are near dotcom bubble levels and spreading to companies which are still affected by the pandemic, like Airbnb (-3.77%)
In a year when international travel came to a standstill and hotels lay empty, somehow, by the end of its IPO trading day, Airbnb, an online marketplace for vacation rentals of private homes, was worth US$86 billion, more than Goldman Sachs (-1.80%), the bank that ushered in its IPO.
Not bad for a firm that owns no rooms, operates no hotels, and bears no responsibility for what happens on the premises leased out.
The scramble for Airbnb shares mirrors the mad dash for food delivery firm DoorDash (-5.91%), which had its IPO just a week earlier and contrast sharply with the indifferent reception to last year’s Uber (-3.16%) and Lyft (-2.58%) IPOs.
Whether it is because pandemic-induced lockdowns have made stock traders of us all, or investors are increasingly betting on technology to lift the global economy out of the doldrums, tech stocks haven’t looked this frothy since the dotcom bubble at the turn of the century.
Retail investors using zero-fee trading apps such as Robinhood have supercharged the US$42 trillion stock market with a push into equities not seen since before the Nasdaq crashed at the height of the dotcom bubble in 2000.
Companies have been taking advantage of the seemingly insatiable retail appetite for IPOs, to raise a record US$149 billion so far this year, including Airbnb.
But while IPOs such as Snowflake (-5.18%), a cloud computing firm, as well as DoorDash, a food delivery company played strongly into pandemic investment themes, as more companies move their operations into the cloud, and the trend towards food delivery appears durable, Airbnb, which allows users to rent their homes to travelers, has seen its business ravaged by the pandemic.
But the arrival of effective coronavirus vaccines has led some investors to bet that those firms most badly hit by the pandemic, such as travel and hospitality, could see their prospects improve. 
And investors are betting that Airbnb, which combines technology with those improved prospects, should do well as a result.
Regardless, some degree of caution is advisable.
As coronavirus vaccines become more widely available, and entertainment and leisure options beyond stock trading become accessible once again, the fickle retail investors who chased up IPO prices may no longer serve as a captive audience.
And as “value” stocks come back in play, greater scrutiny over valuations is inevitable, which may lead to pullbacks in many of these IPOs.
Investors who may have caught a case of the IPO fever may just want to put an ice pack on some of their IPO investment assumptions.  

3. Invested in Bitcoin? No Need to Keep it a Secret Anymore

  • Wall Street and other high profile investors are embracing Bitcoin and cryptocurrencies in a more open way 
  • Stigma previously attached to investing in digital assets has all but disappeared 
Just three years ago, investment bankers and money managers who had personally invested in Bitcoin were unlikely to speak openly about it, for fear of being ridiculed by colleagues or censured by bosses who did not want to tarnish the reputations of their financial institutions.
Fast forward to 2020 and an early investment in Bitcoin is not just respectable, it has been seen as a mark of tremendous foresight.
With Bitcoin surging some 270% since its low in March, institutional investors from pension funds to family offices have either shifted some of their portfolios into digital assets or are looking to do so.
And while some institutional investors had already bought into cryptocurrencies years ago, 2020 has been a year when many of them have come out to declare their investments.
Wall Street legends including billionaire hedge fund managers Stanley Druckenmiller and Paul Tudor Jones have publicly endorsed buying Bitcoin, with Tudor Jones revealing that he has up to 3% of his assets in the cryptocurrency.
And last month, when influential money manager Rick Rieder went on CNBC declaring that Bitcoin “is here to stay,” more than 874,000 viewers watched the clip on Twitter, far more than his segments on Covid-19 or monetary policy.
Bitcoin has risen by over 170% this year alone and has been the best-performing asset class of a pandemic year, establishing a fresh all-time-high last month and being fed by fears that major central bank quantitative easing and government fiscal stimulus will debase currencies.
The breakout performance of Bitcoin has attracted some of Wall Street’s biggest money managers including Fidelity Investments, which launched a Bitcoin fund over the summer.
Some firms have taken advantage of the renewed interest in Bitcoin to drive their share prices, including MicroStrategy (-1.52%), which has seen its share price soar after announcing that it had invested a sizeable chunk of its treasury into Bitcoin.
And Bitcoin’s gains have helped some investors make up for losses elsewhere, including Mexico’s third richest person, media billionaire Ricardo Salinas Pliego, who tweeted last month that he had invested 10% of his liquid assets in Bitcoin.
As shares in Pliego’s biggest listed asset, conglomerate Grupo Elektra SAB (+0.58%), have slumped more than 10% this year, and those in the local television network he and his family control have dropped almost 60%, the value of his Bitcoin holdings have soared, offsetting some of those losses.
The last time Bitcoin skyrocketed in 2017, many high-profile and wealthy investors largely stayed on the sidelines, and those who did invest in the cryptocurrency, often did so discreetly.
Back then, Bitcoin was derided as a tool used primarily by criminals and speculators and ultimately worthless, but developments this year have led to what some are terming “institutional FOMO,” with a growing number of investors jostling to announce their investments in the nascent asset class.

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

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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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