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Is Coinbase Planning to “School” the SEC on Cryptocurrencies?

 

The largest cryptocurrency exchange in the U.S. is going on the offensive. Earlier this month, Coinbase was notified by the SEC it would sue the crypto exchange if it moved forward with a plan to provide users interest on crypto assets. Coinbase ($COIN) is now preparing to propose a regulatory framework for digital currency oversight to federal officials. It is likely to contain definitions as to where various coins fall in the spectrum of whether a coin-based asset is a security, currency, or something else. This is after Coinbase’s Chief Legal Officer, Paul Grewal, and CEO, Brian Armstrong, said the SEC had sent a Wells Notice to the exchange. The notice received in early September said it had concluded an investigation on the company and would sue Coinbase if it were to go forward with its plans.

 

SEC
Specific Findings

In determining whether or not Coinbase’s Lend program would violate securities laws, the SEC referred to two U.S Supreme Court precedents. The Howey case and the Reves case were the two cited.  The full contents of the Wells Notice have not been made public, but it’s believed the SEC views cryptocurrency as securities, making the Lend program akin to securities lending much like stock lending or bond lending. Both stocks and bonds fall under the definition of securities and the lending and rebates rates are regulated transactions.

Coinbase History

Coinbase was a founding member of the Crypto Rating Council (CRC), which was created in 2019 to create a shared understanding of how closely any given cryptocurrency resembled a security. This framework was designed to standardize how exchanges approach crypto listings and products within the U.S. The Crypto Rating Council rated each coin from 1 to 5. A score of 1 referred to a currency that is not a security. A score of 5 indicated that a crypto-coin is a security. The CRC has not given a 5 rating to any coins.

This ratings initiative and scorecard were designed to be used by developers for future projects for evaluation and design. Coinbase published as open-source the technical framework for crypto developers last year. The idea was that projects that adopted the framework could ensure their cryptocurrencies would be technically suitable for Coinbase trading if approved for the platform.

SEC Crypto History

The U.S. Securities and Exchange Commission has been reviewing cryptocurrencies in order to develop a framework that protects investors and promotes fairness for those transacting in securities. Many still question whether cryptocurrency should be under its umbrella at all. The SEC Chair, Gary Gensler taught courses at MIT related to cryptocurrencies. In a YouTube video class from the Fall of 2018, Professor Gensler can be heard defining currency as having the following characteristics: Durable, Portable, Divisible, and Uniform/Fungible. Perhaps this class given at a prestigious school by the now SEC head will be included in the “schooling” Coinbase uses to propose regulatory standards.

Take-Away

Coinbase promoted its Lend as a means for investors to earn interest on their crypto holdings. Before implementation, the Securities and Exchange Commission warned that it would sue Coinbase if it went ahead with the plan. Coinbase is taking a proactive stance in laying out what it believes the appropriate regulatory framework would look like. This is expected to be released shortly. In the interim, cryptocurrencies and those active in the asset class are faced with much uncertainty.

One investor of innovation, Cathie Wood purchased 65,612 shares of Coinbase on Tuesday (September 21) for the
ARK
Innovation ETF (ARKK) she oversees. ARKK holds 4,254,756 shares of Coinbase in its portfolio with a market value of more than $1.01 billion.

 

 

 

Suggested Reading:

The Wells Notice to Coinbase May be the Tip of the Iceberg

Is Interest Paid on Crypto Holdings and SEC Violation?

AMC Theaters Now Accepts 4 Cryptocurrencies

What’s the Timeline for a U.S. Digital Currency?

 

Sources:

https://www.barrons.com/articles/coinbase-coin-crypto-regulatory-framework-51632305877?mod=hp_DAY_3

https://twitter.com/brian_armstrong/status/1435439291715358721?lang=en

https://www.banklesstimes.com/2021/09/22/coinbase-to-propose-crypto-regulations-to-u-s-officials/

 

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Canadian Bitcoin ETFs May Be Cathie Wood’s Solution

 

For every problem, there is a solution, and it looks like Cathie Wood may have finally found her answer. Here’s the problem. Wood, who is the founder of ARK Invest and the high-profile Chief Investment Officer of the company that has as its tagline: We Invest Solely In Disruptive
Innovation would like to more readily be able to gain exposure to Bitcoin through ETFs. The problem is, the U.S. Securities and Exchange Commission has not approved Cryptocurrency ETFs, so there are none in existence among the investment companies overseen by the SEC.

 

ARK BTC.X History

Over the past eight years, the SEC has rejected or delayed more than a dozen Bitcoin Exchange Traded Fund applications. The reasons given are concerns over sharp volatilities and potential risks of market manipulation. Back in June of this year, along with the company Swiss-based 21Shares, ARK Invest filed to create a Bitcoin ETF of their own to be called ARK 21Shares Bitcoin ETF. The joint filing is one of the delayed decisions.

The SEC has been dragging its feet on any Cryptocurrency ETFs and has not approved any. SEC Chair Gary Gensler says they’re studying all the ramifications and how the underlying coins or futures contracts may provide higher and lower levels of investor protection. Nothing sounds imminent in terms of a decision by the SEC, and it doesn’t even sound certain that there will be an ETF approved that invests directly in Bitcoin or other cryptocurrencies.

One of Wood’s funds, The ARK Next Generation Internet ETF,  already holds a significant amount of Bitcoin through a closed-end Grayscale Bitcoin Trust (GBTC). This trust owns coins that are held at a third-party custodian. The Grayscale Trust doesn’t track Bitcoin’s exchange rate tick-for-tick. Initially, the Grayscale Trust, which currently has $30 billion in assets, outperformed actual bitcoin and traded at as much as a 20% premium. This is because it became the preferred alternative as an asset that can be held more easily in many investment accounts, such as the ARK Next Generation Internet ETF. 

Wood’s ETF currently has 5.5% of its assets——worth about $314 million——in the Grayscale fund, which is its second-largest holding only behind Tesla (TSLA).

 

Current
Solution

Canada and Europe both moved ahead, allowing fund managers to offer Bitcoin and Ethereum in an ETF wrapper. In February, Grayscale began underperforming Bitcoin and underperforming the first Canadian Bitcoin ETF.

 

 

Wood’s asset-management company, ARK Invest, revised the prospectus of the $5.7 billion ARK Next Generation Internet ETF so the fund can hold cryptocurrencies via Canadian ETFs. Given all the uncertainties, it might be wise to diversify crypto holdings through the Canadian ETFs. Others have made similar moves. Recently, the $1.3 billion Amplify Transformational Data Sharing ETF (BLOK), which is actively managed and mainly invests in blockchain-related businesses, also bought shares in three Canadian Bitcoin ETFs.

Take-Away

The diversification Bitcoin offers relative to other “disruptive innovations” is high. The volatility also presents a unique opportunity. As U.S. fund managers like those at ARK Invest seek to provide an above-average return for their investors, they will find workarounds to gain the exposure they believe is best. These workarounds are at times more costly than a direct holding or one that is domestic.

In the case of ETFs, the ease with which they can be bought and sold and if ever approved in the U.S., used in fund management or qualified retirement accounts, may cause them to trade at a premium to the assets they hold. We won’t know this for sure if the SEC continues to hold off on making a decision.

 

Suggested Reading:

Will the SEC Allow ETFs to Own Cryptocurrency?

Coinbase Receives an Enforcement Letter from the SEC

What’s in the Surprise Cryptocurrency Bill

Elon Musk, Jack Dorsey, and Cathie Wood Drop Bombshells at Bitcoin Conference

 

Sources:

https://www.sec.gov/Archives/edgar/data/0001869699/000119312521201955/d165184ds1.htm

https://www.bloomberg.com/news/articles/2021-09-13/cathie-wood-s-ark-grants-itself-power-to-buy-canada-bitcoin-etfs

https://www.barrons.com/articles/cathie-woods-ark-invest-eyes-canadian-crypto-etfs-51631569128?mod=hp_LEAD_1_B_1

 

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	Image Credit: *lingling*, (Flickr)

A New Platform Lets You Buy Shares of Blue-Chip Paintings – But is Art a Wise Investment?

 

In the fall of 2018, a Banksy work, “Love is in the Bin,” sold for US$1.4 million.

Now the original buyer has put the work up for sale, and it’s expected to fetch over $5 million – that would amount to a return of more than 250% on the original investment.

What if, instead of the art market’s being the sole purview of the deep-pocketed, everyday people could buy shares of a pricy piece of art and sell the shares as they please?

That’s exactly what a new platform, Masterworks, seeks to do.

Art investment funds have existed for over a century. Masterworks, however, has put a new twist on an old practice in that the platform allows individuals to buy shares of specific artworks in $20 increments. Investors can then sell these shares in an easy-to-use secondary market or wait until Masterworks sells the piece and receive pro-rata proceeds.

 

This article was republished with permission from  The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Kathryn Graddy Dean, Brandeis International Business School, and Fred and Rita Richman, Distinguished Professor in Economics, Brandeis University.

 

For nearly 10 years, I’ve taught a course on economics and the arts with art historian Nancy
Scott. In this course, we spend time discussing the history and profitability of art investing, both in theory and in practice.

For those thinking of purchasing art purely for investment purposes, it’s important to understand how art investment funds have traditionally worked, and whether experts believe it’s a good investment.

The French Pool Their Resources

An early art investment fund was called The Skin of the Bear (La Peau de l’Ours), which was based in France during the beginning of the 20th century.

The name comes from a French fable that contains the aphorism “never sell the skin of the bear before you’ve actually killed it” – the French equivalent of “don’t count your chickens before they hatch” – and it alludes to the fact that investing in art can be a risky endeavor.

Partly intended as a means to support emerging post-impressionist artists, such as Picasso, Matisse and Gauguin, the fund was run as a syndicate in which a small number of partners each contributed identical amounts to purchase a collection of paintings. Businessman, art critic and collector Andre Level managed the fund and arranged the paintings’ sale. After the paintings were sold, he received 20% of the sale price for his work. The artists received 20% of the fund’s profits on top of the money they received from the original sale. The investors would then receive the rest in equal proportions.

This concept – returning a proportion of the sale price to the artist – is known as the droit de suite, or artist’s resale right. Versions of this are now law in most parts of the Western world other than the United States.

This first art fund was a success. It created demand for new artworks and supported innovative impressionist and modern artists, while providing a sizable return to its original investors.

Not All Funds are Equal

Another famous investment in art was made by the British Rail Pension Fund.

This fund was established in 1974 to manage a small proportion of the company’s employee retirement holdings, and the objective was to buy works of art over the course of 25 years before selling them off. The fund earned 11.3% in compound returns annually, but because of high inflation during much of that period, the actual gains were much lower.

Other notable art funds ended up as failures. Banque Nationale de Paris’ art fund sold its investment in 1999 at a loss and a fund run by British art dealer Taylor Jardine Ltd. did the same in 2003. Britain’s Department of Trade shut down The Barrington Fleming Art Fund in 2001 after determining it was set up under fraudulent circumstances. And Fernwood Art Investments, founded by former Merrill Lynch manager Bruce Taub, failed to even launch after Taub was found guilty of embezzling his investors’ funds in 2006.

Nonetheless, there are art funds that are still in operation, such as Anthea and The Fine Art Group, and, of course, banks and auction houses have long described investing in art as a suitable diversification strategy for the wealthy.

But what do economists say about art as an investment?

Is it Really a ‘Floating Crap
Game’?

Economic theory suggests that, by definition, investing in art could provide lower returns than investing in stocks. That’s because it’s thought of as a passion investment. Like investing in sports memorabilia, jewelry or coins, part of the return to investing in art ought to be the intrinsic enjoyment of the objects themselves. The total return consists of the monetary return and the enjoyment of ownership.

As stocks do not, for most people, provide this enjoyment value, the monetary returns to investing in these financial instruments should, in theory, be greater than the monetary returns to investing in art.

But it’s important to actually analyze the numbers.

One of the very first papers on the monetary return of art investing was published in 1986 and written by the late eminent economist William Baumol.

The title? “Unnatural Investment: Or Art as a Floating Crap Game.”

Baumol estimated the long-run inflation-adjusted returns to investing in art, over a 300-year period, to be just 0.6%. Some researchers have since estimated higher returns. For example, work by Yale finance professor Will Goetzmann and economists Jiangping Mei and Mike Moses found inflation-adjusted returns of 2% over 250 years and 4.9% over 125 years, respectively. Estimated returns vary based on the time period, sample and methodology.

Furthermore, these studies don’t include transaction fees, which, when it comes to art, can be sizable, thanks to the hefty commissions charged by the auction houses or private dealers for serving as the middlemen. They also don’t take into account sample selection; paintings that plummet in value often can’t be sold at auction.

Both the Goetzmann and the Mei and Moses studies, however, estimate that the performance of the stock market doesn’t seem to be correlated with returns on art investments. So there may be some benefit to investing in art as a way to diversify your portfolio.

Art for All?

Masterworks, however, is a bit different from the traditional art funds discussed above. Investors are buying shares of a single piece of art, rather than investing in a fund that includes multiple works. The price of entry is much lower, and, as long as there are willing buyers for the share of artwork, investors aren’t locked into the fund for a particular time period. Investors can earn a return just by selling shares that go up in value, without waiting for the artwork itself to be sold.

But like the traditional art funds, investors in shares of art sold by Masterworks will make money if the price of their artwork goes up, and lose their money if it goes down.

Ultimately, Masterworks seems innovative and fun. The format will likely appeal to a younger generation of investors, many of whom may have started investing small amounts through apps such as Robinhood ($HOOD).

The site is easy to navigate and could provide some enjoyment – even I was tempted to dabble in buying some shares.

But should you hope to get rich from investing in art? Probably not.

Furthermore, unlike Skin of the Bear, it doesn’t necessarily benefit emerging artists. Masterworks focuses on established works with a track record, by artists such as Banksy, Andy Warhol and Claude Monet, to name a few.

That being said, Masterworks could bring investing in art to a mass audience. But, caveat emptor: Art is a risky investment.

 

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AMC Theaters Now Accepts 4 Cryptocurrencies

Is it Proper to Yell “Market Crash” on a Crowded Message Board?

Making Sense of Non-Fungible Tokens

NFT Collectible Marketplace for DRAFTKINGS

 

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Is it Proper to Yell “Market Crash” on a Crowded Message Board?

 

Headlines in the financial news of a coming “market crash” have caused a lot of conversation on message boards, social media investment sites, and even on broadcast media. Below is a “study” I conducted inspired by several posts I’ve come across, including one on WallStreetBets by someone named u/geniusmanchild. I decided to investigate two things. First, is the term “market crash” being searched on the internet more than normal, and second, when “market crash” is running well above average in searches, is it followed by market weakness or a sell-off. This is largely an unscientific study, but I believe the results are very telling when perception is matched against measurable data.

Google Trend is Your Friend

As a quick intro for those unfamiliar, there’s a Google tool called Google Trend.  It allows you to put search terms and date ranges to discover when searches for that term were strongest. For each search, there’s a period identified that represents the peak of searches for the whole date range. A score of 100 is given to this peak period. All of the other periods are ranked against this; for instance, half as many searches would be given a score of 50.

 

Google Trends, Search Term Market Crash

 

Above is the Google Trend representation of user interest in “Market Crash” for the five years ending September 11, 2021. The Google Trend output shows from February 4^th to February 11, 2018, the maximum number of Google users searched for “market crash.”  There have only been six times other than this 100-point period during these five years where the results were above 25.  I’ve compared these periods against the moves (shown below) for the S&P 500, Nasdaq 100, and Russell 2000 one week after.

 

 

For the period November 6- November 12, 2016, the search term scored a 42. This is the first arrow to the left on the chart. The following week the Russell 2000 roared upwards to 9.53%, the S&P 500 was up 3.70%, and the Nasdaq 100 rose .9%. The markets did not crash following this period where a crash was being discussed. The next period was the peak of 100. This occurred from February 4- February 11, 2018. Despite the concerns, the S&P index rose the following seven days by 5.26%, the Russell 2000 gained 5.39% and the Nasdaq 7.43%. The market didn’t retrace to where it was that week for over a year.

The last quarter of 2018 was rough. Google Trends “Market Crash” showed a score of 30 between December 23 and December 29. The height of the chatter seemed to mark the bottom of a sell-off as the indexes didn’t revisit the December 2018 low for years afterward. During the last week in February 2020 and the second and third week in March Google Trend again crossed the 25 mark reaching as high as 69 during March 8- March 14. Here we did see a sell-off in the indexes. The S&P 500 the following week was down 18.98%, The Russell 2000 sunk 14.83%, and the Nasdaq 100 fell by 20.77%. One month later the S&P 500 and Nasdaq were above the beginning of the fall. The Russell 2000 was close to breakeven. They have not revisited these lows since. From January 24, 2021 through January 30, Google Trends was abuzz with people searching “market crash.” The following week the S&P 500 rose by 8.07%, The small-cap Russell 2000 climbed by 13%, and the Nasdaq 100 rose 14.08%. On the week ended February 21^st, there was a lot of clamoring again with people searching. There was never a huge selloff, but the following week the S&P 500 lost 1.44%, the Russell 2000 shaved .49%, and Nasdaq was down 1.46%.

Take-Away

The most recent read on Google Trends is that the search term is at the 10 level. I began by saying this is not a scientific evaluation. However, for this short time period one might surmise that when people begin fearing the crash is near, there is ample room for markets to continue to rise. I’ll have to soon run the same analysis on the search term “Market Rally, ” and report those results.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Why Investors Have Consistently Bought the Dip Since 2021

Should Investors Listen to Influencers?

How Much is a Trillion?

SEC Investigates Digital Engagement Practices in Broker Apps

 

Sources:

u/geniusmanchild
Post

https://app.koyfin.com/share/f52864aadb

https://trends.google.com/trends/explore?date=today%205-y&geo=US&q=market%20crash

 

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Imagine a Bitcoin ETF With No Underlying Bitcoin Assets

 

What if investors finally get the opportunity to own a Bitcoin ETF or an overall cryptocurrency fund, and there is no actual cryptocurrency held within the fund?  This may be the case with the first incarnation of any crypto ETFs. The SEC Chair, Gary Gensler, has been open to the idea of allowing crypto exposure in funds, however this may come with strings attached. Back in August, Gensler said that crypto ETFs that comply with the SEC’s strict laws on mutual funds and other federal securities laws could provide investors significant protections. With this, crypto ETF offerings appear to be on the horizon; what might their structure be, and how might they be better than investing in crypto coins?

 

Portfolio Position

As with other asset classes, an ETF pegged to the price of Bitcoin or other cryptocurrencies would be one way for brokerage account owners to transact easily. As an added benefit, customer broker statements could be consolidated. The positions can be held as part of an overall portfolio, including retirement savings without the need for a separate digital wallet. This would take some of the “difficulty” level out of owning a crypto asset, and it is likely that investor adoption would be as quick as other new ETF classes.

 

What Would be in the ETF?

Following the path of other non-equity ETFs such as gold, a Bitcoin/crypto ETF could be created in two different ways. The first is with the underlying coins owned directly by the trust (or corporation) that underly the ETF. The other is the ETF mimicking the exposure and price movements of the assets by holding futures contracts that are impacted by price expectations and demand, (similar to many commodity ETFs). The SEC has been cautious thus far in regulating the crypto world. The new SEC head has been clear that digital assets are now in the process of being defined and categorized. 

 

Chairman Gensler’s Crypto History

Gensler was appointed when Biden took office. Prior to becoming the Chair of the SEC, he taught cryptocurrency and blockchain technology at MIT. He also ran the Commodities Future Trading Commission (CFTC), which maintains general anti-fraud and manipulation enforcement authority over virtual currency cash markets, it is looked at as a commodity in interstate commerce. He understands crypto and realizes it has a place going forward.

 

Strengths Weaknesses of What’s Held

Like most ETFs and Mutual funds using futures, a Bitcoin futures-based  ETF would need to register under the 1940 Investment Company Act. This congressional act regulates the formation of investment companies and their activities. It would require fund managers to disclose more information and comply with stricter rules. From an investor’s standpoint, this can be seen as more eyes watching and protecting them against fraud or extra oversight that adds to management costs. Also, the Bitcoin futures derived ETF could offer additional protection because trading them requires investors, in this case, the fund, to put down cash on margin as collateral.

Futures prices generally track the underlying assets, but there’s always slippage, this slippage is usually greater for more volatile assets (like cryptocurrencies). A futures-based ETF also needs to regularly roll into the next contract. When the longer contract is trading at a higher price, this can be a drag on fund performance.  Another drawback is ETFs can’t close to new money if they become burdensomely large (mutual funds can). If Bitcoin behaves in a way that causes a stampede of investors to want out at the same time, there could be liquidity issues. As with other traded securities, there could also be a trading halt on some exchanges.

Despite some of the above concerns, expectations are that if a Bitcoin or cryptocurrency ETF is approved, it is likely to be of the futures variety. SEC Chair Gensler has described the physical market this way, the “Wild West” that’s rife with “fraud, scams and abuse.” This categorization of physical crypto trading, from a person who knows enough to have taught crypto at the highest level, and previous head of the CFTC, says a lot. The extra level of scrutiny the CFTC provides along with margin to maintain the funds may push him to prefer the non-coin holdings. At least initially, while the market is in his mind prone to scams and abuse.

 

Take-Away

Cryptocurrency ETFs are expected to one day exist. While many stock market investors look toward blockchain stocks to gain exposure to digital assets, others would like to more directly gain exposure to the asset class with a  Bitcoin fund or other cryptocurrency fund as a holding in their securities brokerage accounts.

The new SEC Chair is no stranger to cryptocurrency and seems amenable to finding a way to allow crypto funds. He is, however, well aware of his regulator’s role in protecting investors. There are two options, and many asset classes have funds comprised of both. Holding the coins, or creating the behavior of the coins using futures/options contracts. Based on the SEC Chairs’ own words, he doesn’t sound ready to allow outright purchases of coins in ETFs just yet.

Suggested Reading:

The Wells Notice to Coinbase May Be the Tip of the Regulatory Iceberg

What’s in the Surprise Cryptocurrency Bill?

SEC Investigates Digital Engagement Practices in Broker Apps

Contango, ETFs , and Alligators

 

Sources:

Funds & ETFs

https://www.wsj.com/articles/sec-will-police-cryptocurrencies-to-maximum-possible-extent-chair-gary-gensler-says-11628007567

https://www.barrons.com/articles/sec-signals-a-pathway-for-bitcoin-etfs-this-firm-is-ready-to-pounce-51628176703?mod=article_inline

https://www.barrons.com/articles/a-bitcoin-etf-is-still-in-the-works-here-are-your-options-in-the-meantime-51618014033?mod=article_inline

https://en.wikipedia.org/wiki/Exchange-traded_fund

https://www.cftc.gov/sites/default/files/2020/06/2020-11827a.pdf

https://www.barrons.com/articles/sec-gensler-bitcoin-etfs-51631305928

https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp

 

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Helius Medical Technologies, Inc. Appoints Paul Buckman to its Board of Directors Helius Medical Technologies announced the appointment of Paul Buckman to its Board of Directors, effective September 10, 2021 Research, News & Market Data on Helius Medical Watch recent presentation from Helius Medical

electroCore Announces 510(k) Clearance of gammaCore™ Non-Invasive Vagus Nerve Stimulation (nVNS) to Treat Paroxysmal Hemicrania and Hemicrania Continua electroCore announced the company received Section 510(k) clearance from the FDA of the company’s submission to expand the label of gammaCore nVNS to include the treatment of Paroxysmal Hemicrania (PH) and Hemicrania Continua (HC) in adults Research, News & Market Data on electroCore

Gray Television Purchases Third Rail Studios Gray Television announced that it has purchased Third Rail Studios in Doraville, Georgia, from The Integral Group for $27.5 million Research, News & Market Data on Gray Television

 

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	Image Credit: Marc Tarlock (Flickr)

Investors Have Added Money to the Markets a Record 71.4% After Dips

 

If there is one thing we have learned from the markets this year and last, it is there is still a lot to learn.  Last week’s holiday-shortened trading saw stocks fall, with the S&P 500 declining 1.36%. This is the eighth such one-week dip in 2021; the last seven have proved to be buying opportunities. If 2021 maintains its current pattern, this decline will soon be replaced by higher price levels and new records.

 

 

In the past, money flow from investors into markets often demonstrated a propensity to chase momentum – buying when stocks are rising, selling when falling. Cash would flow into stocks and equity funds, at times with a frenzy, at a market peak. Conversely, sell-offs were met with further selling until the move exhausted itself. The overall market behavior has been different over the past 12- 18 months and is worth understanding, especially that which has been happening since the beginning of this year.

 

 

In a research report put out by Alliance Bernstein last month, they demonstrated that the trend to “buy the dip” is double its seven-year average and at a record.

Of the seven one-week periods so far in 2021 during which equities closed in negative territory, investors then bought at above-average levels during five of them. This was calculated using flows into the 100 largest exchange-traded funds (ETF). The below chart is as of July 31, 2021, in addition to showing the pattern of dips and bounce-back, it shows the level of flows into the market via ETFs which coincide with those dips. 

 

Flows for the 100 largest ETFs by Assets Under Management versus market return for the prior week.

Source: MSCI World Index and Alliance Bernstein

 

With 5 out of 7 dips or 71.4% experiencing higher than average ETF inflows, this year is running well ahead of last year’s 11% increase in flows during dips. The average since 2014 has been 35%. Investors are more comfortable than they were last year that the market would continue to rise, and they seem to have ample dry powder to put to work each time.

One Driving Force

In their report, Alliance Bernstein asked Why is “buy the dip” so prevalent…and why now?  They suspect it is from a number of areas that all lead to an abundance of investible cash. One source of this cash is an unprecedented level of sidelined money. Savings since the start of the pandemic began changing behavior as it was at the fastest pace on record. By March 2021, the personal savings rate (after taxes and spending) was 27%, according to the Bureau of Economic Analysis. It is still well above average at 10%.

A few waves of stimulus money during the pandemic along with many paying down their more expensive debt, were contributors to the additional ability to save.  The causes that created these high household cash positions may only be as long-lived as the current abnormal economy. And, the pace toward normalization will depend on how quickly work-life normalizes, and monetary and fiscal policies allow the economy to carry its own weight.

Until then, with aggressive amounts of cash in the system and employment levels increasing, consumer balance sheets should allow for the part of this trend that has been driven by cash on the sidelines to continue.

 

Take-Away

The “buy the dip” phenomenon has paid off this year. However, other factors that impact markets need to be minded as well. For now, investors have been paid by injecting more cash into their positions each time there is a one-week price drop. Interestingly, all of the openings have been at higher and higher averages. This could mean that investors are cautious in addition to their confidence.

The market, as measured by the S&P 500, dropped last week. We will soon know whether the trend continues and 6 out of 8 dips attract new money to flow in and the market rise, or if this will become a deviation from the trend.

Paul
Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Is it Wise to Buy on Dips?

Money Supply is Like Caffeine for Stocks

Four Inflation Growth Possibilities and Their Impact on Stocks

Yield Curve Control

 

Sources:

https://www.alliancebernstein.com/corporate/en/insights/investment-insights/should-todays-buy-the-dip-equity-trend-guide-a-multi-asset-strategy.html

https://www.barrons.com/articles/2-reasons-to-buy-stocks-after-the-dip-51631202176

www.Koyfin.com

https://www.bea.gov/data/income-saving/personal-saving-rate

 

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Brokerage App Coercion? The SEC Wants You to Share Your Experiences

 

Stockbrokers, as part of their basic description, do not provide investment advice or portfolio management. The SEC is acting to determine whether the practices of brokerage apps such as eToro or Robinhood Cross that line. As important they are also seeking advice from professionals and retail customers to help identify where the lines should be drawn.

Background

Over 20 million new accounts have been opened at U.S. brokerages since January of last year. A substantial number of these account owners had never transacted in the securities markets before. New investors are more likely to rely on tools on the app, consult social media forums, and YouTube channels for advice – and otherwise learn through trial and error.

The Securities and Exchange Commission has as its top two priorities to protect investors and maintain fair, orderly, and efficient markets. The rapid pace of technological change, coupled with an industry that flourished as people stayed home from work while receiving stimulus checks, has the SEC playing catch-up on designing rules and standards to protect investors and to ensure fairness.

Keeping in mind that brokers are not advisors; that is, they are there to execute with your best interest in mind, but not to give advice, the SEC opened a comment period on the bells, whistles, pop-ups, and other rewards and inducements on these brokerage sites. For example, eToro allows the ability to copy portfolios of other traders. Does this cross the line into giving investment advice? Robinhood had a digital “scratch-off” where account owners could get a free stock share. The SEC is moving to determine if some digital engagement practices (DEP) are actually investment advice.

 

Source:  SEC Press release dated 8/27/21

 

SEC Policing Digital Cues

An SEC panel met Thursday (September 9) to discuss digital cues from online brokers to determine if they may potentially harm investors by coaxing them to make decisions that end up costing money. Also, to address the rise of new ways to buy stocks, options, and other public market securities.

There were two major conclusions from the panel meeting. First is that an in-depth analysis could put the SEC in a unique position to review the technology used by brokerage firms and investment advisors to reach customers and track their actions. The other conclusion was that policing digital cues is complicated, and perhaps impossible.

Before New Rules are Set

The SEC is entering into a public comment period to hear the broader open discussion before proposing any new regulatory guardrails for online trading and advisory apps. The reach of any new rules could also impact the so-called robo-advisors like Wealthfront and Betterment and more traditional online brokers that have adopted some of the newer business practices.

 

Take-Away

The impact of digital engagement such as alerts, prompts and prizes that many new stock traders encounter online is not easy to determine. If clearer guidelines are not set, we may see legal cases deciding this using Regulation Best Interest which says that brokers and advisors have to do what is in their client’s best interest.

Some prompts on platforms are there to help increase transactions; does that make it a recommendation? Can these be considered manipulative? The comment period to the SEC ends October 1^st, 2021. They have asked retail investors with experience with online investment platforms to share those experiences using
this questionnaire.

 

Suggested Reading:

Will Robinhood Be Fined on Charges of Gamification?

Coinbase Receives an Enforcement Letter from the SEC

New Jersey Issues Cease and Desist Order on Crypto Payments

Can You Invest in Uranium Directly?

 

Sources:

https://www.sec.gov/news/press-release/2021-167

https://www.sec.gov/rules/other/2021/34-92766.pdf

https://www.barrons.com/articles/brokers-bells-and-whistles-can-harm-investors-sec-panel-finds-51631222273?mod=hp_LEAD_2_B_2

https://www.barrons.com/articles/secs-gamification-review-will-examine-stock-app-designs-51630101406?mod=article_inline

 

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