May 2014 Archive - Mad Hedge Fund Trader

Will the Alibaba IPO Blow Up the Market?

The biggest initial public offering in history is about to be issued by Chinese Internet commerce giant, Alibaba. The floatation, which could raise as much as $18 billion in cash, could value the total company as high as $220 billion, making it the fifth largest company in the US.

The big question now facing equity strategists around the world is whether the Alibaba issue is so big that it will destroy the market?

It certainly is a fair question. Some 44% of the IPO?s that have taken place this year are now underwater. The bloom has clearly gone off the new issue rose, especially for tech issues. If portfolio managers sell $18 billion of other stocks to buy the offering, it could literally suck the life out of an already fragile market.

Alibaba should have done their deal in January, when these deals were still hot. Did they miss the window?? It seems so.

The Chinese Internet juggernaut has another problem, what I call the ?Apple disease.? At $220 billion the company is so big that there is not enough money in the world to get the share price up substantially from the opening print.

Like Apple, it may become one of those behemoths that is permanently cheap, endlessly trolling the bottom of traditional valuation ranges. That frustrates the hell out of value investors. Multiple expansions never happen.

More than eye opening was the 2,300 page registration statement the company filed this week with the SEC. It included financial data for the last nine months of 2013. We learned that revenues were $5.66 billion, net profits were $2.85 billion, and the company is husbanding $7.88 billion in cash. Fair value should come to $40-$50 a share. Not bad for a communist country!

Most amazing are the 48% operating margins that the company is claiming. If true, they make competitors Amazon (AMZN) and eBay (EBAY) appear wildly overvalued.

The firm?s customer base grew by 44% YOY to 231 million last year. Chinese Internet usage generally is expected to soar from 618 million to 790 million by the end of 2016, up another 28%.

Yahoo (YHOO) paid a mere $1 billion for 40% of Alibaba in 2005, probably the only good decision they made in 15 years. After successive dilutions, the stake has fallen to 22.6%.

Yahoo really blew it when they passed on Microsoft?s (MSFT) offer to purchase the company for $31 a share just before the Great Crash, when it then plummeted to $8 a share. It was one of the worst calls I?ve ever seen, and a classic example of great technology innovators becoming lousy managers, and fall victim to hubris.

The sad thing is if you strip out the value of Yahoo?s Alibaba and Japan holdings, it is worth zero. That is probably a fair valuation given the depth to which the quality of the product has fallen. Mobile? What?s that?

The deal will make instant billionaires out of several individuals, most notably founder, Jack Ma, who is facing a $20 billion payday. Don?t you just love China!

Alibaba Ownership

34% Softbank
23% Yahoo
31% Others
8.8% Jack Ma-founder
3.6% Joseph Tsai-CEO

As for me, I?ll be passing on the IPO. It seems like the only time I get allocated shares in a new deal are when they fail. British Petroleum (BP) in 1987, ouch!

You can be sure Alibaba will be one of the most overhyped events in history, complete with dancing characters on the floor of the New York Stock Exchange (dancing pandas? Dancing soy sauce bottles?). After all, that is all it is good for, now that all the trading has gone online and is controlled by high frequency traders.

I am sure that there will be a later opportunity to buy much lower, such as we saw with the Tesla (TSLA) public offering in 2010, which dropped by half to $16 before the ink was barely dry. Then it was the ?BUY? of the century.

Make Jack Ma an Offer

May 8, 2014 - Quote of the Day

Quote of the Day

?The further backward you look, the further forward you can see,? said the WWII British prime minister, Winston Churchill.

May 7, 2014 - MDT - Midday Missive

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.

May 7, 2014 - MDT Pro Tips A.M.

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.

May 7, 2014

Diary, Newsletter, Summary

Global Market Comments
May 7, 2014
Fiat Lux

Featured Trade:
(CHICAGO FRIDAY, MAY 23 GLOBAL STRAGEGY LUNCHEON),
(THE NEW COLD WAR),
(THE BIPOLAR ECONOMY),
(TESTIMONIAL)

The New Cold War

Diary, Newsletter

My friend, Ian Bremmer of the Eurasia Group, a global risk analyst who I regularly follow, has published an outstanding book entitled The End of the Free Markets: Who Wins the War Between States and Corporations. I find this highly depressing, as it takes me as long to read one of Ian?s books as it takes him to write another one. To read a review of his highly insightful tome published in 2008, The Fat Tail: The Power of Political Knowledge for Strategic Investing, please click here. The world is reaching a tipping point. For the past 40 years, global multinationals with unfettered access to capital, consumer, and labor markets have driven the world economy. There is now a new competitor on the scene, the ?state capitalist,? where political considerations trump economic ones in the allocation of resources. Of course, China is the main player, joined by several other emerging nations. The Middle Kingdom has posted double-digit annual growth for the past 30 years without freedom of speech, economic rules of the road, and independent judiciary, and credible property rights. China?s leadership is clearly worried that Western style freedoms will enable wealth to be generated outside their control and be used to orchestrate their overthrow. Private Western companies can only engage in transactions, which stand on their own economically and deliver the short-term profits, which their shareholders demand. In China, long-term political goals enable them to pay through the nose to obtain stable supplies of oil, gas, minerals, and materials. That keeps the country?s massive work force employed, off the streets, and politically neutered. The bottom line is that there are now two competing forms of capitalism. The recent financial crisis has accelerated their entrance to the global stage, moving us from a G7 to a G20 dominated world. Globalization is not ending, but it is definitely entering a new chapter. For those of us who read tea leaves to ascertain major, market moving economic trends, this will be a must read. To buy the book at Amazon, please click here.

May 6, 2014 - MDT - Crude Oil & Swedish Krona

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.

May 6, 2014 - MDT - Midday Missive

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.

Trade Alert - (SPY) May 6, 2014

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

May , 2014 - MDT Pro Tips A.M.

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.