Chinese Tech Bubble Dwarfs US Dotcom Bubble as Manic Buying Spreads to Hong Kong and to Macau’s Casino Stocks!

In addition to my late March post of “price to whatever ratio” where I show how the current Chinese stock bubble seem as integral to the government’s political actions which has resulted to valuations being blown out of proportions, this Bloomberg article finds that valuations of Chinese technology stocks has now dwarfed the US dotcom bubble of 1997-2000. (bold mine)

The world-beating surge in Chinese technology stocks is making the heady days of the dot-com bubble look tame by comparison.

The industry is leading gains in China’s $6.9 trillion stock market, sending valuations to an average 220 times reported profits, the most expensive level among global peers. When the Nasdaq Composite Index peaked in March 2000, technology companies in the U.S. had a mean price-to-earnings ratio of 156.

Like the rise of the Internet two decades ago, China’s technology shares are being fueled by a compelling story: the ruling Communist Party is promoting the industry to wean Asia’s biggest economy from its reliance on heavy manufacturing and property development. In an echo of the late 1990s, Chinese stocks are also gaining support from lower interest rates, a boom in initial public offerings and an influx of money from novice investors. 

The good news is the technology sector makes up a smaller portion of China’s equity market than it did in the U.S. 15 years ago, limiting the potential fallout from a selloff. The bad news is that any reversal in the industry will saddle individual investors with losses and risk putting an end to the Shanghai Composite Index’s rally to a seven-year high.

Wow 220 PERs!!! Philippine index managers must be drooling for local stocks to attain such levels.

Well overvaluations don’t just happen. Rather they are consequences from prior actions, or in particular, such are symptoms of deeper problems. And one of the major problem stems from government policies. And this has duly been imputed by the article which cites “lower interest rates”, and consequently, government support to the technology sector. 

The article shows how government subsidies feeds into the current mania.

China’s government is boosting spending on science and technology as a faltering industrial sector drags down economic growth to the weakest pace in 25 years. In March, Premier Li Keqiang outlined an “Internet Plus” plan to link web companies with manufacturers. Authorities also plan to give foreign investors access to Shenzhen’s stock market, the hub for technology firms, through an exchange link with Hong Kong.

Among global technology companies with a market value of at least $1 billion, all 50 of the top performers this year are from China. The sector has the highest valuations among 10 industry groups on mainland exchanges after the CSI 300 Technology Index climbed 69 percent in 2015 through Tuesday, more than three times faster than the broader measure…

Technology companies have posted the biggest gains among Chinese IPOs during the past year, helped by a regulatory ceiling on valuations for new share sales. Beijing Tianli Mobile Service Integration Co. is the top performer among 147 offerings during the period after surging 1,871 percent from its offer price to trade at 379 times earnings… 

Valuations in China are now higher than those in the U.S. at the height of the dot-com bubble just about any way you slice them. The average Chinese technology stock has a price-to-earnings ratio 41 percent above that of U.S. peers in 2000, while the median valuation is twice as expensive and the market capitalization-weighted average is 12 percent higher, according to data compiled by Bloomberg.

The idea that technology represents a small segment of the equity markets misappreciates the perspective that risks of imbalances have been a systemic issue.

Proof? From the same article

The use of margin debt to trade mainland shares has climbed to all-time highs, while investors are opening stock accounts at a record pace. More than two-thirds of new investors have never attended or graduated from high school, according to a survey by China’s Southwestern University of Finance and Economics.

Money has flowed into Chinese stocks in part because the central bank is cutting interest rates to support growth, something the U.S. Federal Reserve did in 1998 to revive confidence amid Russia’s sovereign debt default and the collapse of the hedge fund Long-Term Capital Management.

Symptoms of policy induced credit fueled asset (stock market) manias have been ubiquitous: margin trade are at all time highs combined with massive formal banking loans and shadow banking funds being funneled into stocks as retail punters enroll in record rates. Market participants then stampede into the price bidding hysteria or indulge in excessive speculation to pump up asset (stock market) prices to levels where valuations don’t seem to matter at all.

Yet systemic issues will have systemic ramifications.

To add icing to the cake, media portrays Chinese stock market irrationality on the increased participation from societal strata with lower educational background.

While education may somewhat help, the reality is that what demarcates between lemmings or people falling for the herding behavior trap and independent thinking is self-discipline which is a personal trait.

As I have pointed out numerous times here, throngs of well-educated or even high IQ people have been mesmerized by the illusions of prosperity from government sponsored bubbles or have even fallen victim to Ponzi schemes. As example, Queen Elizabeth chastised the economic industry for being blind to the 2008 crisis. 

Bubbles essentially pander to the emotions and egos rather than to logic. Thus self-discipline has mainly been about controlling emotions and egos (this is theoretically known as Emotional Intelligence) and hardly about education.

Anyway, to compound on the Chinese version of the modern day dotcom bubble has been an IPO bubble that includes small and medium scale enterprises

From Nikkei Asia (April 3; bold mine)

On Thursday, the China Securities Regulatory Commission approved an unprecedented 30 companies for listing on the Shanghai and Shenzhen stock exchanges. It previously had maintained a moderate pace of initial public offerings to avoid upsetting market dynamics. But the frenzied run-up in stock prices seems to have eased oversupply concerns and encouraged the regulator to let loose.

Investors responded by lifting the Shanghai index to a seven-year high Friday. Bullishness is particularly apparent in the Shenzhen market. Seventeen of the 30 companies approved for IPOs will list on its ChiNext board for startups. The ChiNext index advanced 1.4% to a record 2,510. The average component is trading at nearly 100 times earnings.

ChiNext is a benchmark patterned after the NASDAQ listed at the Shenzhen Stock Exchange.

Wow average PERS at 100x!

Yet aside from monetary easing, price manipulation of IPOs have been used by the government to ramp up the public's interest in the stock market last year.

So even while another Chinese company, Cloud Live Technology group reportedly defaulted on her domestic debt last week, where the Chinese government via the PBOC injected 20 billion yuan ($3.28 billion dollars) most likely to ease pressures in response to such default, the stock market mania has been intensifying.

Chinese stocks used to be correlated with price actions of commodities (chart yardeni.com). Not anymore. Chinese stocks have mutated into mainly a central bank-Chinese government liquidity play with little relevance on the real economy. Such signifies another sign where the stock market fundamental functions of price discovery, and as discounting mechanism, has almost entirely broken down.

And Chinese stock market bubble has even percolated to Hong Kong. Hong Kong’s stocks as measured by the Hang Seng Index have virtually exploded to record highs!

Aside from the rationalized gap between mainland and Hong Kong stocks, fund flows via the Shanghai-Hong Kong connect, the Chinese government again has been attributed as a major influence. 

From the Wall Street Journal: Adding to investor confidence Thursday was an article in the state-run China Securities Journal headlined “Go! Buy Hong Kong Stocks!”, signaling to some analysts that the mainland government is encouraging the rally.

And to include today’s gains (+3.8% yesterday and +2.7% today), in two days, Hong Kong’s stocks has spiked by 6.5% and by over 10% since mid March!

The mania appears to be spreading.

Stocks of Macau’s casinos have also skyrocketed by about a stunning 10% in two days!

Aside from yesterday's dramatic twist of events, today MGM China Holdings (HK:2282) closed +5.44%, Galaxy Entertainment Group (HK:27) +5.56%, Melco Crown Entertainment (HK: 6883) +2.21%, Sands China Ltd. (HK: 1928) +5.92%, Wynn Macau Ltd. (HK: 1128) +8.69% (!!), and SJM Holdings Ltd. (HK:880) owner of Grand Lisboa, +5.13%.

Spectacular volatility!

Paradoxically, this has been happening even as Macau's gaming industry in March suffered another monumental collapse in terms of monthly gross and accumulated gross revenues!

It’s becoming clearer that the Chinese government appears to be bent on substituting or replacing a bursting property bubble with a stock market bubble. They seem to be buying time and anchoring on hope that new bubbles will not only offset the old ones but generate real growth.

Unfortunately, all bubbles end in tears.

Yet the above events represent added accounts of record stocks in the face of record imbalances at the precipice.

Chinese Government Sticks to the IPO Route to Inflate Stock Market Bubble

It appears that the Chinese government sees the current melt-UP in stocks as a wonderful development.

Since the “targeted easing” in June combined by the IPO price controls which I reported last August, the Shanghai Composite Index has gone parabolic—up by about a fantastic 38% as of yesterday (still up today)

The Nikkei Asia on the government’s sustained IPO price controls or stock market management (bold mine)

Chinese authorities are telling companies planning initial public offerings to keep prices low in an attempt to avert a broader market decline, a factor that is fueling the overheating of IPO stocks.

Because the China Securities Regulatory Commission makes the final call on whether a company can go public here, businesses have no choice but to heed its wishes.

And because artificially priced IPOs have been seen by the public “sure profit source”, demand for IPO has basically gone berserk.

From another Nikkei Asia report (bold mine)

Investors placed about 1.43 trillion yuan ($232 billion) in bids for initial public offerings in China between Nov. 24-28, a nearly five-year high on a weekly basis, in a rush to profit from the underpriced issues.

New public issues are sold to individuals mainly through the Internet. The majority of the investors hail from the wealthier classes and have previous trading experience. The larger the bid, the higher the chance of winning it, and many go so far as to borrow money to inflate their offers.

Retail investors lever up on manic-hysteric stock market speculation. So to resolve China’s gigantic debt-property bubble means to induce the same people to rack up more debt to speculate on stocks!

More affirmation of my theory of the politics of monetary easing policies: I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.

Of course it’s not just IPOs but a string of interventions that has juiced up Chinese stock market hysteria, as I earlier noted: the Chinese government has launched “targeted easing” last June, has resorted to selective bailouts of firms which almost defaulted last July, imposed price controls on stock market IPOs last August, injected $125 billion over the last two months. Last week, November 17, the much ballyhooed China-Hong Kong connect went on stream.

One can add the streamlining of foreign proceeds from overseas IPOs plus the latest non-sterilization of recently injections of funds

Mainstream seem to recognize these. Again the Nikkei Asia

The heightened demand for cash from these IPOs is also affecting monetary policy. The People's Bank of China injected about 50 billion yuan into the market on Nov. 21, and said it will supply liquidity through various policies in a statement that day.

The bank then skipped its open-market operations on Nov. 27 for the first time since July, opting to satisfy the short-term demand for cash instead of draining the market.

So the PBOC feeds on the bubble by providing even more liquidity (access to credit).

The PBoC solemnly abides by what their inflation deity has prescribed or ordered (bold added): Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.(JM Keynes, The General Theory of Employment, Interest and Money)

Unfortunately all quasi-booms morphs into bubble busts.

Stocks are not about economic or earnings growth anymore as these have mutated or deformed to reflect on government's policies of credit and liquidity expansion designed to stimulate the "animal spirits" based on "HOPE" of economic salvation from free lunch policies.

So it's really sad to see how the Chinese government continues to lure the average citizenry to chase one bubble after another (from stocks to properties to shadow banks back to stocks) where their citizenry will eventually end up substantially poorer.

This is a sign of desperation rather than a sound boom from economic recovery.  It's a recipe for a total economic collapse.

Again for the Chinese government, HOPE has become the only policy strategy.

Insider Trading in Chinese Stock Markets? More on Chinese government’s blowing of her Stock Market Bubble

Chinese stocks reportedly surged prior to the announcement of interest rate cuts.

Has this been out of luck or from insider trading? 

The Wall Street Journal reports

A sudden surge in China’s stocks hours before Beijing cut interest rates on Friday has drawn complaints from some investors who suspect that word of the central bank’s surprise move was leaked to the market ahead of time.

Authorities have in recent years sought to crack down on insider trading in the country’s volatile stock markets. But the unusual rally adds to worries the illegal practice remains, giving big profits to those in the know but leaving an unfair playing field for other investors.

Shanghai’s benchmark index started the Friday morning session virtually flat, but after the midday break climbed 1.4% to just shy of its three-year high despite a lack of substantial market-moving news. Trading volume jumped 31% from the previous day.

The cut to borrowing costs was announced at 6:30 p.m. local time in Shanghai, three-and-a-half hours after the market’s close. Stocks in Shanghai rallied a further 1.9% Monday.

It could be combination of luck, momentum and insider trading.

 

But the following paragraph gives us a clue why the Chinese government has been inflating a stock market bubble. (bold mine)

Retail investors, who account for more than 80% of all transactions in China’s stock markets, have long complained that information appears to be disclosed unevenly. Beijing’s policy on approvals for new share offerings, which favors state-run enterprises rather than more profitable and innovative private firms, has attracted criticism as well.

Given that the housing markets have been on a steep decline, the Chinese government hopes that by providing “gains” on speculative activities to retail investors in the stock market, such would create “demand” for housing, thereby cushioning the current pressures on the housing markets. Of course Chinese retail investors have been noted to use levered money in order to speculate on stocks.

So the Chinese government’s cure to the housing oversupply financed by overleverage has been to entice the retail sector to lever up in order to pump a stock market bubble.

Such manipulated boom has been channeled directly via price controls of the IPO markets, and the HK-China stocks connect, and indirectly via stimulus and bailouts

The Chinese government’s push to stoke a stock market bubble via the IPO market can be seen via additional measures--the announced ‘liberalization’ of fund flows from IPOs conducted abroad. 

Notes the Bloomberg:

China scrapped some approval procedures related to initial public offerings, part of government efforts to cut red tape and spur private-sector investment.

Chinese companies no longer need a go-ahead from the foreign-exchange regulator to bring back money raised in overseas share sales, according to a State Council statement posted on the central government website today and dated Oct. 23. The government will also cancel the certification process for sponsor representatives, a qualification for investment bankers overseeing domestic IPOs, the statement shows.

Making it easier for companies to send proceeds back home may encourage more overseas share sales, easing the backlog of applications for domestic listings

As one would note, the Chinese government has been so desperate to secure funds that they now resort to “liberalization”, which unfortunately when things fail, will get the blame. 

In addition, given the colossal debt by local governments (estimated at $3 trillion as of June 2013) inflating stocks in favor of state-run enterprises as I noted last weekend is a sign that “Chinese government wishes to find alternative avenues for overleveraged companies to access funds”

China’s State owned enterprises according to Wikipedia are “governed by both local governments and, in the central government, the national State-owned Assets Supervision and Administration Commission” or are owned by the local, provincial, and national governments.

The thrust  of the Chinese government hasn’t been to generate real economic growth, but as signs of desperation, to inflate substitute bubbles in the hope to buy time, to meet political goals in the context of statistical growth and of a miracle.

Essentially, the Chinese government’s therapy to the problem of addiction has been to provide more of the substances which one has been addicted to. Doing the same thing (in a slightly different form) over and over again

Oh, those charts above shows resemblance with the “afternoon delight” in the Philippine stock exchange. The difference is that the above may have been a one day event in the Middle Kingdom but in the Philippines has become a norm. 

As a side note: Philippine stock operators have been visibly hurt in their plans to break the 7,350 from a ‘dump’ by an unexpected participant/s at the last minute, so they have come back with vengeance this morning with a relentless raw emotion driven manic buying episode to push index above 7,350. 

As historian Charles Kindleberger once noted of the hallmarks of manias (or market tops): The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom…And the signal for panic is often the revelation of some swindle, theft, embezzlement or fraud. 

How germane this has been today.

How Fed Policies has Induced the Rigging of the US IPO Market: The Snapshot Edition

Fed policies or the central bank put which has induced a US stock market mania has led to a fantastic yield chasing “pump” of the IPO markets that has rendered price discovery entirely shattered This means that eventually soon such snowballing misperceptions that has backed the current euphoric delusions will mutate into a “dump”.

Here is an excerpt from Analyst Wolf Richter at his Wolf Street. [bold mine]

At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community’s darling ($9.3 billion).

Unlike the others in that group, Snapchat is marked by the absence of a business model and no discernable revenues. But there is hope that it could eventually pick up some revenues by advertising to its 100 million or so users, mostly teenagers and college students, without turning them off. 

But in this climate, no revenues, no problem. Into the foreseeable future, the company will produce a thick stream of undisclosed red ink.

But the investment was an ingenious move.

For KPCB, a huge VC firm, the investment would amount to petty cash. Why did it do this deal? If it could exit at an enormous valuation of $20 billion, it would only double its money – a paltry multiple, given the risks. It would only make $20 million, still petty cash. But there was a reason….

By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.

Snapchat’s new valuation isn’t an isolated event. It’s a product of all recent valuations, and it is itself now ricocheting around and is used to set the valuations at other startups. That’s the multiplier effect. What seemed like an absurd valuation yesterday becomes the norm tomorrow, on the time-honored principle that once a valuation is already absurd, it no longer faces resistance from any rational limit. And nothing stands in the way for the multiplier effect to ratchet valuations ever higher.

Nothing, except the potentially troublesome exit for these investors. Because, without exit, these paper gains will remain paper gains, and eventually will disintegrate into dust.

To exit gracefully, investors can sell the company via an IPO mostly to mutual funds and ETFs that are stashed in retirement funds and investment portfolios. Or they can sell it to giants like Facebook or Google that can pay cash (borrowed or not) or print their own currency by issuing shares, both of which come out of the pocket of current stockholders. At the far end of both transactions are mostly unwitting retail investors.

Read the rest here

Chinese Government Stirs up an IPO Mania

This looks like another example of how governments use stock markets as communications medium to project economic growth or recovery for political goals. 

The Chinese government, whom has controlled the pricing of mainland Initial Public Offerings (IPO), have fueled a debt finance speculative mania. 

From Bloomberg: (bold mine)

Zhang Xiuli says she knows nothing about the nine Chinese companies that held initial public offerings last month.

Not a problem. Zhang, 37, tried to buy shares in each and every one, confident that she knew what was coming next: an immediate surge in price that has rewarded investors in Chinese IPOs with an average first-day gain of 43 percent this year. Her orders were among 655 billion yuan ($106 billion) of bids for 3.2 billion yuan of new shares, an over-subscription rate 28 times bigger than that of Agricultural Bank of China Ltd.’s listing at the height of the nation’s IPO boom in 2010.

New stocks have regained their reputation as can’t-lose bets in China just four years after that last frenzy ended badly -- a majority of IPOs in the second half of 2010 saddled investors with losses within a year. The soaring demand shows how regulatory efforts to ensure deals aren’t overvalued have led speculators to ramp up bets with borrowed money and hurt plans to let the market, rather than the government, set prices in the biggest emerging economy, said Ding Yuan of the China Europe International Business School.

The above account of the "successful" retail punters partly reminds of me of the Philippine version--'basura queen' of 2007.

Next, IPO pricing regulations by the government

All nine companies that had IPOs last month sold shares at price-to-earnings ratios below the industry average, according to data compiled by Bloomberg. The regulator requires any firm pricing stock at levels above their peers to postpone the offering by three weeks and issue risk warnings to investors.

The incentive and mechanism that has powered the IPO mania...

The perception that IPOs are riskless has encouraged some investors to use borrowed money, exposing them to deeper losses once prices stop climbing, according to Lin Jin, a senior analyst at Shenyin & Wanguo Securities Co. in Shanghai.

China’s benchmark money-market rate rose the most in three weeks on July 23 as orders for five IPOs spurred an increase in demand for borrowed funds. The central bank said yesterday that the deals helped fuel a record drop in local-currency bank deposits last month as customers shifted funds to their brokerage accounts.

“The main risk is whether borrowing costs can be covered,” Lin said. “As new share sales become the norm, the effect will taper off and returns will decrease.”

Investors’ rush into Chinese IPOs, which have rallied an average 94 percent from their issue price this year, or seven times more than the global average, contrasts with lackluster demand among local investors to participate in the broader stock market. Traders have liquidated about 1.3 million mainland equity accounts since the end of March, leaving the number of funded accounts at a four-year low of 52.55 million.

So forcing companies to issue IPO prices at below market prices has naturally fostered outsized demand. And such demand which has been lapped up by the gullible public has been mainly financed by debt.

The IPO manipulation scheme seems also intended to reverse liquidations by stock market investors during the recent past.

As one would note, people hardly learn from the past or from history.

Yet all these speculative hysteria have emerged amidst an unexpected slump in credit last July.

From the Wall Street Journal

The latest batch of government data showed a stunning drop in growth in China's financing activity in July—a troubling sign in an economy where debt has become critical to expansion. Total social financing, the broadest measure of lending, expanded by 273 billion yuan ($44 billion) from June, the slowest since the collapse of Lehman Brothers.

The numbers were enough of a shocker—and possibly something of an anomaly—that the central bank felt it necessary to accompany the data release with an unusual written statement explaining that its policy stance hasn't changed. It said July's slump was explained by higher-than-normal lending in June of nearly 2 trillion yuan, among other factors. July has historically been among the slowest months for credit creation. The statement hinted that lending in August has gotten off at a more normal pace.

So this explains the recent 1 trillion yuan ($171 billion) via "Pledged Supplementary Lending" (PSL) as I previously noted.  Chinese authorities must have or has most likely been apprised or informed of this slump, so they launched the Quasi QE. The PSL QE hybrid hopes to provide cushion to this credit drought which authorities recognize risks amplifying the downturn in the property-credit channel.

And it appears that in order to camouflage the extent of credit troubles, and as part of the communications campaign, the Chinese government seems to have resorted to the massaging of the stock markets via IPOs first, in the hope that this will spillover to the rest of the market, in order to project a boom or a recovery to keep the credit flowing.

Yet whether it is about the stock market or property, the promotion of speculative activities has one common denominator: DEBT.

This means that the "kick the can down the road" policy of promoting stock market speculation through debt will exacerbate and compound on excessive leverage conditions in China's highly fragile system, or simply credit risks, which makes her a candidate as trigger to a global black swan event.

As I have been repeately saying here, the thinking of authorities goes like this (and this applies almost everywhere): We recognize of the addiction problem. But the withdrawal syndrome would be cataclysmic. So we will keep the (debt) party going!

Incredible Facebook Statistics

From the Economist,

AFTER eight years, scores of lawsuits and a blockbuster movie, Facebook is going public. It is seeking to raise $5 billion from its initial public offering, which would give it an estimated market capitalisation of $80-100 billion—similar to that of fast-food chain McDonald’s. The social network employs only around 3,000 staff, giving it an average revenue of $1.2m per person in 2011. Analysts are quick to point out that the site’s users effectively act as employees, adding content and value for others. Its actual staff and private investors stand to make a small fortune from the floatation. Mark Zuckerberg, the company’s founder and CEO, owns a 28% stake, which will be worth about $28 billion. Facebook’s value is largely derived from its ability to hone adverts to the specific interests of its users. Someone who posts a lot of comments about, say, an engagement, can expect to see more ads for caterers and wedding dresses.

Facebook’s penetration level has been swiftly growing and now approaches the population of India—a manifestation of the snowballing uptake of the internet.

The company’s dynamic advertising based business model—particularly “site’s users effectively act as employees, adding content and value for others” or interactive commerce, exhibits how technology has been changing the business landscape. In the advertising arena, we are clearly witnessing a transformation from mass advertisements to custom based advertisements.

Lastly, you can see the remarkable difference of social media based business in term of employees. Technology companies (Facebook, Google, Amazon and Apple) shows how innovation can bring about the “small means big” impact/value.

Emblematic of the decentralization dynamic from technological advances, information age companies, whom caters to niche markets, have been highly specialized.

These companies provides us a clue of how organizations will be structured overtime. Also these are indications of how technology will continue to put pressure on vertical based organizations, like governments. Such organizations would need to streamline and adapt a flatter structure or go out of business.

US Capital Markets: Dominance Erode as Investors Shift Overseas

In the world capital markets, the US appears to be losing its leadership

Reports the New York Times (bold highlights mine)

Reva Medical did what a small but increasing number of young American companies are doing — it looked abroad for money, in Reva’s case the Australian stock exchange.

After an eight-month road show, meeting investors and pitching the prospects of a biodegradable stent, the 12-year-old company sold 25 percent of its stock for $85 million in an initial public offering in December.

“There are so many companies that require capital like our company, and they don’t have access to the capital markets in the United States,” said Robert Stockman, Reva’s chief executive. “People are looking at any option to stay alive, which is what we did.”

Reva’s example shows that nearly three years since the financial crisis began, markets in the United States are barely open to many companies, leading them to turn to investors abroad. Denied a chance to list their stock and go public here, they are finding ready buyers of their shares on foreign markets.

Nearly one in 10 American companies that went public last year did so outside the United States. Besides Australia, they turned to stock markets in Britain, Taiwan, South Korea and Canada, according to data from the consulting firm Grant Thornton and Dealogic.

The 10 companies that went public abroad in 2010 — and 75 from 2000 to 2009 — compares with only two United States companies choosing foreign exchanges from 1991 to 1999.

The trend reflects a decidedly global outlook toward stocks, just as the number of public companies in the United States is shrinking.

From a peak of more than 8,800 American companies at the end of 1997, that number fell to about 5,100 by the end of 2009, a 40 percent decline, according to the World Federation of Exchanges.

The drop comes as some companies have merged, or gone out of business, or been taken private by private equity firms. Other young businesses have chosen to sell themselves to bigger companies rather than go public.

Here’s why...

Again from the New York Times, (bold emphasis mine)

A variety of factors explain each company’s decision to list on a foreign exchange, like the increased regulatory costs of going public in the United States. Underwriting, legal and other costs are typically lower in foreign markets, companies say.

The Alternative Investment Market, or AIM, a part of the London Stock Exchange intended for small company listings, is a popular destination for some American companies. The cost of an initial public offering there is about 10 to 12 percent of total capital raised, compared with 13 to 15 percent on Nasdaq, according to Mark McGowan of AIM Advisers, which helps American companies list on AIM.

In addition, the extra annual cost of maintaining a public listing, including complying with Sarbanes-Oxley rules, can be typically much higher in the United States: $2 million to $3 million each year depending on the size of a company compared with a cost as low as $320,000 on AIM or $100,000 to $300,000 in a market like Taiwan, according to advisers.

There are concerns that some foreign exchanges attract companies because their oversight may be less stringent. But companies insist standards are high.

A more important factor than cost, said Sanjay Subhedar, managing director of Storm Ventures, a California venture capital firm, is that investors in the United States who traditionally participate in I.P.O.’s and the banks that underwrite the offerings are no longer interested in share sales by small companies.

Institutional investors like mutual funds want the liquidity of larger offerings with abundant buyers and sellers, he said; bank underwriters want to focus on the more lucrative fees that bigger deals generate.

So fundamentally the article cites compliance cost, cost of listing and maintenance and liquidity as direct costs for the erosion of the dominance of the US.

True, direct compliance costs have been a major hurdle.

Many see that the cost-benefit trade off of the Sarbanes Oxley act (SOX) has been weighted towards costs. In short, the law has been economically unviable and has prompted for unforeseen consequences.

Companies have been spending billions of dollars a year to comply with the SOX with little benefit in return.

Richard Karlgaard of Forbes magazine exhorts for the repeal of SOX

Dump Sarbanes-Oxley. Enacted in 2002 to prevent the next Enron scandal, Sarbox has thrown sand into the gears of entrepreneurship. It has severely slowed the U.S. market for IPOs, since companies earning less than $200 million in revenue can't afford the legal and accounting costs of being a public company today. Deprived of capital, young companies not named Facebook or Twitter prematurely stagnate or sell out. Investors are deprived of opportunity, and the nation is deprived of independent companies that surpass the $1-billion-in-revenue mark.

But there are other indirect factors that also contributes to such dynamic

There is the expanding risk of changing the rules of the game midway or “regime uncertainty” as government intrusions adds onus to the business climate by the contorting expectations and upsetting the balance of risk-reward tradeoffs. This penalizes existing firms and provides disincentives for prospective ventures.

Part of which have been policies that push for boom bust cycles which engenders widespread malinvestments or misdirection of resource allocation.

Another is the effects of policies to devalue. Eroding value of the US dollar may have prompted US companies to go overseas and tap (or arbitrage on) savings denominated in foreign currencies.

There is also the crowding out effect where companies spend money on lobbying to protect their political interests than for expansion.

The Business Insider gives an example of how tech companies have been spending to placate the political deities of Washington.

All these interventions add up to the intensive diversion of productive resources, raise the cost of doing business and consequently reduce the public’s appetite to invest, thereby adding to pressure on jobs creation.

It doesn’t stop here. Taxes have also been a significant part of these growing costs.

Tax Laws have been mounting as government intervention increases.

Chart from Taxes for expats

Also US government’s social spending will likely mean higher taxes.

From Heritage Foundation

And this has already been hurting small businesses which makes up the biggest share of jobs creation.

From Small Business Trends

Total compliance cost for the US economy on current regulations has been estimated at $380 billion per year

So much money has been lost to politics.

As supply-side economist Art Laffer writes at the Wall Street Journal in June of last year

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

So with the prospects of tax increases, capital investments are likely to be constrained (manifested by declining number of public companies) or will shift outside (raising capital overseas).

Bottom line: The eroding dominance of the US capital markets signifies a symptom of an underlying disease- government interventionism (mostly via inflationism)

LinkedIn Doubles on Listing Date, More Signs of Tech Bubble?

For me, the success of IPOs have mostly been sentiment based, where the direction of the general markets account for the success of specific issuance. In other words, bull markets prompt for fantastic returns which would draw in more issues to list. Hence ascending markets will lead to more IPOs.

Conversely, IPOs are usually nonevents during bear markets (the above chart I earlier posted here). Ergo, IPOs can function as indicators of the whereabouts of a bubble cycle.

I recently posted about signs of brewing bubble on internet stocks.

LinkedIn which has been already a hit in the secondary markets made a scintillating debut yesterday.

In the NYSE, LinkedIn prices more than doubled!

From the Marketwatch,

LinkedIn’s stock LNKD +108.58% soared at one point more than 140% to $108.25, before receding to $94.25 by the close of its first day of trading on the New York Stock Exchange.

Propelled by vigorous demand leading up to its initial public offering, LinkedIn’s IPO priced at $45 a share, at the top end of a recently raised range of $42 to $45 a share. Previously, the IPO pricing range had been $32 to $35 for shares in the professional-networking service.

Bespoke Invest notes of IPOs with best first day returns during this cycle.

LinkedIn topped two Chinese internet companies, Youku.com (video hosting service) and Qihoo 360 Technology (internet anti-virus and security products). Again the best returns have all been in the internet sectors.

This means listing of internet stocks have drawn in alot of speculative activities and will likely serve as precedent for more frenzies.

As Tech columnist Eric Savitz writing in Forbes writes, (emphasis added)

In other ways, the current situation looks nothing like the first Internet bubble. (For instance, there is no insane salary-inflating battle for journalists this time around. Sigh.) The most obvious difference is that until now, all of the action has been taking place in the venture capital market, or at least, in the newly emerging secondary market for venture investments. There have been just a handful of IPOs, aside from a flurry of Chinese Internet deals. But many of the key social networking players have been showing signs of inching toward the exits. Facebook hasn’t filed yet, and neither has Twitter, Zynga or Groupon. (Though Zynga and Yelp both threatened to abandon San Francisco unless the city exempted them from an onerous tax on employee stock options they could have otherwise faced going public while based in the city by the Bay.) Skype, after a year in registration, agreed to be acquired by Microsoft for $8.5 billion. Zillow has filed, though and so has Pandora. There’s still the makings here of a 1999-like IPO explosion...

The market’s hunger for LinkedIn shares is a demonstration of the kind of speculative fervor last seen in the recently popped bubble in the silver market. This isn’t really about what’s rational, it’s about dreams and imagination. The risks here are obvious; buying LinkedIn shares at 20, or 30 or 40x last year’s revenues is giant game of chicken that I would personally advise against. LinkedIn is not Pets.com; it is a real company, with impressive growth, and it operates in the black. But is the current valuation rational? I’m not convinced.

History may not repeat itself, as Mark Twain said, but they could rhyme.

Why I Would Not Subscribe To San Miguel’s Offering

I generally do not subscribe to IPOs or secondary listings because I am not a fan of it. As I pointed out here (July 2007) and here, their successes mostly depend on the performances of the broader market where new share listings basically reflect on market sentiment.

Since new listings are sentiment based, they frequently signify faddishness, and in fact, serve as dependable indicators of the whereabouts of the phases of the bubble cycle.

On that note, the fund raising campaign by San Miguel via equity and the exchange bond seems to have raised a buzz. I sense a bandwagon type of enthusiasm especially from short term traders or punters.

Nevertheless here is Finance Asia’s splendid take (or may I say takedown) of the San Miguel Corporation [SMC] offering, (bold highlights mine)

San Miguel Corp, the Philippine conglomerate whose businesses range from beer and food to oil, power and infrastructure, is set to raise $880 million from a concurrent sale of shares and exchangeable bonds. The fundraising is slightly larger than the $850 million indicated by the company earlier this month and could increase to $970 million if the $20 million greenshoe on the international tranche of the equity portion, and the upsize option on the domestic tranche, are both exercised in full.

Even at the base size, this is the largest follow-on capital raising in the Philippines ever. It is also the first ever combined equity and equity-linked deal in this market.

However, in return for the larger size, the company and its controlling shareholder, Top Frontier, had to compromise on price, as most of the investors who came into the equity portion of the deal were highly price sensitive. Having initially set a price range of Ps140 to Ps160 before the international bookbuilding kicked off on April 14, the indicative price was lowered to Ps110 to Ps140 two days before the close and eventually fixed at Ps110. This translated into a 28.1% discount to the latest market price of Ps153.

The final deal also falls well short of vice-chairman Ramon Ang’s talk of a sale of 1 billion shares back in December. Based on the share price at the time, that suggested a deal size of about $3 billion.

The exchangeable bonds did price at the issuer-friendly end with a 2% coupon and yield and a 25% exchange premium, but because it used the same Ps110 as the reference price, it was viewed as generous relative to other recent equity-linked deals. Indeed, investors were much keener on the bonds, which attracted a final order book of $2.8 billion. By comparison, the demand for the equity portion reached only $500 million, which clearly shows that the deal would have failed had it not been for the concurrent EB. Or seen the other way, the bookrunners were able to turn a difficult situation into a successful capital-raising by using the EB to draw in investors.

The deal was marketed as a way to invest into the broader Philippine economy, but evidently investors were not that comfortable with San Miguel’s aggressive expansion into new industries such as power, mining, energy, infrastructure telecommunications and banking, during the past few years. For one, it makes the stock more difficult to value, and there may also be concerns that it is spreading itself too thin.

San Miguel’s precipitate corporate makeover occurred prior to the Philippine presidential elections, which for me, put to question the motives behind such actions by the controlling interests, as I pointed out earlier.

Then the timing of the Supreme Court’s validation of Danding Cojuangco’s ownership may also have some influence on this.

To get some clue...

Again from Finance Asia...

Some 75% of the equity portion consisted of existing shares that were sold by Top Frontier, which owned 67.2% of San Miguel before the transaction and controlled 88.4% of the votes. San Miguel also owns a 49% stake in Top Frontier, making this a classic cross-shareholding situation. The EB was sold by San Miguel itself.

Cross (interlocking) holdings like SMCs’ smacks of corporate legal maneuverings similar to Japan Inc which investopedia.com describes as a “high degree of collusion between Japan's corporate and political sectors led to corruption throughout the system and contributed to the downfall of the overvalued Nikkei.”

Whether applied to Korea’s Chaebol or Japan’s Kiretsu such ownership structure types have functioned as traditional havens for the aforementioned collusion.

So in my view, yes the marketing has purportedly been about returns from equity ownership (well like all politics everything is about everyone else’s benefit) but behind the scenes the incentives, for this offering, could be political more than financial.

I’d further say that the San Miguel’s business model turnabout from beverage and consumer goods to industries as energy, infrastructure and mining seems like a manifestation of the socio-standings and the philosophy of the company’s top honchos.

Beverage and consumer goods dealt with market based competition whereas the latter industries mostly represents political concessions. In short, political operators would intuitively elect for political business platforms; because these are not subject to competition but acquired through privileges from political alliances or networks.

Earlier, I negatively weighed on San Miguel’s shift in its business model (outside the political context).

More clues from Finance Asia,

Aside from raising funds that can be invested into the company’s emerging infrastructure business, a key purpose of the deal was to increase the free-float and put the San Miguel stock back on the radar screens of international institutions. According to the Philippine Stock Exchange, the free-float was only 8% before the offering, which meant the deal had to be marketed pretty much as an initial public offering with an extensive roadshow, pre-deal research and a discount to other Philippine conglomerates. Investors also looked at the equity on an absolute valuation basis, rather than as a discount versus the current market price.

To get the maximum effect on the free-float, San Miguel initially planned to sell only shares. However, this turned out to be too much of a challenge, and so the plan was revised to include the exchangeable bonds at attractive terms as well. To ensure the company would still achieve its free-float objective, the EB was designed to be equity-like and to maximise the possibility of conversion. Hence the favourable premium.

At the end of the day, much ado about San Miguel's offering, unknown to many, falls short of the owners’ expectations, which is another reason why I should not get one.

Besides, in looking at the SMC’s chart...

...it would seem easy to get enchanted on something that has already massively exploded. That’s reading past performance into the future (in behavioral finance-this is called as anchoring).

The above shows where the offering has been made (red horizontal line). Needless to say for chartist SMC chart would translate to a breakdown.

Nevertheless, the sellers (Top Frontier) obviously made quick buck here: buying at php 75 per share and selling at 110 per share or about 46% returns [gross maybe 40% net] (after a big push in SMC's price- their push?) on a holding period of 1 year and a quarter—Not bad for the “largest follow on capital raising” billion peso deal!

Of course, as I earlier stated, San Miguel’s price direction will flow with the overall market.

So SMC can sell you the meme about exposure to the Philippine economy, but at the end of the day SMC's price actions will reflect on the phases of bubble cycle than the company's so-called fundamentals.

And part of the typified trait of bubble cycles is political money hyping up stock prices...Japan Inc. and the US mortgage bubble should be great reminders.

That said, investing in stocks or in financial markets has the greater fool theory always in play.

[As a side note: I am not implying that SMC subscribers are the greater fool. The greater fool is the one usually left holding the empty bag -or the old maid-which means that this applies to all issues, IPO or not]

The point is it pays to be prudent.