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Beige Book Shows “Slight to Modest” Economic Growth

The Fed released its final Beige Book before the presidential election this week. Offering a qualitative look at the economy on a regional basis, the Beige Book can be worth a quick read. The most recent edition seems to affirm the thinking of many regarding the economic recovery: it has slowed.  Economic gains were described as “slight to modest” in this month’s edition. This is better than the “sharp and abrupt” contraction highlighted in the nadir of the COVID-19 pandemic. But “slight and modest” could leave something to be desired. Especially for a Fed that is not just looking to support the economic recovery but also accommodate the expansion. So, is “slight to modest” enough to warrant a policy response out of the Fed? “Not quite yet” seems the most natural answer to me. But with the stalemate over a new coronavirus relief package looking like it will eventually come to an end, we could see that change. If you were not aware of where the Fed stands on the stimulus debate, the economic adage of “more is better” does a decent job of explaining the Fed’s position. But what the Fed could eventually do to further support the expansion remains to be seen. Increases in asset purchases, yield curve control (i.e. explicitly targeting interest rates along the Treasury term structure), shifting asset purchases to the longer-end of the yield curve, or a combination of the three seem possible. One thing is for sure.  The Fed’s policy interest rate is not changing anytime soon. Rates are at their effective lower bound and absent a major change in thinking, I doubt the Fed is going negative. Hikes are equally, if not more, unlikely. Per the most recent economic projections, most FOMC participants don’t see inflation hitting the Fed’s new two percent average inflation target until 2023. And with the new policy in place of tolerating inflation above two percent to achieve an average of two percent over time, I wouldn’t be surprised if we don’t see a rate hike until 2024-2025. Wow. The Fed’s balance sheet grew to a new all-time high this week, inching above its prior June high to $7.2 trillion. Asset purchases continue to the tune of $80 billion worth of treasury and $40 billion worth of mortgage backed securities per month. They show no signs of slowing down. The yield on the benchmark 10-year U.S. Treasury is 0.83% up from 0.74% last week. Next FOMC meeting is Nov. 4-5.  No action expected.

Clock Seems to Have Run Out on Pre-Election Stimulus Deal

While I have been an optimist about the chances for a pre-election agreement between Speaker of the House Nancy Pelosi and Secretary of the Treasury Steven Mnuchin, the clock seems to have run out. Last night the Speaker said that her fellow House Democrats don’t want to return to vote on a deal if the Senate won’t take the bill up; and Senate Majority Leader Mitch McConnell has said the Senate opposes a pre-election vote. I think that by invoking the position of the House Democratic Caucus, the Speaker is telegraphing the no bill message. Both sides will talk about a bill in the lame duck session of Congress; but that could be tough. If President Trump is defeated, he is unlikely to devote time to a deal. And a big deal requires his personal lobbying of Senate Republicans.  Defeated members usually show their dejection by not coming back to Congress for weeks. If Biden wins, there may be pressure from Democrats to just wait until there is a new President.  This is all bad news for the 23 million Americans who don’t have jobs, testing programs that need money, schools that are in need of funding to bring kids back; the list goes on and on. The debate was at least more civil: between a moderator who did her job, and the new mute mic policy helped a lot by eliminating the distraction of shouting over each other.  The President’s more Presidential behavior likely shored up support from some supporters who were turned off by his performance in the first debate. Biden’s strong statements on immigration, climate change, and racial divides likely appealed to his supporters and any lingering undecided voters.

GRANNY SHOTS: Best bets in 2020 - Week 43

Below we’ve highlighted stocks that we recommend across at least two of our investment strategies for 2020. These companies could benefit from multiple themes and secular tailwinds – clear picks in our view for the second half of 2020. Figure: Granny Shots are the “best of the best”Stocks which appear in multiple themes. Source: FSInsight Figure: Granny Shots Portfolio PerformanceMonthly. Source: FSInsight. FactSet as of 10/22/20 Figure: Intersection of investment recommendations by strategyAs of 10/22/20, Source: FSInsight, FactSet The stocks in the Granny Shots portfolio collectively outperformed the S&P 500 by 3960 bps since its inception (S&P 500 is up 33.0% during the same period).

Don’t Lose Sight of Improving Technical Backdrop into 2021

One of the biggest benefits of studying technical analysis, observing the change in prices across asset classes, is that it filters out the mainstream and social media noise we are all bombarded with. Investors are overwhelmed with election rhetoric, renewed COVID-19 concerns, stimulus talks that are on and off again every day not to mention the volatility of earnings reports. It’s no wonder equity markets have remained in choppy trading ranges since the beginning of September with many investors struggling for conviction in either direction. I’m obviously biased as a technical analyst, but I am far more interested in what IS changing between and within markets and less concerned with someone’s explanation as to WHY they are changing. As one seasoned portfolio manager with over four decades of experience managing a large international portfolio regularly reminds me “Rob, your job is to identity what IS changing in markets and it’s the media’s job to try to weave together stories that try to explain WHY”. This is a particularly important point to remember at the momentum as the headline drama builds into another election. Why? The first key technical point is to stay focused on the fact that the underlying market cycle, generally measured over a 3-4 years, is rarely disrupted by an election. By my analysis, the current 4-year markets cycle should carry markets higher through 2021 well into 2022 before we see evidence of a cycle peak. Secondly, despite the choppy trading that has developed since the beginning of September, there are a number of bullish internal leadership shifts developing. Growth stocks are pausing but are not breaking down while participation is broadening to a growing number of cyclical groups. I view this rotation to cyclicals as a healthy development for equity markets into and well through year-end. In addition, the behavior of other assets classes remains supportive of the rotation developing within equity markets with 10-year bond yields continuing to show evidence of bottoming. Flowserve (FLS) - A contrarian cyclical recovery idea in the early stages of bottoming. I continue to encourage investors to ignore the headline noise and choppy trading for the coming weeks and to remain positioned in the direction of the improving longer-term cycle. Specifically, use near-term pullbacks to continue broadening portfolio exposure to include more cyclicals as part of a bar-bell portfolio that already includes core positions in many of the leading growth stocks. Fundstrat’s Tom Lee and Ken Xuan publish six thematic portfolios one of which is a PMI Recovery basket. I would encourage investors looking for a list of stocks that should be beneficiaries of an improving economy to review this list. For contrarian investors, I’m highlighting FLS as a laggard within that list that in the very early stages of bottoming as it begins to rally above its 200-dma and reversing its 2020 relative performance downtrend.  Figure: Weekly Sector ReviewSource: FSInsight, FactSet Discretionary and technology uptrends intact but pausing while industrials, materials continue to trend above the 50-day moving averages of their relative performance lines versus the S&P 500. Financials have stabilized and are potentially within striking distance of rallying above relative performance downtrends. Stay tuned. Figure: Best and worst performance sectors over past 3 months

Stocks Down 0.5% on Week; Stimulus Should be “when not if”

One of the top market rules for me, maybe even rule #1, is never to try to impose my views on the markets.  And perhaps, it is more useful to try to decipher the message from market behavior.  If I had to describe equities over the past week, they seemed to have been treating fiscal stimulus as a binary event. Regardless of the fact that this seems more of a “when not if” question to me. More on this below. On the COVID-19 front, the trend in daily cases continued rising this week. This has been the case for the past few weeks and I see two major takeaways: (i) US cases could reach 70,000 within 2 weeks, matching the July highs, (ii) Because the spread is primarily in 11 states, we might be nearing peak velocity in those states. We are still in wave 3 of COVID-19 in the US. And this wave, so far, is primarily a spread of cases in states that were largely unscathed in wave 1 (NY tristate +MA +RI) and wave 2 (FL, CA, AZ, TX, or F-CAT along with 19 tag along states). And this means COVID-19 is finding its way into areas of the US which are caught off guard. So, part of the key over the next few weeks is for policymakers and citizens in these 20-ish states to panic enough to reduce the spread. There must be some of this taking place already, as daily cases are increasing but not soaring exponentially. And even states like South Dakota and North Dakota might already have reached peak velocity. I think hospitalizations are increasingly a better measure for tracking COVID-19 spread and severity.  I see several reasons for this: (i) expanded testing is leading to more detected cases, but not necessarily meaning rising infection, (ii) wide scale testing at schools, offices, certain businesses, means we will see greater detection (iii) there are many people who are testing PCR positive but are recovered. In fact, the testing positivity rate in the US is 6.2% right now, well below 9% of wave 2. (see chart nearby).  And in wave 1 and wave 2 states, positivity rates are very low. So, on balance, I am feeling a bit better about COVID-19 this week, despite the fact that cases and we could reach 70,000 within a few weeks. STRATEGY: Markets implying fiscal deal a binary event but it is when not if For the millions of Americans with stimulus benefits expiring, the next coronavirus relief package is truly critical.  Those who need this next installment of payments are those who are relying on the US for the safety net. However, I see less at stake for equities.  In other words, it does entirely make sense to me that stocks were stuck in neutral and seem to pivot on fiscal stimulus updates.  But I revert to the rule #1, I can't tell markets what to do. And despite the fact that a stimulus deal did not happen this week, it will happen before year end. This week JPMorgan's Fixed Income team made a very interesting comment. Their strategists suggest that US High-yield defaults have peaked for this cycle. This is a significant statement. High-yield is a close cousin of equities.  And this economic depression has led to a surge in defaults in High-yield.  But now, it looks like this cycle has peaked and if this is indeed the case, this is a major risk-on signal. Especially with 3Q20 earnings signaling that the EPS nadir is passed. Bottom Line: Given the fairly robust incoming economic data, high levels of cash on the sidelines, and high anxiety into elections, this surely seems to be a set-up for a pretty big post-election rally.  The more we churn here, the more impressive the post-election surge. Figure Comparative matrix of risk/reward drivers in 2020Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

October 23 · Issue #769

Crypto prices end a strong week with market cap back at $400 billion levelThe Philippines does not expect to introduce a digital currency any time soon, but Russia says its ‘cryptoruble’ pilot will start next yearJapan says public opinion will need to be driver for CBDC Safe But Not AccessibleIt has been one week since OKEx announced a key member (pun intended) of their team was “out of touch” and meeting with Chinese authorities and withdrawals were “temporarily suspended.” “Other functions are up and running” and “funds and assets are safe and not affected.”  Users of OKEx have appeared patient, but how long can this last. The Headlines Market Data Thoughts on the Ecosystem

FSInsight 3Q20 Daily Earnings Update – 10/23/2020

Click HERE for the full earnings daily in PDF format. 88 companies are reporting this week. Of the 130 companies that have reported so far (27% of the S&P 500), 87% are beating earnings estimates by a median of 17%. On the top line, 78% are beating by an average of 9%.

What next after BTC’s surge toward next resistance near 13.8K?

For a full copy of this report in PDF format click this link. After surging through resistance at the August highs near 12.5K  over the past week, BTC is closing in on next major resistance near June 2019 highs at 13.8K. With short-term trading indicators pushing into overbought territory, traders are understandably questioning whether they should reduce exposure. We disagree. Sure, a near-term dip or pause is likely given the recent rally, BUT the longer-term term technical structure continues to improve suggesting pullbacks are likely to be short lived and relatively shallow. Based on the following bullets and accompanying charts, we remain bullish on BTC’s longer-term prospects and rather than attempting to micro manage trading position, maintain exposure using pullbacks and pauses to further increase exposure.  Key technical developments Improving long-term price structure following 2018-2020 consolidation – BTC’s price structure is incrementally transitioning into a new long-term uptrend following its very broad 2018-2020 consolidation above its long-term structural uptrend defined by the 200-week sma. BTC has reversed its 2018-2020 downtrend with a series of higher highs and lows following the March collapse in all risk assets. Bottom line: BTC’s price pattern is in the early stages of a new longer-term uptrend with the June 2019 highs at 13.8K its next key resistance hurdle followed by 20K. While a pause/consolidation between current levels and 13.8 is likely, our recommendation is for longer-term investors to stay focused on the improving longer-term technical structure and to not be unnerved by tactical pullbacks and consolidations. Slide 3Relative performance trends vs equities, golds and bonds is beginning to trend to the upside. In our opinion, the most more noteworthy chart for investors to focus on is BTC’s relative performance versus the S&P 500, Gold and the TLT Bond ETF. BTC is likely in the early stages of assuming leadership to all three asset classes. This appears to be an almost textbook perfect bearish to bullish transition as BTC emerges from 6-mnonth trading range/pause following its 2019-2020 downtrend reversal. Asset allocators take note! Slide 4Daily chart is becoming overbought but expect pullbacks to be shallow and short lived. Momentum indicators are becoming overbought on BTC’s daily chart but they are by no means extreme yet. Our expectation is that pullbacks are likely to be shallow given the bullish higher weekly time frame chart discussed above.  Slide 5Intra-day 4 hour chart IS very overbought – Given BTC’s impressive surge over the past few days, it is hardly surprising its 4-hour RSI momentum indicators are very overbought. However, rather than attempting to micro manage the trade by selling in hopes of also identifying the exact pullback low, we recommend maintaining exposure at current levels and using near-term pauses and consolidations to further build BTC exposure. Slide 6Too early to rotate to small-caps – Participation remains concentrated in larger-caps – Our Fundstrat FS CryptoFX advance-decline lines for large-caps (FX 10), mid-caps (FX40) and small-caps (FX250) illustrate that upside participation is concentrated in larger-cap cryptos. As such, we recommend investors focus exposure in larger-caps, until we see breadth improve into smaller-caps. Slide 7 Resuming its longer-term uptrend – 13.8K next resistance (Slide 3)... BTC emerging vs the S&P, Gold and TLT bond ETF (Slide 4)... BTC – Overbought short-term – Expecting shallow pullbacks (Slide 6)... Participation remains concentrated in large-caps (FX 10) (Slide 7)...

CRYPTO SPECIAL REPORT: Zilliqa: Making a competitive play to capture the ASEAN Open Finance Market

For a full copy of this report in PDF format please click this link. Zilliqa Research Pte. LTD. (“the Company”) is the software and services company behind development of the Zilliqa DLT Network. The Singapore-based Company was founded in 2017 and is focused on refining Zilliqa’s DLT technology and deploying the platform with a focus on financial services applications in the ASEAN (“Association of Southeast Asian Nations”) region. Zilliqa (ZIL) is a public Distributed Ledger Technology (“DLT”) platform for decentralized applications (“dApps”). It employs sharding technology to achieve high levels of throughput and maintain low transaction fees. Zilliqa’s DLT offers a differentiated Blockchain-as-a-Service (BaaS) computing infrastructure platform. DLTs like Zilliqa allow businesses to leverage cloud-based solutions to build, deploy and use apps, smart contracts and other blockchain functions without hosting the infrastructure. Zilliqa’s sharded DLT enables high transaction throughput, with historically low fees, and offers a new smart contracting language, Scilla, to make its network safer for deploying enterprise-grade applications. First from Banking to Fintech, and now from Fintech to OpFi, Zilliqa looks focused on the right place. Zilliqa’s DLT is designed to support a range of use cases, but the team is currently laser focused on targeting the biggest one, banking. DLT based financial services, which we refer to collectively as Open Finance (“OpFi”), represent a cost-effective way to reach underserved markets and improve upon current infrastructure, while delivering unimagined financial applications through open APIs and new data access models. Disruption opportunities span payments, remittances, lending, investing, insurance and more. ASEAN OpFi represents a $7.2B revenue opportunity for ecosystems like Zilliqa by 2025 (Slide 34). We estimate that OpFi companies employing DLT in the region could capture 19% share from the digital banking market which represents a meager 2% of the overall ASEAN financial services market. ASEAN’s financial services market is ripe for disruption. Despite being collectively the 5th largest global economy, with rapid economic growth rates and high levels of internet penetration, ASEAN suffers from low levels of financial inclusion, with 75% of the population either unbanked or underbanked. Enterprises within the Zilliqa ecosystem could be worth $3.6B in 2025 by capturing 10% of ASEAN OpFi (Slide 35). Companies in the Zilliqa DLT ecosystem would generate $722M in revenue if our base model input is correct. We estimate the total value of areas where Zilliqa’s DLT can reduce costs to be ~$360M. Of these costs, we estimate enterprises save 50% using DLT, with the remaining $180M paid as fees to the Zilliqa DLT Network and Zilliqa Research. We assume industry net profit margins of 20% and a 25x P/E for our ecosystem valuation. Zilliqa’s DLT network and the ZIL token could be worth $3.9B and $0.22 using our 2025 model assumptions (Slide 37). From an assumed $64B serviceable market using Zilliqa’s DLT, we assume 30% use the ZIL token to facilitate the financial function(s) being served (i.e. using ZIL for payments or as loan collateral) and a 5x model velocity to reach our valuation. We assume 50% or $90M of DLT fees go to network nodes. As RedHat is to Linux, Zilliqa Research is to its DLT, which could earn the Company $118M in revenue and value it at $590M by 2025, should it successfully execute to our base model inputs (Slide 41). If Zilliqa Research can capture 50% of the DLT related fees (25% of savings) through provision of consulting and support services to companies building on its open-sourced network, it would earn the Company $90M in Enterprise Support revenue. The Company could earn an additional $9M in network fees and $19M in block rewards, for a total of $28M in BaaS revenue from its expected 10% Zilliqa DLT node ownership. Valuation assumes 20% profit margins on $118M in revenue with a 25x P/E.    Blockchain accelerator funds drive ecosystem growth. The launch of Zilliqa Capital, a proposed $50M - $200M ecosystem fund, holds the potential to strengthen the platform’s position as a leading regional player in ASEAN and APAC OpFi markets, if successfully launched (Slide 55). What could go wrong? DLT adoption in general could lag, resulting in underperformance. Zilliqa could fail to gain market share against competing DLT platforms with greater traction or alternative features. Failure to reach our assumptions (Slide 42). It’s early to estimate the market size and our approach may prove to be inaccurate as new markets emerge or fail to materialize. The Company may fail to gain product market fit and generate revenue from customers. Crypto is a volatile asset class with the potential for any token network to eventually lose significant value. Bottom line: Successful deployments in 2020 would validate the Company’s go to market strategy and the DLT’s utility in a production environment. We’ll continue looking for signs of increasing fundamental network growth, while keeping an eye on how strategic partnerships evolve over the coming months. Key slides from this report... Zilliqa: Making a competitive play to capture the ASEAN Open Finance Market (Slide 1)... Zilliqa Research could capture ~$120M in revenue by 2025 (Slide 32)... The platform technology stack is reshaping the delivery of banking (Slide 23)...  Zilliqa DLT Network is a platform technology for the Open Finance ecosystem (Slide 25)... Zilliqa DLT Network is a platform technology for the Open Finance ecosystem (Slide 26)... Ecosystem: Network effect and value creation feedback loop design (Slide 15)... Zilliqa Ecosystem Funds: Driving blockchain ecosystem growth (Slide 55)...  

FSInsight 3Q20 Daily Earnings Update – 10/22/2020

Click HERE for the full earnings daily in PDF format. 88 companies are reporting this week. Of the 99 companies that have reported so far (20% of the S&P 500), 88% are beating earnings estimates by a median of 16%. On the top line, 77% are beating by an average of 10%.

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