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
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
posted by Steve at 1:15 PM
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