Tech to Bust First. Then China

Monday, 14 September 2020
Melbourne, Australia
By Greg Canavan

Over the past few weeks, I’ve been alerting you to the risks in tech stocks.

Today, I’m going to alert you to the risk that is China. Because it’s a big one.

First though, let’s finish the discussion on tech…

I know you probably don’t hold US tech stocks directly. But if you have an allocation to international shares, via superannuation or pension funds, for example, you can bet that you do.

Not only that, the meltup in tech stocks is emblematic of a lot of speculative activity that has been sweeping through markets these past few months.

That it makes no sense from an economic perspective is beside the point. During meltup phases, the market NEVER makes sense. Meltups, by definition, are irrational. So the rational investor will always be left scratching their head.

Because of this, I’ve cautioned against getting too carried away with things. If you’re going to speculate, do so intelligently. Have a strategy and an exit plan. That way, if things turn for the worse, you’ll get out without too much damage being done.

As Woody pointed out on Friday, that’s exactly what Callum is doing with his Catalyst Trader service. He just closed out a trade and banked 50% gains in under a week.

It wasn’t just a lucky trade. Cal identified the stock and potential catalyst, and recommended the trade at a time when the speculative end of the market began to falter. In other words, the successful outcome had nothing to do with the meltup in speculative stocks.

As Editorial Director, that’s what I love to see: Stock ideas playing out on their own merit (and the hard work of the editor in researching the story) rather than simply moving with the tide of the market.

Having said that, swimming with the tide is definitely where you want to be. To paraphrase the famous trader, WD Gann: be a bull in a bull market and a bear in a bear market.

The going has been good lately, but in my view, the odds are increasing that we’re moving back into a bearish phase.

And if you look at this shorter-term chart of the NASDAQ, you can see that it’s looking fragile. After a massive post-crash rally, in the past few weeks you’ve seen panic selling, followed by a weak bounce. If the NASDAQ can’t find support here, I think you’re going to see some further sharp falls.

Don’t say you weren’t warned…

Port Phillip Publishing

Source: Optuma

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So what’s going on over in China?

Well, you know that strong economic rebound everyone’s been talking about?

How China’s powering ahead of the rest of the world after being the first nation to pull out of the COVID hole?

It’s all thanks to an extraordinary surge in debt.

Data released by the People’s Bank of China on Friday revealed total credit growth in China (also known as total aggregate financing) surged 3.58 trillion yuan in August (US$524 billion)!

This was 110% greater than July’s credit growth and a massive 40% above expectations.

As Doug Noland of the long-running Credit Bubble Bulletin put it in his weekly essay:

With 2020 GDP estimates in the 2.0 to 3.0% range, the divergence between Chinese Credit and economic output is unprecedented. That Credit growth has accelerated in the face of rapidly deteriorating economic prospects portends major troubles ahead. China’s “Terminal Phase” excess – including rapid acceleration of late-cycle loans of deteriorating quality – is unparalleled in terms of both degree and duration. Stoking a stock market mania while prolonging a historic apartment Bubble only exacerbates systemic fragility.’

The experts say this credit bubble will continue to inflate in the months ahead. From Bloomberg:

“Aggregate financing will most likely remain strong in September and October due to a large mandate for issuing government bonds,” Nomura Holdings (NYSE:NMR) Inc. Chief China Economist Lu Ting wrote after the data was released.’

But if the stock market is a good barometer of present and future liquidity conditions, it’s not looking too inspiring right now.

As you can see in the chart below, the Shanghai Composite Index peaked in July and again in August. It tried to rally again in early September, but couldn’t breach or even get to the recent highs.

Port Phillip Publishing

Source: Optuma

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Instead, the Chinese market sold off and is nearing short-term support.

If it breaks down through that 3,200 level in the weeks to come, it may well be saying that the best of the post-March credit boom is behind us.

That has big implications for Australia.

I mean, look at what this credit surge has done for iron ore prices…

Port Phillip Publishing

Source: Optuma

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The price of red dirt has rallied more than 60% since the March low.

Copper isn’t far behind. Bloomberg reports:

The global copper market could be on the cusp of a historic supply squeeze as Chinese demand runs red hot and exchange inventories plunge to their lowest levels in more than a decade.

A growing chorus of traders and analysts say those dwindling spot reserves could trigger a further surge in prices, building on a rally that lifted copper this week to two-year highs above $6,800 a ton. Red Kite Capital Management fund manager George Daniel said the market is starting to resemble that of the early 2000s, when a similar Chinese buying spree emptied the world’s warehouses of copper and sent prices vaulting to record highs.

The 24 million ton-per-year copper market has experienced bouts of tightness ever since the early days of China’s industrial expansion, but that country’s rampant appetite after emerging from coronavirus lockdown could usher in a period of chronic undersupply. China’s Caixin manufacturing purchasing managers’ index for August reached its highest reading since January 2011, with copper usage surging as factories pump out cars, household appliances, smartphones and electrical cables.

“This time it’s been different because China has been sucking everything up,” Daniel said in London. “It feels like we’re getting into a period where there’s just no copper around.”

Hmmm…‘this time it’s been different’…

When it feels like ‘there’s just no copper around’, in my experience, that means we’re pretty close to a top in price. As you can see in the chart below, copper has surged 45% from the March lows. 

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

But if we’ve seen the best of the Chinese credit surge, I would expect prices to falter soon.

Keep in mind though, credit bubbles are no different to stock bubbles. They can go on longer than you think possible. They defy rational explanation.

But when the inevitable slowdown comes, it’s going to hurt Australia badly.

I’ve been warning about this for a few months now. You can read my report, and what to do about it on the investment front, here.  

Continue below to view Murray Dawes’ ‘Week Ahead’ update. This week he looks at a little gold stock that rocketed 80% in a week and, according to Murray, has further upside. Watch Murray’s quick video analysis below.


Alaskan Gold
By Murray Dawes


[Click on the picture to find out about a $100 million market cap gold stock based in Alaska that has a 2.5 million ounce resource that could grow to six million ounces.]

After a recent option expiration, this little gold stock rocketed 80% in a week.

They brought about $15 million into the firm with the exercise of options, which will help fund further exploration.

There is always fun and games as a large chunk of options nears expiration. There is often a lot of weight on the stock with various investors trading around their position to either fund the exercise of options or manage their profit taking.

But once the options are out of the way the stock is free to trade based on supply and demand. It’s pretty clear after an 80% rally in one week that the buyers have been lined up and eager to get on board.

The stock has a market cap of a little over $100 million but currently has a resource of 2.5 million ounces, which will probably grow dramatically as more drilling is done.

Before you get too excited, the grade of the resource is 0.44g/t. Don’t stop reading!

There’s more to the story than that.

You see, this is an intrusive related gold system (IRGS) near surface and there are other multimillion ounce operations in the area with similar grades that are producing plenty of gold with a high margin.

There is a low strip ratio of around 1:1, which is unheard of in Australia and the gold is recovered with a heap leach operation that is very cost effective.

So, don’t turn your nose up at the 0.44g/t just yet.

The chart is looking compelling for further upside, but I reckon it’s looking a bit hot right now.

I give you the levels where I think there will be plenty of support in future, so if you are interested in hunting for gold explorers that may turn into multimillion ounce producers, this one may float your boat.


Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader