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Novum Alpha - Daily Analysis 24 February 2021 (10-Minute Read)

Keep calm and stay invested. At least that's the message from the U.S. Federal Reserve as the central bank reminded investors that they weren't out of the woods just yet.

A wonderful Wednesday to you! 

In brief (TL:DR)

  • U.S. stocks regained some of their lost ground turning into Tuesday with the S&P 500 (+0.13%) and and blue-chip Dow Jones Industrial Average (+0.05%) up marginally, while tech continues to take a beating as Treasury yields remain persistently high and the tech-centric Nasdaq Composite (-0.50%) was down. 
  • Asian stocks slipped as investors balanced the risk of a stronger recovery driving global rates higher against the Federal Reserve’s pledge of continued policy support. 
  • The benchmark U.S. 10-year Treasury yield was steady at 1.340%.
  • The dollar continued its slide in Asian trading. 
  • Oil gave up some gains with March 2021 contracts for WTI Crude Oil (Nymex) (-0.81%) at US$61.17. 
  • Gold was up with April 2021 contracts for Gold (Comex) (+0.17%) at US$1,809.00 as investors priced in the Fed's allowances on inflation. 
  • Bitcoin (-10.83%) fell to US$47,900 highlighting lingering doubts about the durability of the cryptocurrency’s gains while inflows into exchanges have slowed but are still higher than outflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

  1. Investors Have a Friend in the Fed
  2. Value Investors Have Their Moment
  3. Tether - As Good as Dollars Around the World, Whatever That Means

Market Overview

Keep calm and stay invested.
At least that's the message from the U.S. Federal Reserve as the central bank reminded investors that they weren't out of the woods just yet. 
Despite positive indicators suggesting that the U.S. economy is on the mend, unemployment, which typically takes several years therafter to pick up, remains stubbornly high and the Fed is not taking any chances. 
That having been said, investors are taking a tepid turn towards more cyclical stocks and dumping tech as bond yields rise. 
That trade is likely to persist for as long as Treasury yields remain high and unless the Fed positively intervenes to up the rate of government borrowing costs, it's not that investors are betting on value stocks as much as that there are more alternatives to just tech than there may have been earlier. 
In Asia, markets were a mixed bag with Tokyo's Nikkei 225 (-0.47%), Sydney’s ASX 200 (-0.80%) and Hong Kong's Hang Seng Index (-0.03%) lower in the morning trading session while Seoul's Kospi Index (+0.58%) was up as expectations over manufacturing output remained bullish.  
1. Investors Have a Friend in the Fed
  • U.S. Federal Reserve has said that they will continue to support the economy, even as inflation picks up 
  • Tech and growth stocks reversed course on Tuesday as investors recognized that even as the U.S. economy rounds the corner, the Fed has no intention to curb asset purchases any time soon nor will it be uncommunicative when it intends to do so
When markets are down and if you are feeling broke, you can always call, Pow-well.
When you’re on margin and the market’s alarming
Seems to help I know, Pow-well.
Just listen to the calming words that this white-haired man is saying
Linger at the press briefing where he says Fed’s still paying
How can you lose?
The stocks can get much higher there
You can forget all your troubles, forget all your cares
Because Pow-well
Things will be great because Pow-well
No better market without Pow-well
Bull market’s waiting for you
(Sung to the tune of Petula Clark’s 1964 single “Downtown” off the album of the same name)
Because even as investors dumped stocks and risk assets (Bitcoin anyone?) at the start of the week, the venerable Jerome Powell of the world’s most powerful central bank, the U.S. Federal Reserve, told the U.S. Senate those words every investor wants to hear – that the Fed intends to maintain its heavy support of the economy.
Powell indicated in no uncertain terms that the Fed has no intention to tighten monetary policy or taper asset purchases (for fear of unleashing a taper tantrum) even with a brighter economic outlook.
While near-zero interest rates have supported the lofty valuation of tech companies and other growth sector stocks, economic momentum which has been gathering at a fast clip in the U.S. has seen real interest rates climb, triggering unease in parts of the U.S. equities market.
Speaking before the powerful Senate banking committee, Powell noted,
“In recent weeks, the number of new cases and hospitalization has been falling, and ongoing vaccinations offer hope for a return to more normal conditions later this year. However, the economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.”
And while some Debbie downers are warning that a burst in economic activity coupled with robust fiscal stimulus could trigger an unhealthy spike in inflation, Fed officials have downplayed the threat of such a spike, dismissing such prices rises as unlikely to be sustained.
According to Powell, inflation dynamics do “not change on a dime” and argued that there is no evidence of a strong connection between budget deficits and inflation.
Powell also noted the unused capacity in the labor market, with almost 10 million more Americans unemployed today compared to a year ago, continues to be one of the more worrying aspects of the American economy and has noted,
“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved. We will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.”
In other words – don’t bet against the Fed and investors can expect the Fed to continue providing what investors have grown to expect throughout the pandemic – more money to move markets. 
2. Value Investors Have Their Moment
  • Rotational play into value stocks and cyclical sectors of the economy finally delivers respite for value investors who have seen their portfolios lag growth stocks over the past year
  • Investors are increasingly betting on a broad-based economic recovery that is likely to favor economically-sensitive stocks and dumping what appear to be expensive tech and growth sector stocks 
As bond yields started rising and the market floors were strewn with the carcasses of speculative fever, there was one section of investors who tried their best to hide the smile on their faces and the glint in their eyes – value investors.
Finally, followers of the cult of Buffett, that oracle of value investing, who insists that the markets have become inherently frothy and valuations unsustainable, are having their “Come to Jesus” moment as value stocks start to shine again.
By one measure, growth stocks are having their worst month since the dotcom bubble.
More speculative segments of the market including “blank check companies” or SPACs (Special Purpose Acquisition Companies), and newly listed (and highly unprofitable) IPOs, are being punished by investors, all as the benchmark 10-year U.S. Treasury yield pushes to its highest level in a year.
By Tuesday morning, the S&P 500 Value Index was up some 6.7% this month, ahead of its growth counterpart – the largest monthly spread before the dotcom bubble burst in 2000.
And while investors were dumping tech firms as rates started to rise, the surge in Treasury yields undermines the so-called “TINA” trade – There Is No Alternative – because as the risk-free rate of return goes up, the net present value of growth stocks goes down, as does their acceptable premium.
Instead, as there are signs that economic conditions are improving, things like industrials, financials and energy have grown more attractive.
Meanwhile in SPAC land, the IPOX SPAC Index, which tracks the performance of a broad group of SPACs, fell by as much as 11.8% at one stage before recovering to trim losses to around 5%, as investors dumped risk.
To understand where all this is coming from it’s that low U.S. Treasury yields were the basis for investors to literally buy anything (including Bitcoin) because the cost of holding “safe” U.S. government debt was so high (as inflation erodes the value of these safe holdings).
But as yields have risen, investors have had to look in the mirror and decide if many of the things they bought are worth their price, especially non-yielding assets such as gold and Bitcoin.
When yields are so low, the holding cost of a non-yielding asset like gold or Bitcoin is negligible. But with Treasury yields surging, they become higher.
3. Tether - As Good as Dollars Around the World, Whatever That Means
  • Tether, the world's most heavily used cryptocurrency and stablecoin, will report its actual dollar-based cash reserves every quarter to the New York Attorney General's Office
  • Companies surrounding the Tether controversy (whether it covered up losses and if it's actually backed 1:1 for the dollar) have settled the claim for US$18.5 million, suggesting that whatever the New York Attorney General alleged, couldn't have been too egregious and without admission or denial of liability 
What happens when something that claims to be backed by something else may not actually be backed, and what if that something that it claims to be backed by, isn’t even backed by anything?
Welcome to the world of Tether.
As the first stablecoin that was issued and allegedly backed by U.S. dollars in a bank account (somewhere), Tether or USDT (which stands for “U.S. Dollars Tether”) grew in popularity as a halfway house between holding fiat currency and holding cryptocurrency.
When traders trade out of cryptocurrencies such as Bitcoin and Ether, they hold their dry powder in USDT as opposed to swapping directly out to fiat, the primary reason for this of course is expedience.
Because swapping fiat currency to cryptocurrency can be a long and slow process (with multiple KYC and AML hurdles to cross), many traders tend to keep their reserves in USDT to facilitate easy trading and that increased the number of trading pairs that cryptocurrencies kept with Tether.
Today, the bulk of cryptocurrency derivatives is still traded in Tether and the liquidity for the stablecoin remains heads and shoulders above other more “regulated” stablecoin issuances.
But controversy has surrounded Tether from the very beginning, especially given Tether’s cozy relationship with cryptocurrency exchange Bitfinex (they are both owned and run by the same people), allegations of Tether's manipulation of Bitcoin’s price were widespread.
Things came to a head when New York Attorney General Letitia James filed suit against Bitfinex for allegedly hiding the loss of comingled client and corporate funds, as well as covering up the actual state of Tether’s reserves.
The dust has finally settled on those allegations, as Bitfinex agreed to pay US$18.5 million in a settlement with the New York Attorney General’s Office, without admitting or denying any wrongdoing, in what amounts to no more than a slap on the wrist.
Even better for USDT, New York officials, who originally began investigating the stablecoin in 2019, will receive quarterly reports on the composition of Tether’s actual dollar reserves over the next two years, but the company will end all trading activity with New York residents.
In effect, the New York Attorney General’s Office will be acting almost like an auditor for Tether, which is great for the digital asset sector that has grown to become heavily reliant on Tether, with data provider CryptoCompare noting that some 55% of all Bitcoin purchases utilize the stablecoin.

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Feb 24, 2021

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