Novum Alpha – Daily Analysis 29 January 2021 (10-Minute Read)

Fantastic Friday to you as the markets fumble through to the end of the week.

In brief (TL:DR)

  • U.S. stocks rose on Thursday with the S&P 500 (+0.98%), tech-centric Nasdaq Composite (+0.50%) and blue-chip Dow Jones Industrial Average (+0.99%) all higher as regulators move to curb retail investor speculation. 
  • Asian stocks opened higher in the morning trading session taking their cue from Wall Street. 
  • U.S. 10-year Treasury yields rose to 1.05% on increasing risk appetite (yields rise when bond prices fall). 
  • The dollar retreated as investors found it safe to pile back into stocks again. 
  • Oil fell with March 2021 contracts for WTI Crude Oil (Nymex) (-0.96%) slipped to US$52.34 as tighter lockdown measures and the discovery of more coronavirus variants weighed down sentiment in a nascent recovery. 
  • Gold slipped with February 2021 contracts for Gold (Comex) (-0.21%) at US$1,845.10 as investors focused in on stocks. 
  • Bitcoin (+7.34%) rebounded sharply to US$33,390 as inflows into exchanges slowed and retail investors shut out of speculative stocks found their fix in cryptocurrencies (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today’s issue…

  1. Investor’s Are Trawling Twitter & Reddit for Tips, Should You?
  2. Don’t Count on a Quick End to the Pandemic 
  3. MicroStrategy’s Cryptocurrency Chimera

In case you’ve missed our webinar ““Women in Crypto #2: Cryptocurrency in 2021 – Opportunities and Challenges”, here is the full livestream on Facebook

Market Overview

Never underestimate the power of the people. Whether it’s in elections or investing, the ability to capture the imagination of the collective consciousness can start wars, end revolutions and solve global problems. 
For now though, that collective will in the United States is being directed to bet on speculative stocks and since Robinhood, a zero-fee trading app with a slick user interface that has been blamed for the gamification of stock investing, stopped allowing trading in the GameStop (-44.11%) shares, retail investors hungry for speculative rush have had to head other more speculative areas of the market, including cryptocurrencies.  
In Asia, stocks were a mixed bag with Tokyo’s Nikkei 225 (-0.18%), Hong Kong’s Hang Seng Index (+0.62%), Seoul’s KOSPI (-1.37%) and Sydney’s ASX 200 (-0.14%).

1. Investor’s Are Trawling Twitter & Reddit for Tips, Should You?

  • Investors looking to Reddit or Twitter (+7.28%) to try and identify the next GameStop or AMC Entertainment should invest in a Bloomberg terminal to validate shorts against any share
  • Decentralized organization of investors to trade in the options of any company requires coordinated communications making the strategy liable to abuse, misinformation and being gamed 
After the brutal onslaught saw short sellers lose billions of dollars betting against GameStop, the so-called “smart money” is throwing in the towel and recognizing that if you can’t beat them, might as well join them.
Even institutional investors are finding that they can’t look away from Reddit forums like r/wallstreetbets to find out what the next GameStop or AMC Entertainment (-56.57%) is likely to be, as the stock market becomes a casino where the whales no longer hold court. 
But it’s not just the message boards where clues as to the next short squeeze is likely to show up – options activity and the number of outstanding shares for any previously unloved company are key to finding the next speculative stock that could see a ridiculous rally.
Central to the trade is the ability to force market makers (the counterparties that facilitate the sale of options to investors) to go into the open markets and buy the underlying stocks of those options in order to risk-neutral their position.
Because the role of a market maker isn’t to make bets on the market, but facilitate the efficient trade in them, the purchase of a handful of options, especially when the number of outstanding shares being traded is limited, has an outsized impact on price.
After GameStop’s boom, movie-theater chain AMC Entertainment Holdings and apparel retailer Express (-50.79%), as well as telecom companies of yore such as BlackBerry (-41.35%) and Nokia (-14.25%), are already making gains after their names were circulated around forums and social media.
Forget about fundamentals, price-to-earnings ratios or valuations, identifying the next stock to run requires investors to be clued-in on the collective consciousness of the herd.
And while some investors will make mad amounts of money chasing the next big stock run off of what appears on internet forum message boards, many more will lose money, or so the experts tell us.
In fact, what we’re witnessing in the stock markets when it comes to these companies rallying is swarm intelligence backed by collective action.
Recognizing that the collective has far more power than any individual acting on its own, the collective needs to be able to organize and rally its members to chase up a particular stock.
The problem is, how will investors know that such signals are real, or just a trap?
As greater awareness that Reddit forums and Twitter feeds can be used to direct collective retail investor movements, some will certainly try to hijack those narratives for their own nefarious purposes.
But the markets (generally) are a transparent place – the amount of shares outstanding, price movements and open options interest can, and must be tracked if treading into the dicey world of decentralized investing movements.
And as any disillusioned QAnon believer will attest, grassroots movements can disappear into the wilderness as quickly as they start.  

2. Don’t Count on a Quick End to the Pandemic

  • Vaccination programs for the coronavirus are no guarantee to a speedy end of the coronavirus pandemic  
  • Investors may want to adopt a wait-and-see approach before rotating into value stocks as interest rates likely to continue to hover near zero for longer
As far as diseases go, humans, given their basic social instinct, have had a poor track record in eradicating them.
So far only one disease has been eradicated – smallpox – after an inoculation endeavor which took the better part of a decade.
Even measles which had been on the retreat, has made a troubling resurgence.
And while a lot of hope hinges on the efficacy of a slew of highly effective coronavirus vaccines, it’s not known how many vaccinations need to be administered to reach the coveted herd immunity, or even if that herd immunity is possible in the face of coronavirus mutations.
There’s good data that the vaccines made by Pfizer (-1.08%) and BioNTech (+3.80%) as well as Moderna (+2.45%) are effective – as much as 95% – at preventing the immunized from developing the coronavirus itself, but the jury is out on asymptomatic infections and transmission thereof.
If the goal of a vaccine is to stop infection as well as disease, then the track record in terms of vaccine development has been patchy at best.
Take for instance the measles vaccine which is great at preventing both the disease and the spread, whereas the whooping cough vaccine which is better at stopping the disease but not necessarily the spread.
With the coronavirus vaccines, it’s impossible to say whether it can prevent the spread, symptoms or otherwise.
Complicating matters, researchers are now reporting that the coronavirus mutations discovered in South Africa, Brazil and the United Kingdom have the potential to circumvent the immune protection provided by natural infection.
So what does that leave us with?
In a middle case scenario, we end up with the coronavirus becoming endemic, in other words, it will never be fully eradicated from the community with periodic spikes under certain conditions.
Investors pricing in a speedy recovery and rotating into value stocks in anticipation that they’ll rise towards the third quarter of this year, may want to adjust the timeline for their investments, especially as stimulus has typically tended to favor growth stocks. 

3. MicroStrategy’s Cryptocurrency Chimera

  • MicroStrategy’s (+7.09%) Bitcoin-tied bond issuance has turned out to be a back door way for investors to bet on Bitcoin, while still receiving a coupon rate
  • Because MicroStrategy’s shares are not the equivalent of a Bitcoin ETF, it tracks the price of Bitcoin but is inefficient, at least with a bond, there is downside protection 
Bond investors are typically a conservative lot.
Mostly looking to balance out a risk-biased portfolio, bond investors are looking for a fixed yield with a coupon rate that they hope can at the very minimum beat inflation, and perhaps some upside as well.
And typically the coupon rate or yield on that bond would reflect the creditworthiness of the company or government issuing it.
But last year, in the midst of an unprecedented rally in Bitcoin, business software firm MicroStrategy, which had already apportioned US$250 million from its balance sheet into Bitcoin, sought to staple Bitcoin to a bond issuance to spice things up a little.
Last December, MicroStrategy issued a convertible bond with the intention of using the proceeds of that funds raise to buy more Bitcoin, opening a backdoor for bond investors to pile into the cryptocurrency craze.
Unlike buying shares of MicroStrategy, which by some estimates only provide US$0.23 of exposure to Bitcoin for every US$1, the convertible bond provided a far more risk-managed means to participate in the upside of a Bitcoin rally with reduced downside.
Last July, MicroStrategy changed its cash strategy and tied its shares to Bitcoin, so if the price of Bitcoin doubled, so did the price of MicroStrategy’s shares, pushing the convertible bond deep into the money.
And if Bitcoin were to rise astronomically, bond investors would win big, but even if the price of Bitcoin were to collapse, investors would still get their money back because cash-rich MicroStrategy would be there to shore up the bond and pay on the yield.
In essence, it was a risk-free bet on Bitcoin, with all of the flavor and none of the fat.  
The cryptocurrency purist would argue that the bond’s paper gains are paltry compared with an outright investment into Bitcoin within the same time period.
But for the already conservative bond investors however, there’s a certain level of comfort in a Bitcoin play that’s backed by debt.
Unless they trade out of the debt by selling it or converting the bonds to shares in MicroStrategy (hence the term “convertible bond”) the bondholders will still get paid back on the bonds when the bonds mature, and let’s not forget the coupon rate till then, provided the company is still running.
Given MicroStrategy’s cash reserves, even if Bitcoin were to fall by 40%, it would still have more than enough to pay out on those coupons.

Who said bond investing had to be boring? 

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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