Ever hear of 'you get what you pay for' ? Problem with hedging a leveraged book is you need puts that move big. Thus the use of BIDU and FXI. (I like GOOG options however since I believe the mkt tends to underprice volatility for the when it makes large moves. The lack of volatility between large moves keeps goog vols and long option premiums under control). The IV blowup yesterday alone was beautiful on the BIDU. Going long volatility pays. These puts were near term expiring and I even closed them above my entry point at a profit. QQQQ or DIA puts don't perform, simply put. BIDU moved 20% yesterday. nasdaq and s&p took 2 months to move like that. IV blowup is also much less accentuated. If the market crashes, I want puts on something that goes down 50% (ie Hang Seng a la 87 market crash), not 10%. Thats the thought here. Its occured to me hedging does something crucial - it preserves cash in an adverse market. The idea that risk of carrying leverage can be almost entirely offset by hedges is certainly appealing and requires good management in itself. Encountering the rare day where a sharp reversal was net positive on a leveraged long account was certainly eye opening. With cash preserved, I can actually afford to take that next position. Thats more important than foregoing potential gains (and missing the BIDU trend, for example). Now I realize its especially necessary if leveraged w/ options positions or margined stock, since trend reversals threaten to entirely wipe out value of pre-existing long positions. I personally don't have the fortitude to play momentum when the fundamentals don't seem in line with my thinking. I'd much rather play it when I see fundamentals intersect. Sure I'll forego gains, but I also won't get hurt when the momentum reverses. Watching these big favorite momentum stocks right now is pretty silly. Analysts come out every day and upgrade/pump these stocks to no end, but these same stocks were ignored when they were much greater values. And the latest JP Morgan move on BIDU is the biggest tell. The same analyst that gave it the goofy $400 price target one week later comes out and deflates the bubble. How do the fundamentals change in one week? Amazing this guy even gets the credibility to move the markets. That price action yesterday (and today) says one thing: this game is momentum, and everyone is in the same names ready to pile out just as quick as they piled in. At these levels, the the hands are definitely weak. I wouldn't fight the trend with primary positioning, definitely, but I wouldn't play it long term and get to delusioned about goog to $800 fantasies or BIDU to $500 the same. Those momentum names recovered because we are still in the early stages of a bull that will probably go much further ... but there will be a day where the selling continues on a second day. Thats the day you let your hedges run. Yesterday I sold most of my hedges and kept all of my FXI on the table, though. I don't regret it, but I thought it was too early for the dumping to continue unless china was going to follow our lead. People are conditioned to buy the dips in a bull market, as I am.
Its not silly. They were trading at 150-200 1.5-2months ago, and nothing fundamentally has changed with the company. I cant figure out whats driving all these buyers (& that the price has shot up, wall street ppl who were sayin it was over valued at 160 are saying its going to go to 500 now, even though nothing has changed with the company). I sold out my bidu stake over the past 3 weeks, sold out google last week. Both had been significant parts of my portfolio. I do hope bidu misses earnings for a good excuse (like they ramped up on hiring for future growth), and the stock tanks to 150. That way I can back the truck up again. Baidu is a great company, with a great future. Its just not a $300 company yet
I don't think it is anything more complicated than higher prices bringing in more buyers which makes the price go higher. That model stopped working in real estate so there is a lot of money around that will be attracted to anything that is moving up.
BIDU's market cap is only 11 Billion. BIDU will hit $400 very soon. PS......Has anyone used http://www.baidu.com ? I tried but don't know Chinese. Maybe someone could post their opinions on Baidu and compare it to Google.
Shorting these things just before end of year does not make sense in my view. I saw BIDU as overvalued two years ago with it at about $80 when it was selling for forward PE of 100 soon after it came public. Now guess what the forward PE is? It just less than 100 (next year estimate is 3.80). Guess what is happening now? As we approach the end of the year folks are starting to make valuations based upon F2009 figures: my latest readings of the analysts says they are expecting $7.50 a share. Try multiplying that by PE of say 80, and you quickly come out with a figure of $600 for the share. Now that may seem unrealistic, but unless there is a general plunge in the market, or significant earnings miss, the odds are against making money via puts on the stock, if you are holding for more than a few days.
34 million outstanding shares 66 expected million $ in revenues, $21 million in profit this q, $76 million profit expected for fy07. Thats $2.23 per share earnings for fy07. near forward PE of 144. On 3.80, forward PE 2008 of 85. If BIDU guides down at all for next yr below an 85% annualized growth rate, forget about it $600/share. GOOG in comparison: forward 2008 PE of 32.25. current 2007 PE of 41.55. Wonder if goog can keep up 30% annualized growth as the stock is pricing. I think GOOG is very close to a cyclical peak... When they start posting annualized #s heading towards 15 or 20% growth, GOOG will have trouble holding 500, let alone 640. And at a more mature 5-10% annualized growth, imagine how GOOG will be valued, even if it had $40/yr EPS !!! [which is where GOOG will likely be in 3-4 yrs) I do agree with the general upward bias in this market, though, and say these prices may be sustainable in the search for appreciating assets. Regardless: a good high vol hedge ...
You have to factor in appreciating RMB when you arrive at $7.25 in earnings in 2009. For Q4-07, consensus is .71/sh, but whispers are now close to .81/sh. The growth rate in earnings is also accelerating after dropping in early 2007. BIDU should cross 600 in 2008 if all things hold.