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Novum Alpha - Weekend Edition 27-28 February 2021 (8-Minute Read)

The U.S. House of Representatives has approved the Biden administration's bold US$1.9 trillion fiscal stimulus package, which should provide some respite for equities on Monday, but hurdles still remain over getting the plan past the Senate, where Democrats have a razor thin majority. 

Welcome to your wonderful weekend as investors take shelter in the close of the markets for a brief respite from the chaos. 
In brief (TL:DR)
  • U.S. stocks finished a mixed bag on Friday with the S&P 500 (-0.47%) and blue-chip Dow Jones Industrial Average (-1.50%) down, while the tech-centric Nasdaq Composite (+0.56%) was up on momentum trading, after suffering its biggest loss this week. 
  • Asian stocks closed lower on Friday, as rising U.S. Treasury yields blunted demand for stocks. 
  • The benchmark U.S. 10-year Treasury yield retreated slightly to 1.415%, but investors remain wary of a rebound in yields next week. 
  • The dollar continued its ascent, putting pressure on commodities. 
  • Oil fell with March 2021 contracts for WTI Crude Oil (Nymex) (-3.20%) at US$61.50 as the dollar strengthened and even on signs that the U.S. economy is recovering.  
  • Gold sank lower with April 2021 contracts for Gold (Comex) (-2.62%) at US$1,728.80 as the dollar regained strength. 
  • Bitcoin (+1.83%) recovered slightly over the weekend to US$47,197, as inflows into exchanges slowed against outflows (inflows suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 
In today's issue...
  1. Stocks! Stocks! Stocks! Stocks! 
  2. GameOn for GameStop 
  3. Cryptocurrency Exchanges Trade Crypto But Chase Cash


Market Overview
The U.S. House of Representatives has approved the Biden administration's bold US$1.9 trillion fiscal stimulus package, which should provide some respite for equities on Monday, but hurdles still remain over getting the plan past the Senate, where Democrats have a razor thin majority. 
Stocks capped losses to end off a horrible week which saw U.S. Treasury yields spike to their highest levels in a over a year, as investors rushed to dump risk assets of every stripe. 
In Asia, markets closed the week a sea of red with Tokyo's Nikkei 225 (-3.99%), Sydney’s ASX 200 (-2.35%)Seoul's Kospi Index (-2.80%) and Hong Kong's Hang Seng Index (-3.64%) taking their cue from Wall Street and falling on their swords. 
1. Stocks! Stocks! Stocks! Stocks!
  • Rising U.S. Treasury yields may have affected stock prices, but did little to dampen flows into stock funds 
  • Passive investing the main culprit for the seemingly unending flow of capital into the equity markets 
Whether it’s unbridled optimism or a lack of alternatives, stock investors have shrugged off the worst volatility to trouble the bond markets in a over a year.
Despite the spike in U.S. Treasury yields wreaking havoc on equities, U.S. exchange-traded funds consistently saw inflows – including US$2.7 billion at the height of the bond carnage on Thursday.
This month alone, stock ETFs inhaled a whopping US$80 billion of flows, or four times the annual average according to data from Bloomberg.
One reason is optimism that effective coronavirus vaccines and signs of economic recovery in industrialized countries will provide a potential boost for corporate earnings to catch up with otherwise heady valuations, especially in the face of rising bond yields.
The other reason is purely a function of market structure.
Over the past three decades, the rise of passive, low-cost investing, has meant that over 100% of stock flows now come from passive funds.
And the problem with passive funds is that inflows of money (fueled by excessive liquidity) require the funds to deploy that capital into the stocks they are meant to track.
Ironically, as stock prices go up, these passive funds need to buy more of that component stock to ensure that the index they are purported to track remains in a state of balance.
That results in rising stock prices fueling investor sentiment to buy even more stocks and so on and so forth.
Reddit is buzzing again, and energy and financial stocks have advanced for a forth straight week, in the latest sign of a enduring reflation trade.
Is it sustainable?
If fund flows are anything to go by, then yes.
Because short of the U.S. Federal Reserve turning off the taps, or governments deciding not to borrow – it’s hard to imagine how and when things come to a head.
And while concerns over inflation remain, most investors are approaching those concerns with a “later me” sort of attitude.
Past episodes of rising rates have foreshadowed strong equity yields, and since 2008, rate upcycles have coincided with positive fund flows in five out of six instances, according to a study by Deutsche Bank (-3.50%).
It’s not just optimism, it’s also market structure, and no, it doesn’t have to make sense, but then very little does these days anyway.
2. GameOn for GameStop
  • Short sellers have been driven underground, meaning that potential land mines in the stock market become less obvious and investors are no longer armed with a healthy dose of skepticism 
  • Risks of an even greater bubble being inflated abound as short sellers have typically acted as a check on irrational market exuberance or outright fraud 
Weeks after the GameStop (-6.43%) saga was declared over, and shares in the video game retailer made their rapid descent once again, the coast isn’t quite clear yet for short sellers.
Last week, shares of GameStop doubled on news that the embattled video game retailer’s CFO would be leaving the company, sparking rumors that the firm may be due for a shakeup.
Where the real damage to short selling has occurred however has been the indelible mark that GameStop has left on those funds that make money by shorting the stocks of companies.
Like post-traumatic stress disorder, even short-biased hedge funds are increasingly starting to look like their long-only counterparts, with more funds tilted towards bullish bets than at any time after 2010, according to data from Morgan Stanley’s (-1.99%) prime brokerage unit.
And just in case short sellers thought that the worst was over, GameStop surged this week doubling in the course of a few trading hours, highlighting the unknown and unknowable risk of retail investors returning to the fray.
To protect themselves, hedge funds have gravitated towards bets that spread out their risk, eager not to concentrate positions that would make them obvious targets.
And instead of being glued to Bloomberg terminals, short sellers have also had to scour Twitter (+3.31%) and Reddit as well, lest they unwittingly raise the ire of the restive retail investing horde.
Even when hedge funds do sell short, they are adhering strictly to internal rules before they lose too much money, while others are finding ways to take short positions without having to disclose them to the market.
Short selling in and of itself isn’t necessarily a bad thing – short sellers have exposed frauds like Wirecard and Enron.
But short sellers have also deprived companies that could have been saved during times of crises, by making it impossible for them to go to the markets to raise capital when they needed it most.
Short selling is a controversial activity to say the least, but it does serve a market function.
For now, the worry is that by chasing short sellers underground, or worse, making them bulls, the market may be building up to an even bigger and more unsustainable bubble.
If markets tend to crash when the last bear becomes a bull, imagine what can happen when the last short seller goes long. 
3. Cryptocurrency Exchanges Trade Crypto But Chase Cash
  • U.S. cryptocurrency exchange Kraken set to raise another round of funding at an expected valuation of between US$10 billion to US$20 billion 
  • As interest in cryptocurrencies heat up, cryptocurrency service firms are taking the opportunity to raise capital at bullish valuations, particularly as Coinbase inches closer to its direct listing
Hot on the heels of Coinbase’s prospective listing on the Nasdaq, U.S. cryptocurrency exchange Kraken is seeking to raise a new round of funding in a move that could see the firm valued at over US$10 billion.
According to Bloomberg, the San Francisco company founded in 2011, is in discussions with Fidelity, Tribe Capital and General Atlantic, and could see Kraken ultimately valued at over US$20 billion, depending on demand.
The timing could not be more opportune.
Even though the price of Bitcoin has pulled back somewhat, having hit US$58,000 before correcting sharply as U.S. Treasury yields spiked, interest in cryptocurrencies has never been higher.
Coinbase, which is set for a direct listing, and is the largest cryptocurrency exchange in the U.S. by volume, has been valued at almost US$100 billion, with revenue surging to US$1.3 billion last year and profits a record US$322 million.
Cryptocurrency exchanges have gained attention this year, as a wave of interest in Bitcoin and cryptocurrencies saw record volumes pouring into cryptocurrency exchanges and a surge in transaction fees.
And unlike other large cryptocurrency exchanges like Binance and Huobi, Coinbase and Kraken are two of a handful of U.S. cryptocurrency exchanges that are licensed and regulated and can accept U.S. customers.
Just two years ago, Kraken leaned on investment platform Bnk to the Future to raise US$13 million at a roughly US$4 billion valuation, and its latest raise could see its valuation more than double and potentially grow by as much as five times even.
Kraken also facilitates margin trading (trading cryptocurrencies through borrowing) and according to, is one of the largest U.S. cryptocurrency exchanges by spot trading volume.
Where Kraken’s value may lie though is in its Bitcoin futures, which puts it in the top ten cryptocurrency exchanges globally by volume.
As greater institutional and mainstream interest in cryptocurrencies grows, cryptocurrency exchanges and ancillary businesses will attract more investment interest – including for services such as blockchain analytics (for KYC and AML) and blockchain software services.
Growing interest in issuing a central bank digital currency also means that firms which provide expertise in blockchain analytics, could find their services tapped on by central banks globally.
A survey of central banks last year by the Bank of International Settlements saw 80% of central banks either considering launching their own central bank-issued digital currency, or seriously considering such issuance. 
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Feb 27, 2021

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