Stocks and Trading Thread - Channeling your inner Mono

[The Minsky Moment]

Looks like I'm frontrunning Bill Gross on Shenzhen.

At the very least I'd stay out of China right now. Valuations are nuts.

What kinds of companies are listed?  How are their earnings calculated and reported?  What is the level of float?  Who is buying and selling on the exchange and what kinds of information do they have?  What drives listings?

There are a ton of questions that I would need answered before taking a position long or short. 

[MadImmortalMan]

I've been looking up the companies listed in the etf I mentioned (CNXT). The results are hilarious.

Here's the top ten:

Top 10 Holdings
Company    YTD Return    % of Assets
* East Money Information Co Ltd    --    4.05%    P/E 944
* Suning Commerce Group Co Ltd    --    3.69%    P/E 166
* Hangzhou Hik-Vision Digital Technology Co Ltd    --    2.93%    P/E 36
* Leshi Internet Information & Technology Corp Beijing    --    2.63%  P/E 384 
* Siasun Robot & Automation Co Ltd    --    2.44%  P/E 238
* Jiangsu Kangde Xin Composite Material Co Ltd    --    2.37%  P/E 47
* Eternal Asia Supply Chain Management Ltd    --    2.30%   P/E 209
* Wonders Information Co Ltd    --    2.21%    P/E 318
* Iflytek Co Ltd    --    2.05%    P/E 164
* Xinjiang Goldwind Science & Technology Co Ltd    --    1.76%   P/E 22

Only one of those is priced rationally. 

[DGuller]

To be fair, P/E ratios can be misleading.  They go to infinity when the company is not making any money.

[The Minsky Moment]

I picked one of those at random - Siasun Robot.  As it happens it was down 10% in the most recent trading day, so perhaps the bubble story is confirmed.  Maybe.

Looking at their accounts: gross profit, net income, EBITDA - whatever measure you use, has tripled into the past 4 years.

I know virtually nothing about this company.  They make industrial robots apparently.  Is there a market for that in China?  Yes there is a big one, it is growing, and it is likely to keep growing for quite a while.  Is it possible this domestic company may have an advantage selling to other domestic enterprises that are automating?  It's certainly possible. 

P/e in the 200 range seems high but it is not an immediate obvious certainty that valuation is wrong.    Expensive compared to what?

[Admiral Yi]

Expensive compared to cash.

[The Minsky Moment]

Expensive compared to cash.

Cash earns zero so no.

[Admiral Yi]

Stock prices will crash so yes.

[The Minsky Moment]

Stock prices will crash so yes.

Begs the question.

[Admiral Yi]

Fair enough.  As long as  the best possible yield a Chinese investor can get is 0.5% (nominal), then 200 PE is rational.

However, 9% of total purchases are bought on margin, I'm assuming at cost higher than 0.5%.

[The Minsky Moment]

Chinese "investors" are doing things like buying vintage wine and artworks or plowing money into an obviously overheated RE market or un-backed "trust" products for lack of useful investment outlets  . . .

Comparatively speaking a company that triples profits in 4 years could look attractive.

[Admiral Yi]

I don't understand how you can say on the one hand that the RE market is overheated but then defend these insane stock valuations.  Seems to me all your arguments about lack of reasonable investment opportunities could be used to defend RE prices.

[The Minsky Moment]

Seems to me all your arguments about lack of reasonable investment opportunities could be used to defend RE prices.

Yes they could.
And the RE prices may be defensible, at least in the high tier cities. 

[DGuller]

Fair enough.  As long as  the best possible yield a Chinese investor can get is 0.5% (nominal), then 200 PE is rational.

It's only rational if investors are risk-seeking, and not risk averse as is commonly assumed.

[The Minsky Moment]

It's an easy mistake to fall into to look at China through the prism of a western capitalist economy.  China has banks, industrial enterprises, tech companies, consumer companies, it has stocks and bonds, and exchanges where securities are bought and sold.  It looks like a regular western economy.  But these things don't work the same way or have the same function they have in the West.  If it becomes deemed that there is a state or party interest that Company X have more sales or profits or that its stock sell for price Y that can be made to happen, and the fact that Bill Gross insists it is grossly mis-valued on the fundamentals means exactly nothing. 

Keep in mind most of the companies listed in Shenzhen are state owned or controlled . . . as are their main customers and suppliers, as are the local banks that likely own or control most of the corporate securities.

This does not mean I think these are "buys".   On the contrary I think anyone without very deep insight into this market is taking huge risks by taking any position.,

[Admiral Yi]

I am not aware of any examples of the state engineering public demand for this or that company.  Also if they are able to engineer profitability with the wave of a hand it's puzzling why so many SOEs are losing money.

I think it's more reasonable to say the stat can kill a company, but not make one successful.