Before this news about Baidu, actually there were reports that Baidu was guilty of “intensionally hiding the China San’lu milk powder scandal” during August this year (Olympics time). Luckily to them, local goverment officials did the exact same thing to keep the big party on. But this time they got caught. Some financial analysts naively think those Ad. made up a small portion of the Ad. revenue. This maybe true. But I don’t the problem is that simple.

Both Focus Media and Baidu did a bit evil here, much more evil than the alcohol ad. on CCTV. More importantly, CCTV, the dominant player in China TV ad. market, is not willing to give up the top spot easily.

Interestingly, I found many local TV stations (TV shopping channel) do similar ad. on TV too, when I visited China last time. I remember one company Acorn International (NYSE: ATV) is listed in the US, its stock went from the high of $28 to about $2 in about a year. So what’s the business lesson here?

Do not do evil.

I can appreciate the goverment intention here is solving the “excess migrant labor workers”, and lack of middle class problems in China. They should act from tax policy, business regulations, etc. But I guess the Chinese goverment is for the business, by the business and of the business, just like the US gov.

My second thought
Bill Ackman was on Charile Rose recently (either Tuesday night or Monday night), and he was arguing GM should file for bankrupcy. My gut feeling is even if this makes economy sense, politically this is a difficult thing for Dems or President-elect Obama: their union connections.

I think I also have a second thought on China giant stimulus package (infrustructure), my initial thought was purely economics based. It’s just impossible to do the necessary reform (tax, cultivate middle class) in near term. If I was in Mr. Wen’s shoes, I would come to similar conclusions: we got to make sure those migrant workers employed, otherwise it’s a giant social problem.

China Mobile Group is the holding company of China Mobile Limited (listed company). I think one reason goverment did this, is they actually don’t have much money at hand. Another reason, to put some constraints on the development of China Mobile, which has dominant position in China mobile communication industry. But this does not come without any moral hazard, the Chinese goverment did not rob directly from the shareholders of CHL, but they did it in an indirect way. China Mobile has about 4 billion shares (ADR equivalent), $7 billion divide by 4 billion, which is about $1.82 per share for CHL shareholders. In other words, China Mobile worked 6 months for the goverment for free.

On the postive side, China Mobile management and employee will see the urgency of developing the 3G, and other business.

Ref: Yang Hai Feng Chinese article, the transfer of 50 billion may not be a bad thing for China Mobile.

I found his opinion on China economy growth when I searched “Ross Perot McCain” and found this article on Newsweek. The China quote is in page 3.

“He attributes the success of China to the fact that even uneducated Chinese must learn 3,000 characters early in life, compared to the 26 letters in the English alphabet. “Their hand-eye productivity is incredible because of drawing the symbols,” Perot says, noting that most of today’s Ph.D.s in engineering are from China and India, and only a small percentage from the United States.”

While I don’t think Chinese need to learn 3,000 characters, I agree with Ross’ analogy about America and China.

(Theme song of Beijing 2008 Olympics)

What a week, Yahoo Tech-ticker

Internet privacy, tolerance in China
It’s Olympics time, I know it’s not the time to bash the people or the goverment. But the following story just made me upset. Basically some thugs posted false stories about a lady on the web. When the lady tries to get help from lawyer, the lawyer was threatened. I just don’t understand how people can have that kind of energy to dig up all the personal pictures, and use that to spread rumors. I also doubt the sincereity of Chinese web sites on this issue: traffic is much more important to them because traffic brings in ad. money, but they don’t care how they generate web traffic. It seems to me the business interest (traffic) over stepped the laws or ethics.

The cult culture
Over the years Apple has this cult like culture among its fans. Looking at site such as MacRumors you will get an idea. While I think Apple products are generally very good, I don’t like their prices. It seems they are going to lower their prices, as they are expanding their market. This is a delicate problem for Apple because people usually got wooed to Apple because of its unique design, cool brand, and thus get the “being cool” status from friends. Now if Apple is everywhere, like iPod did, it loses that status. But Apple is going to pursue this route anyway, under the pressure from Wall Street. This can be shown in its earning forecast for next quarter.

Earning
Apple released its 3Q 08 earning yesterday, and the number was good. But it offered so-so guidance, which drove its stock lower today. We know Apple usually likes to sandbag its earning guidance, i.e., they lowered the expectation, and then try to beat it. But this time the number is much lower than expectation, which makes people (e.g., tech-ticker guys) think they are trying to get market share at the expense of profit.

Stock
These days I am hasitate to buy a stock when the buzz is all around. Apple just released its iPhone 3G on July 11. While I think Apple will do well in China and many emerging market, I think the current valuation is too high for a large cap consumer-fashion-tech stock. Also keep in mind the US economy is in recession, so this back to school season will not be strong. Considering all this, I would not touch AAPL for now.

China’s role in the Fannie/Freddie mess
As Fannie/Freddie crisis deepens, people find China in akward postion because China is the largest holder of 2F’s bonds: total $376.3 billion. I don’t know exactly how China got into this mess, but I think one reason is decision maker in China must think 2F bonds are safe because of US goverment implicit gurantee. At least the market thinks so because the rating agency S&P, Moody and Fitch all gave Fannie/Freddie top rating. But wait a minute, didn’t those rating agency give a pass to those toxic MBS and CDOs? One thing I am sure is the China 2F buyers’ job are still safe, because at least they did better than the guys bought Blackstone at IPO, bought Morgan Stanley at $50s couple months ago.

Financial companies using lots of oil?

What a week in the stock market last week. All the financial stocks, good or bad, got a big boost after Wells Fargo and JP Morgan announced better than expected earning, with the retreat of oil price from high $140s to less than $130. Financial companies certainly don’t use oil as direct inputs, but it appears the smart money has flow from oil (energy) to financials, in addition to the short covering after SEC says stopping nakes shorts on Fannie, Freddie and primary brokers. So go short the big bad oils, not the big bad GSEs and wall street banks…

Eat/drink Oberweis ice cream/milk, not Oberweis fund
The latest Barrons (July 21) featured Oberweis fund, which is not new to me because I read it from Fortune (columnist) couple months ago. The thing interesting is Oberweis fund lost to its benchmark Russell 2500 Growth Index in last 3, 5, and 10 years: in the respective period, Oberweis Mid-Cap (OBMDX) annualized returns were 4.8%, 6.2% and 4.4%, vs. 5.2%, 9.8% and 4.8% for the index.

So why should a rational investor hand his/her money to Mr. Oberweis? I just don’t get it.

Starbucks closing
Starbucks is closing 600 US stores in the near future. Here is the list (PDF) from their web site. It seems SBUX initially was reluctant to share this information, it did so after pressure from local communities. A sad thing for coffee lovers and the affected 12,000 employess.

Appendix:
WSJ: Why no outrage?
“For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street’s biggest broker-dealers could hardly bear to look themselves in the mirror if they didn’t extend themselves three times further. At the end of 2007, Goldman Sachs had $26 of assets for every dollar of equity. Merrill Lynch had $32, Bear Stearns $34, Morgan Stanley $33 and Lehman Brothers $31. On average, then, about $3 in equity capital per $100 of assets. “Leverage,” as the laying-on of debt is known in the trade, is the Hamburger Helper of finance. It makes a little capital go a long way, often much farther than it safely should. Managing balance sheets as highly leveraged as Wall Street’s requires a keen eye and superb judgment. The rub is that human beings err.”

Charlie Rose interviewed Ted Koppel on PBS (July 9). I put it on my calendar but forgot to watch it later. I am now looking for the video because I want to see intelligent discussions between two top journalists (talk show host).

Appendix:
1) Again quote Ted: My analogy [of 24/7 news] is it’s rather like standing 2 feet away from a railroad track and watching the trains go by. And, boy, you’re close and it’s exciting and there’s a lot of energy and you really feel as though you’re on top of it, but you can’t for the life of you see what’s going on. And if you really want to know what’s going on, you’ve got to step back 10 feet, 20 feet, 50 feet, sometimes half a mile, so that you can see the locomotive and the caboose and everything that is in between.

Maybe I could use that idea for investing? Isn’t this similar to Buffett’s approach to investing (live in Omaha, instead of Manhantan).

2) Ted Koppel grills Mike Brown (Google video, 8 mins), the head of FEMA, on FEMA man-made disaster after Hurricane Katrina.

Hint: the local officials pump up the GDP numbers so that they can get promoted; the corporate CEO/CFO pump up the earning number so that their stock options will be more valuable.

Of course in an ideal world, when the law is enforced, those kind of things will not happen.

Reference:
(Chinese) In this post, a Chinese bank executive describes that the future earning of a bank has already been determined in advance.

(Chinese) Lang Xian Ping (see item 3) describes the “GDP is the king” policy in China and its effect in economy. Link here.

In light of the recent earthquake, China had 3 days mourning, and issued this notice to all the web site owners (source: wang jianshuo). Also, if you watch the CCTV news (Xin Wen Lian Bo), you will notice that the majority is still focus on the good news, and meetings between leaders are still the main focus. So, has China changed or not? The answer is obviously yes. I am using two recent events as evidence.

1) The response on the Chinese web on Olympics torch incident: I think the feelings expressed by Chinese people are genuine. To be honest, I have been upset by the demagogue of western media portrait of China for too long. I am sure many open minded western people will share my feelings, if they got opportunity to visit China lately. One of my colleagues visited China lately, and he was very impressed by the infrusture and progess made.

2) The earthquake: I don’t think add too much on this one, because people already have experienced the openness of the media. Otherwise, Wang Shi (Chairman of Vanke) will not get into the donation gate.

Obama’s win
Progress has also been made in the US. Forty years after the assisanation of MLK and Robert Kennedy, Obama, the son of African immigrant and a white woman, won the Demacratic party presidential nominee. One key thing, I notice, is Obama’s ability to organize using the web. remember the Obama girl (Video: YouTube)?

Seriously, as I said before, Obama organize his web site much better than Hillary’s (much more Google search friendly); and his young supporters used Facebook, MySpace heavily for organizing. Note Obama is the No. 1 popular guy on facebook; Premier Wen is No. 10.

Townhall meeting: interestingly, John McCain asked Obama to do a series of townhall meetings. Note townhall is a very traditional style commucations for citizens and their leaders.