Washington, DC -- (SBWire) -- 10/08/2014 --Nationally Syndicated Financial Myth Busting Radio Show with Host Dawn Bennett, CEO of Bennett Group Financial Services, LLC, on September 28, 2014, interviewed Daryl Jones, Director of Research at Hedgeye Risk Management.

Mr. Jones covers commodities, geopolitics and major asset classes outside of equities at Hedgeye. He holds a Bachelor’s Degree from Yale University and a Masters Degree from Columbia University in finance and value investing.

He answered questions on Alibaba and why the media believes it is coming to America's rescue. He discusseswhat's inside the 500-page disclaimer investors haven't actually read yet from Alibaba.

Here is the interview with Daryl Jones:

Q: As your firm Hedgeye pointed out, Alibaba has an F-1 that's about 500 pages long. Please explain an F-1
and tell us what’s in it? Do you think investors actually should read it because there's something important in there?

A: Yes. An F-1 is the filing that a foreign company would do before going public. There's actually been an interesting sort of analysis on these types of FCC filings. The longer they are, the more complex they are. Typically what happens is stocks underperform, which is really no surprise.

Clearly investors, while it's tough to kind of slog through a document like this, should try to get through it. Alibaba, in particular, is a really unique company because they're just on a very high level. Investors aren’t actually owning shares in the company, they are owning contracts for profits from shares in the Cayman Islands company. So it's a really unique corporate structure that's non-traditional and comes with a lot of risks.

Q: So is it a unique corporate structure because the Chinese government has ownership in it and they're trying to hide that?

A: Yes, the Chinese government has ownership in it, which may be good for investors, if they're not aligned with the Chinese government. However, the Chinese government doesn't allow foreigners to own shares directly in companies that play within the China Internet sector, so that's actually why this structure was et up.

The Chinese government doesn't want foreigners to have direct ownership in any of these companies, and as a result, what we have is Alibaba share holders have just a contract that is effectively at the whim of the Chinese government.

Q: So what's the biggest risk for American investors in investing in a Chinese e-commerce giant like Alibaba? Is it politics, is it theft of intellectual property? What would that be?

A: Clearly politics is a big issue here. The Chinese government can and has changed the rules on a whim. They did something about three or four years ago that impacted Alibaba directly, which is they said a non-bank has to have a license to do online payments. So what Alibaba ended up doing was spinning out their online payments company and moving it offshore. So the government, especially a government that's not a democracy, could quickly change the rules. So that's a risk.

The other big risk I think is just ballpark, Alibaba has what's estimated to be 75 percent of the e-commerce business in China. Which, on the face of it sounds good but that's also a share that's probably going to degrade over time. The reason the company right now is so profitable is because they have this dominant market share that is probably more at a peak than a trough, so I think the risk is really increased competition.

Q: So if you invest in Alibaba, it's more of a bet on an opaque political system, right, that has a monopoly on whether actually Jack Ma's going to be allowed to succeed or not? Do you see it that way?

A: Well, exactly. It's a very opaque company in a very opaque economy. It's a very opaque and top-down political system. To the extent that they're aligned with investors. If the government is invested in the company, maybe that's a positive.

However, this is far from a non-traditional investment and the company's trading at 18-times sales, which is a really high multiple. The fact is the company basically has the same value, or, market cap, as companies like Walmart and JP Morgan. So investors really have to decide if it has the same sort of intrinsic value or assets as those companies. It really seems like a peak already. We've been calling it Alibubble rather than Alibaba. A lot of risks here that we would certainly urge people to be cautious about.

Q: About 80 percent of the stocks of mostly publicly traded companies in China is actually owned by the Chinese government. Is there some fear out there that the Chinese government could actually dump millions of shares on the market and drive down the value of share prices? Is that a real possibility?

A: When you have that sort of concentration, it's always a possibility. It would be something that hasn't necessarily happened before, but when we look at any type of investment, whether it's a government owner or anything else, clearly concentration of ownership is a risk and at some point, even governments sell. It's a concern that people should consider.

Q: All the worries in the United States about geopolitical and economic threat posed by China, for all the years that we've heard that, and the American financial and consumer markets actually remain pretty widely open to them, while the opposite is actually hardly true. Do you think this is an unequal relationship today, even though Alibaba just went public on our exchange here?

A: It's clearly unequal. We can only hope that with our market system being so open that it encourages China to do that. But I don't know. I don't like the imbalance that occurs. It's almost like we're giving them access to something that empowers them but we don't get the commensurate return from them. On some levels, it’s very inappropriate.

Q: So Alibaba’s CEO Jack Ma said on the day of his company's big board listing that he actually planned to invest some of his new capitalization in American small businesses. Any thoughts on what form that might take, if at all? Do you think that's true? Or will the Chinese company actually end up being a lifeline for American businesses?

A: Ha-ha, I guess. To be fair to him, he actually had already done that to some extent. Over the last two years, he's invested in almost 29 different companies close to $15 billion.

He invested in Lift, almost like a peer-to-peer taxi company. He staffs out with a company that speculated they're looking at investing in. So he already has been doing that, I don't think i t's altruistic. He's doing this for the purpose of Alibaba, which at the end of the day, is somewhat driven by what the Chinese government allows him to do.

Q: Do you think that Alibaba is actually going to give U.S. retailers and businesspeople a direct route to the hearts and wallets of Chinese consumers?

A: I think if it could, that would be a real positive thing. This looks like the CEO enriching himself, creating a fiefdom. I don't think this is something that's altruistic or really positive for the American economy, per se. It's also symbolic of what we think is a bit of a stock market bubble.

Q: Do you think Jeff Bezos, for e xample, Amazon's Merchant and Chief, actually finds himself at war with Alibaba's Chairman Jack Ma? Do you think he feels that way?

A: It’s potentially a major competitor. They now have a currency to buy companies. They now have raised $25 billion on the IPO. Obviously, there's not a lot of presence, domestically, with U.S. consumers. While there are some concerns about the company, they do have a dominant share of e-commerce in China, and they now have very, very deep pockets. I think Amazon rightfully should be concerned. < /o:p>

Q: Well, Amazon doesn't offer guaranteeing payments, right? I understand Alibaba actually owes much of its success to that. There hasn't been a lot of reporting about how this financing operation works. Is this an overlooked risk, in your mind?

A: A big part of their payment system ha s sputtered off and it's closely held by the chairman, and some of the original founders. I think it's called Alipay. That is a major risk, and it's the mechanism to how the business works. I guess the positive is that what they've kind of created within China is a combination of eBay, PayPal, Amazon, Amazon web services all in one. I think structurally, is a good thing. However, it's very opaque when the big driver of the business that paints all of the business effectively is owned by another entity, that's definitely a concern.

Q: Your boss, Keith McCullough, called the Alibaba IPO epic, and he noted how off the charts the enthusiasm was for the stock. Are traders just simply starving for a trade, for a rally?

A: Yes, in part, what's happening, I think, is people are buying into the China Internet story, the growth of the Internet. The idea that the population of China is 1.4 billion, but only half of those people have the Internet.

Traders on some levels did want to buy into the rally. This is really something that signifies more of a top than anything else. The biggest IPO in history. The stock is up 38 percent on the first day. The company now has a market cap larger than J.P. Morgan, larger than Walmart, or almost as large as Walmart. Clearly this is a lot of froth. Traders and investors really kind of wanted to buy into the rally, and keep the rally going. It's just sort of an excursion for them to do that.

Q: Do you think one day we'll look back at this Alibaba IPO and shake our heads in shame or in embarrassment that we bought into it?

A: Keith McCullough, back in the day, actually worked at Credit Suisse First Boston, which was renowned for bringing companies pu blic that really had no business going public. On some level Alibaba is a real business, but what we're buying into is a contract for the profits of a company in China that we can't legally actually invest in. So there's some legal risk there.

Also the valuation is sky-high, but I don’t think the company's going down in flames, but I think we also have to kind of consider, these dynamics, and really think about what it means for Tia nenmen Square.

Q: Does Alibaba even have any tangible physical assets like IBM, or Hewlett Packard, or Microsoft?

A: I think they have assets around $4 or $5 billion, which isn't necessarily insignificant. If you think about what the company's worth, over $200 billion, it's kind of crazy. However, the company appears to be very profitable, but again, it's just profitable because it has a monopoly in China that is going to erode ov er time. At 18-times sale, that’s what I take away from that.

Q: So at the end of the tech bubble, there were some IPOs that looked really ridiculous in hindsight. You're basically saying you think Alibaba could actually be the mark of the top of the current bull market? This Federal Reserve-driven market? Do you think it could be the top?

A: Exactly. When interest rates are at low levels for an abnormally long time, people just start chasing any asset class. We know that bonds are ridiculously overvalued. This is an indication that even equities are at a peak. If this isn't the sight of a bubble, I don't know what is. The largest IPO ever, a company in China that's very opaque. It screams a bubble and signals a top.

Q: On Monday, Alibaba’s options will trade. Do you have any suggestions as to what type of option strategy to use 3F

A: If someone owns the stock, I would definitely consider hedging it. So probably selling calls against a position. My guess is the premium on the options is going to be very high, and may not be a valuable trade. Investors can play with the volatility around the stock. The stock is volatile primarily because of the opacity of the company. When investors have less clarity, or less transparency, they tend to be more fickle with what they own. This is an example of where the stock price is going to be very volatile. So playing the options in regards to the volatility I think is one way to do it. A lot of shorts have come into the stock. I think 3 and a 1/2 percent of the shares oustanding are now short.

Q: Is Hedgeye shorting it?

A: We're still doing our work on the company, so we haven't come out with a recommendation yet. Our Internet analyst is wo rking on it. Some of these things are concerning.

Q: How should Main Street investors look at Alibaba as a stock investment?

A: It’s something people should stay away from. It's too complex. Investors aren’t even buyi ng stock in the company. So investing in it is governed by a whole different set of rules. Investors are at the whim of the Chinese government.

There are a lot of great American companies that investors can own stock in that have great growth trajectories. With all the opacity around Alibaba, I think people should stay away from it, particularly the Main Street type of investor who doesn't have the time to do all their homework.

Q: So what are you guys advising investors to do? Obviously not Alibaba, but what else are you doing?

A: Our view right now is really that people should shift into more of a defensive mode. From an asset allocation perspective, we think Investors should stay away from small cap and from things that are more speculative. I’d suggest blue chip companies are levered to the U.S. economy. So names that I've alre ady mentioned, like, Walmart, McDonald's, some of the big banks, companies like that.

Q: What is your overall take of where the market is today? Do you think we're reliving the late '90s?

A: I wouldn't necessarily compare it to the late '9 0s. That was really a time of an epic equity bubble. Right now we are definitely concerned about the stock market, and our view really is born out of where we think the economy is.

We have a kind of four-quad model that we look at, and we think we're heading into what we call a quad four, which is an environment of decelerated growth and decelerating inflation.

On the inflation side, that's actually a positive thing, and could emerge to be really good for the economy. If oil continues to go down and readings of inflation go lower.

People are really going to be potentially surprised by the downside in growth over the next couple bursts which means that equities will probably struggle.

Q: So the correction we got on Wednesday, I believe, this past week. Were you surprised at that?

A: No, that's sort of something we've been recommending our new clients to keep their eye out for. Valuations are high, if not at a peak. This sort of economic environment can surprise people with downside. The risk passes more to the downside, to more of a correction than anything else.

Q: Goldman Sachs came out with that report that 77 percent to 80 percent of the money managers out there are underperforming the S&P and the Dow, as well as the hedge funds for the last six years have had extremely poor performance. It seems like everybody's just getting squee zed in a no-volume market.

A: That's exactly what's happening. The issue that hedge funds have is really competition. Twenty years ago when there were a hundred hedge funds, they'd outperform, and did really well. Julian Robertson from Tiger had a conference this week, and he was talking about this basic idea that 20 years ago, when he started his hedge fund, nobody else was shorting stocks. Now everybody is. The free money is betting the stock performance is not there anymore. So then we have a hedge fund with too much leverage. The shorts go up and really what happens is the total asset class underperforms. We've seen CalPERS getting out of hedge funds.

CalPERS to be fair was always under-allocated to hedge funds. However, if you're allocating billions and billions of dollars, why put it into an asset class that consistently underperforms? It's just not intuitive. They are better off if wanting equity exposure, just being in the markets.

Q: So this four-quad model that you're working off, it's in the fourth Quadrant. What does that mean to investors? What type of correction would you be expecting, just to kind of clean out the market a little bit here? Realistically, there seems to be more delusion and happy talk than there should be?

A: Yes, realistically, we could get a 15 to 20 percent correction. I don't think anybody's really considering that. What we feel really confident about is small cap stocks will probably underperform, and the market itself is not going to generate great returns over the next probably year or so.

Q: The NASDAQ is already down. Forty-seven percent of the stock's already down substantially.

A: Yes, exactly, and underperforming. That's a perfect example. It's the internals in the market that are really breaking down. There have been some leaders. They're still doing well. It's just a bad sign when market internals are getting negative.

Q: When you talk about the internals, it's like these stocks are disintegrating inside these indices, like the S&P 500 and the Dow, but the index continues to rise. Can you explain why?

A: Normally, this would happen because there are certain sectors that are outperforming. In the U.S., it's been some more defensive sectors, like the utilities. Unfortunately, what happens is eventually it all kind of catches up.

Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients’ as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill. For more information, call 866-286-2268 or visit www.bennettgroupfinancial.com.

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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com

She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included Rock Legend Ted Nugent, as well as Steve Forbes and Grover Norquist. The show is a great complement to Dawn’s monthly investing seminars that take place at Tysons Corner in McLean, VA, where she discusses investing.

She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or dbennett@bennettgroupfinancial.com