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Bye, Oil Bubble?

Filed under: Finance — Thomas at 12:03 am on Monday, June 23, 2008

The latest Barron’s has run a good article against an obvious oil bubble, which is really worth reading. By reaching $135 a barrel from $20ish in 2000, just 8 years ago, the trajectory of oil prices looks very similar to the Nasdaq’s eight-year run to a peak of more than 5,000 in March 2000. Today, Nasdaq sits on ~2,400. Most believe that the hike of oil prices, up 40% simply this year, doesn’t reflects fundamental changes in supply and demand caused by the economy, but by some other factors.

Not surprisingly at all, the biggest hoarders are always the governments across the world. There are several ways for the governments to keep the oil prices high. One is through the government controlled buffer-stock system, which, ironically, is supposed to help ease fluctuations on the free market. In US, it is called the strategic petroleum reserve (SPR). The SPR now holds 705 million barrels of crude, equal to about 35 days of domestic consumption. Thank God that Congress moved in May to stop adding the SPR as it neared capacity. The second way is called government subsidy. In an ideal free market, higher price will curb demand and eventually push the price down. An unrealistically low price simply pushes the price even higher. China raised prices on retail gasoline and diesel fuel by 18% last Thursday. Guess what had happened? The crude price sank the next day. If all the governments follow suit, we will see the price dropping below $100 per barrel soon. The last but not least, the governments should stop maintaining an artificially weak currency. Fed Chairman Ben Bernanke and his colleagues need to understand that weakening the dollar purposely to avoid a sharp price dip in the real estate market simply sacrifices the whole economy, further stimulating the speculation against commodity prices, oil in particular. All the other countries who pegs their currencies with dollar in some degrees need to do the same.

The second largest force include endowments, pension funds and other institutional investors. They employed what so called commodity-indexing strategies, which has topped at $260 billion in March from $13 billion in early 2004, which may control 1 billion barrels of crude. There is also a loophole in the system that lets indexers escape commodity-position limits by purchasing over-the-counter swaps and other derivatives. The triple whammy finishes when the sharp price jack-up forces short-covering by independent oil and gas producers.

All in all, unless governments, especially the US government, start to act towards the right direction, we have to live in a world with ridiculous oil prices. It doesn’t look like that we have a free market for crude oil since governments and big funds have played dominate roles in the market. Common people like us just want to say: bye, oil bubble!

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Feng Deng’s China Investement Strategies

Filed under: Finance — Thomas at 1:43 am on Thursday, May 29, 2008

Feng Deng, co-founder of Northern Light Venture Captical, then co-founder of Netscreen, shared his China investment strategies with HYSTA audience in May 10th. Graduated from Tsinghua University, the No. 1 university in China, Feng has successfully transformed from a well known entrepreneur, achieving great successes in Netscreen, to a top-10 Venture Capitalist in China, enjoying the dragon’s booming economy.

Granted, it is not an easy job to win in China. As a Chinese, Feng had pretty successful business before coming to US. Returning back to China with the glory of Netscreen, he still has to re-learn the China market from scratch. Here comes his first advice: A strong China presence is one of the keys towards investment successes. Flying VCs could hardly deliver good results. Nowadays, mainstream VCs are rushed to China because everyone in the industry is doing that, which is far from enough.

Chinese entrepreneurs have very good survival skills but lack of scaling skills. On the contrary, once a prominent entrepreneur in Silicon Valley, Feng well knows that start-ups in US require good food and much-less-polluted air to become bigger and go public. Thus, his second suggestion for investors is to become a farmer, raising crops, instead of being a hunter, expecting short term easy money. It is important to focus on the company’s potential (scalability and sustainability) and the team, instead of a pure money play. Given the fact that China is far from matured, a good company could grow dramatically for decades even with a very high market share. One excellent example is Baidu.

Last but not least, Feng’s successes root in his good and hard work. After a whole day work in China, he will start another run of back-to-back meetings with folks in US from 7PM until midnight. Chinese VCs, as US VCs in their early stage, are generalists. Thus, Feng has to cover a broad range of companies and industries. Along with hiring assistants, hard work plays a major role to his glory since good old Netscreen time. His portfolio includes SpreadTrum (SPRD), Actions Semiconductor (ACTS), baihe.com — the No. 1 dating site in China, LianLian — mobile based micro-payment, Meng Yang — leading national maker of lamb products, etc.

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Baidu: Riding The China Internet Dragon

Filed under: Finance — Thomas at 2:03 am on Monday, May 19, 2008

At the last Tuesday night, Robin Li, CEO of Baidu.com, came and shared with us the Baidu story. At the beginning of the event, led by Qi Lu, Executive Vice President of Yahoo! Inc. and President of HYSTA, we had a special moment dedicated for these deeply affected by China earthquake that devastated thousands of people in Sichuan Province, China. Around the same time, Baidu.com, as the No.1 web site in China, has acted quickly, helping people save lives and donate for quake victims. The same night, along with a 2 million RMB donation, Robin has urged the company to use its unbelievable penetration, including millions of Chinese web surfers and thousands of affiliates, to help these devastated by the quake. One amazing story came about the same time when a female student, Qi Zhang, helped military find the best helicopter landing spot near the epicenter by posting online. It simply reflects how the Internet is shaping China and how Baidu is riding the China Internet dragon better than ever.

Here, let’s review some basic facts. China reached the magic mark at the end of February this year. With 221 million Internet users, China surpassed US to become #1 country in Internet users. However, the Internet penetration in China is only 16 percent – below the world average of 19.1 percent, and well below that in US of approximately 50 percent. Maintaining 70% of the search market share in China, Baidu.com has another 3125% to grow when the Internet penetration rate in China reaches 50%. No wonder, Baidu.com’s stock is very hot in NASDAQ. As Robin has pointed out in his speech, China annual GDP growth is about 8% ~ 9%, advertisement revenue in China grows at 15% ~ 20%, online advertisement doubles overall advertisement revenue with the yearly growth rate at 40%, China search market advances with a 80% year-to-year growth and Baidu tops all at 160%.

Robin’s success wasn’t occasional. His focus is dead-on: search. He worked on search since college. As a staff engineer in Infoseek, he wrote a book in Chinese, in which he analyzed business cases in IT industry for late 90’s. Even he, himself, keeps referencing the book when facing challenges in business. Sharp business sense combined with his talent and focus in search, the success of Baidu.com is his to lose. Let’s expect Baidu.com to achieve more successes under his lead in China as well as in Japan!

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Bye, Oil Bubble?

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