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Novum Alpha - Daily Analysis 5 August 2021 (10-Minute Read)

Markets are at a pivotal moment. The delta variant on the coronavirus is forcing a rethink of a speedy reopening and return to business as usual at a time when at least some of the U.S. Federal Reserve's officials are seriously considering tapering asset purchases according to schedule.

 
A terrific Thursday to you as markets take a turn for the unknown. 
 

In brief (TL:DR)

 
  • U.S. stocks wound weaker on Wednesday with the Dow Jones Industrial Average (-0.92%) and S&P 500 (-0.46%) lower, while the tech-centric Nasdaq Composite (+0.13%) was higher as investors considered the mixed U.S. economic data and potential for central bank tapering. 
  • Asian stocks were steady Thursday as investors assessed mixed U.S. economic data and comments from a U.S. Federal Reserve official that the central bank is on course to taper stimulus support amidst a time of heightened uncertainty. 
  • Benchmark U.S. 10-year Treasuries rose one basis point to 1.19% (yields rise when bond prices fall) as investors wade cautiously into equities.  
  • The dollar held a climb.
  • Oil steadied below US$70 with September 2021 contracts for WTI Crude Oil (Nymex) (+0.29%) at US$68.35 after a three-day slump exacerbated by the delta coronavirus resurgence.
  • Gold edged lower with December 2021 contracts for Gold (Comex) (-0.15%) at US$1,811.80.
  • Bitcoin (+3.73%) rose to US$39,799 with inflows lagging outflows and signs that the benchmark cryptocurrency may hit an inflection point over the weekend (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 
 

In today's issue...

 
  1. Robinhood's Rocket Just Got Lit
  2. Inflation Forecasts Are Just That, Forecasts
  3. Are Cryptocurrencies Securities? The SEC Wants You to Think So
 

Market Overview

 
Markets are at a pivotal moment. 
 
The delta variant on the coronavirus is forcing a rethink of a speedy reopening and return to business as usual at a time when at least some of the U.S. Federal Reserve's officials are seriously considering tapering asset purchases according to schedule. 
 
To be sure, there are signs that asset markets if nothing else, are more frothy than requiring support.
 
But the economic and employment circumstances in the U.S. are far from certain and there are signs that the delta variant could prolong the pandemic at a time when early vaccination gains are starting to slow. 
 
Those concerns however did not weigh on Asian markets as the tread higher in Thursday's morning session with Sydney’s ASX 200 (+0.21%), Tokyo's Nikkei 225  (+0.20%) and Hong Kong's Hang Seng (+0.29%) all up, while Seoul's Kospi Index (-0.06%) was down slightly. 
 

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

 

 

1. Robinhood's Rocket Just Got Lit

 
  • Robinhood surges higher into meme stock country, regardless of regulatory concerns over its business model involving payment for order flow
  • Retail investors have started backing Robinhood, using options which could see it surge far higher in a repeat of the meme stock craze in the earlier part of the year
 
It wouldn’t be a meme stock without some drama.
 
After an abysmal first day out the gates, Robinhood Markets (+50.41%) which fell 8.4% from its IPO price on its firs day of trading surged a whopping 50% after a wave of retail investors pumped it higher.
 
Spiking as high as 82% at one stage, frenzied buying pushed the company’s market value to a peak of US$65 billion from its lackluster debut at US$29.1 billion on Nasdaq last Friday.
 
While Robinhood had allocated as much as 35% of its IPO shares to retail investors, it was initially met with a lukewarm reception.
 
Institutional investors also stayed clear of the stock in anticipation of volatility.
 
But retail investors may just have been trying to shake out weaker hands, as flows from this increasingly significant segment of the investment market surged by 10-fold, or five times what it had been in recent days.
 
Reddit forums and Twitter (+0.10%) feeds were alit with mentions of Robinhood’s surge with users comparing the rally to other meme stocks like GameStop (-3.90%) and AMC Entertainment (-11.16%).
 
Some have suggested that retail investors poured into Robinhood after receiving Cathie Wood’s stamp of approval as Ark Investment Management’s, Ark Fintech Innovation ETF bought 89,622 Robinhood shares a day earlier to close above the IPO price for the first time.
 
But there is some method to the madness.
 
As was the case for GameStop and AMC Entertainment, retail investors are once again using options to force market makers to bid up shares of Robinhood.
 
According to data from Bloomberg, the most actively traded options on Robinhood were bullish US$70 calls that expire on August 20.
 
A call option is the right to buy at a specified price and market makers who sell these options will need to purchase the underlying stock as a hedge in case these options are exercised.
 
Because a company cannot have options traded on its stock until at least three days after its IPO, that rush of options activity contributed heavily to Robinhood’s price volatility.
 
Investors pricing in a plunge in Robinhood may however be acting prematurely.
 
Given the recent history of meme stocks, an 82% surge, while notable, is only table stakes.
 
And as option activity builds up, retail investors have the capability to push Robinhood even higher, regardless of fundamentals.
 
In any event, Robinhood is already profitable, unlike other meme stocks of the time.
 
And even if the U.S. Securities and Exchange Commission cracks down on the controversial payment for order flow business, there is more than an outside chance retail investors will rally around their beloved trading app to bid its stock even higher.
 

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

 

 

2. Inflation Forecasts Are Just That, Forecasts

 
  • Investors should be concerned about macro developments, but instead of betting on an opinion, prepare for a multitude of possibilities 
  • Inflation continues to be a concern, but history has demonstrated that economists and even central bankers have been poor predictors of which way it will go
 
As initial inflation data started pouring in earlier this year, investors reacted predictably by dumping U.S. Treasuries and tech shares, which respond poorly during periods of inflation, and rotating into gold and Bitcoin. 
 
For many analysts and economists who had been predicting elevated levels of inflation, this was their moment of vindication.
 
Marker after marker suggested that inflation was on the rise and investors started to get jittery, betting that the U.S. Federal Reserve would be forced to hike rates sooner than anticipated.
 
Fast forward and a virulent coronavirus variant later, markets are still pretty much what they looked like before inflation data spiked in April and May, albeit far more pricey. 
 
Bitcoin is rising and Robinhood Markets is the new GameStop. 
 
So are macro forecasts even relevant anymore?
 
To borrow the words of then-U.S. Defense Secretary Donald Rumsfeld, there are known unknowns, and unknowable unknowns.
 
While predicting the macro future may be unknowable, it is a known unknowable.
 
Since the tech bubble burst at the turn of the millennium, investors appear to think less above events surrounding individual companies and stocks, and more about the economy, monetary and fiscal policy, as well as world events.
 
Sure, there are the odd meme stocks that light up message boards on Reddit and Twitter, but the flood of money into the markets over the past 16 months has changed the complexion of considerations for investors, and inflation matters more now than at any point before the pandemic.
 
Inflation matters because accelerating price increases would almost certainly force higher interest rates, lowering asset values and compelling central bankers to cool down the economy.
 
But is it even possible to know how inflation will shape up?
 
Consider that for years central bankers in rich countries have targeted a healthy 2% rate of inflation and undershot it successfully every year.
 
Despite staggering budget deficits, continuous economic growth and a rapid expansion of the money supply, all of which our economics professors tell us should lead to inflation, prices barely budged over the past decade.
 
And that has led to an entirely different set of proselytizing – the rise of the inflation doomsday soothsayer, advocating the purchase of everything from Bitcoin to bullion as a hedge against inflation.
 
Besides the fact that there are few, if any, perfect hedges for inflation (the data on gold makes it clear that unless you expect to live several centuries, it is an imperfect inflation hedge and the jury is out on Bitcoin), investors shouldn’t be arranging their affairs according to macro forecasts.
 
It’s perfectly reasonable for investors to at least consider the prospect of higher inflation and prepare for it – what are the companies and sectors that will be best able to defend against higher prices?
 
But certainly not go all in on it.
 
It’s one thing to have an opinion, but betting the farm on a forecast is akin to Russian roulette.
 
 

3. Are Cryptocurrencies Securities? The SEC Wants You to Think So

 
  • U.S. Securities and Exchange Commission looks set to play a more active role in cryptocurency regulation 
  • Biden administration's SEC push to oversee cryptocurrencies more closely ought to be welcome especially if institutional participation is to increase 
 
Not so long ago, in a speculative space not so far away…
 
The biggest battle raging between the purveyors of highly speculative initial coin offerings or ICOs and the U.S. Securities and Exchange Commission, was whether a fresh offering of digital tokes constituted an offering of securities, and thus would raise the ire of the SEC.
 
ICO issuers would spare no expense on lawyers drafting pricey legal opinions as to why a particular ICO was not a security, the favorite defense being that it was a “utility token.”
 
Four years later, billions lost and there are perhaps no more than a handful of ICOs which genuinely qualify as “utility tokens.”
 
But the sheriff of the SEC at the time, Jay Clayton refused to claim jurisdiction or act on nascent assets that could not be clearly adjudged to be “securities” in the traditional understanding of the term.
 
Clayton’s successor Gary Gensler however has no such hang ups.
 
Calling on Congress to provide the SEC with additional powers to protect investors in what he’s termed the “Wild West” of cryptocurrency markets, “rife with fraud, scams and abuse,” Gensler said he saw few signs crypto assets were catching on as a medium of exchange and rather should be seen as “highly speculative stores of value.”
 
The distinction that Gensler draws is important because a “store of value” potentially makes cryptocurrencies a “security” and puts it within the purview of his SEC.
 
And that has broader implications over which cryptocurrencies could soon come under sanction or censure by the SEC.
 
Gensler is mulling a robust oversight regime for cryptocurrencies, establishing safeguards for the millions of investors who’ve been stocking their investment portfolios with digital assets, and hasn’t shied away from approaching Congress to ask for those powers.
 
Having previously taught an oversubscribed course on blockchain and digital currencies at the Sloan School of Management at the Massachusetts Institute of Technology, Gensler has asked Congress to pass a law that could give the SEC legal authority to monitor cryptocurrency exchanges, but caveats that the SEC’s powers are already broad and he may not need new laws to police the space.
 
Gensler’s proactive approach to provide oversight, over a space that has long thrown up issues of which U.S. agency should have jurisdiction, should be a welcome move for cryptocurrency investors.
 
Broadly, Gensler isn’t anti-cryptocurrency, noting that technology has sparked economic progress throughout human history, and he sees a similar boost being possible for digital assets, but not in the absence of strong and thoughtful regulation.
 
And that strong and thoughtful regulation could be precisely what the cryptosphere requires.
 
With regulators globally tightening the noose around unregulated cryptocurrency exchanges like Binance, the U.S. could potentially lead the digital asset space by providing the clarity for institutional participation and broader adoption.
 
Because ultimately, you can’t play the game if you don’t know the rules,
 
 

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Aug 05, 2021

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