Friday, March 2, 2007

Understanding the Market: Why? Whether? When?

Given that China's stock market has been more than doubled in the past year and the Shanghai and Shenzhen 300 Index, which covers 300 major listed companies, is now valued at 38 times earnings, something like week's tumble, a 9.2\% plunge in one day, is just predictable. The real valid question is: Why Tuesday?

Please be reminded that Tuesday was the 2nd trading day after the Chinese New Year and the annual session of National People's Congress is due to open this Saturday. During the two-week gathering, budget and legislative proposals will be read and economic and social issues will be discussed by the more than two thousand delegates. The stock market, which has been drawing everybody's attention recently and has generated some biggest concerns, will definitely be among the top issues. Hence, after a modest rise on Monday, Tuesday became an ideal time for mood changing: happy time is over and uncertainty is on the way. It's just common sense that there is no way to continue last year's skyrocketing momentum when there is no huge fundamental improvement. And when you see tons of people are rushing to the market with their newly-borrowed money, you know something is going to happen: ``negative feedback'' is about to kick in. And your action? To sell.




It's interesting to see that many reports postulated that China's selloff in stocks ``triggered'' the domino-like spread globally, leaving the Dow Jones Industrial Average posted the most significant fall in more than five years at the other end of the Pacific. The natural question here is: Whether this is true?

In the many-dimension business world, it's almost always impossible to prove something is right in strict sense. But we can adopt a humble strategy: it's usually much easier to show it's wrong, or at least, not that convincing. Suppose the assumption that such a China effect is strong enough, then we can conclude that it's those countries that have the closest trade and financial connections with China that would be hurt the most; and in all countries, it's those similar type industries/companies that would be the major victims. But to my best knowledge, the distribution is quite even. I am not saying the postulation is wrong: the effect is just not that significant.




Now comes the fundamental question: Is this a long-awaited correction or does it suggest an end to the bull market? In other words, When the market will change?

In a probabilistic sense, my take is the former. Inflation rate is still low, hence the People's Bank of China, which has adopted inflation targeting, has no intension to increase the interest rate. And to not to accelerate the Renminbi appreciation process, PBoC has even less desire to do so very soon. Hence the liquidity is still out there and you can expect asset prices may still be high for a while. When will change come? When the above fundamentals change or something, which is really unexpected and significant enough happen.

P.S. With regard to the Renminbi appreciation issue, I just can't be philosophically convinced that a discrete manner is needed in a continuous world: market will do the gradual adjustment trick by itself. (In reality, the daily fluctuation band against the US dollar, $ $ 0.3\%, has rarely, if ever, been reached.)

Sunday, February 18, 2007

幸否?同否?

问题:

究竟“幸福的都是一样的,不幸的各有各的不幸”?
还是“不幸的都是一样的,幸福的各有各的幸福”?

检验:

可观测到的现象是打动人的多是悲剧而非喜剧。
而能打动人必触及人的自身体验。
故悲剧或不幸的共同成分应该要更多。

结论:

托尔斯泰所谓“幸福的家庭都是相似的,不幸的家庭各有各的不幸”谬矣。

An improved VC Mechanism

Design such a contract, game, whatever you call it.

Provide free rent for those signers or players (start-ups) for a particular period, say, 2 years. At the end of that period, for each of them, if he/she makes some progress (say, make a certain amount of profits) then they should agree to allocate a certain share to you just as what they will do in a typical VC game. But if he/she fails then they need to pay back something, say, the rent plus corresponding interests or some (monetary) penalties.

The idea here is to screen potential entrepreneurs by introducing penalty. If they think they have a high probability to succeed then it's good for them to play the game. Otherwise, they should pass the opportunity since their well-being would be worse two years later (and actually they may borrow some money at the prevailing interest rate to pay the rent to try their lucks).

In the classical Ventral Capital playground, those big-money holders select candidates with their eyes, ears, and expertise. There are lots of information asymmetry problems and the success rate is doomed to be low. Here people planning to start up make self-selection.

We can show it's an improved version of VC again by checking this fact: Those who have a high probability to succeed will knock the office door of either the classical VC or the improved VC. Those with low ones will still try their lucks in VC game but wont bother to play in the improved one.

Lots of pros here, say: The lowest return rate for the VC is prevailing interest rate (in each case). Ans maybe more importantly, people playing the game actually signal that they have a high probability to win and this may cause a real effect since business parters may well trust them more hence it's easier for them to succeed.

One con I can think of: Those guys are not sure whether they will succeed may be screened out (but who can bet these guys will win if they don't themselves?).

Here we can replace the word "rent" with "loan".

人有八疵,事有四患

……

且人有八疵,事有四患,不可不察也。

非其事而事之,谓之总;莫之顾而进之,谓之佞;希意道言,谓之谄;不择是非而言,谓之谀;好言人之恶,谓之谗;析交离亲,谓之贼;称誉诈伪以败恶人,谓之慝;此八疵者,外以乱人,内以伤身,君子不友,明君不臣。

所谓四患者:好经大事,变更易常,以挂功名,谓之叨;专知擅事,侵人自用,谓之贪;见过不更,闻谏愈甚,谓之很;人同于己则可,不同于己,虽善不善,谓之矜。此四患也。

能去八疵,无行四患,而始可教已。

……

庄子⊙渔父第三十一