Novum Alpha – Daily Analysis 16 December 2020 (10-Minute Read)

Wishing you a wonderful Wednesday! 

In brief (TL:DR)

  • U.S. stocks bounced back with the S&P 500 (+1.29%), blue-chip Dow Jones Industrial Average (+1.13%) and tech-centric Nasdaq Composite (+1.25%) all up sharply on rising odds of pandemic aid.  
  • Asian stocks opened mostly up in the morning trading session taking their cue from Wall Street.
  • U.S. 10-year Treasury yields soared to 0.912% from 0.896% on the back of stimulus prospects and as investors had a higher appetite for risk (yields fall when bond prices rise). 
  • The dollar marked a second day of losses as stimulus prospects improved. 
  • Oil slipped with January 2021 contracts for WTI Crude Oil (Nymex) (-0.25%) at US$47.50 from US$47.62 with improved prospects for the economy. 
  • February 2021 contracts for Gold (Comex) (+1.37%) rose sharply to US$1,857.20 from US$1,829.80 on the back of a sliding dollar. 
  • Bitcoin (+1.76%) continued to climb, surging to US$19,510 from US$19,330 as flows into exchanges lagged outflows (outflows typically suggest that investors are looking to hold Bitcoin in anticipation of price rises). 

In today’s issue…

  1. Chinese Owner of Lycra Sees Its Debt Overstretched 
  2. Covid-19 Stocks in a Post-Pandemic World
  3. Bitcoin, what’s it worth to you? 

Market Overview

The U.S. electoral college has cast their votes and it’s official, Joseph R. Biden Junior is the 46th President of the United States, not that there was any real doubt anyway at this late stage.
But having an official stamp of approval has certainly created an air of finality and investors can breathe slightly easier as the U.S. returns to the global negotiation table. 
Elsewhere there has been more good news on the coronavirus vaccine front with Moderna’s candidate proved to be safe and effective ahead of a key FDA review.
And finally, there has been some semblance of bipartisanship with U.S. Senate Majority Leader Mitch McConnell meeting with his Congressional counterpart, Democratic House Leader Nancy Pelosi as the odds of passing a stimulus bill, albeit a slightly smaller one than hoped, improved. 
In Asia, markets entered Wednesday mostly higher with Tokyo’s Nikkei 225 (+0.27%), Sydney’s ASX 200 (+1.24%), Hong Kong’s Hang Seng Index (+0.53%) and Seoul’s KOSPI (+0.42%) all up slightly.

1. Chinese Owner of Lycra Sees Its Debt Overstretched

  • Growing number of both private and state-owned Chinese companies allowed to default on their bonds, serving as a warning to investors that Beijing will not act as a backstop to all companies 
  • Investors are put on notice by Beijing that the freewheeling days of massive debt to finance expansion and growth by Chinese firms may be over 
Lycra is a fascinating material, it’s stretchy, doesn’t absorb water, and during the coronavirus pandemic left very little to the imagination as populations held at home by pandemic lockdowns swapped their suits for athleisure.
And as demand for athleisure soared, so too did demand for the stretchy material that has clad women’s physiques, with yoga pants flying off online store racks.
But despite the stretch in demand for stretchy materials, Chinese clothing maker Shandong Ruyi Technology Group, which owns The Lycra Company, revealed that it was overstretched and would not be paying back investors on a US$153 million bond.
The latest default by a high-profile Chinese company comes on the back of a string of defaults in the Middle Kingdom and marks a worrying trend among investors.
After a series of glitzy international acquisitions, Shandong Ruyi Technology Group revealed in a filing that it had failed to repay the principal and interest on a US$153 million bond that came due on Monday.
The Chinese clothing maker joins a growing list of defaults among troubled Chinese companies that has sent shockwaves rippling through China’s US$4 trillion corporate bond market since November.
Once referred to as the “LVMH of China,” Shandong Ruyi Technology Group has built up total debt of over US$4 billion in the course of scooping up controlling stakes in famous brands including The Lycra Company and Savile Row tailor Gieves & Hawkes.
A wave of defaults, led in early November by Chinese state-owned Yongcheng Coal, has raised questions about the state’s implicit backing of local government debt, long assumed by investors into bonds of Chinese firms.
And while Shandong Ruyi Technology Group is not state-owned, it has felt the squeeze of Beijing’s waning support for debt issued by regional and local governments, previously given carte blanche to borrow heavily in support of maintaining rapid economic growth.
Given the myriad cross-guarantees between government-related companies, the Shandong Ruyi Technology Group default raises the specter of a cascading wave of defaults between government-related companies that have lent to each other and the prospect of financial contagion spreading to the wider market.
But allowing Shandong Ruyi Technology Group to default, could also be an example of, to borrow a Chinese phrase, “killing one to shock a hundred,” reminding firms and their investors that there are no guarantees the central government will have their backs if they are profligate or reckless. 

2. Covid-19 Stocks in a Post-Pandemic World

  • Success of coronavirus vaccine developers may already be priced into high profile biotech firms and drugmakers, with limited upside moving forward 
  • Firms which have lagged the frontrunners in developing a coronavirus vaccine likely to see their stocks languish in the subsequent period 
Drugmakers have pulled off an unprecedented feat – in less than a year, vaccines have been developed to deal with the coronavirus that may yet put the pandemic in the rearview mirror.
But questions remain whether some of the upstart companies who shot to fame on the back of their prospective coronavirus vaccines can keep up that momentum or are a one-hit wonder.
With over 200 Covid-19 vaccines in the mix, only a handful are from public companies and only three are serious contenders for the finish line.
Pfizer (-0.48%) and BioNTech’s (+2.52%), as well as Moderna’s (+0.79%) coronavirus vaccines are already in the process of being distributed and several jurisdictions have approved them for administration.
Whether or not they will prove to be effective in a mass vaccination exercises and with exacting storage and transport requirements remains to be seen.
In the early days of the pandemic, little-known biotech companies captured the interest of investors, with shares in companies such as Novovax (+0.70%) up 3,038% and Moderna up 702% since the start of the pandemic, versus a rise of only 13% for the S&P 500.
Yet even though established drug maker Pfizer, which together with BioNTech, received the first U.S. regulatory approval for their coronavirus vaccine, stock of the firm has lagged the broader market this year.
While companies like Moderna have seen over 80% of their market cap gains this year alone, on the back of speculation over their coronavirus vaccine candidate, storied names like Pfizer have barely budged. 
What this demonstrates is that while a coronavirus vaccine can change the fortunes of a smaller drug maker like Moderna, it does little to move the needle for giants like Pfizer with over US$50 billion in revenues.
Since its inception over a decade ago, Pfizer has excelled at hemorrhaging money, with net losses every year since it was founded.
And while some analysts expect that its coronavirus vaccine will help Pfizer post a profit for the first time ever, investors seem less than enthused about its prospects.
Moderna on the other hand could see its coronavirus vaccine open the path for the rest of its other drug therapies based on the same mRNA technology and from that perspective, have far more growth potential.
Whereas for Pfizer, the US$14.6 billion that its coronavirus vaccine will generate, some of which will be shared with its German counterpart BioNTech, the cash influx isn’t expected to fundamentally change its business.
For other coronavirus vaccine makers however, the lead that Pfizer and BioNTech and Moderna have established may ultimately prove to be insurmountable, which will inevitably lead to greater scrutiny the currently lofty valuations of other biotech firms experimenting with Covid-19 vaccines.
But investors are a fickle lot and much of Moderna’s run up has been driven by retail investors, who are often seen as the ficklest of the lot, becoming the ninth-most purchased stock on retail trading platform Robinhood at one point.
Fortunately for retail investors, Moderna was successful in developing a coronavirus vaccine, but whether other smaller biotech firms will be as successful remains to be seen.
For now, the approval of the current clutch of coronavirus vaccines has not seen a huge surge in the shares of Pfizer or Moderna, with some analysts speculating that much of their success has already been priced in.
And that’s been reflected in other Covid-19 vaccine frontrunners, including Invio Pharmaceuticals and Novavax which are down 65% and 30% respectively.
Short sellers have also ramped up their bets against Invio Pharmaceuticals.
But pressure is on for firms like Moderna, which will need to prove that their mRNA technology that helped create the coronavirus vaccine can be applied to other products, including a vaccine for the mosquito-borne Zika virus.
Viewed from that perspective, Pfizer looks more like a conservative bet, whereas Moderna, a risk-on bet on its continued growth and new successful products. 

3. Bitcoin, what’s it worth to you?

  • No one really knows the price of Bitcoin, yet everyone has a view on its value 
  • Cottage industry of data providers will assist in providing more clarity as to the true “price” of Bitcoin, especially as more institutional investors enter the cryptocurrency space 
There are fewer questions which attract as much debate as to the value of Bitcoin in dollar terms.
Even among those seasoned in the cryptocurrency arts, even asking for the price of Bitcoin requires an exercise in approximation.
Because Bitcoin’s price doesn’t exist so much as it is debated.
From dodgy centralized exchanges with questionable liquidity, to some of the most highly traded-on platforms, Bitcoin’s price can vary so much you’d think they were trading different assets altogether.
So even though investors can agree that Bitcoin set a record recently, what they can’t agree on is what that milestone is, or even when it was set, with every single data source differing by as much as a few hundred dollars.
And the decentralized nature of Bitcoin’s marketplace has created a cottage industry of analytical tool providers, to track this nascent, but volatile asset class.
Since Bitcoin exploded this year, S&P Dow Jones Indices announced that it would create new cryptocurrency indices to help investors better track the price of their favorite digital assets while other firms have launched everything from Bitcoin volatility indices to price tickers similar to a Bloomberg terminal.
But the disparate data also presents another problem for investors – what counts as historical data?
Because so many quantitative strategies require reliable data to parse their algorithms and for backtesting, even determining the source of Bitcoin and other cryptocurrency price data is no simple task.
In the traditional capital markets, an exchange acts as the final arbiter of price, enabling investors to value underlying assets in index and exchange traded fund products – no equivalent exists in the cryptocurrency markets.
But the decentralization of data also provides myriad opportunities as well.
Because there is no singularity of price when it comes to cryptocurrencies, there is an abundance of mispricing and therefore arbitrage opportunities.
Depending on the level of reliable liquidity that can be obtained from the market, sufficiently savvy algorithms can automatically trade out that arbitrage, making cents on the dollar, but given sufficient volumes, those cents start to add up.
But those opportunities won’t last indefinitely, especially given that the demand for data has risen with the increase in interest in Bitcoin this year.
Earlier this month, S&P unveiled a partnership with cryptocurrency data service provider Lukka to create a suite of indexing products for cryptocurrencies.
And as more institutional investors start participating in the cryptocurrency space, demand for such services will only grow, especially when money managers need to mark-to-market their assets at the end of each accounting period.
Oscar Wilde once said,
“A fool is someone who knows the price of everything and the value of nothing.”
In the case of cryptocurrencies, no one seems to know the price or value of anything.  

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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