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Novum Alpha - Daily Analysis 1 July 2021 (10-Minute Read)

Like a coronavirus infection, markets are feeling lethargic and breathless in Asia as concerns that the region will be left behind as Europe and the U.S. chart a path out of the pandemic.

A terrific Thursday to you and markets are topping off at fresh records in a brand new month with half the year behind us! 

In brief (TL:DR)

  • U.S. stocks were up slightly on Wednesday with the blue-chip Dow Jones Industrial Average (+0.61%) and S&P 500 (+0.13%) up slightly while the the tech-centric Nasdaq Composite (-0.17%) edged lower as the initial euphoria over Facebook's triumph in the courts waned. 
  • Asian stocks slipped Thursday amid a firmer dollar as traders weighed signs that Covid-19 flareups are hampering some of the region’s manufacturing and looked ahead to a U.S. payrolls report.
  • Benchmark U.S. 10-year Treasuries were steady at 1.47% as traders digested the latest Fed comments (yields fall when bond prices rise).
  • The dollar advanced after its best month since March 2020.
  • Oil retained a climb with August 2021 contracts for WTI Crude Oil (Nymex) (+0.12%) at US$73.56 ahead of a meeting between OPEC+ producers on output policy and as a stalemate in Iranian nuclear talks drags on. 
  • Gold was little changed with August 2021 contracts for Gold (Comex) (-0.03%) at US$1,771.00. 
  • Bitcoin (-2.33%) fell to US$34,986 as trading continues to be choppy in the benchmark cryptocurrency and outflows still ahead of inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. When in Doubt Buy Stock
  2. Robinhood Rises Above the Fray 
  3. Bitcoin Got Easier to Mine 

Market Overview

Like a coronavirus infection, markets are feeling lethargic and breathless in Asia as concerns that the region will be left behind as Europe and the U.S. chart a path out of the pandemic. 
Asia's morning trading was challenging with Tokyo's Nikkei 225 (-0.43%), Seoul's Kospi Index (-0.43%), Sydney’s ASX 200 (-0.32%) and Hong Kong's Hang Seng (-0.57%) all down. 

Did you miss us at the Super Crypto Conference 2021? Watch it here...


1. When in Doubt Buy Stock

  • Record fund flows into U.S. equities despite record-high valuations 
  • Some investors are paring down exposure to U.S. equities on concerns over inflation (for tech stocks) and interest rate hikes, but given that they are still somewhere on the horizon, the growth story remains strong
Despite eye-watering valuations and indices hitting all-time-highs, global investors can’t seem to get enough of U.S. equities, with money pouring into Wall Street at the fastest pace in over 6 years.
Since February, U.S. equity funds have seen net US$189 billion in flows, according to data from EPFR, on stronger economic expectations, as well as postponed concerns over interest rate hikes, added to increasing vaccination rates in the U.S. which have renewed investor faith in the U.S. economy.
And it’s not just foreign investors who are buoying U.S. equities, Goldman Sachs (+1.86%) is forecasting U.S. households and companies to buy some US$500 billion of stocks by the end of this year.
While a significant portion of inflows went primarily to the so-called “reflation trade” with financials, industrials and energy seeing a boost on the anticipation of higher economic growth, more speculative small caps also had a field day.
According to monthly research provided by the Wells Fargo (+1.16%) Investment Institute, U.S. small cap value funds amassed some US$11 billion in inflows in the first five months of this year.
Tech also saw a boost as Facebook (-1.19%) fended off an avalanche of antitrust actions against it, emboldening Big Tech to continue with business as usual.
And Amazon (-0.23%) is objecting to newly appointed head of the Federal Trade Commission Lina Khan investigating any antitrust action against the e-commerce giant on the premise of bias.
Friday’s jobs report will be a key data point to provide clues of where the U.S. Federal Reserve is likely to head next, with the central bank having repeatedly emphasized that employment remains a key determinant of the Fed's view of the economy and whether to pull back stimulus. 
While markets were initially roiled when the last Federal Open Market Committee meeting suggested that interest rate hikes were likely to be brought forward in 2023, more dovish comments by policymakers after the meeting assured investors that the problem was not immediate, pushing risk assets higher.
Nonetheless, not all investors are sold on stocks, with some institutional investors looking to trim their equity exposures to reduce risk because of the high valuations.
But that may be a “later me” problem for the vast majority of investors.
With interest rates still near zero and no immediate signs of Fed tapering of asset purchases, especially as rent reliefs are set to expire in the U.S., which could put downward pressure on housing prices, sparking off a fresh crisis in a sector that has only seen prices travel in one direction, investors could do a lot worse than stocks.
While there has been a general rotation into more economically-sensitive stocks, a shift into airlines and cruise operators may be premature, especially given that their prospects are lifting at a time when interest rates are likely to rise as well, despite shouldering enormous amounts of debt.
And while growth stocks may appear to be overvalued, given their propensity to create new revenue sources, for instance the boom in cloud computing and artificial intelligence, in a sea of expensive companies, they may ironically provide the better value proposition.  

Did you miss us at the Super Crypto Conference 2021? Watch it here...


2. Robinhood Rises Above the Fray

  • Online zero-fee trading app Robinhood enters a US$70 million settlement with Finra over some of its practices ahead of its IPO due later this year
  • Potential IPO investors for Robinhood should also consider that listing will necessarily attract greater regulatory scrutiny and put some pressure on the online brokerage's unique value proposition, especially as costs rise and revenue streams are viewed more closely 
Half a decade ago, an internet story went viral that 23% of McDonald’s (+0.27%) patty meat was actually ground worm, supposedly purchased from “Roger Lee’s Worm Farm,” yet if the story was true today, those patties might actually cost double and be branded as “sustainable insect protein.”
The beef (pardon the pun) when it comes to mystery meats is when we’re not told what goes into them, yet if we place sufficient disclosures, the buyer is expected to accept what is being offered, worms and all.
Which is exactly the tact taken by online brokerage firm Robinhood, who helped to put pressure on trading fees with its slick and user-friendly trading app.
Under U.S. securities laws, market makers are allowed to pay brokers for order flow, so long as the brokerage’s corporate relationships and any conflicts of interest are disclosed accurately.
But those disclosures are like the user agreement on your iPhone – nobody reads them and scrolls to the bottom to accept the terms.
Because Robinhood caters primarily to the retail markets, it wouldn’t come as a surprise if mom-and-pop investors did the same, not knowing that behind the scenes, Robinhood was selling their order flows to shadowy market makers on Wall Street.
Yet the same way that social media or internet search users get an incredible service for free don’t question how these tech firms make their money, few, if any, retail investors even thought about how Robinhood could afford to offer zero-fee trading either.
But that’s now all come to a head as Robinhood has agreed to pay US$70 million to resolve sweeping regulatory allegations that the brokerage misled customers (possibly, but maybe not with malicious intent), approved ineligible traders for risky strategies (depends on your take on the GameStop saga and Dogecoin) or didn’t supervise technology that buckled under record volume and locked millions out of trading.
Like any new market participant, Robinhood has had its fair share of teething issues an the enforcement action is a blow to one of the fastest growing online brokerages, that is shaking up an entire industry, which has grown fat and slow from sure-win transaction fees.
Since its launch in 2014, now even firms like Charles Schwabb are offering zero-fee trading and improving the user interface of their online trading apps.
Robinhood was understandably keen to sweep aside the enforcement action by the Federal Industry Regulatory Authority and has settled for US$70 million without any admission of wrongdoing – a prudent move ahead of what is a hotly anticipated IPO later this year.
Growth at the online brokerage has continued, with its biggest source of revenue still stemming from customer trading, more than tripling in the first quarter of this year despite numerous complaints and almost non-existent customer service.
For investors, Robinhood’s upcoming IPO will give unique insight into a brokerage business model that is unique in how it generates profit.
The key to digital offerings is usability and removing barriers to taking action.
So instead of having four steps to onboarding a new customer, can you cut it down to three? If Robinhood makes money through trading volumes, the bigger question is can you enable “one-click trade” the way Amazon pioneered the “one-click buy.”
On top of gamifying the investment process and streamlining user actions, to ensure that they are repeatable and repeated, so as to be habit-forming, Robinhood also makes money by ruthlessly keeping costs low – so no expensive call centers to cater to customer inquiries, instead rely on automated tools and self-service.
But the Finra action has put pressure on some of Robinhood’s disruption of the traditional brokerage business, with the digital brokerage now introducing legacy (expensive) customer-service offerings, including the ability for customers to ask questions over the phone about options.
And as regulatory scrutiny grows over digital brokerages like Robinhood and SoFi, there may be more than some pressure to put on the legacy support, services and oversight that will eat into profits and which legacy brokerages are shouldering.
Robinhood isn’t out of the woods yet either, with pending investigations from the U.S. Securities and Exchange Commission and New York state regulators how Robinhood determines the suitability of clients for more risky options trading.
As for retail investors, unless they like the taste of worms, it might not be a bad idea to more carefully scrutinize Robinhood’s user agreement. 


3. Bitcoin Got Easier to Mine

  • Bitcoin mining difficulty set to drop by as much as a third on Friday in response to substantial shutdown of mining facilities in China 
  • Trading strategies that rely on Bitcoin hash rate to determine which are the cryptocurrencies that miners are keen to mine will have factored in the unprecedented drop off in China's Bitcoin mining activity, but longer term bodes well for the longevity and resilience of the Bitcoin blockchain
Bitcoin just got easier, not necessarily buying Bitcoin of course, but the mathematical puzzle that secures the Bitcoin blockchain and receiving some of that sweet, sweet Bitcoin block reward for your mining efforts.
And this Friday, the roughly biweekly adjustment in Bitcoin’s difficulty level for processing blocks of transactions will see a major shift unlike any seen prior, primarily due to China’s evisceration of Bitcoin miners in the Middle Kingdom.
For the crypto-curious, the mining difficulty dictates how much computing power is needed to solve a complex mathematical puzzle that determines which miner gets the block reward (Bitcoin) for securing the Bitcoin blockchain.
As more Bitcoin miners get in the game, the puzzle becomes more difficult and as less miners participate, it becomes easier to ensure a target rate of one block (confirmation of transactions) occurring every 10 minutes or so.
Based on current estimates according to the online Bitcoin Difficulty Estimator, the mining difficulty is expected to fall by as much as third, as more Bitcoin miners go offline in China.
In the past, a falloff in Bitcoin computing power, known as hash rate, was viewed by traders as a sign that miners are no longer mining Bitcoin, and looking to other cryptocurrencies for better returns, resulting in Bitcoin price weakness.
This time however, most traders are well aware that the sharp drop off in Bitcoin’s hash rate has been driven primarily by China’s crackdown on cryptocurrency mining, in line with the centenary celebration of the founding of the Chinese Communist Party.
As Beijing has rolled out its digital yuan program as a pilot, which now looks set to be extended beyond the pilot phase, tolerance for cryptocurrency activities within China has dramatically decreased.
In 2017, initial coin offerings or ICOs were banned and shortly thereafter cryptocurrency exchanges were banned as well.
However, China showed some degree of tolerance for Bitcoin mining activities, primarily because major mining equipment manufacturers and designers such as Bitmain and Canaan were Chinese companies, providing plenty of high-quality jobs and technological innovation in the space.
Bitmain, perhaps sensing the climate, very quickly emphasized that its mining machines could be repurposed for other applications, such as artificial intelligence, although their actual use in such roles has been more of a public relations exercise than anything else.
With Chinese Bitcoin miners pulling the plug on their machines and moving offshore, Bitcoin’s overall hash rate has plummeted, with the time needed to confirm a fresh block extending to as long as 20 minutes.
As the current Bitcoin mining difficulty level was set before Bitcoin mining was shut off in China, processing times have doubled, as over a third of hash rate was taken off.
By design, Bitcoin automatically revises its mining difficulty every 2,016 blocks, or approximately once a fortnight, to ensure that blocks are confirmed roughly once every 10 minutes.
However, the recent drop off in Bitcoin mining hash rate has been unprecedented, creating a window of opportunity for even casual miners using souped-up gaming computers, as the mining difficulty is set to plummet.
How much Bitcoin is actually mined in China is unclear, with the University of Cambridge estimating as of April 2020, that some 65% of Bitcoin mining was based in the Middle Kingdom, while other estimates put the figure as high as 75%.
In any event, the concentration of so much mining capability in one country always posed a risk for the Bitcoin blockchain, especially as it could potentially tempt a government (without mentioning any government specifically) to mount its own 51% attack on the Bitcoin blockchain and taking it down in one fell swoop without having to expend the economic cost of developing mining capacity.
That risk is now being reduced as Bitcoin mining spreads offshore and potentially to other jurisdictions which might not necessarily come down on the decentralized cryptocurrency with an iron fist, and bodes well for the integrity and longevity of Bitcoin.  

What can Digital Assets do for you?

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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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Jul 01, 2021

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