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Novum Alpha - Weekend Edition 3-4 July 2021 (10-Minute Read)

The perfect balance of highs and lows has helped U.S. stocks charge into the weekend racking up its seventh straight record session, not seen since 1997. 


A wonderful weekend to you as markets head into positive territory into July. 
 
In brief (TL:DR)
 
  • U.S. stocks flashed to fresh records on Friday with the blue-chip Dow Jones Industrial Average (+0.44%), S&P 500 (+0.75%) and the the tech-centric Nasdaq Composite (+0.81%) all higher as U.S. jobs data was better than estimates but not so high as to threaten a withdrawal of central bank intervention. 
  • Asian stocks ended the week mostly up, except for China and Hong Kong, with increasingly belligerent rhetoric from Beijing threatening heightened geopolitical tensions and increased market risk on the celebration of the Chinese Communist Party's centenary. 
  • Benchmark U.S. 10-year Treasuries slipped to 1.437% after Friday's monthly payrolls report, suggested a recovering economy yet with sufficient reason for the Fed to maintain the status quo on interest rates and quantitative easing (yields fall when bond prices rise).
  • The dollar edged higher on Friday. 
  • Oil was flat with August 2021 contracts for WTI Crude Oil (Nymex) (-0.09%) at US$75.16 after the OPEC+ alliance members pushed back talks till Monday, with no agreement in sight. 
  • Gold rose with August 2021 contracts for Gold (Comex) (+0.37%) at US$1,783.30. 
  • Bitcoin (+3.60%) recovered into the weekend to trade at US$34,631 (Saturday, July 3, at 1400 GMT) and chart watchers will be seeing if Bitcoin breaks lower having closed below key support lines and with outflows still leading inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

 
  1. The Goldilocks Trade
  2. Are We in a Stock Bubble and What Should You Do Just in Case? 
  3. How do you Stop a Cryptocurrency Exchange That Exists Nowhere? 

 

Market Overview

 
The perfect balance of highs and lows has helped U.S. stocks charge into the weekend racking up its seventh straight record session, not seen since 1997. 
 
U.S. jobs data continues to beat economist estimates, but not at such a pace that it threatens the U.S. Federal Reserve from paring back support or undermines the recovery of the U.S. economy. 
 
While U.S. job growth surged the most in 10 months, so did overall unemployment which edged up to 5.9% providing the perfect pretext for the Fed to keep its warm blanket of stimulus over the market and helping investors to continue with their buy now worry later trade. 
 
Over in Asia, most markets were up with Tokyo's Nikkei 225 (+0.27%) and Sydney’s ASX 200 (+0.59%) all in the green, while Seoul's Kospi Index (-0.01%) was flat and Hong Kong's Hang Seng (-1.80%) was down sharply as Chinese equities stocks continued to come under pressure amidst ongoing concern that Beijing is likely to raise geopolitical tensions with the West. 
 

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

 

 

 

1. The Goldilocks Trade

 
  • U.S. jobs data threads a perfect number to send stocks soaring 
  • Jobs growth was strong enough to portend recovery without being so high to tempt the Fed to pare back stimulus immediately  
 
Investors were on edge as U.S. jobs data was released on Friday for two major reasons – if job growth was too fast, the U.S. Federal Reserve might be tempted to roll back stimulus, but if job growth stumbled, confidence in the recovery story might be undermined.
 
Fortunately for everyone, U.S. jobs data released on Friday was not so good that the Fed would have sufficient reason to pull things back, but not so bad to cause undue concern either.
 
Beating economist expectations, some 850,000 jobs were added to the U.S. economy last month, against the 720,000 forecast, and significantly above the 583,000 added in May.
 
With the Fed repeatedly pointing to full employment as a key metric for determining when it would start to extricate itself from the economy, shares on Wall Street powered higher as job growth was positive, but not too positive to risk shaking out the Fed.
 
While the U.S. economy is clearly recovering, job numbers are still some 7 million short of what they were pre-pandemic, despite a strong demand for workers.
 
And while investors will focus on the raw jobs data, they mask far more subtleties that affect job numbers on closer examination.
 
For starters, the speed of recent economic changes makes it harder for businesses to decide how many workers they truly need, let alone how much they should pay them.
 
Take for instance the shift to working from home – how durable is this likely to be?
 
Does it still make sense to run a labor-intensive restaurant in a hollowed-out downtown, or shift to a delivery-based business model?
 
And high labor demand also means that workers have choices – they’ll want to make sure they pick the right one – in the meantime, unemployment checks give them the luxury to decide slowly.
 
Eventually, when the post-pandemic landscape can be more clearly charted, companies can make more long-term decisions and that will help to dramatically determine where labor markets are headed to next.
 
Much of the most recent U.S. employment demand stems from seasonal needs as summer gets under way in the U.S. and hospitality and leisure industries kick off.
 
After that seasonal demand dries up, will help determine whether the Fed will still need to prop up the economy to ensure a smooth transition into more self-sustaining growth.
 
For now, the Fed remains a key factor in why markets are continuing to notch new records and as long as U.S. job data is in the goldilocks zone, so will stocks be as well.  
 

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

 

 

 

2. Are We in a Stock Bubble and What Should You Do Just in Case?

 
  • Richard Bernstein's measure of a bubble demonstrates that risk assets are in a bubble 
  • Timing a bubble's bursting is notoriously difficult, instead investors should consider staying invested for the long term and envisioning what a post-pandemic economic landscape looks like
 
Last week, Richard Bernstein, who heads Richard Bernstein Advisors, an investment management company, wrote in a note listing his five customary tests for whether the market is in a bubble and determined that current conditions satisfy all five.
 
A prominent and consistent bear in the years leading up to the Financial Crisis in 2008, when he was a senior strategist at Merrill Lynch (which was still an independent investment bank at the time), he was also a bull in the long recovery thereafter.
 
According to Bernstein, markets are in a bubble based on five main criteria:
 
  1. Increased liquidity (enough said)
  2. Increased use of leverage (through the use of stock options)
  3. Democratization of market access (circa Robinhood and SoFi)
  4. Increased new issues (such as SPACs)
  5. Increased turnover (trading volumes are up a quarter on average)
 
Accepting Bernstein’s criteria, asset markets are in a massive bubble – so sell now and go into cash?
 
Timing a bubble can be prohibitively expensive, as even legendary value investor Warren Buffett who sat out the entire dotcom bubble can easily attest to.
 
Given the fullness of time, investors who stayed with tech stocks did far better than those who pulled out, but that was of limited value for fund managers who saw clients pull their money.
 
But far from calling from an evacuation of the market, Bernstein notes that this bubble hasn’t lifted the entire market equally with only three sectors of the S&P 500 outperforming the benchmark – Technology, Communication Services and Consumer Discretionary.
 
Yet that doesn’t in and of itself put these three sectors in a bubble.
 
Because the nature of the global economy is changing, it’s entirely possible that companies in these three sectors are the tip of the spear when it comes to that change, and there may be reasons that languishing sectors like Energy and Financials may be lagging the broader market – they’re undergoing disruption.
 
Bernstein’s suggestion is that investors could protect themselves simply by avoiding momentum plays and invest in sectors that haven’t shared in the bounty as the bubble inflated.
 
But that’s a very risky play.
 
For one, it assumes that stocks of companies in non-growth sectors are undervalued because of economic conditions, not because of durable disruption.
 
Second, it’s entirely possible that even when the global economy reopens in a meaningful way, cruise operators and airlines won't necessarily make a rapid return to profitability because of the enormous debt burdens they are nursing at a time when interest rates are widely expected to rise.
 
Instead, investors are probably better off re-imagining what a post-pandemic economic landscape could possibly look like, and then take longer-term bets on the companies that are most likely to profit from it regardless.
 
Take for instance cloud computing and digital communication tools indispensable during the pandemic.
 
Many of these shifts in the way we work are likely to prove durable.
 
Even our very relationship with work is likely to change with investors needing to ask if companies that facilitated that change, like Google (+2.30%), Amazon (+2.27%), Microsoft (+2.23%) and Zoom Video Communications (+0.62%) represent the economy of the future, or whether firms like Haliburton (-0.13%) and Union Pacific (+0.52%) do.
 
Whilst we’re likely to start traveling again, which benefits airlines, once the initial euphoria of open borders wears off, will corporations be able to justify having executives crisscrossing the globe when a video call would do just as well?
 
Could companies justify the carbon footprint of air travel for their employees, especially when many of them may work remotely on a permanent basis?
 
Will fossil fuel energy services companies still be relevant in an era of renewables and the electrification of transport?
 
Rather than trying to figure out whether stocks are in a bubble, investors are probably better off trying to identify the general trend of the economy, and buy into a group of companies that contain more winners than losers. 
 
To be sure, many bets will turn bad, but as the dotcom bubble proved from the experience of Amazon, all it takes is one or two companies to dramatically uplift a portfolio.
 
In the end, bubble-criers will always be right eventually – it’s the when and how that’s trickier.
 
For investors who aren’t in the habit of checking their Robinhood accounts every few minutes or staying glued to their trading screens all day, the better bet against a bubble may simply be to engage in visualization exercises of what the economy of tomorrow may look like, and buying the companies and sectors that are likely to show up there. 
 
 

3. How do you Stop a Cryptocurrency Exchange That Exists Nowhere?

 
  • Dragnet around Binance tightens despite the cryptocurrency exchange's overtures to regulators 
  • Being the world's largest cryptocurrency exchange by trading volume, authorities are better off working with Binance than against it as it remains the favorite haunt of traders both professional and retail alike
 
Hot on the heels of both the United Kingdom’s Financial Conduct Authority and Monetary Authority of Singapore scrutinizing their localized versions of Binance, regulators in Thailand and the Cayman Islands are making moves against the embattled cryptocurrency exchange as well.
 
Since its founding in 2017, Binance has run the gauntlet, with trillions of dollars’ worth of cryptocurrency transactions being conducted on Binance.com, an entity that has no legal presence in any single jurisdiction, while creating satellite legal entities that regulators have been acting against recently.
 
The U.K.’s FCA recently sanctioned Binance Markets Limited., a regulated entity, from conducting any regulated activity without its permission.
 
In Singapore, Binance Asia Services Pte. Ltd. which is in the line for a Payment Services license, may see its application get rejected, given the intense scrutiny it’s coming under from other regulators.
 
On Friday, Thailand’s Securities and Exchange Commission filed a criminal complaint against Binance with a division of the Royal Thai Police for operating a digital asset business without a license, while the Cayman Islands’ financial regulator said that Binance wasn’t authorized to operate in its territory.
 
Yet these piecemeal actions against Binance’s “satellite entities” may do little to affect the jewel in Binance’s crown – Binance.com itself, where the bulk of trading occurs.
 
Since it’s founding in 2017, Binance has facilitated trading anywhere and yet exists nowhere.
 
While other cryptocurrency exchanges like the derivatives-heavy BitMEX sits in light-touch jurisdictions like the Seychelles, Binance’s corporate structure is notoriously opaque, with some suggesting the company is incorporated in the Cayman Islands and others pointing to Malta.
 
A search of companies in both jurisdictions, not known for their transparency anyway, yields fewer clues.
 
Yet it’s lack of a legal jurisdiction hasn’t stopped Binance from growing into the industry leader when it comes to cryptocurrency exchanges.
 
And to be fair, Binance’s insistence on keeping its corporate structure opaque may have been born more out of necessity than a deliberate decision to obfuscate its origins.
 
Started in China around 2017, a crackdown by Beijing against cryptocurrency exchanges forced the company to shift its operations to Japan, where authorities moved against it in 2018, forcing the firm to Malta, which embraced it with open arms.
 
But in 2020, Malta, which is part of the European Union and owing to pressure from the European Central Bank, was forced to disavow Binance, declaring that it was not responsible for regulating the cryptocurrency exchange.
 
Since then, trying to figure out where Binance is domiciled and regulated has been like playing “Where’s Waldo?”
 
Yet during that time, instead of going deeper into hiding, Binance tried its best to incorporate satellite entities that had the chance of one day becoming fully regulated cryptocurrency exchanges in the vein of Coinbase Global (-0.30%).
 
Binance entered the U.K. with Binance Markets Limited, in the hope that it could one day conduct services regulated by the FCA, and Binance Asia Services on the prospect of receiving a payment services license issued by the Monetary Authority of Singapore.
 
Those efforts to exist in harmony with regulators however, appear to have been in vain, and perhaps even a little naïve on the part of Binance.
 
Part of what makes Binance so successful is that it has few, if any, restrictions on investors.
 
No experience? No problem, here’s some leverage for you.
 
No identity documents? We’ll cap your withdrawal limits, but you can trade anyway.
 
This and a slew of other light touch AML and KYC measures, coupled with Binance’s liquidity and market depth have made the cryptocurrency exchange a magnet for traders and investors, even hedge funds can’t resist the siren call of Binance.com with its deep markets.
 
Speaking at a cryptocurrency conference last year, Binance founder Changpeng Zhao has remained defiantly decentralized,
 
“You have to have an entity, you have to have a headquarter, you have to have a bank account. All of those things don’t need to exist for blockchain companies.”
 
Yet despite his rhetoric, Zhao, or CZ, as he’s referred to, did try to work with regulators and incorporated many visible legal entities to cater to the inevitable roll out of regulation in the cryptocurrency space.
 
And while the regulatory crackdown makes for good publicity for authorities, they will do little to censure Binance.com on a practical level.
 
Binance.com customers briefly lost access to withdrawals in the British pound and some U.K. customers said their bank transfers to the exchange had been blocked, but customers could still add or remove euros from the system, or take cryptocurrency off Binance’s platform directly.
 
To catch something, you first have to know where it is and that's something regulators are just coming to terms with. 
 

What can Digital Assets do for you?

 
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Jul 03, 2021

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