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Novum Alpha - Daily Analysis 10 February 2021 (10-Minute Read)

A stimulus-fueled economic rebound or destabilizing inflation? Pick a scenario. Because markets can't seem to make up their mind at the moment, with investors betting on both scenarios stalling the initial rally in U.S. equities.  The trust of the matter is that while stimulus could fuel further asset inflation, it could also send prices higher in other areas, leading to inflation, at a time when central banks have pledged to keep interest rates near zero. 


A wonderful Wednesday to you as we wind into the Lunar New Year weekend in Asia. 
 
In brief (TL:DR)
 
  • U.S. stocks broke their rally on Tuesday with the S&P 500 (-0.11%) and blue-chip Dow Jones Industrial Average (-0.03%) down marginally while the the tech-centric Nasdaq Composite (+0.14%) was up slightly as concerns over inflation weighed on sentiment. 
  • Asian stocks were uniformly up on Wednesday as a weakening dollar fueled emerging market bullishness. 
  • The benchmark U.S. 10-year Treasury yield sank to 1.159% (yields fall when bond prices rise) on concerns over inflation fears having bid up asset prices.  
  • The dollar reversed course and continued it slide. 
  • Oil was flat with March 2021 contracts for WTI Crude Oil (Nymex) (-0.14%) at US$58.28 as traders sat on the sidelines after its most recent rally. 
  • Gold rose with April 2021 contracts for Gold (Comex) (+0.38%) at US$1,844.40 on inflation fears.   
  • Bitcoin (-1.40%) stalled to US$45,990 as initial euphoria over Tesla's (-1.62%) bet on the cryptocurrency started to ebb as flows into and out of exchanges stabilized (outflows typically suggest that traders are looking to hold Bitcoin in anticipation of higher prices). 
 
In today's issue...
  1. Silver Shines Bright as Retail Investors Rally Metal
  2. Twitter in a Post-Trump Social Media Landscape
  3. Tesla's Bet on Bitcoin Hasn't Convinced Wall Street to Jump In, Yet
Market Overview
 
A stimulus-fueled economic rebound or destabilizing inflation? Pick a scenario. 
 
Because markets can't seem to make up their mind at the moment, with investors betting on both scenarios stalling the initial rally in U.S. equities. 
 
The trust of the matter is that while stimulus could fuel further asset inflation, it could also send prices higher in other areas, leading to inflation, at a time when central banks have pledged to keep interest rates near zero. 
 
And it's not at all clear if raising interest rates will necessarily throttle back inflation as if it's some kind of switch that central bankers can turn on or off.
 
Be that as it may, a weaker dollar and the prospect of asset inflation in the U.S. has seen Asian markets perform better in the Wednesday morning trading session. 
 
Tokyo's Nikkei 225 (-0.10%) was the sole laggard, but looks to gain by the end of the day while Seoul’s KOSPI (+0.47%), Hong Kong's Hang Seng Index (+1.74%) and Sydney’s ASX 200 (+0.52%) were up. 
 
1. Silver Shines Bright as Retail Investors Rally Metal
 
  • Redditors are bidding up the price of silver, despite the absence of any short bets on the commodity
  • Silver exposure comes in many vehicles, making it more difficult to stop the Reddit hoard through any singular conduit, and also papers over the genuine rise in industrial demand for the precious metal
 
Silver gets far less attention than its shinier cousin gold, yet it has a lot more industrial applications.
 
Needed for everything from electronics to keeping milk safe, antimicrobial lab coats to water purification, silver is to industry what peanut butter is to bread.
 
But silver’s industrial, as well as monetary value has more or less helped to keep its price managed within a range based largely on supply and demand.
 
What’s changed is that silver has now become the target from the same marauding band of traders from Reddit forum r/WallStreetBets who have been bidding up the metal.
 
Emboldened by their successful pump of embattled video game retailer GameStop (-16.15%), Redditors targeted the precious metal and sent it to its highest level since 2013.
 
Prices for silver rose as much as 11% on Monday, following a rally of 6% last week.
 
But unlike shares of GameStop, silver can be had in many forms, from ETFs (exchange traded funds) that specialize in silver, such as iShares Silver Trust, to physical silver - meaning any attempt to restrict the flow of retail money into silver may not be as effective as was the case with GameStop.
 
GameStop’s rally came to an abrupt halt when retail trading platform Robinhood curbed the amount of those shares that its users could purchase.
 
That restriction gave the hedge funds time to exit their positions and stopped the breakneck rise of GameStop’s shares.
 
While some analysts suggest that it will be difficult for retail investors to corner the silver market, given the large off-exchange market for the precious metal, where banks trade on behalf of clients, their impact on the most visible aspects of silver’s price rally can’t be ignored.
 
And unlike in the case of GameStop, there aren’t any visible short positions for Redditors to target, with most banks using futures contracts to hedge their physical holdings of silver, meaning they are net neutral.
 
What the Redditors could be papering over though is a genuine demand for silver as the global economy begins its tentative recovery, especially given the myriad industrial applications for silver, including in solar power. 
 

https://patricktan-crypto.medium.com/

 

 
2. Twitter in a Post-Trump Social Media Landscape
 
  • Twitter (+2.87%) chooses the safety of American democracy over profits with the decision to dump Trump off its platform likely to hurt revenues in the medium term 
  • Future growth prospects of Twitter will need to depend on rolling out new products, diversifying income streams and increasing the stickiness of existing features as user growth is expected to slow
 
Executives at Twitter must have struggled last year with the decision to ban former U.S. President Donald Trump from its platform.
 
The social media company had enjoyed record user growth and revenues thanks in large part to Trump’s Twitter tirades and as mainstream media platforms reported on Trump’s tweets, more users were drawn to the primarily text-based platform.
 
Trump, who is not particularly tech savvy, and who primarily used an unsecured Android phone for his tweets, was in many ways made for Twitter.
 
Given Trump’s relatively short attention span and penchant for hyperbole, the social media platform became his outlet to express his thoughts directly to his 80 million-plus followers.
 
But since Trump was banned from Twitter, user growth has fallen short of expectations for the second quarter in a row and the firm has warned that it would continue to slow this year, as a pandemic-related boost in user numbers slows down.
 
While Twitter’s revenue beat analyst estimates in the fourth quarter of 2020, rising 28% to a record US$1.3 billion, with net income rising to US$222 million, it also reported a “small but measurable negative impact” from a number of product, policy and enforcement changes ahead of last year’s U.S. elections, primarily targeted at curbing the spread of misinformation.
 
Trump was banned from Twitter earlier this year for allegedly inciting the U.S. Capitol riots, prompting fears that his exclusion from the social media platform could affect its popularity in the coming quarters.
 
But it’s not just the loss of Trump that is putting pressure on Twitter’s forward growth projections – a rise of alternatives, including Mastodon, Reddit and even Clubhouse are all offering allegedly safe “free speech” bubbles to users.
 
Snapchat (-1.54%), Instagram and TikTok have also long siphoned off some of Twitter’s user base.
 
Twitter may also face revenue challenges as an update to Apple’s (-0.66%) iPhone operating system's  privacy policy, could make it more difficult for ad tracking.
 
And while Twitter is looking to diversify its revenue streams, including researching, and testing potential subscription features, such tools, according to the company’s CFO, are unlikely to be meaningful contributors to the bottom line until next year.
 
Nonetheless, outside of the controversy and policy changes, Twitter could thrive in a post-Trump landscape and if its resources are deployed properly, could lead in terms of new products, development and security. 
 
 
3. Tesla's Bet on Bitcoin Hasn't Convinced Wall Street to Jump In, Yet
 
  • Banks have been slow to embrace cryptocurrencies, especially given that they are intended on disrupting their business models
  • Banks have yet to figure out the best way to profit from cryptocurrencies, which is why they have been slow on the uptake, given the heightened regulatory scrutiny that they must endure 
 
Tesla’s revelation of its US$1.5 billion bet on Bitcoin this week sent the cryptocurrency soaring to a fresh all-time-high, but if news of another listed U.S. firm putting a portion of its cash reserves in Bitcoin would send Wall Street flooding in, the response has been notably tepid.
 
To be sure, Tesla is a cutting-edge electric vehicle maker, pushing the envelope in mobility solutions, so why wouldn’t it also seek to reshape what constitutes currency as well?
 
Banks being legacy institutions would naturally be more hesitant to push the envelope on the nascent digital asset class with most top U.S. banks still shying away from cryptocurrencies.
 
While futures contracts tied to Bitcoin and Ether are available at major exchanges, none of the six biggest American banks offer their customers access to such trading – they’ll need to get their crypto fix elsewhere.
 
To be fair, the 2008 bailout of banks was provided as the primary driver for Bitcoin’s creation, so it should come as no surprise that they were excluded from the crypto party.
 
Writing in the 2008 Bitcoin whitepaper, Satoshi Nakamoto, a pseudonym for the person or people who developed Bitcoin wrote,
 
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
 
And while firms such as Tesla may be big on Bitcoin, banks may be slower to embrace an asset class that is essentially looking to disrupt their very business model.
 
Amongst the biggest banks in the U.S., JPMorgan Chase (-0.40%) has been the most forward-looking when it's come to cryptocurrencies.
 
Despite its CEO Jamie Dimon famously calling Bitcoin a “fraud,” last year, JPMorgan Chase agreed to onboard cryptocurrency exchanges Coinbase and Gemini Trust as banking clients, breaking with an industry that has routinely denied even the most basic banking services to cryptocurrency firms.
 
Dimon later retracted the criticism of Bitcoin and says he regretted those comments, seeing Bitcoin as a way for the bank to use blockchain technology, including speeding up corporate payments through its own JPM Coin, built on the same technology that powers Bitcoin.
 
As recently as last May, Goldman Sachs (+0.10%) derided the idea of Bitcoin as an asset class, pointing to its wild swings and arguing that it was not a real unit of value.
 
Yet behind the scenes, Goldman Sachs had been exploring the creation of its own fiat-based cryptocurrency and hired a cryptocurrency trader to help lead digital asset markets, while mulling over starting a digital asset trading desk.
 
But in a low-yield environment, with near-zero interest rates, Wall Street, while mostly on the sidelines for now, may fall in when cryptocurrencies become too good to ignore.
 
Tesla’s US$1.5 billion bet on Bitcoin could be worth a notional US$5.5 billion next year based on historical returns. 
 
And where there's money to be made, Wall Street won't be too far behind. 
What can Digital Assets do for you?
 
While markets are expected to continue to be volatile, Novum Alpha's quantitative digital asset trading strategies have done well and proved resilient.
 
Using our proprietary deep learning and machine learning tools that actively filter out signal noise, our market agnostic approach provides one of the most sensible ways to participate in the nascent digital asset sector. 
 
If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.  
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Feb 10, 2021

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