They Do Ring A Bell At The Top: Alibaba Proves Wall Street Is Off Its Rocker

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

They do ring a bell at the top.

On Friday Alibaba gained $65 billion of market cap in 5 minutes!  And that was on top of the $170 billion IPO price - a valuation that was not all that shabby to begin with.  In fact,  BABA weighed in for the opening bell at 20X its $8.6 billion in sales.

US $2.5-10 / Piece ( FOB Price)
800 Pieces (Min. Order)
30000 Piece/Pieces per Month (Supply capacity)

Well, the above red hot multiple was not actually with reference to the company’s results, but to its drop-box financials. That is, before the day was over it was trading at 27X the LTM sales posted for a shell in the Cayman Islands - an entity on the word processor of a law office located there which may or may not receive actual cash dividends and honest accounting statements from a myriad of entities that do countless things in China.

Ah, yes, in China - the most stupendous bubble of unsustainable construction, borrowing, speculation and corruption known to the pages of history.

So with regards to BABA’s $230 billion market cap at week’s end, you can say this: None dare call it price discovery!

What it shows is that Wall Street is well and truly off it rocker. The Chinese swindlers behind BABA didn’t even have to tap their home market. These preposterously over-valued shares were sold overwhelmingly to Wall Street - to the gamblers, speculators and robo-traders that have occupied what was once a reasonably honest capital market.

(Mr.Ma started the company in 1999 with $60,000 raised from around 80 friends in Hangzhou)

Its not just that the $25 billion raised in the offering will go in part to insiders and in part to a blind pool for the acquisition of anything operating in China or not in China. That isn’t the real red flag. The real one is, well, an actual red flag.  Namely, the utterly unexamined idea that China is just another capitalist economy like the US, UK or even Italy, for crying out loud; and that it is galloping off into a glorious future and a middle class consumption orgy that will make what takes place daily in America’s 3,800 Wal-Marts look diminutive.

The Wall Street brokers thus threw up a storm of statistics about BABA’s GMV(gross merchandise volume) of $300 billion being 3X that of Amazon. And that the number of customers at 279 million is more than the number of adult Americans. Then there are also 8.5 million sellers, 14.5 billion annual orders, and also customers that are eagerly adopting mobile purchasing—a metric that is up 38% to 188 million in the last six months yet still only a small fraction of China’s 700 million internet users.  In short, the pitch is a modern version of “a billion lamps to China”.

Well, I’m sorry kids. China is a monstrous house of economic cards and an inherently unstable polity that will blow sky high in a matter of time - and probably not that much more time. You can’t capitalize what is nothing more than a proxy for everyday retail commerce in China’s maniacal economy with a PE meant for real capitalist enterprises that have invented something of profoundly transformative significance, such Google—- or in their day, Microsoft, Intel, IBM and the Ford Motor Company.

By contrast, Alibaba is a purely derivative mass merchant of e-commerce. It is a Chinese copy of Amazon, eBay, PayPal, YouTube, Twitter and the New York Yankees—-all rolled into an opaque and convoluted financial pyramid that would have made Goldman Sach’s ill-fated schemes of 1929 look reasonable. Moreover, even its Cayman Island grade financials prove that there is absolutely nothing unique and non-replicable about the business model of this purveyor of stupendous volumes of cheap stuff to China’s retail masses.

Stated differently, there is no known capitalist market in which a mass merchandizer with no inventories, no stores, no warehouses, no patents, no state monopoly and virtually no fixed assets whatsoever is worth $230 billion. Indeed, BABA has virtually no working capital and the only assets visible on its balance sheet are cash, $300 million worth of un-depreciated computer software and equipment and $6 billion of intangibles and advances spread among the archipelago of entities that comprise the house which Jack (Ma) built.

Yes, its all new age retail–that is, an internet based purveyor of e-commerce. But that’s just the point - there are no barriers to entry and plenty of competition. In fact, Alibaba is just a cyberspace broker that even in a real capitalist economy would have an impossible time warding off competition and erosion of its currently super-fat first mover margins.  And it surely does have rambunctious competition in China’s essentially lawless internet space - such a Tencent Holdings and the 500 million users of its smartphone messaging apps services—potentially all of whom are being converted to on-line shopping.

That’s very different than Amazon, for example, which carries $8 billion of inventories and $12 billion of fixed PPE - mainly in its massive and virtually irreplicable warehousing and distribution system. That’s not just a barrier to entry - its a veritable bricks and mortar wall.

But here’s the thing. BABA isn’t remotely worth $230 billion because even in China its 40% broker’s margins cannot possibly endure the tsunami of competition it is likely to face - even in the near future.  But honest PE multiples and capitalization rates are driven by the longer-term future, and China’s middle class doesn’t have one!

This is just another version of Japan Inc. - a state-built house of debt, export mercantilism and fabulous over-investment that eventually came to a dead stop 20 years ago. And Japan at least had some rudiments of true capitalism such as law, contracts and some vestiges of market discipline.

As to the case of China’s red capitalism, however, there is no place in the history books where can you find a booming economy that is so artificial, fragile and prone to cataclysmic accident. It has not grown organically from the grass roots owing to capitalist enterprise. Not in the slightest.

Instead, it has been concocted from the center by communist party bureaucrats who discovered the miracle of an unhinged printing press; who adopted the economic arithmetic of Keynesian GDP accounting under the slogan “if you build it, we will count it”; who created a vast pyramidal apparatus of credit distribution down a cascade of corruption that is pleased to call itself a banking system; and which is now swamped in mindless, debt-fueled speculation and building without any semblance of economic discipline, efficiency or rationality.

Folks, that is how a backward economy which was until recently run according to the precepts of Mao’s little red book managed to balloon its total credit outstanding from $1 trillion to $25 trillion in just 14 years after the turn of the century.  That is how an orgy of construction resulted in more cement production in China during 2012-2013 than in the USA during the entire 20th century—-a time which witnessed the building of the New York subway, the Hoover Dam, the vast expanse of Army Corps of Engineers waterways, the Interstate Highway system, the sprawl of American suburbia and its 13 billion square feet of mall space, among countless others.

It is also how China ended up with upwards of 70 million empty apartments, thousands of miles of bridges and roads that are virtually unused, notorious and proliferating ghost cities, and thousands of miles of hastily built high speed railways that are unsafe and mired in corruption. It is also the well-spring of a precarious system of local government finance that is based on little more than monumental speculation and inflation of the price of the lands which were seized by the state 65 years ago. And the list goes on and on.

That there will be a thundering collapse of China’s stupendous borrowing and building spree is only a matter of if, not when. And in that event, the mirage of China’s booming middle class will become painfully evident. Indeed, it is the very same frenetic buyers of stuff on BAMA websites who have jobs which will disappear when the building boom stops and who have asset ledgers which will violently deflate when China’s towering debt bubble finally bursts.

So why did Wall Street capitalize an opaque mass merchant operating in a precarious economy at 27X sales?  The answer is that Wall Street is a momentum driven casino that is now over-valuing everything that moves and all that stands still.

That’s the ultimate evil of monetary central planning. Having destroyed honest price discovery in the financial markets, the Fed now “accommodates” the speculators one meeting at a time - in deathly fear of a hissy fit that will bring down the entire phony edifice of insensible asset inflation that it has midwifed since the last financial crisis. You would think that absurdities like the Alibaba IPO would finally get the attention of our clueless monetary politburo.

But apparently not. As they watch the market climb the precarious chart pattern shown below, you wonder where they think it will all end.

Unfortunately for the American people, the nirvana of Keynesian full employment does not suggest itself as one of the possibilities.

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Roanman's picture

LOL.

"Reasonably" honest capital markets.

Still LOL.

espirit's picture

... and 'Poof', it's gone.

NoDebt's picture

You can't tell what "reasonably honest" looks like when everything is going well.  You can only tell what's honest after the shit hits the fan.  2008-2009 showed what level of honesty we were playing at in our markets.  It was pretty obvious to anyone with eyes we were nowhere near "reasonably honest."  And I see nothing to indicate it's gotten anything but worse since then.

More_sellers_than_buyers's picture

you need specialists for honest markets. Goldman did away with them 10 years ago... but le me tell you, all the BS saying we dont need em... they are fucking thieves... yadda yadda... I will tell you a bit of truth... When the shit hits the fan, as it does occasionally, noone....and I mean no one stepped in to buy , but the spec.   Down arrow me all you want

RECISION's picture

Ali Baba was a Thief...

New Baba - same as the old.

Buck Johnson's picture

When this economy implodes or when the black swan event happens it will take down most of the worlds economy or at least the ones connected hook line and sinker to the western economies.  The market is fake and inflation is rampant and will be more so when hyperinflation happens.  During 2007 and 2009 economic calamity, all stocks took almost a 50% haircut including the market.  I think this time it will be worse and it won't shoot back up as quickly as  it did last time.  Because as some have said we have already used those bullets and got the same result, what's next to use.  I can't wait to see Alibaba implode  into a penny stock when people realize what they truly have and what it really isn't worth.

 

 

Whootie_who's picture

In the dot com robbery we called it vapourware. ...poof indeed

JustObserving's picture

Greed is its own reward. 

One would have thought that 40 thieves would be warning enough.

agstacks's picture

Guy I know bought 500 at $98, and 1000 at 94.  He is psyched.  The worst part is he will proabably make a killing.

walküre's picture

Tell him to buy 2000 at $90 and 5000 at $75, then go all in with 10,000 at $35 in a couple months time.

uhb's picture

...and 1,000,000 at 0,01 :)))

IronShield's picture

There is corrupt and then there's absolutely corrupt.  Enter the dragon.

yogibear's picture

The Apple consumers are so smart their putting iPhones into microwaves to charge them.

 

http://www.independent.co.uk/life-style/gadgets-and-tech/news/ios-8-hoax...

PontifexMaximus's picture

I hope that everyone knows the translation of ali baba

anachronism's picture

I don't! Okay, I'll bite....What is the translation of Ali Baba?

paul steinert's picture

Great prose, Mr. Stockman.

NoDebt's picture

Wait.  What country are we talking about?  You'll forgive me, but catching every reference he throws I sometimes lose track of whether he's talking about Chia's shortcomings or our own.

And what's all this about Alibaba not having a state monopoly in China?  Of course they are.  They would never have been allowed to get so big without at least the tacit support of The Party.  And I'm sure there's plenty of bribes and such sloshing between the two as well.

NoDebt's picture

Oh, stop.  You're going to make me break out in a fit of giggles.

"So any monies made can actually be declared illegal gains and confiscated by the gvt."

You don't think we have our own version of that here?

 

RiskyBidness's picture

Alibaba and the 40 Niggas........Who didn't see this coming.......Hahahahahahaha

NoDebt's picture

That was uncalled for.

And regarding ethnicity, you can never really appreciate the story of Alibaba and the 40 Thieves unless you've read it in it's original Chinese version.

highly debtful's picture

That's a book I don't even want to open.

falak pema's picture

original persian or arab version. Unless "The thousand and one nights" were fu man chu's dream gone beduin in around 750 AD.

falak pema's picture

Its not monetary central planning its corporate mass greed.

Capitalism is the opposite of central planning. The first is based on power of politics controlled at the center.

The second is based on using money and people's greed as leverage to make money based on cheap labour and cheap RM monopolies or oligopolies which give capitalists comparitive advantage leverage.

Eventually both need to control power to work; the first uses bureaucracy and politics cum big stick, the second uses banks, stock exchanges and big stick and political leverage to get its monopoly position to the market.  

We have the collusion of both worlds today at a level unparalled; Charybdis and Scylla. Central planning is now saving the SKINS of the monopolists.

Even Ulysses didn't have to face both of them at once. 

disabledvet's picture

This is total anarchy.

At least it looks and acts like total anarchy. I mean seriously....when does the PLA enter Hong Kong here?

LawsofPhysics's picture

...faith and confidence will be the death of them both.  Eventually there will be enough motivation for the central planners to finally go after some of Tim Geihtner's "arsonists".  Someone will get their balls in a vice and then start naming names, they always do.

 

< meh > same as it ever was.

q99x2's picture

FB is still around even though it has nothing to offer. It has lots of competition offering nothing. This is how bankster FRAUD enables globalists to conquer the world. The corporate wealth is being used to help depopulate the planet. Bill Gates pioneered this.process. 

LawsofPhysics's picture

Depopulate?  Well then, they are not doing a very good job...   ...7+ billion and growing, more than double since Bill Gates became a billionaire...

jubber's picture

more like... AliBaba and the 40 Jewish bankers

disabledvet's picture

Jack Lew...aka "Mr Cayman Islands." SAILING through information hearings!

"A Pryamid scheme is different from a Ponzi." I'll let Wikipedia do the talking as we all now...and always have...known the truth of these things.

Suffice to say "it's called Pyramid Corporation" up here.

Or "brokerage" now I guess.

This is not Wall Street madness per se but certainly fiat madness. I would for someone to explain to me how a reverse repo is different from QE.

Hello? Anybody?

disabledvet's picture

Who? That thing could hit zero in three weeks...even days.

JohninMK's picture

OK, the Chinese have pocketed lots and lots of dollars.

But which pocket have they put them in now ? Stocks, bonds, in a US bank account, Yuan, gold?

walküre's picture

Warren Buffet is laughing his ass off at Wall Street sellin the Jack Ma story and going cash.

highly debtful's picture

I only invest in chickens for now. They provide eggs. And meat. My family eats both. Doesn't make me rich, but it fills our bellies and we don't have to worry about a sudden return of gravity with a vengeance. 

I like to keep it simple these days. 

65 billion in 5 minutes. I don't wanna be near any other human beings when things turns sour.

This is going to end so bad. 

LawsofPhysics's picture

Likewise, that and lead, brass, certain types of lessons for the whole family...  etc.

LawsofPhysics's picture

The latest in Chinese "copy and paste" technology...

whatever ponzi's we can do, they will better times a fucking trillion....

No way the PBC wants to anything to do with the world's reserve currency, period.

laomei's picture

lolol, seriously, give it a rest already, just admit that you don't know what the hell you are talking about and call it a day.  And yes, of course they have patents.  The sheer scale of what alibaba does would be readily apparent if you spent any time in China at all. 

 

As per the holding company, nothing new there, just fearmongering and idiocy.

Dungholio's picture

AliBaba and the Banker Thieves

Spungo's picture

Why all the alibaba hate? It's a real company with real profits. It's absurdly overpriced, but that doesn't mean it's a scam.

Dungholio's picture

It also doesn't mean that the stock itself is not a scam.

ejmoosa's picture

It's all good when the party is going full tilt...

But just wait until sunrise or someone turns the lights on.

Just like Detective Joey on Dexter:

https://www.youtube.com/watch?v=W1fGmVjWyoA

 

And sometimes there's video.

 

 

 

starman's picture

And people still wondering why Atlantic city  closing them casinos!  

We got bigger fucking casinos on Wallstreet!  

paul steinert's picture

Good traders (uh....not me), will make a ton of money on the short side of BABA.

Spungo's picture

btw the REAL alibaba is traded on the Hong Kong exchange, ticker #1688.
The company on the NYSE is the holding company, sort of like a royalty company.

anachronism's picture

It is unfair to blame central planning for this phenomenon. There were no central planners behind the tulips in the 17th century, nor the south sea islands in the 18th.

It has even happened to gold, in the years after the Oil Shock of '73 until 1980, and after 9-11 until 2012.

There is no one to blame and no one to ridicule but ourselves.

ejmoosa's picture

Did those that bet big on the tulips lose?  Were they using their own dollars?

Because the big bettors today do so without the fear of losing.  They have the Fed that A) is spotting them the dough to speculate and B) is willing to absorb their losses.

 

 

Straw Dog's picture

Is that a photo of Mr Ma with white hair and nose ring?

Hard hiting article Mr Stockman.

scubapro's picture

 

hmmm, companies worth a ton of money that dont have inventories or much of fixed assets, perhaps credit card companies, banks of course, advertising firms, ebay, paypal, microsoft, red hat, adobe, the list goes on.

baba will vascillate just as all the companies will.  with their cash hoard they will buy all the 'hard' companies, and any competitor that pops up.  he who goes public first goes public best. 

40x next years earnings that are supposed to double from 2014....standard valuation currently.  it is fairly priced given the environment....which is they are all overpriced.  fat margins and a PEG of less than 1.....i'd like to hate it on its own terms but I cant....there is YELP GRUB P TWTR for that.