Things Never End Well, Otherwise They Would Never End

Why bubbles will continue to happen. And why the tech bubble in the US and China are destined to end badly.

Read the full post at Forbes here.

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Don't Bail on China Tech Stocks

By Eric Jackson
RealMoney Contributor
6/28/2011 1:30 PM EDT
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The second quarter has not been kind to Chinese tech stocks. After flying high from January to April, big China techs such as Sina (SINA - commentary - Trade Now), Sohu (SOHU - commentary - Trade Now) andBaidu (BIDU - commentary - Trade Now) got walloped. Newbie China tech IPOs such as Youku (YOKU -commentary - Trade Now), Dangdang (DANG - commentary - Trade Now), and Qihoo 360 (QIHU -commentary - Trade Now) got hurt even more.

There were many reasons for the sharp pullback in these China tech stocks, some of which are listed below:

• the general market pullback meant that these high-beta names pulled back even more;
• more evidence of fraud in China stocks spreading from smaller reverse takeover companies to larger companies such asSino-Forest and Longtop Financial (LFT- commentary - Trade Now);
• continued worries about a China Internet bubble and concerns that this was the beginning of the end; and
• Jack Ma transferred out Alipay from Alibaba, sending Yahoo!'s (YHOO - commentary - Trade Now) shares down and worrying Americans that there is no rule of law in China.

In the midst of this wave of bad news and worry, I happened to be traveling through China, meeting with several tech companies. I was asked about if we were in a bubble more than anything else while I was there.

What I said then and what I still believe now is that this is not the beginning of the end but the end of the beginning. The Chinese Internet bubble is not bursting now, and I don't believe it will burst this year. I still think we have six to 36 months of good times ahead of us. It's hard to know more precisely than that when the party will end -- at least at this point.

Translated for investors, that means you shouldn't miss out on a second-half bounce-back for these stocks.

There is a range of quality out there, however, so you need to do a lot of research and due diligence before jumping in.

I recommend you stick with two of the biggest quality names: Baidu and Sina. They are solid companies with great management teams that will continue to be in-demand sites for a long time. Everywhere I went in China, I would hear people updating their Sina Weibo status on their iPhones. That is a growing monster service, right there.

Similar to Baidu and Sina, Hong Kong-listed Tencent should also do well in the second half of the year.

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5 Observations About China

By Eric Jackson
RealMoney Contributor
6/13/2011 10:45 AM EDT
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It's been 10 days since I left for China, and since I've been over here, Chinese tech stocks have taken a nasty fall.

Several folks from back in the U.S. who have been following my trip updates on Twitter have asked me what differences I have noticed since my last trip to China in November 2010 and whether China's growth story is still intact.

Here are five things I've noticed about China right now.

1. China's growth story is still going strong, but it's definitely slowed a little.

I got a lot of questions on this, since back in the States, we hear the news headlines about PMI and GDP growth in China cooling things down. People want to know if this is accurate or not. I went around to all the big cities on this trip (Beijing, Shanghai, Hangzhou, Guangzhou and Shenzhen). I met with about a dozen companies. I can only give my anecdotal impressions, but I would say that growth is still phenomenal relative to the U.S.

The number of cranes erecting buildings everywhere is still hard to fathom. How quickly new buildings have gone up since my last trip is also amazing to see.

That said, though, relative to six months ago, the pace of growth seems to have slowed a touch. So, the actions that the government has taken have definitely had an effect.

2. Chinese property developers have been pinched by the government's tightening measures and prices are flat, so the actions are working.

People always want to know about whether there's a housing bubble in China and if it's about to burst. I don't think that's going to happen in the near term. The steps that the government took to cool down the property market have worked. You hear of some property developers now being caught in a situation where they got themselves involved in quite a number of large projects and now these measures are pinching them. Prices are stable at the moment in many cities -- not down but not up.

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Q&A on Doing Business in China

By Eric Jackson, Senior Contributor06/08/11 - 06:00 AM EDT

NEW YORK (TheStreet) -- I have been on a two-week trip to China since last weekend. Before I left, I asked several American colleagues if they had any questions they'd like me to ask the "real" Chinese about their perceptions of both China and the U.S.

On Monday, I met with a group of my followers on the Twitter-like SINA(SINA_) Weibo service. The event was informal and meant simply to be an exchange of ideas. There were representatives from tech firms, resource companies, and Chinese Internet firms.

Here is a summary of their comments to several of my questions:

Q: Do you worry about a U.S. default weighing on China or China's investment in U.S. Treasuries?

A: No. In general, they thought that the U.S. would be forced to take action in order to protect its own self-interests and those of U.S. Treasury holders. They also thought most average Chinese made no link between the U.S. debt and their own economic interests.

Q: Do you worry that there will be an economic crash in China caused by itself?

A: No. Americans don't understand that the Chinese take a long view to their investments. If their stocks were to drop suddenly, the Chinese would likely stick it out with the stock as opposed to Americans who would immediately sell it.

Q: Do you think the next Chinese president and premier will be more conservative or more permissive?

A: More conservative.

Q: What do you think of the way Jack Ma of Alibaba handled the transition of Alipay, negatively impacting Yahoo!(YHOO_) and Softbank?

A: Most educated people think that Jack Ma didn't do the right thing in the transfer. They can't understand why he would do such a thing. This has seemed very suspicious from the start.

Q: Why do you think so many American companies fail when they come to China?

A: The most important point is that the U.S. company imposes a top-down management structure that is too rigid for the local management team. The companies which win are generally the ones who have given their team total autonomy to run their businesses the way they see fit for the local market. When the Americans put what they know has worked in the U.S., they tend to force local Chinese to follow orders, which isolates them.

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No Panic Here in China

By Eric Jackson
RealMoney Contributor
6/9/2011 10:00 AM EDT
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I have been in China for the past week, and have had a chance to visit a number of Chinese Internet firms -- including Tencent, Perfect World(PWRD - commentary - Trade Now), NetQin (NQ- commentary - Trade Now), NetEase (NTES -commentary - Trade Now), Baidu (BIDU -commentary - Trade Now) and AirMedia (AMCN -commentary - Trade Now).

It's been a down market for the last six trading days, and Chinese stocks have been hit hard, including the former leaders such as Sina (SINA -commentary - Trade Now), Sohu (SOHU -commentary - Trade Now) and Youku (YOKU -commentary - Trade Now).

The mood amongst most of these companies, however, remains upbeat. Most now point to the recent worries about Chinese frauds as the reason for the bigger pullback in the entire sector. Most say they have received no uptick in questions from their own investors about their auditors or their own corporate governance.

One thing I couldn't help but notice, as I drove around Beijing, was the large number of advertisements being bought in the offline world (as in buses, billboards or kiosks) for new private consumer-oriented e-commerce sites such asLashou.com (the No. 1 group-buying site in China), VANCL (a clothing retailer) and Tmall.com, which is part of Taobao (of whichYahoo! (YHOO - commentary - Trade Now) is a 40% owner).

Most of these companies expect to hold initial public offerings in the next six to 18 months. They have obviously been trying to drive traffic to their sites in the last few months in order to dress themselves up for investors -- and they don't mind spending money to do it.

Earlier this week I met with a company called Letao.com, which is also private but experiencing extraordinary growth selling shoes online. Some refer to it as the Zappos of China even though there are subtle differences that, in some ways, make the company a more attractive business. Letao is probably further away from an IPO than some of those other companies I've mentioned. Even though they have money to spend on advertising, it is trying to do this wisely, through search marketing and group buying primarily. Nevertheless, Letao is aware of the feeding frenzy for buying ads of all kinds in China now, and it sees how this is leading to higher ad prices each time they renew.

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