I have written a few pieces recently about the Chinese Small Cap space and the conundrum of their extremely low valuations and their penchant for fraud, or at least the suspicion of it. It seems the shorts have struck gold in the form of China Media Express (CCME) this week, which will cast an even darker cloud over the entire group. This is terrible news for longs and speculators.
What Happened?
The stock was halted last week by the company for “news pending.†I have had stocks that I owned halted and it’s a pretty terrifying feeling. The news is usually not good, unless you know an earnings release is forthcoming or a merger is on the way. As I write, the stock is still halted, but news is out that its auditor Deloitte has quit and its CFO has resigned effective immediately. Ouch. On top of that, the NASDAQ has changed the halt to “more information requested.†Here is a snippet from the company’s press release. As an aside, DTT is Deloitte:
“The DTT resignation letter stated that DTT was no longer able to rely on the representations of management, and recommended that certain issues encountered during the audit be addressed by an independent investigation.â€
The stock’s message board is in a tizzy as people speculate at what price the stock will open. Experience dictates that it will be at least a 50% haircut, followed by a possible delisting. The company has basically admitted that serious wrongdoing has occurred and investors always shoot first and ask questions later.
Image Hit
There are likely several legit Chinese small caps, but they will be guilty by association since CCME was the poster child for potential fraud. Now that it has been realized, investor sentiment will go from sour to downright aversion for the whole group. It’s a shame because there are many exciting companies with great growth prospects lumped in there.
This is another great example of the virtues of diversification and only using risk capital to play these kinds of stocks. A well-diversified portfolio would be able to absorb the shock of one of its stocks even going to $0. Unfortunately many longs will be destroyed financially for putting all their eggs in a very risky basket. If it works out they are heroes, but it doesn’t look like that will be the case this time.
A Huge Hit For Chinese Small Caps is an article from: 
