China Xiniya Fashions ADR – Trading Sub Cash

October 3, 2011

The route in all things related China has created a number of anomalous investment situations. Hong Kong listed stocks have been pulverized over China hard landing fears but any China stock that has been US listed and subject to less corporate governance scrutiny has been annihilated. There are many stocks in this space where to go down from here; the stocks must be a fraud. That isn’t to say that there are not many other Chinese ADR frauds. I would speculate that there are for companies that have not gone through the IPO process. For stocks that have IPO’d and are not reverse mergers it may be far-fetched to believe that all the stocks are frauds.
Here is just one example among many. China Xinya Fashion is a small cap Chinese ADR. The stock has a USD market capitalization of $85M. The cash on the balance sheet is $121M. The company is free cash flow positive the past five years and generating cash. There is no debt on the balance sheet. My conclusion is that there must be fraud going on for this stock to trader lower from here. Interesting situations that the market crisis has created.

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Home Inns – Company Defends Shares and Street Comes to Support

September 29, 2011

Home Inns has turned into another interesting Chinese ADR saga. It appears to me that this is more to do with an extremely jittery market than anything relating to a continuation of the fraudcap dynamics that have taken down Chinese reverse mergers and Sino-Forest.

Overnight the company has secured financing of $240M termed out to September of 2016. The loan was from CSFB and JP Morgan.

A couple of Wall Street analysts, including Kevin Yin of CSFB are out defending the shares. It is being reported by Kevin that the company took calls overnight and stated there has been no change in business trends and that occupancy and RevPar are all in line with previous guidance. Home Inns is up 7% today recovering almost half of yesterday’s decline. This company is well positioned in the China hotel space as budget hotels expand quickly through China. If there is nothing sinister going on this will have been a great opportunity to purchase a premium China growth story. It shows how things may be getting overdone in terms of fears and cynicism amongst investors as well.

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Home Inns (HMIN) falls 16% on no news

September 28, 2011

Interesting – it appears that confidence has just suddenly been lost in this fast growth China ADR. The Company had a Corporate Day with Goldman Sachs on September 7th. The analyst sponsoring the event was Jason Kwok, and it was reported that management has been seeing 5% room rate hikes and saw no signs of a slowdown in volume trends. GS pointed out that in the worst quarter of the financial crisis portfolio occupancy stood at 90%, with only an 8% RevPar decline. We aren’t in an environment anywhere near that.

It’s worth noting that Home Inns actually had an IPO here in the US with CSFB as the lead. You can get the prospectus on the IR website. The stock didn’t list through a reverse merger. The auditor is Price Waterhouse Coopers

Today the implied volatility on the NASDAQ listed stock surged to 105%. Historical implied vol has been 50%. Volume was 1,863,137 shares vs average volume of 549,419 (3.4x normal).

It bears watching here if there is any news tomorrow.

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Gold – Is It Still a Bull Market? A Jesse Livermore re-read

September 28, 2011

All one needs to know about today’s Gold market: “…..You know its a bull market”

From Reminiscences of a Stock Operator
In Fullerton’s, there were the usual crowd. All grades!

Well, there was one old chap who was not like the others. To begin with, he was a much older man. Another thing was that he never volunteered advice and never bragged of his winnings. He was a great hand for listening very attentively to the others. He did not seem very keen to get tips – that is, he never asked the talkers what they’d heard or what they knew. But when somebody gave him one he always thanked the tipster very politely. Sometimes he thanked the tipster again – when the tip turned out OK. But if it went wrong, he never whined, so that nobody could tell whether he followed it or let it slide by.

It was a legend of the office that the old jigger was rich and could swing quite a line. But he wasn’t donating much to the firm in the way of commissions; at least not that anyone could see. His name was Partridge, but they nicknamed him Turkey behind his back, because he was so thick-chested and had a habit of strutting about the various rooms, with the point of his chin resting on his breast.

The customers, who were all eager to be shoved and forced into doing things so as to lay the blame for failure on others, used to go to old Partridge and tell him what some friend of a friend of an insider had advised them to do in a certain stock. They would tell him what they had not done with the tip so he would tell them what they ought to do. But whether the tip they had ways to buy or to sell, the old chap’s answer was always the same.

The customer would finish the tale of his perplexity and then ask: “What do you think I ought to do?”

Old Turkey would cock his head to one side, contemplate his fellow customer with a fatherly smile, and finally he would say very impressively, “You know, it’s a bull market!”

Time and again I heard him say, “Well, this is a bull market, you know!” as though he were giving to you a priceless talisman wrapped up in a million-dollar accident-insurance policy. And, of course, I did not get his meaning.

One day a fellow named Elmer Harwood rushed into the office, wrote out an order, and gave it to the clerk. Then, he rushed over to where Mr. Partridge was listening politely to John Fanning’s story of the time he overheard Keene give an order to one of his brokers and all that John made was a measly three points on a hundred shares and of course the stock had to go up twenty-four points in three days right after John sold out. It was at least the fourth time that John had told him that tale of woe, but old Turkey was smiling as sympathetically as if it was the first time he heard it.

Well, Elmer made for the old man and, without a word of apology to John Fanning, told Turkey, “Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I’ll be able to buy it back cheaper. So you’d better do likewise. That is, if you’ve still got yours.”

Elmer looked suspiciously at the man to whom he had given the original tip to buy. The amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and soul, even before he knows how the tip is going to turn out.

“Yes, Mr. Harwood, I still have it. Of course!” said Turkey gratefully. It was nice of Elmer to think of the old chap.

“Well, now is the time to take your profit and get in again on the next dip,” said Elmer, as if he had just made out the deposit slip for the old man. Failing to perceive enthusiastic gratitude in the beneficiary’s face Elmer went on: “I have just sold every share I own!”

From his voice and manner you would have conservatively estimated it at ten thousand shares.

But Mr. Partridge shook his head regretfully and whined, “No! No! I can’t do that!”

“What?’ yelled Elmer.

“I simply can’t!” said Mr. Partridge. He was in great trouble.

“Didn’t I give you the tip to buy it?”

“You did, Mr. Harwood, and I am very grateful to you. Indeed, I am, sir. But”

“Hold on! Let me talk! And didn’t that stock go up seven points in ten days? Didn’t it?”

“It did, and I am much obliged to you, my dear boy. But I couldn’t think of selling that stock.”

“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers.

“No, I couldn’t.”

“Why not” And Elmer drew nearer.

“Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.

“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”

“My dear boy,” said old Partridge, in great distress–”my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”

Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: “Can you beat it?” he asked me in a stage whisper. “I ask you!”

I didn’t say anything. So he went on: “I give him a tip on Climax Motors. He buys five hundred shares. He’s got seven points’ profit and I advise him to get out and buy ’em back on the reaction that’s overdue even now. And what does he say when I tell him? He says if he sells he’ll lose his job. What do you know about that?”

“I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in old Turkey. “I said I’d lose my position. And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don’t feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It’s a bull market, you know.” And he strutted away, leaving Elmer dazed.

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Mortgage rates hit sub 4% in the US and Japan

September 28, 2011

What a battle between inflationary trends and deflationary trends. Sub-4% mortgage rates have the potential to positively impact the economy. There are two impacts. The first, and most important, is the cash flow impact. Households are provided the opportunity to cut payments by some 15%-30%. Many households will re-term a 30-yr mortgage from 20, 22, 25 years back out to 30 years which further reduces monthly payments. In an environment where there is very limited net new job creation and limited scope for pay increases, this is quite meaningful to the average household. Obama has been pushing the HARP program to facilitate refinancing approval. I believe there is the potential for lower mortgage rates to impact the economy more than many economists expect.

The second impact is through improving the affordability of housing you increase the value of the housing stock. The wealth effect from housing will play out slowly and over many years. Moreover, even if lower mortgage rates simply get house prices flat, this is a very good thing from a household net worth standpoint relative to 3-4% declines which Case Schiller says we are running at today. Remember many households are leveraged to the value of their home, so 3% house price declines can mean anywhere from a 6%-30% hit to housing related equity (the nest egg).

Of course the same dynamics would be a positive for Japan, a country which has even more issues creating new jobs and income growth for younger workers.

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Jay Schottenstein Buys 1M shares of American Eagle – filing after the close

September 23, 2011

Jan Schottenstein is a savvy retail investor who was the former Chairman of American Eagle. He has remained an active investor in the retail space since this role. I take note of this filing after the close because he also stepped in and bought AEO last September – Sep 8th 2010 to be exact. American Eagle was $13.50 on Sep 8th 2010 and it went on to $17.36 within a month (29% return). The rest of retail ripped during this period as well and into year-end. Last time Jay bought 1/2 a million shares. Today he filed on 1M shares (double the amount) bought on 9/21 and 9/22.

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