Research Watch

Bitcoin’s perfect storm, the end of the gold era, the risk-on, risk-off shift, Australia’s rebalancing, the North Korean coin toss, and Shakespeare on Wall Street.

Summary: This week’s Research Watch includes a range of investment snippets, including Bitcoin shines brightly, the end of the gold era, the risk-on, risk-off shift, Australia’s rebalancing, the North Korean coin toss, and Shakespeare on Wall Street.
Key take-out: The next big thing to watch out for will be whether mainstream businesses start accepting Bitcoin as payment in a more widespread fashion.
Key beneficiaries: General investors. Category: Portfolio management.

One of the most interesting stories to emerge from the latest Eurozone crisis is the remarkable rise of Bitcoin, a fringe alternative currency that has finally caught the attention of analysts. One describes the “perfect storm” driving the supposed safe haven higher, while another wonders whether the asset is taking some of the shine off precious metals. In fact, Societe Generale has just declared “the end of the gold era”. In more traditional markets, RORO appears to be fading, and equity movements demonstrate confidence in the Australian economy’s shift away from mining. Elsewhere, short North Korea with Jim Rogers, William Shakespeare was a grain hoarder, and bullish analyst calls might actually be a bearish sign. On video, learn how a few good days in the market can change everything.

Bitcoin is experiencing a perfect storm of support...

“Where is all of the momentum behind the Bitcoin trade coming from? [ConvergEx Group Chief Market Strategist Nick Colas] bullets a few points:

  1. An increasingly tech-savvy base of savers all around the world don’t think it is any stranger to trust an open-source piece of software than it is to put your money in a commercial bank.
  2. Lots of people around the world are uncomfortable with central bank policies, which seem to give money away to a global banking system which remains fundamentally broken.
  3. Worries over heavy deposit taxes in various European countries (Spain, Greece, and even Italy), courtesy of the resolution to the Cypriot banking crisis.
  4. Some clarification of US regulations, bringing Bitcoin long-needed legitimacy.
  5. A naturally constrained and predictable supply through the issuance process.

The term ‘perfect storm’ fits here, even if it is a bit of a cliche at this point, says Colas. Where it goes next is anyone’s guess, but Colas thinks the next big thing to watch out for will be whether mainstream businesses start accepting Bitcoin as payment in a more widespread fashion.” (Nick Colas of ConvergEx Group via Business Insider, April 1).

Some think it might be eating away at precious metals...

“By now everyone has heard about Cyprus, Italy, and the EU’s continuing battle to hold itself together. However, one surprising result of the increased attention to the EU has been the relatively muted response in gold and gold miners … I think there is something else happening to the price of gold; something that isn’t yet widely discussed, and which affects the value of gold as an investment asset. Recently, a CNBC reporter was discussing gold and espoused the view that gold is no longer a safe haven asset. Instead, the reporter’s view was that gold has become securitised and now deserves to be treated like a common ETF asset rather than a separate store of value. But if this is the case, what are people using as a safe haven asset instead? … It is possible that Bitcoins are starting to steal some of gold’s historic role as a safe haven asset, and if that comes to pass it will be a headwind for the metal and the miners of it going forward. In fact, there is some small possibility that hedging market risks in the future may be done in part with Bitcoins, and that would be a major change from the past with enormous ramifications for markets and monetary policy.” (Seeking Alpha, March 31).

As the gold era comes to an end...

“Societe Generale’s big (bearish) scorecard on ‘the end of the gold era’:

That buttresses a call outside consensus for a 15% drop in prices by the end of this year. (Societe Generale via FT Alphaville, April 2).

Traditional sell-side research may suffer the same fate...

“The tightening up of standards and rules surrounding research published by investment banks, has left a gap which social media are filling enthusiastically. A traditional research note on the impact of events in Cyprus this weekend can’t clear compliance much before 9 a.m on Monday morning, too late for markets in search of instant gratification. But then, what market participants want isn’t a traditional research note, with ‘buy’ and ‘sell’ recommendations carefully vetted and caveats strewn around like confetti. ‘What has happened, and what does it mean?’ is the first question, followed by a deluge of follow-ups ‘yes, but what if ...’ and so on. Whether you are a trader, a salesperson, a fund manager, a Master of the Universe to indeed an interested bystander, what you want is information, opinion and debate and Twitter gives it to you. For the traditional common-or-garden sell-side analyst, this demands a change of approach. The public dissemination of non-market-moving information and broad macro-economic views should not be subject to restraint by regulatory authorities. At the same time, the analyst does not necessarily know for sure how markets will react to news ... the best way to establish how the mood in financial markets will evolve, is to express an opinion and open it up to a wider debate.” (Kit Juckes of Societe Generale, March 24).

Markets are shifting away from RORO...

“Something strange happened in the market today. The dollar (DXY) and the US equity indices traded lower – together.

“Since the financial crisis, the correlation has been consistently negative, making today’s move unusual. That’s because markets switched into the ‘RORO’ (risk on/risk off) mode after the Lehman collapse. And the dollar has clearly been viewed as a ‘safety asset’ – an asset that rallies in a risk-off scenario. So does today’s bout of positive correlation point to signs of normalisation? Only time will tell. But this relationship is important to watch, as it will signal any major regime changes in the market and a potential shift away from RORO.” (Sober Look, April 1).

And backing Australia’s rebalancing...

Don’t bet on a sell-off just yet...

“The most remarkable aspect of [the S&P 500’s new record high] may be that it got there with very few notable pullbacks. ‘It’s been 90 trading days since the last 5% dip and 374 days since a correction,’ writes Deutsche Bank’s David Bianco in a new note to clients. So, does this mean we’re overdue for a sell-off? Not necessarily, says Bianco. ‘Dips of 5% are inevitable, but they don’t happen in absence of bad news or emerging risk,’ he writes. ‘Since 1960, the average number of trading days in-between 5% dips is 118 and in- between 10% corrections is 357 days. The [standard deviation] is 92 and 387 days, respectively. … Hence, pullbacks aren’t clockwork. … The charts show the longest periods between dips and corrections. We’re right around average now.”


(David Bianco of Deutsche Bank via Business Insider, April 1).

A bear call on bullish analysts...

“New research shows that when companies call disproportionately on bullish analysts, they may be about to run into trouble. Economists Lauren Cohen and Christopher Malloy at Harvard Business School and Dong Lou of the London School of Economics analysed the transcripts of U.S. quarterly conference calls between 2003 and 2011. They looked at how the recommendations of analysts who were called upon compared to the average. The analysis found that companies which inordinately favoured bullish analysts on conference calls often just met, or barely exceeded earnings forecasts a— something that can be a sign of manipulated earnings — and were more likely to restate earnings later. They were also more likely to raise cash through a secondary stock offering shortly thereafter, giving them cause to try to give their share price a short-term boost. … A portfolio that shorted companies that cast their conference call Q&A sessions with bulls and went long the rest would outperform the overall market by about 10% to 12% per year, the economists found.” (Wall Street Journal, March 26).

The North Korean coin toss...

“Amid heightened tensions on the Korean peninsula, investor Jim Rogers is choosing sides--financially, anyway: He is going long on rare North Korean coins. But his reasons aren’t likely to please Kim Jong Eun. North Korea gave collectors an unusual opportunity to buy the country’s gold or silver minted coins at a three-day coin fair in Singapore this weekend. By Sunday, Pyongyang-based Korea Pugang Coins Corp. had sold its entire stock of coins, which included 20 one-ounce gold coins featuring mostly century-old generals as well as several hundred silver coins featuring North Korean sports achievements, cultural landmarks and national animals. Most of the coins were purchased by Mr. Rogers, an American commodities investor now based in Singapore, said a Korea Pugang Coins representative, who didn’t give her name. The company knows Mr. Rogers from last year’s fair, when he bought the entire lot of North Korean coins offered. Mr. Rogers ... wants to wager against the long-term prospects for the isolated, economically struggling country. He views his purchase as a bet on the collapse of North Korea. ‘At some point down the line, North Korea will cease existing as a country. Then the value of the coins will go up,’ Mr. Rogers said.” (Wall Street Journal, March 31).

Shakespeare belonged on Wall Street...

“The Bard of Avon, who championed the downtrodden in plays like ‘Coriolanus,’ was a conniving character in his personal life, British researchers claim — a tax dodger who profiteered in food commodities during a time of famine. William Shakespeare was fined repeatedly for illegally hoarding grain, malt and barley for resale during a time of food shortages. He also was threatened with jail for avoiding taxes, according to the study of court and tax archives by researchers at Aberystwyth University in Wales. The profits were channelled into real-estate deals, the researchers wrote, making Shakespeare one of Warwickshire’s largest landowners. … It would seem that Shakespeare was drawing on personal knowledge when he wrote ‘Coriolanus,’ a political tragedy that includes an early 1600s version of an Occupy protest against the 1%: ‘They ne’er cared for us yet: suffer us to famish, and their storehouses crammed with grain; make edicts for usury, to support usurers; repeal daily any wholesome act established against the rich, and provide more piercing statutes daily to chain up and restrain the poor.’” (LA Times, April 1).

Video of the Week: A few good days...

Bloomberg looks at the difficulty in timing the stock market and the importance of best gain days.
Graph for Research Watch

Click here to watch video

(Bloomberg, April 2)