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Novum Alpha - Daily Analysis 26 August 2021 (10-Minute Read)

Asian investors were understandably jittery on what many are expecting will be an inevitable U.S. Federal Reserve tapering of its US$120 billion-a-month asset purchases, wounds still raw from the 2013 taper tantrum.

A terrific Thursday to you as stocks continue to trend higher, with few bears left in the market to speak of. 

In brief (TL:DR)

  • U.S. stocks continued their ascent on Thursday, with the Dow Jones Industrial Average (+0.11), the S&P 500 (+0.22%) and tech-centric Nasdaq Composite (+0.15%) pushing fresh records once again, ahead of the Jackson Hole (virtual) summit. 
  • Asian stocks wavered Thursday as traders await more clues about the regulatory outlook in China as well as the U.S. Federal Reserve’s approach to paring stimulus.
  • Benchmark U.S. 10-year Treasury yields held an advance at 1.34% ahead of the Jackson Hole symposium (yields rise when bond prices fall) on the back of thin volumes. 
  • The dollar was firm.
  • Oil fell with October 2021 contracts for WTI Crude Oil (Nymex) (-0.64%) at US$67.92, paring a rally this week driven by bets that demand will weather the delta virus strain’s impact on the economic recovery.
  • Gold was lower with December 2021 contracts for Gold (Comex) (-0.04%) at US$1,790.30.
  • Bitcoin (+1.14%) rose to US$48,761 on technical indicators of being oversold and with outflows starting to lead against inflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 

In today's issue...

  1. Step Aside, The Pros Are Going All in On Meme Stocks
  2. OnlyFans Realizes That Sex Sells
  3. U.K. Regulators Surrender to Binance

Market Overview

Asian investors were understandably jittery on what many are expecting will be an inevitable U.S. Federal Reserve tapering of its US$120 billion-a-month asset purchases, wounds still raw from the 2013 taper tantrum. 
In 2013, then Fed Chairman Ben Bernanke's tapering of asset purchases in the wake of the 2008 Financial Crisis saw volatility spread to Asia which suffered a broad selloff, especially for emerging market debt and equities. 
Investors are understandably worried over a repeat of that episode and Asian stocks showed this unease in Thursday's morning trading session with Tokyo's Nikkei 225 (-0.11%), Sydney’s ASX 200 (-0.32%), Hong Kong's Hang Seng (-0.80%) and Seoul's Kospi Index (-0.46%) were all lower on Thursday's morning trading session. 

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1. Step Aside, The Pros Are Going All in On Meme Stocks

  • Recent surge in meme stocks was found to have been driven not by retail investors 
  • Hedge funds and other professional investors may be playing off each other, with short sellers having a hard time from their counterparts and with the ever-present risk that retail could make a comeback into the trade 
To be sure, Wall Street does not fear retail investors.
Despite the wounds inflicted by retail investors on Melvin Capital, a star hedge fund that shorted video game retailer GameStop (-5.06%) to infamy and an estimated US$5 billion in losses, Wall Street still believes that mom-and-pop investors are ultimately still the bag holders.
Bag holders in Wall Street parlance are the retail investors who are left to pay the bill once the so-called smart money has made off with the cash.
But where the GameStop fiasco stung is that one of Wall Street’s own got burned and retail investors ultimately had the last laugh.
Which is why Wall Street is back to (hopefully) have its revenge.
According to data compiled by Vanda Research, a firm that tracks retail flows in the U.S., mom-and-pop demand for a basket of some 37 retail-favorites has been lackluster, but that hasn’t stopped those stocks from posting their biggest gains since June.
Stocks favored by day traders for their volatility rose an average 10% yesterday, which Vanda Research attributes to long-short hedge funds that are generally quick to dump bearish bets as the rally attracted high levels of short interest.
As retail investors headed to the beach for the summer, the pros gently waded back in, to send short interest in meme stocks from AMC Entertainment (-0.68%) to GameStop (-5.06%) soaring.
But other hedge funds smelled blood in the water, pushing prices of meme stocks higher and data from S3 Partners is showing once again that investors betting against AMC Entertainment and GameStop are now nursing some US$1 billion in losses over just the past three days, bringing combined losses on shorting these stocks to US$10.2 billion.
And while it’s true that the companies whose stocks have been shorted probably aren’t the most healthy or viable, the grassroots Reddit-fueled rally of these meme stocks caught many professional investors by surprise earlier this year. 
Many hedge funds in fact declared that they would be less public about their short positions, for fear of raising the ire of retail investors.
But mandatory quarterly disclosures has meant that certain hedge funds can’t keep these short positions under wraps indefinitely, and short interest is definitely up.
In the Vanda Research note, Ben Onatibia and Giacomo Pierantoni noted,
“Despite the broad rally in meme stocks, retail purchases were mainly concentrated on AMC Entertainment, with over US$56 million in Tuesday’s session. All other meme stocks combined, totaled a paltry $4 million in net retail buying.”
And what this means is that the pros aren’t really battling retail anymore – they’re duking it out with each other.

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2. OnlyFans Realizes That Sex Sells

  • OnlyFans reverses course on ban on sex videos on its platform 
  • Banking and payment gateways could continue to be a problem for OnlyFans and its back-and-forth on content could rattle creators who may jump ship to competitors 
In one of the fastest about faces, social media platform OnlyFans that built its popularity on subscriptions to salacious content (basically porn) has announced that it is no longer planning to ban sex videos.
The move, which is no doubt likely to be met with deep sighs and groans of approval from OnlyFans content creators, comes as the company claims to have “secured assurances necessary to support our diverse creator community.”
Last week, OnlyFans said that it had to ban sex videos to comply with the requests of its banking partners and payment service providers.
OnlyFans received sharp backlash and was widely criticized by content creators last week across various social media outlets, for turning its back on those who had helped the platform to grow.
In an interview with the Financial Times on Tuesday, OnlyFans founder Tim Stokely revealed that the Bank of New York Mellon (+1.91%) had made it difficult for the company to pay its creators, allegedly rejecting every wire transfer related to OnlyFans.
Since September 11, 2001, U.S. financial institutions have had to bear greater compliance burdens to ensure that their networks and accounts weren’t being used to facilitate illegal activities.
Despite the quick U-turn by OnlyFans, the damage may already have been done, with content creators already setting up accounts on competitors, especially as the reliance on a single point of failure for their income becomes apparent.
During the pandemic lockdowns, thousands of sex workers suddenly found no way to support themselves and OnlyFans became a key source of income for them as a way to reach out to fans while receiving money from paid subscriptions.
OnlyFans creators now total more than two million and while not all of the content is sexual, much of it is.
Creators can set the prices they charge to subscribers each month, with OnlyFans retaining 20% of the subscription revenue and everything else going to the creators, including money from individual pieces of content and tips from fans.
OnlyFans is owned by Fenix International, a United Kingdom-based company that last year reported revenue of some US$390 million for the year ended November 30, according to U.K. business filings, and a more than sixfold increase from a year earlier, with around 80% of revenues coming from the U.S.

3. U.K. Regulators Surrender to Binance

  • United Kingdom Financial Conduct Authority concedes that it is neither able to effectively supervise or discipline Binance 
  • Experience of the U.K. FCA underscores the challenges faced by regulators in policing a novel technology that by design allows it to circumvent national borders, restrictions and oversight
You can’t regulate what you can’t supervise, and you can’t supervise what you can’t see.
Which is why the United Kingdom’s Financial Conduct Authority or FCA announced that it is “not capable” of effectively supervising Binance’s U.K. arm.
In a June notice, that attracted little attention at the time, the FCA conceded that it had no ability to oversee, let alone discipline Binance, one of the world’s largest cryptocurrency exchanges that facilitates hundreds of billions of dollars’ worth of transactions every month.
According to the FCA notice, Binance’s U.K. affiliate had “failed to” respond to some of its allegedly basic queries, making it impossible to oversee the cryptocurrency juggernaut, which has no fixed headquarters yet offers services globally.
The concession by the FCA underscores the challenges facing not just regulators in the U.K., but globally, in tackling potential risks to consumers buying unregulated and complex financial products through agile cryptocurrency businesses, which have the capability of circumventing national banks, and monetary authorities. 
Parallel financial systems are hardly new – from offshore private banks to over the counter or OTC trades in derivatives, and complicated mortgage-backed securities and swaps that set the scene for the 2008 Financial Crisis.
But because cryptocurrencies by their very nature allow borderless transactions and peer-to-peer transfers of value, authorities have a far harder time spotting illegal active or identifying systemically risky transactions.
And despite Binance’s CEO Changpeng Zhao or CZ’s public declarations to turn Binance into a compliant cryptocurrency exchange, working with regulators globally, the company (if one can call it that) has flipped the bird to the FCA so far.
According to the FCA, Binance declined to explain how it is organized, how U.K. residents use its products or even who runs its website.
While nominally domiciled in the Cayman Islands, Binance has thousands of employees globally, but no headquarters.
When the FCA demanded that Binance should state prominently it cannot undertake regulated business in the United Kingdom, the company buried an innocuous link to this boilerplate declaration somewhere on its homepage.  
The FCA’s initial crackdown on Binance in the U.K. sparked off a string of warnings by regulators from Thailand to Japan, seeking to censure the cryptocurrency exchange.
But the experience of the FCA should be instructive that even as regulators globally seek wider powers to police the cryptocurrency space, the technology itself may allow users to circumvent that regulation altogether.

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Aug 26, 2021

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