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Novum Alpha - Daily Analysis 17 November 2021 (10-Minute Read)

A wonderful Wednesday to you as markets wind their way back while cryptocurrencies take a beating.

 

In brief (TL:DR)

 
  • U.S. stocks ticked up on Tuesday with the Dow Jones Industrial Average (+0.15%), S&P 500 (+0.39%) and tech-centric Nasdaq Composite (+0.76%) all recovering lost ground. 
  • Asian stocks dipped Wednesday after robust U.S. economic data lifted Wall Street shares, U.S. Treasury yields and the dollar and spurred more calls for tighter monetary policy.
  • Benchmark U.S. 10-year Treasury yields soared to 1.64% (yields rise when bond prices fall). 
  • The dollar was near the highest level in 12 months.
  • Oil retreated with December 2021 contracts for WTI Crude Oil (Nymex) (-0.74%) at US$80.16 on heightened expectations that the Biden administration would call on the nation's strategic reserve to keep prices in check.
  • Gold was higher with December 2021 contracts for Gold (Comex) (+0.14%) at US$1,856.70. 
  • Bitcoin (-3.78%) fell to US$59,327 in Asian trading on Wednesday on continuing concerns over tighter U.S. regulation and taxation of cryptocurrencies. 
 

In today's issue...

 
  1. Chinese Economy is Going Back in Time
  2. Musk Dumps More Tesla Stock
  3. Narrowing the Cryptocurrency Tax

 

Market Overview

 
Corporate profits have generally weathered the price pressures filtering through the world economy, helping global stocks to stay around all-time highs.
 
The key question remains whether the jump in costs will prove transitory or become a bigger challenge that forces a sharper monetary policy response, roiling both shares and bonds.
 
In Asia, markets dipped Wednesday with Tokyo's Nikkei 225 (-0.45%), Hong Kong's Hang Seng (-0.30%), Sydney’s ASX 200 (-0.80%) and Seoul's Kospi Index (-1.00%) were all lower after robust U.S. economic data lifted Wall Street shares, Treasury yields and the dollar and spurred more calls for tighter monetary policy.
 
 

1. Chinese Economy is Going Back in Time

 
  • Economic growth in China is slowing to a rate not seen since the 1990s, a price that Xi is willing to pay to reduce the country’s reliance on its property sector, which makes up a full 70% of the economy and 29% of GDP.
  • Before the pandemic, China was growing at breakneck speed, closer to 7% per year
 
Never underestimate the power of a Chinese leader.
 
When Chairman Mao Zedong embarked on the ill-advised Cultural Revolution, China, a country already ravaged by years of civil war and foreign invasion, was brought back into the dark ages.
 
And now, as Chinese President Xi Jinping stands on the cusp of securing an unprecedented third term in office, with the prospect of ruling China for life like Mao and Deng before him, he appears just as intent as his predecessors on forcing change, regardless of the consequences.
 
Economic growth in China is slowing to a rate not seen since the 1990s, a price that Xi is willing to pay to reduce the country’s reliance on its property sector, which makes up a full 70% of the economy and 29% of GDP.
 
Beijing’s squeeze on the real estate sector is widely estimated to linger into next year and well beyond, prompting several banks to cut their growth forecasts for China to below 5% next year, the weakest growth in over three decades.
 
Before the pandemic, China was growing at breakneck speed, closer to 7% per year.
 
A sharp slowdown in China’s growth will have ramifications across the board, especially for countries which rely on the world’s second largest economy to soak up their commodity exports, like Australia and Indonesia.
 
Chinese consumers critical for the sales growth of companies from Apple (+0.67%) to Volkswagen (+0.074%) are also likely to dial back consumption as a consequence.
 
And because Xi is personally involved in real estate policies, an easing of those measures isn’t likely anytime soon.
 
But how the Chinese real estate market fares also has spillover effects, with weak consumer spending compounding slowing economic growth.
 
Sporadic coronavirus outbreaks and a zero-tolerance policy of any infection has also seen businesses opening and closing with increasing regularity, all of which are weighing on sentiment.
 
Given that the property sector helped to power China’s rapid recovery from the pandemic, the contraction this past year in the aftermath of Beijing’s crackdown on mortgage lending has put pressure on some of the country’s most indebted property developers like China Evergrande Group.
 
But investors can price in a slow decline rather than a messy implosion.
 
Chinese developers typically secure most of their financing by selling homes to buyers before they’re built – failure to complete these properties may result in social unrest.
 
Furthermore, China’s GDP has grown far faster than property prices, and given that the bulk of the population remains rural, demand for housing isn’t purely speculative, with genuine demand backing the rise in prices.
 
 

2. Musk Dumps More Tesla Stock

 
  • Musk dumped 934,000 shares for about US$930 million on Monday, adding to the US$6.9 billion that he already sold last week.
  • Tesla is now down 17% from its all-time-high earlier this month, but has nonetheless added 44% this year and helped propel the S&P 500 to fresh records.
     
Musk is continuing to dump Tesla (+4.08%) stock, exercising options and continuing a streak of sales that have helped tank the shares by the most since the start of the pandemic.
 
According to regulatory filings, Musk dumped 934,000 shares for about US$930 million on Monday, adding to the US$6.9 billion that he already sold last week in the wake of the Twitter poll asking users whether he should sell 10% of his stake in the electric vehicle maker.
 
While some of Musk’s sales can be explained on helping to pay taxes for the exercise of 2.1 million options, the rest is less clear.
 
Musk’s sale of Tesla shares comes against broader debate in the U.S. over whether the rich are paying enough in taxes.
 
Some of Musk’s stock sales are coming as part of a pre-arranged blind trading plan established in September, where he did warn that he was likely to exercise a large block of options toward the end of next year.
 
With millions of equity options that Musk needs to exercise before next August, something the Tesla CEO did not reveal before his Twitter poll, Musk has been selling shares to pay the taxes on those options.
 
Then again, Musk may also be messing with the market as well – many of Musk’s options are tied to shares of Tesla hitting certain prices, which unlock more options.
 
There is an incentive for Musk to talk up the shares, allow them to hit their targets, unlock those options, exercise them and sell them to tank the market, and then snap them up again when they’re at a lower price.
 
While all of this is purely speculative, the incentive mechanism for Musk’s share options mean that Musk could wield his significant Twitter influence and shares to do just that.
 
In 2018, Musk was censured by the U.S. Securities and Exchange Commission when he tweeted that funding to take Tesla private had already been secured.
 
Musk settled that matter, but the SEC may take another look at his latest tweetstorms.
 
Tesla is now down 17% from its all-time-high earlier this month, but has nonetheless added 44% this year and helped propel the S&P 500 to fresh records.
 

Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...

 

 

 

3. Narrowing the Cryptocurrency Tax

 
  • Since the U.S. President Joe Biden signed the landmark infrastructure bill into law, concern in the cryptocurrency community is growing around tighter regulations and more onerous declaration requirements for tax purposes.
  • The bill includes a provision that would make it retroactive to the infrastructure bill’s signing as well, to ensure complete coverage. 
 
It’s somewhat ironic that cryptocurrencies took a dive because of the potential for more arduous reporting requirements for taxation in the U.S. while at the same time often themselves allegedly being used for tax avoidance.
 
Since the U.S. President Joe Biden signed the landmark infrastructure bill into law, concern in the cryptocurrency community is growing around tighter regulations and more onerous declaration requirements for tax purposes.
 
Yet the selloff may be somewhat premature, after all, Washington is a place of drama with its myriad twists and turns.
 
They don’t call it politics for nothing as a bipartisan team of U.S. senators is introducing a bill to narrow some cryptocurrency tax reporting rules that were laid out in the infrastructure legislation.
 
The new bill would seek to override a provision in the infrastructure legislation that cryptocurrency investors have long rued as being overly broad and stifle innovation in the digital asset sector.
 
In a statement, Oregon Democratic Senator Ron Wyden wrote,
 
“Our bill makes clear that the new reporting requirements do not apply to individuals developing blockchain technology and wallets.”
 
“This will protect American innovation while at the same time ensuring those who buy and sell cryptocurrency pay the taxes they already owe.”
 
The proposed tweaks to the infrastructure legislation would address new reporting requirements for cryptocurrencies that could force some cryptocurrency companies that provide a service “effectuating” the transfer of digital assets to report information on their users as other financial firms are required to do, to enforce tax compliance.
 
Wyoming Republican Senator Cynthia Lummis wrote in a separate statement,
 
“Digital assets are here to stay in our financial system and the decisions we make now will have impacts far into the future. We need to be fostering innovation, not stifling it.”
 
The bipartisan move by senior senators reflects the growing influence of the cryptocurrency industry in Washington.
 
Along with the increase in wealth from the unprecedented run up in cryptocurrencies, cryptocurrency industry stakeholders have been pouring money into lobbyists to ensure that their interests are heard as well.
 
If left alone, Biden’s infrastructure bill contains language that could be interpreted by tax authorities as requiring cryptocurrency miners and software developers to report tax data to the Internal Revenue Service that they couldn’t access.
 
Although blockchain transactions are transparent, attribution of those transactions is a specialized, analytically expensive endeavor that is undertaken by specialist firms like Merkle Science, Elliptic and Chainalysis, whose services have grown increasingly in demand.
 
While it is as yet unclear whether the cryptocurrency reporting bill that would curtail some of the excesses of the infrastructure bill could come up for vote, it could be included with other yearend legislative packages in the coming weeks and slip through.
 
The bill includes a provision that would make it retroactive to the infrastructure bill’s signing as well, to ensure complete coverage. 
 
 

What can Digital Assets do for you?

 
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With almost a decade trading both digital assets and financial instruments, the Fund represents a blend of our best quantitative strategies melded with a discretionary overlay that provides investors with the most comprehensive and holistic approach to digital assets on the market today. 
 
If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.  

Nov 17, 2021

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