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Novum Alpha - Daily Analysis 27 October 2021 (10-Minute Read)

Investors are counting on earnings to support equity prices and so far the reporting season has been solid overall but risks remain.

 
A  wonderful Wednesday to you as markets wind their way higher. 
 

In brief (TL:DR)

 
  • U.S. stocks closed higher Tuesday with the Dow Jones Industrial Average (+0.04%), the S&P 500 (+0.18%) and tech-centric Nasdaq Composite (+0.06%) all up.
  • Asian stocks fell Wednesday as traders evaluated more evidence of intensifying global price pressures, a flareup in U.S.-China tension and the earnings outlook.
  • Benchmark U.S. 10-year Treasury yields rose two basis points to 1.63% (yields rise when bond prices fall). 
  • The dollar was steady.
  • Oil traded around US$84 a barrel with December 2021 contracts for WTI Crude Oil (Nymex) (-0.61%) at US$84.13.
  • Gold retreated with December 2021 contracts for Gold (Comex) (-0.21%) at US$1,789.60. 
  • Bitcoin (-3.54%) fell to US$60,552 on with a sudden turnaround in flows putting downwards pressure on prices (inflows suggest that investors are looking to sell bitcoin in anticipation of lower prices). 

 

In today's issue...

 
  1. Investing in Chinese Tech Stocks Just Go Trickier
  2. U.S. Big Tech Soars on Robust Earnings
  3. The Crypto Wind Has Died Down Behind Robinhood
 

Market Overview

 
Investors are counting on earnings to support equity prices and so far the reporting season has been solid overall but risks remain.
 
Tech seems a good bet so far with the likes of Google and Microsoft reporting strongly, buoyed by the resilience and growth of their cloud computing businesses.  
 
Worries remain that over time rising raw material and wage costs and supply-chain snarls could crimp margins even as the energy crunch continues to ripple across the global economy.
 
In Asia, markets slipped Tuesday with Tokyo's Nikkei 225 (-0.12%), Seoul's Kospi Index (-0.73%) and Hong Kong's Hang Seng (-1.58%) down, while Sydney’s ASX 200 (+0.07%) was up slightly in the morning trading session.
 

 

1. Investing in Chinese Tech Stocks Just Go Trickier

 
  • The U.S. Federal Communications Commission vote to force China Telecom (-1.19%), one of three leading communications providers in China to close its U.S. business took investors by surprise as they rushed to dump Chinese tech stocks.
  • Investors searching through the rubble for opportunities in Chinese tech stocks may want to consider waiting it out just that bit longer, because given the circumstances, there’s no guarantee that cooler heads will prevail in Beijing.
 
Investors hoping for more cool-headed relations between the Biden administration and Beijing were surprised by a flare-up in otherwise warming relations.
 
When Biden entered the White House, it was hoped by many that he would roll back the inconsistent relations the previous Trump administration had with Beijing.
 
But yesterday, the U.S. Federal Communications Commission vote to force China Telecom, one of three leading communications providers in China to close its U.S. business took investors by surprise as they rushed to dump Chinese tech stocks.
 
Making matter worse, U.S. Secretary of State Antony Blinken remarked that the exclusion of Taiwan, which China considers a renegade province, from the United Nations, “undermines the important work” of the international body.
 
The remarks echo an earlier response last week by U.S. President Joe Biden who when asked by reporters whether or not the U.S. would defend Taiwan in the event of an invasion by China, he said, “Yes, we have a commitment to do that.”
 
The comments by Biden and Blinken are moving further away from the longstanding “strategic ambiguity” that has long held sway on Washington’s Taiwan policy and will necessarily irritate Beijing, ahead of a crucial plenary session next year where Chinese President Xi Jinping is widely expected to seal his grip on power with an unprecedented third term.
 
China’s tech sector had been recovering after being battered by headwinds from Beijing’s crackdown on the industry following the U.S. listing of ride-hailing giant Didi Global (-4.81%).
 
The sharp selloff all but erased the bulk of a rebound and demonstrates just how fragile sentiment is toward China’s embattled tech sector.
 
China Telecom doesn’t do much business in the U.S. anyway, but being barred from the market altogether is a significant symbolic measure and echoes earlier moves to keep companies like Huawei Technologies out as well and will almost certainly see some form of response from Beijing.
 
The concern from investors of course is that ahead of a key Chinese Communist Party conclave next year, President Xi will be looking to demonstrate strength and even small measures like the China Telecom ban in the U.S. could rapidly give way to escalating tensions.
 
Investors searching through the rubble for opportunities in Chinese tech stocks may want to consider waiting it out just that bit longer, because given the circumstances, there’s no guarantee that cooler heads will prevail in Beijing.
 

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2. U.S. Big Tech Soars on Robust Earnings

 
  • The pandemic surge in cloud computing and a strong rebound in digital advertising shows that the lower digital ad spend was really confined to Snapchat, and not an industry wide issue.
  • The cloud sector is shaping up to becoming a three horse race, with Amazon Web Services well in the lead, followed by Microsoft’s Azure Cloud and upstart Google Cloud.
 
U.S. tech shares suffered initially when disappearing messaging app Snapchat (+1.76%) reported lower advertising earnings but the stalwarts of the tech scene, the blue chip tech companies defeated all expectations with stellar third quarter numbers.
 
The pandemic surge in cloud computing and a strong rebound in digital advertising shows that the lower digital ad spend was really confined to Snapchat, and not an industry wide issue.
 
Google (+1.35%) and Microsoft (+0.64%), which reported earnings yesterday saw a combined 33% growth on last year’s third quarter on the back of a staggering US$110.4 billion in revenue.
 
The gains were due in large part to demand for cloud computing, with Microsoft’s Azure Cloud and Google Cloud contributing heavily to the bottom line thanks to a shift to remote working among many companies.
 
Advertising sales also picked up at Google, thanks to travel and retail revivals globally with lifting pandemic restrictions.
 
Microsoft has gained 42% this year alone while Google is up 62%, outperforming the S&P 500 by a wide margin.
 
Apple (+0.46%) and Amazon (+1.68%) are due to report earnings tomorrow but are predicted to reflect the positive trend that saw Microsoft and Google surge well beyond all analyst expectations, especially given that more people shopped from home.
 
Microsoft, by all measures a tech institution, saw quarterly revenue grow a whopping 22%, its biggest quarter since 2014, spurred on primarily by the success of its cloud division which grew a massive 36%.
 
For a company that large to grow at that rate is nothing short of miraculous.
 
The cloud sector is shaping up to becoming a three horse race, with Amazon Web Services well in the lead, followed by Microsoft’s Azure Cloud and upstart Google Cloud.
 
Microsoft and Google may have an advantage because their offerings come with a suite of productivity tools.
 
Microsoft’s Office 365 still controls the majority share of the productivity suite, while Google Workspace is gaining in popularity, especially among startups and smaller companies.
 
As the shift towards remote working proves durable, the use of these tools is only expected to increase, and that’s not taking into account plenty of other markets which are just adjusting to the trend.
 
Google Cloud’s year-on-year growth was a remarkable 45% showing how much momentum is building up at the fledgling division.
 
Google also has a leg up on competitors through its focus on offering products based around analytics, an increasingly important tool for businesses, as well as its provision of some of the best artificial intelligence and machine learning tools, and that could be a serious differentiator between other cloud service providers.
 
Significantly, the pick up at Google’s Ad Services division shows that Apple’s tweak to its privacy policies, making it harder for advertisers to gather personal data to target, had minimal impact on Google’s core business offering.
 

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3. The Crypto Wind Has Died Down Behind Robinhood

 
  • In the second quarter of this year, Robinhood Markets earned revenue from users trading cryptocurrencies to the tune of some US$233 million.
  • Robinhood Markets has grown increasingly reliant on cryptocurrency trading, with some 64% of revenue from its last filing coming from Dogecoin, the token that has been shilled by Elon Musk.
 
Not so long ago, in an investment universe not so far away, Robinhood Markets (+1.44%), the slick investing app that opened a pandora’s box for the retail crowd was minting a fortune off the cryptocurrency trade.
 
In the second quarter of this year, Robinhood Markets earned revenue from users trading cryptocurrencies to the tune of some US$233 million.
 
Yet even as bitcoin has rallied to a fresh all-time-high, Robinhood Markets saw revenue from cryptocurrency trading plummet to US$51 million in the third quarter.
 
With so many options for buying and selling cryptocurrencies, with even payment companies like Venmo throwing their hat in the ring, the market for cryptocurrency wallets and buying options is fast getting crowded.
 
And that’s not forgetting the elephant in the room, Coinbase Global (-1.86%).
 
Although a digital wallet that Robinhood Markets is working on could potentially make it a one-stop shop for retail traders who want to bet on stocks while having a taste of cryptocurrencies, that wallet is not yet available.
 
Investors are also demanding tokens that aren’t yet available on Robinhood Markets, such as the dog-themed Shiba Inu and taking their business elsewhere.
 
Robinhood Markets has grown increasingly reliant on cryptocurrency trading, with some 64% of revenue from its last filing coming from Dogecoin, the token that has been shilled by Elon Musk.
 
But the cryptocurrency markets give as quickly as they take and one moment’s hottest token could turn into a sh*tcoin in an instant, meaning that investors looking at Robinhood Markets need to discount whatever the app earns from cryptocurrency trading.
 
The tumble in cryptocurrency revenues at Robinhood Markets, in a month that in theory should have been excellent for both the platform and the digital asset markets has since seen shares of the company tumble below its IPO price.
 
Funded accounts at Robinhood Markets also declined from the previous quarter, suggesting that user growth is slowing even as retail traders moderated their trading activity thanks to a rapidly reopening U.S. economy.
 
Losses at Robinhood Markets also widened to US$1.32 billion, largely attributable to stock-based employee compensation in the wake of the IPO.  
 
 

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Oct 27, 2021

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