Novum Alpha – Daily Analysis 2 February 2021 (10-Minute Read)

A terrific Tuesday to you as markets race ahead and shed some of the earlier retail investor-led shocks of last week. 

In brief (TL:DR)

  • U.S. stocks entered the month of February all uniformly higher with the S&P 500 (+1.61%), tech-centric Nasdaq Composite (+2.55%) and blue-chip Dow Jones Industrial Average (+0.76%) all recovering from last week’s shock whipsaw by retail investors. 
  • Asian stocks continued to put on gains, spurred by bullish sentiments from Wall Street.  
  • U.S. 10-year Treasury yields ended last week more or less unchanged at 1.07% as investors sat out while the retail mob took over the markets (yields rise when bond prices fall). 
  • The dollar advanced against other major currencies. 
  • Oil rose with March 2021 contracts for WTI Crude Oil (Nymex) (+2.47%) at US$53.49 as traders felt safe enough to come back into markets. 
  • Gold continued to rise with April 2021 contracts for Gold (Comex) (+0.76%) at US$1,864.40 as the swell of retail investors mobbing markets picks its next target. 
  • Bitcoin (+2.02%) was flat at US$33,687 as inflows into exchanges continued to outpace outflows and trading is expected to stay choppy this week (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 

In today’s issue…

  1. Myanmar Takes One Step Forward Two Steps Back
  2. GameStop Demonstrates That Price is What You Pay, Value is What You Get
  3. Musk Ado About Bitcoin 

Market Overview

Professional investors are feeling that it’s safe to come out again as retail traders led by Reddit channel r/wallstreetbets direct their attention towards silver.
Investors are feeling confident enough to dip their toes back in the markets again as the prospect of fresh fiscal stimulus out of Washington has become too enticing to ignore and stocks are surging. 
Over in Asia, investors were buoyed by U.S. markets and Tokyo’s Nikkei 225 (+0.75%), Hong Kong’s Hang Seng Index (+1.33%) , Seoul’s KOSPI (+2.24%) and Sydney’s ASX 200 (+1.33%) were all up. 

1. Myanmar Takes One Step Forward Two Steps Back

  • Myanmar’s fledgling democracy hits the skid as the military questions the latest election results and alleges electoral fraud 
  • Already weakened economy likely to see further downside as firms most exposed to Myanmar will be in limbo for awhile longer 
For optimists, Aung San Suu Kyi’s third landslide victory at the polls was a sign of a change in times, but for long-time observers of Myanmar’s dysfunctional politics, it was more a case of three landslides too many.
Cynics have long wondered how long the generals would tolerate Myanmar’s opening to the world, regardless of the economic benefits that that brought with it.
Yet after a decade of Myanmar’s highly praised opening, it looks like the generals have had enough of their dalliance with democracy.
The people of Myanmar it seems, at least according to its generals, cannot be trusted with self-governance.
Whilst not exactly as destructive as Cambodia’s “Year Zero,” the powerful Myanmar military is disputing the recent election results (sound familiar?) and instead of storming the capitol, have reverted to the all-too-familiar habit of detaining Aung Suu Kyi yet again.
In what is another blow for Myanmar’s fragile attempt at democracy, after accusations of genocide against the country’s minority Muslim Rohingya population triggered international outcry, it appears that Myanmar’s economic dreams are starting to fade yet again, even discounting the effects of the pandemic.
The Myanmar military and its political factions have demanded authorities investigate allegations of voter fraud, after Suu Kyi’s ruling National League for Democracy won over 80% of available seats in its Assembly of the Union.
Following a state of emergency, Myanmar has (yet again) reverted to military rule for at least one year.
The economic consequences of the election will likely be felt almost immediately, with the Biden administration threatening to “take action” and shares of companies closely linked to Myanmar tumbling.
China rare earth miners such as China Northern Rare Earth Group High-Tech (-4.44%) and China Rare Earth Holdings (-3.33%), which receive large supplies of rare earths from Myanmar, saw their share prices tumble after the Myanmar military moved to detain Suu Kyi.
And Singapore-listed conglomerate Yoma Strategic Holdings (+0.00%), with 100% of its revenues derived from Myanmar and which has interests including real estate development, food and beverage and financial services, requested for a trading halt of its shares on the Singapore exchange.
Yoma Strategic’s shareholders will likely be on tenterhooks for the rest of this year, or at least until it becomes clearer what the generals in Myanmar intend to do next.
To be sure, many multinational companies had already chosen to pull out of Myanmar following the alleged genocide of Muslim Rohingyas in its restive northwest corridor.
And even those companies  that remained recognized that the undeveloped market was difficult to navigate with a population steeped in poverty and largely illiterate, difficult to use as a manufacturing base.
Those firms that did remain in Myanmar however were mainly in the extractive industries and cut lucrative deals with the military.
And that has given the military some degree of autonomy to act with impunity.
Ultimately, any U.S. sanctions against Myanmar will do little to hurt the generals where it hurts most, their pockets.
And with evidence that China is willing to look the other way on what appears to be another coup in Myanmar (they have been remarkably restrained thus far in their assessment of the situation), the generals will be emboldened to close the doors of the country yet again.

2. GameStop Demonstrates That Price is What You Pay, Value is What You Get

  • GameStop (-31.50%) shares demonstrate what happens when an unstoppable force meets a highly movable object, the most stubborn buyer gets to dictate the price
  • Lack of fundamentals or traditional valuation will facilitate the inflation of even more asset bubbles and fuel a wider disconnect between underlying assets and asking prices 
Elementary classes in economics teach that price is a function of demand and supply.
Yet nowhere is this foundational tenet of economics more violated than in the stock markets.
The price of stocks is seldom, if ever, a reflection of the demand and supply of any particular stock, but rather, reflect the activities of the market’s most stubborn sellers or buyers, as GameStop’s short sellers have learned the hard way.
It’s why the entire market can drop by 10% as a result of a single seller – all that seller needs to be is stubborn enough and markets will react in a way that is totally disproportional to the impetus of that seller.
Take for instance what happened in 2008, where a single order of only US$50 billion, or less than 2% of the total value of stocks globally, triggered a drop of close to 10% and caused losses of around US$3 trillion.
That order in 2008 had been initiated by French bank Société Générale, which discovered an authorized purchase of stock by a rogue trader, and wanted to reverse the trade, no matter the cost.
And why did the markets react so violently in 2008 to that sell order?
Because that sell order was extremely stubborn, that’s why.
Which helps to explain what happened to hedge funds who were squeezed by retail investors pumping up the stock of GameStop – the retail investors were price insensitive.
And the moves by these retail investors led to a spiraling feedback loop that saw the stock of GameStop, a company with a less than stellar track record and dim prospects, shoot from a valuation of just US$2 billion to US$20 billion in virtually the blink of an eye.
But such moves also have the effect of allocating capital in the most inefficient way.
Don’t get me wrong, everyone loves a David vs Goliath story, especially when David wins, but longer term, these disconnects do not bode well for a capitalist system which is built on the foundation that markets should act as efficient allocators of capital.
In other words, if GameStop was a dying company, the market should have let it do just that, die.
But ultra-loose monetary policy from global central banks have not only removed the invisible hand of the market, instead, it’s forced the hand of investors, to allocate resources to suboptimal assets.
And that’s why investors rooting for the underdog in these market machinations must also note that hedge funds have also served a function, exposing corporate frauds like Enron and Wirecard and papered over liabilities like Lehman Brothers.
Long term, short sellers still serve a public good, even where it may appear to be at a socially unacceptable price.
If short sellers are beat into submission and lurk in the shadows, longer term the market will suffer, as the disconnect between value and price widens.
When everything is expensive, price is far less reflective of an asset’s value than ever before and the risks for investors, higher than ever.  

3. Musk Ado About Bitcoin

  • Elon Musk sends price of Bitcoin surging before pulling back
  • Musk is only the latest in a growing number of high profile voices coming out to publicly back Bitcoin 
Whatever your views on Elon Musk, investors could do far worse than invest in assets he cultivates.
Whether it’s been Tesla (+5.83%) or SpaceX, the effervescent and outspoken Musk has had an uncanny track record of proving skeptics wrong and delivering eye-watering returns to early investors of ventures he’s been involved in.
And Musk’s latest venture is into Bitcoin, sending ripples through the cryptocurrency industry after publicly declaring that he’s a supporter of the bellwether digital asset.
Speaking on social audio app Clubhouse, the CEO of both Tesla and SpaceX said that he thinks Bitcoin is a “good thing,” conceding that he’s “late to the party” and should have bought the cryptocurrency almost a decade ago.
Musk’s comments sent Bitcoin soaring above US$34,000 in U.S. trading hours before easing back.
Over the weekend Bitcoin surged by as much as 16% when Musk changed his Twitter profile to “#bitcoin,” but the rally mostly lost its steam by Monday, when traders returned to their desk.
As an unconstrained asset with no historical fundamentals, Bitcoin is often buffeted by narratives and comments from high profile investors.
And retail investors who are only just discovering their powers over the so-called “smart money,” have also been flexing some of their newfound money muscles on Reddit forums and Twitter feeds, pumping up the meme cryptocurrency Dogecoin by some 70% in a single day, before allowing it to plunge headlong into the weekend.
Musk said on Clubhouse that he doesn’t have strong views on other cryptocurrencies outside of Bitcoin.
The largest cryptocurrency by market cap, Bitcoin has shed some US$8,000 in value since it touched a high of near to US$42,000 earlier this year.
And while some investors argue that Bitcoin is winning a wider audience because it’s muscling in on gold’s role as a hedge against inflation, others see a speculative rally fueled in large part by retail investors riding high atop a mountain of fiscal stimulus.
But because Bitcoin is so strongly driven by narratives, both views could technically be correct, just not at the same time.  

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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