A magnificent Monday to you and welcome to the start of the final week of January!
In brief (TL:DR)
- U.S. stocks ended last week reverting to similar themes with the S&P 500 (-0.30%) and blue-chip Dow Jones Industrial Average (-0.57%) both down as economically-sensitive stocks saw fund outflows while the tech-centric Nasdaq Composite (+0.09%) saw slight gains as investors reverted to "safety" in tech's ability to grow regardless of the pandemic.
- Asian stocks saw a muted start to trading Monday as investors evaluated the worsening pandemic and prospects for stimulus and looked ahead to this week’s Federal Reserve policy meeting.
- U.S. 10-year Treasury yields held at 1.09% as risk sentiment soured and investors rotated back to safety (yields fall when bond prices rise).
- The dollar held Friday's gains.
- Oil was steady with March 2021 contracts for WTI Crude Oil (Nymex) (-0.08%) down at US$52.23 and may see continued weakness this week unless there is clearer evidence of economic growth, supply-side contractions or political will to commit to fresh stimulus in Washington.
- Gold corrected with February 2021 contracts for Gold (Comex) (-0.06%) at US$1,858.80 from US$1,859.90 and looks set to continue weakening this week.
- Bitcoin (+2.48%) rebounded to US$32,699 over the weekend as inflows into exchanges slowed but it's less clear if the rally is sustainable as inflows have still continued to outpace outflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices).
In today's issue...
- Playing for All the Chips
- Tech Builds the Platform, But Publishers Pay for It
- Bitcoin Has Worst Week Since September 2020
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Market Overview
Time may be flying but it doesn't appear that the rest of the world is as the coronavirus pandemic is still very much ever-present.
Investors have increasingly had to search faster and further for yield.
Stocks in Asia started the week higher as sentiment improved for emerging markets and with investors betting that Asia will lead the global economic recovery as Tokyo's Nikkei 225 (+0.44%), Sydney’s ASX 200 (+0.39%), Hong Kong's Hang Seng Index (+0.78%) and Seoul’s KOSPI (+1.19%), all opened up in the morning trading session.
1. Playing for All the Chips
- Intel's (-9.29%) decision to continue manufacturing inhouse is a gamble, but may ultimately prove prescient as chipmaking becomes an increasingly strategic capability
- Coronavirus pandemic has demonstrated the dangers of offshoring too many strategic or essential manufacturing capabilities, as evidenced by the shortage of medical and personal protective equipment as countries raced to shore up their own supplies
Since their invention in 1958, microchips have gone from filling the insides of thermonuclear warheads to just about everything.
And trends such as the Internet of Things are accelerating the demand for chips for everything from internet-enabled smarthome devices to even clothing that monitors your health.
But chipmaking is a costly and highly competitive business, with a slew of firms all vying for a share of the chip business that was worth an estimated US$450 billion last year alone.
Last month, disrupted supply lines because of the coronavirus pandemic caused a shortage of chips which forced vehicle production lines at Honda (-1.40%) and Volkswagen (+1.88%) to grind to a halt.
But it’s not just the pandemic that can starve countries of essential chip supplies, politics can as well.
China imported an estimated US$300 billion worth of chips last year, as the Middle Kingdom lacks the manufacturing capabilities to meet its own demand.
But China is steadily working to develop its own capabilities, even as the manufacture of chips has become more and more concentrated within a handful of foundries located in South Korea and Taiwan.
The proximity of China to Taiwan and South Korea make those manufacturing bases look particularly risky for the United States, both in terms of the possibility of geopolitical tensions blocking essential supplies of chips as well as China’s growing assertiveness in the region.
And while it makes sense from a profit standpoint for chip firms like AMD (+1.38%) and Nvidia (-1.12%) to base the manufacture of their chips offshore, it may not make sense for government to close a blind eye to that offshoring from a political perspective.
Unlike in the 1970s where the key currency of commerce was oil, the future is likely to be one dominated by silicon.
And from the at perspective, Intel’s decision, to continue to manufacture the bulk of its chips within the United States until at least 2023, may ultimately prove prescient.
Although shares in the company pulled back when incoming CEO Pat Gelsinger made clear that Intel would continue on its current path, of housing manufacturing within the company, the geopolitical climate may yet prove to favor Intel shares.
Moore’s Law, which states that the cost of computing power will roughly halve every two years, is beginning to falter.
And chip clock speeds are starting to stagnate, even as each successive generation of chips has become technologically more difficult to manufacture.
The stakes are getting higher as well, as dominance in chipmaking has fallen from 25 firms a decade ago, to just three today – Intel, Taiwan Semiconductor Manufacturing Company and Samsung Electronics.
The latter two are investing heavily in new manufacturing capabilities – Intel needs to choose its own path – profits or persistence.
Politics may ultimately decide, the bigger question is whether investors can stomach the short to medium term cost of that persistence.
2. Tech Builds the Platform, But Publishers Pay for It
- Australia may force Google and Facebook to pay publishers for content published on their sites that is circulated
- If legislation passes in Australia requiring both Google and Facebook to pay for content from news sources, it could lead other countries to follow suit, dragging down profits
“Then the king told the attendants, ‘Tie him hand and foot, and throw him outside, into the darkness, where there will be weeping and gnashing of teeth.’”
– The Gospel according to Saint Matthew, Chapter 22:13
With Google (+0.45%) still the dominant search engine globally, the costs of not having access to Google’s myriad services can be costly.
And Australians may soon be in for a large serving of teeth-gnashing as the search giant has threatened to shut down its search engine in Australia, in the latest salvo in an escalating dispute between the tech giant and lawmakers there.
Lawmakers in Canberra have proposed legislation that would force Google and other platforms like Facebook (+0.60%) to pay local news providers for content published on their sites.
Although Canberra has described the legislation as “world-leading” and needed to create a sustainable media landscape, it is precisely for this reason that Google and Facebook cannot afford to back down.
The two companies face a genuine risk that a successful application of the proposed legislation that would make platform providers pay for publishing and circulating news content, could embolden other jurisdictions to follow suit.
As the coronavirus pandemic has ravaged national finances, governments have been left routing through the couch cushions to look for new revenue sources to prop up ailing economies on life support, and to find a way out of crushing sovereign debt.
One of the lowest hanging fruits of course would be tech firms, and charging them to circulate news from publishers, an obvious and rich source of revenue.
Given their massive user bases, platforms like Google and Facebook are too big to ignore and news publishers have leveraged their platforms to increase circulation of their stories and draw users to their sites.
But Google and Facebook serve ads alongside these news stories and new publishers receive a small share of those revenues, with Google and Facebook taking the lion’s share.
Using a web of complex corporate structures, digital firms have long channeled revenues to more tax-advantageous jurisdictions, regardless of where those revenues may have been generated, making it hard for tax authorities to claim their pound of flesh.
By forcing platforms like Google and Facebook to pay local publishers for news content however, a local and readily taxable revenue stream that was previously out of reach, becomes immediately accessible.
Withdrawing from a country is clearly the nuclear option and one that both Google and the Australian government are better served avoiding.
And although Australia only represents an estimated 0.6% of Google’s search users, as the world’s 13th largest country by GDP, average revenue per user is healthy.
Accounting for over 80% of all digital advertising in Australia combined, both Facebook and Google might end up cutting a deal with publishers, but any deal would still set a dangerous precedent that could see publishers in other jurisdictions demanding their fee as well.
Which is why the scope for compromise between Canberra and the U.S. tech giants is narrowing every day.
Google has already given ground in France, where it agreed to pay French publishers an undisclosed sum for snippets of articles following a long drawn out fight with regulators.
But it’s not a zero-sum game for Google or Facebook.
As regulators are increasingly scrutinizing the tech giants and politicians are putting pressure on the platforms to greater police their content, entering deals with established news organizations has the potential to reduce their burden of moderation.
But entering into too many of these quiet side deals will ultimately weigh on revenues at Google and Facebook, because ultimately a wedding party needs guests and throwing people out when nobody’s attending anyway, hurts everyone.
3. Bitcoin Has Worst Week Since September 2020
- Bitcoin has the worst week on record since September 2020 bogged down by concerns over regulations and an alleged double-spend
- Lack of understanding of Bitcoin and the nature of the blockchain can lead to knee-jerk reactions but lack of fundamentals to model Bitcoin off of make it a hard asset class to get a grip on, let alone master
Bitcoin has rebounded somewhat heading into the weekend, but traders would not be blamed for wanting to forget the worst week for the bellwether cryptocurrency since last September.
There is such a thing as too much too fast as the rally towards US$42,000 in the span of just days, was perhaps too much for Bitcoin investors to stomach, especially with retail investors pouring into the space.
Not helping matters is that global regulators are allegedly eyeballing the cryptocurrency industry more closely, although such conclusions are based mainly on the comments made by U.S. Treasury Secretary Nominee Janet Yellen during her Senate confirmation hearing.
It perhaps doesn’t help that the cryptocurrency-savvy Gary Gensler is also set to be appointed to head the U.S. Securities and Exchange Commission either – with Gensler long having expressed doubts over the “utility” nature of a vast number of initial coin offerings, which he maintains are nothing more than securities that need to be regulated.
And let’s not forget the alleged “double spend” of Bitcoin, which suggested that the same Bitcoin had been used in two distinct transactions, a major no-no in the realm of digital currencies – the truth is that Bitcoin did not suffer a double spend, just a misinterpretation of the normal functioning of the blockchain.
That realization didn’t help though, as Bitcoin crashed below US$30,000 until the clarification helped the cryptocurrency to rebound.
But the episode highlighted just how frail the faith in Bitcoin really is.
A lack of understanding of the underlying blockchain technology coupled with retail investors who are only invested in the space insofar as they can make a quick buck, has led to increasing levels of volatility and is prone to bouts of both irrational exuberance and manic depression.
What’s happened then is that some professional investors at least, are sitting out of cryptocurrencies altogether, turned off by the volatility and lack of tools by which to build a more comprehensive evaluation model of the asset class altogether.
Bitcoin is a Chimera in that sense – a mythical creature that comprises elements of several animals – Bitcoin is all at once a risk asset, safe haven, hedge against inflation and speculative tool.
But that hasn’t deterred some of the biggest names in investing to dip their toes into the sector.
After a breakneck rally that saw Bitcoin gain by some 300% last year, BlackRock, the world’s biggest asset manager, is opening the door to holding Bitcoin-linked derivatives in two of its funds, the BlackRock Income Opportunities fund and the BlackRock Global Allocation fund.
In a filing with U.S. regulators last week, BlackRock noted that the use of cash-settled Bitcoin futures could involve a high level of liquidity risk and that future regulatory changes could lead to losses, emphasizing yet again just how nascent the digital asset class is.
But the move by BlackRock should still be seen as long-term bullish as it reflects what some are suggesting is the growing tide of institutional interest in the space.
On CNBC last November, BlackRock’s Chief Investment Officer of Global Fixed Income Rick Rieder said that Bitcoin even had the potential to replace gold in investors’ portfolios.
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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