I’m a little late getting going today… I’d like to say that I’m jet-lagged, but really I’m just email-lagged as I try to dig through the few days of messages that I missed in my brief foray to the Emerald Isle over the past few days (which was fantastic, by the way, thanks for asking).
But going we’ll get, and today the teaser pitch that’s popping to the top of my list is from Steve Sjuggerud, whose name I can finally spell correctly after writing about his various newsletters at Stansberry over the past decade — this particular pitch is for his True Wealth service, which is now offered at $49 “on sale” as one of the “entry level” letters for Stansberry (they say the retail price is $199).
Sjuggerud generally follows a pretty disciplined strategy that most often focuses on ETFs, with the occasional large cap stock making an appearance, and his stated goal is to buy assets that are “cheap, hated and in an uptrend” — which has the benefit of sounding good and logical… though it does not, of course, work every time.
This time out, it’s more of a “special situation” that he’s touting — he says that “The Largest Single-Day Wealth Creation Event of the Decade is Fast Approaching.”
So what is that?
The sexier description from the ad gets the blood chugging through your veins:
“PhD Currency Expert and Former Hedge Fund Manager Says: ‘Mark Down This Date: May 15, 2017’
“The Global Currency Event of the Decade is fast approaching…
“An announcement from one of the most powerful financial authorities in the world is coming in the next few weeks that could lead to returns of up to 871%.”
The short answer is that he’s talking about the inclusion of the Chinese domestic stock market in the major MSCI indices.
Which doesn’t sound all that sexy, but is a potentially meaningful driver of stock prices — though it’s hard to really know for sure, because index adjustments on this scale, adding a giant stock market to global indexes, are not really common.
Most of the time, a change to a big index that is widely followed by passively indexed investment money, like the S&P 500, will have a meaningful impact on the stocks impacted… if a stock is added to the index, for example, the shares will often pop up in the month or two (sometimes it’s a lot faster) that it takes for all of the index funds to buy up enough shares to match the index. Sometimes, as Sjuggerud notes in his teaser pitch, the stocks will even move a few percent just in the day or two around the addition to the index. Passive index money is a huge driver of the markets, and pointing that fire hose of money at a new stock almost always has at least some impact.
It’s not always that simple or easy, of course — active investors and arbitrageurs look for these opportunities all the time, and they hire researchers to dig into the data and try to identify the next company that will be added to the S&P 500 (or whatever other index, though the S&P is the biggest bang for the buck because of the massive pool of money that tracks that US large cap index), so word generally leaks out about expected changes to the index, and folks try to buy up those shares so they can sell them at a slightly higher price to all the index funds, who don’t necessarily have the luxury of waiting to buy shares, in the days leading up to or following the adjustments to or rebalancing of the index.
And on the flip side, the index funds themselves can game the system a little bit — they have a mandate to follow the index, but they don’t necessarily have to follow it slavishly to the day… it wouldn’t be shocking for big managers like Vanguard and Fidelity to start accumulating shares of companies that are almost certain to be added to any given index in the days before the index change is officially announced, and in the days between that announcement and the actual change, particularly because changes tend to happen at the lower end of the index where each individual stock has a relatively small impact (since indexes are market-weighted, adding a new stock at the top, like Apple, would immediately change 4% of the S&P 500, and that would be huge… but what happens more often is that a stock grows into being just big enough to enter the S&P 500, and if a new $4 billion stock like AutoNation (AN) gets added as the 495th largest company in the S&P, for example, that’s only going to drive about one tenth of one percent of that passive money into the new stock… even passive funds generally have some latitude to adjust that tenth of a percent somewhat gradually).
So front-running the index funds is a profitable and legal way to “game” the market, as p plenty of folks have noted (many of the quotes in the ad are from a 2015 Bloomberg article here, if you’d like more background)… but things tend to even out a little bit over time… any predictable pattern in the stock market is jumped on by lots of MIT-trained quants who seek out those little edges, and as more and more folks seek out those small advantages, the advantages tend to disappear. That’s the way of the markets in this over-computerized age, and the lament of the quantitative investor… if your edge is sifting through data and identifying trends or triggers, there’s nothing to stop the next ten supercomputer jockeys from finding that same edge.
Sjuggerud seems quite sure that MSCI will add China A-Shares (stocks which trade in the domestic Chinese exchanges, in Shenzhen and Shanghai, as opposed to those which already have listings in much-more-accessible Hong Kong or other global markets) to the big MSCI Emerging Market index.
That will be a big deal, for sure, because it would add a huge amount of global liquidity to the A-shares markets… though it may also be that MSCI won’t add A-shares to the index unless the cap on foreign trading in those shares is lifted by the Chinese regulators, so it’s kind of a chicken-or-egg situation to that extent. If China makes A-shares more accessible to more investors and loosens their capital controls, there would probably be more liquidity and a boost to Chinese trading with or without Chinese domestic stocks being added to the MSCI Emerging Markets index.
Is it guaranteed that MSCI will include Chinese A shares? No, though it seems inevitable at some point — everyone agrees with MSCI that the market has been “too big to ignore” for years, though plenty of index managers who follow the MSCI Emerging Market index don’t look forward to the headache of dealing with a market that’s not as open as the index’s other components.
Over the past couple of years there have been several points, particularly in 2015 but also just a year ago, in early June of 2016, where investors were convinced that the MSCI index change to incorporate mainland China was imminent, even running up the price of A-shares stocks from time to time in anticipation, and yet it still hasn’t happened.
There have been plenty of articles of folks chiming in about the likely change this year, from negative pieces back in January when the MSCI leaders were chiding China about capital controls, to a Forbes blogger trying to guess at the odds for the “MSCI green light” just last week, but I suppose it hasn’t been in the headlines as much this time around as it was a year ago and two years ago.
I have no particular insight into whether or not it will happen in this next rebalancing, though May-June is the next time period during which a change would most likely be announced if it’s done like past rebalancings… and there will probably be more and more chatter about it over the next two months as pundits dissect the possibilities. The last update I’ve seen from MSCI is last year’s update to their consultation presentation, which basically floated the idea that they might move to a partial inclusion of A-shares in the Emerging Markets index this June as they wait for more flexibility and/or clarity from the Chinese regulators.
If they went forward with that, it would be a much less dramatic impact on the A-shares stocks — but probably still pretty substantial, since A-shares would go from no weight in the trillion-plus dollars that follow the MSCI Emerging Markets index to at least 1% of that index. One percent of a couple trillion dollars is real money, though I don’t know if it’s enough to move those very large markets.
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