Novum Alpha - Daily Analysis 9 July 2021 (10-Minute Read)
A fantastic Friday to you as stocks falter and sentiment soured on risk on concerns the economic recovery may be weaker than suggested.
In brief (TL:DR)
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In today's issue...
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Market OverviewThis just in! The coronavirus pandemic is not over!
And if this comes as news to you, it may be because you live in a place which on the surface has returned pretty much to normal.
But the sad fact of the matter is that the world is far from back to normal and while the global economy appears to be on the mend, it's coming from a pretty low base.
The U.S. summer hiring season hasn't been as fantastic as expected and now doubts remain on whether the global economy is really recovering or the world is in for a perfect storm - low growth, high inflation and limited room left for central banks to act.
In Asia, markets had a rough morning trading session with Hong Kong's Hang Seng Index (+0.10%) up slightly, w
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1. Meme Stocks Start to Lose Steam
It’s all fun and games until you realize that it was never a game.
At some stage it’s time for investors to put on their big boy pants and realize the “serious” business of stocks.
And it appears that time has come as a basket of some of the hottest meme stocks has plummeted, with some plunging by over 20% in as many days, with retail investors shunning speculative bets on troubled companies in favor of more “mature” buys.
A Bloomberg-tracked group of 37 meme stocks has fallen by almost a fifth since its high in June led by losses from Clover Health Investments (-3.70%), GameStop (+0.38%), BlackBerry (+0.96%) and Naked Brand Group (-2.46%).
And while there are signs that the day-trading frenzy that marked the arrival of the meme stock may be fizzling out, there’s no sign that retail investors have forsaken the market for summer pleasures.
Retail investors are now estimated to be responsible for as much as 26% of all trading volume based on data from Vanda Research, and up from roughly 20% last year, despite predictions that their presence in the markets would wane once the U.S. reopened.
While some retail investors may have been lured into the markets by the prospect of making a quick and easy buck through highly speculative bets on companies like GameStop, even more were buying into bog-standard ETFs and stocks like Apple (-0.92%) and Microsoft (-0.90%), according to Vanda Research.
But the slide in meme stocks may also be a function of the trade becoming too crowded and retail investors moving on to other things, as the initial excitement wears off.
Last week, Morgan Stanley (-2.65%) suggested that professional traders follow the lead of retail traders into meme stocks, a move that may have undermined the anti-Wall Street cache of the meme stock trade.
The original meme stock trade was a grassroots-led movement to “punish” professional Wall Street firms that were short-selling companies like GameStop, a well-hated/loved video game retailer.
From the perspective of these retail traders, GameStop may have been a terrible company with poor customer service and a questionable business model, but it was “their” terrible company and if they could find a way to “stick it to the man,” they would.
But as with so many other fads, when the meme stock trade started to get crowded, the early traders who made a fortune off stocks like GameStop and AMC Entertainment (+6.37%) quickly moved on to other things.
It would however be premature to rule out retail traders entirely in their ability to sway the market, it’s just that there appears to be far more method to the madness now, than at any time in the past.
According to data from Vanda Research, last week, retail investors were betting big on companies and ETFs that appear to represent the future, including the Nasdaq 100 (-0.60%), Virgin Galactic Holdings (+17.27%) and even semiconductor heavyweight Micro Technology (-1.42%).
Retail investors have also shunned Wall Street’s “reflation trade” (bets on companies that are more economically-sensitive and which were expected to do well in a reopening).
Industrials, financials and energy companies which were expected to pick up sharply on signs that the U.S. economy was recovering, have since started to show weakness once again.
From a retail investor’s perspective, that makes absolute sense.
If stocks represent the future, both in terms of retirement or profit, then it’s hard to imagine that retail investors would identify strongly with the staid, industrial-age imagery that most strongly represents companies that constitute the reflation trade.
Fossil-fuel burning, monolithic temples to a bygone past, many of these companies may appear to be ripe for disruption, or at least that’s what retail traders are communicating with their capital allocation.
And while it may not have mattered as much in the past, now that retail investors have had a taste of their power and influence in the markets that matter, they may be hooked on that power and more than willing to use it.
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2. Bond Yields Are Plummeting & Why You Should be Concerned
“Be careful what you wish for cause you just might get it all
You just might get it all and then some you don't want…”
- Taken off the lyrics of “Home” by Daughtry, off the album of the same name, (c) Universal Music.
Last week, investors were hoping, nay, anticipating that U.S. job numbers wouldn’t be so good as to threaten the prospect of central bank tapering, and they got exactly what they wanted.
Jobs grew, but well below analyst estimates, ensuring that the U.S. Federal Reserve was unlikely to shift its policy any time soon, but it also forced investors to question if the U.S. economy was really recovering as well as it should be.
And that uncertainty, has led to a flight to safety, with a furious plunge in U.S. Treasury yields seeing investors sour on everything from stocks to cryptocurrencies, while propelling fast-growing tech stocks to fresh highs.
Earlier expectations that robust economic growth and elevated levels of inflation would usher in a period of higher interest rates are now starting to falter, with the reflation trade losing steam.
A multitude of risks are facing investors now, more so than at any time in recent history.
Minutes of the last U.S. Federal Reserve meeting revealed that policymakers were contemplating dialing back support and hiking rates on an accelerated schedule, while the more transmissible delta variant of the coronavirus is threatening to ripple through the U.S. which has all but returned to pre-pandemic life without restriction.
And with signs that growth is peaking in China, the global economy could be facing a perfect storm – higher inflation, slower growth and central banks discovering that they’ve hit the limit on stimulus.
Which is why the benchmark U.S. 10-year Treasury yield is heading back to its pre-pandemic lows.
With the costs of holding cash increasing and not many “safe” places to put that cash, investors are pouring into Treasuries and tech stocks and if that sounds like the pandemic trade, that’s because it is.
Companies that were expected to bust out the gates as the U.S. reopened, including industrials, financials and energy, have lost steam and pandemic favorites like Apple have powered to fresh highs.
High-quality corporate debt has also been in demand, with so much money chasing so few options with investment grade corporate bond yields plummeting to their lowest levels since February, according to data from ICE BofA Fixed Income Indices.
But with corporate debt yields plunging, many “less creditworthy” companies are likely to slip through the cracks, with BlackRock this week downgrading its outlook for U.S. high-yield bonds, warning that the potential yield on offer was far below the risks of lending to these companies.
To be sure, the reflation trade may have been premature from the start, and with signs that the economic picture may not be as rosy as portrayed, investors can’t be faulted for moving into Treasuries and tech firms which have demonstrated a reliable penchant for making profits even in a pandemic.
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3. SPACtacular Stablecoin USDC Heads for Public Markets
A dollar by any other name would buy as much?
There are dollars and then there are digital dollars and as far as digital dollars go, Tether, the controversial dollar-backed stablecoin is heads and shoulders above any other stablecoin in the cryptocurrency landscape.
With a market cap of some US$62 billion, Tether has quietly grown into one of the biggest players in the U.S. commercial paper market and the most widely used and lightly supervised digital dollar stablecoin.
So when Circle, issuer of the USDC stablecoin came to the fray, it offered a unique opportunity to go a different route when it came to a digital dollar.
From the get-go, Circle maintained far higher levels of transparency, with audited accounts of actual dollars (whatever that means) deposited at banks and other financial institutions, but take-up in the cryptocurrency community had been slow initially.
As the cryptocurrency space has attracted institutional interest and regulators are circling around cryptocurrency companies, Circle’s initiative to be regulatorily compliant seems prescient even though USDC comes in a far second place for stablecoin issues with a market cap of just US$26 billion or less than half that for Tether.
Circle looks set to increase transparency with a US$4.5 billion SPAC-listing and in a statement, CEO Jeremy Allaire said,
“Through this strategic transaction and ultimate public debut, we are taking an even bigger step forward, with the capital and relationships needed to build a global-scale internet financial services company that can help businesses everywhere to connect into a more open, inclusive and effective global economic system.”
Speaking to Bloomberg Television yesterday, Allaire said,
“We saw an enormous opportunity to both raise capital, but also more importantly build a significant public company with transparency and visibility to the enterprises and institutions that are building on top of us.”
Not longer after the Bitcoin whitepaper was written, there was an obvious need for stablecoins to balance the inherent volatility in cryptocurrencies.
Traders looking to stay invested in the cryptocurrency ecosystem but not wanting to take a position in the interim saw the value in Tether, which was launched in 2014, as a halfway house from cashing out of cryptocurrencies entirely or braving the volatility.
Circle launched its USDC as a “regulated” alternative to Tether, four years later in 2018.
USDC is not legal tender by any stretch of the imagination, but the concept of private currencies is not new and during the industrial revolution, mining towns located far away from other forms of economic activity, would issue company scrip as a form of private currency issued to employees by their employers.
That company scrip could be exchanged in company stores also owned by the employer – private currency for a highly localized economic system.
Used since the mid-1800s in the United States, private currencies can still be found not just in North America, but all over the world, in various states and rates of circulation.
As a payment services provider for internet businesses, Circle has the unique opportunity to issue a private currency, USDC, that solves two of the biggest problems when it comes to such issuances – liquidity and convertibility.
When asked by Bloomberg Television whether central bank digital currencies might pose a threat for stablecoins such as USDC, Allaire was dismissive,
“I don’t think the strategy for the U.S. should be to try to out China, China.”
Circle will enter the public markets via Concord Acquisition Corp.
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Jul 09, 2021