In my previous post on how to trade during a bear market, I used Tencent as a prime example.
The stock actually bottomed the day after I published the post and since has rebounded more than 30%.
The rebound was ignited by the news of Beijing’s strong push to stabilize financial markets and stimulate the economy. Nothing specific to Tencent. Nothing that anyone, outside people inside the Party in China, could have predicted to happen on a specific day.
There is a clear obsession, especially between retail investors, to explain every movement in the stock market with a specific reason or news. The reality is that sometimes the market reaches an extreme, everyone is 100% pessimistic (JPMorgan called the Chinese market “uninvestable” the day before the rebound) or 100% optimistic (insert here any stock trading at 100 times or more its sales) that the only possible move is contrary to the prevailing trend.
As I said, picking these turning points is really difficult. I certainly did not do it, mine was an informed yet fortuitous example: there is a big difference between writing and actually pushing on the BUY button. Tencent is still in a terrible position, at least technically speaking, and the existence of these bear market rebounds should not be a justification to buy into the stock. My post was about generating awareness of a common phenomenon during bear markets…there are plenty of YouTube channels out there selling trading signals if that’s what you are looking for 😉
Why would the Chinese regime kill its own tech sector?
Reading about what led Russia where it is now, offered me a very interesting insight into the current situation in the Chinese stock market, the tech sector in particular.
Ben Mezrich wrote a book about Putin five years ago: when Putin became the leader, he gathered all the oligarchs around a table positioned in front of the wall where Lenin used to kill regime dissidents. The wall still displayed bullet holes. The message was clear, do as I say or this is what you should expect. Or as Squid Game put it:
When the Chinese regime cancelled Jack Ma more than a year ago, I thought it was normal: he criticised the Party leadership and they put him back at his place. But why they would kill an entire sector? Tech companies help Chinese economy to thrive and a thriving economy is the best ingredient to sustain a regime, so why act like this?
Fact is, a regime desires successful entrepreneurs as long as they are functional to perpetrate the status quo. At a certain point, too much success might translate into a challenge for the status quo.
You do not have to be a genius to run an oil company. Drill some holes in the ground and then sell a product that has already more demand than offer. Anyone can do it (borrowing the necessary technology from outside), you can put your retarded cousin on top and things will run more or less smoothly anyway.
Even copying someone else technology, your retarded cousin will never be able to create and run a successful Amazon rip-off. You need someone smarter to do that.
There are plenty of smart Russian tech entrepreneurs…but how many Russian tech companies you know? It is not the lack of human capital, you do not have a tech giant in Russia because it would be a too big danger for Putin’s leadership. The so far unsuccessful war campaign in Ukraine is a reflection of this: Putin cannot afford to have smart generals at the top of the Army because a smart general would have the power to topple the regime.
Having smart people in powerful positions is too big of a risk for a dictator.
This is why Tencent and the other Chinese tech companies trade at these levels. I thought it was something more temporarily, a phase of a cycle, and instead it might be a feature of the system, not a bug. I still think that at this price, the risk is worth the possible return. But what I read in the last two weeks definitely pictured me a scenario a did not considered before.
I wish I was the guy who saves the interesting links he founds but…I am not. I probably liked / re-twitted them, so you can maybe find them on my Twitter feed. Sorry about that.