This is the web version of Eastworld, Fortune’s newsletter focused on business and technology in Asia. Subscribe here to get future editions in your inbox.
Well, it has been an eventful week in Washington. And yet, amid the chaos, President Donald Trump on Tuesday found time to sign an executive order banning transactions with eight more Chinese apps, including Alipay, the payment platform owned by Chinese billionaire Jack Ma’s Ant Group, and three apps owned by Chinese tech giant Tencent Holdings.
The order is the latest volley in the outgoing administration’s ongoing campaign to use national security powers to counter Chinese technology companies. It alleges the apps “permit China to track the locations of Federal employees and contractors, and build dossiers of personal information.”
The measure won’t take effect for 45 days, a month after Trump’s last day in office. As Bloomberg points out, “it will be up to President-elect Joe Biden to decide whether to enforce the policy.”
Tuesday’s edict—which follows similar bans slapped last August on Chinese social media apps TikTok and WeChat, and a host of technology blacklists aimed Chinese tech giants like Huawei Technologies—won’t inflict significant pain on the companies it singles out because none of them has significant exposure to the U.S. market.
But the measure could create big headaches for American businesses by restricting their transactions in China.
Alipay, for example, was downloaded only about 200,000 times in the U.S. last year, according to Sensor Tower, but claims more than 1 billion users and 80 million merchants in China. Many global companies say it will be impossible for them to do business in China if they are prohibited from AliPay and its main rival, Tencent’s WeChatPay.
But never mind. The order’s main aim, as Reuters notes, is to “cement Trump’s tough-on-China legacy” in his final days in power.
That legacy, deserved or not, is sure to complicate Biden administration efforts to reset the U.S.-China relationship. Biden’s aides have said the new president won’t make any immediate changes to Trump’s China policies, and will proceed deliberately in deciding which to keep, modify, or discard.
As we’ve noted often in this space, hostility towards China is one of the few—if not the only—truly bipartisan sentiments in Washington. Biden will find it difficult to unwind Trump’s sanctions and renegotiate his “phase one” trade deal without antagonizing Democratic friends and Republican foes alike.
Biden does promise, though, that he’ll work together with other Western democracies to bolster U.S. leverage in dealing with China. That would be a departure from Trump’s “go-it-alone” approach. Central to that shift is a proposal to create a “Summit of Democracies” to articulate an alternative to Chinese authoritarianism. But as Bob Davis and Lingling Wei point out in this thoughtful analysis in Wednesday’s Wall Street Journal, building a “grand alliance” to counter China poses daunting challenges.
“Given the lure of the vast Chinese market,” they write, “Mr. Biden could face a tough time convincing allies to sign up for a united front against Beijing…U.S. allies say they can’t be sure of America’s long-term commitment to an international alliance, given four years of a unilateral approach.”
Case in point: China and the European Union last week agreed on a sweeping investment treaty designed to create lucrative new business opportunities for both sides, concluding seven years of tortured negotiations. EU leaders signed off on the deal despite heated internal debates about China’s record on human rights and forced labor, and a last-minute appeal from Biden’s national security adviser Jake Sullivan to hold off until they’d had a chance to discuss it with the new administration.
The EU-China deal remained intact despite the arrest in Hong Kong on Wednesday of 53 pro-democracy activists on national security charges. The EU is still keen to get the deal done, Bernd Lange, head of the EU parliament’s trade committee, told the South China Morning Post.
Financial Times columnist Gideon Rachman decried the investment treaty as “a considerable kick in the teeth for Joe Biden.”
Europeans are “kidding themselves if they think they can be blind to the increasingly aggressive nature of Xi Jinping’s China,” Rachman argued. “If an authoritarian nation, such as China, displaces America as the dominant global power, then democracies all over the world will feel the consequences.”
More Eastworld news below.
This edition of Eastworld was curated and produced by Grady McGregor. Reach him at [email protected]
Elon Musk loves Joe Biden
Good morning. In a lengthy phone interview with Fortune’s Vivienne Walt last week, the world’s richest man (sorry, JB) gushed over the new American president. “I’m super fired up that the new administration is focused on climate,” he said.
Musk fan boys can tell you that his political views have long leaned to the right, on many issues. He has fought unionization at his factories, and in 2018, donated far more to Republicans than Democrats.
But his turnaround on Biden should come as no surprise. The Biden team is contemplating a variety of measure to encourage electric cars and attack climate change—which can only mean more money in Musk’s pocket. It recognizes a new reality in the climate debate from a decade or two ago. Businesses used to routinely oppose climate discussions because they feared resulting taxes and regulations. But one person’s tax is another’s subsidy. And today, some of the biggest companies—Tesla included (No. 7 in market cap in the S&P 500)—are on the receiving end.
More news below. And here’s your fact for the day: For the first time in 37 years, Budweiser will not be advertising in the Super Bowl. I guess the Clydesdales are in quarantine.
What the savvy investor can learn from the bonkers rally in GameStop shares
This is the web version of the Bull Sheet, Fortune’s no-BS daily newsletter on the markets. Sign up to receive it in your inbox here.
Good morning, Bull Sheeters. Tech stocks are leading the way this morning, sending U.S. futures mostly higher, and lifting global stocks, too.
It’s a big earnings week for Big Tech with one half of the FAANGM sextet reporting in the coming days.
In today’s essay, I look at the bubbly trade in penny and loss-making stocks, including the crazy surge in GameStop.
But first, let’s see where investors are putting their money.
- The major Asia indexes are mostly higher in afternoon trading with Hong Kong’s Hang Seng up 2.4%, continuing an impressive monthlong rally.
- The big gainer is Tencent, which at one point was up more than 10% on Monday as bulls poured into call options at a staggering clip.
- China is the new global leader for business investment. The much watched figures on direct foreign investment came out this weekend, showing the U.S. lost the No. 1 position in the past year, thanks to COVID-19.
- The European bourses were mostly higher out of the gates with the Stoxx Europe 600 up 0.5% at the open, before slipping.
- President Biden phoned a slew of world leaders this weekend, including Britain’s Boris Johnson. Downing Street was quick to highlight that the topic of a trade deal came up on the call. The White House had a different recollection of the conversation.
- The one-two punch of Brexit and COVID is jangling nerves in the U.K.’s financial and business capital. Roughly 40% of Londoners say they’d consider a move across the Channel to Europe.
- U.S. futures point to a positive open. That’s after all three exchanges closed out last week in the green.
- Goldman Sachs equity strategists see signs of “froth” and “unsustainable excess” in the U.S. stock market. It’s not just with SPACs, they warn, but also the “bubble-like” enthusiasm for stocks with negative earnings. There’s more on this below in today’s essay.
- Big tech dominates the earnings calendar this week. The big names include: Microsoft (Tuesday), Apple and Facebook (Wednesday).
- Gold is flat, trading around $1,850/ounce.
- The dollar is down.
- Crude is up, with Brent trading above $55/barrel.
- As of 9 a.m. Rome time, Bitcoin was up around 1%, at $33,300.
The B-word comes up a lot on Wall Street these days.
As Goldman Sachs equity analysts wrote in a note this weekend, “among the questions we receive most frequently from clients is whether U.S. stocks trade at unsustainably high levels (read: “Bubble”).”
The answer to that question is: yes, bubbles abound. But you have to know where to look for them.
For example, equities pros struggle to find an adjective for the craze in blank-check SPACs. There have been 56 SPAC IPOs so far in 2021, raising $16 billion. (If SPACs still puzzle you, check out Fortune‘s Jeff John Roberts analysis of what a “lousy” investment the SPAC is for anybody looking to make a quick and decent return.)
There are other alarm bells Goldman sees in the markets—namely, the robust trade in penny stocks, in companies hemorrhaging losses and in overvalued stocks (as represented by EV/sales multiples hitting or exceeding 20X). It almost goes without saying that such risky bets usually don’t end well. And yet volumes in these YOLO (you only live once) trades are reaching historic highs.
EV/sales is a much watched metric. It gives investors a good idea of whether the market value of a company (factoring in its level of equity and debt) is in line with revenues. A stock with a relatively low EV/sales—say, under 1X—may be a company that’s undervalued despite decent top-line growth. A high EV/sales ratio, meanwhile, indicates investor exuberance is running hot for a business whose stock price is growing faster than sales—or so it often seems.
They tend to be highly risky.
“Since 1985,” Goldman writes, “the median stock trading at an EV/sales multiple above 20x has generated a subsequent 12-month return of -1%, compared with +6% for the median US stock.”
In the past month, nearly one-quarter (23%) of shares that have changed hands are companies with out-of-whack inflated EV/sales, as the table above shows. Meanwhile, there’s been a similar surge in the volume of trading in firms with negative earnings.
One such beloved loser is GameStop; it’s soaring again this morning in pre-market trading. The loss-making video game retailer is up nearly six-fold since Jan. 12 as retail investors go all in to punish the many shorts that are betting on its crash. It’s being called the mother of all short squeezes, and it’s triggering a whole slew of vicious take-downs on Twitter. The big scalp for the WallStreetBets crowd is the veteran activist short Andrew Left of Citron Research, who it appears is losing huge sums on his bearish position at the moment.
At one point on Friday, GameStop was the most actively traded U.S.-listed company, Bloomberg reported. Never mind that it had a rough Christmas sales period, and recently delivered a sobering outlook that involves further belt-tightening to weather its COVID-battered market.
GameStop bulls—I can’t believe I just typed those words—are going all in on the stock as if it were an e-commerce juggernaut.
If you were a bubble hunter, stocks like this one would be worth examining.
Have a nice day, everyone. I’ll see you here tomorrow… Until then, there’s more news below.
As always, you can write to [email protected] or reply to this email with suggestions and feedback.
What does big business need to do to earn your trust?
A peaceful transfer of power doesn’t mean that threats of political violence—and difficult conversations about it—have ended. Tim Ryan, the chair of PwC U.S. weighs in with some advice below. (Hint: The actual challenge leaders are facing is proving that they’re trustworthy.)
But first, here’s your Inaugural poet Amanda Gorman-inspired week in review, in Haiku.
“Where can we find light
in this never-ending shade?”
Asked by a new voice,
in a new moment,
free from the belly of a
beast that stalks us all.
It took a poet
to capture the promise of
a hard-won hill, climbed
by many on the
backs of a justice-seeking
few. Unfinished, yes
we are. But here’s a
good place to start: Pay all the
poets what they’re worth.
Wishing you a lyrically peaceful weekend.