The Weekly Wrap

Market Update

ASX 200 Index (XJO)

The chart below depicts the STW.AXW (an exchange traded fund that seeks to replicate the ASX 200). The appearance of Distribution alerts last week on a Daily and Weekly basis may be a sign that this market is ready to pause its seemingly unending upwards move. We have been vocal identifying the extreme optimism that currently exists, not just in share markets, but in EVERYTHING.

Often when a financial mania reaches boom conditions, it does so alone or with few participants. At the moment, the bubble of everything includes shares, real estate, crypto coins, art and even NFT’s. An NFT is a non-fungible token that is described as a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable.

Recently, Christies auctioned an NFT by an artist known as Beeple for US$69m. The NFT contained all of the digital works by the artist over the past 13 years.

In these times of extreme euphoria, it would be wise to take a more cautious approach to investing, as it was only 12 months ago that markets fell 40% in less than a month.

China’s Iceberg?

Betrayal: Major brands lose their footing as they walk the China tightrope – For the likes of Asics and Hugo Boss, backtracking on their support of China amidst the Uighurs controversy is proving to be costly.

DJ Chinese Economy Grew More Than 18% in First Quarter — Update

China’s booming economy is missing one crucial ingredient – The question is whether small businesses and Chinese consumers can fully share in the good times.
The echoes of China’s financial crisis are being heard as a giant struggles to survive

The headlines above paint a very different picture for China and their economy. The official view is that the economy grew by 18% in the first quarter of this year. Dig a bit deeper and Industrial production was up 14%, but down from 35% year on year growth in the January to February period and lower than forecasts. Economists at HSBC estimate that after stripping out the distortion from last year’s COVID-19 disruption, China’s GDP grew at 0.6% for the first quarter of 2021.

China’s economy is facing a raft of issues starting with an ageing population, slow consumer spending and signs of inflation at the producer level. On the credit front, there has been a huge increase in State Owned Enterprises (SOE’s) defaulting on their bond payments. This is causing massive unrest amongst participants as it has always been assumed that the government would stand by these companies and their debt.

One such company, Huarong, was actually created to house bad debts from the fallout of the Asian Crisis in the late 1990’s. Now this company is in trouble as they have moved beyond their charter to enter into the lending market and securities trading. The contagion effects if this company was to fail is scaring offshore bond holders and the credit market is nervous.

COVID-19

With delays in getting the vaccine underway in Australia and lack of doses given to the poorer countries around the world, COVID-19 is now mutating in various countries and the fear is that it will simply bypass any vaccine currently in production. International travel still looks to be off the agenda for the foreseeable future so this means that the average Australian will still travel at home barring any further outbreaks and the closing of State borders, the economy is considered to be in an OK state. The key will be to watch how many businesses go into administration in the next 6 months with the end of JobKeeper.

Judging by the chart above, the world will need to maintain a solid pace of vaccinations to avoid even greater infection rates.

US Market Update

Optimism is at extreme levels in America. The current Daily Sentiment Indicator for the S&P500 reached 87.8% bullish, which is now a new record. Advisers aren’t immune either as over 70% are bullish. We spoke last week about the float of Coinbase on the NASDAQ and the share price rose 70% over its issue price before closing 30% higher on the day. This still puts the value of this exchange above any other in the world.

Manic behaviour occurs at the end of bull markets, not the start. It is a red flag that investors record-breaking willingness to assume risk always occurs in a bubble. This psychological disposition has crept into all markets and the common theme is the increasing participation of young and inexperienced investors.

The rise of NFT’s is a classic example of this behaviour. The chart below illustrates how manic the alternate, speculative universe has become.

PPK Ltd Update

We have been keeping investors up to date with PPK and have recommended to buy the stock over the past 18 months. The company is at the forefront of producing Boron Nitride Nanotubes (BNNT) and it has multiple uses in a number of fields. An exciting feature of using BNNT is that it can bring incredible efficiencies to a number of applications, including energy storage, aviation, military and dentistry.

We recently came across an interesting research piece on PPK, published by Australian based fund manager, EPG Capital. To read the report please click here . We reiterate our Buy recommendation.