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Novum Alpha - Weekend Edition 24-25 July 2021 (10-Minute Read)

A raft of robust corporate earnings out of the U.S. are giving investors something to float on as shares rallied to fresh records amid optimism that despite the rising tide of coronavirus variants, the economic recovery remains on track. 

A wonderful weekend to you as stocks head higher on the back of blockbuster corporate earnings. 
 
In brief (TL:DR)
 
  • Record corporate earnings powered the Dow Jones Industrial Average (+0.68%), the S&P 500 (+1.01%) and tech-centric Nasdaq Composite (+1.04%) to fresh highs. 
  • Asian stocks ex-China closed higher on Friday, taking their cue from Wall Street. 
  • Benchmark U.S. 10-year Treasuries were flat at 1.276% as investors soaked up bonds and tech stocks amidst increasing concern over the delta variant (yields fall when bond prices rise).
  • The dollar was little changed.  
  • Oil edged up with September 2021 contracts for WTI Crude Oil (Nymex) (+0.22%) at US$72.07 amid robust corporate earnings fueling bullish sentiment on demand. 
  • Gold was flat with December 2021 contracts for Gold (Comex) (-0.18%) at US$1,805.90. 
  • Bitcoin (+4.61%) rallied over the weekend to US$33,900 and technical indicators continuing to point to US$36,000 being the next level of resistance while inflows continue to slow against outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 
In today's issue...
 
  1. So you fancy yourself a stock picker? 
  2. Beijing Banning Profits? What will the Communist Party think of Next?
  3. China's Crypto Miners Stage a Conference and Plan a Coup 

Market Overview

A raft of robust corporate earnings out of the U.S. are giving investors something to float on as shares rallied to fresh records amid optimism that despite the rising tide of coronavirus variants, the economic recovery remains on track. 
 
U.S. indices shrugged off China's continued crackdown on its companies listed on American stock exchanges, this time taking the fight to China's lucrative and rapidly growing edutech sector.
 
In Asia, markets reflected the divergence in fortunes with Sydney’s ASX 200 (+0.11%), Tokyo's Nikkei 225 (+0.58%) and Seoul's Kospi Index (+0.13%) all up, while Hong Kong's Hang Seng (-1.45%) was down at the close as Beijing continues to undermine its foreign-listed companies.  
 
 

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

 

 

 

1. So you fancy yourself a stock picker?

 
  • Professional money managers moving into safety as outlook over pandemic, stimulus and inflation become uncertain
  • Excess liquidity and no signs of central bank tightening mean that rotation out of risk is likely to prove temporary at best
 
Stock pickers and professional money managers are supposed to have access to the latest data, the best research and an intuition that surpasses that of the retail investor – or at least that’s what justifies their fees.
 
But in a broad market rally where seemingly every asset travels in only one direction, the professional money manager has had a hard lot when even the Reddit horde can generate supernormal profits.
 
Yet as every seasoned professional money manager will know, the key to investing is longevity – which means surviving not just the bad times, but the good times as well.
 
During periods such as the current market rally, investors, both retail and institutional, start to question whether underperforming managers may be missing the plot, some even go as far as to pull their money to take more passive and low-fee positions instead.
 
But it is exactly during times like these that the professional investor earns their keep and the reason why retail investors should pay attention to what they’re doing now.
 
Coronavirus cases are soaring again, thanks to the delta variant at a time when unprecedented stimulus is starting to turn stale and just as inflation appears to be rising.
 
There’s plenty to make even the most steely-eyed investor nervous right now and it’s showing up in the financial markets with investors pouring back into pandemic favorites of Treasuries and tech, sending the Nasdaq 100 to fresh records this past week.
 
Money flowed into bond and money-market funds as well, with some investors admitting that they’re looking for refuge.
 
While markets were able to take the pandemic in stride for the most part, safe in the belief that vaccines and stimulus would ensure a pathway to normalcy, suddenly investors aren’t so sure.
 
With data from Israel suggesting that the Pfizer-BioNTech vaccine is only 39% effective against the delta variant, there’s no certainty that vaccination equates with reopening.
 
Investors have abandoned the reflation trade and the list of hot stocks now reads like a pandemic who’s who – from Facebook (+5.30%) to Moderna (+7.84%).
 
But lest we get the impression that professional investors are battening down the hatches, it’s really just a wait-and-see as to what happens next.
 
Good thing the U.S. Federal Reserve hasn’t started tapering or tightening just yet.  
 
 

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

 

 

 

2. Beijing Banning Profits? What will the Communist Party think of Next?

 
  • China cracking down on its for-profit after-school education service providers in an effort to reduce the inequality gap 
  • Business models of some of China's most profitable education and edutech companies could literally vanish overnight if Beijing moves to close the sector 
 
To observers, China may be nothing more than nominally communist.
 
From profits to private ownership, Vladimir Lenin would turn in his grave if he saw how his vision of communism evolved into the economic powerhouse that is China. 
 
But while China may appear to be a capitalist country, albeit with Chinese characteristics, a recent move by Beijing to literally ban profits suggests that the socialist apple doesn’t fall far from the communist tree.
 
Almost instantly, some US$16 billion was wiped from the market cap of three major Chinese education companies listed in New York on Friday after a leaked memo suggested that Beijing might ban academic tutors from making a profit.
 
The document, dated July 19 and leaked to the Financial Times, allegedly required home-schooling or off-campus education companies, a highly lucrative industry in the results-obsessed Chinse society, to register for non-profit status and barring local authorities from approving any new agencies.
 
If enacted, the measure would be a heavy blow to one of China’s fastest growing industries – tutoring children outside of school and preparing teenagers for university entrance exams.
 
The possible move comes after Beijing’s crackdown on ride hailing app Didi Global (-20.98%), which has seen its shares plunge by over a fifth since its IPO, after authorities moved to take its app off all app stores in China, over concerns on how the company handles user data.
 
Within the first hour of trading in New York on Friday, shares of TAL Education (-70.76%), Gaotu Techedu (-63.26%) and New Oriental Education (-54.22%) were all down by as much as 60% and closed an average of 60% down by the time the bell rang on Wall Street. 
 
As China has prospered, income inequality has soared, allowing the more well-off to send their children for supplementary classes or hire expensive private tutors to give their children a leg-up in their academic careers.
 
In a country which prizes academic excellence and where teachers are often lavished with gifts around the holidays, there has been growing resentment among China’s lower income households over the perceived self-perpetuating cycle of privilege enjoyed by the rich.
 
Getting into a good university in China, already a fiercely competitive process, is often seen as a chance for someone from a poor family to lift their social status.
 
But the burgeoning after-school tutoring industry has handed advantages to rich students that their less well-off counterparts could only dream of.
 
In Beijing’s upscale Haidian District, which is ringed by some of the best universities in China and well-known for its vibrant tutoring schools, 57 students made the list of the top 80 scores in the city’s college entrance exams last year, although the district accounted for less than a quarter of the city’s total test takers.
 
Education, since the time of the emperors, has long been seen as a social-leveler, where during ancient Chinese times, a commoner could rise to prominence if they had scored well at the imperial exams.
 
Since then, college entrance exams have taken over the place of the imperial exams and rich parents will spare no expense to ensure that their progeny get a coveted spot at Peking University or Tsinghua University, alma mater to many of the Chinese Communist Party’s elite.
 
According to the leaked document, China will ban academic training agencies from raising capital through IPOs, whether at home or abroad, measures which are likely to put a damper on the rapidly rising, and highly lucrative sector. 
 
And the business models of the existing listed Chinese education companies is in serious doubt. 
 
Unlike China's crackdown on Didi Global, the social compact between the Chinese Communist Party and the Chinese people could be upset by edutech, and apparatchiks will no doubt prize social stability over the profits of a handful of companies, reason enough for investors not to catch any falling daggers. 
 

3. China's Crypto Miners Stage a Conference and Plan a Coup

 
  • Some Chinese cryptocurrency miners swapping to other cryptocurrencies to stay in the game
  • China showing no sign of easing up on its nationwide cryptocurrency crackdown, an effort that is likely to intensify as the country nears its National Day holiday in October 
 
In the sweltering 120-degree heat that is Chengdu, Joel Xu is wearing a hoodie and jeans and lining up to get into the “Web 3.0 Blockchain Application Cum Computing Power Overseas and Distributed Storage Conference” – otherwise known as “what’s next for bitcoin miners in China.”
 
A gathering of some of China’s largest cryptocurrency miners, attendees braved the sweltering heat of midsummer in Chengdu, where the city is just as hot as the hot pot, to swap stories, share ideas and figure out how they can stay engaged in cryptocurrencies amidst a nationwide crackdown by authorities.
 
While many cryptocurrency miners have long fled China, as evidenced by the sharp drop off in hashrate last month when Chinese miners fled the Middle Kingdom, many others stayed behind to figure out how they can continue to be in the crypto business without raising the ire of Beijing.
 
Some cryptocurrency miners have swapped their rigs to mine cryptocurrencies that were perceived to consume less energy, such as Filecoin, while others were betting on mining as much Ether as possible, in the hopes that when Ethereum eventually moved to a proof-of-stake blockchain, they would be well-positioned to generate staking fees for securing that blockchain.
 
Others have shifted to use their data centers to secure the file-storage blockchain Swarm, where miners are rewarded for data storage and processing services provided, receiving the cryptocurrency as payment for providing distributed storage and processing solutions.
 
Although China has banned cryptocurrency exchanges and initial coin offerings, it hasn’t banned individuals from actually owning cryptocurrencies, but that may have more to do with the fact that it’s often difficult to ascribe ownership of cryptocurrencies to an individual, rather than because Beijing is tacitly endorsing the technology.
 
And there are no signs that China is easing up on cryptocurrencies either, with Anhui province pledging earlier this month to shut down all cryptocurrency mining projects within the next three years, following similar efforts by Inner Mongolia and Yunnan.
 
It doesn’t matter if the source of energy is renewable either, as Sichuan, China’s biggest producer of hydropower has also moved to shut down its rapidly expanding cryptocurrency mining industry.
 
Sichuan was initially a safe haven for Chinese cryptocurrency miners who had fled Inner Mongolia following the latter’s crackdown on the sector to reduce its reliance on fossil fuels – the province is the largest producer of coal in China and almost all its power is generated from burning coal.
 
China's cryptocurrency miners can confer all they want, but as with so many things in China, it's more about survival.  
 
 

What can Digital Assets do for you?

 
While markets are expected to continue to be volatile, Novum Alpha's quantitative digital asset trading strategies have done well and proved resilient.
 
Using our proprietary deep learning and machine learning tools that actively filter out signal noise, our market agnostic approach provides one of the most sensible ways to participate in the nascent digital asset sector. 
 
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 24, 2021

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