On China’s Grand Strategy
The country continues to go through a declining credit impulse, while regulators crack down on tech stocks and other industries…
After a strong year in 2020, Chinese stocks have been among the worst-performers in 2021, and they constitute a sizable chunk of many emerging markets indices.
The country continues to go through a declining credit impulse (which is typical every three years or so), while regulators crack down on tech stocks and other industries (which is not typical; it’s been a more aggressive crackdown than any of their prior ones). It started in late 2020 when regulators went after Ant Financial and Jack Ma in particular. They then broadened that crackdown to the whole ecommerce space. Earlier this month, they forced ride-hailing app Didi (DIDI) to delist from app stores until they regulate user data differently. This week, they went hard after for-profit education companies, and made it so that companies wishing to IPO in a foreign market have to announce it to Chinese regulators ahead of time.
Valuations and investor sentiment on Chinese stocks is nearly rock-bottom at this point. Investors have to contend with the tail risk possibility of the United States forcing some Chinese companies to delist from US exchanges if relations between the countries weakens, and China itself cracking down on its own companies and taking steps to make it harder for them to list on US exchanges.
When things appear uninvestable, it is often when they are ironically the most investable, or at least the most speculate-able with cautious position-sizing.
Short Squeeze Masterclass
Thematic Context: “Short Interest in Bitcoin remains at record highs as the asset recovers from its recent doldrum. This may be setting up a short-squeeze situation as prices recover amidst crowded positions (short), causing heavy losses to speculators who do not get out of the way.” — 26th July 2021 Market Obs
As it happens, we saw $110million get liquidated (orange line, Futures Short Liquidation) within a span of approximately less than 30mins, sending Bitcoin price markedly higher in a flash (Grey Line). This shows why understanding market positioning is essential to profit handsomely from the effects of asymmetry, most of our cyclical investments are not intentionally “contrarian”, but it happens more often than not as we try to be ahead of consensus (ie. our Coal Trade).
There are no notable data prints in the day ahead. Risk will be driven by Covid Delta Variant situation, Dollar movement and Big-Tech earnings (especially Apple (AAPL), Alphabet (GOOGL) & Microsoft (MSFT) after market hours today).
Keep short USD and long NZD, & CNH. Remain short USD vs NZD & CNH. NZD is grinding higher as the rise in US stocks continues to improve risk sentiment. CNH, on the other hand, is surprisingly stable given the near 6% drop in China A50 stock index yesterday.
2. Commodities: Uranium & Energy — The rally continues. Stay invested.
Key risks: Spread of the delta strain that could worsen the risk aversion sentiment is the key risk for now.
Equity Index: Long Nasdaq futures. Another day, another record high. Yes, again. Stay long and patient. Approach of support levels at 13950–14000 will be a good opportunity to add to longs but this seems unlikely in the shorter term.
Single Stocks: New highs yet again, but this is not even close to the end of the grind higher. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Spread of the delta strain and geopolitical worries are the key risks.
WHAT HAPPENED YESTERDAY
- The U.S. Dollar Index decreased -0.3% to 92.62. A softer dollar bolstered the EUR, which gained +0.28% to $1.1804. Investors will closely parse comments by Federal Reserve Chair Jerome Powell on Wednesday after a two-day policy meeting for clues on how the central bank will start tapering its asset purchases, its assessment of inflation risks, and the future of interest rates. Powell will likely highlight that the recovery is on track but COVID remains a key downside risk.
- In the Treasury market, the 10-yr yield settled 1 basis point lower at 1.29%. The 2-yr yield remained unchanged at 0.22%.
- S&P 500 (+0.2%), Dow Jones Industrial Average (+0.2%), and Nasdaq (+0.03%) eked out intraday and closing record highs on Monday, although there wasn’t that much conviction ahead of a big week that will include an abundance of earnings news, GDP data, and the Fed’s policy meeting.
- Amazon.com (AMZN 3699.82, +43.18, +1.2%) rose 1% amid a speculative report from City A.M. that the company is considering accepting bitcoin as a payment option. That report, however, was refuted by Amazon around the close. This speculative rumour was one of the triggers that led to the massive squeeze up in BTC (+14.4%) and ETH (11.0%)
- Tesla (+1% After-Market) beat expectations on both the top and bottom lines, and passed $1 billion in quarterly net income for the first time.
The company reported a $23 million impairment related to bitcoin.Earnings: $1.45 vs 98 cents per share adjusted expected. Revenue: $11.96 billion vs $11.30 billion expected. Parts shortages have been stubbornly persistent for Tesla and other automakers. In its shareholder deck, Tesla said that it had delayed the launch of the Semi truck program until 2022.
On the shareholder call Monday, Musk said a “big struggle this quarter” was to procure enough modules that control the airbags and seatbelts in Tesla vehicles. The lack of supply limited the company’s production both in Fremont, California, and Shanghai.
HEADLINES & MARKET IMPACT
Notable Snippet: The chamber’s top Democrat, Chuck Schumer, said that the Senate may work through the coming weekend and into its scheduled August recess if needed to craft a deal. “We have reached a critical moment,” Schumer said. “The bipartisan group of senators has had nearly five weeks of negotiations since they first announced an agreement with President Biden. It’s time for everyone to get to ‘yes’ and produce an outcome for the American people.”
Biden has called the plan essential. He also wants it to be followed by a much larger $3.5 trillion budget framework that would allow for spending on some of his other priorities, including climate measures and social spending. Republicans have said they will not support the larger measure.
THEMATIC CONTEXT: “This is a recurring reminder of what might happen if the Biden administration does not act fast enough to boost the economy ahead of the midterm elections in Nov 2022, and we suspect they will pull it through. The time to be hawkish is not now till 8th Nov 2022 and we believe that the US’ Fiscal and Monetary authorities will soon fall in line. Stay invested in assets and as the dust clears, we will swing back into full position.” — 22nd June 2021
Notable Snippet: China has launched a special six-month campaign to regulate its internet industry, the Ministry of Industry and Information Technology said on Monday.
The campaign targets problems that may disrupt market order, damage consumer rights, or threaten data security. In the interest of data security, the ministry will target companies that have not taken management and technical measures as required in the collection, transmission and storage of data, and in offering the data to other entities.
THEMATIC CONTEXT: “We can see that the CCP is very purposeful in their statecraft. At this point in time, China has everything going for it, except its demographic trend. The higher cost of living and a long mandated “one child policy” is starting to threaten the sustainability of China’s economic growth which stems largely from “human capital”. China in the next decade will be in a demographic decline like Japan and South Korea, this will put pressure on the pension system and open the way for an emerging demographic like India to usurp China’s dominance in the region (something they took hundreds of years to regain). The biggest threat to the CCP and China is domestic, China’s history has been plagued by Warring States and revolutions due to “inflation” and it’s something the Party is most afraid of. Making education affordable is killing two birds with one stone as it alleviates the demographic issue and takes care of inflation with regards to sustaining a healthy family nucleus. We suspect this will be good for China in the long run on a socioeconomic level as well because access to quality education will produce for STEM (Science, Tech, Engineering, Math) graduates which allows them to compete on a technical level. China is a structural long for the long term and it’s important to judge the policies independently.” — 26th July 2021
Notable Snippet: Intel Corp (INTC.O) said on Monday its factories will start building Qualcomm Inc (QCOM.O) chips and laid out a roadmap to expand its new foundry business to catch rivals such as Taiwan Semiconductor Manufacturing Co (2330.TW) and Samsung Electronics Co Ltd (005930.KS) by 2025.
Amazon.com Inc (AMZN.O) will be another new customer for the foundry chip business, said Intel, which for decades held the lead in technology for manufacturing the smallest, fastest computing chips.
THEMATIC CONTEXT: “This is a theme we are heavily invested in as it’s the economic policy that underpins the Post-Covid recovery and the road map that will define the new order of the world, which entails more deglobalization and the rise of economic factions. We believe that Materials, Commodities, Infrastructure and asset prices will all be beneficiaries from the fiscal and monetary accommodation that will be required to ensure Western economies will not lose out in the great power competition.” — 14th July 2021
Phan Vee Leung
CIO & Founder, TrackRecord