On Feb 2, Pennsylvania’s most famous groundhog emerges from his burrow to declare how long winter will continue — a different form of reading the tea leaves. This year, Punxsutawney Phil made his prediction after crawling out on a cold Wednesday morning, seeing his shadow and declaring that there would be six more weeks of winter. He was probably not referencing the Crypto Winter, which was starting to take root then.
Phil is arguably better at predicting this natural phenomenon than Paul the English Octopus (who was successful only in the 2010 World Cup) or even poor Rabio, his Japanese cousin, who was quite good at predicting the results for Japan’s World Cup exploits but was unfortunately given the chop and turned into sashimi.
This week’s story isn’t about how we often want to send the market commentators with their false crystal balls to the chopping block, although fortunately, Chew On This has been more right than wrong since its inception a year ago.
But, as we wade through the summer, and for the jaded and cynical market observers, sometimes it feels like Groundhog Day. In this 1993 fantasy comedy movie, Bill Murray stars as television weatherman Phil Connors, whose cynicism gets him trapped in a time loop. Waking up on Feb 2 to the tune of I Got You Babe, he repeats his worst assignment until he finds love. He eventually wakes up on Feb 3 to be able to move on.
History repeats itself
“History repeats itself; first as tragedy, second as farce.” Arch-anti-capitalist Karl Marx spoke these wise words. He was more right than wrong, although in markets, the multiple numbers of farces and times investors get caught wrong-footed, over and over, still surprises me.
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Like Groundhog Day, summer is playing out in traditional financial markets as postulated. The relief rally that caught many investors wrong-footed just as they lightened up in May and June has run out of steam as we enter the Jackson Hole week for The Federal Reserve (Fed).
Will the central bankers retreat and not signal a retreat in interest rate rises? Will it thus further level off the short-covering rebound in tech and growth stocks (which we warned about in Issue 1048)? As it is, those who piled in late in early August on a slight fear of missing out (FOMO) are already nursing minor wounds from running with the bulls (it is the Pamplona season in Spain now).
Ironically, as markets first rallied in mid June, leaving many large institutional investors and private investors on the sidelines of the market, their outlook changed as the markets moved first. And look how far they have come.
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The S&P Value index was up 12% since mid-June, and the S&P Growth was up 22%. The rebound in all things sexy during the pandemic that has been sold off by up to 70% in some of the most extreme growth indices has been nothing short of spectacular as investors scrambled to reassess their fear of holding on (FOHO) fears. Based on a Bank of America survey of investors, 88% of the respondents expect US inflation to decline over the next 12 months, leading to forward expectations of a less tight-fisted Fed.
For the first time since August 2020, fund managers now expect growth to outperform value. In fact, by another measure used by quantitative asset managers, the value spread (which theoretically measures the valuation gap between cheap and expensive stocks globally), on the strength of this rebound, has returned to extreme levels seen at the peak of price bubbles in US tech stocks in March 2000.
Hope springs eternal on the back of many evangelists of the financial markets. After all, it is easier to get deals done, raise capital and print order tickets when selling a buy story rather than wading through a famine, investors staying on the sidelines, brooding over energy prices, possible recessions, and fretting over costlier food and mortgage repayments.
For those keen on buying each pullback and just rotating into tech (after all, it is still so low compared to 2021), the cautionary tale is from not that long ago. The dot com bubble did not fully play out until 2003 or 2004, even though the balloon was pricked in April 2000. And likewise, it took several years with bear rallies paying excellent trading returns for the fluff from 1929 to work through the excesses in the wake of the Great Recession.
Perhaps this time is different; markets have shorter memories and are moving at more compressed cycles. But suppose one were to triangulate through the tea leaves, especially on private equity valuations, which are still being marked down. In that case, the cost of refinancing still reverberates through credit markets for growth companies. Or it could be the new capital being raised for opportunistic distressed credit and equity.
Still, the last two months have been a bear rally. Private banks are starting to push “is it time to get back into tech” research, just as the Nasdaq rebound paused last week. To me, this is again another contrarian indicator.
It will be Groundhog Day for investors to buy aggressively into growth and tech now, especially in the west. And in financial markets, unlike Bill Murray’s character, love alone will not set you free.
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Green crypto shoots
Deep into the Second Crypto Winter, news continues on the collapse of platforms after platforms like Holdnut last week in Singapore. Even if it’s digital dust like some of the non-fungible tokens (NFTs) and altcoins with no intrinsic value, with their flimsy and clumsy white papers, one should be embarrassed to be even part of it for a speculative punt.
With the tide running out, many unregulated exchanges and business models are left exposed to swimming naked. In some cases, they are outright fraud and scams, hopefully serving as a cautionary tale for many aspiring investors looking for a quick buck.
Nonetheless, regulators — including the Monetary Authority of Singapore — now have the reason to take a firmer grip on these innovative libertine business models and ideas and are indeed wading through deliberately and thoughtfully. Interestingly, even as the newsflow continues to be negative, some underlying green shoots exist.
This is not a ESG (environmental, social, and corporate governance) comment, and neither do I believe the folks that tout that using solar energy for crypto mining per se makes crypto “green” as some storytellers will like you to believe (and invest alongside too). Like most risk-off asset classes that found a temporary nadir in June and July and which have since rebounded, the mainline crypto coins, Bitcoin and Ethereum, have also done likewise.
For Bitcoin, the rebound from the bottom was more than 30%. This speculative instrument has fallen equally spectacularly by 20% in a day or so from US$25,000 ($35,955) to $21,000.
As postulated in this column in July, the rising cost of energy, chip shortage and real estate coupled with the Second Winter levelling of Bitcoin from US$67,000 down to US$19,000 has led to the flushing out of non-profitable miners.
This has led to the Hash rate, which measures the total computational power used in a cryptocurrency network to process blockchain transactions or mine, stabilising and turning up even whilst Bitcoin prices eased.
Could natural selection have occurred and the weakest have been carried out? Hash rate bottoms and turnarounds have been associated with previous cycles of crypto bust to boom turnarounds. This is analogous to chip production cycles in more traditional industries like semiconductors.
It could be that the worst is over, and we have crossed like Punxsutawney Phil, our groundhog says, peak winter. It is not likely to be spring in six weeks, and there are still too many scams, fraudsters and dodgy business models, so one has to be very cautious.
In sticking to the credible platforms licensed by decent regulators, including the US and Singapore ones, at least that would be one degree of assurance. Still, I would not be wadding in for a flutter and certainly not in size.
When in doubt
Those who have decided to take the summer off will miss all these sideshows. Sticking to the tried and tested in Sunny Singapore continues to pay dividends (literally) as the halfyear and quarterly dividends get credited to your designated bank account.
I was chuffed that one theme we emphasised in this column played out again. Tuan Sing Holdings has just offered to privatise its 80.2%-held subsidiary SP Corp for $1.59 — a nice 165% gain from its last trade of 59 cents. Jackpot! It may appear, but this offer price is SP Corp’s book value. Excluding any premium, minority investors who are patient realise value!
Perhaps I am getting old and remain biased for value and sceptical about fluffy growth. But there are still many stocks, unloved and forgotten, misunderstood, or marked down temporarily because of special situations, trading a fraction of their NAV or cash value.
By doing a bit of research (or by reading The Edge Singapore), it is possible to get out of the groundhog day of markets moving against you, and there is no need to wade completely into the metaverse yet.
Buy the value of the discount and sleep peacefully. When the trends are clearer, and the bulls come back, you can pretend to be a genius in the stock market again.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore