China Media Express: Up on Bad News

Mar. 3.11 | About: China MediaExpress (CCME)

There you have it. When stocks go up on bad news, the bottom is likely in. Muddy Waters Research came out with more accusations accusing China Media Express (OTCPK:CCME) of all sorts of fraud. For those of you who follow CCME and do not yet know of WCTBills, I encourage you to read his rebuttals against accusations of fraud here.

Here’s what I think is going on. I think that the shorts have shorted all of the available shares to short. I think that on top of this, on Tuesday they decided to not only buy tons of puts but to also sell naked calls. Then, they came out with their hit piece in an attempt to drive it down into the single digits and … it backfired. Since when do fraudulent companies go up on fraud accusations? It’s what I’ve been telling you all along. CCME is not a fraud. The companies that have committed fraud in this space never had investors on their board of directors or big four auditors.

Also, it's been over two months that the company has been in the process of being audited. You'd think that the auditors would have found evidence of fraud by this point in time -- especially with everyone pointing their finger at CCME -- and more specifically citing specific examples where the company is committing fraud.

There are roughly 7.5M shares short and to the best of my knowledge -- they are still on RegSho -- meaning that they are selling shares short that they do not have. That's why they've recently taken it to the next level of buying puts and selling naked calls. There is no evidence of the shorts covering. When the stock dropped from over $20 to $12 -- the shorts added to their position instead of covering.

What do you have when you have a company that has a growing short position that is so large that they are selling shares they don’t have, wrecklessly buying puts, selling naked calls, and then timing hit pieces to be released one hour into trading in order to get long investors to sell first and ask questions later? Well, apparently you have a rally. Now, with all of these fraud charges circulating and the stock price rising -- the short roast has officially begun. What’s funny to me is that the only lawsuit that has been filed against CCME is for 250 shares. That will likely be dismissed.

My investment hypothesis remains unchanged. In the next four weeks, I anticipate:

  1. New IR Firm.
  2. Deloitte audit (with multiple checks not only from DTT Hong Kong but from DTT Global). Everyone acts like this won’t pass. Deloitte audited them last year -- and the cash was there then. It’s there now too.
  3. Dividend.
  4. Share buyback.
  5. Large I-Banks coming on board. CCME is hard to miss.
  6. Can we get a dual listing? Maybe in the next 12 months.
  7. Possible additional audit/verification work done by other firms that further refute fraud accusations.

Disclosure: I am long CCME. Selling puts.