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Novum Alpha - Daily Analysis 9 September 2021 (10-Minute Read)

A rally that took global stocks to records has cooled as investors await more indications that economic reopening can overcome challenges posed by the delta variant.

 
Time for Thursday and the markets are in red.
 

In brief (TL:DR)

 
  • U.S. stocks dipped with the Dow Jones Industrial Average (-0.20%), S&P 500 (-0.13%) and the tech-centric Nasdaq Composite (-0.57%) were all down.
  • Asian stocks declined Thursday after a dip in U.S. shares as investors continue to fret over a slowdown in the economic recovery from the pandemic.
  • Benchmark U.S. 10-year Treasury yields were steady at 1.34% (yields rise when bond prices fall).
  • The dollar ticked higher.
  • Oil was higher with October 2021 contracts for WTI Crude Oil (Nymex) (+0.19%) at US$69.43 amid a slow return of U.S. production after Hurricane Ida.
  • Gold was lower with December 2021 contracts for Gold (Comex) (-0.11%) at US$1,791.60.
  • Bitcoin (-1.94%) continued to fell to US$46,124 as inflows raced ahead of outflows, dramatically clogging exchanges and their ability to execute orders (inflows suggest that traders are looking to sell Bitcoin in expectation of lower prices). 
 

In today's issue...

 
  1. Retail Baits & Switches Wall Street
  2. Could the U.S. Government Run Out of Cash Again?
  3. The SEC Won’t Let Me Be, So Let’s Sue some Crypto Companies
 

Market Overview

 
A rally that took global stocks to records has cooled as investors await more indications that economic reopening can overcome challenges posed by the delta variant.
 
U.S. futures were in the red after the S&P 500 retreated for a third day and the Nasdaq 100 posted the biggest drop in two weeks. A U.S. central bank survey signaled a moderation in economic growth due to the delta virus strain.
 
In Asia, markets were mostly lower on Thursday's morning trading session, with Tokyo's Nikkei 225 (-0.42%), Hong Kong's Hang Seng (-1.22%), Seoul's Kospi Index (-0.89%) and Sydney’s ASX 200 (-1.39%) were all down.
 

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1. Retails Baits & Switches Wall Street

 
  • Retail investors sold US$2.45 million in AMC Entertainment on Tuesday, marking the first time that mom and pop investors became net sellers of the movie theater operator.
  • While the smart money may now be pouring into the meme stock craze, retail appears to be receding, leaving the funds to fight it out amongst themselves, with predictable consequences.
 
When retail investors banded together and left short sellers like Melvin Capital to lick their wounds after rallying the stocks of companies like GameStop (-0.10%) and AMC Entertainment (-0.90%), Wall Street sat up and took notice.
 
According to data from Vanda Research, at its height, retail investor flows made up as much as one quarter of all trading volume, during the meme stock frenzy in the earlier part of this year.
 
And when the so-called “smart money” moved in on the trade, retail investors once again played them out by taking the opportunity of gains ahead of the Labor Day long weekend to start selling shares to the professional investing crowd.
 
According to data from Vanda Research, retail investors sold US$2.45 million in AMC Entertainment on Tuesday, marking the first time that mom and pop investors became net sellers of the movie theater operator.
 
The retail tide is slowly but surely receding not just from meme stocks, but from equities in general.
 
With stimulus checks all but spent, and increasing uncertainty around the pace and strength of the economic recovery in the U.S. and weaker payroll data, where just 235,000 jobs were created last month out of a forecast 725,000, retail investors are understandably becoming more circumspect over how they move their money.
 
In the most recent rally in August, retail investors bought barely a quarter of the stocks that they soaked up during the meme stock mania earlier in the year, according to Vanda Research, accounting for just US$250 million of shares sold, compared with US$1 billion.
 
While the smart money may now be pouring into the meme stock craze, retail appears to be receding, leaving the funds to fight it out amongst themselves, with predictable consequences.
 
Last month, Vanda Research reported that professional investors had poured into meme stocks, anticipating a retail resurgence in these companies that never came and now retail investors are quietly leaving the trade, only to leave the so-called smart money to hold the bag.
 
Trying to divine retail flows however has proved increasingly challenging.
 
Whereas free money may have fueled any manner of speculative bubble, the threat that the U.S. economic recovery will not be as robust as anticipated thanks to the delta variant and the potential slowing of stimulus are all contributing to retail lethargy, but ruling them out completely would be premature.
 

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2. Could the U.S. Government Run Out of Cash Again?

 
  • Janet Yellen has warned the US Treasury risks running out of cash next month unless Congress increases its borrowing limit.
  • Investors will be looking to see if a repeat of 2019 is in the offing, with some suggesting that should Congress stall the lifting of spending limits.
 
Given the relentless pace of fiscal spending in Washington, one would be forgiven for thinking that the U.S. government could never run out of money – well not literally at least.
 
But for Washington to spend, it first needs to borrow and that’s where Congress comes in as U.S. Treasury Secretary Janet Yellen warns that her department risks running out of cash next month unless Congress increases its borrowing limit.
 
The Biden administration is increasingly worried that unless Congress lifts borrowing caps, there’s another real chance that the U.S. government could possibly go into another debt default.
 
Although not offering a “specific estimate” on when the government would be out of money, Yellen, in a letter to congressional leaders yesterday, said that it would most likely happen sometime in October, or roughly the time when other administrations had also run out of cash.
 
Yellen’s letter was not short on fearmongering, warning congressional leaders that,
 
“A delay that calls into question the federal government’s ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets.”
 
To be fair, even if the U.S. defaulted on its debt, it wouldn’t be the first time that, or a government shutdown happened.
 
As recently as 2019, the Trump administration was forced to shut down just before Christmas until almost the end of January, with the 35-day shutdown the longest in U.S. history.
 
Making matters worse, the 2019 U.S. government shutdown occurred because of a deadlock on Trump’s proposed US$5.7 billion border wall with Mexico, an idea that seems quaint now with the benefit of hindsight.
 
Despite the shutdown, Treasury sales proceeded as per normal, and the world didn’t suddenly dump U.S. government debt, because in truth, who would they dump it to?
 
Considered one of the world’s “safest” securities, Treasuries have withstood all manner of national and global calamity, and even the Trump administration.
 
No doubt the U.S. may have suffered some dent to its prestige in the wake of 2019’s federal government shutdown, that it was able to emerge from the other end, provided Treasury holders with no shortage of comfort.
 
But mounting risks that the U.S. could face a debt crisis as early as next month complicates efforts by the Biden administration to pass a multi-trillion-dollar economic agenda through Congress.  
 
Not so long ago, increasing the U.S. debt limit was a routine and mundane affair for Congress, allowing the U.S. Treasury to pay the bills for spending already approved by lawmakers, but has since morphed into a forum for partisan politics.
 
Investors will be looking to see if a repeat of 2019 is in the offing, with some suggesting that should Congress stall the lifting of spending limits, the Treasury Department may be forced to cut back further on issuing new debt, which could send yields plummeting and ripple through equity markets, sending stocks higher.
 
 

3. The SEC Won't Let Me Be, So Let's Sue some Crypto Companies

 
  • The U.S. Securities and Exchange Commission has warned Coinbase that it will sue the cryptocurrency exchange if it launches a new digital asset lending product.
  • But the SEC moves could have the deleterious effect of pushing cryptocurrency exchanges offshore and it’s unclear what the ultimate goal of the regulator is.
 
“So the SEC won’t let me be, or let me be me, so let me see.
They try to shut me down technically, but it feels so empty without me.”
 
– adapted from the lyrics of “Without Me” by Eminem off the album The Eminem Show © 2002
 
With the first round going to cryptocurrency exchanges like Binance, which regulators like the U.K.’s Financial Conduct Authority have conceded that they are struggling to oversee let alone sanction, U.S. regulators are taking a different tact, sue what you can see.
 
The hitherto unregulated and unregulatable cryptocurrency industry is entering a new phase with early efforts to reign in the relentless march of gray-zone exchanges like Binance failing to yield fruit and regulators now gunning for the targets that they can reach with the latest being U.S.-listed Coinbase Global (-3.23%).
 
The U.S. Securities and Exchange Commission has warned Coinbase that it will sue the cryptocurrency exchange if it launches a new digital asset lending product.
 
Designed to allow users to earn interest on certain cryptocurrencies deposited with the exchange, Coinbase’s product called “Lend” (no prizes here for creativity in naming) is not new in the digital asset sphere.
 
Exchanges have long been offering attractive yields to depositors who lend cryptocurrencies on their platforms and Coinbase would hardly be the first, but the SEC’s contention is that such a product would be considered an “investment contract” thus making it a security under federal law and needing to be registered.
 
Using what the “Howey test,” a seminal case for determining whether an investment contract creates a security, the SEC argues that Coinbase’s Lend product creates such a circumstance and therefore could become an unregistered security if launched
 
Brian Armstrong, Coinbase Global’s CEO took to Twitter to express his frustrations at the SEC action,
 
“They are refusing to offer any opinion in writing to the industry on what should be allowed and why, and instead are engaging in intimidation tactics behind closed doors.”
 
“Whatever their theory is here, it feels like a reach/land grab vs other regulators.”
 
And Armstrong may have hit the nail on the head, because SEC Chairman Gary Gensler has gone hat in hand to Congress before, asking for more sweeping powers to regulate the nascent cryptocurrency space, while maintaining in the same breath that the SEC already has all the powers it needs to police the vibrant industry.
 
But the SEC moves could have the deleterious effect of pushing cryptocurrency exchanges offshore and it’s unclear what the ultimate goal of the regulator is.
 
Coinbase’s Lend product could just as easily be said to resemble a savings deposit, paying out a fixed interest on deposited digital assets and therefore within the purview of the Office of the Comptroller of the Currency.
 
Under the Trump administration, the OCC had clarified that national banks could accept dollar deposits to back up stablecoin issuances, albeit with far more stringent and conservative control measures in place.
 
Nonetheless, the inter-agency land grab as alluded to by Armstrong may be precisely what the cryptocurrency space doesn’t need at the moment.
 
Given the decentralized nature of the industry and as demonstrated by cryptocurrency exchanges like Binance, regulators and national governments are better served by putting out clear guidelines or risk alienating those digital asset innovators to base themselves offshore.
 
Take FTX for instance, one of a clutch of rising cryptocurrency exchanges with an American founder and CEO but headquartered in Hong Kong.
 
If the U.S. is to genuinely become a leader in the cryptocurrency space and not lose the race for digital asset dominance to other countries, piecemeal enforcement actions such as the one contemplated against Coinbase will be counterproductive and counterintuitive.
 
 

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Sep 09, 2021

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