Novum Digital Asset Alpha – Daily Analysis 28 August 2020 (8-Minute Read)

Finally it’s Friday and I hope you’re looking forward to a fantastic weekend! The markets? Mixed at best. 

In brief (TL:DR)

  • American stocks were cautiously optimistic on Thursday, as the S&P 500 (+0.17%) and blue-chip Dow Jones Industrial Average (+0.57%) were up marginally, taking a breather from the relentless ascent on Wednesday, while the tech-heavy Nasdaq Composite (-0.34%) saw a slight dip on profit-taking.  
  • Asian stocks were mostly up in the morning session, on the back of accommodating monetary policy from the U.S. Federal Reserve. 
  • U.S. 10-year Treasuries slumped, with no signs that the Fed intends to raise rates, as yields soared to 0.744% from 0.686% – its highest level since mid-June (yields generally rise as bond prices fall).  
  • Oil slid as Hurricane Laura weakened while making landfall in the refinery and LNG-rich Gulf of Mexico with WTI Crude Oil (Nymex) (-0.23%) at US$42.94 from US$43.35, and with no dent to oil production facilities.  
  • The dollar remained steady after climbing from a 2-year low. 
  • Gold continued to slide as loose Fed policy saw investors unsure of what to make with inflation as Gold (Comex) (-0.60%) slid to US$1,939.40 from US$1,951.10 in the previous session on the back of a steady dollar. 
  • Bitcoin (-1.51%) tracked gold and slid overnight, with the benchmark cryptocurrency falling to US$11,300 from US$11,480 (GMT 0300) in the previous session, as outflows from exchanges continued to lead inflows and with overall volumes edging up (outflows typically signal a willingness on investors to hold Bitcoin for future appreciation).

In today’s issue…

  1. How One Company Stands To Benefit From Apple’s Eye for Augmented Reality
  2. U.S. Jobless Claims Decline But Not If You Read The Fine Print
  3. Fidelity Investments Launches First Bitcoin Fund for Wealthy Investors

Market Overview

Market observers these days may be better off reading goat entrails or tarot cards, because traditional indicators no longer seem to be working as expected. 
 
The U.S. Federal Reserve’s dovish stance has indicated to investors that the central bank is prepared to do whatever it takes to prop up the economy. 
 
Typically, if things look to be going bad, investors would be clamoring for “safety” in tech stocks, Bitcoin and gold. 
 
But given that the Fed’s low interest rate environment is likely to persist until the economy recovers, investors rotated into stocks that were considered more “risky” in a boost to rotational play. 
 
Asian markets, which are not as tech-heavy as American indices saw a bump in the morning trading session with Tokyo’s Nikkei 225 (+0.36%), Seoul’s KOSPI (+1.34%), and Hong Kong’s Hang Seng Index (+0.59%) all up, while Sydney’s ASX 200 (-0.54%) was down.  
 
Inflation risks are very much present – the Fed’s comments have merely marked a momentary pause where investors are now considering rotating into other laggard industries in a low-interest rate environment. 
 
And with the Fed basically indicating clearly that inflation can and will be allowed to inch past the target 2%, it remains to be seen how unprecedented fiscal and monetary policy moves can control the inflation genie without it running amok. 
 
In the meantime though, so-called inflation hedges like tech stocks, gold and Bitcoin will see pullbacks. 
 
But when inflation rears its head, expect these current laggards to come back into sharp focus. 

1. How One Company Stands To Benefit From Apple’s Eye for Augmented Reality

  • Apple’s (-1.20%) quiet investments in augmented reality technology could become a platform changer and spur industry-wide adoption of sensors which enable such technology 
  • Lumentum, the world’s largest supplier of 3D depth-measuring sensors which already go on Apple’s iPhones to facilitate augmented reality may be a huge beneficiary when the rest of the smartphone market catches up to the technology 
Discretion is often the better part of innovation, but an acquisition is almost always preferred to an inquisition. 
 
Such has been Apple’s secretive policy of snapping up smaller deep tech companies, away from the camera shutters and splashy headlines. 
 
According to a report by Calcalist
 
 last Friday, executives at Apple secretly purchased Camerai, an Israeli maker of computer vision software. 
 
No big deal right? Just another routine acquisition surely? 
 
But when the iPhone 11 launched last September, it sported a 3-camera setup with a laser-equipped 3D sensor capable of measuring depth for augmented reality (AR), which we know Camerai’s software is critical for in order for making AR work. 
 
And Apple’s commitment to AR could prove to be a big win for Lumentum (-2.20%), whose sensors are a direct beneficiary of the Camerai acquisition.
 
Investors may know Lumentum as being the company which makes the front-facing sensors Apple uses for iPhone’s facial recognition technology, but the firm also makes the 3D depth-measuring sensors on the back of the new generation of iPhones. 
 
Apple has a strong reputation for not hurtling head first into breakthrough technologies, but when it eventually co-ops those technologies, they very quickly become the industry standard. 
 
The iPhone wasn’t the first device to strap on a multi-touch screen nor the first to add biometric authentication, but when Apple eventually made the leap, it became de rigeur on every other smartphone. 
 
And those leaps have allowed Apple to significantly drive down component prices, which is good news for Lumentum, the world’s largest supplier of 3D-sensing laser diodes. 
 
Now that Apple is including Lumentum’s AR sensors on its devices, it’s only a matter of time before other smart phone makers are forced to follow suit. 
 
And with Android powering 85% of the global smartphone market, that market is way more important to Lumentum than Apple. 
 
Lumentum’s stock has risen pretty much alongside the rest of the market, but at a far more modest pace – up 8% for the year and with shares trading at only 13 times forward earnings and 3.7 times sales – compared to the S&P 500 which has a forward price-to-earnings ratio of 26.17. 
 
In a market where everything seems somewhat overpriced, Lumentum is, dare we say, “cheap”?   

2. U.S. Jobless Claims Decline But Not If You Read The Fine Print

  • Genuine state of unemployment in the U.S. difficult to discern given the layering of several unemployment benefit regimes
  • Improved numbers on such unemployment claims are undermined by rising claims on other programs, markets may be pricing in a jobs recovery that is not really present 
Who ever reads the fine print anyway? That’s what we have lawyers for right? 
 
But in the case of the latest U.S. jobless claims data, savvy investors may actually want to start reading the fine print. 
 
Applications for state unemployment benefits decreased last week, following an unprecedented spike earlier, with some analysts interpreting the data as indicating the market’s gradual recovery and helped to propel stocks to record highs. 
 
Initial jobless claims in regular state programs fell by 98,000 to 1.01 million for the week ended August 22. 
 
And continuing claims – the total number of Americans claiming ongoing unemployment assistance, has also dropped for the week ended August 15, though still at a very high absolute number of 14.5 million. 
 
But claims remain well above pre-pandemic levels and are unlikely to improve in the absence of government support for businesses and consumers. 
 
Political gridlock in Washington has also stymied any extension of support for cash-strapped companies and jobless Americans, meaning the next wave of unemployment claims really lurks just around the corner. 
 
And the many layers of unemployment benefits in the U.S. means that no one data point paints a truly comprehensive portrait of the employment situation in America at the moment. 
 
Take for instance the Pandemic Emergency Unemployment Compensation, which provides up to 13 additional weeks of jobless benefits and showed an increase of about 119,000 at approximately the same time that other unemployment claims went down. 
 
And just this week alone, Bed Bath & Beyond announced it would eliminate 2,800 jobs while American Airlines said it plans to cut 19,000 workers in October, once federal payroll aid expires. 
 
Meanwhile, after several months of gradual improvement, the trend in job postings pulled back for a second week according to data from Indeed.com and a worrying sign that all is not well. 
 
Given the complexity of America’s unemployment benefits regime, with both state and federal schemes sometimes overlapping and the unemployed simply hopping between schemes, some indicators will decline while others rise. 
 
To be sure, the jobs situation in the United States at the moment is anything but rosy, which makes sense considering that the coronavirus pandemic is still raging in many states and the global economy is in tatters. 
 
But that hasn’t stopped analysts from talking up a recovery or investors from pouring into markets.

3. U.S. Authorities Capture North Korean Cryptocurrency

  • Massive seizure of North Korean cryptocurrency accounts by U.S. justice officials demonstrates both the ability and the willingness to weed out bad actors intending to use cryptocurrencies to mask their crimes 
  • Move by U.S. Justice Department should provide greater comfort and confidence for investors stepping into the cryptocurrency space, as cryptocurrencies prove that they are not infallible when it comes to masking fund movements 
So it appears that cryptocurrency isn’t as cryptic after all. 
 
For the most part, cryptocurrencies offer the psuedonymity that most users require, but nefarious actors may find that authorities have caught up with technology and are now able to zoom in on bad actors within the cryptocurrency space. 
 
On Thursday, U.S. authorities moved to seize 280 cryptocurrency accounts that they said were used by North Korean hackers to steal over a quarter of a billion dollars from cryptocurrency exchanges around the world, including U.S.-based exchange Algorand. 
 
According to the U.S. Justice Department, the accounts targeted in the civil forfeiture filing were used by North Korean hackers and their Chinese agents to launder some of the money stolen from over a dozen cryptocurrency exchanges. 
 
In March, the U.S. Justice Department indicted and sanctioned two Chinese nationals accused of helping North Korean hackers launder the money stolen from cryptocurrency exchanges and filed a civil action to seize related assets held in 113 cryptocurrency accounts. 
 
Within hours of the seizure filing, authorities, who had been monitoring cryptocurrency accounts linked to the alleged thefts, saw accounts that had been dormant for months, flushed almost instantly. 
 
By tracking movements through those accounts, U.S. authorities were able to discover that the hackers had targeted several more cryptocurrency exchanges and were laundering the proceeds from these heists through accounts controlled by the same Chinese nationals who had been arrested. 
 
Thursday’s seizure reflects the willingness of the U.S. Justice Department to target the use of cryptocurrencies for money laundering by nation states and terrorists, and is a welcome move. 
 
As banks and institutional investors start moving into the cryptocurrency space, authorities’ willingness to weed out bad actors, be they state actors or terrorists attempting to use cryptocurrencies for nefarious purposes, will increase the level of confidence for new participants. 
 
Cryptocurrencies have long suffered a bad rep, particularly from the mainstream media, as being little more than vehicles to facilitate crime. 
 
The latest seizure by the U.S. Justice Department demonstrates that if nothing else, cryptocurrencies afford a comfortable balance between traceability and anonymity.
 
Criminals counting on cryptocurrency shouldn’t buy into their own hype over the ability of cryptocurrencies to cover their crimes.  

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

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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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