Novum Alpha - Daily Analysis 23 December 2020 (10-Minute Read)
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In brief (TL:DR)
In today's issue...
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Mutation? No big deal.
At least according to coronavirus vaccine developers who are confident that their vaccines are up to scratch to face down the mutating coronavirus first discovered in the United Kingdom.
Not much at this stage will slow markets down, with government and central bank intervention almost guaranteed to buoy markets.
In Asia, markets were higher with Tokyo's Nikkei 225 (+0.14%), Sydney’s ASX 200 (+0.63%), Hong Kong's Hang Seng Index (+0.16%) and Seoul’s KOSPI (+0.24%) all up slightly in the morning trading session despite signs that the pandemic may be worsening.
Things may be bad with fresh lockdowns and renewed travel restrictions, but in the stock markets, everyday feels like Christmas.
1. A New Coronavirus Mutation Won't Kill the Buzz in Markets
While a mutated coronavirus is scary, it’s not scary enough to keep investors away from the markets and hunkering down in their bunkers.
And while global stocks and key commodities like oil slumped and bond prices surged on Monday after investors reacted to the new strain of the coronavirus that emerged in the United Kingdom, by the afternoon, it was as if all was forgotten, with the S&P 500 making up most of the lost ground.
To be sure, short term disruptions and often disastrous public health situations in parts of the world are largely ignored by financial markets on the core belief that extraordinary circumstances will be met with extraordinary government and central bank support.
That faith in governments’ willingness and ability to intervene in times of crisis bolsters investor faith in the avoidance of mass unemployment, loss of income and to ward off a cascade of bankruptcies.
Government and central bank intervention has emboldened investors to look further ahead and served as a driver of extreme valuations, unlike the irrational exuberance more typical of stock market bubbles.
And while the S&P 500 is trading at almost 27 times price-to-earnings, that’s based on the past year’s earnings, whereas forecast earnings put it at just 19 times over the next two years.
In other words, take 2020 as a mulligan, a do-over if you will, where governments and central banks hit the “pause” button while the world sorts things out.
And while stocks of IAG (+5.80%), owner of British Airways fell by over 7% on Monday, the difference between a 72% collapse in share price and a 78% share price given the circumstances is more perceived than actual, and the stock has since rebounded.
The bigger question is whether the coronavirus mutation is likely to lead to longer term public health implications.
For now, leading scientists say that it won’t.
And both Pfizer (-1.71%) and Moderna (-8.98%) are testing their existing coronavirus vaccines on the new mutated strain of the coronavirus, with Moderna expecting that it will work against variants.
And if science continues to support the consensus belief that the mRNA-based coronavirus vaccines will be effective, the economic outlook is unlikely to change.
2. In China It's Best to Keep Your Head Down & Make Money
Jack Ma has always had a flamboyant personality.
Despite not ever having written a single line of code, he built an e-commerce giant in the form of Alibaba (+0.32%) and is one of the world’s richest men.
If Berkshire Hathaway’s (-0.78%) annual meetings are Warren Buffett’s fireside chat then, Alibaba’s annual meetings are more like Jack Ma’s personal rock concerts, complete with fake hair and tattoos.
But in October, on the eve of an impending US$34 billion IPO of financial services giant Ant Group, Ma’s comments at a Shanghai conference would prove to be one last rock concert too many.
Taking to the stage at the conference, Ma proceeded to roast the anachronistic government regulation that he blamed for stifling innovation in China, lambasting the Chinese financial system and by extension the powers that be.
A vignette to widely held, but rarely expressed frustration amongst China’s entrepreneurial class, Ma went off on a 20-minute roast that was a vintage performance by the famously outspoken executive, known for his confident swagger and searing rhetoric.
But this proved to be one performance too many for the ruling class in Beijing and by November, the Chinese Communist apparatchiks scuttled the Ant Group public offering, lowered tough new antitrust rules and shaved off about US$140 billion from the market cap of Ma’s Alibaba.
Billionaires are known to have expensive taste, but at approximately US$43 million a word (translated to English), Ma’s was a very expensive speech to say the least.
Ma has since disappeared from public view, and his empire is under the microscope of regulators, but he is believed to still be in China.
While most believe that Ma is not headed for a personal or financial downfall, his rebuke is part of Beijing’s greater effort to reign in the power and influence of its tech behemoths.
Ma’s castigation also serves as a warning to the heads of other tech giants, including Baidu (-0.94%) CEO Robin Li and founders of Tencent (+0.26%), Ma Huateng, Chen Yidan and Zhang Zhidong as well as other Chinese tech firms.
In the Chinese context, there’s no such thing as “too big to fail,” and although once hailed as drivers of economic prosperity and symbols of the country’s technological prowess, the empires built by these tech tycoons are now increasingly being viewed as a threat to the Communist Party.
But there was method to Ma’s apparent madness.
Aware of the impending avalanche of regulations that would attempt to bring the realm of digital finance within the ambit of the legacy financial system, Ma was making a last-ditch attempt to deflect the inevitable regulatory onslaught.
Admirable, but ultimately futile as instead of staving off regulations, it accelerated them – within a week, China’s antitrust regulator issued proposed new anti-monopoly rules, a veiled threat to Ma and his fellow Chinese tech titans to tone down the swagger.
Ma’s spectacular fall from grace has been years in the making.
Part of a cadre of self-made billionaires, Ma and his fellow tech moguls created their fortunes despite the Chinese Communist Party, instead of relying on powerful Party connections to ply their trade.
Ma and other tech founders have constantly run the gauntlet that is tech entrepreneurship in China, navigating the conflicting demands of Beijing, with the independence of receiving foreign investment.
And while the west encourages, even idolizes, flamboyant CEOs in the mold of Richard Branson and Elon Musk, the Chinese Communist Party bristles at any attempt to divert focus away from loyalty to the Party.
3. SEC's Lawsuit will Ripple Through the Entire Cryptocurrency Industry
Even as members of the Trump administration are packing up, sending out resumes or scrubbing evidence that they had any involvement in the last four years of Trump’s presidency, there’s still plenty of time to throw a grenade in the room.
Despite being no fan of cryptocurrencies and leaving the Securities and Exchange Commission (SEC) at the end of the year, outgoing SEC Chairman Jay Clayton has seen it fit to sue Ripple Labs, alleging that its XRP, the cryptocurrency that Ripple issued, has violated securities law.
Over the past few years, the SEC has had a winning record against startups which it alleges to have breached securities laws by raising money through the sale of cryptocurrencies, but these companies were minor compared to Ripple.
With a US$10 billion valuation in its most recent funding round in 2019, XRP is also the world’s third-largest cryptocurrency by market value, but fell by almost a fifth on the news.
And therein lies the irony, even though XRP may be decentralized, Ripple itself is a prime target for regulators.
Early on, Ripple devolved control over XRP to developers who receive XRP as a reward for maintaining and advancing the XRP blockchain.
But key to the SEC’s claims is that Ripple, as well as CEO Brad Garlinghouse and co-founder Chris Larsen, who were named in the suit, had sold XRP tokens in 2013 worth some US$1.38 billion in an unregistered securities offering.
The main crux of the lawsuit is whether the sale of XRP was a security that should have been registered with the SEC, providing the SEC and the public with disclosures about Ripple’s business model, risks and financial condition.
According to the SEC lawsuit, Ripple had marketed and sold XRP wholly as a speculative asset, not a currency.
The fallout from the SEC lawsuit will ripple across the cryptocurrency industry, especially because XRP is like Bitcoin and Ether in certain ways, but different in significant ways that sparked the SEC lawsuit.
If successful, the SEC may set even clearer ambits of what would and wouldn’t fall foul of securities laws, but the action itself appears arbitrary and may have a chilling effect on prospective cryptocurrency issuances.
The timing of the SEC lawsuit however is curious, especially given that XRP has been around for a while, and with SEC Chairman Jay Clayton heading for the exit from the SEC in just over a week.
And while the SEC has publicly suggested that neither Bitcoin nor Ether are securities, the agency has been cautious not to suggest any other cryptocurrencies aren’t.
Which means that technically any cryptocurrency could fall afoul of securities laws if the SEC deems in its sole purview that they are a target.
And that could mean institutional investors who have just waded into the cryptocurrency space may stick to the “tried and tested” with greater focus on Ether and Bitcoin, to the detriment of other cryptocurrencies.
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Dec 23, 2020
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