Gregory Bergman
Editor-in-chief, CapitalWatch
The
market continues its upward trend, with the S&P consistently
closing over 3,000 and The Dow Jones ascending absurdly around 2,000
points this week; Nasdaq continued its celestial climb and just today
reached an all-time high. And yet as U.S. and global indices move into
the empyrean realm, the Earth and its inhabitants sink further into
poverty, anger, and despair.
The virus is starting to hit the
poorest countries in Africa, a continent mostly spared thus far. One bit
of terrestrial good news, however, is that, here in the U.S., the rate
of unemployment unexpectedly fell rather than rose. Economists surveyed
by Dow Jones had been expecting payrolls to drop by 8.33 million and the
unemployment rate to rise to 19.5% from April's 14.7%. Job gains in May
stunned the market. Maybe Antifa is hiring?
Expect a market dip
in the next month or two; buy that dip. By autumn, stocks should fall.
But so far, the Bergman Buy Index continues to rise, increasing close to
50% since we started the index!
Chart: 30 Picks
Beginning Sum: 100k in Hypothetical Capital -- Current Capital $149,952.74
(For more information and a detailed breakdown of the stock portfolio with buy and sell prices, email gregory.bergman@capitalwatch.com)
The Undivine Comedy
This
week, full-time comic book villain and part-time president Donald Trump
emerged from the bowels of his bunker to pull off a Bible brandishing
stunt outside St. John's Church in Washington D.C. in an effort to
communicate to his followers that, after retreating underground to
insulate himself from the protests, he was the sturdy safe keeper of the
Christian values that underpin American democracy.
While
production of the farce went smoothly, pre-production was a bit of a
mess--if you consider shooting tear gas onto a large crowd of peaceful
protestors to make way for Trump's imperial 17-minute stroll to the
church --to be a mess. Flagged by military and police escorts on
horseback, Trump waddled his way to the set. His prop, the Bible, was
handled carefully by daughter and former humanoid Ivanka Trump, who
carried the Bible in a white, $1,540 MaxMara bag. Slipping it to him,
Trump held it high (upside down, but high), for the cameras, made a few
wisecracks and that was it.
End Scene.
"He did not pray,"
said Mariann E. Budde, the Episcopal bishop of Washington. "He did not
mention George Floyd, he did not mention the agony of people who have
been subjected to this kind of horrific expression of racism and white
supremacy for hundreds of years."
That was one of the many
negative ratings the former television reality star received for the
latest episode of this dark, four season (hopefully) comedy. Too bad,
considering the fact that, according to CNN, he had told the all-white
production team that they should think of the event akin to the filming
of a TV show.
Two thumbs, way down.
And now, acronyms you should know.
PCAOB
PCAOB
(The Public Company Accounting Oversight Board) is a private-sector,
nonprofit corporation created to oversee accounting professionals who
provide independent audit reports for publicly traded companies. It is
this entity that will be the enforcer of the soon-to-be newly minted
restrictions targeting Chinese U.S.-listed stocks.
The crux of a
new legislative crackdown on Chinese companies recently approved by the
Senate is this: Chinese U.S.-listed companies will have to open their
books to PCAOB the way their American corporate counterparts do for a
period of three years. Also, companies will have to prove they are not
connected to Beijing--many, of course, are.
The bill, ostensibly
designed to protect the American investor, will have consequences,
including a projected $1 trillion lost in New York and redirected on a
one-way ticket to Hong Kong. For Chinese companies, it will mean a loss
of the world's largest and most liquid equity markets. Although, half of
these stocks trade by appointment, so maybe they are not after
liquidity anyhow. In fact, here is a little Sino secret: For many
Chinese U.S.-listed stocks, their entire public presence is nothing more
than show, a stamp of approval in the form of a photo-op in Midtown
signaling to their Chinese customers they are the real deal. Going
public is also a way for insiders to get money out of China; money loves
democracy the way Covid-19 loathes autocracy.
To the average
American investor, the legislation will offer some protection from the
Luckin Coffees of the world. But losing JD.com and Alibaba and other
world-class companies, should they choose to delist of their own
volition (or internal pressure from Beijing), will mean a loss of
massive market capitalization on the U.S. exchanges.
As for
smaller companies that may be banished from Lower Manhattan, there is
one lucky loophole that may save them: Not all Chinese stocks are
Chinese.
VIE
VIE (variable-interest-entity) is an opaque
business structure in which most American investors who buy Chinese
stock are invested. When you hold a Chinese stock as an American
investor, your American depositary receipts are receipts in a Cayman
Islands company that holds a contract with the Chinese firm. The VIE
owns private shares of the underlying entity (e.g. Alibaba), then sells
stakes to shareholders like you.
For example, when an American
investor owns stock in Alibaba, you don't technically own stock in
Alibaba, but in the VIE of Alibaba. In Alibaba's case, the VIE is,
according to Bloomberg, owned by a mere 38 people, mostly senior
management.
VIEs arose because Beijing restricts foreign
investment in certain sectors like the free-wheeling internet. VIEs
enable Chinese companies to raise money outside of China and offer early
investors a chance to get their money out of the country (again, one of
the main motivators to seek an overseas listing, to begin with). Almost
$1.3 trillion in market cap is tied to Chinese VIEs publicly traded
outside mainland China, according to U.S. credit-ratings provider
Standard & Poor's Financial Services LLC.
While VIEs give U.S.
investors the ability to capitalize on the company's growth, it does
not give direct voting rights. However, when push comes to shove, some
Chinese companies allow these American shareholders to play a part in
the voting process. To wit, according to The Motley Fool, when Sina
(Nasdaq: SINA) faced an activist challenge in 2017 from the hedge fund
and 4% SINA stakeholder, Aristeia Capital, the company allowed its
shareholders to vote on the fund's proposal.
This loophole may
help save some Chinese stocks from being kicked off U.S. markets
because, when a stock's books are opened for audit by the dreaded PCAOB,
the audits show the VIE's balance sheet, not the company's. A loophole
some Sino-friendly U.S. investors hope will keep their companies from
delisting. As for the Chinese companies that voluntarily delist, that is
going to be a big problem, as the legislation in question disallows
Chinese companies from just changing their symbol to trade on the
over-the-counter market. This would mean going private first, and a new
IPO in Hong Kong or Shanghai second.
ANTIFA
Antifa,
pronounced "An-TEE-fuh" stands for "Anti-fascists," a group that Trump
has helped bring center stage amid the recent civil unrest.
On the
surface, it is hard to take issue with the concept of
anti-fascism--you'd have to be a fascist to consider it. The group,
based out of Portland, is not a large, centralized organization of
violent militants' intent upon destroying the Republic, as Trump would
have you believe. And setting aside Trump's inability to label them a
terrorist organization (the president has no legal power to do so), the
group's power, mobility, and membership have been purposefully and
cynically overblown.
Antifa is a relatively small and
decentralized group, active mostly in Oregon and northern California.
They believe in direct action, not policy reform as an agent of change.
Without any central marching orders, so far as we know, members spend
most of their time trying to stop Ben Shapiro from speaking at Berkeley,
the rest of it devoted to figuring out where they fall on the now
nearly infinite gender identity spectrum. They are mostly in cyberspace,
sourcing out Neo-Nazis and white supremacists and then subsequently
outing these fascists' to their neighbors and employers.
So, hang
around weird white chat groups to kvetch about black people and
involuntary celibacy, and a latte-sipping coastal hipster from
Portlandia will take you down.
Inspired by the leftists who fought
Hitler's and Mussolini's thugs in the streets and, more recently,
movements in Germany and the U.K. that arose to combat the rise in
Neo-Nazism in those countries, they are, on balance, the "good" guys.
They want to live in a world, theoretically, where racism and sexism and
homophobia and anti-trans sentiment do not exist. Sometimes, they get
angry and punch a Nazi in the face. At least, so far. The group's
influence over the chaotic protests is comically short of what Trump
says. That said, is Antifa indeed a cause for concern?
Yes, but
some perspective. Far more were killed by white supremacists last year
than any other domestic organization, according to most crime experts.
And around the world over, extremist right-wing groups are far more
violent than leftist ones. To those who might object to speaking about
this in relative terms, let me point out the Fox News crowd has spent a
lot of time reminding us of the importance of relativism. You know, like
the incessant whataboutism employed on Fox News: "Sure Covid-19 is bad,
but do you know how many people die of the flu?" In Benghazi, every
life is precious. In the midst of a pandemic that kills hundreds of
thousands of people, everything is relative. "What about automobile
deaths? So, we are supposed to what, just stop driving now?" And so on,
and so forth.
In a time to choose sides, I am sympathetic in the
extreme--but there is a limit. Turning over an empty police car is
ill-advised, trying to murder four policemen with a homemade bomb is
something altogether different. Samantha Shader, 27, of Catskill, New
York, has been charged with four counts of attempted murder after
tossing a Molotov cocktail into a police vehicle during a protest in New
York. Although suspected, Shader is not a confirmed member of Antifa
and there is no evidence thus far that the group or a faction of the
group planned or had information about the attack. Either way, this
anarchic attack has given Trumpians a rhetorical tool that will be
weaponized to great effect come November. Plus, this kind of terrorist
violence is quite scary.
Now, I am not, in any way, saying there
are "good people on both sides," as the president said after the
Charlottesville, VA, clash between fascists and anti-fascists. But I
think it is fair to say that there may be all bad people on one side and
some bad people on the other side. I do not want to live in a word in
which I have to choose between Bolsheviks and Brownshirts; the spectrum
of political thought is, to use a concept anti-fascists embrace and
fascists abhor, nonbinary.
Everyone who is not a Nazi should want
to punch a Nazi--or a killer cop, for that matter. Fighting fire with
fire is sometimes necessary and justified. To stop fascism in World War
II, we had to destroy "everything but the kitchen sink," an expression
first used by bombed-out German civilians who found only the kitchen
sink standing in their otherwise incarcerated homes. But looting another
store (let alone one owned by someone who shares the skin color and
experience as George Floyd) is not going to help.
To the hardcore
Antifa members and sympathizers, do you really want to overthrow the
government and disarm the police? And I do not mean getting rid of
tanks; I mean totally disarm. Minneapolis, the city in which the murder
of George Floyd occurred, is considering disbanding the police--what
that really means if it happens remains to be seen. Maybe the
departments are so corrupted by racist practices that they cannot be
fixed. One thing it might be wise to remember, however, is that
according to the Small Arms Survey civilians alone account for 393
million (about 46%) of the worldwide total of civilian held firearms, or
"120.5 firearms for every 100 residents." Good luck with disarming
them.
For a small number of ultra-militant Antifa members, that
what they really want-- the overthrow of governmental structures by
violent means if necessary. Despite the posturing, even the most
committed and cacophonous Antifa members, at least until now, have not
hatched a terrorist plot. Even when they confronted Neo-Nazi protests in
Charlottesville, they did not go to engage in specific acts of violence
but to "react to a particular situation," according to Gary LaFree, a
terrorism expert at the University of Maryland and founder of the Global
Terrorism Database. "We could find no evidence that anybody who claimed
association with Antifa went there to plant a bomb or kill someone,"
said LaFree in a piece for The Washington Post. That was then, however;
this is now. It may not be Antifa, but one can expect to see more
violence planned and carried out by leftist groups or members, violence
akin to that committed by anarchists of the 1920s is not unthinkable.
Right-wing white fascists and Jihadists remain the biggest terrorist
threats in the U.S., but there are true Galleanists among us who do not
want systemic change, they want to change the system entirely--or they
want no system at all.
The protests, which were brought on by
righteous moral outrage have, at times, devolved into violence. The
culprit? A combination of moral righteousness, mob mentality, heat,
unemployment, bad actors motivated by greed or violence or ideology, and
a pandemic that has kept restless young people indoors for a trimester.
But
one thing the looting is not a product of is a vast, directed
conspiracy of a centralized militant leftist terrorist group whose
tentacles have spread nationwide and whose grip over a generation
absolute. The protests are about the murder of Floyd, not Trotsky. (He
was killed by Soviets, not Capitalists, but you get the point.)
And
yet, Trump's focus on the group has, in part, motivated self-proclaimed
"Armed Rednecks" whose mission is now to disrupt protests, however
peaceful, to protect their homesteads and local businesses. They see
Antifa everywhere and are cocked and loaded, readying for a firefight
with what is mostly an imaginary enemy. We have reached the next stage
in this most recent American drama: Vigilantism. It was this act of
"playing cop" that got Trayvon Martin killed in Florida in 2012.
Remember him?
Well, the protestors--the good ones and the bad ones--most certainly do.
Gregory Bergman
Editor-in-chief, CapitalWatch
(The
opinions expressed in this article do not reflect the position of
CapitalWatch or its journalists. The analyst has no business
relationship with any company whose stock is mentioned in this article.
Information provided is for educational purposes only and does not
constitute financial, legal, or investment advice)