Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Mr. Market and American Investors bet big on China and Alibaba

Strangely, American investors are making big bets on China when anti-Chinese sentiment is growing because of Coronavirus.

In America, politicians and intellectuals are taking a hard line against China. For example, U.S. Senator Tom Cotton (R-Arkansas) wants to ban the sale of Chinese pharmaceuticals in America, The Atlantic claims.

Meanwhile, political scientist Andrew Michta demands a “hard decoupling” from China. Stupidly, U.S. Senator Josh Hawley (R-Missouri) claims he will introduce legislation that could allow US citizens to sue the Chinese government over coronavirus.

In contrast, the New York Stock Exchange (NYSE) price for Alibaba (NYSE: BABA) rose from $175.85 on 16 March 2020 to $211.24 on 16 April 2020 but fell to $207.34 on 21 April 2020. Hence, the share price of the prominent Chinese company on the NYSE rose by $35.39 as America’s coronavirus crisis spiraled out of control.

Does Wall Street have no Faith in America?

I think Alibaba’s stock price shows Wall Street has little faith in America. However, the S&P 500 Index rose from $2,386.13 on 16 March 2020 to $2,797.53 on 16 April 2020, but fell to $2,736.56 on 21 April 2020.

Thus, Wall Street is optimistic about the futures of both America and China. However, the Coronavirus statistics tell a different story. Worldometers estimates, the People’s Republic of China reported 82,758 total Coronavirus cases on 21 April 2020.

In contrast, the United States reported 794,297 coronavirus cases on the same day. Dramatically, the USA reported 42,564 coroanvirus deaths while China reported 4,632 coronavirus deaths on 21 April 2020.

I think the coronavirus statistics justify the Alibaba Holdings Inc. (NYSE: BABA) bulls. However, the same statistics cast doubt on the bull case for American stocks.

I have to wonder if Mr. Market is paying attention to the coroanvrius pandemic. In particular, I have to wonder if Mr. Market is underestimating coronavirus’s effects on the economy.

Should You Invest in China?

America bears and cynics will wonder if it is time to make big investments in China.

Frighteningly, some economists estimate the United States had a 15% unemployment rate on 16 April 2020, MarketWatch claims. Economists estimate that over 21 million Americans have lost their jobs to coronavirus.

Additionally, many critics claim the United States is not doing enough to alleviate the effects of Coronavirus. For example, main pandemic relief program in the United States is two payments of $1,200 to most Americans.

In contrast, the British government will pay up to 80% of wages of workers employers keep on staff during coronavirus. In detail, Her Majesty’s Government will cover wages of up to £2,500 ($3,108.10) a month if employers keep employees on salary; even if their businesses shut down, the BBC reports.

Thus, the British have a plan to keep their economy operating and the United States does not. Hence, America could soon face an economic crash similar to the Great Depression of the 1930s. Thus, the China bulls look smart and the America bulls dumb.

Will the United States Survive Coronavirus?

However, some members of the US Congress want to adopt the British plan of guaranteeing citizens’ salaries.

U.S. Senator Josh Hawley (R-Missouri) and U.S. Representative Pramila Jayapal (D-Washington state) want Congress to cover idled workers’ salaries, The International Business Times reports. Jayapal wants to go farther than Hawley; she wants Uncle Sam to cover 100% of idled employers’ salaries up to $100,000.

In contrast, Hawley wants to pay 80% of wages up to what he calls the national median wage. The US Census Bureau estimates the “national median wage” at $31,000 a year or $2,583.33 a month.

Thus, some American leaders are contemplating the dramatic steps needed to deal with coronavirus. Unfortunately, top tier American leaders such as President Donald J. Trump (R-Florida), U.S. Speaker of the House Nancy Pelosi (D-California), presumptive Democratic presidential candidate Joe Biden (D-Delaware), and U.S. Senator Mitch McConnell (R-Kentucky) are not discussing such plans.

Are the America Bulls Right?

Therefore, the America bears buying Alibaba (NYSE: BABA) could be smart. The United States could be psychologically and politically incapable of an effective coronavirus response.

Remember, they first detected coronavirus in December 2019, yet no major US political leader was discussing the pandemic until March 2020. Thus, nobody in Washington led on this issue. In contrast, China’s swift response appears to have contained coronavirus.

Meanwhile, some American ideologues appear willing to let the United States economy collapse and their neighbors die rather than abandon their beliefs. For instance, US Representative Thomas Massie (R-Kentucky) tried to delay a swift vote on coronavirus relief, NPR reports.  

Additionally, nationalists such as US Senator Tom Cotton (R-Arkansas) and President Donald J. Trump (R-Florida) appear more interested in attacking China than responding to coronavirus. For instance, Trump is trying to end U.S. funding for the World Health Organization (WHO), The New York Times reports. Trump is cutting WHO funding because he thinks the organization is too close to China.

Consequently, any US coronavirus response could be slow and ineffective. Given that potential, investing in Chinese companies looks smart.

Is Alibaba a Good Investment?

Overall, Alibaba Holdings Group Limited (NYSE: BABA) is a profitable company.

For instance, Alibaba made an $11.078 billion gross profit on revenues of $23.192 billion in the quarter ending on 31 December 2019. To clarify, those numbers come from the last quarter before Coronavirus.

Impressively, Alibaba’s revenues grew at a rate of 35.97% in the last quarter of 2019, Stockrow estimates. Moreover, Alibaba reported a quarterly operating income of $5.682 billion and a common net income of $7.514 billion on 31 December 2019.

Alibaba is a Cash Rich Company

Alibaba was a cash-rich company at the end of 2019. For example, Alibaba reported an operating cash flow of $14.168 billion; a financing cash flow of $8.828 billion, and an ending cash flow of $18.631 billion on 31 December 2019.

Alibaba had $54.319 billion in cash and short-term investments on 31 December 2019. That number grew from $35.691 billion on 30 September 2019 and $30.325 billion on 31 December 2018.

Is Alibaba a Poor Man’s Amazon?

Thus, Alibaba is accumulating a huge pile of cash that rivals Amazon’s. To explain, Amazon (NASDAQ: AMZN) had $55.021 billion in cash and short-term investments on 31 December 2019.

I think many investors view Alibaba as a poor man’s Amazon because of the cash. The investors buy Alibaba because it shares some of Amazon’s characteristics. For example, Stockrow estimates Amazon’s revenues grew at a rate of 20.8% in the last quarter of 2019.

Yet, Mr. Market paid $2,392.58 a share for Amazon and $210.94 a share for Alibaba on 16 April 2020. Bargain-hunting investors buy Alibaba because it resembles Amazon, but its shares cost less than 10% of Amazon shares.

Amazon vs. Alibaba

Alibaba (NYSE: BABA) and Amazon (NASDAQ: AMZN) are both giant ecommerce platforms. Alibaba dominates the online market world’s second largest economy in China, while Amazon owns ecommerce in the world’s largest economy, the United States of America.

Notably, Stastista estimates Alibaba had 711 million active consumers in 4th Quarter 2019. That number grew from 636 million active customers in Fourth Quarter 2018.

had 112 million active users in the United States at the end of 2019.* In contrast, Fortune estimates Prime had over 100 million subscribers at the end of 2019. In addition, CIRP claims 65% of Americans subscribed to Prime in 4th Quarter 2019.*

What is the Difference between Amazon and Alibaba?

I think the difference between Amazon and Alibaba is that Alibaba is a direct retailer while Amazon concentrates on platform building. Thus, Alibaba is closer to Walmart (NYSE: WMT) than Amazon.

To explain, Alibaba’s principal function is to sell stuff. Conversely, Amazon’s main goal is to grow its platform. Hence, Alibaba is a sales machine while Amazon is a membership generator.

Thus, Alibaba makes money by selling stuff. In contrast, Amazon makes money by selling stuff and providing services to customers. For example, Amazon Web Services (AWS) generated $35.026 billion in revenue in 2019, Statista estimates. Additionally, Amazon offers services such as same-day delivery and streaming video.

I think Alibaba’s business model is better suited for China, a country with a large working class and growing middle class with some cash. Amazon’s business model is better for the United States, a large country with a shrinking working class and a stagnant middle class.

Interestingly, Alibaba could be in a better position to tap growing developing countries such as India and African nations. Consequently, Alibaba is investing heavily in Indian gambling apps, Bloomberg reports. Alibaba is investing in gambling on the subcontinent because Bloomberg estimates 300 million Indians gamble and bet online.

Is Alibaba a Good Stock?

Thus, I consider Alibaba (NYSE: BABA) a good investment for those who are skeptical of America’s future. To explain, I think Alibaba can make money in developing nations outside the United States.

However, I think Mr. Market overvalued Alibaba at $207.34 on 21 April 2020. I consider Alibaba overpriced because it pays no dividend.

Despite that, I think America’s problems show all investors need to consider buying some Chinese stocks. Thus, circumstances could force American investors to choose between patriotism and making money.