Slowdown is Catching Up with Baidu

Stocks continue to rally when bad news is announced, which again, is a complete character reversal from what we've seen for the entire fall and early winter. You have to respect that and toast Kool Aid. That said, Baidu.com (BIDU) which had the least surprising pre-announcement ever considering all the bad news of late [Nov 20: Not a Good Week for China "Dot Coms"], has been acting poorly before today, so I will be cutting part of this position just to reduce exposure.

Unfortunately, as China has bounced, I was hoping Baidu.com would give us that exposure, but it's been lagging due to company specific issues. That said, this name has been our lucky charm since we seem to make a profit on every purchase - I was hoping to sell the shares we rebought around $111 [Dec 3: Adding Back to Baidu.com] closer to $130-$140, but I'm going to cut some here at $119. With the recent moves in other names, we have some nice charts finally developing, (maybe) and I'd rather buy names acting healthy on pullbacks than a chart like this. For example, the iShares Xinhau China 25 (FXI), which is a collection of large cap Chinese stocks that we've been pointing at this past week, is a more appealing set up (on a pullback)

For now, I'm going to cut Baidu.com from a 2.2% stake to 0.7% and then re-assess. Most of these shares were bought at $111, so we have a decent gain in just over a week (7%). I would like to see this stock break above its 20 day moving average (low $130s) as a show of strength. If it cannot do this, we will probably exit it completely and wait for a better time to have this as a position.

I will re-iterate what I said yesterday about perception versus reality. I believe perception in China is relatively immune to the global economic slowdown - I believe reality will show that to be untrue. Note Baidu's comments about machinery/franchising - that's real business on the ground in China. But perception is what drives stock prices, not reality. There has been a bit of a real estate, consumption bubble also formed in China - really no different than the US in that aspect. But they shall recover much quicker than we will. (and they don't need the kindess of strangers to do it)

• Baidu (BIDU) this morning said it now expects Q4 revenue of $131 million to $133 million, down from previous guidance of $151 million to $155 million. Analysts had been expecting a reduction in guidance; The Street consensus had already come down to $140.1 million. Yesterday, several analysts cut estimates on the company.

• Baidu said the economic slowdown in China is having a greater than expected impact on online marketing particularly, in machinery and franchising. Also affecting results, the company noted, was its recent removal of paid search listings from unlicensed medical and pharmaceutcal companies, following a series of negative reports on China Central Television. The company said it also removed a number of “questionable” paid search listings outside the medical sector. Baidu did say that some medical and pharmaceutical advertisers have resume paid listings after the submission of required licenses.

Disclosure: Long Baidu.com in fund; no personal position