Afterpay and Square owner Block’s (SQ) share price tumbled 15% to a $61.88 close on the NYSE after Hindenburg Research published its detailed accusatory report on the company. 

The Hindenburg report on Block was 2 years in the making, alleging that the company has firstly knowingly and willingly facilitated fraud against consumers and the government, and also been ignorant to criminal activity occurring via its subsidiary - Cash App.

Due to the app’s relaxed compliance and AML regarding user account creation, the App has become prominent in the world of crime. Hindenburg alleged, on the back of ex-employee screenshots, that users of blacklisted accounts were often connected to dozens or hundreds of other active accounts suspected of fraud.

Furthermore, Hindenburg asserts that the Fintech giant has “wildly overstated” its genuine user count and understated its user acquisition costs, providing misinformation to its investors during Cash App’s post-pandemic user surge. According to some former employees of Block, 40%-75% of accounts were either fake, involved in fraud, or part of a network of accounts made by a single user.

Finally, Block has been accused of gouging merchants and users via elevated fees and predatory pricing. An example provided was the avoidance of government regulations of an “interchange fee” cap applicable to banks with over $10b in assets. Block has $31b in assets and is accused of routing funds through smaller banks to avoid the fee, allowing them to charge merchants significantly higher fees.

Jack Dorsey, who has self-proclaimed the title of “Block Head”, has responded that the report was “designed to deceive and confuse investors,” and that the company is “highly regulated with regular disclosures, and [the company] is confident in their products, reporting, compliance programs and controls.” He said the firm was exploring legal action against Hindenburg for the “factually inaccurate and misleading report”.

The report comes after Block’s 78% fall from its peak in August of 2021. Regardless of the report, it is obvious that the company, like many of its growth stock peers, had lost the lustre experienced during the COVID rally.

In fy22, Block only reported a 1% net revenue increase and a $540.7m net loss. FactSet estimates point to further losses to continue in 2023 at $208m. Regarding Cash however, revenues increased 53% primarily due to growth in the number of active Cash App Accounts. Additionally, the app is showing signs of stagnation with slowing inflows and account growth (declining from 54% in 2021 to just 13 % in 2022).

Despite this, multiples continue to trade far above peers at EV/EBITDA multiple of 60x, forward 2023 “adjusted” earnings multiple of 41x, and a price-to-tangible book ratio of 13.1x. In Comparison, Block’s major competitor, Paypal trades at an EV/EBITDA multiple of 16.6x, and 15.1x adjusted 2023 earnings, and also had a $4.169b profit and an 18% net revenue increase driven by total payment volume of 33%. Matching Paypal’s more reasonable multiples would imply a 62%-72% downside for Block.

Indeed, Bitcoin’s major price decline since November 2021 did place a dent in Block’s net revenue. Yet, the recent Bitcoin rally has not been able to buoy the share price. It seems investors have been wary about buying into Block.

Part of this could be attributable to its Co-founders Jack Dorsey and James McKelvey offloading $1b during peak between Nov 2020 to Oct 2022. Dorsey sold 2.5m shares while James McKelvey sold 2.2m.

At this point, there is significant uncertainty surrounding the company and where its stock is headed. This will largely depend on how the company fends off the accusations and whether the market can look past the report. 

In the short to midterm, we are neutral verging toward the bear side. Our outlook may however change depending on how the markets digest the news in the following weeks. Furthermore, we believe it will be difficult for Cash App to maintain its previous growth as Block is likely to face scrutiny and pressure to increase compliance and AML precautions.

A Block and A Hard Place. Hindenburg Research Takes Aim

It wasn’t long ago when the world saw its worst energy supply crisis in decades exacerbated by Russia’s invasion of Ukraine. Yet, since its peak of $140 a barrel in March of 2022, Oil prices have been battered with the majority of resultant price gains forfeited. Weakening global demand stemming from fears of an imminent recession and China’s stringent Zero-COVID policies have resulted in an oversupply. While market angst seemed to settle, with price consolidating between December ’22 to February ’23, the hectic month of March saw the collapse of multiple major US banks and the upheaval of IB Credit Suisse, reigniting turmoil in an already fragile commodities market. Recession fears and slowing demand had compounded with the worsening global oversupply issue - US crude inventories rising 3.3m barrels last week (expected to only be 1.6m) (American Petroleum Institute) and Russian production being excessive considering Western sanctions (International Energy Association). The result was a 20% sell-off in the past 2 weeks as institutions sought to limit their exposure in the options market (option covering), putting in a 15-month low of $64.5 on the 20th of March.

The pivot in Brent crude’s time spreads, declining from $5.26 last week to $2.94 indicate a convergence of WTI futures with the spot price of oil – ie. contango. This reaffirms apprehensions of weakening demand resulting in oversupply.

However, investors have reacted positively to news of Credit Suisse’s acquisition by UBS, backed by the Swiss National bank. Additionally, Oil prices were further buoyed by the Russian energy minister Alexander Novak’s statement that the nation would reduce Oil production by 500,000 barrels per day until June 2023. The WTI is now 3.9% higher than it was at the beginning of the week. Fiona Cincotta, Senior Financial Markets Analyst at City Index says “fears of a banking crisis and a recession have eased, brightening the oil demand outlook at least for now,” However, this may quickly change depending on the market’s reaction to the forthcoming oil inventory reports from the American Petroleum Institute (4:30 pm ET) and the Energy Information Administration.

Indeed, commodity traders are currently facing instability due to the ongoing crisis in the global banking system; however, the situation is not unprecedented. It is reminiscent of the events leading up to 2007 when oil prices had fallen from $77/barrel to $52/barrel in late 2006 when the markets anticipated recession after the Fed raised rates by 450bp. The yield curve inverted, commodity markets were destocked, and spare production capacity was low. However, when the Fed paused and China began to aggressively stimulate its economy, followed by Europe raising rates, the US dollar fell by 12%, and commodity prices almost doubled. The onset of a US recession in early 2008, which is what global markets fear most today, caused commodities to reach record highs as the Fed cut rates and Chinese stimulus led to a surge in demand, causing supply constraints.

While Fed funds futures do indicate an 83 % chance of a 0.25% rate hike to 5% in the Wednesday (Thursday 5 am AEDT) meeting, most economists still believe that the Fed will likely pivot at some point in 2023. The current global macro conditions are increasingly analogous with China exhibiting signs of economic recovery, a continually slowing US economy and soon-to-peak US dollar (MUFG) against a backdrop of tight micro fundamentals – forecasted declining oil inventories from China reopening, return to pre-COVID aviation and Russian output cuts. While it is not likely that economies will experience a repeat of the 2008 GFC due to better preparedness, it cannot be said that commodities will not experience a similar boost when economies cut rates and global demand increases.

As aforementioned, while the 2-week crude free fall has been halted, a reversal will likely require upcoming inventory reports from the API and EIA to be optimistic. Furthermore, eyes will be on the Fed’s announcement for interest rates tomorrow morning. For a bullish pivot, in the mid-long term, macroeconomic factors such as China’s demand for oil during recovery will be vital. Indeed, OPEC forecasts that Chinese oil demand will grow by 710,000 Barrels per day in 2023, a number significantly higher than the projected 590,000 last month. Goldman Sachs’ UK head of commodities believes that Chinese demand coupled with a flight from capital markets will drive oil prices higher.

Going forward, we are bullish on Crude and believe that China’s likely resurgence combined with supply-side reduction will place upward pressure on oil prices. OPEC+ sources believe that the current drop in prices reflects broader market fears for financial contagion rather than supply and demand. We see this in a positive light for commodities going forward as the Fed now faces the dilemma of whether to remain hawkish to prioritise inflation or to take a more dovish approach to ensure financial systems do not collapse. The latter would be more conducive to growing commodity prices.

Barrel Into the Green?

Yesterday (March 16th 2023) marked the 1 year anniversary of the Federal Reserve’s first rate hike since 2018 from a meagre 0.25% to 0.5%. Today, after 8 consecutive rate interest rate increases in what was the fastest tightening cycle in history, the rate sits at a problematic 4.5%. Similarly, the ECB had hiked the main rate 6 times from -0.5% to 3% today. While the aggressively hawkish monetary policy has seen inflation decline from 9.1% to 6% in the US, and 10.5% to 8.5% in the Eurozone, the figures are still far from price stability targets. Moreover, the rates have weighed heavily on global markets and especially the global banking system. The past few weeks have revealed grave fragilities, led by the collapse of Silvergate Bank, which has dominoed to the collapse of Silicon Valley Bank, Signature bank and on the 15thmarch, Credit Suisse’s (CS) 21% share price plunge following its announcement of “material weaknesses” in its financial reporting.

The impact of these on the EUR/USD have been manifested in the roller coaster of a week in price action. In the week beginning on the 8thof March, news of the collapse of multiple US banks and lower US inflation expectations from cooling employment figures had placed great downward pressure on the USD. The implication of both being increased investor scepticism regarding whether the Federal Reserve would continue raise rates at the next FOMC meeting on the 22nd March. Indeed, following the SVB news, Goldman Sachs, Barclays and Wells Fargo have adjusted rate expectations and believe the Fed will maintain current rates in March. A more dovish stance would negatively impact US inflows and demand for USD. This weakness is exacerbated by the fact that all 3 recent bank collapses were in the US with minimal exposure to Europe.

The result was a 228bp rise in the EUR/USD in the week starting 8th March 2023.

However, these gains were almost bound to be short term, given that bank contagions would see rallies in the USD.

Indeed, the reversal of these gains were immediately reflected when CS announced material weaknesses in their FY22 reporting. This was drastically worsened when the Saudi National Bank (CS’s largest backer) stated that it would not inject further capital into the bank. The EUR/USD pair had shed over 200 pips from its weekly high, falling to the 1.053 zone. Essentially, the dollar gained on the back of safe-haven buying given CS’s large presence and exposure in European markets. The Euro has recovered slightly to the 1.061 zone following the ECB’s 50bp rate hike this morning and reassurance of a $54b credit lifeline for CS from the Swiss National Bank to. This represents the first emergency lifeline given to a major global bank since the GFC. Again, the evidential struggle of global banks amid the fastest rate tightening cycle raises serious doubts over whether central banks are able to continue raising rates to combat inflation.

Nonetheless, this morning, ECB’s Lagarde has stressed that banks are in a much strong position then they were in 2008 as justification for the EU rate hike this morning.

It is clear that while FX markets had largely reacted to the headlines of US inflation and the Fed’s monetary policy, more recently, growing global financial stress has driven market movement. Investors should proceed with caution as volatility is likely to remain.

The Roller Coaster Ride of EUR/USD

In the hectic week which began on the 8th of March 2023, the world saw the collapse of the 2nd and 3rd largest US banking failures in the U.S. - Silicon Valley Bank (SVB) and Signature bank (SB). Indeed the news had rippled through global markets, especially concerning the crypto industry where the banks had great interest and a major concentration of clients. According to CoinShare, digital asset investment products had seen the largest single weekly outflow of $255m, led by Bitcoin’s $243.5m. While Ripple was certainly not free of exposure, seeing over a 5% price shock when SVB announced the second wave of mass withdrawals, the asset had defied market conditions and received net inflows of $0.3m. Ripple’s Garlinghouse also reassured on the 13th of March in a tweet that there would be no disruptions as most cash was with a broader network of banks. Furthermore, investors were reassured by the government’s announcement that all SVB and SB depositors would be made whole. Following this news, crypto bulls immediately retook the reins, driving broader market gains led by BTC spiking 25% in the past 5 days. Yet, XRP has again been an exception, remaining bearish as the market continues to recover. Why?

About: In December 2020, the US Securities and Exchange Commission initiated its lawsuit against Ripple on the basis that XRP was sold to investors without being registered as a security. The company has claimed that XRP is not a security, but rather, used in its business to facilitate cross-border transactions for clients.

The case continues to contribute to the continued depression of XRP, with investors uncertain as case updates have gone quiet. Investors await summary judgment, which has been speculated to arrive “in the coming days or weeks” according to Pro-XRP lawyer John Deaton. Attorney Jeremy Hogan had suggested in a tweet last week that presiding judge Torres may have already come to a verdict on whether XRP is a security.

The recent silence and uncertainty follow the significant 57-page ruling of the Daubert motions, where both parties sought to exclude expert testimony from summary judgment. The TLDR (Too long; didn’t read) was summarised by Ripple general council Stuart Alderoty. While neither side was a clear winner from the ruling, Alderoty suggests that the outcome is in their favour as the SEC’s top expert witness, who was tasked with analysing XRP buyer expectations, was struck from the record. On the contrary, Ripple’s experts on the differences between Ripple’s contracts and those in the Howey case (a monumental case that set precedent for investment contract qualifications) were allowed to remain.

While Ripple and its community of supporters are optimistic for a win, there is still clear uncertainty reflected by the depressed asset price. A loss for Ripple would likely have industry-wide implications, acting as a precedent to allow the SEC to crack down on all reaches of the industry.

While we are optimistic about a ruling in Ripple’s favour, if Ripple were to lose, the probable consequence of a major sell-off is also taken into account. Regardless of the decision, Ripple’s potential as a borderless, trustless, instant, and cheap payment and currency exchange settlement system is convincing. The company has already partnered with hundreds of financial institutions globally which use and are integrated into RippleNet. For this reason, we see value in Ripple moving forward and are bullish in the long term.

Indicators point toward a bullish reversal

XRP currently trades at $0.365 to the USD following a month-long decline in a descending channel. Monthly lows were formed on the 12th of march when the price touched but failed to break through the lower trend line of the channel. Over the past 2 weeks, the volume has grown quite exponentially and resulted in a diverging OBV. Such can be interpreted as the loading of a spring before its release, creating bullish momentum for a rapid breakout into a bull market. A similar sign of bullish reversal is seen in the RSI, which continues to lose downward momentum, remaining flat for the past month despite the continual decline in price. A bullish reversal would likely require support from optimistic SEC v Ripple news as well as continued positivity in the broader market. On the upside, the immediate key barrier for XRP is the upper trend line of the current declining structure. A break through to the up side would confirm the current bullish flag pattern.

All things considered, we are bullish on XRP, and see the current depressed price as a buying opportunity. In the mid-term, the price of XRP will largely be impacted by the outcome and news related to the SEC suit. However, in the long term, we see great potential.

Market Rippling News!

Bitcoin has broken below $20,000US and has reversed more than half of the gains in the spectacular beginning to 2023.

Bearish momentum in crypto and indices continue to mount following an unexpected increase in Hawkishness from the Fed.  On Wednesday, Federal Reserve Chair Jerome Powell announced that a more than expected rate rise is likely. According to CME group, 63% of investors are forecasting a 50bp increase.

The market meltdown was exacerbated on Thursday, when crypto bank Silvergate announced that it would wind down operations and liquidate its bank. The collapse of FTX had triggered a series of catastrophic events for the Bank, and eventually resulted in a bank run led by Coinbase, Paxos, Galaxy Digital and Crypto.com. The company was forced to sell off its assets at a steep discount to cover $8bn in withdrawals. The company’s stock is down 97% from 2021 peak.

Further crypto market moving news came this morning, when the New York State Attorney General (AG) files suit against Seychelles-based Crypto exchange KuCoin, claiming that it was in violation of securities laws by offering unregistered securities – crypto tokens which included Ethereum. The claims shocked the market, representing the first time regulators have claimed Ether to be a security.

Over the past 24 hours, crypto bulls have suffered major losses, with Coinglass showing over $300m in liquidations and more than $119m from BTC alone. Over $275m of these positions were longs.

Current psychological support is provided by the 0.618 fib retracement level while the 14 day RSI has dipped below 30 to indicate oversold. On the hourly chart, the MACD has begun to lose bearish momentum and the RSI indicates that BTC is deeply oversold. A break of the current $19,800 level could see further pain down until the $18,000 level. However, the retracement should be temporary, and provide the necessary liquidity for institutions to buy before the bull run.

Bitcoin teeters on the edge of $20,000, how much more pain?

As of the 15th of February 2023, Bitcoin has roared back past $24k after surging more than 10% in the past 24 hours, reclaiming all declines since the beginning of the month. Over the past 24 hours, Coinglass data shows that total liquidations on Bitcoin had reached $65m, with some 90% of that being short from positions.

The pump has occurred despite the intensification of regulatory scrutiny from the SEC. Last week, crypto Exchange Kraken had agreed to a $30m settlement with the US regulator and shutting down its entire US staking operations. Just 3 days later, the US SEC has announced its intention to sue the stablecoin issuer Paxos over the BUSD, claiming that the Binance-branded stablecoin is an unregistered security. Clearly, the market’s contrarian bullishness indicates that increasing regulatory clampdowns have been ebbed and priced cryptocurrencies.

Other news revolved around Tuesday’s US CPI data which showed that inflation had surged by 6.4% in January YOY, a figure higher than expectations. Typically, high inflation spurs further rate which are detrimental to risk assets like crypto. Yet, it is clear than investors have seen a silver lining in the slight decline on an annual basis, nonetheless.

Today’s market rally marks BTC’s highest daily gain since its November lows and can be seen to indicate that fears of inflation, rate hikes and increasing regulatory clamping are being shrugged off. While there is no single catalyst for today’s pump, it certainly represents a sign of strength in the cryptocurrency market.

Simultaneously, the bounce comes following Bitcoin’s test of its daily 200 EMA support. Current price charts seem to resemble those leading into the 2019 bull market with the monthly MACD set up for a bullish cross. Resistance levels will present at the $25,000 level as August heights and the weekly 200 EMA are tested. A break of this level could see BTC rally toward $30,000.

Unfavourable market conditions? Bitcoin roars back past $24k

The pump has occurred despite the intensification of regulatory scrutiny from the SEC. Last week, crypto Exchange Kraken had agreed to a $30m settlement with the US regulator and shutting down its entire US staking operations. Just 3 days later, the US SEC has announced its intention to sue the stale coin issuer Paxos over the BUSD, claiming that the Binance-branded stablcoin is an unregistered security.

Other news revolved around Tuesday’s US CPI data which showed that inflation had surged by 6.4% in January YOY, a figure higher than expectations. Still, it is clear than investors have seen a silver lining in the slight decline on an annual basis.

Today’s market rally marks BTC’s highest daily gain since November lows and can be seen to indicate that fears of inflation, rate hikes and increasing regulatory clamping have been ebbed and priced into markets. It’s a sign of strength in the market for risk assets to further their rally.

Simultaneously, the bounce comes following Bitcoin’s test of its 200 day EMA support. Resistance levels will present at the $25,000 level as August heights are retested. A break of this level could see BTC rally toward $30,000.

Unfavorable market conditions? Bitcoin roars back past $24k

On the 7th of February, the Reserve Bank of Australia raised the cash rate for the 9th meeting in a row by 25bp to 3.35%. The decision was made in response to the record 7.8% YOY December quarter inflation figure – the highest since 1990. Additionally, While the rate rise was broadly anticipated by economists, the board’s outlook that ‘further increases in interested rates’ would be needed was more hawkish than expected. With upward market momentum already weakening, the AUS200 tanked 0.46%, triggering a correction that continued today.

As global and domestic inflation remains very high on the back of strong domestic demand and tight labour market conditions, likely, the RBA will not be satisfied to cut rates until these pressures have eased off. As of the 10th of February, the bank’s near-term inflation forecasts were upgraded with trimmed mean inflation expectations rising by 50bp to 4.3% at year-end. However, the RBA has reassured in its February statement that ‘medium-term inflation expectations remain well anchored. The ASX Interbank Cash Rate Futures Implied Yield Curve indicates that Implied yield will peak at 4.03% in August 2023, representing a further 65bp increase from the current cash rate and potentially more pain in the market. On a more positive note, the RBA expects that slowing domestic demand and global factors will help curb inflation, and indeed, Australian retail sales volume in Q4 dipped for the first time in 2022.

The Central bank’s rate rise came at a time when the AU200 had tested and was rejected by resistance at the 7600 level. Since the all-time high of 7633 in August 2021, this is the 3rd rejection from these levels. A minor correction is imminent, ensuing from the overbought conditions of the RSI 14 on the daily chart, the fading of buying pressure and indicated by the bearish crossover of the MACD (12, 26) below the signal line. However, it is unlikely that this will remain, even with imminent interest increases. The index remains bullish and currently sits comfortably above the 200-day moving average - a key area of support tested in the first few trading days of 2023. Following the retracement, a retest of the all-time high should plausibly be expected in the mid-term.

Gavin Lee

Gavin Lee

2023年3月24日

A Block and A Hard Place. Hindenburg Research Takes Aim

Gavin Lee

2023年3月22日

Barrel Into the Green?

Gavin Lee

2023年3月17日

The Roller Coaster Ride of EUR/USD

Gavin Lee

2023年3月17日

Market Rippling News!

Gavin Lee

2023年3月10日

Bitcoin teeters on the edge of $20,000, how much more pain?

Gavin Lee

2023年2月16日

Unfavourable market conditions? Bitcoin roars back past $24k

Gavin Lee

2023年2月16日

Unfavorable market conditions? Bitcoin roars back past $24k

Gavin Lee

2023年2月15日

Will rising interest keep the AUS200 low?