Alibaba Stock Soars in Jubilant Trading Debut

Alibaba debuted as a publicly traded company Friday and swiftly climbed more than 40 percent in a mammoth IPO that offered eager investors seemingly unlimited potential for growth and a way to tap into the burgeoning Chinese middle class. 

Trading under the ticker "BABA," shares opened at $92.70 and nearly hit $100 within hours, a gain of 46 percent from the initial $68 per share price set Thursday evening. Demand was so high that the company raised its price ahead of the debut. 

"The business model is really interesting. It's not just an eBay. It's not an Amazon. It's not a Paypal. It's all of that and much more," said Reena Aggarwal, a professor at Georgetown.

The red flags around Alibaba and one of the biggest stock debuts in history

The Alibaba Group, China’s e-commerce powerhouse, made history Friday when it raised more than $21 billion in a record-breaking stock market debut. So what exactly did investors buy? 

A piece of a Caribbean-based holding company with tenuous ties to the actual firm. An ownership stake that’s overshadowed by the powers granted to a small group of insiders. And potential future conflicts with Chinese regulators, who are notoriously hard to predict.

DYI Comment:  I'll have John J. Xenakis of GENERATIONAL DYNAMICS do the talking from his excellent website.

China's Alibaba IPO causes lightheaded investors to pop champagne corks

Here's how one news story began: 

"Alibaba debuted as a publicly traded company Friday and swiftly climbed more than 40 percent in a mammoth IPO that offered eager investors seemingly unlimited potential for growth and a way to tap into the burgeoning Chinese middle class. 

The sharp demand for shares sent the market value of the e-commerce giant soaring well beyond that of Amazon, eBay and even Facebook. The initial public offering was on track to be the world's largest, with the possibility of raising as much as $25 billion. 

Jubilant CEO Jack Ma stood on the floor of the New York Stock Exchange as eight Alibaba customers, including an American cherry farmer and a Chinese Olympian, rang the opening bell." 

We've now completely returned to the euphoric hysteria that preceded the 2007-2008 financial crisis. At that time, investors were going nuts over one IPO after another, one leveraged buyout after another. Each one was a sure thing, just like Alibaba, and I'm told that there are a lot more IPOs coming in the next few months. 

There aren't any "real people" investing in Alibaba. The investors are almost all hedge funds and financial institutions. A hedge fund can borrow $10 million and use it to buy Alibaba stock, since it's "sure" to go up. That's how a combination debt bubble and stock market bubble are created. Different hedge funds borrow money and use it to buy stocks, pushing up the prices of the stocks, and in essence creating money backed by a chain of debt. The problem arises when one hedge fund loses money and can't repay its debts, causing a chain reaction that results in a financial crisis. 

Stock market valuations are going farther and farther into the ozone bubble layers. The last time I mentioned the S&P 500 Price/Earnings ratio, just a couple of weeks ago, it was at 18.97, which is already astronomically high by historical standards. But now, according to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations) on Friday (September 19) has shot up to 19.36. 

Do I have to remind you, Dear Reader, that it wasn't very long ago, in 1982, when the S&P 500 P/E ratio was below 6. It falls to that level every 30 years or so, and it's overdue to do so again. This would push the Dow Jones Industrial Average down to the 3000 level. 

By the way, those hedge funds didn't really invest in the Alibaba company on Friday. Alibaba is described as "China's e-commerce powerhouse," bigger than eBay and Facebook combined. But the Chinese do not permit foreigners to own Chinese internet stocks. So they set up some kind of holding company in the Cayman Islands, with some kind of relationship to Alibaba. Investors who bought stock on Friday actually bought shares in that holding company. Even large investors have absolutely no say in how Alibaba is run, and China's regulators can pull the plug at any time. But apparently today's investors are so imbued with sheer stupidity that they bought the stock anyway, and pushed its opening price of $60 per share all the way up to $93 per share, within just a few hours.

DYI