Novum Alpha – Daily Analysis 18 January 2021 (10-Minute Read)

We’re back! Welcome to another brand new work week and your Monday Market Madness as stocks have taken a beating from last week, what does this week hold for investors other than the inauguration of a new U.S. President? 

In brief (TL:DR)

  • U.S. stocks ended lower last Friday with the S&P 500 (-0.72%), tech-centric Nasdaq Composite (-0.87%) and blue-chip Dow Jones Industrial Average (-0.57%), on disappointing fourth quarter results from some of America’s biggest banks. 
  • Asian stocks opened the week mostly lower despite China’s economic recovery.  
  • The U.S. 10-year Treasury yield ended last week lower at 1.08% on continued demand for Treasuries (yields rise when bond prices fall). 
  • The dollar held gains in Asian trading as investors stood on the sidelines. 
  • Oil slipped with February 2021 contracts for WTI Crude Oil (Nymex) (-0.74%) down at  US$51.97 from US$52.36 with doubts over the pace of any economic recovery lingering. 
  • Gold added to losses with February 2021 contracts for Gold (Comex) (-0.49%) at US$1,820.90 from US$1,829.90 as the dollar continued to gain. 
  • Bitcoin (-1.16%) slid to US$35,948 out of the weekend as the expected retail rally failed to materialize on souring sentiment and a resurgent dollar and with inflows into exchanges leading outflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today’s issue…

  1. Biden’s Stimulus Checks May Stir More Animal Spirits in Stocks 
  2. Betting On Chinese Companies Just Got Trickier 
  3. Some Companies Are Betting Big on Bitcoin, Good for Them 

Market Overview

Welcome back to another brand new week! 
It’s just days before the inauguration of Joseph R. Biden Junior as the 47th President of the United States and while security and preparations in Washington are proceeding in earnest, concerns remain over the looming threat of Trump’s supporters making one last attempt at undermining the election. 
While security services in the U.S. are on high alert and there are more troops in the capital than in both Afghanistan and Iraq combined, more attention is being paid to Biden’s proposed US$1.9 trillion stimulus package that many believe will spark another rally in stocks. 
In Asia, investors opened the week mostly lower with Tokyo’s Nikkei 225 (-0.90%), Seoul’s KOSPI (-0.88%) and Sydney’s ASX 200 (-0.77%) all down at the open while Hong Kong’s Hang Seng Index (+0.27%) was up on bullish economic data out of China. 

1. Biden’s Stimulus Checks May Stir More Animal Spirits in Stocks

  • History may repeat itself with potential for bulk of US$1,600 stimulus checks ending up in the stock market 
  • Professional investors have taken to alternative media channels to determine where retail investors are likely to strike next 
Like rain, stimulus checks fall on both the rich and the poor, resulting in many unintended consequences.
When the last round of pandemic stimulus checks were slipped into the pockets of Americans, many who had no immediate need for the money, spent it in the stock market and on Bitcoin.
A survey of the priority of spending for Americans for their stimulus checks found stocks at the top of the list, with many younger Americans also listing Bitcoin.
And earlier this month when US$600 landed in the palms of Americans, Tesla (-2.23%) added US$130 billion to its market cap, IPOs like Airbnb (-6.22%) rallied, and options and penny stock trading volume exploded.
With a further US$1,400 headed into American wallets in the coming weeks, Wall Street is betting that more than a chunk of those checks will end up in the markets.
The last year saw retail investors emerge as a force to be reckoned with, with even professional traders turning to non-traditional channels such as Reddit, Twitter (-1.33%)  and YouTube to gain insight into their psyches. 
It’s estimated that almost half of all Americans will be eligible for the additional US$1,600 stimulus check that the Biden administration is proposing in the fresh stimulus package, and even if a small proportion of those Americans puts that money into the markets, the effect could be sizeable.
The timing of the stimulus checks happens to coincide with what many analysts on Wall Street are warning as a peak bubble in stocks.
Volume in penny stocks is already at a level six times a year ago, and day traders are venturing off exchanges into the more speculative over-the-counter markets.
The options market saw its second-busiest day on record for bullish equity calls (a right to buy) this past week, while data from Goldman Sachs (-2.27%) , an investment bank shows that a basket of stocks favored by retail investors has surged 10% since the beginning of this year.
Investors looking to ride this wave need only fall back on those sectors that retail investors have churned to dizzying heights, so expect the likes of Apple (-1.37%)  and Tesla to do well, but whether those gains are ultimately sustainable or not is another question altogether. 

2. Betting On Chinese Companies Just Got Trickier

  • Investors in Chinese stocks may not realize that their investments are via vehicles which Beijing has never officially sanctioned but simply looked the other way on 
  • Doxing of Ant Group’s IPO should serve as a warning to investors in Chinese companies that ultimately it’s still Beijing that’s in charge of their investment and not market forces 
With a captive audience of almost 1.4 billion consumers, for many investors, the Chinese market and the Chinese companies that cater to it, are too tantalizing an investment to pass up.
But global investors who had any doubt as to who is truly in the driver’s seat of China’s masters of commerce can set those doubts aside, and possibly those dollars as well, because it’s Beijing who’s the boss.
After halting the US$37 billion flotation of Ant Group, the digital financial services arm of e-commerce giant Alibaba (+1.09%), foreign investors into Chinese firms have gotten jittery because there are clearly no “sacred cows.”
Chinese authorities opened an antitrust probe into Alibaba last December and this month, the Communist Party’s body for political and legal affairs vowed to take trust-busting more seriously.
Alibaba is one of a handful of outsized and extremely powerful technology firms that form the bedrock of China’s tech sector.
Insulated from outside competition with most of the equivalent U.S. tech firms banned in China, Chinese tech firms have been able to cement their dominant position from within the Great Firewall of China and have become extremely rich and powerful in the process.
And in some ways, that power may have gotten to the heads of some these tech firms’ larger-than-life founders, none more so than Alibaba’s highly outspoken co-founder Jack Ma.
Ma has always been a low-key critic of the Chinese Communist Party, but that element was found sorely lacking when he made some scathing comments about the Chinese financial sector at a conference in Shanghai in September.
The comments were the last straw on the camel’s back and Beijing came down hard on Alibaba, to remind Chinese tech giants which side their steamed buns were basted on.
Ma hasn’t been seen publicly since.
And while tweets from Tesla CEO Elon Musk can often see stock of the electric vehicle maker rise and fall, the consequences of comments by Chinese CEOs can have more serious implications for their companies.
Investors are already spooked, with Alibaba’s share price down by over 25% since October, soon after Ma made the comments.
At stake are billions of dollars of foreign investment in not just Alibaba, but a string of other Chinese companies.
Foreigners can buy stocks in Chinese firms through complex offshore legal structures that Beijing has never fully endorsed, but has not clamed down on either for over two decades.
That level of risk may ultimately prove too much for some investors, especially since last month China’s State Administration for Market Regulation fined Alibaba and another tech giant Tencent (+1.86%) which owns the super app WeChat, for not seeking approvals for past acquisitions.
A sustained regulatory onslaught could raise doubts about the viability of the complex foreign-ownership arrangements that Chinese companies have used for years to allow foreign investors in.
Beijing may have built the Great Firewall, but it’s foreign investors who may end up paying for it. 

3. Some Companies Are Betting Big on Bitcoin, Good for Them

  • Growing number of listed U.S. firms considering allocating a proportion of their balance sheets to Bitcoin 
  • High level of volatility in Bitcoin could be a double-edged sword, igniting interest in firms whose stocks may have been languishing or potentially putting at risk entire balance sheets
For many CEOs of America’s biggest firms, getting included on the S&P 500 is a hallmark of achievement. 
But getting included in the prestigious index of America’s largest firms is only the first step in an ongoing battle to keep their stock relevant to the investing public.
So when business software maker MicroStrategy (-8.39%) , whose shares had been languishing for years, saw its stock price rally when it was revealed that a significant amount of its assets were invested in Bitcoin, more than a handful other CEOs and their CFOs took note.
And while CFOs are more naturally risk averse, a growing number are said to be studying the possibility of investing in Bitcoin in more than just an academic sense.
Yet CFOs who are willing to bet their treasure on Bitcoin were in for a stomach-churning ride as the bellwether cryptocurrency sunk more than 25% on a given Sunday.
Burning a hole that size in any corporate rainy-day fund would not just be career-ending, it could wipe out the firm altogether.
But a 300% rally in Bitcoin has proved to be a siren call too alluring for some firms to ignore.
And last year, Square (-2.217%) , headed by longtime cryptocurrency advocate Jack Dorsey, announced that it had converted as much as US$50 million of its total assets as of the second quarter of 2020 into Bitcoin.
For companies whose stocks have been drifting rudderless, a bet on Bitcoin could potentially reflate their fortunes.
And even companies which are doing well seem to be driven to at least consider an allocation into Bitcoin, as revealed when Tesla’s Elon Musk openly inquired on Twitter about converting “large transactions” of the electric vehicle maker’s balance sheet into Bitcoin.
But there may be some method to the madness.
For a company whose fortunes have been languishing for a while, Bitcoin may help to attract investor interest towards a speculative bet on that firm as a proxy play for Bitcoin, regardless of what happens next.
And for firms that are already enjoying a healthy rally in their stock prices, the risks of a pullback in Bitcoin aren’t as severe, because their fortunes aren’t entirely tied to the cryptocurrency.
Either way, CFOs may be lured by the talk of an incoming Biden administration undermining dollar strength and at least consider a punt on Bitcoin, and if not, their CEOs may spur them to roll the dice anyway.  

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.

For more information about Novum Digital Asset Alpha, please click on the image below:

Leave a comment

13 − 10 =

This site uses Akismet to reduce spam. Learn how your comment data is processed.