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Novum Alpha - Daily Analysis 25 October 2021 (10-Minute Read)

Global equities have remained resilient in the face of risks from price pressures stoked by supply-chain bottlenecks and higher energy costs thanks in large part to strong earnings bolstered by fat margins.

 
A magnificent Monday to you as global equities meander through a multitude of risks. 
 

In brief (TL:DR)

 
  • U.S. stocks closed a mixed bag on Friday with the Dow Jones Industrial Average (+0.21%) the only index up, while the S&P 500 (-0.11%) and tech-centric Nasdaq Composite (-0.82%) were lower on concerns that the U.S. Federal Reserve could raise rates ahead of schedule on inflation concerns. 
  • Asian stocks mostly dipped Monday as traders weighed inflation risks, a Covid-19 outbreak in China and earnings prospects for major technology firms.
  • Benchmark U.S. 10-year Treasury yields rose one basis point to 1.64% (yields rise when bond prices fall) with traders betting that the Fed would be forced to pare back asset purchases as soon as next month on inflation pressure. 
  • The dollar was steady.
  • Oil extended a rally with December 2021 contracts for WTI Crude Oil (Nymex) (+0.96%) at US$84.56 on signs that demand will continue to be robust. 
  • Gold was little changed with December 2021 contracts for Gold (Comex) (-0.07%) at US$1,795.10. 
  • Bitcoin (+0.98%) rose to US$61,732 and all eyes will be on trading activity for the ProShares Bitcoin Strategy ETF on Monday as profit taking saw a correction in the benchmark cryptocurrency.
 

In today's issue...

 
  1. How Serious is the Supply Chain Squeeze?
  2. U.S. SEC Review of GameStop Saga Reveals Boring Truth
  3. More Payment Service Providers Provide for Cryptocurrencies
 

Market Overview

 
Global equities have remained resilient in the face of risks from price pressures stoked by supply-chain bottlenecks and higher energy costs thanks in large part to strong earnings bolstered by fat margins.
 
But investors are growing wary that tighter monetary policy to keep inflation in check will stir volatility in markets as well as eat into margins over the last quarter of 2021, meaning that Q4's profits could get battered. 
 
Elsewhere, the European Central Bank’s meeting this week will be closely watched for guidance on its pandemic bond-buying program, with odds on that the ECB will keep to business as usual. 
 
Investors are assessing a delta-variant virus outbreak in China that’s expected to worsen as well as economic challenges from a real-estate sector slowdown.
 
In Asia, markets were mixed Monday with Tokyo's Nikkei 225 (-0.99%) down while Hong Kong's Hang Seng (+0.24%), Sydney’s ASX 200 (+0.51%) and Seoul's Kospi Index (+0.44%) were up in the morning trading session. 
 

 

1. How Serious is the Supply Chain Squeeze?

 
  • Fresh data is revealing pressure on every link in the supply chain.
  • While most companies claim to be managing the higher costs by raising their own prices or finding efficiencies elsewhere, like putting goods on planes, there are also limits to the measures.
 
On a transcontinental flight aboard a United Airlines jet, the belly of the plane is filled with takeout containers, hardly the sort of perishable, high value cargo that one would expect to be put aboard a plane.
 
Everything from takeout containers to toys is being loaded on planes as the supply chain snarls in the U.S. have seen companies get creative on transport and logistic solutions.
 
But soaring jet fuel costs threatens to put the kybosh on flying materials across the country.
 
Fresh data is revealing pressure on every link in the supply chain. From factory closures in China triggered by a new wave of Covid-19 outbreaks, to trouble finding staff to unload trucks, conditions are threatening to make inflationary pressures more persistent.
 
Toymakers are lamenting higher resin prices while airlines recovering from the pandemic are being battered by higher fuel costs.
 
And despite unemployment still well above pre-pandemic levels, there is a growing labor shortage, which is slowing the pace of economic recovery in the United States.
 
Last Wednesday, the U.S. Federal Reserve’s Beige Book, which summarizes economic conditions, noted,
 
“Most districts reported significantly elevated prices, fueled by rising demand for goods and raw materials.”
 
While most companies claim to be managing the higher costs by raising their own prices or finding efficiencies elsewhere, like putting goods on planes, there are also limits to the measures.
 
Consumer goods giant Procter & Gamble, which manufactures everything from toilet paper to Tide detergent, announced price increases for 9 out of 10 of its product categories in the U.S. alone, while PepsiCo said its price increases could persists into the first quarter of next year.
 
The good news for investors is that the Fed knows that the bulk of these price increases is due to supply chain issues and pent-up pandemic demand.
 
And because monetary policy is a blunt tool to use to reign in price increases, the more logical thing to do first would be to dial back asset purchases before thinking about raising rates, which could derail an already fragile recovery which is under pressure from supply chain issues.
 
Much of the Fed’s policy moving forward however may be down to politics.
 
The Biden administration has neither confirmed nor denied whether the dovish Jerome Powell will stay on for another four-year term as the Chairman of the Federal Reserve.
 
Powell’s hand at the keel would mean a more predictable and smoother return to normal monetary policy, whereas a new broom may indeed sweep clean.
 
For now, corporate earnings may suffer as margins are squeezed because of price pressures and those firms that are least able to pass on increased costs to consumers may find themselves worse-off despite a stellar third quarter.
 

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2. U.S. SEC Review of GameStop Saga Reveals Boring Truth

 
  • Following the U.S. Securities and Exchange Commission report on the GameStop (-6.55%) saga though, it wasn’t necessarily conspiracies that can be used to explain what happened, but creaky infrastructure instead.
  • GameStop’s price continued to hold up even after the short covering would have been exhausted and according to the SEC.
 
Bad news conspiracy theorists, it wasn’t a band of lizard people who secretly rule the Illuminati that led to the GameStop saga, it was Mom-and-Pop investors.
 
For starters, Wall Street underestimated the retail revolution in U.S. stock markets that has since seen regular investors take on an outsized role in institutional investor stomping grounds.
 
While stock markets such as South Korea have as much as 80% of flows from retail traders, on Wall Street, until the pandemic, retail made up less than a tenth of trading flows, soared to as much as a third during the pandemic and now claims a fifth of all trades. 
 
Following the U.S. Securities and Exchange Commission report on the GameStop saga though, it wasn’t necessarily conspiracies that can be used to explain what happened, but creaky infrastructure instead.
 
For starters, the SEC claims that the number of people trading GameStop shares shot up to nearly 900,000 by January 27 this year, driven apparently by social media chatter, and by the final full week of that month, saw GameStop up 1,400% from its average in 2020.
 
And while it may be tempting to believe that online day traders rallied together to target short-selling hedge funds, the SEC’s investigation revealed that such buying by hedge funds was a “small fraction” of overall buying volume.
 
GameStop’s price continued to hold up even after the short covering would have been exhausted and according to the SEC,
 
“It was positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock.”
 
Similarly, when retail trading platform Robinhood switched off trading, it wasn’t in response to pressure from hedge funds lurking in the shadows, instead, it was a clearing and settlement system that was simply unable, under its own rules of risk management, to keep facilitating the huge wave of one-way bets.
 
Because a market maker’s ultimate goal is to make money off the spread from each trade and not expose themselves to price movements, there just simply weren’t enough instruments on the other side to hedge these one-way bets.
 
Now that the dust has settled on GameStop, the saga was an example of what happens when an unstoppable force (retail investors) collide with an immovable object (market infrastructure).
 
The SEC report asks for market participants to reflect on what went wrong and what didn’t to be better prepared for when it happens again in markets which are now showing “broad participation” or in other words, more retail investors.
 
That another GameStop will roll around is just a matter of time.
 

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3. More Payment Service Providers Provide for Cryptocurrencies

 
  • Payment app Venmo, is the latest firm to allow credit card holders to automatically purchase cryptocurrencies right from their Venmo account using the cashback they’ve earned from purchases.
  • But Venmo, which is owned by PayPal (-1.16%), is hardly alone when it comes to cryptocurrency adoption for its user base.
 
If you can’t beat’em, facilitate payments for them.
 
Or at least that’s what is being suggested by payment services companies who may have previously been sitting on the fence when it comes to cryptocurrencies, but are now starting to embrace them.
 
Payment app Venmo, is the latest firm to allow credit card holders to automatically purchase cryptocurrencies right from their Venmo account using the cashback they’ve earned from purchases.
 
The move drew mixed responses from Venmo’s user base but shows that the pressure on companies to provide services connected to cryptocurrencies, even at the risk of alienating or confusing a portion of their user base, resistant to the nascent asset class.
 
But Venmo, which is owned by PayPal, is hardly alone when it comes to cryptocurrency adoption for its user base.
 
Upgrade, which offers personal loans and credit cards, recently launched the first U.S. credit card to offer bitcoin rewards, while Robinhood Markets (-4.09%), which has enabled cryptocurrency trading for some time now, is expanding features to support the service.
 
Stripe, which lets merchants accept customer payments, is growing its cryptocurrency team while retail giant Walmart (+1.01%) is launching a pilot program that allows shoppers to buy bitcoin at Coinstar kiosks in some of its U.S. stores.
 
Even traditionally staid financial institutions have had no choice but to throw their hat in the ring, with the likes of Goldman Sachs Group (+1.65%), Bank of New York (-0.050%) and even Singapore’s own DBS Group Holdings (+0.22%), offering cryptocurrency-related services and trading.
 
To top it off, last week saw the successful launch of the bitcoin-futures based ProShares Bitcoin Strategy ETF, which along with a similar ETF from Valkyrie Investments, soak up some US$1 billion in assets.
 
Whereas in the not-so-distant past, getting exposure to bitcoin’s price fluctuations was a complicated affair, best left to the technically competent, a growing number of companies are making it easier so that everyday customers can get a sprinkling of cryptocurrency in their everyday lives.
 
For now at least, it doesn’t seem as though many cryptocurrency holders are hot on dumping their bags by spending them, with many quite content for now to speculate and trade on them.
 
And for the companies which are willing to provide cryptocurrency services, the returns can be incredibly lucrative.
 
Cash App, the mobile payments service developed by Square (-4.55%), generated some US$2.72 billion in revenue and US$55 million in gross profit from bitcoin transactions during the second quarter of this year alone, three times what it did last year.
 
 

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Oct 25, 2021

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