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On the day that the stock of Chinese electric cars company BYD took a sharp dip, one investor saw an opportunity to buy.

Himalaya Capital Investors, an investment vehicle controlled by Li Lu, added 3.2 million shares in BYD last Thursday, the day when the company’s share price mysteriously plunged nearly 30% on the Hong Kong Stock Exchange, according to the company’s latest filing.

LL Group, the parent company of Himalaya Capital Investors where Li Lu is the controlling shareholder, now holds 57.4 million shares, or about 2.4% of BYD’s total issued share capital.

The once rumored candidate to run a portion of Warren Buffett’s portfolio, Li is an early investor in BYD himself and later through a fund with investment from Charlie Munger, the vice chairman of Berkshire Hathaway.
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BYD closed at HKD 27.85 on the Hong Kong Stock Exchange today, down 2.6% from opening. Li looks to have already made a paper profit from the additional shares, which were purchased at an average of HKD 23.54 per share.

Notably, the rather breathtaking short-squeeze we observed late last week was not accompanied by a material shift in internals or credit spreads. Understand that such improvement would not reduce the overvaluation of the market, but it would significantly reduce the immediacy of our downside concerns. Meanwhile, however, we interpret last week’s short-squeeze as more likely to be one of those “short-lived announcement effects.” Even here, despite enthusiasm over the word “patient,” the Fed announced no meaningful change of course.

Monetary easing is reliably supportive to risky assets only when safe, low-interest liquidity is viewed as an inferior asset. This can be inferred from the behavior of market internals and credit spreads. At present – again, aside from short-lived announcement effects – we don’t observe the conditions under which monetary easing should be expected to be particularly supportive to risky assets. While the current meme is that monetary easing is equivalent to rising stock prices, recall that the Fed was already aggressively lowering interest rates in the fall of 2007, and eased monetary policy aggressively and persistently through the entire course of the 55% stock market collapse that followed. 

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Coupled with an increasingly synchronized global economic downturn, we’ve seen a particular collapse in oil prices. Some observers view this as if it is “stimulative” to the economy, but that perspective confuses the price decline resulting from an inward shift of the demand curve as if it was caused by an outward shift of supply. Our view is that the concerted decline in commodity prices, foreign currencies, and Treasury yields, coupled with a blowout of credit spreads in junk debt (particularly energy-related debt) is all consistent with weakening global economic prospects. Given the “cleanest dirty shirt” perception of the U.S. dollar, the greenback has certainly benefited from this dynamic. But to expect this benefit to persist assumes that a) the dispersion between U.S. and global prospects will continue to widen, and b) that widening is not already priced into the currency markets.