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Novum Alpha - Daily Analysis 29 July 2021 (10-Minute Read)

It's hard to fathom the mind of the Chinese Communist Party, but seriously, what were they thinking?

A terrific Thursday for you and what better day to be launching one of the most hotly anticipated IPOs for this year. 

In brief (TL:DR)

  • U.S. stocks tread water on Wednesday as the U.S. Federal Reserve discussed scaling back asset purchases without committing to a timeline, with the Dow Jones Industrial Average (-0.36%) and S&P 500 (-0.02%) down slightly while the tech-centric Nasdaq Composite (+0.70%) was higher on record tech earnings. 
  • Asian stocks rose early Thursday after the U.S. Federal Reserve inched closer to tapering substantial stimulus but said more economic progress is needed and as traders weigh efforts by China to restore market calm there.
  • Benchmark U.S. 10-year Treasuries stood at 1.230% (yields fall when bond prices rise) as investors still show sufficient appetite for safe haven assets. 
  • The dollar was steady in the wake of the U.S. Federal Reserve meeting.
  • Oil was resilient with September 2021 contracts for WTI Crude Oil (Nymex) (-0.10%) at US$72.32 as declining stockpiles of U.S. crude, gasoline and distillate signaled healthy demand during the nation’s summer driving season.
  • Gold edged higher with December 2021 contracts for Gold (Comex) (+0.88%) at US$1,820.50 as investors cottoned on to the prospect of inflation. 
  • Bitcoin (+1.18%) rose to US$39,620 as investors continue to nibble at the benchmark cryptocurrency with outflows leading inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 


In today's issue...

  1. Robinhood's IPO Demonstrates They Know Their Customers
  2. These Days Everything's Bespoke, Even Your Stock Index
  3. Contrarian Cryptocurrency Bet May Pay Off

Market Overview

It's hard to fathom the mind of the Chinese Communist Party, but seriously, what were they thinking? 
You can't cancel an entire industry's profits and not expect that global investors wouldn't get freaked out about it. 
But in a country where decisions, harsh as they may be, are often executed (as are executions) with swift abandon, apparatchiks in Beijing may have been stunned by the rapidity with which global investors voted with their feet. 
To be fair, China may on the surface appear to be a brazenly capitalist society, but it's really not, it's at best a Chinese socialist society with capitalist characteristics. 
And that's why both sides underestimated the ramifications of their actions - Beijing, by assuming that its other sectors wouldn't be affected by what was seen as a precision strike on its afterschool education sector, and global investors, for assuming that Chinese leaders would act on purely capitalistic terms. 
But alas, these are the growing pains of every major economy, let alone one that for the most part appears to be a portrait of contradictions. 
And while the Chinese Communist Party's media circus will be out in full force to assuage investors that the Middle Kingdom is still very much open for business, it's hard to measure the full extent of the long term damage of Beijing's most recent moves.  
Asian markets were mostly higher on Thursday's morning trading session with Sydney’s ASX 200 (+0.45%), Tokyo's Nikkei 225 (+0.64%) and Hong Kong's Hang Seng (+2.07%) all up, while Seoul's Kospi Index (-0.07%) was flat otherwise. 

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




1. Robinhood's IPO Demonstrates They Know Their Customers

  • Robinhood prices its IPO due later today on Nasdaq at the lower end of its target price, from US$38 to US$42 
  • Large retail allocation for Robinhood's IPO may ultimately be the feather in the firm's cap as it is highly likely to rocket out the gates 
While some analysts are lamenting digital brokerage Robinhood’s unconventional decision to allocate an unusually large stake of its upcoming IPO for its own customers, that’s mainly because these analysts don’t know Robinhood’s customer base like the brokerage does.
In an IPO, underwriters typically support the share price and soak up any sell orders to prevent an IPO dipping below its listing price.
But these underwriters, typically investment banks or other financial specialists, have their work cut out for them especially if retail investors have a significant allotment of IPO shares, because they have no lock-ins and are not obligated to hold those shares on the opening day.
Yet Robinhood was also the brokerage that made trading easy for retail investors, ushering the era of the meme stock and facilitating the rise of GameStop (-5.28%) and AMC Entertainment (+2.37%) into the investment lexicon.
Robinhood sees the move to allocate a significant allotment of IPO shares to retail investors, as a means to democratize a corner of the stock market that has typically been reserved for institutional investors and the wealthy.
In a typical IPO no more than a fifth of IPO shares are earmarked for retail investors, Robinhood expects to allocate as much as 35%.
But that also creates a problem for large institutional investors pondering participation in the Robinhood IPO, with some already indicating that they intend to sit out the listing altogether, fearful that the outsized retail allocation could lead to volatility.
That view however is the same reason that professional money managers were left on the defensive when trying to short the shares of GameStop.
Over the past eighteen months, Robinhood has been credited with facilitating a new force in the markets – retail investors.
And as the past year has demonstrated, retail investors have the wherewithal to move the market – Robinhood itself could become the next meme stock and judging by the initial chatter on Reddit and Twitter, the social media channels where Robinhood’s customers live – it has all the makings of one.
Robinhood will price its IPO at US$38 and will start trading on Nasdaq on Thursday, U.S. eastern time.

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




2. These Days Everything's Bespoke, Even Your Stock Index

  • Indirect indexing gains in popularity as retail investors leverage better software to mimic other indices, but with plenty of room for customization  
  • Investors can also take advantage of tax-loss harvesting which allows capital gains tax exposure to be reduced through holding shares of underlying indices directly 
Given the freedom that apps like Robinhood and SoFi have provided to retail investors, providing them with the tools to construct their own sophisticated portfolios if they so choose, it was only a matter of time before the money management industry caught up as well.
Long seen as the exclusive purview of rich investors, some of the biggest names in the asset management business are preparing for a major shift to an era when even retail investors are demanding customized equity portfolios.
So-called indirect indexing provides a more bespoke approach to off the shelf index products, the most famous of which is the S&P 500 SPY, which tracks the benchmark index of American equities.
The shift will be slow at first, but will help to justify some of the fees being charged by wealth managers as downward pressure on fees shows no signs of relenting.
And while direct indexing isn’t likely to undermine existing demand for ETFs, it will allow investors to own a group of stocks that track performance of an established index, with the latitude to customize that portfolio to manage tax losses or to include environmental, social and governance preferences.
Unlike in an equity mutual fund or an ETF, in direct indexing, an investor owns the securities in their own account, rather than a share of a pooled fund with software ensuring the portfolio tweaks the weightings to replicate the performance of the index as well as customize holdings towards preferences such as value or growth stocks.
And unlike an ETF or mutual fund, directly owning shares in companies facilitates what’s called “tax-loss harvesting,” where direct indexers systematically sell losing stocks and replace them with similar holdings, allowing investors to offset capital gains taxes incurred when investments are up, but still stay in line with the index they are tracking.

3. Contrarian Cryptocurrency Bet May Pay Off

  • One of the top performing funds this year has taken contrarian bets on Bitcoin and land
  • Growing number of investors are looking to hedge the prospect of inflation and Bitcoin may eventually no longer serve as a contrarian bet
Being a contrarian is a tricky business, it involves having the resolve to go the distance in the face of ridicule and scorn.
But when it pays off, it pays off in spades, it’s just that in the meantime, a contrarian bet can be a lonely trade.
Which is why despite being one of the best performing U.S. fund managers this year, Horizon Kinetics only manages US$7 billion – there’s a reason it’s called the “crowd.”
Horizon Kinetics (+0.47%) has three of the top 10 best-performing mutual funds this year, according to data from Morningstar, and if they were a K-pop group, could be likened to BTS, albeit with a far more niche following.
Speaking with the Financial Times, veteran hedge fund manager Peter Doyle noted,
“There is no turning back after the pandemic and globally there is a debt problem and it means either default or currency debasement.”
Which is why Horizon Kinetics is once again leaning into its contrarian chops and doubling down on land and cryptocurrencies.
Kinetics Paradigm, which has returned 47.71% for the year to July 26, first bet on Bitcoin through the Grayscale Bitcoin Trust as far back as 2016, a 1% stake which has now risen to contribute over a tenth of the value of the fund.
According to Doyle,
“People should have exposure to the asset class.”
Doyle cites how the supply of Bitcoin is limited and commands a scarcity premium at a time when there are concerns about fiat currencies losing their value.
And despite the recent pullback in cryptocurrencies, Horizon Kinetics has still managed to maintain three of its funds near the top of the performance table this year.
But before investors pile into the Kinetic trade, it’s also important to note that the bulk of the gains pulled by Horizon Kinetics has also been attributed to its bet on companies with vast land holdings, another scarce resource.
Nonetheless, as contrarians go, more investors are piling into the Bitcoin trade and are increasingly doing so, not necessarily on the basis of expectations of capital gains, but as a means to pad their portfolios against inflation, and there’s nothing contrarian about that.

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Jul 29, 2021

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