postcards from the florida republic: An independent and profitable state of mind.
I have returned from Boca Raton. The typical drive from Boca to Bonita is about 2.5 hours.
Last night, unfortunately, it took 4.5 hours.
Right as we turned onto Alligator Alley, we had to cool our heels for two hours due to a very nasty accident involving semi-trucks and motorcycles. I wish I could un-see a few things.
Typically, I’d take the full day off - you wouldn’t hear from me.
But, half a world away, in China, more than $100 billion in liquidity is pouring into the system, and it won’t be long before profits end up on our shores.
Here’s what’s happening…
The East Is Red Easing
A few days ago, I revealed that Michael Burry, the famous “Big Short” hedge fund manager, overcame his concerns about the equity markets in the first quarter.
Burry actually sold his entire stock portfolio at the end of 2022, save for one company: Geo Group (GEO), which runs prisons and border detention centers.
In the first quarter, Burry put his money to work. His 13F filing for the first quarter revealed an interesting trove of perceived value stocks. He scooped up Capital One (COF) and New York Community Bancorp (NYCB).
Both have proven to be well-timed purchases.
But his two largest positions are in China.
He owns about $11 million in JD.com (JD) and $10.2 million in Alibaba (BABA). These positions were not well-timed. JD.com is down about 29% this year and about 20% lower from Burry’s average entry price. BABA shares are up 9% on the year, but they’ve peeled back from the $120 level shares reached in mid-January.
Rallies for Chinese equities aligned nicely with the bout of quantitative easing executed at the end of 2022 at the reopening of China’s economy.
Then in early June, we saw more easing from the People’s Bank of China, which coincided with the bottoming of BABA shares at under $80 per share. JD stock also hit a trough down around $32.
The growing consensus is that China is about to engage in – you guessed it - more easing. It plans to cut interest rates and increase the issuance of infrastructure bonds with an eye toward more support for the country’s housing market.
Thus it’s totally unsurprising that Chinese technology stocks have been on fire Friday. JD popped 6.8%. Alibaba was up 5.3%. The KraneShares Trust - KraneShares CSI China Internet ETF (KWEB) gained another 7.1%.
Here’s How to Profit in an Easing-Driven Market
QE is the name of the game. Yet, markets can and will experience profit-taking. So, remember: the purpose of a market is to sell
It can be something as simple as selling a bull put spread that would allow you to generate income and take possession of the stock at a good price on the off chance it drops.
The JD Aug 18, 2023, $36/$35 put spread holds an 83.6% probability of profit and would generate a 13.6% return. In the event shares did fall back to the $35 level, you’d want to be buying.
But if you’re not one for options, that’s okay. Speculators can buy JD.com at today’s levels and set a 10% stop. For the foreseeable future, I’m looking for loosening global liquidity conditions to act as a tailwind. There will be bumps along the way, but the path of least resistance remains to the upside.
These are the kinds of opportunities that fall into your lap when the whole system is broken. That’s why we need to stay focused on momentum and financial conditions. Much easier to come through the politico-economic circus while growing our wealth. Turns out we’ll sleep better at night, too. If momentum turns negative, you’ll be the first person to know.
Stay positive,
Garrett Baldwin
Florida Republic Capital
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.