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
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
posted by Steve at 2:26 PM
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