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China Greenlights Its Tech Firms. Investors Are Still Seeing Red
On Wednesday, the Chinese Communist Party (CCP) made a sudden U-turn on its tech crackdown.
The government will “actively release policies favorable to markets.” News agency Xinhua quoted Vice-Premier Liu He as saying. In coded language, the “rectification” of large Chinese tech firms will soon be over.
The news was so surprising that even parts of the Chinese government seemed caught off guard. The day before, regulators were busy writing up record fines for Tencent (OTCMKTS:TCEHY) in an anti-money-laundering campaign. It’s likely that those fines and others will now be swept under an oversize rug.
No doubt the CCP’s about-face is an attempt to stem the tide of rising cash outflows. Since 2020, shares of Alibaba (NYSE:BABA) have lost two-thirds of their value under the weight of the government crackdown. As recently as Tuesday, JPMorgan was calling the sector “uninvestable.”
But much of the damage has already been done. In 18 months, these tech giants have become quasi-captives to the CCP, much the same as that country’s property developers and banks. And now that the Chinese government has managed to stamp out the remaining free enterprise from its stock market, it shouldn’t expect foreign investors to reignite that flame so quickly.
The Five Surprises From this Week
Nevertheless, good news from the Chinese government is still good news. This week, Alibaba and Tencent rose a third each. And as I mentioned earlier, greater gains are likely still on the way.
There were also four other stock market surprises this week.
1. Russia Narrowly Avoids Default… By Paying in Sanctioned Money
Last Friday, I noted that Russia’s “C” rating by Fitch implied a 40% probability of default within a year.
Fast forward six days, and the country has already managed a near miss.
In a statement on Thursday, the Russian Finance Ministry said it had sent instructions for a $117 million interest payment from its frozen foreign assets. Sanctioning bodies could have easily forced a technical default. Rival ratings agency S&P would cut its rating further to CC, suggesting a 70% chance of default this year.
Since then, an eleventh-hour intervention by the Treasury Department has allowed the coupon payment to go through. No word yet on how a far larger sum of interest ($2 billion!) will get handled next month.
2. Oil Temporarily Drops Below $100
On Wednesday, oil prices temporarily dropped beneath $100 and into the double digits. Prices of oil-sensitive stocks like Indonesia Energy (NYSEAMERICAN:INDO) would drop 60% before rebounding upward once more.
But as analysts at Standard Chartered put it, “the key fundamentals are largely unchanged.”
An analysis by the bank found that the short-term drop came from traders closing out short-term positions to open new longer-term ones.
“The irony of the situation is that the dominance among oil traders of the belief that prices could only move higher has led to a position from which market dynamics dictated that in the short term, prices could only go lower.”
With logic like this, it’s no wonder that analyst Eric Fry recommends a buy-and-don’t-look-at-it strategy, AKA buy & hold.
3. Nickel Trading Suspended… Again
On Wednesday, the London Metal Exchange (LME) suspended trading again, after a “systems error” allowed trades below its newly imposed price limits.
It’s the second time in two weeks that the LME had to halt and reverse trades. On March 8, the exchange ruffled feathers (and checkbooks) after canceling $3.9 billion worth of nickel trades made during the metal’s short squeeze.
Cliff Asness, the founder of AQR Capital Management, would accuse the Hong Kong-owned exchange of “stealing money from market participants trading in good faith and giving it to Chinese nickel producers and their banks.” At least one market maker has already put its exchange membership under review.
If even hedge funds are getting mad at you… perhaps the world really is coming full circle.
4. The Rise of DAO DAO
And finally, the controversial creator of BitClout is back with a new enterprise:
An “Opensea for DAOs.”
Naturally, the project would be a Decentralized Autonomous Organization (DAO).
And who could resist naming such an organization (DAO, DAO)? Clearly founder Nader Al-Naji couldn’t.
Skeptics were quick to pan the new “DAO DAO.” “BitClout grifter” Al-Naji has failed multiple times before, notes crypto reporter Timothy Craig. In 2017, Mr. Al-Naji’s team managed to burn through $10 million of investor money before returning the remainder. And in the entrepreneur’s own words, competing services today “make BitClout look like Craigslist.”
Still, hope springs eternal in the blockchain world. And if (DAO, DAO) strikes it rich, you can be sure someone will one day create a DAO to invest in DAO DAOs.
Any naming suggestions for the DAO DAO DAO? I propose “Fred.”
What to Expect Next Week
Earnings Reports to Watch
- Monday. Nike (NYSE:NKE), Pinduoduo (NASDAQ:PDD), Greenidge Generation Holdings (NASDAQ:GREE), Volcon (NASDAQ:VLCN)
- Tuesday. Adobe (NASDAQ:ADBE), Carnival (NYSE:CCL), BuzzFeed (NASDAQ:BZFD), Splash Beverage (NYSEAMERICAN:SBEV)
- Wednesday. General Mills (NYSE:GIS), Phunware (NASDAQ:PHUN)
- Thursday. Nio (NYSE:NIO), Darden Restaurants (NYSE:DRI), Joby Aviation (NYSE:JOBY), Bitfarms (NASDAQ:BITF)
- Friday. ToughBuilt Industries (NASDAQ:TBLT)
Notable Crypto Events
- Monday. Fungie DAO launches My Space Pug, a crypto version of Flappy Bird
- Tuesday. OKCoinJapan lists on QTUM
Wednesday. World Blockchain Summit begins in Dubai
The Chinese Government Should Envy Oat Milk
When oat milk maker Oatly (NASDAQ:OTLY) hit public markets last May, it was hard to contain investor excitement.
Oatly is “reminiscent of the great consumer growth stories we’ve seen IPO in recent decades,” said analyst fund Hedgeye. To them, Oatley was going to be the next Chipotle (NYSE:CMG) or Lululemon (NASDAQ:LULU).
Instead, the oat milk firm would stumble like Amplify Snack Brands, the maker of one-hit-wonder SkinnyPop. OTLY shares have dropped 80% since going public; losses have widened to $80 million per quarter.
Oatly’s woes stand in stark contrast to those of Chinese tech giants. Whereas companies like Alibaba and Didi ran afoul of politicans, Oatly has struggled because of changing consumer demand. The broad shift away from plant-based foods has also ensnared firms like Beyond Meat (NASDAQ:BYND), a company that now trades at a quarter of its valuation from last year.
Chinese authorities are only just realizing that these kinds of corrections are a feature, not a bug. By allowing markets to penalize failing industries and promote successful ones (instead of using government intervention), Western financial markets have remained lightyears ahead of Chinese ones. No American company loses sleep over missing a Shanghai listing.
Investors certainly don’t love drinking a spoiled glass of oat milk. But in the grand scheme of wealth-building, it certainly beats the alternative of companies succeeding — and failing — over political whims.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.