If You Read Chinese, You Should Not Hesitate Shorting FSIN

Read Jin Ri Cai Fu Bao (今日财富报 or Today's Fortune), if you read Chinese, you should not hesitate shorting FSIN after reading it.

http://jrcfb.com.cn/News.aspx?SN=246

In fact, the way FSIN forges its financial statement is so common in China, so many others are using the same means to fool foreign investors, especially those who do not read Chinese. Ashamed.

Read it:
      据几家上当受骗的美国投资人透露，中国警方正在积极介入调查一个十分老练的“金融诈骗学校”有系统地制造虚假中国企业赴美上市的案例。这一诈骗学校通过他们成熟的操作系统教授那些急功近利的中国企业如何伪造销售合同、政府文件、并操纵其财务报表，以达到在美国OTCBB，NASDAQ，AMEX和NYSE上市套钱目的。

Translation:

"According to some American investors who were the victims of the accounting fraud, the Chinese police is actively involved in an investigation of a sophisticated "financial fraud school" which systematically produces the cases that fraudulent Chinese firms got public in the US. This fraud school taught the methods of forging sales documents, government documents and financial statements to some Chinese entrepreneurs who are eager for quick success and instant benefit, in order to make them listed on OTCBB, NASDAQ, AMEX and NYSE to obtain investors' money."


A more important question is: what do they do when they obtained investors' money after getting listed? If you think they'll make business better you are too naive. I already mentioned that they are "eager for quick success and instant benefit", or in Chinese, "急功近利", they highly probably used the money purchasing a luxury house in Australia or Orange County.

Fushi Copperweld, Inc. (NASDAQ: FSIN) is a fraudulent company. Strong Sell.

Fushi Copperweld, Inc. (NASDAQ: FSIN) is a fraudulent company.‎

As a Chinese and a researcher, even before Muddy Waters reported the evidence of FSIN's accounting fraud, I have found evidence. I am writing down all the research I have made.

1. Frazer Frost:

Searching Compustat database, which is provided by WRDS (Wharton Research Data Services) and can be accessed through Columbia University library database system, I find each listed company's auditing firm. Among them, a notorious one comes into my eyes: Frazer Frost. 

If you don't know Frazer Frost, I am listing the firms it has made listed:

Jiangbo Pharmaceuticals Inc (JGBO)

China Valves Technology Inc (CVVT)

China Natural Gas Inc (CHNG)

Harbin Electric Inc (HRBN)

RINO International Corp (RINO)

Familiar with them? They are all found involved with fraudulent financial statements. Some of them have already been delisted

You may have a question: how many firms in total has Frazer Frost helped make public? Are the 5 just the special cases? I can tell you : 13 firms. Among 13 firms there are 5 of them already found guilty, how much confidence do you have for the rest? Also, every single one of the 13 ones is through reverse merger. 5 have been found with fraudulent problems. And who's the next one? Fushi Copperweld. Frazer Frost made, reverse merger.

I will write separated articles about other Frazer Frost-made firms. But for now, let's look at FSIN.

2. Website.

I grew up in a business family and I have plenty of relatives who live in China doing business. Some of them have quite big firms. I myself began to show up in business occasions regularly since 5 years old. I have been in at least 1,000 business dinners before high school. I'm not saying that I have more experience than most others, but I am confident that I am experienced in distinguishing honest firms from fake ones.

An easy way to tell is the firm's website. It's hard for American investors and those who are not familiar with Chinese business. A basic rule is to look at the organization of the site and the font it uses.

Let's look at a website of a successful firm:

http://www.aokerola.com/index2.html

Notice that a Chinese firm's website always has this at the bottom:

公司注册地址：山东省淄博市张店区南定镇岳店村 公司办公地址：山东省淄博市高新区高科技创业园B座303
奥克罗拉版权所有 Copyright 2010© www.aokerola.com All Rights Reserved 中企动力提供技术支持
客服电话：0533-3588889 鲁ICP备09018957号

They are the firm's address, phone number and the most important thing:

the registration number in SAIC: 鲁ICP备09018957号

Even in this firm's English site

http://en.aokerola.com/index2.html

it has the Chinese character registration number:

Webpage Copyright:AOKEROLA GROUP  Powered by www.300.cn  鲁ICP备09018957号

You can look at another firm:

http://www.yxoppc.com/index.asp

See? At the bottom, it has 【苏ICP备05004547号】which is this firm's registration number.

But look at Fushi Copperweld:

http://zh.fushicopperweld.com/

It doesn't have it at all.

Moreover, don't you find it wield about the font of Fushi Copperweld's website? Well, if you don't read Chinese, you may not have any feelings, but to me, it is so obvious that this site is simply built via a template. Look at the 

on Fushi's site, do you find it in ANY OTHER REAL Chinese firm's website?

NO because Facebook is blocked in China !

And these links only make Chinese investors have a feeling that it's not a serious business.

Another evidence may not be so understandable to American investors. The English version of a Chinese firm's website usually has some English language problem, making it look just like that the English is a bad translation from Chinese text. But Fushi Copperweld's Chinese version looks like it was translated from English. But which Chinese firm will write their English descriptions first? The only reason I can understand is there is some group helping this firm get listed and make money from it. And this is true.

3. "Gang Four"

Chinese media has reported that there was a group of four people (two Chinese Americans, two white Americans) helping some Chinese small firms getting listed on American stock exchanges. This is the procedure they did:

1) come to the firm, ask them for 40% shares

2) get them quoted on OTCBB

3) contact some lawyers and auditors, let them sign the forged financial statements (who knows how much they gave those people for signature)

4) transfer to NASDAQ/NYSE/AMEX

5) sell the stocks they have, run away, leaving the fooled American investors

Most of the fraudulent firms found out were getting listed through this procedure. It's very likely that FSIN is the same. Don't forget FSIN's location in China is only one block away from the fraudulent RINO's !

So it shouldn't be a surprise that FSIN's website was originally written in English, because they were very likely written by those native English speakers.

4. Pricing: it should be delisted if it forges the financial statements. But since Muddy Waters has released its different revenue reports to SAIC and SEC, we can see that the actually revenue is less than 1/7 of the amount it claims. Therefore the reasonable price should be less than 1 dollar.

Ahhh.... Writing dissertation papers....

Writing dissertation papers is such a painful process if you don't have any assistance like research assistants or data analysts. If you are a professor or a head of a research department/institute, congrats you can save a lot of time of doing the time consuming and boring job, which actually is 99% of research -- find data, write program codes, summaries literature ... The valuable 1% is the time of thinking the logic. For theoretical works, you still need to process a lot of data to justify whether the theory you are proposing is consistent with the historical records. For empirical works, data is almost everyday's life.

Anyway, my eyes become increasingly uncomfortable these days... but my programming skills is better.

关于trading的相关知识

1. Sell side 的 投行 的 sales and trading department 一般是client based，一个sales跟他管的客户联系(entertain 客户等等)，客户需要什么的时候，会联系这个sales，然后跟着这个sales的trader会给出报价，一个trader能做的好不好一般看他跟哪个sales，以及这个sales的客户好不好做生意。一般中国人很难配到好的客户，所以bonus也比较少。因为equity在交易市场已经能很好的交易，客户不会找sales去买他需要的东西，所以一般客户需要的产品是fixed income产品，因为没有交易所，以及exotic的产品。trader根据模型给出exotic产品的定价，然后sales告诉客户看看客户要不要买。Asset management 的traders更像prop trading或者hedge fund里面的，就是拿钱做交易，对手是整个市场上的其他人，而不是给什么客户提供服务和报价。

2. put-call parity 在 HTB (hard to borrow) 的时候不成立。P+S = C+ K(discount)。当HTB的时候，无法卖空股票因为市场上的人都在卖，所有人都在买put，所以上面等式的左边在HTB的时候大于右边。当钱很多的时候看空应该short call，因为需要的操作比较少，操作多的话资金量大的会对market有更多的impact cost。

如果你觉得要大跌，要short call的时候要short deep in the money call因为比较贵，而且是别人来操作执行，执行的时候有时要打电话给broker，很麻烦；要long put的时候要long out of money put因为它比较便宜。但是如果你觉得不涨也不跌或者有可能涨也有可能跌，一般要long deep in the money put， 因为你不想因为它突然涨上去你亏了。如果strike是250的put价格50，价格跌到200以下你就赚了；如果strike是240的put价格41，价格跌到199以下你才赚，这1块钱的差别是time value: "价格涨到250以上的概率远远小于涨到240以上的概率，所以...." 没听懂??

3. 教科书上说 call price > S - K 因为1）"max", 2) exp(-rt)
call price = max (S - K*exp(-rt), 0) 现在执行不如以后执行好，因为现在执行用的是现在的strike，比以后的strike要贵(时间价值)
但是教科书上不一定是对的。

European Crisis: They Need Implementation, Not Just Talk

I'm just back from a talk, "Perspectives on the European debt crisis", by Jean-Pierre Landau, former Deputy Governor of the Banque de France and now Adjunct Professor at Sciences Po. The talk was held by Columbia economics department and maybe some other institute.

About 20 people were there, many of them European background, most of them professors. I don't know if they enjoyed the talk, and I think the speaker was sincere, frank and willing to share, but I still find it disappointing.

Because of the speaker's background, he talked much about the regulation. Though at the beginning of the talk, he did say that he might have some bias and he tried to avoid them, because "where you sit decides what you think", that's why I think he was a sincere and frank speaker. He said we need more strict regulation, he talked a lot about the design of the regulation system and the whole financial system. Well, I should admit that because of his French accent, there was some part that I missed, but at least I can be very sure that he didn't talk about the things I want to hear: implementation and action.

Government officials and scholars have a common feature distinguishing them from business people: they always talk about theories but rarely talk about details and implementation. There are a lot of theories in the world but only a much smaller subset can be implemented well and realized. They don't talk about details because most of them never was really in the market doing real things. They don't have the experience of knowing the details about what's going on in the reality. When they talk about the design of the grand system, I can't help laughing.

The big system design has not many varieties. It's very possible for you to summarize all the different styles by spending one month reading literature and talking with people. But the details need years and tens of years to learn. It's the same as trading and doing other business: the general idea is not hard, what decides whether it can be successful is how you implement it and how well you control every detail. Just like many countries have the American style democratic system, only a few can achieve American living standard (look at Mexico, the Philippines). To open a supermarket is not hard, what is hard is to make every detail perfect and to make it a Walmart. That's also the reason that when both traders hear the same message, one may earn much more than the other by better controlling the timing of trading.

European crisis is financial, but it's an economic problem. What the central bank can write on the papers is limited. What you can do a lot is to make the implementation better. It is ridiculous to me that when you have a system and you find it not working well, you just begin to blame it and try to design another one, sometimes, or on most occasions it's the implementation making a system work or not.

Last word: the Europeans need less talk about the big, but more actions on the smalls.

seekingalpha.com is a great site

http://seekingalpha.com/

I know some others, like Barron's:
http://online.barrons.com/home-page#

Market Brief to release insider's SEC filings
http://marketbrief.com/

Anyone know other resources ? I'm eager to learn !

What Is Momentum? -- Information Spread

This may not be a new idea, but it's mine.

When I was reading the technical analysis, I was thinking why it might have some reasonable ground. When I was watching the candlestick charts, it indeed looks like there is a trend (long-term trend, short-trend ...). Well I reminded myself the things that the market efficiency believers used to teach me: even a Brownian motion can look like it's not stochastic. But ... is there seriously a reason for the trend?

There may be one. Trough trading, I find one thing that many academic papers ignore: people (especially, the traders) have limited energy and time to pay attention. Although the market has already had so many financial professionals, they are still not enough to absorb so much information, even with the support of back desk of researchers. The information's spread, especially for the areas not many people are paying much attention, is not always very fast. It can take one day, sometimes two days, sometimes even longer. Take the most recent example of TVIX and GAZ/UNG: the premium was so high, and it was not like all the people suddenly find that -- some people posted this on StockTwits weeks ago, but nobody was paying attention. As more and more people realize, they followed into the arbitrage.

Economics news or big issues publicly known are quickly reflected in the market prices, but not all the information has the priority to be known. "Economic Calendar" in WSJ posts the big information releases, but among tens of thousands of pieces released everyday, not all of them are noticed in the real time.

http://online.wsj.com/mdc/public/page/2_3063-economicCalendar.html

For commodities and government bonds, there are relatively limited variations. Copper is copper, gold is gold, information is not that heterogeneous compared with stocks (commodity traders, pls correct me if I'm wrong). But for stocks, every listed company is different, and every one is complicated inside. Aside from the quarterly/annual reports you hardly know what is happening now. Unless the new information is published, no one knows the everyday dynamics and if you don't find new information about a company, of course your attention moves away to others.

But what's the fluctuations around the main trend? It's because the informed don't know whether they are the last or the first to know in the market. If they think they are the last to know a positive news, they should sell off in the very short run; if they think they are the first, they hold. But people don't know, so they have uncertainty, then the "stochastic" things begin to work, and a lot of research were discussing whether the weather/temperature/balabala statistically affects traders' sentiment.

Then I have a research idea: How can I test the speed of the information spread? Make a rumor and see how long it affects the market price? (experimental economics !) Well, no mention if it's illegal, it can be affected by a lot of random effects like other big news or something. Though I haven't figured out a good way to research it, I guess it's an interesting one.

Technical Analysis

I've been just beginning watching the market from opening to the close for about two weeks. Before I was doing the trading strategy / back test research but I didn't really have a sense about the market, I just downloaded data from yahoo finance or from Bloomberg in the library, then wrote some programs to test if a buy-and-sell signal works. After some time I was wondering why it's me doing the signal entering job. You can find anyone who can program to do this. I didn't find that this work utilized my knowledge of economy and market (well ... I was thinking I did have some knowledge of market, now I find I have too much to learn, I'm far away from knowing the market). OK, then I began to use my scholarship/fellowship that the greatest Columbia University Graduate School of Arts and Sciences grants me to do trading. I began to follow the market, and the new ideas and thoughts and deeper understandings come up everyday.

I read the book "Technical Analysis of the Financial Markets" by John J. Murphy since last month. Well, the whole academia is teaching the market efficiency (except the behavior finance people), they claim that the technical analysis never works (well it's not really true, there are some highly inefficient markets in the world outside the US, I know some funds are making huge amount of money every year). I believe the US market is more efficient than other countries', I can see that from the extremely low beta of American stocks .... (beta = 0.02 OMG I can't imagine how many funds are using how many quantitative strategies to make the inefficiencies disappear in this country). Though it's more efficient, it doesn't say that it's efficient. I read the book and find the various indicators are too many -- it's so hard for a beginner like me to decide which one to use under what situation, the market has news everyday and I don't think I can manage that well by just looking at the charts. Looking at charts must make you lose some information because if you need to judge the direction of the trend, the information at the beginning of the trend must be wasted. Well.. I think I'm gonna review the fundamental analysis/indicators I learned before. Here are some resources I know to compare a stock's P/E or PEG or other indicators with it's competitors and the industry average:

http://www.google.com/finance?q=NASDAQ:SOHU

"Related Companies, Add or Remove Columns"

http://finance.yahoo.com/q/co?s=FMCN+Competitors

Btw the way, I find the Yahoo Finance and Google Finance are really useful. I need to spend the next two days to figure out the meaning of every term (there are still some terms that I'm not familiar with) and the use of every sub-page. Also, my homework includes the study of Wall Street Journal market data pages.

http://online.wsj.com/mdc/public/page/marketsdata.html

And I just searched a while via Google Scholar, there are tons of research about the predication of stock return by fundamental analysis. I read some, and I think the most important reason for the academic papers' findings look not feasible is that they rarely care about the transaction costs and bid-ask-spread. This may not be a big problem if the paper is trying to test return of long-term investment strategy, but if it's about short-time, it's really a big problem and may be misleading.

Can I really post via emailing?

Let's see if it works....

Zigan Wang

PhD candidate, Department of Economics
Graduate School of Arts and Sciences
Columbia University, New York, NY, USA

The First Post !

Great ... This is the first post since I opened this blog three years ago !

Who am I? What am I doing? Where do I live? ...

Well, I'm a phd student, or "candidate" since I'm already finishing my third year. I study economics, now I have a desk at SIPA building at Columbia University in New York. I almost work here everyday from morning to late night. Am I a workaholic? Maybe. Anyway, I passed qualifying exams, so I'm supposed to find a topic to do research about economics. But I really find myself not interested in most topics economists are talking about -- empirical industrial organization, network theory, hospital system ... I know they are important things and we really need some people to do these research but I really am not interested. What I'm interested should be a vast area -- it should have a huge amount of information for me to learn, and it should be exciting -- it should be changing everyday, and it should involve a lot of people (not like some area only less than 100 people are doing topics in the world). So it's finance. It's the market.

I'm obsessed with financial market now. I have been obsessed for one year. Securities markets and real estate market are fascinating. So I opened a trading account on Interactive Brokers (IB) and put some money into it. Also I subscribe some services like Reuters. Now I can watch the market data, which is fascinating, everyday and I trade some stocks and ETFs/ETNs on my own.

I'm not a great programmer but I'm into it. Every time I think I find a trading idea, I can't help writing it down and use historical data to back test it. It's really time-consuming because I don't have back desk support like a trader in a company, but I grow with doing it. I learn something everyday.

So in this blog, I'll post my learning process, my thoughts about the market and others about my life. Can't imagine how I will feel in one year when I look back -- but I hope the feeling will be great.