China Ouhua: red wine and red flags (4)

China Ouhua announced their audited accounts, qualified by the auditors (as was the case in the previous year), with some really bad news for the shareholders:

When Ouhua IPO-ed, they were supposed to be a fast-growing, highly profitable player in the wine industry in China.

Now it informs its shareholders that it abandoned its vineyards due to bad weather, insect pest and (worst of all) poor management? The vineyards are their main business to produce their own wine, it cant possibly get much worse than this, can it?

Despite the wine business going horribly wrong for Ouhua, they still deposited RMB 119M cash to purchase land, "conveniently" without having any independent valuation done. The transaction should have been concluded a long time ago, but is still "pending".

I am afraid that either this transaction will go through, and the land is useless given the abandoned vineyards, or the transaction will not go through, and the deposit will not be returned.

Michael Lewis wrote in "Crash Boys":


"Financial regulators, like editorial writers, are at best the markets’ last line of defense; they are less inclined to join any battle than they are to wander in afterward and shoot the wounded."


Malaysian regulators have done some enforcement that (I think) falls in this last category ("wander in afterward and shoot the wounded"), for instance:

SAAG: " ..... Notwithstanding that SAAG had been de-listed ...."
Carotech: "..... Notwithstanding that CAROTEC was de-listed ....."
MAE Models: "..... Notwithstanding that MAEMODE was de-listed ....."
EcoFuture: ".... Notwithstanding that EFUTURE had been de-listed ....."
Baswell: ".... Notwithstanding that BASWELL had been de-listed ....."
Axis: "..... Notwithstanding that AXIS had been de-listed ....."
NAMFATT: "..... Notwithstanding that NAMFATT has been de-listed ....."
Global Carriers: "..... Notwithstanding that GLOBALC was de-listed ....."
Kenmark: "..... notwithstanding that KENMARK had been de-listed ...."
Intelligent Edge Technologies: "..... Notwithstanding that IE was de-listed ....."


I hope that the regulators in the case of Ouhua will not wait for the company to be delisted, and take appropriate action now, it is long overdue in my opinion.

They should order an in-depth investigation, not only at the current situation and the recent developments, but also at the whole IPO process, the warranties and representations that were provided, all the parties involved (the promoter, the bankers, the advisors, the pre-IPO shareholders) and the roles they played. They should also interview the many directors that have resigned, and the previous auditor.

"Flash Boys", a year after

I wrote before about "Flash Boys".

Michael Lewis wrote a follow-up on his book, one year after it's publication. One snippet:


His [the president of BATS, one of the exchanges] defining moment came when Katsuyama asked him a simple question: Did BATS sell a faster picture of the stock market to high-frequency traders while using a slower picture to price the trades of investors? That is, did it allow high-frequency traders, who knew current market prices, to trade unfairly against investors at old prices? The BATS president said it didn’t, which surprised me. On the other hand, he didn’t look happy to have been asked. Two days later it was clear why: it wasn’t true. The New York attorney general had called the BATS exchange to let them know it was a problem when its president went on TV and got it wrong about this very important aspect of its business. BATS issued a correction and, four months later, parted ways with its president.


My own opinion: I don't think that HFT (High Frequency Trading) is a real problem for long term investors. It might be though for short term traders who turn over their holdings very often.

HFT does not add anything to the economy, it merely transfers some wealth from some (the huge majority of the investors) to some others (the HFT players). Exchanges will profit from the higher turnover in the short term. Not sure if they profit in the longer term though, some investors might not like HFT and either abandon the exchange or lower their turnover.

Exchanges have an important role in growing the economy of a country. They should be non-profit organisations, focused on regulation an orderly market, fair to all participants. HFT clearly doesn't belong in that picture.

Exchanges could make HFT impossible or at least very difficult by certain implementations, like delaying orders and/or prices, increasing their commissions, randomly matching orders in a batch, making sure that HFT traders do not have more information then other market players, etc. I am sure that clever people in the industry can come up with some effective methods.

HFT traders could then focus on something more meaningful, like coming up with a cure for cancer, building new technology, etc.

Unfortunately, most exchanges are privatised and therefore are looking to maximize their profits, often with the focus on the short term.

Michael Lewis: "Flash Boys" (2)

An alternative, rather critical view on Michael Lewis' latest book can be found here:

"Michael Lewis’ Repeat Omission: No Crimes Were Committed"

In Flash Boys, Michael Lewis has again launched a book that hews to his established formula: colorful outsiders take on a big bad entrenched establishment and win. Even though Lewis seems assured of having yet another best-seller, this book is getting more criticism than his works usually do. Put it this way: when commentators as diverse as Felix Salmon, Matt Levine, and Pam Martens feel compelled to object, it looks like Lewis has overfitted this tale to his blockbuster formula.


One of the mentioned links is written by Pam Martens:

"60 Minutes Sanitizes Its Report on High Frequency Trading"

Another interesting link is written by "Streetwise Professor":

"Michael Lewis’s HFT Book: More of a Dark Market Than a Lit One"

Michael Lewis: "Flash Boys"

Michael Lewis, one of my favourite writers, has written a new book, "Flash Boys".

Some excerpts from the article "The Hero Of Michael Lewis’ New Book Is A Mysterious Stock Exchange That Goldman Sachs Loves", published on Business Insider:


Michael Lewis and his publisher have done an excellent job keeping the details of his new book, ‘Flash Boys: A Wall Street Revolt’, completely under wraps, but some details are leaking out.

The book is about high frequency trading, and a firm called IEX that has created a separate exchange where everyone — fast or super fast — is safe to trade.

Critics say that firms that trade at high speeds can harm other actors in the market, and even cheat them out profitable trades.

"We view IEX’s core mission as simplifying an overly complex market structure trough a transparent rule set, minimal number of order types, and most significantly, a speed buffer that intentionally slows down trading in their market, relative to other venues"

“The U.S. stock market now trades inside black boxes, in heavily guarded in New Jersey and Chicago,” he writes in the prologue. “What goes on inside those black boxes is hard to say.”

IEX was born at the Royal Bank of Canada in large part thanks to Brad Katsuyama, the man who ran the bank’s U.S. trading desk. Katsuyama has been outspoken about the problems with HFT before, and it was he who lead the defection from the firm.

The goal, Lewis writes, was to “restore fairness in the U.S. stock market.” Katsuyama had watched his clients get nickeled and dimes while trading for them.

“I started to realize that, day in and day out, I was getting screwed,” Katsuyama told the New York Times last year.


Other reviews of the book can be found here and here.

The above is highly relevant for Bursa Malaysia, which has introduced a trading engine powered by NASDAQ OMX. It would be good if Bursa Malaysia would take a public stand in the matter of High Frequency Trading: are they going for the short term (increased trading by HFT players at the expense of the other traders and investors), or are they aiming at the long term (a fair market for all, where clients do not get nickeled and dimed).

The SGX, unfortunately, seems to have made their choice already, according to this article "Singapore Exchange Seeks High-Frequency Traders".

I have been very critical about High Frequency Trading before, and don't intend to change that stand, unless proven otherwise.

High volume trading does not equate creating shareholders value or enhancing the economy of a country, it is simply creating profits for a very small number of market players and the exchange, at the expense of all other participants.

Berkshire Hathaway is an example of a company that created tremendous value for its shareholders:

Its average daily trading volume is however only 437 shares. I don't think any of it's shareholders mind.

Irish banks abusing state guarantee

Bank bailouts are a terrible moral hazard: "Heads I win, Tail you lose".

In Ireland the economy is doing really badly, partly by the 2008/2009 crisis and the subsequent bank bailouts, to be paid by the taxpayers. Details are emerging that are not exactly pretty, from an article of The Irish Times:

David Drumm, former chief executive of Anglo Irish Bank, laughed at the prospect of abusing the State guarantee, the latest revelations from tapes reveal.

 

“We won’t do anything blatant, but . . . we have to get the money in . . . get the f***in’ money in, get it in,” he tells a senior manager at the bank, John Bowe.

In another recording, Mr Bowe and another senior executive at the bank, Peter Fitzgerald, are heard laughing about the prospects of nationalisation. They see it as “fantastic” and are delighted at the prospect of becoming civil servants.

The victims? The ordinary people, as usual:


Mr Gilmore said that the decision cost the Irish people billions of euro. “I think we need to get to the bottom of how the decisions were made and what was behind them.”


I often complain about the slow enforcement in Malaysia, but Ireland is also not exactly quick in taking actions either.


The chairman of the Oireachtas Finance Committee Ciaran Lynch said the latest disclosures were proof-positive that an inquiry into the banking collapse was urgently required.


Urgently? After five whole years?

Even Warren Buffett invested in two Irish banks just before the crisis, although not in the Anglo Irish Bank. He is, apparently, human after all. The good thing is, he did acknowledge his mistake.

For more background on the Irish crisis, a long but very interesting article by Michael Lewis: "When Irish Eyes Are Crying"

Michael Lewis: Boomerang

"Boomerang" from Michael Lewis will feature in many 2011 book lists. It is a very informative and yet enjoyable book about the 2008/9 crash, through interviews with unlikely people who were caught in it.

http://www.amazon.com/Boomerang-Travels-New-Third-World/dp/0393081818/ref=sr_1_1?ie=UTF8&qid=1324970071&sr=8-1#_

"The tsunami of cheap credit that rolled across the planet between 2002 and 2008 was more than a simple financial phenomenon: it was temptation, offering entire societies the chance to reveal aspects of their characters they could not normally afford to indulge.

Icelanders wanted to stop fishing and become investment bankers. The Greeks wanted to turn their country into a piñata stuffed with cash and allow as many citizens as possible to take a whack at it. The Germans wanted to be even more German; the Irish wanted to stop being Irish.

Michael Lewis's investigation of bubbles beyond our shores is so brilliantly, sadly hilarious that it leads the American reader to a comfortable complacency: oh, those foolish foreigners. But when he turns a merciless eye on California and Washington, DC, we see that the narrative is a trap baited with humor, and we understand the reckoning that awaits the greatest and greediest of debtor nations."

The good news is that the book is simply a collection of the columns of Lewis in Vanity Fair, so readers don't need to buy the book:

http://www.vanityfair.com/contributors/michael-lewis