Update Baidu (BIDU)

Shares of Chinese search engine company Baidu (BIDU) are off 3.6%, or $5.13 a share, as of 3 p.m. today, after the company reported truly terrible fourth quarter results after the close of the New York markets yesterday, February 16. Earnings of 95 cents a share were five cents a share above the Wall Street consensus. (Baidu is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ .

Revenue grew by just 82.6% from the fourth quarter of 2010 as the company saw a 13% increase in its base of active advertisers to 311,000 and a 62% increase in the average ad spend per customer.

The company also managed–deplorably—to keep a tight lid on costs with the costs of acquiring traffic flat with the fourth quarter of 2010. The cost of traffic acquisition remained below historical levels as Baidu’s careful screening of traffic from its partner sites cut down on traffic “waste.” The company did increase spending on research and development for mobile search—mobile searches now account for 15% of all searches on Baidu, the company says—and on its content verticals in online video and online travel services. With investments in bandwidth to support higher traffic, the company actually saw operating margins collapse by 0.6 percentage points to 51.4%.

Okay, let me take my tongue out of my cheek. It was a great quarter and the selling today is really nothing more than profit taking. Read more

Why didn’t the U.S. Federal Reserve think of this? The Fed could have fixed the U.S. real estate bust with one stroke.

Today, February 13, China has told its big government controlled banks (sorry private shareholders) to roll over loans to local governments. That means local governments that borrowed from the banks to pay for the 2008 stimulus plan ordered by Beijing and to finance everything from factories to roads to apartment complexes to shopping malls to the tune of 10.7 trillion yuan ($1.7 trillion) won’t have to pay back those loans as they mature over the next three year.

That’s really good news for cash strapped local governments, which don’t have the money to pay off those loans—about half of that $1.7 trillion in loans is projected to come due over the next three years–and for China’s banks, in the short-run, since they won’t need to declare trillions of yuan in bad loans.

It looks like today’s announcement represents a defeat for the China Bank Regulatory Commission, which had been insisting, through the middle of 2011 at least, that local governments had to pay back their loans in full and on time—and that if they didn’t banks had to recognize a bad debt.

In the short-term the extension of maturities will make the balance sheets of China’s big banks even harder to understand since the difference between good and bad loans won’t be a matter of cash flow and payment schedules, but of government fiat. There’s worry that even if the big banks don’t declare bad loans, they’ll know they’re building up in their loan portfolios, and will consequently cut back on lending. Read more

Now if Yum! Brands could only fix its U.S.business

Expect to see more of this in earnings reports from China: Companies that are trading lower margins today for bigger market share tomorrow.

That’s the message in the 2011 results reported by Yum! Brands (YUM) yesterday, February 6.

The operator of KFC, Pizza Hut, and Taco Bell restaurants reported that margins in its Chinese restaurants fell 2.4 percentage points in 2011 to 19.7% from 2010. The culprit was rising costs from commodities—about 8% year to year—and wages. Wages went up 20% for its Chinese businesses in 2011.

In the year sales in China grew by 29% as the company opened 656 new restaurants. But operating profits were up just 15%.  (Both results are before currency translation). Same store sales climbed 19%.

But there’s an upside to the pressure from wages on restaurant margins. Read more

Don’t fight the Fed. It’s an important piece of Wall Street wisdom built on the often-repeated power of changes in the Federal Reserve’s policies on interest rates and the money supply to overwhelm all other financial market trends. When interest rates are headed down and the money supply is headed up,  most of the time, stocks will head up too.

Not always, of course, since the Fed itself can get overwhelmed by a global financial crisis here or a euro debt crisis there that can lead to a situation where the real economy doesn’t respond to the Fed’s monetary prodding.

But the saying is true frequently enough so that aligning your investment strategy with Federal Reserve policy makes sense most of the time.

So what about when it isn’t just the Federal Reserve that’s lowering interest rates and pumping money into U.S. economy, but the European Central Bank pursuing the same course in Europe, and the Banco Central do Brasil in Brazil, and, just beginning but accelerating, the People’s Bank of China in China?

Is this flood of cash enough, by itself, to push stocks higher in 2012—no matter what the real global economy is doing? Traders and investors have started 2012 by answering that question with an emphatic Yes. January’s rally in U.S., European, and emerging market stocks is based on a belief that the huge wave of cash that the world’s central banks have unleashed—or are about to unleash—on global economies will send stock markets higher and set economies to growing faster.

Let me give you two reasons why the global version of Don’t fight the Fed won’t work out quite as well as the current optimism suggests this time around. Read more

An early Lunar New Year holiday will make figuring out China’s markets and economy especially tough this week

The markets are going to be even tougher to read this week than they’ve been lately.

You can blame some of that (although the Greek debt crisis will certainly help) on the Lunar New Year holiday that started on January 21 and stretches until January 29. The Shanghai stock market is closed for those dates. The Hong Kong stock market is closed from January 23 through January 25.

There’s a good chance that the Luna New Year already distorted data last week, especially in the commodities markets. Companies in China, for example, always stock up on raw materials and on inventory in the weeks before the holiday. For example, China cut gasoline exports to a three-year low in December as companies stockpiled fuel for the big surge in travel during the Lunar New Year festival. The month also saw a big surge in diesel imports for the same reason.

If looking at those figures, you drew any conclusions about the direction of the Chinese economy, the likelihood is that you would have been wrong. Read more