Exit China Agritech, China MediaExpress Positions as Soon as Trading Resumes

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 |  Includes: CAGC, CCME
by: Robert Weinstein

Sun Tsu's The Art of War:

So there are five ways of knowing who will win. Those who know when to fight and when not to fight are victorious. Those who discern when to use many or few troops are victorious. Those whose upper and lower ranks have the same desire are victorious. Those who face the unprepared with preparation are victorious. Those whose generals are able and are not constrained by their governments are victorious. These five are the ways to know who will win.

China MediaExpress Holdings Inc. (OTCPK:CCME), the hotly debated "is it a fraud? is it not a fraud?" Chinese advertising company, appears to be in the process of a total implosion.

It appears that the warnings of Citron Research, Muddy Waters Research, and SA’s Roddy Boyd turned out to be correct. Investors have plenty to fear with CCME. In what seems to be a never-ending string of Chinese reverse merger frauds, China Agritech Inc. (OTCPK:CAGC), went up in flames today as well.

CCME and CAGC investors received the worst possible news today. The China branch of Deloitte walked away from CCME and called for an independent investigation of their books. CCME’s CFO resigned, without giving an official reason. Ernst & Young China stopped providing services for CAGC. NASDAQ has now halted trading on both companies. Two more Chinese companies have left investors twisting in the wind, wondering if there will be anything left of their investments.

Although it was to be released in two days, CCME announced it will delay its 10-K filing for at least a month. Meantime, NASDAQ changed the reason for the halt from “news pending” to a request for additional information. Most likely, investors will not be able to trade CCME for at least a month unless the company moves to the over-the-counter bulletin board or the “pink sheets” exchange.

CAGC investors likely face the same fate as CCME shareholders; however, it could be worse. It appears that some CCME investors will not lose everything, even if the stock reopens near zero. Given the significant short interest in CCME, some sophisticated investors loaned out their shares for a fee so they could make them available to short sellers looking to borrow shares.

Simply put, high demand to borrow shares in CCME provided some longs with the opportunity to loan out their shares, collect a premium, and interest on that loan. With the stock halted, every day that goes by short sellers accrue interest charges because they cannot return their borrowed shares. Investors who loaned out their shares and collect the interest can receive something in return before the likely delisting of CCME occurs. As a result of a much lower short interest, the same scenario did not pan out for CAGC shareholders.

Based on my past experience and observations, CCME and CAGC investors should exit their positions as soon as they possibly can, in the absence of positive news prior to the resumption of trading. Having recently traded ICOP, BGS, GAP and many others that are under stress, the highest price is usually immediately after the resumption of trading followed by a continuous and steady circling of the drain until the lights go out.

Absent positive news I will look to short call options upon a resumption of trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in OTCPK:CCME, OTCPK:CAGC over the next 72 hours.