Lots of readers wondering today about Steve Sjuggerud’s latest China teaser — it starts with a pretty “urgent” promise…
“Recently, in a closed-door meeting in Boston, the most powerful authority in global investing told me…
“Two Stocks That Nearly Every Wall Street Firm Will be Forced to Buy at 3:59pm on May 31
Get there first… and you could double your money”
So what’s this closed-door meeting business?
“It began a few weeks ago, when I got the stock tip of a lifetime at a closed-door meeting with one of the world’s most powerful financial groups.”
And that “powerful financial group?” More tease:
“I’d argue this group has more influence over the market and your money than any single politician… the International Monetary Fund… or the World Bank.
“That’s because $12.4 trillion in assets are legally required to follow the decisions made by this group, which impacts 94% of U.S. pension fund assets and 99 of the top 100 global money managers.”
OK, so that’s MSCI, the index people (competitors with FT and the S&P). They’ve been building international indices for almost 50 years, and it’s true that they have the most widely-followed base portfolios in the world. They’re a separately traded company now, by the way (ticker MSCI), they were spun out of Morgan Stanley (that’s where the MS came from) about ten years ago.
And, yes MSCI over the past five years has been deliberating about whether and how to include Chinese stocks in its core index offerings, particularly in the widely followed Emerging Markets index. And Sjuggerud has promoted Chinese stocks before as a way to profit from this pending “inclusion” in the MSCI indices, including last year when the announcement from MSCI was, “yep, we’re including a small allocation to China A Shares… but not ’til next year.”
So what is he adding this time around? Presumably that portfolio has done very well, given the great performance from the large China tech stocks he has focused on over the past year or two, and he’d like you to subscribe to True Wealth China Opportunities to learn more … but perhaps we can glean a bit from the ad and learn something without plunking down $1,500 a year (nonrefundable, naturally).
Any clues, then? Here’s more to tantalize from Sjuggerud:
“I’ve studied the market for 25 years and I’ve never seen an opportunity this big… where you could realistically double your money in as little as 18 months.”
We should at least give him credit for putting a time period in there — often, these kinds of ads promise that the stock will double “starting on May 31″… which, of course, means nothing. Those kinds of promises sometimes inspire people to place roulette-like bets on the “secret” stock doubling on June 1… which is, of course, absurd.
Even if a stock is likely to rise because of a new wave of investment from institutions or inclusion in a new index, it’s not going to rise dramatically in the space of 24 hours — these kinds of changes are not shocks or surprises, the indexes and the funds that follow them know they’re coming and they work their way into those positions. They don’t all just go out and buy millions of shares of the “new” stocks at 9:30 am on the day they’re included in the index (or at 3:59 the day before) — volume does pick up when new stocks come in, but with large companies there’s usually a lot of global supply that can handle that volume as long as nothing else crazy happens that day, and there will have been a lot of planning ahead by all the major investment managers.
To be clear, Steve’s sentiment has been very forthright, and right, for a couple years now — he’s been touting the idea of investing in Chinese stocks, particularly the big Chinese tech companies, since at least mid-2016. As he notes in the headline of one of his free articles recently: “Steve and Porter agree: ‘If you want to be long stocks, please – dear God – be long Chinese stocks.'” He’s not waffling, at least, and he has probably done very well so far.
So what are the stocks he’s most excited about right now? It was only about six weeks ago that he had a pretty big ad campaign reiterating his “China Melt Up” forecast, hinting at most of the same stocks he’s been bullish on for a couple years… so is this something new, or is he just re-stating that he thinks more global indexed money flowing into the domestic Chinese stock market will cause those large Chinese tech companies to become more valuable?
Well, he does call out two stocks for particular attention…
“… at the closed-door meeting in Boston I attended, they made a huge announcement about one of their most popular indexes.
“It’s a decision that will legally force the wealthiest financial institutions in the world to send more than $484 million into 2 stocks at 3:59 pm on May 31, 2018….
“We estimate over $19 billion will ultimately flow into two stocks — both of which I can pretty much guarantee you’ve never heard of.”Are you getting our free Daily Update
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And Sjuggerud cites a scholarly paper about the index inclusion effect as part of his argument that stocks being added to major indices move higher than stocks that aren’t added — that’s generally true, though despite the massive rise in passive investing (meaning, funds that just follow the index), the impact has not actually gotten more severe over the years… at least, according to that paper. Here’s an excerpt from the abstract:
“The analysis finds that between 1990 and 2015 the average excess return for additions from the announcement to effective day was 5.64%…. Based on past theories, more passively linked funds should create a larger shift in the demand curves for the stocks around inclusion, but the results do not yield such conclusions. The index inclusion effect appears to have peaked in the late 1990s while the passive management industry has continued to grow.”
So yes, being included in an index, on average, has a significant impact on a stock, particularly in the time between the inclusion is announced and the day the index is officially adjusted to add the new stocks. Computers and investors are watching, though, and any impact like that is likely to be traded and arbitraged by institutions, so the impact is not wildly massive and has not grown. Still, 5% as an average short-term outperformance is significant — and it’s certainly possible that over the long term, with more passive cash flowing in, we’ll continue to see the big get bigger as the largest weightings in the indexes have more money chasing them (indexes are market cap-weighted, so if you have to buy the index you have to buy more shares of the biggest companies in the index).
And MSCI did announce those specific changes, including a couple hundred new Chinese names being added to the EM index at the end of the day on May 31 — you can see that plain list here if you want to browse for yourself.
As a way of anticipating the impact, Sjuggerud refers to another MSCI index inclusion event and the big moves it caused in several stocks… here’s some on that:
“On November 30, 2015, MSCI decided to add a list of stocks to an index.
“After their announcement, every group following that index prepared to buy the tickers at the close of the market… right before the official “inclusion date.”
“Watch what happened next with the three biggest names…”
What follows there are three charts showing the last hours of the trading day on November 30, when those stocks did spike up a bit into the close by several percent… and that probably was either some of the managers adding heavily to those shares or some traders trying to piggyback on an anticipated move in the stock post-index inclusion, but the impact over a slightly longer period of time is generally a lot more muted… even with massively higher volume from index inclusion.
What do I mean by that? Well, her