Your Week In Brief

The Undivine Comedy. Plus, Antifa and Other Acronyms of the Week.

Author: Gregory Bergman   

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

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(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.

  


(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. )

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