Novum Digital Asset Alpha – Daily Analysis 3 August 2020 (6-Minute Read)

It’s the first week of August and in what has felt like a year that can’t end, we’re already into the third quarter. 

In brief (TL:DR)

  • U.S. stocks ended the week higher, as tech stocks helped to push major indices into the green with the S&P 500 (+0.77%), blue-chip Dow Jones Industrial Average (+0.44%), tech-heavy Nasdaq Composite (+1.49%) all posting positive numbers into the weekend. 
  • Asian stocks started the week in mixed fashion following an increase in pandemic cases and boiling tensions between the U.S. and China.
  • U.S. 10-year Treasuries edged lower, as yields rose to 0.557% from 0.535%  in the previous session (yields typically increase when prices fall).  
  • Oil continued to inch lower with WTI Crude Oil (Nymex) (-0.67%) at US$40.00 from US$40.27 in the previous session.
  • The U.S. dollar edged up ever so slightly, with the ICE U.S. Dollar Index (+0.23%) up, on signs that the greenback may be ever so slightly oversold. 
  • Gold slowed its ascent with Gold (Comex) (+0.28%) at US$1,991.50 from US$1,985.90 in the previous session, as gold pushes towards the US$2,000 threshold.
  • Bitcoin (-6.83%) fell to US$11,135.81 (GMT 0200) after frenetic weekend trading saw it surge past US$12,000 at one stage, followed by a flash crash of US$1,400 in minutes, that saw it fall to US$10,423.86, while Bitcoin outflows from cryptocurrency exchanges continued to lead inflows (outflows typically suggest that traders are intending to hold on to Bitcoin for further price appreciation). 

In today’s issue…

  1. A Falling Dollar Floats All Assets 
  2. As Tech Stocks Get More Expensive, Should You Be Banking on Banks Instead?
  3. Bitcoin Hits US$12,000 in Weekend Trading – Buy Now Or Regret Forever? 

Market Overview

It may be a new month, but it somehow feels like groundhog day because in pandemic terms, it looks as if we’re headed back to March all over again. 
 
Coronavirus infections are picking up yet again in some U.S. states and in Washington, politics threatens to derail a much-needed stimulus package to shore up the millions who have been made redundant because of the pandemic. 
 
In Australia, the state of Victoria is in a state of emergency, which may be the default state of mind for many investors these days. 
 
Asian markets were mixed at the open, with Tokyo’s Nikkei 225 (+2.09%) and Seoul’s KOSPI (+0.11%) up as the Japanese yen traded higher level after weakening sharply from the previous week, while Sydney’s ASX 200 (-0.04%) and Hong Kong’s Hang Seng Index (-0.35%) were down over concerns with simmering Sino-American tensions.
 
And just when you thought that a global pandemic could unite the world’s two largest superpowers in a spirit of cooperation, tensions between China and the U.S. are reaching their nadir. 
 
Between Hong Kong and trade, spying and Taiwan, it seems no day passes without a new set of potential flashpoints threatening to send the world’s juggernauts plummeting headlong into conflict. 
 
Considering that the 1918 flu pandemic occurred against a backdrop of global conflict (World War One), the historical precedent does not bode well. 
 
But a declining dollar is making investors “rich” from stocks and all manner of dollar-denominated assets, including Bitcoin. 
 
At times like these, it may be helpful to remember that more dollars does not make one rich, it’s what those dollars can buy that does. 
 
And inflation, while at bay, can’t be held in abeyance indefinitely. 
 
Welcome to a new week! 

1. A Falling Dollar Floats All Assets 

  • Dollar decline is boosting stock and dollar-denominated asset prices 
  • American stocks look attractive to overseas investors just as overseas and emerging market assets start looking sexy as well 
Like that Tinder match that has everyone’s heart aflutter, a declining dollar has all manner of assets swiping right on the dollar. 
 
Following a long rally since the start of the coronavirus pandemic, the dollar has since entered a phase of summertime sadness, confounding investors who had bet on the dollar’s safe haven qualities, but fueling a surprise stock market and asset rebound. 
 
The ICE Dollar Index, a measure of the dollar against a basket of other major currencies, saw its worst day in July in almost a decade.
 
There are plenty of reasons why the dollar is coming under increasing pressure, chief among which of course is U.S. government spending, yawning budget deficits and mounting coronavirus cases. 
 
But a falling dollar does have its benefits because it lifts the prices of stocks and commodities, helps American exporters, and makes American assets cheaper for overseas investors. 
 
The declining dollar has also been a boon for Europe.
 
The euro surged to 2-year highs last week as European Union leaders agreed on a more than US$2 trillion spending package, bolstering investor faith in the bloc’s unity and economic recovery, and also highlighting the region’s success in containing the coronavirus when compared to the U.S. 
 
Already volatile economic conditions could see an even greater shift, as U.S. elections loom in November and some analysts start to question whether a weaker dollar will end up boosting American exports at all, given the scope and scale of the global recession putting a damper on overseas demand. 
 
In the meantime, investors are taking bets on commodities and buying gold, with the precious metal already above its high set in 2011 and nascent asset classes like bitcoin rising as well. 
 
While investors are swiping right on many dollar-denominated assets, they’re not swiping right on all of them. 

2. As Tech Stocks Get More Expensive, Should You Be Banking on Banks Instead?

  • Stocks of America’s largest banks are looking a lot cheaper compared to technology
  • Banks are a lot better capitalized and prepared for a crisis than other industry counterparts, yet are trading at huge discounts that are unreflective of their value 
With their stocks languishing and their executives sounding grim, profits at U.S. banks are tumbling. 
 
But shouldn’t the fact that banks are making any profit at all be somewhat inspiring? 
 
Coming out of the 2008 financial crisis, banks are in far better shape than they were over a decade ago. 
 
Compared with the overall market, U.S. bank stocks are trading at lower multiples of earnings and value since the last financial crisis, but have been punished by investors as if they’re going to be the next shoe to fall.
With the U.S. Federal Reserve slashing interest rates and likely to keep them there for the next 2 years, banks’ lending margins are likely to come under increased pressure. 
 
And with businesses and consumers looking stressed, the risks of outstanding loans going bad rises. 
 
But American banks have made unprecedented provisions going into this crisis, and those with investment banking arms have made record profits trading off the volatility in stocks and other assets, including JPMorgan Chase (-0.39%), Bank of America (+0.16%) and Citigroup (-0.69%). 
 
To be sure, quarterly profits were down across the board, but that there were any profits at all, should help bank investors breathe slightly easier, especially when firms in other sectors have seen revenues drop by as much as 90%. 
 
And while retail investors have been piling into Amazon (+3.70%), Neflix (+0.63%), Apple (+10.47%) and Microsoft (+0.54%), legendary value investor Warren Buffett has upped his firm
 
 Berkshire Hathaway’s (+0.76%) stake in Bank of America by US$813.3 million to over US$24 billion. 
 
The market rally since March has been driven primarily by technology stocks, especially those companies which seem to benefit from social distancing and lockdowns, while industries exposed to general economic growth, which includes banks, have been crushed. 
 
Yet the big American banks of today are an entirely different creature compared to what they were over a decade ago. 
 
More stringent rules have led to banks stockpiling so much capital and expanding their already-dominant positions that they are far more dominant today, than they were in 2008. 
 
Banks have also put aside more in loan-loss provisions than at any time since 2008, yet are still expected to end the pandemic year with profits. 
 
And banks themselves have also diversified their asset and income bases, with even pureplay investment banks like Goldman Sachs (-0.79%) becoming deposit-taking banks. 
 
Unless an investor believes that the coronavirus pandemic will never end (in which case abandon all hope and prepare for a post-apocalyptic existence akin to Mad Max), the debt relief which banks have passed on to their borrowers will eventually pay off. 
 
Thus far, banks have continued lending, and eased the economic burden for its borrowers, unlike the financial crisis, where they froze lending activity to save their own skins. 
 
And the price-to-book value for banks, an important measure for value investors, was only 84% in the past quarter, down from 118% a year ago.
 
Banks have also gotten the green light to dip their toes in the cryptocurrency space. 
 
Last week, the U.S. Office of the Comptroller of the Currency, in an interpretive letter, clarified that banks can provide banking services to cryptocurrency services, as well as provide custody for cryptocurrency assets. 
 
Which pushes banks, especially those with investment banking arms, one step closer towards securitizing cryptocurrency assets, and unlocking the trading and profit potential of a new class of assets. 
 
It’s still early days for banks, and without greater clarity in how the economy will pan out, investors are understandably bearish on their prospects, but that may be because they are judging the stocks of large U.S. banks from the lens of 2008 instead of 2020. 

3. Bitcoin Hits US$12,000 in Weekend Trading – Buy Now Or Regret Forever?

  • Bitcoin immediate term may be overbought 
  • Consider Ethereum instead as it proves to be breaking out of its correlation with Bitcoin 
Talk about getting high over the weekend.
 
On a heady mix of monetary and fiscal stimulus from central banks and a slipping dollar, Bitcoin surpassed US$12,000 for the first time in almost a year over the weekend, before rapidly dropping to around US$10,600 and then recovering to now hover around US$11,100. 
 
But investors wondering if they should get in now, before Bitcoin gallops away and clears US$12,000 forever, should have reason for pause. 
 
The signals and daily momentum indicators for Bitcoin suggest that in the immediate term, it’s overbought, much like for gold, but beyond the volatility in the near term, Bitcoin is still likely to trend
towards US$13,800. 
 
And investors willing to wager US$11 to make US$2.80, based on an uncertain timeline, should recall that at its core, Bitcoin is still a highly speculative and volatile asset class. 
 
Last week, Bitcoin surged almost 17%, amid speculation that further U.S. monetary and fiscal stimulus risks eroding the value of the dollar and fueling inflation. 
 
But a stronger catalyst other than the existing narrative, will be needed to push both Bitcoin over the
next level of resistance, US$13,800 and gold above US$2,000. 
 
In past rallies, Bitcoin has struggled to clear US$13,000, and retreated back towards US$9,000 soon thereafter.  
 
But that was pre-pandemic and we’re living in what historians will likely refer to one day as the “after times.” 
 
Institutional interest and embrace of the cryptocurrency space will provide additional and more
enduring interest in the cryptocurrency sector and that bodes well for Bitcoin’s longer term price. 
 
In the meantime, investors looking for better value may want to consider Ethereum instead as a crop
of specialized applications, decentralized finance or “DeFI” on the Ethereum blockchain have fueled lending, borrowing and trading of cryptocurrency, in particular Bitcoin, riding off the rails of Ethereum.  
 
Despite some weakness for Bitcoin, Ethereum still continues to trade close to US$380, near it’s year high of US$400.
 
Until fairly recently, Ethereum’s price appreciation had been strongly determined by Bitcoin’s performance, but there is increasing evidence that Ethereum may be having an outsized impact on movements in Bitcoin. 
 
Ethereum has rallied some 75% this year, and the momentum from the smart-contract enabling blockchain protocol, is buoying other cryptocurrencies, including Bitcoin.
 
Despite playing second fiddle to Bitcoin for much of its existence, the sheer usage metrics of Ethereum may be a case of the tail Ethereum tail wagging the Bitcoin dog. 
 
Maybe time to buy Dogecoin? 

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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