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Novum Alpha - Daily Analysis 6 August 2021 (10-Minute Read)

All eyes will be on crucial payroll data due out of the U.S. later today to get a better gauge of how the U.S. economy is doing with investors largely pricing in an uptick in jobs that wouldn't be so strong it would cool the Fed's appetite to stay engaged in the U.S. economy.

A fantastic Friday to you as stocks edged higher towards the weekend. 

In brief (TL:DR)

  • U.S. stocks turned positive Friday with the Dow Jones Industrial Average (+0.78%), S&P 500 (+0.60%) and the tech-centric Nasdaq Composite (+0.78%) all higher as investors priced in positive economic news ahead of today's payrolls data. 
  • Asian stocks dipped Friday as traders weighed the spread of the delta coronavirus strain against a record Wall Street close while awaiting key U.S. payrolls data.
  • Benchmark U.S. 10-year Treasuries rose one basis point to about 1.24% (yields rise when bond prices fall).
  • The dollar held a climb.
  • Oil was flat with September 2021 contracts for WTI Crude Oil (Nymex) (+0.09%) at US$69.15 as an increase in supply pushed prices below US$70 again. 
  • Gold edged lower with December 2021 contracts for Gold (Comex) (-0.33%) at US$1,802.90.
  • Bitcoin (+2.02%) rose to US$40,602 with inflows lagging outflows and as Bitcoin heads towards a make or break moment into the weekend. Further weakness could spell a rebound on Monday, while a failure to break above US$42,000 could see a small selloff at the start of next week (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. Tempting the Fates by Shorting Meme Stocks
  2. Are Stocks Really Expensive?
  3. Energy Efficient Ethereum? What will they think of next?

Market Overview

Jobs, jobs, jobs, jobs. 
All eyes will be on crucial payroll data due out of the U.S. later today to get a better gauge of how the U.S. economy is doing with investors largely pricing in an uptick in jobs that wouldn't be so strong it would cool the Fed's appetite to stay engaged in the U.S. economy. 
The U.S. Federal Reserve remains the key driver of markets at the moment and investors will be looking for "Goldilocks" data - payrolls data that suggests that the job market is improving, which will help consumption prospects, but not so high as to force the Fed to turn bearish.  
Coronavirus variant concerns however weighed more heavily in Asian markets which were a mixed bag on Friday morning, with Tokyo's Nikkei 225 (+0.30%) and Hong Kong's Hang Seng (+0.01%) up, while Sydney’s ASX 200 (-0.08%) and Seoul's Kospi Index (-0.31%) were down slightly. 

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



1. Tempting the Fates by Shorting Meme Stocks

  • Another hedge fund reveals that it has shorted a major meme stock, AMC Entertainment, pushing the movie theater operator higher 
  • Announcing short positions publicly is fraught with risk as it acts as a beacon for retail investors to rally around and force a short squeeze which can be hugely profitable for bullish call options 
You’d think that after the beating hedge funds suffered by shorting shares of GameStop (+4.52%), they’d stay away from meme stocks for as long as retail investors prowled the markets, but you’d be wrong.
After U.S. hedge fund Melvin Capital was hammered with an estimated US$6 billion in losses by shorting the video game retailer GameStop, now London-based hedge fund Odey Asset Management is throwing its hat in the ring and taking on AMC Entertainment (+12.30%).
The second-most popular meme stock this year, Odey has taken out short positions against AMC Entertainment, noting in a letter to investors that retail investors are one of several factors that have “created some major distortions” and provided “some compelling short opportunities.”
Almost as if in response, shares of AMC Entertainment shot up some 12.30% on report of Odey’s short position.
Meme stocks have been challenging for hedge funds because even though short selling can deliver big gains when stock prices fall, losses are theoretically unlimited when a stock rallies and crowded short positions are difficult to cover when traders are rushing to buy. 
With the pandemic increasing the amount of retail flow into the markets, hedge funds have been battered by their influence, with an estimated one quarter of all trading volume attributable to retail investors earlier this year, according to Vanda Research.
And while retail trading flows have ebbed somewhat, they still make up one fifth of all trading volume, a sizeable amount and extremely powerful when directed at a specific target.
The best analogy for this is in terms of water, splashing a bucket of water is not as damaging to a plant as watering it with a high-pressure hose.
And retail investors have already claimed their first hedge fund victims, with Melvin Capital nursing a whopping 53% loss in January, while White Square Capital, another fund that bet against GameStop, recently shutting its flagship fund.
Nonetheless some hedge funds have done well by quietly betting against meme stocks when they fell back down at the end of January and that may be the key – going short quietly.
In the meantime, AMC Entertainment, which is carrying a whopping US$4.5 billion in debt and over US$450 million in deferred lease payments, could potentially see another retail-led rally to punish short sellers.

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



2. Are Stocks Really Expensive?

  • Stocks are neither expensive nor cheap, price is what you pay, value is what you get
  • Traditional metrics for measuring a stock's "expensiveness" or "cheapness" need to be adapted to consider retail flows 
The financial media has a habit of waxing lyrical about allegedly “expensive” U.S. tech stocks attracting eye-watering valuations.
But are stocks really so expensive?
With some tech companies priced at double digit multiples of sales, it’s important to figure out what their present value is today.
Say you had a dollar today and you could guarantee that that dollar was to grow at an annualized rate of 20% per year for the next four years, you’d have around $2.07.
Less an average annual inflation rate of 2%, that dollar today would be worth around say, $1.93 or so.
So in order for you to “give up” your dollar today, for instance to purchase a pricey tech stock or that hot new tech IPO that is hemorrhaging cash, every dollar you put into that stock needs to outperform an alternative investment.
The reason why stocks, especially U.S. tech equities, seem expensive at the moment is because of the negative real yield on fixed income such as U.S. Treasuries.
Negative real yields and rising inflation makes holding on to cash, or cash equivalents like commercial paper or short-term U.S. government debt, penalizing for an investor.  
And as such, investors are willing to pay more for riskier equities, especially those with strong growth prospects.
But the difficulty comes with determining what has strong growth prospects.
Take a company like Snapchat (+0.55%) for instance, which is valued at 7 times revenues.
Investors might take a bet on Snapchat on the assumption that because its larger competitors like Facebook were able to generate meaningful profits, that Snapchat will eventually as well.
But that’s a big assumption, because it assumes firstly that more established competitors won’t muscle in on a lucrative opportunity and second that other startups won’t come out with innovative products that would undermine a firm's otherwise obvious growth trajectory.
Investors instead need to look at the paradigm shift in investing as a whole.
If ratios like price-to-earnings were an unequivocal indicator of success for a stock, companies like Amazon (+0.63%) would have been relegated to the dust heap of history by now, while Yahoo would have been a sure bet.
Ever since retail investors became a significant force in the markets, the old ratios and assumptions can’t be taken as gospel anymore.
And if meme stocks are anything to go by, “expensive” is really just more of an equivocation than a statement of fact.

3. Energy Efficient Ethereum? What will they think of next?

  • Ethereum's London hard fork marks the first major move to shift the Ethereum blockchain to a more energy-efficient proof-of-stake mechanism 
  • Major coup for Ethereum to achieve the consensus needed to make blockchain changes is testimony to its durability and allows for more use cases to be developed 
EIP 1559 – never has so much ridden on an innocuous Ethereum Improvement Proposal.
Dubbed the “London hard fork,” EIP 1559 represents the start of a major shift in the Ethereum blockchain to a proof-of-stake protocol that could potentially put to rest allegations that cryptocurrencies (or at least Ethereum) consume large amounts of electricity.
EIP 1559 is estimated to have already eliminated some US$2 million worth of fees on Ethereum, based on data from
Cryptocurrencies have long attracted criticism, the most vocal of which has been from Elon Musk, for using a proof-of-work system that requires computers to run round the clock to solve complex mathematical puzzles to secure the underlying blockchain and receive that blockchain’s cryptocurrency as a reward for the electricity and computing power spent.
And while software developers working on Ethereum have spent years to transition to a proof-of-stake system which essentially allows holders of Ether to “stake” their Ether to secure the Ethereum blockchain, that shift has been marred by developmental delays and achieving consensus.
It is that achievement of consensus which represents a major success for Ethereum.
With other cryptocurrencies like Bitcoin, even something as seemingly trivial as increasing the block size can result in bitter debates between developers and cause hard forks, where a new blockchain that resists the change could be formed.
Ethereum’s shift to proof-of-stake is a combination of several factors, but not least among which is its widespread use – being the world’s most heavily used blockchain – and sufficient distribution of stakers, with enough concentration to wrought consensus to make these changes.
ETH 2.0, which will see Ethereum finally transition to proof-of-stake, will be expected to occur sometime in early 2022 and excitement about the shift has seen bullish sentiment on Ether push the cryptocurrency up by almost 600% over the past year, while Bitcoin is up around 300%.
These gains in Ether come even after falling from recent all-time-highs in April, when the cryptocurrency was trading around US$4,000 (at time of writing Ether was trading around US$2,700).
From decentralized finance to non-fungible tokens, decentralized applications and demand for Ethereum has exploded over the past year.
Since the record-breaking US$69.3 million sale of Beeple’s NFT “Everydays: the First 5,000 Days,” demand for NFTs have been steadily growing with everyone from art galleries to fashion houses offering digital tokens minted on the Ethereum blockchain.
EIP – 1559 will also fundamentally change the emission schedule for Ether as well, from one that is mildly inflationary, to one that is deflationary and closer to Bitcoin.
But that doesn’t mean higher fees for transactions and if nothing else, should bring down fees for using the Ethereum blockchain, while simultaneously helping increase the value of Ether.
In Ethereum’s initial 2013 whitepaper, a cap for Ether was originally envisaged, but given the dynamic nature of cryptocurrency development, that “cap” was later shifted into a dynamic policy that would adapt to the specific circumstances.
Ethereum’s block size is also now variable and that should also help transaction speed.
Previously, the amount of transactions that could be jammed into a block was fixed, meaning that users sometimes had to wait for their transaction to clear when demand was high.
Blocks now behave like accordions, expanding and contracting according to incoming transactions. 

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Aug 06, 2021

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