Nobody can doubt that (in)famous short seller Muddy Waters, whose initial research pieces received broad distribution on the virtual pages of Zero Hedge, does sufficient due diligence on the companies they designate as targets of their ire. And just for humiliating John Paulson with the utter debacle that was Sino Forest they will forever live in the pantheon of "out of the blue", ad hoc bearish research analysts with a chip on their shoulder. Furthermore, right or wrong, Muddy Waters and their fraudcap peers do a great benefit to the investing society by testing, often repeatedly, the weakest links in the "story" of any one company (especially those out of the increasingly more criminal orient) - if right, it merely precipitates the bankruptcy of what will be a dead end corporate story and thus the misallocation of capital by lazier investors; if wrong, they allow management to generate higher IRRs by buying back their stock in the open market (a far better use of funds for honest management teams than suing independent third party research analysts who may or may not have a short stake). Yet sooner or later, everyone peaks. Has Muddy Waters? This is perhaps a relevant question now that the shorters have taken up another campaign, this time against Singapore agri-processor Olam. The raw data, compiled by Bloomberg is below: decide for yourselves.
Presented in chronological order:
- Orient Paper down 77% (ONP - June 28, 2010)
- RINO International down more than 99% (RINO - Nov. 10, 2010)
- China MediaExpress delisted after losing more than 99% (CCME - Feb. 3, 2011)
- Duoyuan Global Water down 96% (DGWIY - April 4, 2011)
- Sino-Forest delisted after falling 74% (TRE CN - June 2, 2011)
- Focus Media down 3.8% (FMCN - Nov. 21, 2011); FMCN then gained 59% since plunging 39% on day Muddy Waters issued report
- New Oriental up 32% (EDU - Muddy Waters report dated July 18, 2012); EDU has more than doubled since falling 35% on day Muddy Waters issued report; that followed 34% drop the previous day, when co. said it was subject of SEC investigation
To not beat around the bush, was the June 2011 Sino Forest thesis MW's last magnum opus, and has all the low hanging fruit been picked already?
We have every confidence that Carson Block and company have only the purest of intentions (facilitated by a variety of incentives of course, monetary and otherwise), but perhaps it is time to reevaluate the business model. Because the last thing Muddy wants is to become the "fade" itself. One or two more flops, and the work product of the company, that may or may not be trying to raise capital to become a hedge fund, could easily become counterproductive.
And just a thought: China has more than enough fraud but how about targeting some US-based fraudcaps and criminal management teams for a change. There are plenty. And with cash flows imploding, and the bulk of US companies relying on GAAP tinkering and balance sheet shenanigans to carry them over until free cash flow "returns" (which in the New Normal won't happen), we are confident they will only increase, and that shifting MW's focus to the US may yield far greater results, both monetary and in terms of visibility, than persisting with the status quo.