TGIF! Busy morning! I am headed to Hong Kong this weekend so there will be no CO Monday nor Friday. I’ll do my best to get a note out from there though no guarantees as I’ll be busy. On a personal note, keep your fingers crossed as my 10 year old’s soccer team plays in the Connecticut state finals tomorrow.

Alibaba reported good earnings that fell slightly short of analyst expectations. Worth noting that many analysts cut their price targets but not many cut their revenue expectations. Let’s take a look at the numbers:

• Revenue grew 54% to 85.1B ($12.3B) versus analysts estimate of 86.5B
• Core Commerce (China retail) business grew 56% year over year
• Adjusted EBITDA margin 31% from 45% a year earlier
• Adjusted EPS increased 12% to 7.62 versus estimate 7.51
• Q3 Revenue forecast 375B to 383B versus estimate 395B
• Total users increased 25mm from Q2 to 601mm
• Mobile Users increased to 666mm +32mm from Q2

On the earnings conference call management didn’t pull any punches by addressing the trade war’s effect on China’s consumer. Specifically: 

• Big ticket purchase such as home appliances had decreased (I believe this might be caused by rising home prices stifling new buyers versus a trade war).
• Overall Alibaba’s retail e-commerce platforms were experiencing “robust growth”.
• They noted that cell phone sales were down due to a lack of innovation (Apple’s earnings last night noted that while EM phone sales were soft China was strong).
• Management pointed out that the value of goods sold on Alibaba’s platform (Gross Merchandise Volume) grew.
• In long run they noted that China’s middle class continues to grow while Alibaba’s management team has faced 3 global economic crisis. 

Takeaway: By examining Alibaba’s business lines’ Adjusted EBITDA, it is clear that Alibaba’s core business is doing great ($4.3B) though their efforts in Cloud Computing ($-34mm), Digital Media/Entertainment (-$554mm) and Innovation Initiatives(-$181mm) are unprofitable. This flows through and explains Alibaba’s decreased margin and net income. Management noted that they are taking a conservative approach due to the trade war overhang. As investors we have to trust Alibaba’s management that these investments will add to net income in the future. Alibaba has 105mm shares short/4 days worth of trading.Hang Seng ripped +4.21% on MASSIVE volumes up 43% day over day and 1/3 higher than the 52 week average as all 50 index constituents gained. The market jumped at the open but reports of Trump’s cabinet drafting a trade agreement saw the gas pedal get pushed to the floor in the afternoon session. Tencent jumped an amazing +9.29% worth 234 of the indice’s 1070 point gain. You don’t see companies with a market cap over $300B moving more that much. AIA had a huge day as well +4.81%/113 index points. Within the MSCI China All Shares’ HK stocks, Healthcare was the leading sector +7.53% with discretionary +7.44% and tech +7.22%. Stocks with US trade exposure had big moves such as ZTE +12.35% and Apple suppliers Sunny Optical +10.43% and AAC +4.42%. Southbound Connect volumes (Chinese investors investing in HK stocks) had a massive day/2X yesterday in mixed trading as buyers slightly outpaced sellers. Tencent had big volumes as sellers outpaced buyers. 

Shanghai & Shenzhen gained +2.7% and +3.43% as volumes were 17% higher day over day and well over the 52 week average. Breadth was amazing: Shanghai – 1,430 gainers and 39 decliners; Shenzhen – 2,015 gainers and 61 decliners. Staples and tech were leading sectors which gained 6.88% and 6.74% though it was a very broad based rally. Tax cuts and support of private companies was reiterated overnight from policy makers. Mega caps saw significant flows, large caps strong inflows while small and mid caps saw outflows. Northbound Connect volumes were the highest EVER with inflows setting a new record of $2.5 billion as buyers dominated trading activity 2 to 1. MSCI inclusion stocks Kweichow Moutai and Ping An were the volume leaders with buyers outpacing sellers nearly 10 to 1 and 3 to 1. 

102,000 fewer Chinese visited the US representing a 13% decline in September year over year. Chinese tourism accounted for $33 billion to the US economy in 2016 according to the US Travel Association.

CNY 6.87 – after rising to 6.97 the currency rose to 6.92 and today’s 6.87. Just a massive move. There has been so much coverage about CNY breaking 7.  

• Yields were stable; I would rather see a mass exodus from fixed income to support the equity rally
• Yield on 1 Day Chinese Gov’t Bond 1.88%
• Yield on 10 Year Chinese Gov’t Bond 3.57%
• Yield on 10 Year China Development Bank Bond 4.19%

Metals rebounded on the Shanghai while softs were just that on the Dalian