Merry Christmas

Also, I will be visiting families and probablly not updating this blog for a week or so.

I sold MXB six hours too early

Stocks in review week of Dec 16 to Dec 22

1) I bought some MXB shares on Dec 19. After I read its prospectus more carefully, I found two things I don’t like: it will use the proceeds of the IPO ($225 m) and borrow some $425 m to pay the dividend to its parent, Morgan Stanley; Morgan Stanley still controls more than 90% of its share. So I put up a limited sell order at 29.30 for Dec 21.

On Dec 21 the stock opened at $29.50 and had a huge run from 3:00 PM EST till close. It closed at $33.72. This reminded me 3 years ago I sold my 51job (JOBS) two days too early.

Mission impossible: beat the index

For the mutual fund, besides being the leader in its category each year, one key performance measure is to beat the bench market index. For instance, if a fund is invested in emerging markets, one key bench mark is MSCI emerging market index (EFM, an ETF tracks this index). For reference, the index is up 33.44% from Dec 21 2006 to Dec 20 2007.

But, beating the index is very hard. Consider Bill Miller, the legendary fund manager of Legg Mason Value Trust, and he is going to underperform the market second year in a row after beating S&P continously for 15 years. Here is a link to the fund details. From the portfolio, Bill hit a home run with Amazon, but he also had dogs like Sprint, Yahoo and to a lesser extent, eBay. The following is Performance of Monthly and Average Annual Total Returns (as of 11/30/07, source: Legg Mason site).

Two more questions for Longtop

1) Why it quit the outsourcing biz?
We know outsourcing is a typically low margin business. Interested readers can look at the VanceInfo (formerly WorkSoft), the first Chinese IT outsourcing company listed in Nasdaq. It did IPO recently.

Longtop should not get into the oursourcing business to begin with. I suspect the VCs suggested the company to quit the outsourcing business, and the company did so early this year. This move will improve the profit margin and it will look good on the finanial statement. More importantly, it will save the company resources and focus on its main business: the software and service for China financial industry.

As a side note, by quiting outsourcing Longtop may have avoided the effect of “slowdown” of US financial sector (depends on the type of customers they serve). From I heard from Cisco conference call a while back, the US financial indutry is cutting back on IT spending now.

2) Effect of tightening monetary policy
For example, the raise of bank reserve rate by People’s bank of China. The move was to make sure economy not overheat, and banks should be prudent on its lendings. This will not have effect on banks’ IT spending. Because the bank IT budget is separately from its bank reserve. As I said in my previous post, banks are increasingly rely on sophiscated IT systems for customer relations, marketing and sales, internal management, etc.

NetSuite IPO update

It priced at $26, according to AP news.

I did NOT bid on NetSuite IPO eventually. Two things: it raised price range from initial 13-16 to 16-19; and I noticed NetSuite is not profitable so far. On the other hand, when its bigger rival, the on-demand software provider SalesForce (CRM) did IPO in 2004, it was about to turn profitable.

Don’t know the exact reason why the recent weak Mr. market valued it so high. I remember more than 3 years ago CRM was priced in mid teens range during IPO. I suspect the recent strong show of VMWare is one reason. Like the Baidu situation in 2005, it did IPO one year after the successful IPO of Google, people (who missed GOOG) bid up BIDU from the IPO price of $27, to openning price of $70. The night before IPO I was planning to buy it at $35, and get out at $42. My plan did not get executed because I was way too conservative 🙂

Got some MXB MSCI Inc. shares

I bought some MSCI (company, stock:MXB) today. A month ago I heard about it from my friend StrengthTrader’s blog. But at that time I was a bit obsessed with my LFT and CROX, and did not have stomach for another IPO. In last few weeks when I was doing research for my new 401K plan and IRA, I found MSCI index is frequently mentioned as the bench mark for many funds. It’s not the first time I heard about MSCI, but it re-inforced my belief that index fund will be more and more important for retirement investing. This is especially true in current weak market.

Also, from my limited research on the mutual funds for my 401k and IRA, most funds can not beat the index. So it does make sense for people to simply investing in the index fund (or ETF?).

Back to MSCI, it was a division inside Morgan Stanley, and recently got spin off, and IPOed on Nov. 18. Here is its prospectus. The stock is not cheap, at $29, its PE is about 34, twice the earning growth rate (17%). Also, keep in mind Morgan Stanely still has more than 80% stake on this baby.

By the way, for more information on mutual fund investing, you may want to check out my friend Sun’sFinancialDiary. I know he has a lot more experience on this topic than me.

(update Dec 20) Found this bearish article on MSCI at ZachStocks.

Fund selections for Vanguard IRA

I picked the following funds (and their weight) for my Vanguard IRA yesterday.

Vanguard International Value 50% (developed market large cap value)
Vanguard Winsor II 25% (US large cap value)
Vanguard Selected Value 25% (US mid cap value)

The first two funds are in my current 401k plan, I found the Vanguard Selected Value through Kiplinger magazine.

1) Performance
I looked at a fund’s 5 and 10 years performanace. I found something interesting: most funds could not beat its bench index consistently. For instance, Vanguard Explorer Fund and its bench mark is listed below:

Average Annual Returns—Updated Monthly as of 11/30/2007

	1 Year	3 Year	5 Year	10 Year
Explorer Fund Investor	5.53%	9.71%	14.24%	9.44%
Russell 2500 Growth Index	9.52%	11.79%	15.93%	6.60%

I found Vanguard Intl Value fund to be an exception. Vanguard Winsor II also faired well. I left out fund such as Vanguard Prime Cap Core, because it does not have 5 years track record.

2) Weight

Random thoughts about China housing bubble

All right, now the Chinese regulatory (People’s Bank, China banking regulatory commision, China Securities Regulatory Commission,…) got what they wished for this Christmas: after the cool down of the doemstic stock market, now housing market started take a turn (according to many experts including Vanke CEO Wang Shi). This is reflected in the sharp declining of home builder stocks in China (think Vanke 000002). And in the US, two China real estate ADRs, EJ and XIN, both lost more than 10% today.

I think most people will agree the existence of bubbles in China stock market and housing market. But many of us disagree how big it is; is it causing problem for the real economy (overheating), and introduce unecessary risks? I am not economist and do not pretend to be one. The interesting thing for me, is that the Chinese regulatory took the notes from the melt down of US sub-prime loans, and tried to be one step (or maybe many steps) ahead of the curve. (Below, E-House/EJ office on Changning Rd, Shanghai)

What is second home?

Week in review 12-09 to 12-15

1) China central bank, along with China Banking Regulatory Commission, defined “what is second home” for the lending purpose: it will be measured against a family (husband and wife), not individual. See this NetEase news.

12月11日，央行、银监会联合发布《关于加强商业性房地产信贷管理的补充通知》明确规定，以借款人家庭为单位认定房贷次数。另外，如果首套住房人均面积低于当地平均水平，再贷款购房还是按照首套标准执行。业内人士解释，以家庭为单位来界定，就相当于夫妻双方无论任何一方有向银行申请房贷的记录，另外一方再贷款买房，都要按照房贷新政执行，即提高首付比例的同时，贷款利率按照现行贷款基准利率的1.1倍来计算。

For more info, check out Baidu.

A smart move to contain the housing speculation. But will it really work as desired?

2) US Fed cut interest rate by 0.25, not as much as Wall Street liked. Stock tanked after the announcement. Obvious the baby (Wall Street) is not happy with this Xmas gift from Ben.

Vanke: good stock at bubble price?

Stock Price
Shares of Vanke (sina, Google Finance) has gained more than 200% YTD, but it is taking a hit lately. A while ago I read these two interesting articles (21cbh, sina) about the valuation of Vanke share. The key question is whether it is over priced, considering its growth potential. Of course no one can predict the growth. At the beginning of 2007, has anyone predicted the housing price in Shanghai would go up 30% to 50% this year? I know I did not…

Housing Price
Vanke chairman Wang Shi said the Chinese housing market is at its turning point now. I don’t know whether the Chinese housing market is peaking out or not. In the following I used its monthly sales data and tried to calculate the average price in last 7 months. The ave price went from 7,634 Yuan per sqm in May to 10,393 Yuan per sqm, a 36% gain. From May 31 to Nov 30 its stock went from 19.41 Yuan to 31.55 Yuan, a 63% gain.