Perspective and Hypocrisy

What is the big deal with the Chinese government’s recent directives stymying technology or education firms?

During the 2010’s, the U.S. Department of Education either forced the closure or change of ownership, sued or ended accreditation or recognition of ‘education providers’ such as DeVry Education Group (now Adtalem Global Education), ITT Educational Services, Corinthian Colleges and Apollo Education (which was taken private at $10 per share, compared to its high of $89/share in 2009).

For example, then Californian attorney-general, Kamala Harris led the charge in suing Corinthian (leading to their demise in 2016 when she won her judgement) for predatory practices of mounting and leaving students in crippling debt……much like China’s concerns today.

In addition, didn’t the U.S. government force the break-up of AT&T and Microsoft?

And I wonder……aren’t Google, Facebook, Microsoft, Apple etc, some type of pseudo-government agencies ?

or at least, at their behest or influence?

Between all the congressional hearings and testimonies and the ‘cloud’ of anti-trust undertakings, a little perspective is required to the current Chinese news.

After all, it is not a far-fetched idea that Amazon is forced to ‘spin-off’ its AWS division.

The hypocrisy of western governments doesn’t seemed to be recognised by their own selves. They apply a host of restrictions, rules and bans too.

Perhaps China is entering its own Progressive Era and the U.S. may have its own 2.0 version?

https://www.bloomberg.com/news/articles/2021-07-27/china-tech-crackdown-xi-charts-new-model-after-emulating-silicon-valley?sref=qLOW1ygh

July 30, 2021

by Rob Zdravevski

rob@karriasset.com.au

Take your pick – Thorium or Uranium

While I have hinted that I am bullish on nuclear energy and uranium……I have been an avid watcher of thorium which has been seen as a nascent alternative but in truth it has existed for some time. Its evolution has been retarded for a host of political and capitalist reasons.

An extract from this article says, “China has some of the world’s largest reserves of thorium, a silvery metal with weak radioactivity. By some calculations it has enough to meet the country’s energy needs for at least 20,000 years. By contrast, China has some of the lowest uranium reserves of any nuclear-capable country”.

https://www.neimagazine.com/news/newschina-moves-forward-with-thorium-molten-salt-reactor-8919220

Chinese stocks are not popular

A most interesting contrarian, oversold investment opportunity on my radar is the Hang Seng China Enterprises <equity> Index (“HSCEI”).

The HSCEI serves as a benchmark that reflects the overall performance of Mainland Chinese securities listed in Hong Kong.

Index constituents include Bank of China, Sinopec, Alibaba, Conch Cement, Geely Auto, CNOOC, China Mobile, ICBC, CITIC and Tencent.

With all the hoopla surrounding restrictions of where Chinese companies are permitted to list their publicly quoted securities, temporary mis-pricing is often what occurs at such a moment.

The HSCEI has declined 20% from its February 2021 peak.

Why would Chinese authorities ruin their ascension onto the global capital markets scene by restricting foreign capital interest and retarding their own companies seeking liquidity?

It doesn’t make sense and I think there is some type of smokescreen (tactic) behind the latest announcements which may include inflicting a little pain on U.S. investors or flexing a little (soft-power, economic) muscle.

Don’t lose sight of the larger part of a story. China wants to have a financial services and capital market industry similar to the Western World.

They are hiring ‘western’ skills and offering full banking licenses to ‘western’ firms, just so they can be ‘like us’.

It is in China’s interest to bid for foreign capital.

For example, China is the world’s 2nd largest bond market. Today, the foreign share of the mainland Chinese bond market is 3.5%, which has risen from 1.2% at the end of 2017.

Interest in Chinese capital markets (bonds or stocks) will continue to grow with news such as $300 billion to enter the bond market as a result of FTSE Russell officially adding China to its World Government Bond Index in October 2021.

In order to sniff out an investment opportunity, it’s important to filter or dissect the current ‘noise’.

July 8, 2021
by Rob Zdravevski
rob@karriasset.com.au

* not investment advice, just commentary

The effect of Biden’s Chinese investing bans

There are so many 2nd and 3rd derivative effects from this news.

https://www.bloomberg.com/news/articles/2021-06-03/biden-to-blacklist-59-chinese-companies-in-amended-trump-order?sref=qLOW1ygh

The headline screams nationalism, protectionism and death to globalisation.

Then there is worthy speculation about trade wars, military tension, broader protest by Chinese manufacturers to curtail supply to American companies and currency manipulation to occupy my time.

n.b. the Chinese Yuan is at a 3 year high versus the USD.

Albeit I understand the security concerns behind this decision but the card has been badly played.

Biden’s strategy is to win votes and maintain control of both houses at the November 2022 mid-term elections, when all 435 seats in the United States House of Representatives and 34 of the 100 seats (14 Democrats and 20 Republicans) in the United States Senate will be contested

He will do that by spending big (enriching or impressing the populous) and being tough on China. Both things Obama never did.

Biden won’t forget that in the middle of Obama’s first term, the Republicans ended unified Democratic control of Congress by winning a majority in the House of Representatives.

My mind tells me that opportunity will lie in declining Chinese stocks (it’s always interesting when there is forced selling), a rising U.S. Dollar (this will impact commodity prices) and rising U.S. interest rates.

China can weaken their currency and sell a bucket load of U.S. Treasuries. They are the largest foreign owner of U.S. debt. This will send yields higher which increases U.S. government borrowing (it’s interest bill) costs and triggers other inflationary risks (? short Manhattan property again ? )

Interestingly, the Australian Financial Review said, “Australia has not developed a similar list of Chinese companies that Australians are not permitted to invest in personally or through a company.”

Can you imagine that ? ….a government telling me if I am allowed to own shares in a company which is traded on a public market where I’ve previously been permitted to trade shares.

June 4, 2021

by Rob Zdravevski

rob@karriasset.com.au

Trusting China (Part 1)

At a recent investment forum, the topic of the prospect of a U.S. Dollar losing its reserve currency status was raised.

Consensus pointed at the Chinese Yuan (Renminbi) taking over that mantle over varying range of timeframes.

But when I asked the gathering would they buy the Chinese currency once it becomes the world’s reserve currency, the majority of answers featured the response ’No’ and “I don’t trust the Chinese’.

But I thought,

we have been happy purchase products manufactured in China, for low competitive prices.

In fact, we probably aren’t aware how many Chinese made items we actually consume or utilise, ironically mostly commissioned/ordered by Western corporations.

And we are equally happy for ’the Chinese’ to buy the goods or assets which ’the West’ wants to sell to them.

After all, China flirts with Japan as being the largest owner of U.S. Government Bonds.

So, I pondered the hypocrisy of ‘westerners’.

The thing is…..we will need to, at some point ’trust the Chinese’

Interestingly, JP Morgan Chase CEO, Mr Jamie Dimon (in the recent Senate Banking Committee Hearings) said that Chinese banks will be the prominent competition for the American banking industry in the next 30 years.

<end of Part 1>

May 31, 2021
by Rob Zdravevski
rob@karriasset.com.au

Political Trade Destruction

Dear Australian #auspol politicians involved in incompetent trade and diplomatic rhetoric……it is in the “Chinese” tea leaves, that Iron Ore is next on the list of ‘sanctions’. I just wish the media would call them sanctions. It would sell so much more advertising…..

Politicians who are inexperienced in business and unable reading the geopolitical mood are causing more damage than their pea brains can possibly imagine.

Don’t they understand that a backbencher from an obscure political seat calling for an “inquiry into the origins of a Chinese flu” is a badly weighted bet and ramifications of the rebuttal can hardy be comprehended by someone inadequately positioned to speak in a manner within a nation’s parliament.

In these circumstances, political table-pounding seldom prevails over commercial reality and necessity.

Don’t look know, but to the complacent producers of current and future ‘sanctioned’ products, our politicians are doing some effective price mean reversion on behalf of your wallet.

October 13, 2020
by Rob Zdravevski
rob@karriasset.com.au

A Bull in China….

The chart below shows the Shanghai Composite today is trading at the same price it was in 2018, 2015, 2010, 2009 & 2007.

More so, it has been a flat market for the past 4 years,

In the interim, I expect that market to come back a little, perhaps to 3,100 (about 10% decline), while my indicators are confirming the longer trend is higher.

August 31, 2020

by Rob Zdravevski

rob@karriasset.com.au

 

Shanghai Weekly

Iron Ore – As Good As It Gets

June 23, 2020

by Rob Zdravevski
Iron Ore – As Good As It Gets ?

Over the past 6 weeks, the price of 62% grade Iron Ore has risen 25%. It’s now trading around $102.

Prices have risen due to a combination of China’s factories and manufacturing returning to a “normalised” utilisation and Brazil shipping less ore.

The previous spike, in January 2019, saw Iron Ore price climb from $75 to $95 within 2 weeks and a subsequent surge to $125 occurred over the next 3 months.

This was mainly due to the collapse of a tailings dam in Brumadinho (owned by VALE), which also tragically resulted in lives being lost.

I can’t quite reason about the cause of the 2nd lurch higher as economies were at the tail-end of a 7-8 year economic cycle.

However, the price normalised back to over the next 4 months as Australian suppliers filled the gap.

<see chart below>

Today, the price of Iron Ore has risen again due to a Brazilian supply disruption aided by “newer news” that Brazil’s COVID-19 environment is worsening.

Once again, Australian iron ore miners seized the supply opportunity yet prices have continued to roar ahead.

It is at this point in time, that I now think, that this is as “good as it gets” for the Iron Ore price.

But I also have the following questions;

  • Can Brazil contractually sell Iron Ore to China below prices as seen in the spot and futures markets?
  • Is it true that Brazil produces a higher grade of Iron Ore than Australia?
  • Will Brazil’s cheaper labour and production give them an advantage?

If the answer to these 3 questions is “Yes”, they then qualify for two of the three “cheaper, better and faster” categories.

Brazil could also be “faster” getting ore to the port, although overall we need to keep in mind that it does take 45 days to ship Brazilian Iron Ore to China when compared to the 12 day journey for Australian suppliers.

Anecdotally, I can’t help speculate that Brazil is feeling the strain of lower export receipts and may start to push product through its ports with less hesitation.

Inversely, it’s naive to think that China’s importers are submissive “price-takers” of sensitively priced commodities.

And so, my analysis of the price action in the Singapore traded 62% TSI contract suggests the strength of the advance is waning, as it makes a “rounding top” of lower highs and lower lows, a change in trend is near and the price traded to extremes on various measures.

The “fat part of the trade” has been seen and I expect it to retrace and trade down to $92.

For those who disagree, I am curious what you think will “drive” the price higher from here and how much risk are you taken when compared to the reward on offer when looking at the whole picture?
Until next time,

Rob
Subscribe to my blog: www.robzdravevski.com

Drop me an email: rob@karriasset.com.au

Disclaimer

 

Some extra reading.

https://www.abc.net.au/news/2019-02-12/iron-ore-price-explainer-after-mining-dam-collapse/10800698?nw=0

https://en.wikipedia.org/wiki/Brumadinho_dam_disaster

If you’d like to have a chat to me about some of our best stock ideas for your portfolio, feel free to call me on 0438 921 403.

Rob Zdravevski is the proprietor of Karri Asset Advisors, a specialist in the provision of investment advice and equity recommendations for clients’ portfolios.

It’s not me, it’s always them

Let’s blame Greece for a swoon in Aussie equities.

Now that the Shanghai stockmarket has declined 20%, let’s blame them too.

China is trying to stimulate their economy. Yep, that’s another thing to pick on.

Hang-on, isn’t Australia also cutting rates? Aren’t we in a monetary easing phase too?

Perhaps other countries should blame us for doing something as preposterous as cutting rates and weakening our currency.

When the Chinese equities market doubled in the past year, we should have blamed them too, ‘cause the Aussie market didn’t follow.

Greece’s woes has nothing to do with the decline in the shares of an Australian company such as Boral, Computershare or Alumina.

Australia needs to looks at itself before blaming others for its stockmarket gyrations. It has a high cost labour force, high taxes, internationally uncompetitive manufacturing, higher cost of money and a high cost of living.

Subjectively, our politics of late, hasn’t exactly been clear, stable and welcoming either.

We’ve not had an economic recession for 23 years and we’re still not happy. Always ready to blame somebody else.

Forget the blaming of the other countries. Many of them are performing much better than Australia’s. Our hubris has not prepared us for the reversion that the Australian economy will suffer during the next cycle.

Can You Smell The Deception & Misdirection

This is a periodical post about things that I see in the financial press, which I tend to interpret differently. When managing investors money, you need analyse the news and not just simply read it because you can’t assume you are getting to the truth.

Firstly, Jakarta warns Australia they are prepared to “clash” over border violations incurred by the Australian Navy. Australia best heed their warnings and wipe that smirk off your face because 300 million Indonesians should send your xenophobic fears into overdrive. I hope our government isn’t pinning all of our defensive hopes on U.S. Marines stationed in Darwin?

But equally Telstra is looking to form a 50/50 venture with Telekom Indonesia. Can David Thodey please be our next foreign minister?

I can’t believe why any company in the world wants to pay that much for a small insignificant business such as Warrnambool Cheese & Butter. Good luck to them.

Panic, Panic – protestors block Bangkok streets and the Thai Prime Minister is suspected of corruption. The Thai stock market has risen 9% in 10 days since this story picked up steam.

Alex Waislitz’s Thorney Group raises $68 million. Now I’m not sure what their raising target was but from a distance, their reputation could have easily raised 4 times that amount. My point is, would-be stockbroking firm geniuses should keep in mind that it’s difficult to raise money from the public.

With 65% domestic market share, Qantas still thinks it plays on an uneven playing field.

Franchisee of Australia’s 370 Burger King stores, Competitive Foods Australia, posts revenue of $1.03 billion for fiscal year 2013 and makes $21.4 million profit. That’s a lot of invoices and money to handle in order to make a 2% net profit margin. Last year, revenue was $935 million and profit was $8 million. Hey Jack, I see that cost cutting program is working?

Australian rail operators (in the Pilbra, Western Australia) are complaining that truckers have got an unfair price advantage when they transport iron ore. If trucking iron ore is cheaper than by rail, then the iron ore giants should then give their competitors access to their railroads. Umm, I didn’t think they would.

Various interviewees in newspapers are wishing for a weaker Australian Dollar. Be careful what you wish for. When you see commodity prices rise, it is usually accompanied by a higher Australian Dollar. In Australia we mainly export commodities, ’cause we don’t manufacture things such as cars, televisions or clothes anymore. So if the AUD remains weaker, we can sell US Dollar denominated commodities and receive a lot of AUD once its converted but it’s also good for overseas money to buy up Australian assets (see Australia is “on sale”).

Australia’s stock market falls due to weak Chinese data. Yup, heard this one before. Just like other brokers who actually ask me if I’m staying up late to watch the U.S. unemployment numbers. It doesn’t really affect the earnings of the shares in the companies that I and my clients own but if you need to justify a movement in the stock market with some sort of news, good luck and be my guest. Please continue to manage your investments on the basis of “jumping at shadows”.

Finally, this week, not a single economist who provided an estimate on the Australia Consumer Price Index reading got it correct and Deutsche Bank posted a “surprise” $1.15 billion quarterly loss.

Whether these professionals continually get their ‘calls” incorrect, can’t make money themselves or continue to pay fines for manipulation & price rigging, yet people still give these investment firms their money to manage.

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