More on price support for the Greatest IPO in history

Good to be back from a wonderful July 4th Holiday, spending time with family and friends.   Our Cavaliers are the NBA Champs, the town was pretty much shut down for the celebration and the Indians are leading the division.  Fireworks over Cleveland were a little foggy, but lots of fun as always.

July 4th fireworks from our boat....BOOM!

Even though our town is pretty much on lock-down because of the RNC, we're all looking forward to an action packed, fun-filled Convention!  I haven't seen a police presence like this since the Walter Cronkite news reels of post-war Checkpoint Charlie at the Berlin Wall.  Fortunately, thanks to our Ohio open carry law, everyone is heavily armed.

What could possibly go wrong?

Anyway, let's get back to work.

I've received a number of e-mails and inquiries from readers asserting that there's a possibility that I could indeed be "full of beans" regarding my suppositions that the Alibaba stock price is artificially supported because of insider intervention.  The arguments generally centered around the premise that the market cap is simply too large to be manipulated.

On its face I'd suggest that this would be quite true if it wasn't for one incredible economic force that I'll present for your consideration.  That force, of course is:

The hard working, industrious, conscientious, trusting and unfortunately, naive Chinese people.

Alibaba.....The The World's Largest Shadow Bank

In January of 2015 I published a blog post describing how Alibaba was actually a financial firm that ran a dubious "eCommerce" business on the side.  I won't recount all of the details in this post, but feel free to reference it for a bit of background.

Let's take a look at some of the Alibaba websites to illustrate the "Worlds Largest Shadow Bank" Thesis.

§  Antsdaq: Crowd-funding site for media and software projects. Roughly 18 million users. 
§  Ant Check Later: Short-term lending for online purchases, similar to PayPal credit. 
§  MyBank:  Small loans to corporations. RMB 613.2 Billion extended to 3 million borrowers, Average loan RMB 2,000, with a 2% NPL rate. 
§  Zhima (“Sesame”) Credit: Loans to individuals and “credit” scores for individuals. 
§  Ant Fortune: (Includes "Ant Treasure" , "Trick Treasure" , "AntGroup" and "Ant Microfinance" )Sales platform for investment products. 
§  Zhaocaibao: Sales platform for investment products. 
§  Yuebao: A tool for transferring money to the Tianhong fund. 
§  Alipay: Online and mobile wallet. 
§  Ant Financial Cloud: Cloud computing platform for financial institutions.

Since all of these businesses are reputed to be controlled by Alibaba and privately held, i.e.) outside the reporting envelope of the Alibaba ADR and NOT included in any of the 300+ related consolidated or equity method entities, there's very little publicly verifiable information on exactly how large these businesses are.

One thing we can be sure of, is that the amount of float these businesses provide is absolutely enormous. Various sources estimate that these funding/banking/investing/P2P & B2B Lending sites provide between US$150 Billion and US$200 Billion of total funding on hand at any point in time.

So what is the most important element of a successful Ponzi Scheme?

Now lets go back to my discussion re: Bernie Madoff, Frank Gruttadauria, WorldCom, Enron, etc. Although ineffective, incompetent or even complicit Public Accountants, Regulators and Bankers (as discussed throughout this blog) can all play a major part in the metamorphosis of a tiny little fraud into a gigantic, systemic risk, a successful Ponzi scheme can only continue (Sometimes for years or even decades) if the perpetrators have access to adequate funding.  Simply put, lots of money (whether it's yours or not) can cover up a lot of malfeasance, silliness and accounting shenanigans. (Note: Jack, before you call your lawyers, I'm not accusing Alibaba management of running a Ponzi Scheme here, I'm just talking about Ponzi schemes in general and exploring possibilities re: the Alibaba capital structure.)

So let's say, hypothetically of course, that Alibaba's financial statements might be, shall we say, suspect? Even with Alibaba's vast amount of capital, mis-deployed on dozens of odd, money-sucking businesses of dubious strategic value, there seems to be minimal imminent risk that the stock price could collapse. The hard working, industrious, conscientious, trusting and unfortunately, naive Chinese people won't let it.  They are willing to continue to pour money into these sites/funds, regardless of any formal government guarantee, oblivious to the possibility that they may lose principal.

Moreover, there seems to be little distinction between earnings (company money) and funding (someone else's money) in the Alibaba ecosystem.  Funds are funds to be invested (aka "spent"), no matter what the source, with no consideration as to repayment.. All of the above described funds/tools/float (US$150 Billion +) can be deployed or "invested" without limitation to any of the 300+ Alibaba businesses or perhaps even used to buy Alibaba common stock or bonds, as was discussed, in the last couple of posts.  US$150 Billion is more than enough to prop up a stock where the daily volume is under a billion dollars a day.   If this mess really is a Ponzi scheme (hypothetically), until the hard working, industrious, conscientious, trusting and unfortunately, naive Chinese people stop funding it and/or actually want their principal back, this charade could continue for a long time.

A Seemingly Unrelated Topic.....

Yesterday Softbank announced that it was acquiring ARM, a computer chip designer located in the UK. The $32 Billion deal, at a 40% premium over the company's closing price on Friday is the biggest ever deal involving a European tech company.  Masayoshi Son is indeed, one of a kind.

ARM is up +40% since the announcement, so apparently Mr. Son is paying 40% more than the market thinks ARM is worth. The purchase price calculation would yield a P/E of 70x last years earnings.  Of course Mr. Son understands things that Mr. Market doesn't. He knows that under his leadership, direction and vision, ARM will morph into something many multiples greater than what it is today.  Just like he's done with "Buy.com" and Sprint.  He may have to personally take the reins of course, a job he can easily do while also personally redesigning Sprint's networks, in between his bi-annual rounds of effortless, 2-under-par golf.....Henrick & Phil should take note.

Here's a Summary of what I thought of Softbank back in September 2015, as a refresher, complete with citations re: Mr. Son's efforts to "alleviate sadness and increase everyone's happiness to the greatest extent possible".

Apparently Tokyo shareholders think a bit less of the "all cash" deal than Mr. Son, sending Softbank shares down 10% overnight.  Shareholders have been clamoring for Mr. Son to clean up his balance sheet and he's responded by committing the $17 Billion tranche from the sale of BABA and Supercell shares, presumably along with an additional $15 Billion he'll scrape together somehow.  Interestingly, Softbank only had cash & equivalents of $24 Billion as of 3/31/16 so Mr. Son is seemingly betting the farm on this acquisition. We all recall how Mr. Son fared when the dot.com bubble burst (destroying $70 billion of his personal net worth) with a hubris reminiscent of a Fourth of July skyrocket "oooohhhh", and a very public explosion "ahhhhh". Like Melania Trump's speech last night, this episode seems strangely familiar.  Mr. Son's modus operandi hasn't changed.

So how is this mess related to Alibaba and the the hard working, industrious, conscientious, trusting and unfortunately, naive Chinese people?

It's becoming clearer by the day that the the hard working, industrious, conscientious, trusting and unfortunately, naive Chinese people are funding this (alleged) Ponzi scheme.  Their good faith IOU's were and will continue to be happily extended to Messrs. Ma and Son, through their spider web of related shadow-bank enterprises. This money, absent of regulatory oversight is available to use for any and every imaginable boondoggle, without restriction, fueled by the trust that these legendary financiers would work their absurd financial alchemy and continue to turn lead into gold.  The deeper we get into this, the closer we get to reality being painfully exposed. The Chinese people believe that their money is safe and they are achieving risk-free, out-sized returns through this magic.  Like Bernie Madoff, Frank Gruttadauria, WorldCom and Enron, this charade can continue for a long time, but when the end eventually comes, it will be shockingly swift, and investors all over the globe will be hurt by it.