Short seller Citron Research dropped a "bomb" on Valeant, a pharmaceutical company, the report can be found here.
Interestingly, well known hedge fund manager Bill Ackman is "long" the stock. Ackman himself is short Herbalife.
Bronte Capital wrote "Some comments on the Valeant conference call".
Bloomberg reports: "Ackman Feeling Shortseller's Sting as Citron Sinks Valeant Stock", a snippet:
Ackman, the billionaire hedge fund manager, has long maintained that Herbalife Ltd. is a house of cards -- a suggestion that’s drawn howls from the company. Now another Wall Street scold, Citron Research’s Andrew Left, says one of Ackman’s picks looks like the Enron Corp. of Big Pharma -- a claim the company, Valeant Pharmaceuticals International Inc., rebutted Wednesday.
Yet as Valeant’s share price plunged anew, Ackman was, in effect, getting a small taste of his own medicine. Left, a small-time short seller, had grabbed headlines and captivated Wall Street, much as Ackman has done with his campaign against Herbalife. While this dust-up might seem lopsided -- Ackman runs a prominent hedge fund, Left a relatively obscure investment and research shop -- it nonetheless underscored how vocal short-sellers can gain attention and turn markets against companies fast.
“If there’s one person in the world I don’t feel bad for, it’s Bill Ackman,” Left, a 45-year-old Florida native based in Los Angeles, said in a telephone interview. “If I could switch bank accounts and hair with him, I’d close out tomorrow. Ackman’s a hedge fund manager who goes short and goes long and sometimes you win, sometimes you lose.”
Assuming there’s been no change in its holdings since the end of the second quarter, Ackman’s Pershing Square Capital Management has lost about $2.8 billion on Valeant as it declined 55 percent from an intraday peak of $263.81 on Aug. 6, according to data compiled by Bloomberg.
“In this business, nothing is personal,” Left said. “He goes home and sees his kids, I go home and see mine, and he does what he believes with his opinion.”
Biggest Selloff
If people had never heard of Citron Research before, they have now. Just after 10 a.m. Wednesday, the firm published a note suggesting Valeant was inflating its sales, igniting the biggest selloff anyone had ever seen in the stock. Laval, Quebec-based Valeant plunged as much as 40 percent, prompting a public response from the company and creating billions of dollars of losses for its hedge fund owners.
In a statement, Valeant said Citron’s research is “erroneous” and that the company derives no sales benefit from inventory held at specialty pharmacies mentioned in the report. It suggested Citron had reached inaccurate conclusions, misconstruing links between them that are explained by logistics and support agreements.
Past foes of Ackman saw irony that a company he’s invested in was sent reeling by a short-seller claiming that its revenue is overstated. Citron, the decade-old stock-commentary site originally founded as Stocklemon.com, said Valeant is using a specialty pharmacy called Philidor RX Services to store inventory and record those transactions as sales. “Is this Enron part deux?” the report said.
Just last week Muddy Waters wrote a scathing report about TeliaSonera, a Swedish telco involved in corruption which is, according to Muddy Waters, much larger than reported so far.
Showing posts with label short selling. Show all posts
Showing posts with label short selling. Show all posts
Thursday, 22 October 2015
Wednesday, 2 September 2015
Silverlake Axis down 24%, suspended, after damning report (3)
Silverlake Axis has responded, one snippet:
"the Board has decided not to dignify the Report by preparing its own point-by-point rebuttal".
That is very unfortunate, and I doubt it is in the best interest of the Company's loyal minority shareholders. A point-by-point rebuttal might have given the much needed clarity regarding the issues at hand. I find the reasoning not to give this rebuttal rather weak.
The Board also did not come with a plan to improve its corporate governance in general, particularly the transparency.
The only plus point is:
"the Company will be engaging Deloitte Singapore, as an independent third party, to undertake an independent review of the allegations concerning the related party transactions entered into between the Company and the Silverlake Private Entities and the associated profit margins as referred to in the Report and to provide its findings and conclusions as to their veracity, which the Company will publish in due course."
But this might take a while. Also, Deloitte will not address the other issues raised.
An article in The Star offered a remarkable sentence:
"Goh pointed out that the lines of responsibility are clear within the company as the board has control over its running while he concentrates on research."
The running of the company is the responsibility of the executive directors, in this case the CEO and Goh himself. The other members of the board are non-executives, surely they are not responsible for the running of the company, they will lean more towards strategy and oversight. It almost sounds like Goh (Founder, Chairman and majority shareholder) doesn't feel responsible for the issues, rather concentrating himself on research. Strange, since the huge network of related companies are owned and founded by him.
With the share price almost half of the price a few months ago, I would have thought that a much stronger reaction was needed, especially directed to the more concrete allegations in the 42-page article.
I still struggle with the high reported revenue per employee. For instance here there are many discussions about hiring and working for Silverlake. Reading through dozens and dozens of postings I do not get the impression that Silverlake is hiring the best of the best (for instance only from top universities), has rigorous interviews and pressures their employees, enabling the company to bill top dollars. This was one of the issues raised by the short seller report.
As interested observer, I guess we need time to see how things will pan out in the future.
"the Board has decided not to dignify the Report by preparing its own point-by-point rebuttal".
That is very unfortunate, and I doubt it is in the best interest of the Company's loyal minority shareholders. A point-by-point rebuttal might have given the much needed clarity regarding the issues at hand. I find the reasoning not to give this rebuttal rather weak.
The Board also did not come with a plan to improve its corporate governance in general, particularly the transparency.
The only plus point is:
"the Company will be engaging Deloitte Singapore, as an independent third party, to undertake an independent review of the allegations concerning the related party transactions entered into between the Company and the Silverlake Private Entities and the associated profit margins as referred to in the Report and to provide its findings and conclusions as to their veracity, which the Company will publish in due course."
But this might take a while. Also, Deloitte will not address the other issues raised.
An article in The Star offered a remarkable sentence:
"Goh pointed out that the lines of responsibility are clear within the company as the board has control over its running while he concentrates on research."
The running of the company is the responsibility of the executive directors, in this case the CEO and Goh himself. The other members of the board are non-executives, surely they are not responsible for the running of the company, they will lean more towards strategy and oversight. It almost sounds like Goh (Founder, Chairman and majority shareholder) doesn't feel responsible for the issues, rather concentrating himself on research. Strange, since the huge network of related companies are owned and founded by him.
With the share price almost half of the price a few months ago, I would have thought that a much stronger reaction was needed, especially directed to the more concrete allegations in the 42-page article.
I still struggle with the high reported revenue per employee. For instance here there are many discussions about hiring and working for Silverlake. Reading through dozens and dozens of postings I do not get the impression that Silverlake is hiring the best of the best (for instance only from top universities), has rigorous interviews and pressures their employees, enabling the company to bill top dollars. This was one of the issues raised by the short seller report.
As interested observer, I guess we need time to see how things will pan out in the future.
Wednesday, 17 June 2015
Markets also need negative viewpoints (3)
I have written several times about this subject, for instance here, here and here.
An article on Investors.com written by Mark Calabria seems to agree:
"Don't Silence Short Sellers, They Play An Important Role"
Former Lehman CEO Richard Fuld's recent public emergence was accompanied with the complaint of many a corporate leader: Don't blame me, blame the short sellers.
During the financial crisis, his was not a lone voice calling for a ban on short selling. The Securities and Exchange Commission ultimately delivered on such due to extensive Wall Street lobbying.
The evidence, however, is overwhelming — short sellers regularly identify corporate misbehavior and often do so long before financial regulators like the SEC.
Of course, this should not be a surprise; shorts have very strong incentives to do so. Unlike our financial regulators, who keep their jobs regardless of their performance, short sellers put huge amounts of their own money on the line.
As an economist, I'm generally quick to remind others that all policies have both costs and benefits. The same is true for short selling. There have been abuses and frauds.
Shorts can and have profited by spreading false rumors. At least one went so far as to short Sea World and then spread false rumors that the killer whale Shamu was ill. Such rumors can momentarily increase funding costs and divert corporate resources.
The same could be said of unflattering press coverage, but we would never think of silencing the press as an avenue of lessening these real costs.
Short sellers have at times also attempted to leverage the powers of Washington to help cover their bets. Some have contributed to individual members of Congress in the hope that a hearing appears in relation to the object of their short.
Regulators have been urged to open investigations. In cases where there is sufficient evidence, investigations may be merited. One need only recall the years-long efforts to get the SEC to investigate Bernie Madoff.
The SEC and other regulators following up on allegations is part of their jobs, but that should be done quietly until some evidence of guilt is established. As a former Senate committee staffer, I could never imagine organizing a hearing with the purpose of helping a hedge fund cover its bets. The ethics are questionable, to say the least.
So yes, shorting has its costs and its ugly side. But given the perverse and weak incentives of our financial regulators, I have far more confidence in short sellers weeding out corporate misbehavior than I do in the SEC.
My confidence is not based simply on some theoretical model, but on the facts. A 2010 study in the leading finance journal investigated empirically who blows the whistle on corporate fraud. Under a variety of tests, the researchers find that short sellers were consistently one of the primary sources of identifying corporate fraud.
Perhaps more shocking is that short sellers did so at rates far higher than does the SEC. In fact, over the time frame studied, 1996 to 2004, short sellers exposed more than twice the level of corporate fraud exposed by the SEC.
Another 2010 study found that when short sellers discover corporate fraud they cause that fraud to be ultimately discovered sooner, as well as dampening the extent to which stock prices are inflated by corporate misreporting of financial statements.
These findings mean that short sellers not only benefit themselves but also help protect regular retail investors by reducing the amount of time that retail investors are vulnerable to financial misreporting.
The price dampening impact of shorts also reduces the ultimate loss that retail investors would suffer when financial misreporting is eventually revealed. This study, also published in the leading finance journal, estimates that retail investors actually receive more of the benefits of shorting than do the shorts themselves.
One might argue that even a broken clock is correct twice a day. Short enough companies and you will eventually find some guilty of fraud. The evidence here is also conclusive. Shorts are not random. Nor are they riding off the work of others. Short interest is overwhelmingly concentrated in firms that are later revealed to misrepresent their financials.
Short interest also is found to begin long before any initial investigation by regulators or the press. Successful shorting is the result of intensive investigation into financial statements and industry data.
Whether short sellers were "responsible" for the failure of Lehman Bros. is something I will leave for others to debate. What is clear from the academic evidence is that short sellers play an outsize role in weeding out corporate fraud.
Do they get it wrong sometimes? Sure. Do they occasionally push the envelope on ethical behavior? No doubt about it. But do they also protect retail investors from financial fraud and do so at no cost to the taxpayer? You can bet on it.
An article on Investors.com written by Mark Calabria seems to agree:
"Don't Silence Short Sellers, They Play An Important Role"
Former Lehman CEO Richard Fuld's recent public emergence was accompanied with the complaint of many a corporate leader: Don't blame me, blame the short sellers.
During the financial crisis, his was not a lone voice calling for a ban on short selling. The Securities and Exchange Commission ultimately delivered on such due to extensive Wall Street lobbying.
The evidence, however, is overwhelming — short sellers regularly identify corporate misbehavior and often do so long before financial regulators like the SEC.
Of course, this should not be a surprise; shorts have very strong incentives to do so. Unlike our financial regulators, who keep their jobs regardless of their performance, short sellers put huge amounts of their own money on the line.
As an economist, I'm generally quick to remind others that all policies have both costs and benefits. The same is true for short selling. There have been abuses and frauds.
Shorts can and have profited by spreading false rumors. At least one went so far as to short Sea World and then spread false rumors that the killer whale Shamu was ill. Such rumors can momentarily increase funding costs and divert corporate resources.
The same could be said of unflattering press coverage, but we would never think of silencing the press as an avenue of lessening these real costs.
Short sellers have at times also attempted to leverage the powers of Washington to help cover their bets. Some have contributed to individual members of Congress in the hope that a hearing appears in relation to the object of their short.
Regulators have been urged to open investigations. In cases where there is sufficient evidence, investigations may be merited. One need only recall the years-long efforts to get the SEC to investigate Bernie Madoff.
The SEC and other regulators following up on allegations is part of their jobs, but that should be done quietly until some evidence of guilt is established. As a former Senate committee staffer, I could never imagine organizing a hearing with the purpose of helping a hedge fund cover its bets. The ethics are questionable, to say the least.
So yes, shorting has its costs and its ugly side. But given the perverse and weak incentives of our financial regulators, I have far more confidence in short sellers weeding out corporate misbehavior than I do in the SEC.
My confidence is not based simply on some theoretical model, but on the facts. A 2010 study in the leading finance journal investigated empirically who blows the whistle on corporate fraud. Under a variety of tests, the researchers find that short sellers were consistently one of the primary sources of identifying corporate fraud.
Perhaps more shocking is that short sellers did so at rates far higher than does the SEC. In fact, over the time frame studied, 1996 to 2004, short sellers exposed more than twice the level of corporate fraud exposed by the SEC.
Another 2010 study found that when short sellers discover corporate fraud they cause that fraud to be ultimately discovered sooner, as well as dampening the extent to which stock prices are inflated by corporate misreporting of financial statements.
These findings mean that short sellers not only benefit themselves but also help protect regular retail investors by reducing the amount of time that retail investors are vulnerable to financial misreporting.
The price dampening impact of shorts also reduces the ultimate loss that retail investors would suffer when financial misreporting is eventually revealed. This study, also published in the leading finance journal, estimates that retail investors actually receive more of the benefits of shorting than do the shorts themselves.
One might argue that even a broken clock is correct twice a day. Short enough companies and you will eventually find some guilty of fraud. The evidence here is also conclusive. Shorts are not random. Nor are they riding off the work of others. Short interest is overwhelmingly concentrated in firms that are later revealed to misrepresent their financials.
Short interest also is found to begin long before any initial investigation by regulators or the press. Successful shorting is the result of intensive investigation into financial statements and industry data.
Whether short sellers were "responsible" for the failure of Lehman Bros. is something I will leave for others to debate. What is clear from the academic evidence is that short sellers play an outsize role in weeding out corporate fraud.
Do they get it wrong sometimes? Sure. Do they occasionally push the envelope on ethical behavior? No doubt about it. But do they also protect retail investors from financial fraud and do so at no cost to the taxpayer? You can bet on it.
Friday, 13 March 2015
Markets also need negative viewpoints (2)
Quite good article by Reuters about companies being targeted by short sellers or negative reports, in particularly about Noble Group.
Not in the sensational "Short sellers cause havoc, causing huge losses to orphans and widows" kind of style that I (unfortunately) noticed several times in newspaper articles, but much more balanced.
"Noble's concession gives clout to maverick researchers"
Some snippets:
"Almost all of the investment research or opinions disseminated to the market fail to properly scrutinize listed companies. In fact, they are usually nothing more than a dressed up regurgitation of management drivel," Soren Aandahl, director of research at short-seller Glaucus Research, told Reuters.
Sell-side analysts - who recommend stocks to clients - often face a conflict of interest given the banks many work for seek advisory fees from the firms they analyze, Aandahl said.
Activist short-sellers such as Glaucus and company-watchers like Iceberg Research have stepped in to assume the role of corporate antagonists. Short-sellers sell borrowed shares, buy them back at lower prices and pocket the difference. To push a company's share price down, they bring to light, for instance, what they perceive as misleading accounting.
Not in the sensational "Short sellers cause havoc, causing huge losses to orphans and widows" kind of style that I (unfortunately) noticed several times in newspaper articles, but much more balanced.
"Noble's concession gives clout to maverick researchers"
Some snippets:
"Almost all of the investment research or opinions disseminated to the market fail to properly scrutinize listed companies. In fact, they are usually nothing more than a dressed up regurgitation of management drivel," Soren Aandahl, director of research at short-seller Glaucus Research, told Reuters.
Sell-side analysts - who recommend stocks to clients - often face a conflict of interest given the banks many work for seek advisory fees from the firms they analyze, Aandahl said.
Activist short-sellers such as Glaucus and company-watchers like Iceberg Research have stepped in to assume the role of corporate antagonists. Short-sellers sell borrowed shares, buy them back at lower prices and pocket the difference. To push a company's share price down, they bring to light, for instance, what they perceive as misleading accounting.
Friday, 20 February 2015
Markets also need negative viewpoints
I normally quite like Bloomberg's articles, but find the following article not balanced enough:
"Anonymous Analysts Are Wreaking Havoc in the Asian Markets"
The headline is much too aggressive for my liking, the share price of two companies in SE Asia declining caused by negative reports is something else as Asian Markets turning into chaos.
The first paragraph:
"An anonymous researcher releases a report questioning the accounts of a publicly traded company. Investors catch wind of it and sell. The targeted firm denies the allegations, but by then the share-price damage is already done."
I have not yet met a single fraudulent company admitting its fraud at the first instance being confronted by a report. Since both honest and fraudulent companies will deny allegations, the denial itself contains therefore no news.
What could contain news is a detailed write-ups from companies in which they give a point-to-point rebuttal of all the allegations.
Even better, if companies had pre-empted events by providing a high degree of transparency to their shareholders. In Noble's case for instance there was unease for quite some time regarding the valuation of Yancoal, why had it not addressed that issue before? Valuing an asset at 56 times its market value is bound to raise some eyebrows.
Let's assume that short sellers are right in a particular case, then "the share-price damage is already done" is indeed true. But the damage is caused by unscrupulous managers and their financial engineers who have cooked the books, blown lots of hot air in the company, spread rumours etc. The short sellers have merely prevented more future damage (while in some cases profiting handsomely in the mean time, I admit).
Also, some of the allegations by so called short sellers or whistle blowers might need years to pan out. In 1999, financial analyst Harry Markopolos "informed the SEC that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver". It took another nine years before the fraud was finally unravelled, lots of additional damage being done in those years.
A further comment from the Bloomberg article:
“No research should be anonymous,” said Jimmy Ho, president of the Society of Remisiers, Singapore’s biggest association of equity traders.
Whilst I agree that non-anonymous research would be better, I do have sympathy for the reasoning behind it:
Carson Block, the founder of Muddy Waters LLC, said in 2012 he stopped trying to bet against Chinese stocks after workers at a storage company he owns in Shanghai were harassed and unidentified “gangsters” came looking for him.
“Putting our name on the reports gave us more credibility but I understand why people see a need to be anonymous when publishing this kind of information because of the threats and the costs of extra protection,” Block said in an interview on Tuesday in New York.
And:
...independent research reports can be beneficial for investors if they “weed out” companies that are bending accounting rules or engaging in fraudulent activity.
“I’m not concerned about the origins of the report, it’s whether the report is true, accurate and valid ultimately,” said Surtees, whose firm oversees about $50 billion. “Time will tell.”
Another comment by Mr. Ho:
“MAS should make sure analysts do not use their research for their own agenda.”
That also means that analysts (or brokers, bloggers or anyone spreading rumours to increase the share price of a certain company) who write positive reports for their own agenda (or the agenda of their company) should equally be punished. In that case government of all countries in the world should consider quickly building a few more jails for this purpose alone.
News on financial markets is rather biased, and all in a positive way for listed companies:
Despite all these shortcomings, I like the capital markets and am an active and passive (through external fund managers) participant for more than thirty years, both in listed and unlisted companies.
But giving the many biases, there is a clear and urgent need for views from "the other side", views that give critical analysis of companies, that question their accounts and their business models.
Therefore we have to be careful not to immediately jump on top of messengers of bad news.
The three cases mentioned in Bloomberg's article are:
"Anonymous Analysts Are Wreaking Havoc in the Asian Markets"
The headline is much too aggressive for my liking, the share price of two companies in SE Asia declining caused by negative reports is something else as Asian Markets turning into chaos.
The first paragraph:
"An anonymous researcher releases a report questioning the accounts of a publicly traded company. Investors catch wind of it and sell. The targeted firm denies the allegations, but by then the share-price damage is already done."
I have not yet met a single fraudulent company admitting its fraud at the first instance being confronted by a report. Since both honest and fraudulent companies will deny allegations, the denial itself contains therefore no news.
What could contain news is a detailed write-ups from companies in which they give a point-to-point rebuttal of all the allegations.
Even better, if companies had pre-empted events by providing a high degree of transparency to their shareholders. In Noble's case for instance there was unease for quite some time regarding the valuation of Yancoal, why had it not addressed that issue before? Valuing an asset at 56 times its market value is bound to raise some eyebrows.
Let's assume that short sellers are right in a particular case, then "the share-price damage is already done" is indeed true. But the damage is caused by unscrupulous managers and their financial engineers who have cooked the books, blown lots of hot air in the company, spread rumours etc. The short sellers have merely prevented more future damage (while in some cases profiting handsomely in the mean time, I admit).
Also, some of the allegations by so called short sellers or whistle blowers might need years to pan out. In 1999, financial analyst Harry Markopolos "informed the SEC that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver". It took another nine years before the fraud was finally unravelled, lots of additional damage being done in those years.
A further comment from the Bloomberg article:
“No research should be anonymous,” said Jimmy Ho, president of the Society of Remisiers, Singapore’s biggest association of equity traders.
Whilst I agree that non-anonymous research would be better, I do have sympathy for the reasoning behind it:
Carson Block, the founder of Muddy Waters LLC, said in 2012 he stopped trying to bet against Chinese stocks after workers at a storage company he owns in Shanghai were harassed and unidentified “gangsters” came looking for him.
“Putting our name on the reports gave us more credibility but I understand why people see a need to be anonymous when publishing this kind of information because of the threats and the costs of extra protection,” Block said in an interview on Tuesday in New York.
And:
...independent research reports can be beneficial for investors if they “weed out” companies that are bending accounting rules or engaging in fraudulent activity.
“I’m not concerned about the origins of the report, it’s whether the report is true, accurate and valid ultimately,” said Surtees, whose firm oversees about $50 billion. “Time will tell.”
Another comment by Mr. Ho:
“MAS should make sure analysts do not use their research for their own agenda.”
That also means that analysts (or brokers, bloggers or anyone spreading rumours to increase the share price of a certain company) who write positive reports for their own agenda (or the agenda of their company) should equally be punished. In that case government of all countries in the world should consider quickly building a few more jails for this purpose alone.
News on financial markets is rather biased, and all in a positive way for listed companies:
- Managers have a real financial incentive (receiving wages but often also owning a stake in the company) to paint their companies as rosy as possible, they even hire PR companies for that purpose.
- Brokers and the like receive their handsome fees through all kind of financial work for these companies (bringing them to the market, structuring deals, etc.), their research reports are often quite biased (just check how many "buy" reports there are versus "sell" reports). Even if brokers don't have a direct link to a company, they might be involved with one of the other companies of the majority shareholder.
- Professionals like auditors and writers of independent reports too often have a bias towards the companies that pay them: "whose bread I eat, his song I sing".
- Journalists are sometimes hesitant to post negative questions, their papers are sometimes biased towards companies that advertise (a recent example from the UK and the response containing the remarkable admission "All [media organisations] have their own self-serving agendas, both political and commercial").
- Regulators should be on top of their game, but realistically they can't follow hundreds of companies and are not strong in particular fields (like valuations).
Despite all these shortcomings, I like the capital markets and am an active and passive (through external fund managers) participant for more than thirty years, both in listed and unlisted companies.
But giving the many biases, there is a clear and urgent need for views from "the other side", views that give critical analysis of companies, that question their accounts and their business models.
Therefore we have to be careful not to immediately jump on top of messengers of bad news.
The three cases mentioned in Bloomberg's article are:
Thursday, 5 February 2015
Long-term investors should know about short selling skills
Great article by "ContrarianValue Edge":
"What Long Term Investors Can and SHOULD LEARN From Short Sellers"
Some snippets:
Let me make it clear at the outset that I had never done short selling nor do I plan to do in future. But I found principles of short selling technique to be equally helpful to long-term investors. For short sellers the maximum upside is 100% whereas downside is unlimited. These asymmetrical returns force short sellers to be much more diligent and conservative compared to long only investors. I was surprised to note that most successful short sellers never short any stock merely on over-valuation. I am not talking here about short sellers who short a stock in the morning and cover their position by the end of the day. I am talking about short sellers, who after deep analysis create a position and hold on to it until their conviction pays off.
Charlie Munger once said, ‘All I ever want to know is where I’m going to die, so I never go there’. My sole attempt at studying short selling technique is to find what successful short sellers look for in a good short and to avoid such stocks.
Successful short sellers look for the following before they decide to short any stock:
Many interesting links are also to be found in the above article.
A good (albeit almost 20 years old) book is "The Art of Short Selling" by Kathryn Staley:
"What Long Term Investors Can and SHOULD LEARN From Short Sellers"
Some snippets:
Let me make it clear at the outset that I had never done short selling nor do I plan to do in future. But I found principles of short selling technique to be equally helpful to long-term investors. For short sellers the maximum upside is 100% whereas downside is unlimited. These asymmetrical returns force short sellers to be much more diligent and conservative compared to long only investors. I was surprised to note that most successful short sellers never short any stock merely on over-valuation. I am not talking here about short sellers who short a stock in the morning and cover their position by the end of the day. I am talking about short sellers, who after deep analysis create a position and hold on to it until their conviction pays off.
Charlie Munger once said, ‘All I ever want to know is where I’m going to die, so I never go there’. My sole attempt at studying short selling technique is to find what successful short sellers look for in a good short and to avoid such stocks.
Successful short sellers look for the following before they decide to short any stock:
- Business : Secular problems or fundamental change in the nature of business.
- People: Dishonest and incompetent management.
- Balance Sheet: Higher leverage is preferred.
- Profit & Loss account: Quality & Sustainability of earnings. Simple overstatement of earnings is not enough. Short sellers are looking for cases where economic reality is significantly divorced from the accounting presentation of the business.
- Price: Valuation is given least preference by most short sellers.
Many interesting links are also to be found in the above article.
A good (albeit almost 20 years old) book is "The Art of Short Selling" by Kathryn Staley:
Tuesday, 23 December 2014
Hong Kong SFC takes action against short seller Citron
From the Financial Times, some snippets:
Citron Research has become the first shortseller to face action from Hong Kong’s watchdog, which alleges the California-based group knowingly made “false and misleading” claims about Evergrande, the Chinese developer.
Hong Kong’s Securities and Futures Commission on Monday started market misconduct tribunal proceedings against Andrew Left, the head of Citron, for claims made in June 2012 that Evergrande was insolvent and had consistently presented false information.
Shortsellers aim to profit from price falls by borrowing shares they do not own in the expectation that they will be able to buy them back more cheaply. Mr Left made HK$1.7m ($219,251) in profit from selling short 4.1m Evergrande shares before he made his claims, the SFC said.
Mr Left declined to comment.
The Hong Kong action comes as shortsellers fall under increasing scrutiny from Asia’s regulators, who have variously probed the veracity of their claims and their methods. This year, Taiwanese regulators pursued Glaucus Research, another California-based shortseller, while India’s watchdog temporarily banned a small Hong Kong hedge fund for what it said was insider trading.
In June 2012 Evergrande plunged as much as 20 per cent on the day Citron released a 57-page report on the group, which is one of China’s largest developers and a household name for its ownership of the Guangzhou Evergrande Football Club.
Evergrande, which is listed in Hong Kong, had a market capitalisation of about $8.6bn when Citron’s report was published online. It closed the day worth $7.6bn.
Citron is one of the better known of a group of China-focused short-sellers that emerged about five years ago and whose biggest scalp came in 2011 with the collapse of Sino-Forest, a $4bn forestry group, after Muddy Waters, another shortseller, questioned its veracity.
But shortsellers have enjoyed patchier success in recent years as companies have fought back and regulators stepped up their scrutiny. Evergrande was one of the first to issue a robust defence, blasting Citron’s claims and using the sort of colourful language employed by the shorts themselves.
David Webb commented on his website:
"This should be interesting. The SFC will need to show that Andrew Left either knew that his allegations were false or was reckless or negligent as to whether they were, in which case Section 277 of the SFO bites."
Citron Research has become the first shortseller to face action from Hong Kong’s watchdog, which alleges the California-based group knowingly made “false and misleading” claims about Evergrande, the Chinese developer.
Hong Kong’s Securities and Futures Commission on Monday started market misconduct tribunal proceedings against Andrew Left, the head of Citron, for claims made in June 2012 that Evergrande was insolvent and had consistently presented false information.
Shortsellers aim to profit from price falls by borrowing shares they do not own in the expectation that they will be able to buy them back more cheaply. Mr Left made HK$1.7m ($219,251) in profit from selling short 4.1m Evergrande shares before he made his claims, the SFC said.
Mr Left declined to comment.
The Hong Kong action comes as shortsellers fall under increasing scrutiny from Asia’s regulators, who have variously probed the veracity of their claims and their methods. This year, Taiwanese regulators pursued Glaucus Research, another California-based shortseller, while India’s watchdog temporarily banned a small Hong Kong hedge fund for what it said was insider trading.
In June 2012 Evergrande plunged as much as 20 per cent on the day Citron released a 57-page report on the group, which is one of China’s largest developers and a household name for its ownership of the Guangzhou Evergrande Football Club.
Evergrande, which is listed in Hong Kong, had a market capitalisation of about $8.6bn when Citron’s report was published online. It closed the day worth $7.6bn.
Citron is one of the better known of a group of China-focused short-sellers that emerged about five years ago and whose biggest scalp came in 2011 with the collapse of Sino-Forest, a $4bn forestry group, after Muddy Waters, another shortseller, questioned its veracity.
But shortsellers have enjoyed patchier success in recent years as companies have fought back and regulators stepped up their scrutiny. Evergrande was one of the first to issue a robust defence, blasting Citron’s claims and using the sort of colourful language employed by the shorts themselves.
David Webb commented on his website:
"This should be interesting. The SFC will need to show that Andrew Left either knew that his allegations were false or was reckless or negligent as to whether they were, in which case Section 277 of the SFO bites."
Tuesday, 4 November 2014
Porsche: The Hedge Fund that Also Made Cars
Amazing story regarding Porsche and Volkswagen, so weird you can't make it up.
As one commenter wrote: "Game of Thrones - German Car Company Edition"
Some snippets:
Volkswagen, from "was widely considered by the financial community to be a pretty crappy company, which is why it was trading at such a low multiple of revenue" to "the most valuable company in the world".
As a result, Volkswagen became one of the most shorted stocks on the market.
This maneuver of secretly buying shares would have been (and still would be) illegal in the United States. In Germany though, where Porsche is based, it was likely legal.
And precisely when Porsche needed banks the most, banks stopped lending money. The words spoken by the company’s CFO years before -- “banks are there for you when you don’t need them, and when you do need them, they’re no where to be seen” -- now seemed prophetic.
The financial markets were baffled by Porsche’s acquisition of Volkswagen shares. Why was a sports car company pouring so much money into a struggling mass-market car company? It seemed to be the equivalent of a company like Hermes announcing it was taking a large stake in Old Navy.
In the blink of an eye, Porsche went from predator to prey. Once on the brink of acquiring Volkswagen, Porsche now found itself borrowing a billion dollars from them just five months later.
“According to rumour, Ferdinand Piëch likes to run chickens off the road in his Volkswagen Touareg. Whether that is true or not, he certainly tends to ride roughshod over humans, metaphorically at least.”
In 1972, as a married man with five children, Piëch struck up an extra-marital affair with Marlene Porsche -- the wife of his cousin and fellow heir, Gerd Porsche. You can imagine that taking up with your cousin’s wife might make things awkward at Porsche-Piëch family reunions and company board meetings.
So, what is to be learned from the saga of Porsche?
First, if you’re a car company, it’s probably best to focus on making cars instead of gravity-defying financial maneuvers.
Second, capital has a tendency to be there when times are great, but disappears when you need it most.
Finally, if you’re going to go shoot the king, don’t miss.
I wrote before about the hedge fund shorting Volkswagen's shares.
As one commenter wrote: "Game of Thrones - German Car Company Edition"
Some snippets:
Volkswagen, from "was widely considered by the financial community to be a pretty crappy company, which is why it was trading at such a low multiple of revenue" to "the most valuable company in the world".
As a result, Volkswagen became one of the most shorted stocks on the market.
This maneuver of secretly buying shares would have been (and still would be) illegal in the United States. In Germany though, where Porsche is based, it was likely legal.
And precisely when Porsche needed banks the most, banks stopped lending money. The words spoken by the company’s CFO years before -- “banks are there for you when you don’t need them, and when you do need them, they’re no where to be seen” -- now seemed prophetic.
The financial markets were baffled by Porsche’s acquisition of Volkswagen shares. Why was a sports car company pouring so much money into a struggling mass-market car company? It seemed to be the equivalent of a company like Hermes announcing it was taking a large stake in Old Navy.
In the blink of an eye, Porsche went from predator to prey. Once on the brink of acquiring Volkswagen, Porsche now found itself borrowing a billion dollars from them just five months later.
“According to rumour, Ferdinand Piëch likes to run chickens off the road in his Volkswagen Touareg. Whether that is true or not, he certainly tends to ride roughshod over humans, metaphorically at least.”
In 1972, as a married man with five children, Piëch struck up an extra-marital affair with Marlene Porsche -- the wife of his cousin and fellow heir, Gerd Porsche. You can imagine that taking up with your cousin’s wife might make things awkward at Porsche-Piëch family reunions and company board meetings.
So, what is to be learned from the saga of Porsche?
First, if you’re a car company, it’s probably best to focus on making cars instead of gravity-defying financial maneuvers.
Second, capital has a tendency to be there when times are great, but disappears when you need it most.
Finally, if you’re going to go shoot the king, don’t miss.
I wrote before about the hedge fund shorting Volkswagen's shares.
Wednesday, 15 October 2014
Jim Chanos: "The Biggest Short"
Great article by Steven Drobny about Jim Chanos, the well known short seller.
Chanos recommends his fund as an insurance, for all investors who have a sizeable "long" portfolio in shares. Chanos will do well when shares tank, and bad if shares rise. But from time to time there is an industry (for instance property developers) that is badly hit while the overall market rises, in those times both Chanos' fund (shorting that industry) and the overall index can rise.
I normally don't short particular shares (I do from time to time short an index, but only rarely), but even then Chanos' observations are interesting. The way to discover candidates to short is basically the same as the way to discover which shares to avoid like the plague.
Also, observations about China's economy and it's huge property bubble.
Chanos recommends his fund as an insurance, for all investors who have a sizeable "long" portfolio in shares. Chanos will do well when shares tank, and bad if shares rise. But from time to time there is an industry (for instance property developers) that is badly hit while the overall market rises, in those times both Chanos' fund (shorting that industry) and the overall index can rise.
I normally don't short particular shares (I do from time to time short an index, but only rarely), but even then Chanos' observations are interesting. The way to discover candidates to short is basically the same as the way to discover which shares to avoid like the plague.
Also, observations about China's economy and it's huge property bubble.
Monday, 14 July 2014
Got ’em, Gotham
Good article in The Economist about the Gowex fraud, some snippets:
Gowex’s dramatic collapse marks one of the biggest victories for a relatively new breed of company-accounts “detectives”: small, independent research-and-investment outfits that revel in unearthing alleged book-cooking. Having focused largely on China’s fraud-filled market until now, they are branching out.
Gotham’s approach is to short and shout: it takes a negative investment position, then noisily publicises its findings. It is cut from the same cloth as Muddy Waters, which is run by Carson Block, a former self-storage entrepreneur. His biggest scalp to date is Sino-Forest, which went bust in 2012 after Muddy Waters accused it of overstating its forest holdings in China. Another such outfit is Citron Research, whose leader, Andrew Left, prides himself on never having been successfully sued for defamation.
Gotham spent eight months studying Gowex, amassing far better information than investment-bank analysts, most of whom were still recommending the shares when it buckled. Gotham spotted that Gowex used a little-known auditor (a classic red flag: see the Bernard Madoff case), whose fees were unusually low, as if they were based on revenue far smaller than Gowex’s books stated. Often, the sleuths comb the books for ratios that are hard to manipulate. Gotham also noted, for instance, that Gowex’s revenue per employee was implausible compared with rivals’—while the revenue could be inflated, it was harder to fake the headcount.
..... market regulators often eye them [short sellers] with suspicion: Spain’s at first reacted to Gotham’s report by investigating its publisher, not Gowex. China has cracked down on shorts, even imprisoning the writer of one negative report.
.... perhaps two-thirds of cases involve improper revenue recognition. New global accounting rules announced in May seek to curb one common ruse, booking sales prematurely, for instance on long-term contracts. But sometimes the revenues are simply invented, often by getting a related party to pose as a customer. Sometimes very closely related: Gotham said in its report on Gowex that it had evidence the firm’s biggest customer “was really itself.”
In the Malaysian context, no case of short sellers "attacking" a company has happened, nor do I expect that in the near future, despite Malaysia having its fair share of accounting frauds. It would be interesting though if something like the above would happen, given the "shoot the messenger" mentality. How would the company, the regulators and the press react?
Gowex’s dramatic collapse marks one of the biggest victories for a relatively new breed of company-accounts “detectives”: small, independent research-and-investment outfits that revel in unearthing alleged book-cooking. Having focused largely on China’s fraud-filled market until now, they are branching out.
Gotham’s approach is to short and shout: it takes a negative investment position, then noisily publicises its findings. It is cut from the same cloth as Muddy Waters, which is run by Carson Block, a former self-storage entrepreneur. His biggest scalp to date is Sino-Forest, which went bust in 2012 after Muddy Waters accused it of overstating its forest holdings in China. Another such outfit is Citron Research, whose leader, Andrew Left, prides himself on never having been successfully sued for defamation.
Gotham spent eight months studying Gowex, amassing far better information than investment-bank analysts, most of whom were still recommending the shares when it buckled. Gotham spotted that Gowex used a little-known auditor (a classic red flag: see the Bernard Madoff case), whose fees were unusually low, as if they were based on revenue far smaller than Gowex’s books stated. Often, the sleuths comb the books for ratios that are hard to manipulate. Gotham also noted, for instance, that Gowex’s revenue per employee was implausible compared with rivals’—while the revenue could be inflated, it was harder to fake the headcount.
..... market regulators often eye them [short sellers] with suspicion: Spain’s at first reacted to Gotham’s report by investigating its publisher, not Gowex. China has cracked down on shorts, even imprisoning the writer of one negative report.
.... perhaps two-thirds of cases involve improper revenue recognition. New global accounting rules announced in May seek to curb one common ruse, booking sales prematurely, for instance on long-term contracts. But sometimes the revenues are simply invented, often by getting a related party to pose as a customer. Sometimes very closely related: Gotham said in its report on Gowex that it had evidence the firm’s biggest customer “was really itself.”
In the Malaysian context, no case of short sellers "attacking" a company has happened, nor do I expect that in the near future, despite Malaysia having its fair share of accounting frauds. It would be interesting though if something like the above would happen, given the "shoot the messenger" mentality. How would the company, the regulators and the press react?
Friday, 25 October 2013
Short seller Muddy Waters targets NQ Mobile
Article on Dealbook's website:
After Muddy Waters Report, NQ Mobile Falls by Half
When the stock market opened on Thursday, NQ Mobile, a Chinese mobile security company, had a valuation of $1.1 billion. Just hours later, half of its value was erased.
Call it the Muddy Waters effect. A short-selling firm known for its scathing reports on Chinese companies, Muddy Waters released a harsh assessment of NQ Mobile on Thursday, calling it a “massive fraud.”
NQ Mobile immediately experienced a stomach-turning plunge, with its shares falling more than 50 percent. The stock, which opened the day at $23 a share, fell as low as $8.46 before recovering slightly to close at $12.09. The company is listed on the New York Stock Exchange.
In its research note, Muddy Waters argued that “at least 72 percent of NQ’s purported 2012 China security revenue is fictitious,” saying the company was a “zero.”
“NQ’s largest customer by far is really NQ,” Muddy Waters, which is run by Carson C. Block, said. The note added that the company’s “future is as bleak as its past,” and that its “acquisitions are highly likely to be corrupt.”
In a statement, NQ said the accusations were “false,” adding that it would issue a more detailed response before the market opens in the United States on Friday.
“NQ Mobile will respond quickly, transparently and forcefully to these false allegations regarding our company,” the statement said.
Muddy Water's report can be found here.
After Muddy Waters Report, NQ Mobile Falls by Half
When the stock market opened on Thursday, NQ Mobile, a Chinese mobile security company, had a valuation of $1.1 billion. Just hours later, half of its value was erased.
Call it the Muddy Waters effect. A short-selling firm known for its scathing reports on Chinese companies, Muddy Waters released a harsh assessment of NQ Mobile on Thursday, calling it a “massive fraud.”
NQ Mobile immediately experienced a stomach-turning plunge, with its shares falling more than 50 percent. The stock, which opened the day at $23 a share, fell as low as $8.46 before recovering slightly to close at $12.09. The company is listed on the New York Stock Exchange.
In its research note, Muddy Waters argued that “at least 72 percent of NQ’s purported 2012 China security revenue is fictitious,” saying the company was a “zero.”
“NQ’s largest customer by far is really NQ,” Muddy Waters, which is run by Carson C. Block, said. The note added that the company’s “future is as bleak as its past,” and that its “acquisitions are highly likely to be corrupt.”
In a statement, NQ said the accusations were “false,” adding that it would issue a more detailed response before the market opens in the United States on Friday.
“NQ Mobile will respond quickly, transparently and forcefully to these false allegations regarding our company,” the statement said.
Saturday, 31 August 2013
Glaucus whacks China Minzhong
I updated the below posting several times with new information that I found. Very interesting is this link from Lighthouse Advisors in which they explained in their June 2012 report (starting the last paragraph of page 3) why they divested their stake in Minzhong.
As far as I can see, all the reasons given sound reasonable and might strengthen the case for Glaucus Research:
I wrote one time before about short seller Glaucus, from an article in The Business Times (Singapore):
"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."
Glaucus Research is one of those research institutions who focus on short selling of possible frauds and/or overvalued companies. Its website can be found here.
For those who question their motives, they are very open about it in their disclaimer:
Other well known short sellers are Muddy Waters, Citron Research and James Chanos.
Some more information on Glaucus Research can be found in this interview with Soren Aandahl in the SCMP.
The same founder was interviewed in The Edge, and mentioned that they were actively looking into a Singaporean company. Well, the Singapore share market didn't have to wait long. On Monday August 26, 2013 Glaucus published its report about Singapore listed China company "China Minzhong Food Corporation".
The information that it contained is highly damaging, that is, if it is indeed true. It is also insightful, how these short sellers do their research and what indicators they look at. One suspicious indicator was that the margins of Minzhong compared to other players in the same industry were just much too good to be true. Something else was that the company claimed to make a lot of profit, but it didn't show up in the cash.
One interesting chart in the report reveals the large number of S-chips (China companies listed in Singapore) that have gone down so far:
Worrisome, also since many of the better auditors were involved, apparently that is no guarantee that the accounts can be trusted.
A lot of supporting evidence on China Minzhong (either directly or circumstantial) is presented in the 49 page report, plus several documents as supplemental evidence.
On a side note, in Glaucus' report about China Metal Recycling (which company the SFC tries to wind up, meaning the allegations were indeed true) it does mention, rather interestingly, that it received a lot of support from local Chinese organisations in their search for evidence.
At least one prediction came true so far:
"we believe that Singapore regulators will halt trading of Minzhong's shares pending a full investigation into the Company".
That did indeed happen, after the share tumbled about 50% in high turnover in a matter of just two hours.
One letter in the Singapore media suggested that the SGX should have halted trading more early, and that circuit breakers would have had the desired effect.
Regarding the quality of the allegations by Glaucus, I leave it to the readers to form their own opinion, they do appear rather convincing to me. A lot of discussion is going on at the Valuebuddies forum regarding this case. A good write up can be found here, from blogger "Ninja Master Fund".
China Minzhong so far has only reacted in a rather standard letter (which can be found on the SGX website), without any detail at all, just claiming that Glaucus "misunderstood" their business model.
We have to wait for much more specific information regarding the detailed allegations by Glaucus, that Minzhong overstated their revenue and profit significantly and other serious matters.
Minzhong did release their quarterly earnings numbers, which on the surface appear to be very good.
But the million dollar question is: are they really believable? According to Glaucus, they aren't.
In one contest however, Glaucus seems to have the clear advantage, the beauty of their logo.
Glaucus:
China Minzhong:
Bursa Malaysia has recently started to promote short selling. Are they ready for these kind of events, if something similar would occur? Would they welcome short sellers like Glaucus Research?
And on another matter, are they really still keen to list Chinese company on Bursa?
To the Malaysian readers: Happy Merdeka.
As far as I can see, all the reasons given sound reasonable and might strengthen the case for Glaucus Research:
- Two comparable businesses are Chaoda Modern (almost certainly a fraud) and China Green (fair share of CG issues)
- Limited management ownership of Minzhong who received their shares at almost zero cost gives a temptation for the management to act in their own benefit at the expense of that of the other shareholders
- GIC of Singapore came in much more early than the IPO, they might have done due diligence in 2006, but the company has changed a lot since then
- The business model is cash flow negative, the land is leased and thus the company can not borrow against it, share placements are far more likely than dividends
I wrote one time before about short seller Glaucus, from an article in The Business Times (Singapore):
"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."
Glaucus Research is one of those research institutions who focus on short selling of possible frauds and/or overvalued companies. Its website can be found here.
For those who question their motives, they are very open about it in their disclaimer:
Other well known short sellers are Muddy Waters, Citron Research and James Chanos.
Some more information on Glaucus Research can be found in this interview with Soren Aandahl in the SCMP.
The same founder was interviewed in The Edge, and mentioned that they were actively looking into a Singaporean company. Well, the Singapore share market didn't have to wait long. On Monday August 26, 2013 Glaucus published its report about Singapore listed China company "China Minzhong Food Corporation".
The information that it contained is highly damaging, that is, if it is indeed true. It is also insightful, how these short sellers do their research and what indicators they look at. One suspicious indicator was that the margins of Minzhong compared to other players in the same industry were just much too good to be true. Something else was that the company claimed to make a lot of profit, but it didn't show up in the cash.
One interesting chart in the report reveals the large number of S-chips (China companies listed in Singapore) that have gone down so far:
Worrisome, also since many of the better auditors were involved, apparently that is no guarantee that the accounts can be trusted.
A lot of supporting evidence on China Minzhong (either directly or circumstantial) is presented in the 49 page report, plus several documents as supplemental evidence.
On a side note, in Glaucus' report about China Metal Recycling (which company the SFC tries to wind up, meaning the allegations were indeed true) it does mention, rather interestingly, that it received a lot of support from local Chinese organisations in their search for evidence.
At least one prediction came true so far:
"we believe that Singapore regulators will halt trading of Minzhong's shares pending a full investigation into the Company".
That did indeed happen, after the share tumbled about 50% in high turnover in a matter of just two hours.
One letter in the Singapore media suggested that the SGX should have halted trading more early, and that circuit breakers would have had the desired effect.
Regarding the quality of the allegations by Glaucus, I leave it to the readers to form their own opinion, they do appear rather convincing to me. A lot of discussion is going on at the Valuebuddies forum regarding this case. A good write up can be found here, from blogger "Ninja Master Fund".
China Minzhong so far has only reacted in a rather standard letter (which can be found on the SGX website), without any detail at all, just claiming that Glaucus "misunderstood" their business model.
We have to wait for much more specific information regarding the detailed allegations by Glaucus, that Minzhong overstated their revenue and profit significantly and other serious matters.
Minzhong did release their quarterly earnings numbers, which on the surface appear to be very good.
But the million dollar question is: are they really believable? According to Glaucus, they aren't.
In one contest however, Glaucus seems to have the clear advantage, the beauty of their logo.
Glaucus:
China Minzhong:
Bursa Malaysia has recently started to promote short selling. Are they ready for these kind of events, if something similar would occur? Would they welcome short sellers like Glaucus Research?
And on another matter, are they really still keen to list Chinese company on Bursa?
To the Malaysian readers: Happy Merdeka.
Tuesday, 6 August 2013
Weekly roundup
Several interesting articles in Singaporean newspapers:
[1] Article about Claire Barnes and the Apollo fund managed by her, one of the best performing funds in Asia. Warren Buffett often warned investors in Berkshire Hathaway that the performance of the previous years would not be able to sustain. This humility is typical of good fund managers and Claire Barnes is no exception, she explains the stellar performance of her fund for a good part on the initial years which coincided with the Asian crisis, when some unbelievable bargains were available. Peter Lynch was a successful fund manager for Fidelity, but he was very much disappointed once he found out that investors on average had actually lost money in his fund. The reason was that much more money was invested when the index had gone up a lot, and money was withdrawn when the index had gone down a lot. The Apollo Fund has closed on occasions, when Claire Barnes had problems finding value. This seems to make perfect sense.
[2] Article about AirAsia X CEO Azran Osman Rani and his entrepreneurial background. Great story, also touching on his twitter against racism. I have issues with Corporate Governance in both AirAsia and AirAsia X and have written several times about them, but I do admire the people who run these businesses.
[3] Article about BFM 89.9 founder and CEO Malek Ali and his entrepreneurial journey, another great story. However, also a less great paragraph, Malek was summoned to Malaysia's Communications & Multimedia Commission (MCMC) where he had to explain why his radiostation invited someone from the Economist Intelligence Unit (EIU) to discuss its Global Democracy Index. More about this index can be found here and here. Malaysia was classified as a "flawed democracy", which is less bad than it sounds, it means Malaysia is in the 2nd category out of 4, and ranked 71st out of 167 countries. Apparently the results from the EIU were deemed to be not favourable enough for the powers that be, hence the need to call Malek, a very worrisome development.
[4] Article in The Business Times about the important role that short sellers play in governance, highlighting the case of China Metals Recycling (CMR), which is the latest China company to come under official scrutiny amid allegations involving inflated accounts:
"What's interesting from a markets and governance perspective is that the allegations about CMR's finances first surfaced in January when US short-selling firm Glaucus Research Group published a report recommending a "strong sell" because, among various reasons, CMR's claim (on its website) that it is China's largest scrap metal recycler was a "lie" and that "many of the company's key financial and operational metrics deviate so significantly from other scrap metal recyclers that its reported performance defies credibility".
"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."
[5] Everything was going nicely with MISC, minority investors rejected the low offer from PETRONAS (a nice and rather rare victory for shareholder activism in Malaysia) and the share recovered to a price that was higher than the offer price (again, indicating that the offer was really not sufficient). But things have changed quickly, PETRONAS wants to ship the liquid gas themselves. With PETRONAS controlling MISC (whose main source of input is the transport of liquid gas), a clear conflict of interest situation will be created. I hope that PETRONAS will reconsider their plans, this new development doesn't sound like a good idea at all. KiniBiz's "Tiger" asked the following pertinent questions:
• Is it Petronas’ intention to deliberately undermine MISC’s prospects so that the price can be depressed for another future takeover offer by Petronas?
• If it is, is it the right way for Petronas to behave as a national oil corporation which has or should have high standards of corporate governance?
• Is this what we can expect from Petronas in terms of its other listed subsidiaries — go to the market, get investors, try and privatise for a low price and if that fails, deliberately sabotage that listed company so as to mount another takeover on it?
• Is this an act of vengeance that the misguided management is trying to impose on minority shareholders for rejecting the offer, even if the move will ultimately undermine and perhaps even destroy its very own subsidiary?
[6] My article "Maemode: accurate predictions by Ze Moola, but why did nobody notice?" received quite a lot of web traffic. I uncovered some more issues and hope to revisit this subject in the future in more detail.
[7] There has been speculation in the press of an IPO of POSH Semco, a subsidiary of POSH in which Maybulk has invested close to RM 1 Billion. I don't like to react on speculation (which has been proven so often to be wrong), I just like to point out that POSH itself (the mother company of POSH Semco) was supposed to be listed within 5 years, a term that will expire before the end of this year. Also, there is still a put option by Maybulk to sell back their stake in POSH at a premium of 25% to their purchase price. I have written many times about the extremely pricey purchase of POSH by Maybulk during the depth of the global crisis, especially regarding the questionable valuation report and the biased independent report. I hope that the minority investors are given the right to decide if the put option will be exercised or not, and that the majority investors will abstain from voting, although I doubt this will actually happen.
[8] And lastly some good news reports KiniBiz, which can be seen as another victory for shareholder activism in Malaysia:
"Final ‘voluntary termination’ payments were issued today in a media conference called by the management company of the beleaguered Country Heights Grower Scheme.....
Today’s payment by the management company of the scheme, Plentiful Gold-Class to CIMB Commerce Trustee comprised a 90% capital refund of RM182.9 million, unclaimed monies with regard to the first 10% capital refund and a goodwill payment of RM25 million by Lee Kim Yew, the founder and head of the Country Heights Grower Scheme."
[1] Article about Claire Barnes and the Apollo fund managed by her, one of the best performing funds in Asia. Warren Buffett often warned investors in Berkshire Hathaway that the performance of the previous years would not be able to sustain. This humility is typical of good fund managers and Claire Barnes is no exception, she explains the stellar performance of her fund for a good part on the initial years which coincided with the Asian crisis, when some unbelievable bargains were available. Peter Lynch was a successful fund manager for Fidelity, but he was very much disappointed once he found out that investors on average had actually lost money in his fund. The reason was that much more money was invested when the index had gone up a lot, and money was withdrawn when the index had gone down a lot. The Apollo Fund has closed on occasions, when Claire Barnes had problems finding value. This seems to make perfect sense.
[2] Article about AirAsia X CEO Azran Osman Rani and his entrepreneurial background. Great story, also touching on his twitter against racism. I have issues with Corporate Governance in both AirAsia and AirAsia X and have written several times about them, but I do admire the people who run these businesses.
[3] Article about BFM 89.9 founder and CEO Malek Ali and his entrepreneurial journey, another great story. However, also a less great paragraph, Malek was summoned to Malaysia's Communications & Multimedia Commission (MCMC) where he had to explain why his radiostation invited someone from the Economist Intelligence Unit (EIU) to discuss its Global Democracy Index. More about this index can be found here and here. Malaysia was classified as a "flawed democracy", which is less bad than it sounds, it means Malaysia is in the 2nd category out of 4, and ranked 71st out of 167 countries. Apparently the results from the EIU were deemed to be not favourable enough for the powers that be, hence the need to call Malek, a very worrisome development.
[4] Article in The Business Times about the important role that short sellers play in governance, highlighting the case of China Metals Recycling (CMR), which is the latest China company to come under official scrutiny amid allegations involving inflated accounts:
"What's interesting from a markets and governance perspective is that the allegations about CMR's finances first surfaced in January when US short-selling firm Glaucus Research Group published a report recommending a "strong sell" because, among various reasons, CMR's claim (on its website) that it is China's largest scrap metal recycler was a "lie" and that "many of the company's key financial and operational metrics deviate so significantly from other scrap metal recyclers that its reported performance defies credibility".
"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."
[5] Everything was going nicely with MISC, minority investors rejected the low offer from PETRONAS (a nice and rather rare victory for shareholder activism in Malaysia) and the share recovered to a price that was higher than the offer price (again, indicating that the offer was really not sufficient). But things have changed quickly, PETRONAS wants to ship the liquid gas themselves. With PETRONAS controlling MISC (whose main source of input is the transport of liquid gas), a clear conflict of interest situation will be created. I hope that PETRONAS will reconsider their plans, this new development doesn't sound like a good idea at all. KiniBiz's "Tiger" asked the following pertinent questions:
• Is it Petronas’ intention to deliberately undermine MISC’s prospects so that the price can be depressed for another future takeover offer by Petronas?
• If it is, is it the right way for Petronas to behave as a national oil corporation which has or should have high standards of corporate governance?
• Is this what we can expect from Petronas in terms of its other listed subsidiaries — go to the market, get investors, try and privatise for a low price and if that fails, deliberately sabotage that listed company so as to mount another takeover on it?
• Is this an act of vengeance that the misguided management is trying to impose on minority shareholders for rejecting the offer, even if the move will ultimately undermine and perhaps even destroy its very own subsidiary?
[6] My article "Maemode: accurate predictions by Ze Moola, but why did nobody notice?" received quite a lot of web traffic. I uncovered some more issues and hope to revisit this subject in the future in more detail.
[7] There has been speculation in the press of an IPO of POSH Semco, a subsidiary of POSH in which Maybulk has invested close to RM 1 Billion. I don't like to react on speculation (which has been proven so often to be wrong), I just like to point out that POSH itself (the mother company of POSH Semco) was supposed to be listed within 5 years, a term that will expire before the end of this year. Also, there is still a put option by Maybulk to sell back their stake in POSH at a premium of 25% to their purchase price. I have written many times about the extremely pricey purchase of POSH by Maybulk during the depth of the global crisis, especially regarding the questionable valuation report and the biased independent report. I hope that the minority investors are given the right to decide if the put option will be exercised or not, and that the majority investors will abstain from voting, although I doubt this will actually happen.
[8] And lastly some good news reports KiniBiz, which can be seen as another victory for shareholder activism in Malaysia:
"Final ‘voluntary termination’ payments were issued today in a media conference called by the management company of the beleaguered Country Heights Grower Scheme.....
Today’s payment by the management company of the scheme, Plentiful Gold-Class to CIMB Commerce Trustee comprised a 90% capital refund of RM182.9 million, unclaimed monies with regard to the first 10% capital refund and a goodwill payment of RM25 million by Lee Kim Yew, the founder and head of the Country Heights Grower Scheme."
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