Quick one here…
There’s an ancient saying we have here on Wall Street that originated in the Old West: “When they raid the whorehouse, they take the piano player too.”
One of the most successful Chinese companies in existence, Sina.com (SINA), had been getting the reverse merger treatment, dropping some 40 points in a week on accounting rumors before finally bouncing yesterday. SINA was supposed to be “one of the real ones” so this sell-off has been a particularly shocking experience for holders of the stock.
My friend Eric Von Marketshot III‘s chart below to illustrate:
I’m going to give you the very simple reason why this went on because the concept is important for all investors and traders to understand.
Chinese stocks have been falling from the sky as more and more investors wake up to the fact that there is a systemic fraud problem, especially in the reverse merger ones. SINA and a handful of more established China stocks had been able to stay above the fray…until now. There are big institutional investors in these stocks with more than just money on the line. They have reputations at risk and cannot afford to stay in these stocks hoping the one they own is not a fraud.
They must shoot first and ask questions later.
Or face humiliation like the institutions who were trapped in Sino Forest (TRE.TO) during its halt and subsequent bludgeoning last week…
The remarks set off a sharp sell-off in shares of the company, Sino-Forest, prompting Canadian authorities to temporarily halt trading. Since the report, the stock has fallen more than 70 percent, erasing billions of dollars in value from a company whose investors include Paulson & Company, the hedge fund run by the billionaire John A. Paulson.
Can you imagine you think you own a forestry and timber company and then there is a question about whether they even own any trees at all? Painful for an individual investor, an absolute nightmare if you’re a pro.
According to the most recent 13F filings, SINA has such institutional holders as Wells Fargo, UBS, T. Rowe Price and a few dozen hedge funds with significant stakes. As much as they may love SINA the company, I can assure you that holding the stock through fraud allegations represents an asymmetrical risk to them in the form of looking stupid.
When you’re running 9 figures or charging 2 and 20, having a Chinese internet stock make a monkey out of you simply will not do.