Novum Alpha – Daily Analysis 22 January 2021 (10-Minute Read)

A fantastic Friday to you! Does it feel like we’re living in a new world? In many ways we are, as the Biden administration gets into the driver’s seat to try and bring the crippling coronavirus pandemic under control. 

In brief (TL:DR)

  • U.S. stocks drifted with the S&P 500 (+0.03%) and tech-centric Nasdaq Composite (+0.55%) both up marginally while the blue-chip Dow Jones Industrial Average (-0.04%) was down slightly as concerns over the pandemic saw a rotation back into the familiar themes of tech stocks. 
  • Asian stocks were mainly weaker on diminished risk appetite and concerns now that the Biden administration has revealed the true extent of the damage wrought by the coronavirus pandemic. 
  • U.S. 10-year Treasury yields gained three basis points to 1.11% even though risk sentiment soured as investors bet on a prolonged pandemic (yields rise when bond prices fall). 
  • The dollar continued to weaken on expectations of fiscal stimulus as the true extent of the damage wrought by the coronavirus pandemic became clearer. 
  • Oil fell with March 2021 contracts for WTI Crude Oil (Nymex) (-1.00%) down at  US$52.60 from US$53.13 despite a weaker dollar and as it became clearer that the forecast for economic recovery would have to be delayed. 
  • Gold rose with February 2021 contracts for Gold (Comex) (+0.01%) at US$1,869.40 from US$1,869.30 as the dollar dipped. 
  • Bitcoin (-15.36%) dropped below the crucial US$30,000 level to US$29,814 as inflows into exchanges soared ahead of outflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today’s issue…

  1. Biden Needs to Fix the Pandemic Before the Economy 
  2. Intel Insists on Making Its Own Chips  
  3. Abandon All Hope, Bitcoin Bombs Below US$30,000  

Market Overview

While Americans are waking up to a fresh administration brimming with competence and confidence, it is also coming to terms with just how much had been hidden by the previous administration, of the true extent of the damage wrought by the coronavirus pandemic. 
Like buying a used car and bringing it to the mechanic for the first time, Biden and his team will have their work cut out for them, especially after it became clear that the Trump administration had downplayed the extent and scope of the damage that the pandemic had caused. 
Biden for his part has not minced words and made patently clear that the situation is serious and not likely to resolve itself anytime soon. 
Stocks in Asia opened the morning lower on the realization that Trump had concealed a lot more from the American people than thought earlier with Tokyo’s Nikkei 225 (-0.37%), Sydney’s ASX 200 (-0.08%) and Hong Kong’s Hang Seng Index (-0.32%) all opening lower, while Seoul’s KOSPI (+0.43%), was higher on expectations of firmer demand for chips and work-from-home gear. 

1. Biden Needs to Fix the Pandemic Before the Economy

  • Biden administration has scrambled to get the coronavirus pandemic under control with no less than ten executive orders targeted at measures to curb the spread of the disease
  • Fiscal measures will help in the immediate term, but if the Biden administration is able to curb the spread of the coronavirus, coupled with fiscal measures, economy could get hot, fast 
Less than 24 hours in office and U.S. President Joe Biden has been busy, signing no less than 10 executive orders to combat the coronavirus pandemic that has left hundreds of thousands of Americans dead and the economy in tatters.
Biden knows that the U.S. economy cannot even look to recovery if the pandemic doesn’t get under control and has called for a 100-day mask mandate, to urge Americans to wear a mask.
The marketing is clever, to call it an “indefinite” wearing of masks would be too much for Americans to bear or “wear” in this case, but a hundred days sounds more doable, and it sounds like there is some degree of finality (although there really isn’t). 
The 100-day mask mandate also coincidentally coincides with Biden’s first 100 days in office, a time when a new President’s performance is typically assessed.
As the experience in China demonstrates, keeping things under control is far from a 100-day task, it’s ongoing.
The good news is that the conspiracy theorists who had counted on massive protests and an uprising in Washington D.C. and state capitols everywhere, to contest Biden’s inauguration were thoroughly disappointed.
In Montana, just one Trump supporter appeared, an image that has left this fringe element rudderless and disillusioned.
That should help Biden’s campaign to bring the pandemic to heel, as overt resistance is reduced and deprived of his bully pulpit, the poisoning misinformation campaign of Trump that politicizes the wearing of masks should hopefully be reduced. 
Biden also signed an executive order that mandates the wearing of masks at airports and in certain types of public transportation such as many trains, ships, intercity buses and airplanes.
Coupled with Biden’s stimulus plan that is calling for US$1,400-per-person direct payments to most households and a US$400-a-week unemployment insurance supplement through September, those additional payments should provide temporary respite for an economy that desperately needs to get the pandemic under control. 

2. Intel Insists on Making Its Own Chips

  • Incoming Intel (+6.46%) CEO Pat Gelsinger has stated that the company will still make the bulk of its own chips right through 2023 
  • Strategy of in-house production may pay off if Intel can fix its production woes and as chip manufacturing increasingly becomes seen as a strategic asset
Chipmaking giant Intel’s shares took a beating when incoming CEO Pat Gelsinger made clear that the firm will still continue to manufacture the bulk of its own chips, but shares in the firm have since rebounded. 
Speaking with analysts at a news conference yesterday, Gelsinger said,
“I am confident that the majority of our 2023 products will be manufactured internally.”
The comments sent shares lower, countering calls from investors to shed the manufacturing arm of the industry and focus on other more lucrative sectors.
And while the margins may be bigger for Intel if they were to shed the high capital costs of manufacturing chips, if the coronavirus pandemic was any lesson about supply lines, there’s such a thing as outsourcing too much.
Given that microchips are a key strategic asset, reliance on manufacturing bases in Taiwan and South Korea could be tricky, especially if geopolitical tensions escalate between China and the U.S. or as in the case of the pandemic, a break in supply lines occurs.
When the coronavirus pandemic first hit the U.S., America’s deficiencies in manufacturing medical equipment and supplies was laid bare.
Gelsinger is taking the reins of Intel in the midst of its worst crisis in at least a decade.
The largest chipmaker for most of the past thirty years, Intel dominated the US$400 billion semiconductor industry by making the best designs in its own cutting-edge factories.
But Intel’s fortunes started to decline as other U.S. chipmakers shuttered factories and outsourced production to highly specialized and purpose-built foundries in Taiwan, China and South Korea.
Intel held out, arguing that doing both design and manufacture within the firm, improved each side of its operations and created better semiconductors.
Over the past few years, that strategy has proved costly for Intel’s shareholders, with the likes of Nvidia (+3.75%) overtaking the firm as the world’s largest chipmaker by market cap and as Intel’s own factories failed to deliver the advances in production techniques needed to keep up with Taiwan Semiconductor Manufacturing Company (-2.23%) and Samsung Electronics (+0.23%). 
Intel right now looks to be oversold, especially when investors consider that its most recent margins stood at 56.8% and historically have hovered around 60% – amazing considering that Intel still does the bulk of its own manufacturing and margins in manufacturing businesses are typically a fraction of that. 
Demand for laptop chips have also been robust, even if government and cloud business demand has declined.
While the decline in sales of chips for cloud servers is a concern, it could be more a sign of companies working their ways through existing stocks of chips than indicative of a longer term trend.
Prior to the pandemic, a more cogent argument could be made for Intel to ditch manufacturing and focus on more lucrative outsourcing, but that case is no longer cut and dried.
Recently, vehicle production lines in Volkswagen (+2.80%) and Honda (-1.11%) were halted because of a shortage of chips due to shipping logjams.
Intel has the technology and the potential to fix its manufacturing problems and place itself as a key node in the semiconductor industry and right now its share price doesn’t necessarily reflect that.

3. Abandon All Hope, Bitcoin Bombs Below US$30,000

  • Sharp pullback in Bitcoin attributed to concern over increasingly regulation by the incoming Biden administration  
  • Regulation in and of itself is not a bad thing, because it provides more institutional gateways to enter the cryptocurrency market 
When is the best time to buy Bitcoin? If you can’t stomach volatility, probably never.
To understand the nature of the beast that is Bitcoin, is to understand what an unconstrained asset is.
Unlike any other asset class, Bitcoin’s price (not the equivalent of value) is a function of perception.
Perceived demand, perceived supply and a dose of perceived manipulation, all contribute to making Bitcoin one of the most volatile assets on the planet.
The most recent rout has been attributed to comments made by U.S. Treasury Secretary Janet Yellen, before a Senate confirmation committee, who noted that Bitcoin and cryptocurrencies needed to be regulated, because the bulk of cryptocurrency transactions facilitate crime.
Investors reacted to comments by Yellen of trying to “curtail” the use of cryptocurrencies such as Bitcoin, over concerns that they are “mainly” used for illegal activities.  
While it’s estimated that just 0.34% of all Bitcoin transactions in 2020 were criminal in nature, that hasn’t stopped Bitcoin traders from dumping the cryptocurrency on concerns that U.S. regulators will crack down on the sector.
The reason why governments, especially the United States, might have an axe to grind with Bitcoin, is because of a growing narrative that Bitcoin offers a viable alternative to the dollar, which some fear is being progressively debased through money printing and fiscal measures.
Curtailing the use of Bitcoin could come in various forms, including putting caps on the value of transactions conducted in Bitcoin through regulated cryptocurrency exchanges, placing limits on the number of off ramps for Bitcoin to purchase goods and services in the real world, and even potentially stifling moves by the likes of PayPal (+1.79%) to make it more easy to spend cryptocurrency.
Like any other market, Bitcoin traders can get jittery on uncertainty and Yellen’s comments have placed the fear of Washington into the heart of cryptocurrency traders that the U.S. may tighten regulation when it comes to the nascent digital assets.
But curtailment is very different from a ban and regulation in and of itself is not necessarily a bad thing per se.
Recall that institutional investors like certainty and nothing provides certainty like rules and regulations, which are painfully absent in the cryptocurrency space currently.
And while the threat of uncertain regulation may lead to some short term pullback in Bitcoin and other cryptocurrencies, it would do wonders to facilitate more institutional participation.
What that participation means for price however is an entirely different matter and requires a reversion to reading tea leaves, tarot cards and the Tao.    

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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