UPDATE 2-China stocks fall again, Sina among most traded
(Adds comments from Interactive Brokers CEO and Sina options activity)
By Chuck Mikolajczak and Ryan Vlastelica
NEW YORK, June 9 (Reuters) - With more brokers unveiling rules to hedge against risk from Chinese securities, investor patience over the region may be running out.
Of the top percentage losers on both the New York Stock Exchange and Nasdaq on Thursday, about half of the issues with share prices over $2 were Chinese companies. The selloff comes amid increasing investor caution following a rash of delistings and accounting scandals.
Interactive Brokers Group Inc (IBKR.O), citing "elevated risk concerns," recently barred its clients from borrowing money to take leveraged positions in more than 150 Chinese securities. That announcement sparked a broad selloff in Chinese shares on Wednesday, including those that weren't listed by the broker.
Thomas Peterffy, Interactive's chief executive, told Reuters the group was selected for its increased volatility and said he hoped the new rules would prompt the Chinese to toughen accounting standards. For details, see [ID:nN09173664]
One of the most actively traded Chinese stocks on Thursday was Sina Corp (SINA.O), whose Frankfurt-listed shares were among those named by Interactive. The stock fell 3.8 percent to $92.84 on volume that was more than three times its 50-day average. Taomee Holdings Ltd (TAOM.N), which operates a web site for children, dropped 5.6 percent to $8.50 in its trading debut. [ID:nN09113007]
Overall option volume in Sina was three times average daily levels with about 54,000 puts and 53,000 calls traded by late afternoon on Thursday, according to options analytics firm Trade Alert.
"People are buying puts as the stock is getting crushed," said Gareth Feighery, a founder of Philadelphia-based options education firm MarketTamer.com. The new broker rules are "essentially... restricting investors from borrowing money to take leveraged positions in the shares."
"There is heightened risk concern which has led to a recent sell-off in the Chinese stocks, notably Sina," he said. "As a result, we are seeing bearish option activity in Sina, particularly in the front month June 80 and 90 strike puts."
Charles Schwab Corp (SCHW.N) on Thursday also said it had recently adjusted maintenance requirements for "many" Chinese stocks. [ID:nN09189049]
Sina's selloff extend recent weakness for the Shanghai-based online media company, which is down more than 20 percent so far this month. Over the past year, however, it has been a momentum favorite to the upside, with gains of more than 150 percent over the past 52 weeks.
In a Thursday filing with the U.S. Securities and Exchange Commission, the company disclosed a prepaid variable share forward sale transaction between New-Wave Investment Holding Co and Goldman Sachs Financial Markets, L.P. in which Goldman may sell up to 1,250,000 shares in Sina.
New Wave is controlled by Sina's president and chief executive, Charles Chao, and owns 8.5 percent of Sina's shares outstanding, according to Thomson Reuters data.
The stake makes New Wave the second-largest shareholder in Sina, behind the 9.2 percent stake owned by Fidelity Management & Research Company and just ahead of the 7.7 percent stake owned by T. Rowe Price Associates Inc. (Additional reporting by Doris Frankel; Editing by Leslie Adler)
TMM think they know why it seems a ragtag group of shortsellers, distressed debt traders and the like are doing better than most on this: skepticism and having to take responsibility for all their research. The China law blog has a good guide on how to actually do diligence on Chinese companies and it comes down to this: assume anything too good to be true is a fraud and work from there with a keen eye to people's incentives. Money apparently does not grow on trees. It seems that people who are doing their own work are working out what makes these businesses tick rather than to work out next quarters earnings (they're in the dock) and continue to win this game. TMM think this may be because they are cutting out the conga line of institutional investing ass-covering that seeks to ensure no one is responsible for anything:
Fund of Funds guys: "The consultant said they were good! I didn't do nuffin'!"
Equity Analyst: "The GLG guy said everyone uses their products and are awesome! Whocudanone?"
PM: "The equity analyst put together a bajillion powerpoint slides and talked me into it! It wasn't me!"
Save the money on GLG consultants and spend some time working out a business' supply chain, how they bill customers and the like. Or, even do something as simple as compare revenue per student at TAL Education and New Oriental Education per student and compare it to GDP per capita. Sometimes this stuff really is painfully obvious - and if your equity analyst does not pick up on this stuff he's a goose.
Looking across some equity research on our desk, TMM can't help but feel that short selling is likely to stay lucrative simply because the whole structure of the broker dealer industry makes it easy. Analysts are so petrified of not getting next quarter's earnings they completely ignore primary drivers of businesses to the extent that they miss out on the business being a fraud. Similarly, no one likes the boy who cries wolf, especially downstairs in the investment banking division.
For those not dedicated to the intricacies of corporate investing TMM can only say that if you aren't doing the work stick to your knitting - trading baskets, ETFs and the like - rather than picking single names and if you do stick to larger cap liquid stocks. Sure every now and then you get an Enron, but most of the frauds we are seeing are thoroughly mid or small cap. Caveat emptor for those not well versed in the black arts of due diligence or forensic accounting.
