The First Sign of a Frenzy in Chinese Stocks
Sjug's latest prediction is already playing out... The first sign of a frenzy in Chinese stocks... The 'New Nasdaq' is almost here... A new tech bubble could be just around the corner... In the mailbag: A question from the 'little people'...
Editor's note: The Stansberry Research offices are closed tomorrow in observance of Independence Day. We'll resume our usual publishing schedule on Friday. We hope you enjoy the holiday.
Back in December, our colleague Steve Sjuggerud made yet another bold prediction...
The bullish case for Chinese stocks was about to get even better.
As longtime Digest readers know, Steve has been following a massive shift in the financial markets that could ultimately send up to $2 trillion into Chinese stocks over the next several years.
But late last year, Steve discovered something extraordinary...
In short, two more "tectonic shifts" were coming for the Chinese stock market. Like this other change, these would also "right" some major "wrongs" in the Chinese markets... and he believed it could set off a boom in the process. As he wrote in the December 27, 2018 issue of True Wealth Opportunities: China...
This theme of "wrongs that need to be righted" has been a major driver for our Chinese investments. That's for a simple reason.
When an imbalance exists, we know it will eventually be corrected... And as investors, we know we can often make huge gains as the situation shifts.
China still has plenty of problems to solve. One of them is being taken care of next year...
You see, China is launching its own Nasdaq-like stock exchange. The plans were announced early last month.
As Steve explained, this was a HUGE deal...
It would allow hundreds, potentially even thousands, of China's fast-growing tech companies to go public for the first time. This had never been possible before. More from that issue...
Imagine this... If Facebook were a Chinese company that had tried to go public in China, it would have been banned. Amazon, too. In fact, just about every U.S. tech company that got its start in the '90s would have never been given a chance.
Today, 80% of all U.S. initial public offerings ("IPOs") would be banned under China's current system. It's another incredible wrong in China's stock market... But it's about to get righted...
The big plan is for China to launch its own "Chinese Nasdaq" next year in Shanghai. Insiders are placing the launch as early as June, with reviews of IPO applicants starting as early as March...
This is big news. And it's not a speculation at all. The train is in motion. It's not a matter of if – just when. And right now, it looks like the "Chinese Nasdaq" is just a few months away.
That means in less than a year, Chinese citizens will be able to pour money into exciting Chinese tech startups. This could ignite a tremendous bubble... a dot-com bubble of sorts, but in China...
But again, that wasn't all...
Steve also noted that a second – potentially even bigger – "wrong" could soon be "righted." As he wrote...
To understand what's happening, we'll flip the existing scenario around to the U.S. That's the easiest way to see how ridiculous China's system actually is...
Let's assume that you are an American, and you are a passionate user of Apple (AAPL) and Google products. However... you aren't allowed to buy shares of these companies.
Why not? Well, because the rules about initial public offerings of tech companies from the U.S. Securities and Exchange Commission are so tough, Apple and Google's parent company, Alphabet (GOOGL), choose to list their stocks outside of the U.S. – in China.
So now, the only way anyone can buy shares of Apple or Google is on the Shanghai Stock Exchange. But there's a catch...
As an American investor, you can't buy stocks on the Shanghai exchange. In other words, you have no way to own Apple or Google!
As Steve noted, this situation likely sounds crazy to most Americans...
But it's exactly what's happened in China. Even today, Chinese investors can't buy shares of China's biggest, most beloved companies on the Shanghai Stock Exchange.
However, Steve said it was simply a matter of time before that changed, too. And he predicted China's "New Nasdaq" exchange would likely play a role...
This situation will not last forever. It can't. Local Chinese investors want to own these businesses. And the Chinese government should want them to own shares as well.
No matter how this situation plays out going forward, the end result should be the same... China's tech giants will trade in Shanghai within five years.
Nothing else makes sense. Chinese investors are waiting, cash in hand, to invest in their homeland's tech darlings. They want to do it.
A few things could happen to allow them to put money to work. And I'll admit up front, no one knows exactly how this will play out today. But the New Nasdaq is a logical place for these companies to begin trading in China, thanks to its looser requirements.
So... why do we bring this up today?
Because the first part of Steve's prediction now appears to be underway...
Last week, electrical-equipment maker Suzhou HYC Technology became the first domestic tech company to issue shares on this new exchange. And frankly, if Chinese investor interest in this initial public offering ("IPO") is any indication, Steve may not have been bullish enough. As the Wall Street Journal reported at the time (emphasis added)...
[HYC Technology] launched the inaugural share sale on the Shanghai Stock Exchange's new Science and Technology Innovation Board, which Chinese officials have dubbed the "STAR market."
The stock offering, while small, was more than 300 times oversubscribed, according to an exchange filing. That enabled the 14-year-old company to set a high price for its shares and fetch an overall market valuation of about $1.4 billion.
Yes, you read that correctly...
Investors flocked to buy more than 300 times more shares than were actually available to purchase.
This was simply for the stock of a 14-year-old company described as a "manufacturer of display and touch-testing equipment." Yet according to the Journal, more than 120 other companies have already applied to issue shares as well, including several software and robotic makers and biotech firms.
Can you imagine what could happen when some of these truly innovative companies are able to issue shares? Or better yet, when – as Steve predicts – the "Apples" and "Googles" of China are finally able to list their shares in China, too?
We may not have to wait long to find out...
You see, this new exchange is expected to "go live" later this summer, when shares of roughly 20 newly public companies begin trading for the first time. This suggests several more IPOs are likely to follow soon.
In other words, we could be just weeks away from the start of a new tech boom.
If you're interested in profiting from this trend, there's no better guide than Steve and his True Wealth Opportunities: China service. In fact, he recently prepared a special report detailing his six favorite "New Nasdaq" stocks that U.S. investors can buy right now. Click here to learn more.
New 52-week highs (as of 7/2/19): American Express (AXP), BHP (BBL), Blackstone (BX), Disney (DIS), Western Asset Emerging Markets Debt Fund (EMD), Nuveen Preferred Securities Income Fund (JPS), Kirkland Lake Gold (KL), Coca-Cola (KO), Lockheed Martin (LMT), iShares iBoxx Investment Grade Corporate Bond Fund (LQD), McDonald's (MCD), Motorola Solutions (MSI), Polymetal (LSE: POLY), Royal Gold (RGLD), Rio Tinto (RIO), Starbucks (SBUX), Sprott (TSX: SII), and Vanguard S&P 500 Fund (VOO).
In today's mailbag, Porter responds to a reader's question about homebuying. As always, send your comments and questions to feedback@stansberryresearch.com.
"Dear Mr. Porter Stansberry, my name is Darcy and I read your columns religiously. I've been my own teacher and student for a couple of years now, (no one ever talks back to the little people), and I am one of the little people.
"I started becoming interested in investing when I read an article similar to yours about the collapse of the economy... Anyway I came to the conclusion about investing in gold and silver and that it was a good way to go. So I've been buying coins. You see I don't have thousands of dollars to buy anything in bulk. I figured this was a good way to get a piece of the future... I like you was hesitant about bitcoin thinking it was a fad, but you've got me interested.
"I guess my main concern is getting started. Let me explain. I'll be turning 60 soon and like most people of my era we didn't understand about saving and investing. So now I'm planning on buying a house for the first time in my life. Is this a smart idea or should I invest what I've saved for the house in gold and bitcoin. I have no legacy (such as children or a spouse).
"So what do you think my best options are. I've read in your articles about caring for people with little to invest, but doing it the smart way. I'm curious to find out how you think I should start my (now) future. Any feedback would be treasured. Thank you for caring enough to help the not as fortunate. We need help in investing in our future, too." – Paid-up subscriber Darcy J.
Porter comment: Darcy, I believe in the "little people." It's the "little people" who make America a great nation – the millions and millions of people who get up every day and do their jobs and take care of their families and help support their communities. It's these people whom Stansberry Research was built to serve. Our best clients are "the millionaire next door" – folks who have worked hard, saved their money carefully, and now are looking to maximize their savings to provide for a comfortable retirement.
As you probably know, I am not allowed to give you any personal advice. I can't tell you whether or not you should buy a house. And although I bridle at the restraints on my right to free speech, even if I were allowed to offer you my advice, I would refrain. I simply can't know what's right for you without knowing a lot more about you, your finances, and your goals.
On the other hand, I do have a philosophy about personal finance that I believe will help you make that decision for yourself. I believe the purpose of saving and investing is to provide financial security – not to own a home or any other asset.
However, for a lot of people, owning a home is a critical part of their financial plan. Homeownership can provide a way for you to leverage the power of credit in our economy to your benefit. It can also help shield you from the impact of inflation and the deterioration of the U.S. dollar. And it can turn part of the money you'd spend in rent into equity in real property, a form of savings.
The downside is, it can be very expensive to own a home. I'd recommend not buying a house unless you can easily afford a 20% down payment. I'd also make sure I have at least one year's worth of mortgage payments available in savings. Losing a home is a financial nightmare that no one should ever experience.
After those hurdles, there's a slew of questions that you should think carefully about, most importantly: What's the cost of your mortgage? If you have a low-interest, low-cost mortgage, buying a house can be a great deal. If you don't, it can be a mistake.
I'd try to figure out all of my costs to own a home (mortgage origination, interest expenses, taxes, upkeep) for the period that I'm likely to live there.
So, for a $350,000 home, over say 10 years, that's probably something around $250,000 in total expenses, including interest payments. Seems like a lot, doesn't it? Well, I'm only assuming an average 4% interest expense over 10 years, a 1% annual maintenance cost, and a 2% property tax. Your actual costs of homeownership will certainly be more, including the principal repayment on your loan.
But let's use this rough estimate for now. That's roughly $25,000 in expenses per year to own your home. You could rent a house for $2,000 a month and probably save money – or at least it would look like that in the short term. Over the long term, though, the picture changes.
The money you "spend" to buy a house can end up becoming a form of savings – but only if the house appreciates in value.
Look at these assumptions. At the end of 10 years, you'll own roughly 70% of the house (assuming a 15-year mortgage). And assuming real estate prices have increased 20% to 25% over the period, your house should be worth roughly $435,000 after 10 years.
That means your equity would be worth about $300,000, or 25% more than your direct expenses. So even though buying costs more than renting, it can still be the better way to go.
For most people who buy houses in areas that have both rising populations and rising wages, owning a home can easily be one of the most important and best financial decisions they make. Buying instead of renting essentially allows them to turn one of their biggest expenses – rent – into a form of savings.
But the financial outcome of buying a house depends almost entirely on what you have to spend to borrow the money and on whether or not the area you buy in appreciates while you own the home. And if you end up losing the home, for any reason, the results can be catastrophic financially.
Regards,
Justin Brill
Baltimore, Maryland
July 3, 2019