There is no doubt that last week's move was pretty amazing. Could this have been coordinated attach on the shorts? I think the first step will be to see if the market can reprice the P/E risk premium upwards to between $5 and $10. But I am also not sure we should blindly dive head first into the space. (we have seen this before)There is little doubt in my mind that several companies passed 2011 audits that should not have. What will happen to market sentiment if some high profile names are halted and delisted?
Some key ingredients to reduce risk moving forward:
1. Considering firms that are willing to be adamant that raising equity capital is off the table for the foreseeable future. They need to portray an ability to grow the business using internal capital. Furthermore, many firms will not be able to raise equity capital, so they need to show that they can grow without it.
2. Putting less money in firms that have been negatively written about (Let us not be fooled into a belief that the SEC is not investigating many firms, albeit slowly). This is part of the reason I have some reservations about investing in Lihua Intl (NASDAQ:LIWA) and Telestone Technologies Corp (OOTC:TSTC).
3. There is really little excuse for not having internal controls in check at this stage in the game.
4. Give back massive amounts of capital back to shareholders (special dividends, tender offers)
5. PRC filings matching SEC
Overall, i think the auditor rank is really useless, since top firms are sill behind the curve. The real challenge is identifying real firms that didn't steal some money.
I think we need to start with some fresh names that have not been attacked, even if they have some near-term growth problems. The key will be to find the names that will thrive once China starts to recover. IPOs may be a consideration too. We also need to be cognizant that many pure short investors will revisit the space once prices become compelling. Our positive/negative investigations into company operations will be carried out regardless of price.