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Novum Alpha - Daily Analysis 6 May 2021 (10-Minute Read)

While investors are busy debating the prospect of inflation, the White House has made it plain that it's happy to see wages, especially for those at the middle and lower income brackets, increase.

 
A terrific Thursday to you as tech stocks tank on the remote possibility of interest rate hikes. 
 

In brief (TL:DR)

 
  • U.S. stocks wound Wednesday a mixed bag with the S&P 500 (+0.07%) and blue-chip Dow Jones Industrial Average (+0.29%) mostly flat while the tech-centric Nasdaq Composite (-0.37%) was harder hit as a victim of the reflation trade.  
  • Asian stocks rose Thursday and U.S. futures ticked higher as investors mulled an ongoing debate about inflationary pressures.
  • The U.S. 10-year Treasury yield rose two basis points to 1.58% (yields rise when bond prices fall) as investors shifted into value stocks. 
  • The dollar was little changed.  
  • Oil fell with June 2021 contracts for WTI Crude Oil (Nymex) (-0.12%) at US$65.55 and was mostly flat. 
  • Gold was up slightly with June 2021 contracts for Gold (Comex) (+0.11%) at US$1,786.20 continuing to ride on a weak reflation trade. 
  • Bitcoin (+3.61%) rose to US$56,818 with inflows into exchanges slowing against outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices). 
 

In today's issue...

 
  1. The U.S. Will Go to War with China Over Taiwan - Maybe?
  2. Do You Need an ARK in the Middle of the Desert? 
  3. Dogecoin - The Joke's On You! 
 

Market Overview

 
While investors are busy debating the prospect of inflation, the White House has made it plain that it's happy to see wages, especially for those at the middle and lower income brackets, increase. 
 
That's setting the scene for a massive dose of inflation. 
 
With commodities rising, the U.S. Federal Reserve promising to keep rates low and the White House showing no issue with pumping out stimulus, investors are increasingly jittery over inflation. 
 
But more dollars make for a good Asian trade with Tokyo's Nikkei 225 (+2.05%), Seoul's Kospi Index (+0.67%) and Hong Kong's Hang Seng Index (+0.93%) all higher as investors took their fists full of dollars to the Far East in search of opportunity while Sydney’s ASX 200 (-0.34%) was lower as a weaker dollar makes for higher operating costs for Australian commodity producers.  
 
Did you miss us at the World Family Office Forum? Watch it here...
1. The U.S. Will Go to War with China Over Taiwan - Maybe?
 
  • Washington fortunately chooses wealth over war as it vacillates on the Taiwan issue
  • The U.S. should avoid Cold War-style line drawing as it boxes Beijing into a corner and could stoke it to lash out 
 
Strategic ambiguity is perhaps more reassuring than thermonuclear war.
 
Cooler heads in Washington have prevailed as the prospect of waging war with Beijing over an island in the South China Sea becomes increasingly unappealing, with a top White House official in Asia warning that any declaration that the U.S. would defend Taiwan from a Chinese attack only carries “significant downsides.”
 
For decades, Washington has maintained a policy of "strategic ambiguity," to discourage hawks in Taipei from declaring independence while also dissuading Beijing from taking Taiwan by force.
 
Beijing maintains that Taiwan is part of its sovereign territory and views the island as a renegade province.
 
While some U.S. policy hawks have called for a shift to “strategic clarity” to make clear to Beijing that the U.S. would defend Taiwan in the event of an attack by China, the Biden administration has made plain that there are only downsides to such a blatant declaration.
 
And even as trade tensions between China and the U.S. increase, Beijing’s rising belligerence in the South China Sea and around Taiwan, are providing fuel for hawks in Washington and stoking the flames of conflict.
 
Beijing has already warned Washington about crossing a “red line” over Taiwan, a warning that now comes with the capability to invade the island.
 
And China has flown more warplanes into Taiwan’s air defense identification zone over the past year, than at any other time in the past six decades. 
 
China’s assertiveness, not just over Taiwan, but over the South China Sea, building military bases on a stretch of atolls across the vast expanse, all point to the growing threat that tensions could ratchet up to conflict, if diplomacy is not properly managed.
 
Making things worse, the Biden administration has adopted a Cold War-era stance towards China, stirring the G7 to work together to “contain China.”
 
Dividing the world along Cold War lines will do no one any favors, and boxing China in, could stoke nationalistic fervor that provides Chinese President Xi Jinping with the pretext he needs to mount either a full scale invasion of Taiwan, or at the very minimum, some limited military action.
 
Either course of action by Beijing would be severely damaging on the global economy and depending on the American response, could embolden China to take even more aggressive steps in retaliation. 
 
On the eve of the Second World War, the Allies allowed Hitler to take the Sudetenland, a territory for which they cared little for, and which they wanted to fool themselves into believing would appease the Nazi dictator.
 
Instead, the Third Reich’s successful annexation of the Czech lands only emboldened Hitler to dream bigger, launching a surprise attack on Poland and plunging the world into global conflict.
 
History could very well repeat itself over Taiwan unless cooler heads prevail.
 
And while hawks in the U.S. may prefer “strategic clarity,” ambiguity would be the preferred course because it provides avenues for de-escalation.  
 
Did you miss us at the World Family Office Forum? Watch it here...
 
2. Do You Need an ARK in the Middle of the Desert?
 
  • Cathie Wood's flagship ARK Innovation ETF (-1.54%) pummeled by a recent sell-off in supercharged tech stocks and high-growth companies 
  • ARK's safe haven during the pandemic appearing less relevant as the world reemerges and economies reopen, fueling a reflation trade
 
The darling of Wall Street for most of the pandemic, it was as if Cathie Wood’s flagship ARK Innovation ETF was like the boat that Noah built, saving investors in a landscape drowning in the coronavirus.
 
But as the world emerges from the pandemic, like Noah’s first animals stepping out of the ark and onto dry land, investors are finding that they don't necessarily need an ARK anymore.
 
On Wednesday, ARK Innovation ETF (ARKK) dropped for a seventh straight session – its longest slide in nearly two and a half years.
 
After surging over 150% last year thanks to a string of prescient bets on companies like Tesla (-0.39%) and Zoom Video Communications (-2.38%), ARKK is finally starting to sink on the back of a rotational play back into so-called “value” stocks.
 
Down over 10% this year, investors are piling into protection against further losses, with bearish puts (the right to sell at a specific price) on ARKK at their fourth highest level on record.
 
The top ten holdings of ARKK read like a who’s who of the pandemic, including Zoom Video Communications and Teladoc Health (-0.89%).
 
A once coveted place on ARKK was like a seat on the lifeboat as the Titanic sank in the backdrop, but the specter of inflation and the prospect of higher interest rates is making it harder to justify tech stock valuations.
 
Even robust earnings weren’t able to refloat the prospect for tech firms, and ARKK has seen some US$770 million in outflows in the past five days, according to data from Bloomberg, with the ETF marking its first monthly net outflow since October 2019.
 
Given the growing popularity of the reflation trade, the specter of inflation rising, the tech trade now looks about as valuable as an ark stranded in the middle of the desert. 
 
3. Dogecoin - The Joke's On You!
 
  • Dogecoin defies all expectations and rocks to almost US$90 billion in market cap, eclipsing many major companies 
  • Investors should investigate the reasons for Dogecoin's meteoric rise when considering an allocation of resources to the cryptocurrency 
 
So…you’re a serious investor.
 
You eschew volatile and speculative stocks, preferring blue chips and what the Oracle of Omaha recommends.
 
When you finally buy any asset, you look for safety, stability and security, often preferring predictability over growth, profits over multiples.
 
So when you heard about cryptocurrencies, you dismissed it almost instinctively.
 
After all, how could something so unproven with no track record and backed by nothing, ever provide you with the secure retirement nest egg that you so value?
 
That’s when you step out to mow your lawn only to see your neighbor drive out of his garage in a brand new Lamborghini – all because of a meme cryptocurrency called Dogecoin.
 
And for anyone who still thinks that Dogecoin is still a joke, there are 90 billion George Washington’s which say that it’s not.
 
Yesterday the explicitly humorous digital token rose to a not so funny US$90 billion in market cap.
 
Bear in mind, this is a cryptocurrency that was started as a joke and has never pretended to be anything else but.
 
It’s not helping decentralized finance via smart contracts and it’s not trying to replace the role of gold in a portfolio, it maybe wants to help you not take things too seriously, and possibly make you fabulously rich in the process – that’s Dogecoin.
 
While in the past, the trillions of dollars in stimulus from governments and central banks might have triggered a gold rush for the inflation wary, this time round those dollars are flowing into the nascent cryptocurrency markets.
 
And Dogecoin has become the GameStop of the cryptocurrency space, rallied by a horde of day traders egged on by comments on online message boards like Reddit and cryptocurrency social media staple Twitter (-1.58%).
 
What’s even more remarkable is that while ARKK has languished, on the back of a broader decline in tech stocks, Dogecoin has surged.
 
Started in 2013 as a joke based on the Shiba Inu breed of dog, Dogecoin has a certain vulgar purity that it just might have the last laugh, with Robinhood’s trading app crashing briefly from Dogecoin buying earlier this week.
 
But before you stash some of that bond money into Dogecoin, do note just some of the reasons that have been associated with the cryptocurrency’s most recent ascent – on April 20, a day normally associated with marijuana, the hashtag #DogeDay was trending in a price push, celebrities from billionaires Mark Cuban to Elon Musk have talked up Dogecoin and Gemini, the cryptocurrency exchange backed by the Winklevoss twins (of Facebook (-1.05%) fame), announced Tuesday that it would soon enable trading in the cryptocurrency.
 
And if those reasons aren’t funny to you, then perhaps you might just have a case of the Dogecoin fever.
 
LOL.  
 
Missed out on our NFT special? Watch it here!
 
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May 06, 2021

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