China Stocks Overreact to GS Charges

Includes: CHGI, GS
by: China OTC Player

It's a real testament to the power and influence of wall street mega-firm Goldman Sachs (NYSE:GS) that today's SEC charges of fraud caused an immediate blood-letting in Chinese micro-cap stocks. While the Dow and S&P have sneezed at the news of Goldman's subprime shenanigans, the Rising China Stocks index has caught a case of pneumonia, at least for today. The Dow has dropped 1.5 percent as of this mid-day Friday writing, while the 35-stock RCS index is down by 3 percent.

The only thing that surprises me is that anyone on earth is surprised by the news. Financial misdoings on Wall Street? The market is reacting with shock and horror. Blood seems to be oozing from every pore of the RCS index (not to mention from my portfolio) over this unthinkable event. But come on, really. This isn't an anomaly, it's the status quo. The SEC will make a little noise, two or three heads will roll at Goldman, and then the Obama administration will rush in with a multi-billion dollar gift/bailout package so the Goldman brass can give themselves some more 7- and 8- figure bonuses.

And what does all of this have to do with Chinese small cap companies? Absolutely nothing. Goldman Sachs can't invest in companies like CHGI (down 19 percent today) or GPRC (down 9 percent). I think it's a safe bet that not one of Goldman's thousands of employees has even heard of any of these little companies we know and love. If Goldman were to go out of business tomorrow (hey, I can dream a little) no Chinese small cap company would feel so much as a ripple in their operations.

What I'm getting at is that today's rush to dump the stocks of great little Chinese companies is a completely misguided overreaction to a totally uncorrelated event. It's a buying opportunity. Chinese small caps will go on making cement and pharmaceuticals and digital cable boxes, and they'll keep raking in cash hand over fist. Wall Street titans will keep lying and cheating and defrauding their way to riches, and they'll accept the occasional SEC slap on the wrist as a cost of doing business. It's the way of the world. The critical question is, are you going to recognize the game for what it is and keep playing, or flee the market every time the big boys get caught with their hands in the cookie jar? No one ever made any money by sitting on the sidelines. Come on back in, the water may be a little murky, but it's fine.

My position: None.