Novum Digital Asset Alpha – 10 June 2020

Welcome to the midweek. It’s Wednesday and if you’ve been out of lockdown, you might actually be able to tell the difference! So congratulations on that! 

Markets took a bit of a breather today, as the U.S. jobs-report induced rally on Friday finally lost some steam, but more on that later. 

The S&P 500 (-0.78%) ticked lower yesterday and shares in Asia were mainly flat in the pre-lunch trading session, as investors looked for guidance. 

As of 0300 GMT, stocks in Tokyo’s Nikkei 225 (+0.10%), Seoul’s KOSPI Index (+0.26%) and Sydney’s ASX 200 (+0.24%) were up slightly, while Hong Kong’s Hang Seng Index (-0.25%) was down marginally. 

All eyes are likely to be on the U.S. Federal Reserve which meets Wednesday, and whether or not the central bank will commit to further easing, or stay the course toreview the effects of its policies on the broader market. 

Fed officials will also publish their employment and growth targets for the first time since the outbreak of the coronavirus pandemic. 

The dollar was unchanged against a basket of major currencies as traders sat on the sidelines awaiting more macro factors, while oil fell, with WTI Crude Oil (Nymex) (-1.62%) trading at US$38.31 on concerns over both demand, as well as Saudi Arabia’s impending cessation of supply cuts. 

10-year U.S. Treasuries fell to 0.828% as investors rotated into safe haven assets and out of stocks – bond yields typically fall as prices rise. 

In light with the shift out of risk, gold rose with Comex Gold (+0.12%) trading up at US$1,723.90, while Bitcoin (+0.78%) has eased upwards and continues to consolidate at the US$9,750 level. 

Welcome to Wednesday and if you’re fortunate enough to head out to a bar this evening, happy hour is for you! 

Can You Handle The Truth About Jobs?

Everyone is different with the way they handle inconvenient facts – some prefer not to know, others insist on knowing, and yet others, prefer to be lied to. 

But no one asked last Friday when stocks rallied on the back of a U.S. jobs report that suggested (and I use this term very loosely) that America had actually added 2.5 million jobs to the economy in May. 

Now it may be hard for anyone living outside of the United States to recognize just how vast this land is and so it’s easy to imagine that while things in your city may be bad, maybe some other city in some other corner of America is doing better. 

It may be easy to imagine that it’s not workers all across the country who are hurting, that there is a glimmer of hope somewhere. 

But that would be a lie. 

Because a close examination of the footnotes of the report reveals that the U.S. Department of Labor’s Bureau of Labor Statistics had been inaccurately reporting job numbers for the last two months. 

The labor bureau itself had conceded that government household survey takers mistakenly counted 4.9 million people as employed, despite the fact that they were actually unemployed, because the U.S. government struggles with how it classifies millions of out-of-work Americans.

And had the mistake been corrected, the unemployment rate would have risen in the U.S. to 19.5% in April and 16.1% in May.

The concern though is that investors may increasingly be working off of faulty numbers where accuracy has been sacrificed at the altar of political expediency. 

And rather than correct its mistake, the official U.S. government response was that they don’t correct survey results for the fear of the appearance of political manipulation. 

Wait, what? 

For the last two months, the Labor Department remained aware of the issue, but didn’t widely report it or make the necessary adjustments to correct it.

A discrepancy of 4.9 million people isn’t exactly in the realm of a rounding error. 

Considering that U.S. President Donald Trump belittled economists and analysts for claiming that the U.S. would be at 20% unemployment, calling it “the greatest miscalculation,” it appears that the only miscalculation is emanating from the halls of Trump’s Labor Department. 

“He who is faithful in a very little thing is faithful also in much, and he who is unrighteous in a little thing is unrighteous also in much.”

– Luke 16:11

While it is no revelation that Trump and his administration are pathological liars, Trump ran to the races with this last one, sending stocks soaring Friday and erasing all of 2020’s losses for the S&P 500 and the Dow Jones Industrial Average.  

Trump has never hid his association with the economy, as well as the job and stock markets as his crowning achievements. 

And with blowback over the Trump administration’s mismanagement of the coronavirus pandemic and his poor handling of the George Floyd protests, Trump needs a win more than ever, the worry then is the extent to which he will go for those wins. 

Because if investors can’t even rely on data from supposedly non-partisan sources, what can they rely on? 

True Lies and Tech Buys

While jobs are a lagging indicator of an economy and typically unemployment only falls below crisis levels many years after a recession is over, there are growing signs that many of these jobs lost as a result of the coronavirus pandemic may be lost forever. 

A recent analysis by the University of Chicago estimated that as many as 42% of workers who have been furloughed will never get their old jobs back, and only 30% of those laid off will get new jobs later this year. 

Some companies which took out federal aid packages or loans have openly admitted that they will layoff workers once they meet their government obligations. 

And investors can be sure that the Trump administration will ensure the gravy train of federal assistance keeps piling on till November at the very minimum, to boost key economic data, one way or the other. 

That has investors looking for sectors which will persist regardless of the lies. 

While the S&P 500 was off 0.7% for the year, the tech-heavy Nasdaq Composite (+0.29%) clinched a second consecutive record, eclipsing its high on Monday, to 9,953.75 points. 

And there may be method to the madness. 

Working from home is becoming a new reality. 

Beyond offering a more balanced lifestyle, it may also open the door for job seekers to apply at companies all over America, rather than being forced to solely select opportunities based on the convenience of the daily commute or be hampered by high housing prices, for instance in the Bay Area. 

And while sectors such as retail may see jobs lost forever, much-needed money is flowing into previously neglected sectors such as healthcare, medical products, pharmaceutical devices and biotechnology, which will create new employment there.

To be sure, the structural shift will be painful and retraining will be slow, but thematically, investors can profit from that shift.

So while stocks of Google (+0.28%), Microsoft (+0.76%) and Amazon (+3.04%) dominate headlines for a shift towards cloud computing, there are some other stocks which will benefit as well, but hardly get the limelight. 

IBM (-2.86%) for instance, a venerable brand that has since disappeared from retail investor consciousness, has been quietly gearing itself up to harness the momentum behind the cloud computing revolution. 

While IBM makes its bread-and-butter selling high-powered room-sized mainframe computers that are used for businesses to process bulk data like consumer statistics – a cash cow with US$5.9 billion in sales last year – it’s growth comes from opportunities in cloud computing. 

Cloud computing is expected to grow at a compounded annual growth rate of 29.2% until 2027 and IBM’s cloud computing business is expected to grow much faster than the rest of the company. 

With gross margins of 76.7%, IBM’s cloud computing division is by far also its most profitable. 

But most importantly for investors, IBM has been a dividend powerhouse. 

With a yield of 5.17% versus the S&P 500 average of 1.93%, IBM had a dividend payout ratio of 61% in 2019. 

And while that number may take a hit in 2020, historically, IBM has increased its dividend payments for 25 years straight, a period covering several financial crises and the dotcom collapse. 

Investors have shunned IBM because the company is often likened to General Electric (-5.20%), a lumbering legacy behemoth, staid and uninspiring compared to younger upstarts like Google, Amazon and a now resurgent Microsoft. 

But cloud computing is both a hardware and a software play and there’s only so much innovation needed when it comes to providing critical cloud computing infrastructure. 

IBM may be a legacy technology company, but it also caters to other legacy companies, which are inefficient, slow to adjust contracts or find alternative service providers. 

And although IBM has been often criticized at not being innovative, its focus on lowering costs and developing proficiencies in artificial intelligence and secure cloud services well before other companies belies that allegation. 

IBM has also embraced blockchain technology, with its open source Hyperledger framework that is targeted towards enterprise blockchain solutions – similar to how Google first made Android, its operating system for smartphones, open source, and now dominates with 76.2% of the smartphone operating system market – IBM could one day come to dominate enterprise blockchain. 

Bitcoin’s Rangebound Crawl

When it comes to Bitcoin, impatience is impertinence for market forces. 

Surges to US$10,000 ought not to be celebrated but viewed with a skeptical lens and sharp falls should not result in panic either. 

A steady increase in volume and a broad consolidation has seen Bitcoin edge up yesterday, sudden attempts to push Bitcoin past US$9,800 led to sharp falls over the past 24 hours and animal spirits were quelled as Bitcoin continued a rangebound ascent towards US$9,800.

Yesterday, the long trade we suggested for Bitcoin was an entry at US$9,700 and timing an exit at US$9,850, because there was a distinct possibility for Bitcoin to make another run for US$9,800 again and overshoot, we also suggested a stop loss at US$9,675 – this trade was in the money. 

The short we put out for yesterday was to wait till Bitcoin made another push, to time an entry at US$9,890 and short sell all the way down to US$9,600, taking profit at levels along the way, including at US$9,700 with a short cover at US$10,000 – this trade never hit the entry level, so was never entered into. 

Bitcoin volumes have been increasing steadily over the past 24 hours, with decent levels of consolidation at US$9,700 – a push to US$9,800 and US$9,900 seems likely. 

Those looking to go long can consider an entry at US$9,750 and an exit at US$9,850, with a stop loss at US$9,720 – tighter bands call for tighter controls and more disciplined trading. 

Those looking to short can wait to enter Bitcoin at US$9,880, short all the way to US$9,660 with a short cover at US$9,950. 

Bitcoin is likely to trend sideways over the next 24 hours but make a gradual ascent. There is an outside chance for a push to US$10,000 and reduced odds of a significant medium term fall to below US$9,000. 

Don’t you just hate it when everything and nothing happens? That’s just another day trading Bitcoin. (Source: Novum Alpha internal charting tools.)

Ethereum Chugs Along

Ethereum continued to track sideways over the last 24 hours, rangebound between US$241 and US$245 on the back of increased volumes. 

Yesterday we suggested that Ethereum’s rapid bounce off US$240 the day before, suggested that it had a strong support (in the next 24 hours) at that level. 

The long trade for Ethereum we suggested was entering at US$243 and looking to take profit at US$249 with a stop loss at US$242 – this trade was stopped out.  

Whereas the short for Ethereum we postulated was an entry at US$249 and shorting all the way down to US$241, taking profit at regular intervals along the way – setup a short cover at US$251 – a trade that was never entered into. 

Ethereum traded a much tighter band, US$240 – US$245 over the last 24 hours and is likely to repeat at that level over the next 24 hours as well – traders can trade the intraday volatility relatively safely. 

Go long at US$241 and get out at US$244 with a stop loss at US$239, short at US$244 and take profit at US$241 and set a short cover at US$246 – rinse and repeat.  

Ethereum is moving within a more tightly defined channel within the next 24 hours and there is greater potential for a breakout than there is for a collapse. 

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

Exclusive access to Novum Digital Asset Alpha’s Daily Analysis is made in conjunction with Bitcoin Malaysia.

The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.

It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.

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