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Novum Alpha - Daily Analysis 2 August 2021 (10-Minute Read)

A combination of global investors wanting to believe in the Chinese economic miracle and Beijing doing its best to assuage concerns that its recent crackdown on its companies was isolated to education and tech have helped heave markets higher.

 
An awesome start to your August as Asia leads the way with stocks higher amidst positive sentiments on China's growth outlook.
 

In brief (TL:DR)

 
  • U.S. stocks were weaker heading into the weekend with the Dow Jones Industrial Average (-0.42%), S&P 500 (-0.54%) and tech-centric Nasdaq Composite (-0.71%) all lower, but look set to recover as Chinese stocks rebound on investors buying the dip. 
  • Most Asian stocks rose with U.S. equity futures Monday as some of the concerns over China’s regulatory crackdown eased and progress on a U.S. infrastructure spending plan aided sentiment.
  • Benchmark U.S. 10-year Treasuries edged up to 1.23% (yields fall when bond prices rise) as investors thought it safe to head out into equities again. 
  • The dollar was steady.
  • Oil retreated with September 2021 contracts for WTI Crude Oil (Nymex) (-1.46%) at US$72.87 as traders assessed the demand outlook and an uptick in tensions between Iran and the U.S. after an attack on an Israel-linked oil tanker.
  • Gold slipped with December 2021 contracts for Gold (Comex) (-0.23%) at US$1,813.00.
  • Bitcoin (-5.02%) slipped back below US$40,000 at US$39,622 with inflows leading outflows and fueling the narrative that it was the bout of uncertainty over the weekend fueling recent price increases (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 
 

In today's issue...

 
  1. Will Robinhood Make it to the Meme Stock Leagues?
  2. Is it safe to bet on China again?
  3. A Tax be Upon Your Cryptocurrencies
 

Market Overview

 
A combination of global investors wanting to believe in the Chinese economic miracle and Beijing doing its best to assuage concerns that its recent crackdown on its companies was isolated to education and tech have helped heave markets higher. 
 
And while some analysts are speculating that China's property sector should be the next shoe to drop, it may not be as straightforward for Beijing to break up. 
 
For starters, rising property prices help plenty of middle class investors get richer, but prevent lower income households from getting a foot in the property door. 
 
Because real estate is more nuanced, Beijing is likely to take a more pragmatic approach - punishing listed property developers which are overleveraged could have knock on effects that would dramatically undermine economic stability.
 
Whereas hurting afterschool education companies by making them non-profit would be welcome by the vast majority of Chinese citizens, an important factor as China's ruling Communist Party heads towards its once a decade leadership renewal exercise. 
 
Asian markets were sharply higher with Sydney’s ASX 200 (+1.29%), Tokyo's Nikkei 225 (+1.49%) and Seoul's Kospi Index (+0.04%) all up while Hong Kong's Hang Seng (-0.36%) was down slightly in the morning trading session. 
 

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

 

 

1. Will Robinhood Make it to the Meme Stock Leagues?

 
  • Investors still stung by Robinhood caving to demands to halt the sale of meme stock shares in January 
  • Retail investors are a significant source of order flow and Robinhood needs to beef up its alleged democratization of access to investment chops before it can head higher 
 
“Ay, ay, a scratch, a scratch. Marry, ’tis enough.”
 
– Mercutio, Romeo and Juliet, Act III, Scene 1, Line 82-86
 
Down but not out is perhaps the verdict.
 
In a dismal IPO, shares of Robinhood Markets (+0.95%) tanked 8.4% on their first day of trading, hardly the moonshot that some investors might have been hoping for.
 
For the company that was arguably instrumental in facilitating the meme stock craze, Robinhood itself failed to achieve meme fame on its first day of trading, but should investors rule it out entirely?
 
Robinhood itself appeared to be counting on its ability to rouse the retail investor, reserving as much as 35% of its IPO allocation for them in the hopes that they would propel shares of the online brokerage to the moon, much like how they had for GameStop (-2.27%) and AMC Entertainment (-2.91%).
 
Part of the reason why retail investors may not necessarily have rushed to Robinhood’s rescue is that the online brokerage may be perceived as lacking authenticity, pandering to its retail base with platitudes, but quietly doing deals with Wall Street on the quiet.
 
And that lack of authenticity matters, especially to the Reddit crowd, where meme stocks like GameStop were given a second lease of life.
 
There is no lack of Redditors who haven’t forgiven Robinhood for restricting purchases of GameStop amidst the retail trading frenzy in January, as it buckled under pressure from Wall Street to plug the short squeeze that was bringing hedge funds like Melvin Capital to its knees.
 
Zero-fee trading firms like Robinhood make money by selling their order flow to market makers like Citadel, which is a key investor in Melvin Capital. 
 
By allowing its retail investors to buy up stock of GameStop, Robinhood was indirectly hurting one of its biggest customers and investors.
 
Whether Redditors or retail investors have forgiven Robinhood is as yet unclear because much of its credibility comes from its use as a vehicle to allow retail investors to teach the financial establishment a lesson.
 
That credibility was severely undermined in January when Robinhood buckled to pressure from Wall Street.
 
But Robinhood also enjoys a slick user interface and the gamification of investing that ensures a sticky user base, from which it could eventually derive revenue from, outside of selling order flow.
 
And there are many retail investors who also got rich off Robinhood, despite the January controversy.
 
Nonetheless, Robinhood’s decision to hand over a third of its IPO allocation into the hands of retail investors may be seen as a peace offering and whether it can rebound from its poor opening rests on the shoulders of the retail investors that have made it rich.
 
But like any other meme stock, the path to the moon is unlikely to be smooth.
 

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

 

 

2. Is it safe to bet on China again?

 
  • Chinese economy too big to ignore 
  • Investors looking to participate in the Chinese economy will need to look for sectors which are consistent with Beijing's broader goals 
 
Students of the Chinese economic miracle will know that no market represents more opportunity and more room for growth than the massive Middle Kingdom.
 
With 1.4 billion people, China may no longer be the most populous nation on the planet, but it potentially represents the largest market.
 
Yet moves by Beijing to crackdown on its tech and now afterschool education sector have spooked global investors and at its lowest point, wiped out over US$1.5 trillion in capital in Chinese stocks from Hong Kong to Wall Street.
 
Many are wondering if the worst is over and whether now is time to buy the dip.
 
The answer of course, as always, is an unsatisfactory “yes” and “no.”
 
For decades, the seemingly freewheeling and laissez-faire approach of Chinese President Xi Jinping’s predecessors may have given global investors the false sense of security that China had truly become a capitalist economy.
 
It had not.
 
Beneath the surface of its gleaming cities and bustling ports, China had always been a socialist economy, with capitalist characteristics.
 
That dichotomy is coming into sharp relief as President Xi attempts the hitherto unthinkable – an unprecedented third term as China’s leader at a time of growing income inequality and social instability.
 
China is the Communist Party and the Communist Party is China.
 
Prizing social stability over profits may be an affront to capitalist sensitivities, but for the Chinese Communist Party, it’s just another day at the office.
 
New requirements for data security reviews ahead of overseas IPOs, directives for food delivery firms to pay staff a living wage and escalating curbs on unaffordable housing, China is attempting to solve what the rich countries of the west have struggled with for decades.
 
With economic growth slowing, and tensions with the U.S. at its worst in years, China is shifting its priorities to solving some of the most intractable problems facing the developed world – rising healthcare, property and education costs.
 
And Beijing is attempting to solve those problems in the only way it knows how, with an iron fist.
 
But global investors who were caught flatfooted by Beijing’s regulatory onslaught may need to contend with the fact that the old rules may no longer apply.
 
More so than ever before, understanding which sectors and stocks to invest in may be as much a function of their business model as it is understanding Xi Jinping Thought.
 
But the shift in China, while draconian, is also grounded in the logic of progressive economics that is starting to take root even in the United States – pushing back against monopolies and curtailing their ability to crush competitors, squeeze workers and bilk customers.
 
Last month, U.S. President Joe Biden, while signing a sweeping executive order that signaled the beginning of a move against monopoly power in the U.S. remarked,
 
“Capitalism without competition isn’t capitalism, it’s exploitation.”
 
The challenge though for global investors looking to partake of the Chinese pie, is unlike the U.S. or Europe, where regulations tend to be rolled out with greater transparency and at a more measured pace, shifts in China may appear to occur at the drop of a hat.
 
President Xi had as far back as two years ago, regularly remarked that the afterschool education market should not be for profit, and regulators had warned Didi Global (+4.56%) not to list in the U.S. as it still had outstanding concerns over data management.
 
To understand China today, global investors will increasingly need to dig back deeper into China’s history, to imperial times, where one word from the emperor was sufficient to shift an entire nation.
 
Xi’s new catch phrases or remarks on the sidelines of major events may be taken up by sycophantic officials looking for career advancement who then overdo things, forcing backpedals and policy reversals when their consequences are unexpected.
 
After shedding as much as US$1.5 trillion in market cap, there are signs that Beijing is shifting into damage-control mode, with top officials scrambling to calm markets amidst the recent rout, emphasizing that the crackdown was limited to the education sector only. 
 
But ignoring opportunities in China would be churlish, as the economy is likely to continue generating billions of dollars of growth, investors just need to review which are the permissible sectors that growth can be generated from. 
 
 

3. A Tax be Upon Your Cryptocurrencies

 
  • U.S. lawmakers slip in a cryptocurrency tax with the upcoming infrastructure bill  
  • Taxing cryptocurrencies helps to legitimize the sector, much like how legalizing cannabis, legitimized the entire cannabis industry and provided fresh sources of tax revenue 
 
Nothing legitimizes an asset class quite like a tax.
 
During Prohibition, state and federal governments were deprived of billions of dollars of tax revenue as the sale and consumption of alcohol was banned across the United States and lawmakers don’t want to make that same mistake with cryptocurrencies.
 
With the U.S. weighed down by its massive debt burden, exacerbated by pandemic stimulus, it appears willing to rifle through the couch cushions for tax revenue, even if it comes from cryptocurrencies.
 
New rules, added at the eleventh hour to a US$550 billion bipartisan infrastructure package that is now sitting before the U.S. Senate, would force businesses to disclose trades of cryptocurrencies in excess of US$10,000.
 
The new provisions are designed to raise an estimated US$28 billion in additional tax revenues and add to increased scrutiny the Inland Revenue Service has recently applied to cryptocurrency traders.
 
For the most part, many cryptocurrency investors in the U.S. have been ignoring their tax obligations, which would otherwise require them to pay income taxes on any gains, but even those who wanted to pay tax, struggled with a tax system that has lagged the development of the digital asset class.
 
Filing taxes on cryptocurrency trading can create huge headaches, especially for traders who conducted multiple transactions each year.
 
Part of the problem is that tax regulations are inconsistent – while traditional stock brokerages are required to send detailed tax forms to clients, cryptocurrency exchanges, at least those that are regulated, are not.
 
And even if cryptocurrency exchanges wanted to help their clients file taxes, it’s not always clear how that could be done under current regulations.
 
For years, the IRS has been warning taxpayers to report cryptocurrency transactions on their tax returns, and recently, the agency made clear that fighting tax evasion through cryptocurrencies was a top priority.
 
If so, the IRS will have its work cut out for it.
 
Despite regulatory crackdowns, unregulated exchanges like Binance continue to soak up the bulk of overseas volume and U.S. investors are able to access these exchanges using VPNs where needed.
 
The difficulty for U.S. cryptocurrency investors looking to avoid tax typically occurs when they want to swap out their digital assets for fiat currency, but as more options and means to spend cryptocurrencies increase, this becomes a possible way for tax authorities to better monitor these flows.
 
As more payment service providers such as PayPal (-2.70%) move to facilitate payment using cryptocurrencies, it becomes easier for tax authorities to track such spending and assess if these crypto spenders are under-declaring their taxable income.
 
The irony is that as cryptocurrencies gain mainstream acceptance, they become easier to trace and tax, which for the longest time had been their biggest party trick. 
 
 

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Aug 02, 2021

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