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Novum Alpha - Daily Analysis 4 August 2021 (10-Minute Read)

Restrained language from Chinese state media attacking gaming companies may be a sign that Beijing blinked.

A wonderful Wednesday to you as markets wind higher headed into the midweek. 

In brief (TL:DR)

  • U.S. stocks turned up on Tuesday with the Dow Jones Industrial Average (+0.80%), S&P 500 (+0.82%) and tech-centric Nasdaq Composite (+0.55%) all higher, with investors taking the opportunity to buy the dip. 
  • Asian stocks were steady Wednesday as concerns over China’s clampdown on its technology giants eased while the spread of the delta Covid-19 strain restrained sentiment.
  • Benchmark U.S. 10-year Treasuries rose one basis point to 1.18% (yields fall when bond prices rise) with few signs that the recent surge in demand for safe assets is likely to diminish. 
  • The dollar was steady.
  • Oil declined with September 2021 contracts for WTI Crude Oil (Nymex) (-0.16%) at US$70.45 as concerns grew over the economic recovery fueling demand. 
  • Gold was little changed with December 2021 contracts for Gold (Comex) (+0.09%) at US$1,815.80.
  • Bitcoin (-2.33%) fell to US$38,132 with inflows leading outflows and with technical indicators showing that the benchmark cryptocurrency is at a watershed moment (inflows suggest that investors are looking to sell Bitcoin in anticipation of lower prices). 

In today's issue...

  1. Robinhood - The Faith-based Stock That Pays Off Eventually
  2. Is the future of e-commerce hire purchase?
  3. Bitcoin's Bear Trap

Market Overview

Restrained language from Chinese state media attacking gaming companies may be a sign that Beijing blinked. 
As with so many other things in China, the recent crackdown on tech giants and afterschool education companies resulted in outcomes out of proportion to what Chinese Communist Party apparatchiks may have anticipated. 
More often than not a leader makes a small comment, and an ambitious official looking to curry favor with his higher ups then goes on a massive campaign, often out of proportion to what the leader may have ever intended. 
And that narrative seems to be supported as Beijing embarks on a face-saving and more importantly, market-saving backpedal on some of its actions. 
To be sure, the afterschool education market is likely to be history, but tech companies and the lot are likely to be chastised more than crushed and more importantly, it doesn't look like China is rolling back its market economy, but simply adding Chinese "characteristics" to it. 
And it is these Chinese "characteristics" that investors in the world's second largest economy should be most concerned about. 
Behind the scenes, Communist Party influence in the private sector through the covert and overt nationalization of industries has meant that some of the bloat of the Soviet-era is being reintroduced into private enterprise. 
Asian wound higher Wednesday with Sydney’s ASX 200 (+0.24%), Seoul's Kospi Index (+0.90%) and Hong Kong's Hang Seng (+1.41%) all up while Tokyo's Nikkei 225 (-0.14%) was down in the morning trading session.

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



1. Robinhood - The Faith-based Stock That Pays Off Eventually

  • Robinhood rebounds as expected, pushed higher by retail investors 
  • Digital brokerage app that gamified trading is likely to continue doing well thanks its "stickiness" 
“Hope is like the sun. If you only believe it when you see it you’ll never make it through the night.”
 – Princess Leia Organa, Star Wars Episode VIII – The Last Jedi
Any grassroots movement requires faith.
Because people are often acting independently, they need to believe in something bigger than themselves to act collectively, while taking action as individuals.
Whether it’s a rebellion or Reddit, organizing the affairs of independent actors takes time and for Robinhood Markets (+24.20%), it took just two days.
Despite a lackluster IPO which saw shares sink 8.4% for the largest IPO this year, Robinhood has since surged a whopping 24% on its third day of trading.
The trading app which has been accused of gamifying investing while making traders of us all, has now surged well over its debut price with more than 88 million shares of Robinhood Markets changing hands on Tuesday.
Yesterday’s surge was significant not only because Robinhood was above its IPO price, it’s also higher than its initial US$43 IPO upper price target, once set as the upper bound of a proposed IPO price.
Like so many other assets driven by retail investors, high-profile backers like Cathie Wood’s flagship ARK Innovation ETF, which holds 4.9 million shares according to data compiled by Bloomberg, helped heft Robinhood’s price higher.
Ironically, shares of Robinhood rapidly became the top retail trade on Fidelity Brokerage Service’s self-directed retail platform.
While many analysts were quick to downplay Robinhood’s IPO given its poor showing out the gates, it didn’t take long for retail investors to come in and “buy the dip,” a common parlance among the retail investing crowd on Reddit and Twitter.
Unlike markets in Asia, retail investor flows have been a relatively new phenomenon in the United States in the wake of the pandemic.
At its height, and during pandemic lockdowns, retail traders accounted for as much as a quarter of all trading volume on Wall Street, a number which has since ebbed to 20%.
Nonetheless, retail traders are likely to continue to be a force to be reckoned with, as demonstrated by the persistence of GameStop (-3.11%) and AMC Entertainment (-4.57%), two companies which by now ought to have collapsed under the weight of their own ineptitude.
And the “stickiness” of Robinhood’s slick trading app with its intuitive user interface, notifications and alerts make trading a habit the same way that Facebook (-0.20%) made social media addictive, ensuring that retail traders will continue to have influence on markets for some time to come.
Which bodes well for Robinhood in the long run.

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



2. Is the future of e-commerce hire purchase?

  • Square acquires Afterpay, pioneer in the buy now and pay later service 
  • More importantly, Square has the potential to become super app in the same vein as WeChat, offering users access to myriad financial services 
Taking the goods now and paying in instalments is nothing new and has been around since the laws against usury were “conveniently” reinterpreted around the time of the Renaissance in Europe.
And since that time, economic persons have dreamt up new ways to have our cake and eat it, from credit cards to mortgages, the ability to defer payment instead of gratification has been, and continues to be, at the heart of the capitalist system.
But with millennials and Gen Z increasingly suspicious of credit cards, companies like Afterpay (+0.18%) have filled the gap between the need to have things now and the ability to pay for them later.
Afterpay allows shoppers to split the cost of goods into four instalments with zero interest, but a late fee if payments are missed and the recent acquisition of the company by payments giant Square suggests that the trend may be here to say.
Unlike credit cards and other types of loans which require a credit check, buy now pay later providers largely lend money instantaneously.
Because technically there is no “credit” per se, just splitting the payments, a credit check isn’t needed.
The online shopping move, driven in large part by the pandemic has seen a surge in buy now, pay later demand, as part of a broader trend to secure more flexible financing away from traditional lending via credit cards or loans.
And while Afterpay may have been a pioneer in the space, there are no shortage of buy now pay later service providers, from Klarna to PayPal (+0.92%), even Apple (+1.26%) is looking to explore the market which also looks set to draw closer regulatory scrutiny.
Square’s acquisition of Afterpay will enable the former to now extend Afterpay’s services to the millions of merchants that use Square (-1.06%), and who processed some US$38.8 billion worth of payments in the last quarter alone.
Interestingly, the addition of Afterpay into Square’s Cash App opens the prospect of combining cash-cryptocurrency payments, as it builds out a one-stop financial services shop for payments, cryptocurrency, saving and investing.
The addition of Afterpay fundamentally changes Square’s offering and even though the deal came at a 30% premium to Afterpay’s most recent stock price, Square might enjoy a foreign exchange boost as the U.S. dollar has strengthened against the Australian dollar.


3. Bitcoin's Bear Trap

  • Bitcoin retraces lower as it is unable to sustain rally over US$42,000 on lower volumes, and now appears to be testing major technical levels of support 
  • Bitcoin bear trap suggested last week played out according to technical indicators 
Last week, the possibility that the most recent rally in Bitcoin’s price might really have been a bear trap was raised and it’s increasingly looking like that the short term bullishness in Bitcoin’s price was precisely that.
Despite coming off its best week in over three months, Bitcoin is now returning back at least some of these gains with technical analysts noting a drop below a key trendline that typically portends further weakness.
After clearing US$40,000 but not sustaining a push over US$42,000, Bitcoin has since retraced to trade between the US$37,000 and US$39,000 band, higher than the last low, but still a cause for concern given that it’s since breached its 100-day moving average, a medium-term trendline followed by most chartists.
Bitcoin’s 50-day moving average support is also hovering around US$34,700 or so.
Some suggest that Bitcoin’s pullback is in line with the strong rally and some profit taking, while others see the dip as a buying opportunity amidst supportive comments from Elon Musk and Ark Investment Management’s Cathie Woods, as well as speculation that e-commerce giant Amazon may be throwing its hat into the cryptocurrency ring.
There are signs though that Bitcoin may be forming a fresh bottom, with sufficient buying pressure in the US$37,000 range to ensure that a capitulation seem unlikely.
And while some traders may be jittery over the prospect of greater regulation of the space, that regulators are even giving cryptocurrencies some serious thought should be testimony to the significance of their existence.
Even the U.S. Congress is seeking to legitimize cryptocurrencies by moving for a tax on cryptocurrency gains as part of a US$550 billion bipartisan infrastructure package now sitting before the Senate.

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Aug 04, 2021

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