2008: Outlook Four the Year Ahead

To add to the events this week, today is the first day of Chinese New Year! This means that the Chinese market is put on a standstill for a week as people get long vacations. But with the recent global warming, even China has a foot of snow. Will all these consumers be able to enjoy their long vacation from making low-quality products in bad weather?

What of the space-age technology used to manipulate the weather for the Olympics? Are there unforeseen consequences of these actions? Perhaps there are other actions even more disturbing, like China’s manipulation of their currency, pegging the Renminbi (RMB). China’s market was a top performer in 2007 but with a huge spread between A-shares and H-shares, some people are wary of what may happen after the Olympics. The Chinese want everything to be perfect for their global debut with the Olympic sponsorship, but this seems to be building up a bigger and bigger bubble that is bound to burst eventually. When would China let up on their economic policies? Probably after the Olympics. With such a huge run up and so many people chasing after the money and returns, the global markets can have a huge drawdown if China bursts. What’s worse is that the people closest to the matter, the Chinese themselves, are still overjoyed; some stocks like Baidu (BIDU) have a P/E ratio over 100! (I have to admit though, over the last few months, I have been short high running stocks such as BIDU, Research in Motion (RIMM), Apple (AAPL), Garmin (GRMN), and Crocs (CROX), and have made around 40% on each.)

The Chinese have built numerology into their culture. With 2008 being extra lucky because of the significance of “eight” like “fortune,” everybody is super optimistic. People bid up prices purely due to their lucky numbers, which gives a whole new meaning to technical analysis.

This combined with the recession we are already in, the housing slump, and elections will make this year particularly volatile. Don’t take me as being a pessimist; on a relative and long-term basis, I think there is growth at a reasonable price.

There is perhaps one lucky symbol that may hold true. Red is an overall lucky color for the Chinese, and the saying goes that the best time to buy is when there’s “blood on the streets” or more famously by Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful.” The United States’s Wall Street sure has a lot of blood on the streets with their recent tumbling performance. It’s probably a great time to buy if you are a long-term investor, and heck, you even have 2008 as a lucky number to guide you!

(Image Copyright Mirage Publishing, Inks, Gouche, & Color Pencils, 1991.)

Micro-hoo!? No More Big Three?!

Alright, let’s face it, most of you readers online are going to be more tech-savvy and interested in technology news. As the big headline on every newspaper over the past few days said, “Microsoft offers USD$45 Billion for Yahoo.” The acquisition would be 50/50 cash and stock.

Does anyone think that this is terrible? Big bad Microsoft (MSFT) with their closed-source, resource-hogging monopoly operating system taking over a new Yahoo (YHOO) that has over the past few years renovated all their webpages to be Firefox complaint, helped promote free software, opened up their Yahoo! Mail, and more to compete with the likes of Google (GOOG).

Obviously, MSFT is doing this so that they can themselves compete with GOOG. To me, this merger/acquisition won’t work; YHOO has denied MSFT several times over the last couple years already and it probably won’t get regulatory approval, the market would be controlled by just MSFT and GOOG leading to the elimination of the “Big Three” (GOOG, YHOO, MSFT) and thus less competition.

GOOG has now said that they will help YHOO avoid a takeover attempt by MSFT, assuming they can even get regulatory approval. This itself raised eyebrows, especially MSFT’s since they want the deal to go through without obstacles in their way. MSFT noted this to the press and everyone is on their heels.

With this in mind, USD$45Bn is a lot of money; if the doesn’t go through, the half that is cash (USD$22Bn) is left over with no where to go. What can MSFT do if they can’t merge and they continue to sit on, literally, a ton of cash? Anyone remember a particularly big dividend in November 2004? A stock buyback program is probably better though (I’ll explain in a later post).

Key takeaways:

MSFT obviously sees a lot of value in YHOO. Whether or not they get to acquire YHOO, YHOO is still of substantial value, netting away synergies MSFT and YHOO could have had. If I was a trader, which I’m not and highly discourage, I would short YHOO over the short-term, hold it for the long-term, and not touch MSFT. A fan of MSFT should buy it because of potential large dividends or buybacks, but I don’t think MSFT is a sound company in the long-run (despite their monopolistic tendencies) and the long-run is really what matters most.

(Image CC-BY-SA TheAlieness GiselaGiardino²³.)