A terrific Thursday to you as America turns the page on the Trump administration and ushers in a new era of politics (or more of the “old same” depending on your perspective) with Joseph R. Biden Junior sworn in as President of the United States of America.
In brief (TL:DR)
- U.S. stocks rose with the S&P 500 (+1.39%), tech-centric Nasdaq Composite (+1.97%) and blue-chip Dow Jones Industrial Average (+0.83%) all higher as Biden ascends the presidency and on expectations of generous fiscal stimulus from Washington.
- Asian stocks were mostly higher in the morning trading session on Thursday as investors were fueled by the same bullish sentiment evidenced on Wall Street.
- U.S. 10-year Treasury yields held at 1.08% despite a rise in risk appetite, suggesting that the demand for fixed income and U.S. Federal Reserve quantitative easing will limit short term yield spikes (yields rise when bond prices fall).
- The dollar continued to weaken on expectations of fiscal stimulus.
- Oil advanced with March 2021 contracts for WTI Crude Oil (Nymex) (+0.49%) up at US$53.24 from US$52.98 on a weaker dollar and expectations of fiscal spending.
- Gold rose with February 2021 contracts for Gold (Comex) (+0.24%) at US$1,844.70 from US$1,840.20 as the dollar dipped.
- Bitcoin (-0.90%) fell to US$36,297 but remains firmer as it drifts sideways and with inflows into exchanges just ahead of outflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices).
In today’s issue…
- Why Are Hong Kong Stocks So Hot?
- Airlines Are Burning More Cash Than Fuel
- So you want to become a Bitcoin Day Trader?
1. Why Are Hong Kong Stocks So Hot?
- Flood of mainland Chinese investors awash with cash but with limited options are buoying Hong Kong stocks higher
- Uncertain if rally remains durable, with Beijing keen to use Hong Kong as an alternative capital fundraising base to New York, especially for Chinese firms, but current valuations remain high
2. Airlines Are Burning More Cash Than Fuel
- Reversal into value stocks such as airlines papers over the staggering debt burdens that they will need to service for decades to come
- Sudden spike in interest rates could undermine airline profitability and hinder their ability to service ever-increasing debt burdens that serve as a drag on recovery
The last quarter of 2020 saw a rise in optimism that fueled a rally in languishing airline stocks, with coronavirus vaccines and Joe Biden winning the U.S. presidential election playing into a rotation into so-called value stocks.
But there’s a reason that airline stocks are cheap and ought to remain so for some time to come – their massive debt burdens.
Even as more Americans have taken to the skies during the Thanksgiving and Christmas holiday periods, despite a raging pandemic, iconic airlines such as United Airlines (+0.96%) are struggling to stem the bleed from their debt overhangs.
In the last quarter of 2020, United Airlines burned through US$33 million a day, compared with US$25 million in the third quarter, the bulk of which came from servicing debt repayments and paying severance to employees, which more than doubled from US$4 million to US$10 million a day.
And while U.S. lawmakers approved a further US$15 billion in aid for the battered airline industry, that must be shared amongst all the U.S. airlines and will likely not be enough.
United Airlines lost US$7.1 billion for the whole of last year, with US$1.9 billion or 26.8% of those losses in the last quarter, despite a spike in holiday travel and on revenue of US$3.4 billion.
To be sure, airlines, not just in the U.S., but across the globe, are cutting costs, with the issue right now revenue, or the lack of it, the main drag on prospects.
United Airlines CEO Scott Kirby has conceded that the coronavirus pandemic “has changed United Airlines forever” and pledged to make “structural reductions” that would make it “more profitable than ever.”
And that may be the case as well for airlines across the globe.
With work-from-home and video conferencing proving to be durable pandemic-induced work practices, companies are looking at making some of these changes permanent.
Employees are growing accustomed to working remotely and the cost and carbon footprint of business travel has become increasingly hard to justify.
While a return of leisure travel can be expected when the pandemic gets under control, the size of the business-related travel market, the most lucrative sector for full-service airlines, may have shrunk permanently.
And while interest rates are still near zero at the moment, signs of an economic recovery and rising bond yields will mean that airlines will have to service larger debt repayments, even as revenue is squeezed.
As the pandemic rages in many parts of the world, people are not taking flight any time soon, nor are airline stocks.
3. So you want to become a Bitcoin Day Trader?
- Volatile nature of Bitcoin, which is driven by narrative, lends itself well to momentum trading
- Trying to call highs and lows for Bitcoin is far more challenging than trying to trade with the trend using momentum trading
Novum Digital Asset Alpha is a digital asset quantitative trading firm.
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