Stocks today act like tech bubble in Y2K? Part 3

How can we not talk about China when we talk about asset bubble today?

I haven't really defined what I mean by bubble here, it's now part 3, let me define what I mean by bubble before I continue. You may see my definition is totally different than what other people may define it.

My definition of asset bubble means the asset price is "X" standard deviations above the most optimistic expectations. For the value of X, it is more complicated as it depends on quite a few variables. I'm not going to discuss X in here for now, I will leave that later. In the meantime, just accept my definition and assign a value to X yourself which you think it's insane.

PTR is definitely on the hot spot these days because its market value is now only stayed behind Exxom as the second largest company on earth. So I'll use PTR as the talking point here.

Although it's just behind XOM, but I'm not using XOM here. In fact, I'm using CVX and BP, as their net incomes came close to PTR, serve as a better comparison (Their net incomes are all about $19 billion).

I checked from yahoo finance, both BP and CVX quarterly revenue growth (yoy) are about 4.0%, while PTR is 20.3%, five times higher. Operating margin of BP is merely 9%, CVX is 14% and PTR is 25.6%. Ok, tell me if I'm wrong. That means if their revenue growth continue for a few more years as last year, for each year BP and CVX make $1 revenue, PTR can make more than $1. As well, every $1 more of revenue to BP and CVX, only $0.09 and $0.14 go to net income, while PTR will make $0.256 as net income out of $1 revenue. You also compound the $0.256 to 5 times higher revenue growth, the difference becomes even larger.

Let's now look at the P/E and PEG, PTR's P/E (about 24) is double that of BP or CVX, while PTR's PEG is slightly higher than CVX (1.67 vs 1.42) but lower than BP (2.53). So even PTR is overvalued, it's not crazily overvalued as compare to CVX, it's probably not even overvalued compare to BP.

PTR's current dividend yield is among the lowest, 2.2% for now, while BP is 3.4% and CVX is 2.6%. But wait, let me pull back XOM in here, XOM's current dividend yield is only 1.6%, lower than PTR.

Finally, I want to pull in Mr. Warren Buffett as well. He sold all his stake in PTR and made probably $250 million of profit. But hold on, isn't Mr. Buffett's phliosophy is to buy and hold forever? Why would he sell PTR after holding for about 4 years? I guess other than whatever political reason/conspiracy, I can only guess that it's because he thinks PTR is an asset bubble.

Now you see my definition comes into play. If asset bubble means X standard deviation above the most optimistic expectation, and if my comparison above is at least reasonable, PTR could be overvalued but doesn't look like crazily overvalued. In this case I guess I can only say that Mr. Buffett has a very low X in his formula, if not negative.

So, is China forming an asset bubble? Let me move my discussion to Hong Kong market. HK's currency is linked to US dollar. While US dollar continues to depreciate, HK dollar cannot stay up due to the link. Therefore, it's very hard for HK market to raise interest rate unless they want to remove the link. Therefore, HK has (or at least approaches) to negative real interest. It creates an environment similar to Japanese Yen. Simply, borrow HK dollars cheaply and purchase HK assets, because inflation in HK assets is even higher than the interest you have to pay. And you know HK's currency amount cannot appreciate much in the short term. Yes, it's very similar to the case of Yen carry trade.

So, no wonder HK market up by so much this year because some very smart people know this relationship. My rough guess is, if US dollar does not appreciate, HK market cannot drop by much due to the currency link.

I cannot say if China is a bubble by now, at least use PTR as an example, because I think it doesn't reach the X yet (but should start to be cautious). There are always stocks that are overvalued and undervalued, I cannot conclude the whole market by only one statement.