It’s always about the money. Public opinion, environmental and health concerns, moral issues and even sanctions be damned – if there’s money to be made, people will try to make it.
Right now, we’ve got American owned shell companies funneling U.S. tech to Russia to build the bombs that rain down on Ukraine. Tankers brimming with Russian oil are welcome in India and Turkey. Income mutual funds feast on that 8% Altria dividend that’s driven in part by cigarette and Juul vaping sales. Two-thirds of Americans favor a waiting period for gun purchases that only 9 states’ lawmakers have approved. Walmart (NYSE: WMT) agreed to pay a $3 billion fine for dealing opioids…
I’m not here to judge – money goes where it’s treated best, and sometimes that might be a little unsavory. But there are times when an investment opportunity turns from unsavory to unsavable. And if you think Wall Street firms are going to sound some kind of alarm when an investment starts to become unsavable, well, that’s just not how it works.
There’s a reason that individual investors like you and me are thought of as “bagholders” in the gilded halls of Wall Street investment banks. It’s because we will always be the last to know. The Goldman Sachs of the world take care of themselves first. Next on the food chain are their ultra-wealthy “preferred” clients. Then comes investment banking clients. Wa-a-a-y down at the bottom of the list, you’ll find the individual investor. Us bagholders…
There was a great example of Goldman misdirection just this week. Last weekend, the investment bank rumor mill planted the seed that hedge funds had built up substantial short positions (bets that stock prices would fall) ahead of Wednesday’s CPI inflation reading. Obviously we’re all pretty aware that stocks will sell off when inflation readings come in higher than expected. And Goldman tried to help the hedge fund short seed blossom Tuesday when it released a note advising the general public that if the CPI came in higher than expected, stocks would sell off sharply.
In fact, I have the Goldman Sachs calculus for you right here: (hedge fund shorts) + (bearish hint from Goldman) x (instant bagholders) = Goldman traders make a quick buck when CPI comes in weak and stocks rally.
One of the hardest things for an individual investor is to ignore what Wall Street says and pay attention to what it does.
If you’ve been reading my stuff here at Pro Trader Today for a while, you know I believe that the adversarial relationship between the U.S. and China has reached the point where Chinese stocks should be considered uninvestable.
I’ve documented the reasons for this here, here, here, here, and here. Also, here and here.
And I’m gonna add to my collection today…
Getting Out While the Gettin’s Good
A couple weeks ago, on March 27, Chinese internet titan Alibaba (NASDAQ: BABA) took a page right out of the Wall Street “How to Unlock Shareholder Value” playbook when it announced it was going to split the company into several pieces and treat each piece as an individual company, complete with a new ticker symbol and listed stock certificate for each.
Wall Street investment banks stood and cheered. After all, investment banks will get advisory fees to help untangle Alibaba’s various business segments to create standalone units. They’ll earn more fees for helping ensure investors buy the new shares when they come to market during the IPO. And they’ll have the opportunity to buy a bunch of stock at pre-IPO discount prices.
BABA shares jumped from $86 to $98 the day after the big announcement. By March 30, BABA stock was hitting $103 – a 20% move in 3 days. Not bad, right? And considering Alibaba’s 2023 high is up around $120 and it was a $250 stock not that long ago, maybe a good time to get in?
Maybe ask Japan’s Softbank (SFTBY) what it thinks about Alibaba…
Softbank is a $56 billion company that invests in other tech companies and pays a small dividend. It first invested in Alibaba back in 2000, with a small $20 million stake and currently owns a 15% stake. Softbank has already signed sales agreements that will lower its stake in Alibaba to just 3.8% and raise $7.2 billion in cash…
Wonder why Softbank would sell now, before untold billions of shareholder value is about to be unlocked??
One analyst offered a quaint justification to Bloomberg:
“After the global banking crisis and what happened to SVB in the US, it’s much harder to get loan financing in general…For those early investors in Chinese big tech firms, it might be the same case. So they have to accelerate cashing out from their existing holdings, before doing anything, including investing in new opportunities or buying back shares.”
To which I say, uhh, *cough* bullshit *cough*…
Softbank has $57 billion in cash. And it’s about to raise $8 billion in more cash when it IPOs chip design firm ARM Holdings. So, no, Softbank does not need any cash.
I say that Softbank is selling its Alibaba stake for the same reason that Warren Buffett sold 80% of his stake in Taiwan Semiconductor (NYSE: TSM) at the start of this year after holding for less than 6 months…
Buffett said that while Taiwan Semi is a very well-managed company, geopolitical concerns were a “consideration” in his decision to bail.
Uhh, ya think…?
China’s Charm Offensive
China knows it has an image problem. Back in 2021, president Xi Jinping told communist party members it was time to make China appear “trustworthy, lovable and respectable…” and to “make friends extensively, unite the majority and continuously expand its circle of friends with those who understand and are friendly to China…”
Today we have China’s trustworthy and lovable navy cruising around Taiwan and its circle of friends expanded to include Iran along with North Korea and Russia.
Now I know, China invited a bunch of business leaders to Beijing brown-nose president Jinping at the China Development Forum a few weeks back. Of course, Apple (NASDAQ: AAPL) CEO Tim Cook was there – his company is pretty heavily invested in China…
And so according to media reports, Cook took the stage on a Saturday and praised the country for its rapid innovation and its long ties with the U.S. iPhone maker…”
Cook also tried to reiterate Apple’s commitment to China by announcing that Apple will raise spending on its rural education program to 100 million yuan. Sounds good, but 100 million yuan is worth about $14.5 million US dollars.
I get it: Cook has a business to protect. But he’s moving Apple out of China and into India (and other countries) as fast as he can. $7 billion worth of iPhones were manufactured in India last year, roughly 7% of the total. That will be more this year, you can count it.
Because like I said before, money goes where it’s best, and that just isn’t China anymore.
Wall Street hasn’t officially raised the red flag on investing in Chinese stocks – yet. But it’s just a matter of time. Remember: ignore what Wall Street says, pay attention to what they do.
Chief Investment Strategist
Pro Trader Today