My Bearish Romance With Alibaba
My most active positioning has involved this stock and NFLX since the pullback we had on Aug 24th. We are witnessing a controlled demolition of BABA and there is likely more downside to come.
Why am I so confident shorting BABA frequently?
1) The multiple lockup expirations we had this year were a major contributor to the constant bleeding this stock has endured. It's IPO had a huge amount of hype and heavy buying by retail investors hoping to catch of piece of the world's economic engine in China. Now, we have a huge amount of shares flooding the market and well publicized bag-holders like Yahoo and Softbank looking to unload risk. This is a phenomena that feeds on itself. The more the price goes down, the more likely these billions of $ worth of shares will be sold.
2) This reason is more speculative on my part. It's corporate structure and in particular, it's structure here in the US for shareholders is questionable. We all know why BABA has to utilize VIEs (Variable Interest Entities). It is the only way to get around China's strict foreign investment rules. This doesn't detract from the risks at all however, and even the reason itself, maneuvering around Chinese law presents more downside risk.
Investors in the US are not actually buying Alibaba shares. They are buying pieces of a derivative in the Cayman Islands and have very limited shareholder rights as a result. Examples like Enron and even the 2008 crisis should have taught us that we should always be very wary of corporations that utilize investment structures like SPVs, SPEs, and VIEs. It is too akin to a black box. Companies in the US got away with a great deal of unscrupulous practices before they were caught after a stock market pullback (Enron in 2001 post dot com and all the SPVs post 2008). I find it hard to believe that China has much better corporate oversight than in the US, Alibaba can most likely get away with more due to the nature of the current political climate in China. We don't know what's going on until a catalyst event occurs that exposes issues we may never have thought about in a company. I great admire Jack Ma, but the cult-like worship and his desire for almost complete control are red flags.
I can keep going and there are multiple articles that write in depth about Alibaba discusses these issues. Most importantly, there are far more reasons for this stock to go down than to recover anytime soon. With billions of dollars worth of this stock waiting to be sold off, you can count on every bullish push being met with even stronger selling pressure.
Why am I so confident shorting BABA frequently?
1) The multiple lockup expirations we had this year were a major contributor to the constant bleeding this stock has endured. It's IPO had a huge amount of hype and heavy buying by retail investors hoping to catch of piece of the world's economic engine in China. Now, we have a huge amount of shares flooding the market and well publicized bag-holders like Yahoo and Softbank looking to unload risk. This is a phenomena that feeds on itself. The more the price goes down, the more likely these billions of $ worth of shares will be sold.
2) This reason is more speculative on my part. It's corporate structure and in particular, it's structure here in the US for shareholders is questionable. We all know why BABA has to utilize VIEs (Variable Interest Entities). It is the only way to get around China's strict foreign investment rules. This doesn't detract from the risks at all however, and even the reason itself, maneuvering around Chinese law presents more downside risk.
Investors in the US are not actually buying Alibaba shares. They are buying pieces of a derivative in the Cayman Islands and have very limited shareholder rights as a result. Examples like Enron and even the 2008 crisis should have taught us that we should always be very wary of corporations that utilize investment structures like SPVs, SPEs, and VIEs. It is too akin to a black box. Companies in the US got away with a great deal of unscrupulous practices before they were caught after a stock market pullback (Enron in 2001 post dot com and all the SPVs post 2008). I find it hard to believe that China has much better corporate oversight than in the US, Alibaba can most likely get away with more due to the nature of the current political climate in China. We don't know what's going on until a catalyst event occurs that exposes issues we may never have thought about in a company. I great admire Jack Ma, but the cult-like worship and his desire for almost complete control are red flags.
I can keep going and there are multiple articles that write in depth about Alibaba discusses these issues. Most importantly, there are far more reasons for this stock to go down than to recover anytime soon. With billions of dollars worth of this stock waiting to be sold off, you can count on every bullish push being met with even stronger selling pressure.
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