Come On Obama, Get Tough on China Fraud

Posted on March 5, 2012 by Editor

Come On Obama: Get Tough

I almost hate to go back and revisit any of the 2011 frauds. I’m hoping that era can become a distant memory, and the well behaved companies and their shareholders get rewarded for their patience.

Come On Obama : Get Tough

However, when I read a recent article about the fraud committed against US investors by Ming Zhao, the Chairman of disgraced former China stand out Puda Coal (formerly NASDAQ: PUDA), I was horrified at our weak response.

The primary asset of Puda Coal was Shanzi Puda Coal mining. As it turned out, in 2009, Chairman Zhao sold the assets of Shanzi to himself, then turned around and sold Shanzi to a Chinese state owned company- Citic Trust.

After formally transferring the asset and taking the money, Zhao was able to raise $112.8 million from US and Canadian investors based on Shanzi, which the company no longer owned. He managed to fool light weight auditor Moore Stephens- these guys be penalized for failing to protect US investors as well.

When the fraud was uncovered in 2011, Zhao produced a letter from Citic stating they did not own the Shanzi coal mine. As it turned out, the letter was a forgery.

The whistle was blown on this one by anonymous web site Alfred Little. A fund manager was able to confirm the fraud by simply spending $500 to have an investigator look at some government filings in China showing the asset had changed hands.

The NY Times published an article back on February 23rd concerning the charges the SEC filed against the Chairman and CFO of Puda. Click Here to read the article.

Had such a blatant fraud of these massive proportions been perpetrated in the US, those offenders would be looking at long jail terms.

Here’s what I find astonishing- how is the US allowing these guys to walk around free? Now, I know these are Chinese citizens, and I know the Chinese are tough to deal with.

However, it seems to me our government should be doing something to strong arm those Chinese citizens into a one way ticket to the US so they can face trial, or forcing the Chinese government to take criminal action against these guys.

I don’t care how many of our Treasuries they own. If we’re prepared to unseat dictators in the Middle East to assure oil supplies, why are we allowing Chinese to simply steal $112.8 million from US investors, and get away with it?

Surely, there must be something we can offer the Chinese government in exchange for surrendering those offenders to US authorities.

Come on Obama-

Get Tough and show some back bone. This is ridiculous, and you should do something to get those crooks to US soil immediately.

Just throw one of these guys in jail, and make sure everyone in China knows about. The China/US relationship is far more important to China than a couple of thieving coal executives. With the proper leverage, those crooks would be in jail.

Come On Obama- how about protecting American investors!!!

China Markets Shaping Up.

I’ve been saying all along the China small cap sector would not improve dramatically until the China markets themselves made the transition from Ursine to Bovine.

Take a look at the Shanghai “A” Shares in 2012- China’s version of the S&P 500:

There’s a lot to like about this chart, but it’s a little premature to call it a Bull Market in break out mode.

Coming off the December lows, the Shanghai A’s have improved about 17%. As the index is moving up, the volume is increasing, which is a great sign.

A breakout above the November highs of about 2650 (above the blue line) on volume would suggest we have a new Baby Bull coming out of the gates in China, and there will be plenty of room to run.

Renewed enthusiasm for China stocks is being reflected in large cap sector. My personal favorite- Baidu (NASDAQ: BIDU) is back over $140, and eventually headed for $200. Even beleaguered and heavily shorted Sina Corp (NASDAQ: SINA) was up over 10 points this past week, moving from $62 to $74.60 in the last 4 trading days.

At the same time, the China small caps continue their listless, sideways, light volume trading.

I don’t know if this will change after earnings releases. I suspect there are some great trades, but it is yet to be determined if earnings can turn the tide.

It’s going to take a high profile, major short squeeze to bring attention to the undervalued nature of this sector and bring some institutional money back to these stocks.

I really like YONG for an earnings trade. The Yahoo! earnings calender says they will announce on March 12th, but there’s no confirmation on the company web site. The stock is so cheap bad numbers will probably drive it up.

China XD Plastics (NASDAQ: CXDC) is due out Monday according to Yahoo!, but I haven’t been able to find confirmation from the company.

I’ll be keeping my eye on the news flow and the response in the stocks in order to formulate some trading ideas.

Stand by for a much busier two weeks.

While you’re there, sign up for my free Webinar on:

How China Companies Commit Fraud < < ==

Warmest Regards,

Larry Isen

Market in China : Big Divergences Make China Stocks Look Higher

Posted on February 3, 2012 by Editor

Two Big Divergences
US China Large Caps Diverging
Market In China

Market In China – Two Big Divergences

Despite the fact that the US market is roaring, the Chinese market still looks to be rather Ursine (a fancy Latin work for bearish).

But wait- Is it really still a Bear Market for China stocks, or are the China markets looking up?

The Shanghai A shares- the China equivalent of our S&P 500, still looks pretty darn weak.

Market In China - Shanghai A Shares

There’s been a little bit of resurgence in this index. There’s also a week of trading missing as this market was closed last week for Chinese New Year, and they are just getting underway in China again.

This index is struggling to get through its 50DMA, which would confirm at least a short term up trend is getting underway. It’s not even close to its 200DMA, which would confirm a longer term bullish trend when we see those levels pierced.

The Shanghai A shares were down about 36% in 2011- as I like to say- an absolutely brutal year.

US China Large Caps Diverging the Market in China

The performance of the Shanghai A shares is anemic compared to China stocks trading with US listings.

Let’s start with the Granddaddy of all the ETFs- FXI is the China 25 Index fund- it represents China’s equivalent of the DOW, and contains the 25 largest public companies in China. These are the mega caps owned partially by the government.

Market In China - FXI

The FXI is showing far greater signs of life than the Shanghai A shares, having broken above its 50DMA in January, and well above its 200DMA, suggesting all is well in China Large Cap world.

Here’s the charts of two individual stocks that are still featured by EmergingChinaStocks- check out Baidu (NASDAQ: BIDU) and Sina Corp (NASDAQ: SINA).

Here’s the Google of China:

Market In China - Baidu (NASDAQ: BIDU)

BIDU has been on a 25 point tear this year, and on Friday managed to trade above the 200DMA for the first time since November. I suspect the 200DMA will become resistance for a little while, but that stock looks headed to break through that barrier rather easily.

Market In China - Sina Corp (NASDAQ: SINA)

SINA is a little bit more like the Yahoo! of China with a lot of mobile and digital entertainment components.

As you can see, this stock has run up nearly 30 points in the last month, and is gunning for its 200DMA. SINA was one stock short sellers absolutely vilified when it looked like the government might restrict some of their content. It really never happened.

The Shanghai A index is trailing the US large caps at this time. The China stocks are trading as if the investment community is now expecting a “soft landing” scenario in China.

China small caps are not trading as well as their larger brethren yet- but they will catch up as soon as there are some big break outs. Shorts are covering, but still have huge positions, and as these stocks trade up on lighter volumes, short sellers are going struggle with closing out their positions at lower prices.

One of my 3 favorite China stocks rocketed to a level it hasn’t seen since early September on Friday. The two others had a sideways week, but earnings are coming soon.

And, don’t forget to sign up for my free Webinar on:

How China Companies Commit Fraud

Warmest Regards,

Larry Isen

China Stocks – Inflating Revenues

Posted on January 21, 2012 by Editor

Inflating Revenues in China Stocks and How To Avoid The Fraud

Inflating revenues is another common way fraud is being committed in China Stocks.

The most simple way is to fake the receipt of revenues. The company has to show more money coming into the bank than really has.

China Stocks - How To Avoid Fraud In China Stocks

It’s a simple matter of getting a bunch of fraudulent invoices from the black market, and putting the revenues on your books.

From there, these fake revenues have to be reflected in your banks statements as well, so you need fraudulent bank statements.

This is a simple matter of creating the statements and presenting them to your examiner with the “Bank Chop” seal already stamped. Of course, you’ve obtained a fake stamp for about $200.

It’s common to claim receivables that don’t exist. You claim to have shipped a product, and the buyer is in on the conspiracy. When called by the examiner, the buyer confirms the purchase, but he has, of course, been bribed in advance to cooperate.

China stock fraud going on in the China livestock industry

There’s a lot of fraud going on in the China livestock industry where sales are double counted. For example, and pork producer might sell a whole generation of baby pigs to local farmers. They raise the pigs, and sell them back to the pork producer, who then sells them to an end buyer. The hogs were never really sold to the local farmer, and the sale of the livestock is double counted. Since this is the same animal, this is not allowed under GAAP accounting standards.

China Stocks Fraud And How To Avoid It

Europe Snubs China Bailout Offer – What Will Happen with Chinese Stocks

Posted on November 14, 2011 by Editor

This is particularly funny to me. It has long been rumored China was willing to provide as much as $3.2 Trillion in foreign exchange reserves to bail out the Eurozone. I would have expected the Chinese to focus their demands on austerity programs. However, what they are really after is:

Greater status at the World Trade Organization
Removal of an arms embargo placed after Tiananman Square
Greater influence in the IMF- International Monetary Fund

When it came right down to it- led by Germany, the European delegation simply left rather than negotiate, stating its not worth it to allow a Communist Country to have too much influence of EU Members. The Chinese have a lot at stake in Europe, so they don’t have any great leverage in the process. The EU is China’s largest export market, and a full 25% of China’s foreign exchange reserves are in European denominated investments. If Europe goes down, China will lose very big as well. While all this was going on, stocks in China continued their rebound, suggesting the Chinese markets are really starting to buy into the “Soft Landing” scenario. In Monday trading, the Shanghai A shares were up 1.92%, and the B shares 2.02%- 2% moves to the upside are nothing to sneeze at.

Chinese Markets Go 5 for 7 – Chinese Markets

Posted on October 6, 2011 by Editor

The Shanghai A shares were down .25%, and the B shares down .14%.

The price of copper, considered one of the leading indicators of industrial demand and the health of China’s manufacturing economy, fell to a 14 month low. Many believe this signals another global recession.

We’re going to need some economic numbers out of China suggesting the impending recession is not as bad as the market is pricing in, and the growing Chinese consumer can pick up any shortfall their export manufacturing might experience.

Here’s a few other news items out of China today:

Hedge fund manager and highly respected Bear and Short sell Jim Chanos estimates China’s debt to GDP ratio is close to 200%- worse than European countries. He says their debt crises will lead to 0% growth in 2012. He believe China will write of 7.5% to 10% of GDP to bad loans.
Resource investing news reports electric car demand is strong in Brazil, India, and China- price being the key sticking point.
In a move that many see as an “In Your Face” to the US Senate, China has frozen its currency at the current level. By a wide margin the US Senate recently passed a initiative to start crafting a bill that would allow the US to impose big tariffs on the imports of countries who do not allow their currencies to float. This is aimed directly at China. However, China observers point out- the last time China did this, it was three months out in front of a massive stimulus program.

That’s it for today. Perhaps better news tomorrow.

Continuing South – China has officially become the world’s largest consumer of energy

Posted on October 5, 2011 by Editor

Not much news out of China over night. The Shanghai Markets were lower for a 3rd straight day and for 5 out of the last 7 trading sessions. The China markets are flirting with the lowest levels in 2 years.

In Wednesday’s trading, China’s Shanghai A shares were down .25%, and the B shares down .14%.

There’s a couple of news items out of China worth mentioning- Here you go:

Premier Wen Jiabao was out urging stronger financial support for China’s small businesses. He’s suggesting some bank credit support, preferential tax treatment, and a relaxing of the standards for non performing loans. Also, he wants banks to avoid “adminstrative intervention”. Now, there’s a concept we could use in the US.
China has officially become the world’s largest consumer of energy according to BP’s statistical review world energy. BP reports that in 2010, China used 20.3% of the world’s energy, while the US used 19%.
Llloyd Private Banking just completed a survey of private investors which concluded China has now become the most attractive market on balance of risk and return, with the UK, Brazil, and Russia coming in distantly behind. The Lloyds private banking customers noted they were mostly concerned about the Greek situation.

That’s it for today.

Another Train Wreck Wrecks China Markets Today

Posted on September 28, 2011 by Editor

The Shanghai A shares were off .95%, and the B shares off .17%. These indexes just continue bumping along the bottom at about the lows of 2010.

In Shanghai, 13 stations slowed their trains, and Line 10 closed. Special buses were brought in by the government to move people. Rail stocks of all sorts were clobbered in both Hong Kong and China trading.

In other China news:

Senior China officials were out yesterday stating China GDP growth would hit 9% this year. Lu Ahonguyan, deputy director for the State Economic research center, said there was no need to worry about a hard landing for the Chinese economy. Lu said the global slow down will help China contain rising prices and readjust the country’s economic structure.
Allan Liu, manager of the Fidelity Southeast Asia fund, revealed his favorite consumer stock picks for China. He is extremely bullish on Baidu (BIDU), and Sina Corp (SINA)- Bidu is the China equivalent of Google- Sina is a bit more like a functional Yahoo!. He also likes Hyundai Motors and Kia Motors. Fund manager Paul Winborne of JO Hambro Capital Management likes Sun Art Retail, China Mengui Dairy, Golden Eagle, Hengan Inernational, and Baidu.

That’s all for today.

China Stats Fuel Big Wall Street Rally

Posted on August 24, 2011 by Editor

Sorry for the late post today. I was up too late last night to get an early start on the day. Here’s the news out of China.

In overnight trading, the major China indexes dropped a bit after Wall Street’s huge run up. The Shanghai A shares were off .51%- the Bs off .38% in lackluster trading.
BIDU was up about $10 in trading yesterday. Subscribers were able to sell calls against their position for the 3rd time after two profitable trades in the last two weeks. Subscribe if you want to learn about this.
Yesterday’s 300 point rally on Wall Street was fueled by perceptions there could be a “QE3″ coming out of the economic meeting in Jackson Hole this week. However, China also played a big part in fueling the rally. A manufacturing report out of China showed moderate slowing, but still enough manufacturing to maintain GDP growth in the 8% to 9% range.
Commodities were all higher on the news- oil and copper leading the way.
Yesterday it was widely reported China has now surpassed the US as the largest consumer of PCs in the world. 18.5 million PCs were sold in China in Q2 vs 17.7 million shipped to the US. China is expected to consume 85.1 million units next year compared to 76.6 million for the US.
Harvard Economist Martin Feldstein believes the Chinese will allow the RMB to rise more rapidly over the next 12 months than it has in the past 12. Feldstein believes this will mitigate the risks in China’s foreign investments, and reduce the costs of imports, thereby reducing inflation.
One final note- VP Joe Biden, who has been on a trip to China to reassure the Chinese our bonds are good, not surprisingly goofed up the numbers on our treasuries. In a speech, he claimed we had good reason to watch out for our bonds as the US owns 85% of them- this is simply wrong. We only own 69%. China holds 8%- he got that right. Way to go Joe.

Barron’s Bullish on China

Posted on August 23, 2011 by Editor

China markets were up in overnight trading, being fueled by a moderate decline in the China Manufacturers purchasing index. The Shanghai A shares were up 1.48%, and the B Shares were up .78%.
Think there’s no consumer growth in China? Think again. China Telecom reports Q2 profits rose 12% as its mobile phone subscriber base increased by 50%. The stock was up 4.8% on the news in Hong Kong.
Markets are firming up very tepidly globally on hopes the Federal Reserve will announce some sort of QE3 program to shore up the US economy.
The Chinese Purchasing Manager’s index rose slightly over July – from 49.3 to 49.8. A reading below 50 indicates contraction, but the slight improvement suggests a soft landing.
China has made investments in the production of oil in Libya. And, while China has never had a strong relationship with the nearly ousted Gaddafi, they have been supporting the rebel cause. One rebel faction warned China could lose its assets through nationalization, and the Chinese retorted with harsh words.
This weekend’s Barron’s cover article suggests it’s Time to Buy Emerging Markets after a 20% drop in China, Brazil, and India-Author Chris Williams notes their currencies are holding up against the dollar and the euro, their balance sheets are strong, and they’ve already completed their deleveraging cycle. Prices are also low as $7.7 billion came out of emerging market funds in August alone.
Barron’s also reports legendary and long term Fidelity Fund manager Mark Mobius, a pioneer of investing in China, India, and Russia, is buying up stocks that relate to consumer spending.

12th Five Plans Minimizes China Dependence on Global Macro Picture

Posted on August 22, 2011 by Editor

In overnight action, the Shanghai A shares dropped .68%, and the B shares dropped 1.8%. The B shares are typically more volatile.
Going long BIDU and selling covered calls to generate income. If you don’t understand how to generate income from your positions, sign up for the newsletter and read this past weekend’s edition.
Fan Gang- advisor to the China Central Bank monetary policy committee, in speech to 5th annual bankers conference in Beijing, says no double dip- just slower growth. He says China’s main growth driver will not be effected.
The 12th five year plan calls for reducing growth to 7%, empowering citizens to purchase more goods, raise the minimum wage, become more creative by developing industries like biotech and electric vehicles rather than simply be the world’s manufacturer, and has a major focus on reducing pollution and stabilizing the energy supply.
78% of over 500 China companies that have provided revenue and earnings forecasts for the year are forecasting both quarter over quarter growth, and year over year growth according to an article at Xinhua
China Construction Bank- one of the largest banks in China, announce Q2 profits up 31%

Emerging China Stocks

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