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Arthur Porcari
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Arthur Porcari is a retired former regional stock brokerage firm President with 39 years stock market experience. His finance background includes, three years a stockbroker and two an investment banker with Merrill Lynch, ten years a Regional brokerage firm President, and OTC Market Maker and... More
  • The Collapse of the Big Name China Stocks: OMG! All China Stocks Must Be Frauds. Right? Not So Fast… 2 comments
    Jun 23, 2011 6:13 AM | about stocks: KNDI, BIDU, YOKU, DANG, SINA, EDU, PWRD, SNDA, TSL, CYD

    Those who have followed my Seeking Alpha articles know that in spite of spending eight days in China last November visiting several companies, I have only written positively about one US traded China Stock; Kandi Technologies. (NASDAQ-KNDI) I liked it at higher prices, and based on recently reported events, I love it now. But that is not what this article is about. This article is about a current market sector environment and a number of stocks that I personally wouldn’t buy. Not because I have any problem with them, simply because I only take long term positions in stocks that Wall Street doesn’t know or care about, but where I have spent many hundred, if not thousands of hours doing my own due diligence. However, based on my 37 years as a market professional with more of a Psychology rather then Business educational background, I think I know a short term market disconnect when I see one and history shows it is times like this when longer term reward potential is at its highest for savvy investors.

     

    I am not going to waste a lot of time giving the background of how we have arrived at this point of disconnect between stock price and business performance of the vast majority of US traded China companies. The various forms of media have done a more then sufficient job of creating this environment whereby fear throws out logic. If somehow you have missed what is going on in this sector, then you shouldn’t be investing in the Market. But I will unconditionally state that not all, not even a vast preponderance of China stocks, are purposely fraud infested. However you wouldn’t know this by following the media or looking at the sector stock performance over the past few months. Credit for this phenomenon is certainly given to short sellers and “attack” blog writers who have created a “magic bullet” to create instantaneous assured profits from short selling. But don’t for a second buy into their claim that proper due diligence is the primary reason why the stock of an attack target drops like a rock within seconds of the release of their articles. I suspect the dramatic drops are more so attributable to short sellers capitalizing on Market Psychology of the old adage; “It is easier to scare an investor out of a stock then into a stock”. This point is further proven by the immediate collateral selling in other sector stocks, no matter how unrelated, in just minutes from the release of a 20 to 40 page target article.(who can read that fast?) The thought of this broad based power now being realized by even ignorant attack writers with short selling in mind should be chilling to all to say the least. Emboldened with this psychological tool, virtually all stocks, China or otherwise, could in the future be more vulnerable then ever to this brilliant form of manipulation.

     

    I have read and researched a number of these articles and their targets and have found several which have uncovered activities which seem to range from at least suspicious, to bizarre, to fraudulent in appearance to a western way of thinking, but to broadly blame any such activity as purposely fraudulent rather then considering the possibility that cultural or translation differences may be the cause seems “over the top”. But in all fairness to the writers; even if they did want to be equitable to the target company and perhaps present a draft of their article in advance for contributory company comments, corporate securities counsel would most likely not allow clients to respond in fear of violating SEC selective disclosure rules. So yes, congratulations to the attack writers and their short selling friends, they have found their magic bullet and regrettably for the retail investor, they have no friend in the Regulators who are supposedly empanelled to protect them.

     

    Now on to my main theme here

     

    A month or so ago, many, including myself, felt most of the Chinaphobic sector carnage was likely past. As an old Viet Nam era Marine Corp captain, to my investor friends I had likened the small cap China stock environment at that time of stagnant prices and much lower volume to that of a completion of a combat ”fire fight”. I was suggesting it was time for the bold to stick their heads out of the foxhole and go on the offensive. But even to my supposedly experienced amazement the attacks writers just boldly moved on from the small caps to the “institutional” darlings like Longtop (NYSE:LFT) and Sino-Forest (OTC:SNOFF). Up until a couple of months ago Institutional investors in the big named “Chinas”, were snickering at the carnage the shorts were wrecking on the small Chinas. These confident “Funds” kept driving the big Chinas like Baidu (NASDAQ-BIDU), China Dangdang (NASDQ-DANG), Yoku.com (NASDAQ-YOKU),Sina.com (NASDAQ-SINA), New Oriental Education (NYSE-EDU), Perfect World (NASDAQ-PWRD), Shanda Interactive (NASDAQ-SNDA), Trina Solar (NYSE-TSL), China Yuchai (NYSE-CYD) etc. to newer “highs”. But now let’s fast forward to earlier this week. The “tape” says it all...

     

     

    Symbol

    BIDU

    YOKU

    DANG

    SINA

    EDU

    PWRD

    SNDA

    TSL

    CYD

    April High

    154

    69

    26

    145

    128

    29

    54

    30

    33

    Recent Low

    118

    28

    11

    78

    98

    18

    35

    19

    19

     

     

    To the average investor, seeing the recent rapid breakdown in all the big names along with hearing the incessant media rants that “all China stocks are frauds”, would likely lead the unknowledgeable investor to the belief; “OMG!, the media is right, they are all frauds”. And of course this belief is just further unfairly compounding the problem in the lesser known names. But could it be true that all of these big names are really all frauds? Of course not. It is my opinion that what we are seeing at this moment is Institutional “Window Dressing” as we approach the end of the quarter. Mutual Funds in particular are concerned that with all of the mostly bogus media about China stocks in general, their investors might consider the fund manager “idiots” if shown holding any China stock in the portfolio by quarters end. So “ethnic cleansing” Wall Street style is running rampant.

     

    If it turns out that my above theory is true, it is likely (assuming no more specific “big name” fraud accusations appear) there could be a substantial rally in the big names after Quarters End settlement date passes. IMO, if the big names do rally, this should take the pressure off a number of the smaller names. If Wall Street’s Chinaphobia does begin to quiet down in the new quarter and common sense returns, then the inevitable realization that China is the real growth story for the balance of this decade should reappear and irrespective of what downturn may or may not lay ahead for US stocks, the real fortunes will likely be made in China stocks for a long time to come.

     

    This too shall pass

     

    As painful as this has been for traditional long term investors and honest China companies who have suffered during this unique period of time, this too shall pass. While no “market” is pure of those with fraudulent intentions, I suspect that time will tell that those China companies who survive this bloodbath and come out fundamentally unscathed, will inure significant benefits for two reasons; Firstly, they will have survived a regulatory and accounting review more intensive than any US based companies have ever had to endure and secondly, as US investors once again focus on investing in the fastest growing and largest economy in the world, there will be a much smaller arena of China stocks to chose from.

     

    Dart Board Portfolio-How to outperform any US Index over the next year+.

     

    Trying to safely choose the best stocks in the China arena may likely be a fool’s errand for the unsophisticated investor. But if you have a large enough sum with which to speculate, perhaps you should go to www.allchinastocks.com and print out the list of US trading China stocks. Tack the list to a wall and throw 20 darts and put 5% of your cash in each issue. Even if two or three of your choices yet fail, it is very likely that the balance will more than make up for the losses and handily outperform the S&P, Dow or any other US Index. (Perhaps some ETF consolidator might be wise to take this “tongue and cheek” solution at heart.)

     

     

     

     

     




    Disclosure: I am long KNDI.
    Stocks: KNDI, BIDU, YOKU, DANG, SINA, EDU, PWRD, SNDA, TSL, CYD
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Comments (1)
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  • rolonrolon
    , contributor
    Comments (26) | Send Message
     
    I admire you're steadfast optimism in spite of seemingly getting crushed over the last 8 months. You're articles introduced me to KNDI and other small-cap China stocks and I've taken a huge beating- losing 30-70% on each and every one. It's not a huge part of my portfolio but it's never fun to lose money and I obviously wish I had waited till now to buy.
    24 Jun 2011, 12:14 PM Reply Like
  • t0nutz
    , contributor
    Comments (1193) | Send Message
     
    great article very well explained I think mr. ben has a problem. I love kndi :)
    25 Jul 2014, 07:30 AM Reply Like
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