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Archive for November 5th, 2007

One Trillion Dollor…

Exactly how much is one Trillion dollar?  If the United State ever issue a $1 Million bill, a trillion would be 1 million of them stack together. At 20 PE, a company has to generate 50 billion worth of profit every year to justify that price.  That’s just slightly higher than the GDP of Costa Rica.
Oh, that’s Petro China’s market value, BTW
Ok, perhaps it needs some explanation.  Petro China–a Chinese oil company who mainly serves regional market and majority control by a parent state owned company–issues shares last week.  The float only represent a 2.2% stake of the total company.

A little word on float.  A share of stock represent a fractional ownership of a company, and you are buying into a fraction of the future cash flow.   Under normal circumstances, that is mostly true.  But when a market is overheated, and everyone believed that buy whatever shit listed will make money, that assumption breaks.  You have 50x more demand than supply chasing 2.2% of a well known company, the share price soar.  It soar to a level where this fractional ownership no longer realistically represent the future cash flow of the entire company.

Comes back to 1999 when every 13 year old have a stock portfolio and people quite their job to day trade.  When you now hear about the Hong Kong financial secretary warn citizens not to skip school and day trade, you know there is something wrong.

On top of that, the Chinese market is heavily dependent on the black box politics of the Chinese government.  Part of the craziness was fuel by our manufactured goods money prevented to leave China once it gets there.  Citizens have few investment choice but to inject cash into the market.  The fact that RMB is peg to the dollar adds oil to fire by forcing interest rate in HK and China to be low.  In this closed market, the same company can trade at different market valuation in Hong Kong and in China.

The truth of the matter is, most institutional investor already had more than 30% profit since August and are ready to take it off the table.  So I follow suit and reduced my Asian exposure by 75% and overall positions by 20% last week.  Let’s see what happens.

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