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Novum Alpha - Daily Analysis 23 August 2021 (10-Minute Read)

Guess what's back? Back again? Stocks are back, tell a friend. Guess what's back, guess what's back, guess what's back...(sung to the tune of Eminem's "Without Me").

 
A magnificent Monday to you as stocks take a turn for the better. 
 

In brief (TL:DR)

 
  • U.S. stocks rebounded on Friday, with the Dow Jones Industrial Average (+0.65), the S&P 500 (+0.81%) and tech-centric Nasdaq Composite (+1.19%) all up in the wake of options expiries and investors taking the opportunity to buy the dip. 
  • Asian stocks rose Monday as traders sought to take advantage of last week’s selloff while weighing risks from the delta virus strain and China’s regulatory curbs.
  • Benchmark U.S. 10-year Treasury yields rose to 1.27% as U.S. equities recovered (yields rise when bond prices fall). 
  • The dollar dipped for the first day in six on easing demand for havens.
  • Oil edged higher with October 2021 contracts for WTI Crude Oil (Nymex) (+0.85%) at US$62.67.
  • Gold rose with December 2021 contracts for Gold (Comex) (+0.20%) at US$1,786.60.
  • Bitcoin (+1.58%) surged to US$49,870 heading into the week with signs that it may push as high as US$50,000 as outflows continued to lead against inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 
 

In today's issue...

 
  1. China's Economic Long March
  2. What does it mean for Stocks when we Run Low on Chips?
  3. Crypto Bros on Capitol Hill
 

Market Overview

 
Guess what's back? Back again? Stocks are back, tell a friend. Guess what's back, guess what's back, guess what's back...(sung to the tune of Eminem's "Without Me").
 
Investors are ebullient and pushing markets sharply higher on the final full week of August as traders sought to take advantage of last week's selloff while weighing risks from the delta variant strain and China's unclear economic path and regulatory curbs. 
 
Investors are in a buying mood at the moment, buying into the prospect that the delta variant could derail central bank withdrawal from markets and help to keep asset prices elevated. 
 
Asian stocks rebounded sharply at Monday's open, with Tokyo's Nikkei 225 (+1.69%), Hong Kong's Hang Seng (+2.31%), Seoul's Kospi Index (+1.42%) and Sydney’s ASX 200 (+0.26%) all higher.
 

Did you miss us at VC Headstart 2021 by Wholesale Investor?

 

1. China's Economic Long March

 
  • China's shifting sands of monetary and economic policy make it hard for investors to chart safe passage through a potential investment minefield 
  • Longer term, while the opportunity in China is tremendous, the prospect and timeframe for those returns to materialize may warrant casting the net wider beyond the Middle Kingdom 
 
Investors these days, it would seem, have a different time horizon compared to their forebears.
 
From meme stocks to cryptocurrencies, it’s a struggle to be patient for returns anymore in this age of instant gratification.
 
Yet that is precisely what the Chinse Communist Party is asking investors to do as it guides the world’s second largest economy using amorphous terms such as a “cross-cyclical” approach that apparatchiks have described as taking action sooner, in smaller steps, and with a longer timeframe in mind.
 
But with the recent crackdown on the afterschool education sector nothing short of obliteration, it’s hard to see what “smaller steps” even means.
 
According to some economists, a “cross-cyclical” approach is a departure from “counter-cyclical” policy, which is when central banks and governments add stimulus to spur a slowing economy, either through interest rate and tax cuts or fiscal spending, and tighten conditions when growth starts accelerating.
 
The implication for China is keeping restrictions in some areas, while easing others, for instance cutting the reserve requirement ratio for banks to increase liquidity in the system, but tightening property restrictions to reign in real estate prices.
 
Standard monetary policy, with Chinese characteristics, in other words. 
 
The bigger issue looming for investors though is that a “cross-cyclical” approach means far more challenging market conditions, because it’s difficult to discern, let alone anticipate, policy measures.
 
For instance, reducing the reserve requirement ratio for banks should technically help their profitability, because they can deploy more funds, but Beijing instructing lenders to forgo gains to support the domestic economy will hurt the returns on those loans and hurt the bank's returns. 
 
Similar inconsistencies could also occur for real estate and interest rates.
 
Lower interest rates would typically suggest that asset prices should go up because of reduced borrowing costs, but placing restrictions on real estate prices for instance, would prevent that sector from reaping any of those gains.
 
And that means far more volatility over shorter timeframes as Beijing tries to chart a longer-term economic course for China.
 
But for investors who have become accustomed to shorter wins, especially in current market conditions, a reversal out of Chinese equities may not be altogether ill-advised.
 
The perceived arbitrariness with which Beijing handled both its tech companies and the afterschool education market have shaken even the biggest China bulls, including Cathie Wood of Ark Investment Management, who dumped Chinese stocks in the aftermath of the purge.
 
Slowing growth and a period of painful (but perhaps necessary) economic adjustment in China may not be what investors, fed on the narrative of quick gains from 1.4 billion Chinese consumers, signed up for.
 

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

 

2. What does it mean for Stocks when we Run Low on Chips?

 
  • Global chip shortage likely to last far longer than expected 
  • Clutch of winners from the global chip shortage are an unlikely crew of stocks 
 
Not so long ago, the world ran on a different sort of commodity – oil.
 
Increasingly though, as evidenced by the acute chip shortages experienced lately, the world runs on semiconductors.
 
Powering everything from computers to smartphones, toasters to Teslas, delivery time for even some of the most basic chips has stretched to over 20 weeks, according to data from Susquehanna Financial Group.
 
But with roughly 80% of all chips manufactured in Northeast Asia, the world is increasingly reliant on a small corner of the planet that has become more susceptible to geopolitical tension with its giant neighbor, China.
 
To be sure, the Biden administration is looking to Make America Chips Again, introducing a US$50 billion chip research proposal and plans to onshore production, a process that could take a decade and cost billions in capital.
 
One of the unlikely victims and beneficiaries of the recent chip shortage has been the automotive industry and despite being well into the second half of this year, the problem hasn’t shown any signs of sorting itself out.
 
More automakers are announcing production cuts, with Toyota Motor (+3.53%) being the latest to announce cuts last week.
 
And that has translated into shortages of vehicles, leading to a rise in vehicle prices in the U.S. adding to inflationary pressures.
 
In the U.S. alone, the first half of 2021 saw used vehicle prices surged by 20%, while new cars were more expensive by 3%.
 
But what’s not good for consumers has been great for automakers, General Motors (-0.57%) and Ford Motor (-0.79%) have seen their shares surge, because despite selling fewer cars, margins are higher.
 
The stocks of chipmakers, in particular Intel, which even before the Biden administration announced a plan to onshore chipmaking back to the U.S., had already announced billions of dollars of investment to make more chips closer to home, doubling down on its bet on domestic chipmaking.
 
Unlike rivals Nvidia (+5.14%) and AMD (+0.92%), for decades, Intel (-0.82%) refused to outsource the more expensive process of making chips to contract manufacturers in South Korea and Taiwan, opting instead to focus on its American chip foundries.
 
And for years, the stock of Nvidia and AMD, which outsourced the costly and low-margin business of chipmaking to the likes of Samsung Electronics (+1.38%) and Taiwan Semiconductor Manufacturing Company (+3.08%), soared as they focused on the far more lucrative business of chip design.
 
The tide may however be turning.
 
As geopolitical tensions ratchet up between China and the U.S., and as China itself guns to become a dominant chipmaker itself, the push to make and buy in America will factor well for companies like Intel.
 
 

3. Crypto Bros on Capitol Hill

 
  • U.S. cryptocurrency industry shows its hand in latest proposed amendments to the U.S. infrastructure bill that would have had broad implications on the cryptocurrency industry 
  • Influence of the U.S. cryptocurrency industry cannot be understated, and could potentially help in the broader push for a Bitcoin ETF 
 
It’s the ultimate smart contract, the unwritten one between commerce and Capitol Hill.
 
Not to sound cynical, but it’s no big secret that a big enough check can buy a lot of influence in Washington, as evidenced from the well-appointed offices lining K Street in the nation’s capital.
 
And as cryptocurrency prices have soared, so has a capability hitherto untapped by the digital asset industry – the ability to make itself heard in Washington.
 
As the U.S. Senate was putting the finishing touches on U.S. President Joe Biden’s ambitious US$1 trillion infrastructure plan, just days before the proposal was to be passed, the debate at the Senate stalled as the cryptocurrency industry furiously protested tax reporting requirements under the infrastructure bill.
 
But instead of legions of crypto bros lining up outside Capitol Hill with homemade protest signs and loudhailers, they did it the Washington way, with lobbyists, money and bipartisan members of the Senate objecting to the provisions that would require the U.S. cryptocurrency industry to make far more disclosures than the decentralized crowd has grown accustomed to.
 
While that effort ultimately proved futile – the infrastructure bill passed without amendments to the cryptocurrency provisions – it demonstrated the growing influence of the digital asset industry and its determination to have its voice heard.
 
The debate on the cryptocurrency provisions was all the more surprising given that the focus of the infrastructure bill, was, well, supposed to be infrastructure, and a means to find ways to pay for the bill without raising taxes.
 
Rifling through the proverbial couch cushions, it was the Biden administration which estimated that Uncle Sam could collect an additional US$28 billion in taxes owed under existing laws from cryptocurrency investors.
 
Not much, but every cent counts if you don’t want to raise taxes on Americans who vote you into office.
 
But that’s where things got a little bit tricky.
 
Anyone who knows even a little about cryptocurrencies knows about its pseudonymity, making it hard to ascertain who owns or owes what, and to whom, and the only way to tap into that sweet, sweet crypto cash was to get stakeholders to declare it on tax returns.
 
The U.S. crypto industry recoiled almost instinctively, arguing that such a measure would push more investment offshore, rather than increase taxes collected and the Senate took those allegations seriously because money talks.
 
And with a market cap of US$2 trillion, the Senate can’t help but hear what the crypto bros are saying, nor can the rest of Capitol Hill.
 
 

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Aug 23, 2021

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