Caveat Emptor, Indeed

The Morning Call reads from the classic tome: Alibaba and the Body Thieves

Last night, we received a private message on Twitter about Jack Ma and his current whereabouts.  We responded to the friend who messaged us that it might be a good time for us to dig out the piece we wrote about Ma and Alibaba “a couple of years ago.”  It was, we thought, titled, “Buyer Beware.”

Well…we were wrong on both counts.  The title of the piece was actually “Alibaba? Caveat Emptor.”  And we wrote it more than SIX years ago, just after Alibaba’s American IPO.  My, how time flies.

Before we hop in the Wayback Machine to see it fly backward, though, let’s briefly discuss Ma, his company, and their current predicament.  As you most likely know, Alibaba has, over the last couple of weeks, found itself under heavier scrutiny from Chinese government “regulators.”  Bloomberg News explained the story as follows last Sunday:

Alibaba Group Holding Ltd. led a second day of frenetic selling among China’s largest tech firms, driven by fears that antitrust scrutiny will spread beyond Jack Ma’s internet empire and engulf the country’s most powerful corporations.

Alibaba and its three largest rivals -- Tencent Holdings Ltd., food delivery giant Meituan and JD.com Inc. -- have shed nearly $200 billion in Hong Kong over the two sessions since Thursday when regulators revealed an investigation into alleged monopolistic practices at Ma’s signature company. That marked the formal start of the Communist Party’s crackdown on not just Alibaba but also, potentially, the wider and increasingly influential tech sphere….

Once hailed as the standard-bearers of China’s economic and technological ascendancy, Alibaba and its compatriots now face increasing pressure from regulators worried about the speed with which they’re amassing clout in sensitive arenas such as media and education and gaining influence over the daily lives of hundreds of millions….

It’s unclear what concessions regulators may try to wring from Alibaba. Under the existing Antitrust Law -- now undergoing revisions to include the internet industry for the first time -- Beijing can fine violators up to 10% of their revenue. In Alibaba’s case, that could mean a levy of as much as $7.8 billion….

Ma isn’t on the verge of a personal downfall, those familiar with the situation have said. His very public rebuke is instead a warning Beijing has lost patience with the outsize power of its technology moguls, increasingly perceived as a threat to the political and financial stability President Xi Jinping prizes most.

Now, we don’t know what “those familiar with the situation” consider a “personal downfall,” but we do know that as of last night, “those familiar with the situation” look kinda stupid.  Or so Yahoo Finance seems to indicate, in the article our friend PM’ed us:

Speculation has swirled around Chinese billionaire Jack Ma’s whereabouts after reports surfaced that the high-profile businessman has not made a public appearance in more than two months.

The Alibaba founder also failed to appear as scheduled in the final episode of his own talent show, Africa’s Business Heroes, which gives budding African entrepreneurs the chance to compete for a slice of US $1.5 million.

Ma was supposed to be part of the judging, but was replaced by an Alibaba executive in the November final, UK’s Telegraph reported. His picture was also taken off the website.

An Alibaba spokesperson said Ma was unable to take part on the judging panel “due to a schedule conflict”, according to Financial Times….

Ma’s last tweet was on 10 October last year.

Obviously, we don’t know where Jack Ma is.  For all we know, he’s buried underneath the Yanqing Olympic Village, next to Jimmy Hoffa.  Or maybe he died in a car crash in 1966 and was replaced by a look-a-like named Billy Shears.  “The Walrus was Ma!”  Or maybe he’s just decided to keep a low profile for a few weeks, trying to avoid drawing further scrutiny from those Chinese “regulators” who have been given strict instructions to regulate the sh*t out of him, over and over again, until he tells them what he knows about the shipment.  As we said, we don’t know.

What we do know, though, is that in the grand scheme of things, it doesn’t matter where Jack Ma is, whether he’s vacationing in the Caribbean or gone off to replenish Alibaba’s stock of yellow-matter custard.  Jack Ma is nothing more than a symbol here, a symbol of the dangers that lurk in heart of the CCP.  As we said up top, more than six years ago, on the occasion of Alibaba’s American IPO, we had some thoughts, thoughts that – surprise, surprise, surprise – looks pretty prescient at the moment:

Like most of you, we watched with fascination the results of the initial public offering for China’s behemoth e-commerce company Alibaba.  And like most of you, we were quite impressed with the results:  a jump of more than 30% in the stock’s price right off the bat, over 100 million shares sold, and an estimated company valuation of more than $230 billion, investors clawing to get in on a piece of the action.  All things said, it was quite a day for Alibaba and its co-founder Jack Ma.  It was also quite a day for the company’s underwriters, for the NYSE, and for the government of China.

We can’t help but wonder, though, if it was really an especially great day for investors, particularly those who bought the company heavily.

As always, when it comes to China and its economic and market offerings, we count ourselves among the skeptics.  We don’t have anything against foreign companies using the American exchanges to raise money.  Indeed, we think that’s great.  Nor do have anything against American investors getting in on a good foreign deal and making themselves and their clients rich – or richer, as the case may be.  That too is great.  We just happen not to trust the Chinese government, its ability to keep its hands off the proverbial goose that lays the golden eggs, or, most importantly, its prospects for long-term stability.

As we read, watched, and listened to the commentary on Alibaba, we couldn’t help but think that some people – many people, most people – were far too cavalier in their attitudes about the company and the government under whose beneficence it is permitted to exist.

We then quoted an episode of PBS “Newshour,” in which David Kirkpatrick, “a technology writer and founder of Techonomy, an annual conference looking how technology is changing business” said that “It’s a really positive way to think about it, that, in effect, by so many Westerners buying this stock at such a high price, they’re saying, China is our friend.  We believe in the future of the Chinese economy.”  To which we replied:

Not to put too fine a point on it, but this is insane.  China is our friend?  We believe in the future of the Chinese economy and the Chinese government?  The threat comes from the government “coming down hard on Alibaba?”  We suppose that this description is an accurate one, at least where many investors are concerned.  But it’s also, like we said, insane.  The threats from the Chinese government have almost nothing to do with how hard it “comes down” on Alibaba and almost everything to do with how much it wants from Alibaba, how much it has already taken from Alibaba, how much of Alibaba exists independent from the government.  Likewise, the notion that anyone anywhere should trust in the future of the Chinese government has to be taken as evidence of some sort of psychosis.  The madness of crowds, perhaps?  We don’t know.  But madness it is.

For years, we have used these pages to express our view that China and its government are a threat to business – not just to Chinese business, mind you – but to global business.

Finally, we concluded:

We don’t pretend to be stock pickers.  That’s not what we do.  We discuss global political and social phenomena and allow you, gentle reader, to make up your mind about how they might affect the stocks you pick.

In this case, we are, as always, bearish on China, given the host of problems that it faces and that appear to be growing more and more acute.  Does this mean that Alibaba is a loser of a stock?  Of course not.  It means merely that the government that hosts Alibaba and whose policies will determine the company’s prospects is a corrupt, mendacious, vicious, homicidal, unstable authoritarian regime that is beset by potential social, economic, religious, and demographic catastrophes, and is therefore likely to destabilize the world economic order either wittingly or unwittingly.

It is up to you, in short, to determine what you think about Chinese companies and their stock offerings.  We don’t know what to tell you to do about that.  We do know, though, to tell you to be worried about the Chinese government.  Contra PBS, the Chinese government is not your friend.  It cannot be trusted.  Buyer beware.

If you browse stories from a couple of weeks ago, there appears to have been very little alarm raised by mainstream investment analysts about Alibaba and its relationship with the Chinese Communist Party, despite the CCP’s plain intention to teach Ma and Alibaba some sort of lesson.  “Buying opportunity” was the phrase we saw thrown around more than a few times.  Sure, Alibaba has some problems, this second, but take a deep breath and realize that everything will work out in the end.  After all, it’s too big a company and too well known and is too much of a global emblem of the new Chinese economy for the government to allow anything too terrible to happen to it.

Of course, as the “buying opportunity” folks don’t quite seem to grasp, that’s the whole point.  As Thomas Jefferson never said: “A government big enough to give you everything you want is a government big enough to take away everything that you have.”

Six years ago, we made the case that Alibaba should be considered a risky investment, not for the usual reasons, mind you, but because Alibaba could not exist, WOULD not exist without the approval of the ugliest and most vicious totalitarian regime on earth.  And that, in turn, means that the success or failure of the company –  or any other Chinese company, for that matter – depends not on the development of insightful business strategies or the effective implementation of those strategies but EXCLUSIVELY on the successful navigation of corrupt and dangerous political waters.

Jack Ma seems to have veered off course a bit.

Whether he is now trying to right his ship or has been tied to its anchor and cut loose is an open question.

Either way, the point is the same: when you invest in Chinese companies, you invest in the Chinese Communist party as well.  And your investment is only as safe as the Communists allow it to be.

If you think that’s a “buying opportunity,” then we don’t know what to tell you.

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