🔬Shanghai Surprise: The End of China's Stock Market Woes?

Plus: Paramount is at all-time lows (because they suck at business); and much more!

Jun 20, 2024

"The four most dangerous words in investing are: 'this time it's different.'"
- John Templeton

“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem”
- JP Getty

Super short StreetSmarts today with the US shutdown for Juneteenth. I’ll be back tomorrow with regularly schedule broadcasting. Or whatever you’d call what I do.

Hope everyone took a minute to appreciate their freedom, and their ancestors that fought for it.

Street Stories

Shanghai Surprise

Chinese equity markets were a source of envy for many a nation state this millenium. High growth, dynamic companies were benefitting from a quickly advancing educated class to run them - and more than a sprinkle of government subsidies and homegrown protectionism to boot.

This all got turned on its head during the pandemic: Excessive lockdowns stunted the economy; a property bubble crippled banks and evaporated capital; and the government’s relationship with businesses was… ugh, ‘involved’. The perfect recipe for poisoning equity market euphoria.

Having set the table, there are some definite positives working in the Middle Kingdom’s favor, which have shown signs of reviving investor excitement.

1. Government Buying:

For starters, the PRC has realized that healthy equity markets are important sources of wealth for it citizens, and it has started pouring money - mostly through state-owned enterprises using offshore accounts - into supporting the shares of local standouts. Their main initiative involved a ~$278 billion package to prop up markets.

2. Investor Friendly Policy Shift:

The PRC issued the "9 Key Points" to improve China's capital markets, a rare document to come out of the State Council, and aimed at pushing Chinese companies to build durable, well funded companies with the goal of long-term success and shareholder value creation. KraneShares released a brief summary of the directive:

3. Buy-Back Central:

With a little bit of governmental ‘encouragement’, Chinese best-positioned global success stories have taken advantage of strong cash positions and low share prices to engage in some massive buyback programs. The result of this massive buying can definitely be seen in the share performance of the companies involved.

4. Global Outflows Abate:

International investment in China may not be back to the levels of the go-go years, but outflows have abated and, even if that doesn’t turn into a flood of new money pouring into China, it will at least serve to remove some of the selling pressure on stocks.

5. The Economy Doesn’t Suck

While there are certainly a lot of things the country continues to battle with, such as a destroyed property market and a weak banking system, the country has managed to show signs that steady economic growth is taking place.

This is arguably the most important as domestic business consumers will play largest role in reviving stunted company profits.

To conclude, China may not be the investor magnet it once was but there is decent evidence to suggest that the worst may be behind it. And that future growth may be of a greater quality, with the days of ‘boom and bust’ something of the past.

Paramount Plunges: Turning a Blockbuster into a Box Office Bust

Paramount's stock plummeted below $10, hitting a record low since the Viacom and CBS merger, as the company struggles with a market cap of $6.86 billion and a long-term debt of $14.6 billion. The latest nosedive follows the collapse of merger talks with Skydance Media, adding to a series of failed takeover bids, including a mysterious $30 billion offer from Byron Allen.

With acquisition interest fading and following the surprise CEO exit at the end of April, the new Office of the CEO is tasked with selling off assets and slashing costs, proving that when it rains, it pours in the world of media conglomerates.

The poor state of the business (and part of the reason the acquisition offers haven’t been as chunky as management hoped) can best be seen in the steady march to zero of their earnings.

I’ve mentioned that one of my biggest red flags is when the financials are nose diving but ‘somehow’ Wall Street’s analysts see a miraculous turn around.

Personally, I wouldn’t hold my breath with this one.

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Joke Of The Day

I got an email asking me to invest in Egyptian architecture. Sounds like a pyramid scheme.🤦‍♂️

Trivia

Just some general investing trivia today.

The typical definition of a ‘Small-Cap’ stock is that it has a market capitalization between what goalposts?
A) Between $250 million and $2 billion
B) Between $2 billion and $5 billion
C) Under $4 billion
D) More than zero but less than a Large-Cap
Enterprise value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to market capitalization. What is included in the basic definition of EV?
A) Assets - Liabilities
B) Debt + Market Cap + Cash
C) Debt + Market Cap - Cash
D) Debt - Market Cap + Cash
What does 'Beta' measure in finance?
A) A first order derivative of a stock's price movement
B) A stock's volatility relative to the market
C) A stock's liquidity
D) A stock's price-to-earnings ratio

(answers at bottom)

Trivia Answers

A) Market Cap between $250 million and $2 billion is the typical definition of a Small-Cap stock.
C) Debt + Market Cap - Cash is the basic definition of Enterprise Value.
B) Beta measures a stock's volatility relative to the market.

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