Fuzzy Logic: Those Who Fail to Learn From History...
I firmly believe the influx of people (many "quants" but others as
well) in Finance over the past decade who posess little-to-no knowledge
of Financial history contributed to the bubble and the resulting
Unfortunately, many of these people who know not the many, many
lessons of financial history are lured into finance by the promise of
money and all that comes with it. More unfortunately, despite the many
and various lessons of which we've been recently reminded during/after
this most recent crash, many of these people are still among us.
Today, I read an article about China Media Express Holdings,
and how its going to be the biggest short squeeze the author has ever
seen/of 2011. My 1st reaction was that whoever this author was (I'd
never heard of him), he must not have been around for very long.
Remember Volkswagen (to use but one recent example)?
Apparently the short thesis is that the company is a fraud. I do
not know this company well, so I can't speak to that point, however, I
CAN and will now, for your viewing pleasure, proceed to destroy the
author's rationale for why the firm ISN'T a fraud. He says:
1. CCME has been fully vetted by Starr International -- headed by Hank Greenberg --4 months. Also on the board of directors and checks monthly numbers.
Big deal. Remember AIG Financial Products?
Bang-up job they did! Surely all the problems started after Greenberg
left (debatable). Regardless, numbers can be fudged, easily. More on
this later. Additionally, 4 months is not a sufficiently-long track
record for this point to be used to support a long thesis in my opinion.
2. CCME has been independently vetted by Global Hunter -- 3 months.
What the hell is a Global Hunter? Is that a video game? Again, 3 months is not a very long time at all...
3. CCME has a top four auditor, Deloitte.
4. It is #1 on the Forbes China List of Small-to-Medium Sized Companies with the Greatest Potential.
If you get your investment advice from Forbes you should just give me all your money now and save yourself the trouble.
5. Its Zack's Rank is #1.
6. Investors Business Daily gives CCME top marks, best marks out there actually.
Yea, "top marks" for EPS growth, but IBD doesn't even rate CCME as the top stock in its group! High EPS growth alone does not a solid long-thesis make.
7. Its CFO is a former auditor of Price Waterhouse Coopers, who just bought $1.5 million of stock.
I'm more inclined to consider this an orange (if not red) flag, rather than a green one. Sure, it's good for a CFO
to have a solid grasp of accounting, but posession of such knowledge
can be used for trickery, as well. Again, more on this later
8. Dividend policy starting in the next 90 days.
And the point is what, exactly? No firm that was eventually proven a fraud paid a dividend? Challenge.
Have all of these companies confirmed these contracts not only exist, but exist as CCME has represented?
10. Independent investors have visited the company and not found indication of fraud.
Ask Sam Antar, co-mastermind behind the Crazy Eddie fraud(s). Just because you can't see fraud doesn't mean it isn't there.
11. Mike Koza, who has averaged 33% a year for almost 10 years, owns CCME.
What % of his portfolio does his CCME holdings represent? How long
has he held it for? What's his investment thesis? Is it a momentum
play or a fundamental one? In order for this last point to hold any
credibility as a reason to be long the stock, each of these questions
needs to be addressed.
Their rationale seems to be a bit stronger than Bradford's:
Muddy Waters LLC has initiated coverage on China MediaExpress Holdings, Inc. (CCME) with a Strong Sell rating and an estimated value of $5.28.
- Muddy Waters, LLC believes that CCME is engaging in a massive “pump
and dump” scheme whereby it significantly inflates revenue and profits
in order to enrich management through earn-outs and stock sales.
- We estimate that CCME’s actual 2009 revenue was no more than $17 million (versus $95.9 million it reported).
- The data CCME provides to advertisers shows that it has fewer than half of the 27,200 buses it claims to have.
- The CTR reports that the Company uses to support its claims contain
gross errors that we conclude are due to manipulation by the management.
- We estimate that over half of CCME’s network buses do not actually
play CCME content. Rather, drivers play DVD movies that are often
provided by passengers.
- We caught CCME’s management telling a particularly
egregious lie – that its new website (www.switow.com) has entered into
an agreement with Apple (or one of Apple’s) distributors. Neither is
- Similar to RINO, CCME is an obscure company in its industry. Media
buyers who would have to know it if CCME were to be believed have never
even heard the Company’s name before.
- CCME’s core audience is sub-Greyhound Bus demographic.
Only time will tell how this shakes-out but today, it looks like
that call for a massive short-squeeze was not only premature, but
extremely naive. CCME is already down 33% on the news today.
I don't like engaging in ad-hominem attacks but the author, Glen Bradford's investing experience/background (provided in his bio),
in consists of a bachelors in engineering combined with an MBA (one of
those 3+2 programs), which he completed less than a year ago. It also
looks like he's been trading his own account for 2 or 3 years (maybe
more?) quite successfully.
I don't know Glen, but from reading this article and a few of his
others, he strikes me as one of the people I mentioned earlier. A guy
with brains and drive who thinks he can "make it" in Finance, yet
possesses little-to-no knowledge of the many lessons learned by
If you don't know the stories of LTCM, Enron, Tyco, Worldcom, Adelphia, Global Crossing, the S&L Crisis, how portfolio insurance contributed to the 1987 crash, or countless other lessons going back centuries, then you have no business investing your or anyone else's money.
Actually, wait. Go ahead and try to be an investor, just don't be
surprised when your ignorance comes around to bite you in the ass.