8/26 newsletter

The market is still correcting with the pressure of oil hitting new high and housing market in doubt. Although new home sales still in all time high, the growth part is probably gone.

If your portfolio is tracking SP500 or small-cap, this month's 3% correction is bad enough to bring YTD yield to close to zero. But if it is tracking mid-cap, the 7% gain remains solid.

I find a good model to explain this year's market. Assume you only hold 3 stocks, COMMODITY is +30%, INDUSTRIAL is +0%, FINANCIAL is -10%. The average is +6%. If you lean on the right side, you got more, wrong side, less. Nobody knows how long the pressure from oil and interest rate will last...

--Steve

8/20 newsletter

Just a small comment on the market volatility this week.
I mentioned to you that you can lose money even in a bull market. This week is another example of the tricky capital market. The oil price ran through the roof. You would think oil stocks should be high in the sky as well. But nope.

As SP500 made a small correction, oil stocks were being sold off. Some oil stocks are more than 15% off their July highs. Why? One factor is valuation. The rally in July already brought oil stocks to a very high valuation. With the news of gas price hitting new high this week in every major media channel, Wall Street played a contrarian game. Sell off while individual investors rush to buy. the other factor is that in a well-known high-flying sector, the market usually counters the high demand with high volatility. Therefore, the risk adjusted return is neutralized. Only those who have faith can reap the growth. The faint hearted will be washed out by the price movement.

Baidu.com dropped to $80 range. It probably will continue its decline. My reason is the volume. As I mentioned, Baidu only has ~30 mil shares outstanding (A+B). The daily trading volume is way too high (>10 mil shrs first few days). It will have to cool down to << 1 mil shares daily. Whatever that price is, there it will settle. The tricky setup of class B stock is that, even insiders sold all the B stocks (~28 mil shares) but retains only 3 mil shares, they still control 50% of voting right. It is a sucker's game...

--Steve

8/15 newsletter

The market is undergoing a small correction at 52-week high level. Oil price made a push to $65, another record high. Greenspan raised interest rate to 3.5% and hinted the raise will not stop until year-end, at which time rate will be more than 4%.

It is a very strange economic cycle that stock, oil, real estate, bond price, short term rate are all at historical high. I don't believe anybody can decipher the meaning and implication of this combination until years later...

Suggested reading:
http://www.iinews.com/site/pdfs/IIMag_SAM_July_2005.pdf
I told Danzhi I have very high suspecion on mutual fund industry. You will understand why I take that stand after you read this article. It will also help you think straight toward Wall Street.

--Steve

8/07 newsletter

The market is correcting under profit taking pressure after making new high. This is understandable. However, there are several important developments in the market. I think the most important one is that federal government decides to sell 30-year bond again (which was stopped in 2001). Their reason is to take advantage of the low long-term rate (redeem short-term bond and sell into long bond). However, it also implies the effort of hammering the bond market with the selling since Greenspan had a hard time reversing the bond market rally. Who can be a more powerful seller in the bond market than the Department of Treasury?

Once the bond market turns around, the first hit will be the red-hot housing market. On Friday, home builders index was down 5% when SP500 is down only 1%. You can tell investors are nervous and are standing on the sell side (with huge profit on hand). I have quite a few REIT stocks so I am watching it closely. In yesterday's Star Ledger, there is a chart indicating more and more people are buying houses as second home or investment. This (leverage) is a bad sign in a bull market...

FED is very likely to raise the short-term rate again this week. Oil continues to push into new high ($63 today).

You probably already heard the "successful" IPO of Baidu.com. But this is alarming that, in the heavily scrutinized Wall Street today, IPO price can be missed by 400% in day 1. Something is wrong here. Silicon Valley venture capital is playing game again? (Since Baidu is a foreign company, it is not required to file insider selling to SEC, there is a loophole here.) Here is my analysis after viewing its prospectus.

Baidu is a funny foreign company. It has a top level holding company at Cayman Island, and then another layer at Virgin Island, and then is the LLC at Beijing. It has two classes of common stocks -- Class A is the one going public, 4 million shares; Class B has 28 million shares. Class B has 10 times voting right of Class A. What it says is that Class B, which is private, is the real owner of the company. Class B can be converted to Class A at any time (therefore, selling on the public market). But not vise versa. Why does Class B want to convert to lose its voting power? The only reason is to sell.

With regards to its earning power, it has about $13 mil revenue in 2004. Assuming a 100% growth rate, it will have $26 mil in 2005. It made ~ $1.5 mil in 2004. At IPO, it has 34 million shares outstanding, close at $120 per share, that amounts to a $4 billion company. The PE ratio will be ~150 if all $26 mil revenue is profit. It is a hard call to say the share is reasonably priced. It will need to make $100 mil to qualify a reasonable PE=40. That can be years into the future...

--Steve