Capital 19 Catch-Up

“To be successful in life, you must get in the habit of turning negatives into positives.” – George Foreman

Weekly Index Movement

S&P500 +6.2%

Nasdaq +8.4%

Aussie All Ords +3.2%

Wowza. That was a big week, but not unexpected. We have been saying for some time that markets would rally once the Fed ended interest rate speculation with their announcement on March 16th.

Fed Chair Powell delivered the much anticipated 25bps rate hike but what got the market excited was his comments at the press conference later. To paraphrase what he said:

“there were 7 meetings scheduled for this year before today, and the median expectation in the Summary of Economic Projections works out to 25 basis point increases at each”

That is a smooth and measured rate of increases and gives the market comfort they know what to expect. As long as traders feel the future is ‘kind of predictable” they will buy stocks. And that is exactly what happened this week.

Everything that was sold down heavily all year, received the most buying.

For example, Amazon (AMZN) jumped 13.6% higher during the week. Congratulations to all those who followed our advice in this publication last week to buy Amazon shares.

On Feb 26th we said:

“Last week will turn out to be a significant bottom in the markets. It is time to get your cash out and buy stocks that have been significantly sold down”

Whilst the market has had a significant move higher, there is still upside left, but the next week will be an interesting test. The S&P500 is sitting right at resistance. Should it be able to push through in the next few days, expect a quick move higher to the next resistance at 4590.

Fed Chair Powell also gave us a clear indication of what to keep an eye on to make sure things are going according to plan.

The Fed wants tighter financial conditions to rein in inflation but is not too concerned about slowing the economy because there are far more job openings than unemployed workers.

A few statistics to put Powell’s goal in context:

  • There are 4.7 million more job openings than unemployed workers.
  • At the peak of the prior labor market cycle (November 2018), there were 1.4 million more openings than unemployed.
  • The imbalance in 2018 was not enough to cause wage inflation (+3.4 percent). Now, it certainly is (+5.1 percent last month).

Takeaway: while the Fed is hoping for some inflation relief from factors outside its control (supply chain bottlenecks clearing, mostly), slowing corporate America’s hiring cadence is their immediate focus. Relative to prior cycles, this is a novel target for monetary policy. Nonetheless, Chair Powell made it clear that he is willing to sacrifice some labor market strength in pursuit of lower inflation.

Chinese equities back to a buy rating

A second significant event happened this week for Chinese equities. The iShares MSCI China ETF (MCHI) jumped 20.9% on Wednesday, which is the best daily return in the ETFs history.

Chinese shares certainly have been out of favour recently for a number of reasons

  • China’s government launched investigations, imposed fines, and implemented new rules on private enterprise as a means to rein in its local Big Tech companies after their huge growth during the pandemic
  • Chinese regulators went after a host of industries from internet and ecommerce to gaming and fintech and even property developers.
  • New draft rules that would make all online service providers limit youth’s user time and functions
  • Risks of Chinese stock delistings from US exchanges over a lack of accounting transparency
  • New pandemic lockdowns in China’s tech hub of Shenzhen
  • Ramifications of China’s potential involvement in the Russia-Ukraine conflict.

Clearly, this recent stock price sell-off got the Chinese government’s attention because here is how they responded:

  • The Financial Stability and Development Committee under the State Council said the Chinese government would help stabilize Chinese stock markets. The committee also said the government supports overseas share listings and has made progress with US regulators regarding Chinese stocks on US exchanges
  • Moreover, the State Council said it would take measures to “boost the economy in the first quarter”. Lastly, it said Beijing’s moves to “rectify” internet platform companies “should end soon” and “called for new policies to handle property developers’ risks” according to Bloomberg.
  • China’s central bank and its banking and insurance regulator said they would also work towards a stable capital market.

Investor sentiment improved because this coordinated shift in policy provided some clarity after a long period in which the Chinese government was very tight-lipped about its regulatory efforts.

Chinese companies went from being as unpopular as Putin at a Zelenskyy’s birthday party to investible assets again. Some individual stock moves were quite spectacular.

DingDong (DDL), rose 66% in a single day. Which was nice, as it forms part of our Top 30 Strategy this month. (you can learn more about the Top 30 strategy here)

The Russia-Ukraine conflict has us thinking…..

The Iraq war in 2003. You remember, the US claimed Saddam Hussein had weapons of mass destruction, so it was right to invade a foreign country. No weapons of mass destruction were found, but the invasion was still the right thing to do?

President Bush authorised massive destruction in the country, so after it was all turned to rubble, they decided to rebuild it.

Here is a great article about it:

U.S. contractors reap the windfalls of post-war reconstruction

A little excerpt for you

“More than 70 American companies and individuals – donors to the presidential campaigns of George W. Bush – have won up to $8 billion in contracts for work in postwar Iraq and Afghanistan over the last two years. Those companies donated more money to the presidential campaigns of George W. Bush—a little over $500,000—than to any other politician over the last dozen years, the Center found”

When Putin (we blame him not the Russian people) invaded Ukraine, he must have expected economic sanctions from the West. He also knew his economy wasn’t big enough to support and rebuild Ukraine (Russia is about the same size economy as Australia – and we can’t even help our own town washed away by floods)

We suspect Putin had a conversation with Xi Jinping that went something like this:

Putin – “Hey Xi. I’ve got a plan”

Xi – “Sounds interesting, fill me in”

Putin – “I’m going to take Ukraine, but I need your help, and in return, I’m going to make China rich in resources.”

Xi – “I like it. Tell me the plan”

Putin – “I’ll smash Ukraine into rubble. The pro-west citizens will flee into Europe who will inherit an economic problem to look after them. Once I’m done, I’ll put a puppet government in place who will award Chinese companies the rights to rebuild infrastructure creating millions of jobs, own all the agricultural land to send food back to Russia and China and mine all the key natural resources you need to build out your energy plans”

Xi – “Done. You know the West will impose Sanctions and stop buying your oil, so I’ll step in and buy oil off you to keep your economy running. Don’t worry about SWIFT or international banking, we have our own version we can use to replace it immediately”

Putin – “Thanks partner”

Xi – “No worries mate. Don’t be concerned when you see me say on TV that I won’t support you. That is just to make those Western idiots believe you are on your own. But I’ve got your back”.

That is the big play here. China will get all the natural resources of Ukraine and Putin will get the fame of bringing Ukraine back into the motherland.

An Aussie way to play the UK energy crises

Natural gas prices in the UK have hit an all-time high due to Russian disruptions.

UK Prime Minister, Johnson, wants to end their reliance on foreign energy. (Genius, who else could have thought of that). To do so, he needs to build up domestic production.

Back in 2019, the UK banned fracking, which is a controversial but efficient method of extracting gas from shale oil. Turns out, it’s all well and good to be green, until you can’t afford to heat your house anymore.

There are now calls to re-open the shale oil fields that were previously closed

Calls to ditch plans that ban fracking

Australian company, AJ Lucas (AJL) provides drilling services to the Australian coal industry, and an operator, through its UK subsidiary Cuadrilla Resources Holdings Limited, of exploration and appraisal of conventional and unconventional oil and gas prospects in the United Kingdom.

Whilst coal is a four letter word these days, we can’t do away with it in Australia. Not for a long time.

Scott Morrison says coal industry will be around for ‘decades to come’

Meanwhile, look what is happening to the price of coal

Poor old AJL took a battering from Greta in the last 10 years and conceded defeat on its UK shale assets last year.

Here you have a company with exposure to an energy industry where prices are heading significantly higher and that is carrying a UK asset on its books at zero that could potentially be re-opened in a bid to produce more domestic energy in the UK.

It is trading at just 7 cents now. We view this as speculative but kind of like a call option for holders willing to give it a couple of years, with upside 10 times the downside risk. This was once a $4 stock at the end of the commodity boom in 2008. If it can even get back to just $1 the upside is a huge 14 times.

Others agree with us as this stock is catching a bid recently.

That’s it for this week.

Disclosure

Employees of Capital 19 presently own shares of Amazon. No employees own shares in AJL.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.