Novum Digital Asset Alpha - Daily Analysis 4 September 2020
TGIF! It's time for freakout Friday as markets burn, can the weekend finally provide the reprieve that investors are seeking?
In brief (TL:DR)
In today's issue...
It finally happened, you bought your first stock and the market went ahead to tank.
With more retail investors in the mix than at any other time in recent history, markets had remained suspiciously buoyant until animal spirits returned.
Risk adversity took hold yesterday as stocks were routed, and not by an insignificant amount either.
Asian caved in the morning session, with Seoul’s KOSPI (-1.17%), Sydney’s ASX 200 (-2.55%), Tokyo's Nikkei 225 (-1.09%) and Hong Kong’s Hang Seng Index (-1.75%) all down heavily.
Selling pressure continues to remain high as investors, primarily led by retail, dump stocks and rotate into cash.
Investors are (only now) starting to question the somewhat lofty gains made by stocks in recent times.
Could it be the fault of Tesla (-9.02%) which overplayed its hand by splitting stocks 5-for-1 and then double-dipped into the markets to ask for US$5 billion for its stock again?
Because how much can you milk investors before they start to ask whether you might have overstretched even the most fictitious definitions of valuation?
U.S. markets still have one more trading day to go before "sh*t gets real" and going into the weekend we'll know for sure if investors used the opportunity to buy up an "oversold" market or whether this may be investors truly questioning the validity of investment assumptions.
To be sure, nothing has changed.
Not on the pandemic front, the money-printing front or indeed any front. So why the sudden buyer's remorse?
1. With times these bad, who's making money?
The leaked internal memo could not have made it more clear "do not buy a new car, a new home or engage in any other ostensible displays of wealth, not right away at least" was the admonition to a select group of investment bankers who had received bulging bonus checks.
An industry accustomed to excess and flamboyant displays of wealth (the former CEO of Lehman Brothers used to arrive to work by private helicopter no less), has certainly taken onboard the lessons of the last financial crisis.
Make your money, keep a low profile and when the rest of the world isn't hurting? Celebrate.
With investment banking and trading revenues hitting an 8-year high in the first half of 2020, investment bankers are literally laughing all the way to the bank (at the bank?).
Global banks have been raking in fees from companies scrambling to raise cash and jittery investors scrambling to sell stocks, then buy again as Fed measures caused the markets to surge.
Revenues for investment banks was up by over a third than compared to the same period last year, bucking a sideward trend that had been in motion for years.
Investment banks are getting fat pay days as a huge demand for cash from pandemic-hit companies and the Fed flooding the system with money has propped up market prices and swayed investors into the most risky corners of the market (I'm looking at you Bitcoin).
The result has been a borrowing boom that has pulled banks from the edge and lifted Wall Street's fortunes.
But executives, who have learned that it's not in good taste to be gloating while the rest of the world is suffering, have been quick to dismiss the windfall as temporary.
JP Morgan Chase (-0.31%) CEO Jamie Dimon predicted that revenue would be "cut in half" after his firm clocked in a record US$11 billion in quarterly trading revenue.
Highly-rated corporate debt is up almost a third globally and almost three quarters in the U.S., according to data from Dealogic, but riskier companies have also joined the fray.
With interest rates set to stay low for a prolonged period, Wall Street has had a field day cooking up all manner of intricate debt structures, allowing even the most dicey of companies like United Airlines(+1.38%) to gain access to dollars on the pennies.
The steady supply of new securities has fed Wall Street's vast trading machine, which has been languishing for years amidst robust economic conditions.
Investors need to own something - hoarding cash is not an option - and in a landscape where everything looks risky, highly-rated corporate debt seems like a "safe bet."
And right now, Wall Street is cashing in on taking those bets.
2. U.S. Unemployment Claims Fall to Lowest Level But Don't Be Fooled
As anyone who's navigated the U.S. unemployment system will tell you, it's only slightly less complicated than the U.S. tax code.
And trying to make sense of U.S. unemployment claims data as an indicator of the broader economy may sometimes seem like an exercise in futility, with numbers either suggesting good or bad times for jobseekers depending on who you're asking.
Yesterday, U.S. unemployment claims for first-time claimants fell to their lowest level since the coronavirus pandemic forced a first wave of lockdowns.
But before you break out the 2006 Dom Perignon, you might want to continue sipping on some prosecco from Target (-2.54%) first, because unemployment, at above 10%, still remains historically high.
And the improved numbers could also be a result of adjusted measurement methods which factor in seasonal adjustment, accounting for regular swings in layoffs that happen during certain times of the year, especially around holidays.
Exacerbating the misleading nature of the unemployment claims is the fact that first time unemployment claims may have fallen, but repeat claims are up.
Meaning it's entirely possible that Americans got a job before the lockdown, lost it, sought unemployment benefits, got another job, lost it, and are looking for help again.
If the job data was something to cheer about, investors were unimpressed as stocks in the U.S. plummeted yesterday, led primarily by tech on a reversion to "risk-off" sentiment that is starting to closely resemble the rout in March.
In which case if the malaise persists, expectations will be high on the Fed to do something about it.
Rinse and repeat, keep your investing powder dry.
3. The Big Bitcoin Rout - Is Now The Time to Panic Yet?
So you finally did it. How could you not? After all, practically everyone was talking about it.
After months of wavering, you googled how to buy Bitcoin, linked your credit card to a cryptocurrency exchange and with much trepidation, bought your first Bitcoin.
You were now one of "us" a full-fledged member of the cryptocurrency community.
From then on you would be one of "those people" who'd bore their friends at dinner parties (where available) about how Bitcoin was going to revolutionize the world of finance and how central banks' relentless money printing was going to make Bitcoin the most valuable asset in the world.
That is of course, until Bitcoin plunged 7% yesterday and is now well below the price you bought it at.
A period of introspection and some soul searching typically leads to one of two outcomes - do nothing and accept that this is cryptocurrency, it's volatile and speculative, and write it off until the next Bitcoin bull run (where available).
Or sell now, tell yourself that Bitcoin is a scam and never mention it to your friends ever again.
And at future dinner parties when someone asks you how the "Bitcoin thing" worked for you, just mumble something and avoid the question altogether.
If any of this sounds even remotely familiar, that's because it's the almost inevitable path of a vast majority of retail cryptocurrency investors.
As mentioned repeatedly and constantly, Bitcoin is not a "get-rich-quick" scheme.
If the point of buying Bitcoin is to make you more dollars, then you've missed the point of Bitcoin.
Overnight, Bitcoin crashed to as low as US$10,100 and remains just slightly above that level at the time of writing.
But based on technical indicators, Bitcoin is still very much above key resistances.
And none of the macro factors that fuel Bitcoin's narrative have changed either.
So why the recent price plunge?
Well a lot of it has to do with a shift in risk sentiment and an inability to clear the US$12,000 level of resistance for the fourth time in five attempts.
The other has been a sudden resurgence in the dollar.
On the back of stronger-than-expected economic data, a stronger dollar has undercut sentiment not just for Bitcoin, but for tech stocks and gold as well - the darlings of the coronavirus pandemic.
But has anything fundamentally changed?
Not at all.
And investors can expect even more volatility prior to elections in the U.S. - better unemployment data is due more to a measurement methodology change than any meaningful improvement in employment figures.
A stock market rout, especially if prolonged, typically pushes the Fed and Congress to do more about it and right now they can do only one thing - print more money.
In the time that it has taken to write these paragraphs, Bitcoin has since recovered and is closing back in on US$10,300.
Yes this is crypto, but the volatility is real.
And let's be honest, you never much enjoyed those dinner parties anyway did you?
Here's another excuse not to attend then.
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Sep 04, 2020
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