Picture From China

An amazing photo from Reuters:

A car stops beside a house in the middle of a newly built road in Wenling, Zhejiang province, China, November 22, 2012. An elderly couple refused to sign an agreement to allow their house to be demolished. They say that compensation offered is not enough to cover rebuilding costs, according to local media. Their house is the only building left standing on a road which is paved through their village

Hugh Hendry on the Economist's Buttonwood Conference

Great interview of Hugh Hendry on the Economist's Buttonwood Conference:
For a short summary, refer to Mish's.

Yangtze Reiver in China Turns Red - Chinese Natural Resources Destructions Illustrated

It's all over the place, but Google led me to The Blaze as part of the top results:

When the third longest river in the world turns red, it’s worth taking a moment to stop and make note of it.

The Yangtze River, the longest in China running through Chongquing, which ABC News describes as “Southwest China’s largest industrial and commercial center,” turned a reddish-orange hue on Thursday.

Officials are looking into the cause of the color that was reported in being seen at other points of the river outside of Chonguing as well.

The Daily Mail notes the contrast in color where the Jialin River meets up with the oddly colored Yangtze. The Daily Mail reports some residents are taking up the colored liquid in plastic bottles to save.

This is not the first time this year that Chinese residents have been baffled by an unusual color affecting their natural environment. Last year, TheBlaze reported illegal dumping of a chemical turned the Jian River red in the Henan province.

In June, residents in several Chinese provinces were also warned to stay indoors as a thick yellow haze permeated the atmosphere.

While the Officials look for the cause, I'll share some pictures of this disaster. Maybe it's the new plan from the Central Planers to take care of the overpopulation issue in China?

China really has the power to kill the whole planet, and provided the Japanese and Chinese join forces, for sure the Human species will wiped out of the planet in a matter of a few years.

Australian billionaire to build Titanic II

As a sign of peak irrational exuberance in the bubble economies of Australia and China, the BBC reports that Clive Palmer, one of Australia's richest men, has commissioned a Chinese state-owned company to build a 21st Century version of the Titanic.

"It will be every bit as luxurious as the original Titanic but of course it will have state-of-the-art 21st Century technology and the latest navigation and safety systems," he said in a statement.

Back from China - Portfolio and AAPL update

I got back from China last Sunday, and took some time to do touristy things and relax.

In the meantime, the Euro sunk, and my options hit their stop-order. I don't know where was the Euro trading, but the time of the trade is suggesting somewhere around 1.32$ per Euro.

I don't know where the Euro will go, but the ECB is flooding so much the market, that a potential rationalization could be this flood of Euros coming in the market. Has the Euro topped? and will the USD rally continue? I need to spend more time on this, but I'm currently lacking time.

Finally, today, the S&P was touching the 1,400 mark at the some time where AAPL was reaching $600. How sustainable is this? Not much. As you know if you've been following this blog for a long time, I own Apple shares, and have held them since 2000, where I bought them at the current level of $13. So I'm not playing the perma-bear guy here. The rate of growth and the current valuation of Apple are not sustainable.

Of course, the capitalization weighted S&P and Nasdaq have been largely driven by AAPL which is now such a massive one, easily toping the second largest market cap, Exxon, by about 20%. So when Apple tops, the markets top most probably, and we're not far from that.

Traveling to China

I'll be traveling to China from the 5th to the 11th inclusive. Experience shows that I cannot post during these travels due to the Great Firewall of China and also due to lack of time.

Markets are at a critical juncture. I hope they'll wait for me to be back before crashing...

Skyscrapers Curse — Continued

If you don't know about the Skyscrapers Curse, please read the previous posts I've written on the topic. Beyond that, I don't much more to add than the fact China and world are set for a major economic collapse of historical proportions.

Let's start with China:

Feb. 28 (Bloomberg) -- Shanghai Greenland Group said it may add more floors to China’s second-tallest building under construction to turn it into the highest in the world after the Burj Khalifa in Dubai. 

The closely held company set up in 1992 may increase the height of Greenland Center in the central city of Wuhan to 636 meters (2,086-foot) from 606 meters, said Wang Xiaodong, Greenland’s Shanghai-based spokesman. That will exceed the 632- meter Shanghai Tower also scheduled to be completed in 2014. 

China is home to 53 percent of all skyscrapers being built around the world, up from 44 percent a year earlier, Barclays Capital Research said. The country will increase the number of skyscrapers to 141, from the current 75, by 2017, according to the bank’s annual Skyscraper Index report in January. 

“The local government in Wuhan actually has a stronger intention to revise the plan, but it’s not easy for a skyscraper like this,” Wang said in a phone interview today, adding that the plan may be finalized by the end of the year. 

The Greenland Center broke ground on the project in December 2010 with a planned investment of 30 billion yuan ($4.8 billion). The development will include luxury hotels, apartments, and a conference center, it said. The building is on track to be completed in two years, Wang said, declining to say how much costs will be added with any revision to the plans. 

And then Vietnam:

Vietnam’s Skyscraper Keangnam to Drive Hanoi Rents to 5-Year Low
Feb. 28 (Bloomberg) -- Vietnam’s Keangnam Hanoi Landmark Tower, the tallest in Southeast Asia after Petronas Towers, is boosting prime office space in the capital Hanoi by half and threatening to drive rents to a five-year low. 

The property, which includes a hotel, luxury apartments and mall, is adding 100,000 square meters (1.1 million square feet) of office space, said Choi Yong-Ho, marketing manager of Keangnam Vina, the unit of South Korea’s Keangnam Enterprises Ltd. that built the 346 meters (1,135 feet) tower. 

[...]“The tower flooded the market with a lot of supply,” Fraser Wilson, Ho Chi Minh City-based director of Vietnam Property Fund at Dragon Capital, the biggest private investor in Vietnam’s stock market, said in an interview on Feb. 24. “That can only have a negative impact on the rents.” 

[...] The tower has the same height as the Center in Hong Kong and is higher than Shanghai’s Shimao International Plaza and John Hancock Center in Chicago, according to Council on Tall Buildings and Urban Habitat’s data. 

India's Skyscraper Boom Matchs China’s

We have been talking about the Skyscrapers Curve for 3 years now — see previous posts.

It's interesting to see it evolve, and see how the current credit bubble is global and how much the downturn will be painful due to the fact that these excesses are not only extreme, but are also worldwide.

The report mentions a Skyscraper Index Report from Barclays. I'd be curious to have a look at it. Wouldn't mind if one of you, dear readers, could forward that to me :-)

Here's the case of India. Bloomberg reports:

(Bloomberg) — 2012-01-12 — India, which is building the world’s second-tallest skyscraper, is catching up with China in an office building boom that may indicate that an economic slowdown is imminent, according to Barclays Capital Research.

India is scheduled to complete 14 new skyscrapers taller than 240 meters (787 feet) over the next five years from the current two, Barclays’s analysts led by Andrew Lawrence said in a report yesterday. China will increase the number of skyscrapers to 141, from the current 75, by 2017, according to the bank’s annual Skyscraper Index report.

Over the past 140 years, completion of the tallest buildings has coincided with periods of economic turmoil such as the Great Depression, the Asian financial contagion and the global credit crisis, Barclays said. China is home to 53 percent of all skyscrapers being built around the world, up from 44 percent a year earlier, according to Barclays.

“India, it seems, is playing catch-up,” the Barclays analysts, based in Hong Kong, wrote. “If history proves to be right, this building boom in China and India could simply be a reflection of a misallocation of capital, which may result in an economic correction in the next five years.”

The 720-meter India Tower will be the world’s second- tallest skyscraper when work on the building finishes, overtaking the 632-meter Shanghai Tower that is scheduled for completion in 2014, according to the Council on Tall Buildings and Urban Habitat. Dubai’s 828-meter Burj Khalifa is the world’s tallest building. 

[...] More than half of China’s skyscrapers will be built inland and away from the wealthier coastal areas and Pearl River Delta region by 2017, indicating a move toward second-tier and third- tier cities, according to the Barclays report.

China’s home prices fell for a fourth month in December after the government reiterated plans to maintain curbs that include higher down-payment and mortgage requirements, according to SouFun Holdings Ltd. Housing values dropped in 60 out of 100 cities tracked by the nation’s biggest real-estate website owner, including the 10 largest cities such as Shanghai and Beijing.

The government said last month at an annual economic planning meeting that it won’t back away from real-estate industry curbs this year that are damping home sales and pulling down prices. The nation’s financial center of Shanghai and some other Chinese cities have also said they will continue to impose the home purchase restrictions this year.

Few Random Thoughts Brought back from China

I just returned from China — landed at the Changi Singapore Airport around midnight from Beijing — and as usual it was a good fun, but it's also great to be back.

As I'm traveling for my side projects — which aren't progressing as much as I would like — there isn't much worth sharing with you here, except maybe the confirmation of most of what we've been hearing everywhere about

Here are just two things that I wanted to share — one of which is more than pleasant and the other one is simply terrifying.

So what I really enjoy in China, is the culture of food and the enormous variety of food. Something we, as westerners cannot grasp: when we go to a chinese restaurant in the US or in Europe, we get a localized version of not so good food, mostly coming from the Cantonese culture.

Food is really amazing in China — and yes, they do eat weird stuff like silk worms, jelly fish, duck heart salads and intestine and stomach dishes which I tried and I'm still alive to tell about it — with hundreds of varieties of food, very nice way to present it, and central to the idea of communities: you share your food.

Just to give a concrete idea about what I mean, many of the restaurant we went to have menus that are about 60 pages long, and one of the small ones we went, had about 10 of these 60 pages dedicated to just for their dumplings: I counted about 120 different kinds of them.

Now to the scary bit: China is a country where you live in constant fear or danger. You cannot trust anything. To begin with, you cannot drink the tap water, and you have to pay attention when you get drinking water: check the bottle wasn't opened before being hand over. Then, you cannot breath the air outside. The air is polluted in the areas I've been that sometimes you cannot see from your hotel room the other side of the road (ok, it's a large 6 carriage ways road, like most of the main roads there).

So I was surprised, when walking with one of my local friends in a large supermarket, I noticed a lot of food and packaging from abroad. I asked my friend, thinking that the Chinese where opening themselves to outside, but I was shocked by his answer: "people buy food from abroad because it's safer". So basically, you cannot trust the food neither, nor can you trust almost anything produced and sold locally.

Finally, to dismiss one of the myth of the Chinese workers working 24 hours a day, 7 days a week and being so efficient: the Chinese government prohibits by law the workers to work more than 32 hours overtime of their normal 9 to 5 day. In addition to that, most restaurants and shops close at around 8:30 or 9:00 PM, which supports the idea that you cannot leave the office late and hope to find food or go for drinks...

Traveling to China

I'll be traveling to China from the 9th to the 13th inclusive. Experience says that I cannot post during these travels due to the Great Firewall of China and also due to lack of time.

Hope the world will wait my return before ending. :-)

Governments and Central Banks in Panic Mode

In case some people were not sure, these below are not signs that everything is fine and that the green shots of 2009 are not producing an impressive massive harvest... quite the opposite.

Euro Central Banks Seen Providing Up to $270 Billion via IMF

(Bloomberg) — 02 Dec 2011 — A European proposal to channel central bank loans through the International Monetary Fund may deliver as much as 200 billion euros ($270 billion) to fight the debt crisis, two people familiar with the negotiations said.

At a Nov. 29 meeting attended by European Central Bank President Mario Draghi, euro-area finance ministers gave the go- ahead for work on the plan, said the people, who declined to be named because the talks are at an early stage. The need for a new crisis-containment tool emerged as the effort to boost the 440 billion-euro rescue fund to 1 trillion euros fell short.

Swiss Government May Consider Negative Interest Rate Policy 

(Bloomberg) — 01 Dec 2011 — Switzerland’s government said it may consider additional measures including negative interest rates to aid the country’s central bank in its fight against the appreciation of the Swiss franc. [...]

Stocks surge on Central Bank liquidity offering

Nov. 30 (Bloomberg) — The central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements, the Federal Reserve said, and agreed to make other currencies available as needed.

China said earlier today it will cut the reserve requirement ratio for banks by 0.5 percentage points from Dec. 5, while data on U.S. business activity and the employment and housing markets topped economists’ estimates.

 U.K.’s Cable Urges ‘Unlimited Powers’ for ECB Amid Euro Crisis

Nov. 13 (Bloomberg) — U.K. Business Secretary Vince Cable said the European Central Bank needs unlimited powers to support the euro and the region’s debt-ridden economies.

“If a monetary deal’s going to work, the central bank has to have unlimited powers to intervene to support economies, and indeed banks, to prevent collapse,” Cable said in an interview on BBC television’s “Politics Show” today. “They need to have that clearly at a European level, and that’s one of the issues that hasn’t yet been adequately clarified.”

Harry S. Dent and Arch Crawford Interviews on GoldSeek Radio

Both Arch Crawford and Harry S. Dent were interviewed last Friday on GoldSeek Radio.

As usual, Arch Crawford is talking about astrology and apocalypse.

And Harry S. Dent is talking about the crash ahead — probably in 2012 — and the China Bust that's coming as well.

You can listen to the interview from the link above or the embedded player below: 

 

Arch Crawford's interview starts at about 0:37:00

Harry S. Dent's interview starts at about 0:51:30

The Reasons For China's Imminent Bust

Here is a very good interview of Gordon Chang, by hyper-inflationist and exponential-extrapolator Chris Martenson, available on YouTube and embedded below.

Gordon Chang does a very good job at explaining all the issues with the Chinese economy and he goes into a fair amount of details that I was actually able to learn quite a few things :-)

The global dominant narrative about China is wrong, claims Gordon Chang. Don't expect it to be the 'pocketbook of last resort' that will rescue world markets from their current malaise. 

And don't expect its remarkable economic growth to continue. In fact, expect a "hard landing" for China - and soon. 

[...] Gordon sees these as the inevitable harbingers of a coming collapse in China due to excessive stimulus policies the government undertook starting in 2009. The bubbles and malinvestment created by this stimulus have not been addressed, and increasing weakness and transitions inside the political system are making it less likely they will be before market forces intervene.

PS: I appreciate very much Chris Martenson's economic Crash Course, but his conclusion are totally flawed due to his inability to understand the role of credit in a fiat currency system, and the possibility of deflation.

Traveling To China

Sorry for the unusually low posting frequency in the past few weeks, I have been busy with several projects which are completely unrelated to the financial markets and hence I had to shift priorities...

In addition to that, I will be in China for the next 6-7 days. I will do my best to get connected and keep in touch, but last time I was there, I was unable to cross the Great Firewall of China to access any blogs or write my own posts.

US Mining Company To Dramatically Increase the Supply of Rare Earths

Rare Earth minerals, wildly valuable for everything electronics, is mostly (95%) controlled by China.

So I am glad to post about this 3rd major discovery/increase in production of the past 12 months (see previous posts). Via PCWorld (yes!)

The U.S. mine, owned by Molycorp, has reopened after closing in 2002 following radioactive wastewater spills and price competition. The largest spills, from a pipeline to Nevada, occurred in the late 1990s, in protected lands in the Mojave Desert. The company has since changed its ownership structure.

Molycorp's facility, in Mountain Pass, California, will expand production dramatically. It's being rebuilt to produce up to 40,000 metric tons of rare-earth elements by 2013, which would be a 700 percent increase from its production target for the end of this year.
The carbonatite deposit, which contains a variety of ore types, was discovered by prospectors in 1949, according to a U.S. geologist. About 8 percent of the deposit contains rare-earth minerals, a good ratio in rare-earth mining.

Seventeen elements on the periodic table of elements are considered rare earth, including neodymium and terbium. Molycorp mines 10 of the rare-earth elements by hauling ore-laden rocks from the ground, crushing them, and then chemically extracting the elements.

Also see this video report, available on YouTube:

Australia's Home Price Drop For the Third Consecutive Quarter — Central Bank Drops Rate

The Australian real estate bubble has popped and there is probably no end in sight, but here's the news about the third consecutive quarterly decline.

This is something I forecast more than a year ago, about actually 15 months ago and reiterated many times since then (including here): interest rates have peaked in Australia, and the next move is down.

Well, today, after much anticipation, I was proven right.

Nov. 1 (Bloomberg) -- Australian house prices declined in the three months through September, the third straight quarterly drop, as the developed world’s highest borrowing costs curbed demand. 

An index measuring the weighted average of prices for established houses in eight major cities dropped 1.2 percent last quarter from the previous three months, when it fell a revised 0.5 percent, the Australian Bureau of Statistics said in Sydney today. 

The median estimate of 19 economists surveyed by Bloomberg News was a 1.5 percent fall. They declined 2.2 percent from a year earlier.

Nov. 1 (Bloomberg) -- Australia’s central bank cut interest rates for the first time since 2009 and a Chinese manufacturing index slid, stoking concern that Europe’s debt crisis is weighing on Asia’s export-dependent economies. 

The Reserve Bank of Australia today reduced its key lending rate to 4.5 percent from 4.75 percent, saying Europe’s woes are starting to hit Asian trade. 

In China, a purchasing managers’ index fell to 50.4, the lowest level since February 2009, while South Korea reported the smallest gain in exports in two years. 

Nov. 1 (Bloomberg) -- The Australian dollar fell for a third day against its U.S. counterpart after the Reserve Bank cut interest rates for the first time in 2 1/2 years on signs global growth is moderating. 

The so-called Aussie declined against its 16 major peers after RBA Governor Glenn Stevens said inflation is close to the central bank’s target, adding to prospects policy makers may further reduce rates. 

Demand for the Australian and New Zealand dollars was limited after data showed manufacturing in China, the South Pacific nations’ major trading partner, slowed. “The Aussie is lower after the RBA rate cut,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. 

“It seems like they have opened the door for more rate cuts because they say that inflation is likely to be close to target. I think there’s a possibility there may be another cut in December.”

With China imploding, and the end of the commodities bubble, and the collapse of the real estate bubble, Australia will face the implosion of two enormous bubbles and the only engines of their bubble economy.

From here, I think the probability for the Australian Bubble Economy to fall into the abyss is very high. So high that I wouldn't be surprised to see the AUD/USD trade at 0.50. The probability for this to happen is in my opinion much much higher than to see it at 1.50 as one of my bullish blogger states.

One of the World's Largest Rare Earth Deposits Found in Australia

Australian web site ABC Rural reports that:

A north Queensland mining company has discovered one of the world's largest deposits of the rare earth, scandium. 

Scandium is used to make solid oxide fuel cells, which are used generating electricity from natural gas and renewable fuels. 

This discovery has been made at a former nickel mine at Greenvale, just out of Townsville. 

With scadnium selling currently selling for $5,000 a kilo, owner Metallica Metals says it will double the size of a planned cobalt and nickel mine at the site. Metallica managing director Andrew Gillies says the deposit's quality and purity are outstanding, and very unusual. 

"Scandium is found probably in most rocks, typically perhaps five to 15 parts per million; we've got sometimes a thousand times that," he said. "We would think that we've got something unique. There's only three resources in the world and we've got two of them."

This is not the first discovery of a massive deposit of Rare Earth metals, so actually, maybe we'll soon change their names (see my previous posts about rare earth minerals). But, it's obviously a great news is you're a consumer of these minerals (and also, end users, such as electronic devices etc.) or for Australia's economy.

On the other end, if you're a speculator with a long position in Rare Earths — an already crowded place, or the Chinese Government Monopoly, you're in trouble over the medium turn.

Bank Runs 2011 Continues in France, Spreads to China

My friend blbl forwarded me a couple of interesting reports, in French, which I have translated using Google Translate (so please bear with the quality of the translation).

The first one is showing that a major corporation, the biggest oil producer in the country, has been withdrawing funds from the banks:

Total reduced the number of banks in which it deposits funds for fear of a credit crunch in the euro area, but remains confident in the French settlements, said Monday its chief financial officer at the agency Dow Jones and Wall Street Journal.

"We have reduced our exposure to banks by reducing the amounts that we file, the number of banks that we use and duration of deposits," said Patrick de La Chevardière the sidelines of a day devoted to investors in London.

The group, which manages about 20 billion euros of money available, runs its funds more quickly than before and instead of depositing money for a week or a month, prefers the day. He now uses a little over ten banks, without specifying how many schools he previously used.

The second one is about a massive fund withdrawals facing Chinese banks:

The four major Chinese commercial banks are losing large amounts of deposits so that high inflation and low interest rates encourage investors to entrust their funds to individuals or private companies, reported Thursday the official press.

Deposits of the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China and Agricultural Bank of China (ABC) have shrunk from 420 billion yuan (48, 6 billion euros) during the first 15 days of September, according to Zhongguo Zhengjuan Bao (Journal of the securities of China).

30 Year Old Boutique Hedge Fund Manager Makes Fortunes Uncovering US Listed Chinese Scams Companies

My friend Mr. H forwarded me a Washington Post report titled Gaining by betting against flimsy Chinese firms which is proving right my previous forecasts about the scams going on in China and how many of their exchange companies would go to zero.

I find this story fascinating because it shows just how a small amount of research and very clever tactics can bring down these scammers and make you rich in the process, while big Wall Street firms are completely unable to come up with any useful information, even after paying their analysts hundreds of thousands of dollars a year.

Did you know there is about $20 billion worth of small- to medium-size Chinese companies listed on U.S. exchanges ? That makes the potential losses for western investors quite high.

Here's the story, with my emphasis.

Sahm Adrangi works with six other people in a small room on Madison Avenue with a view of an adjacent brick building. 

He doesn’t speak Chinese. He’s never set foot in China. At 30, he claims no special insight into the sources or durability of the Chinese economic miracle. Yet he has managed to dig up enough information to wreck the fortunes of several Chinese companies — while building up his own. 

Two years ago, Adrangi, a 2003 Yale graduate, left an investment banking job and set up a small hedge fund, largely with money from himself and his parents, as well as a few other supporters. Since then, his red-hot fund has increased sixfold, partly a fortuitous accident of market timing but mostly a product of his ability to spot flimsy Chinese companies listed on U.S. markets — which he bets against by short-selling them. 

The firm is tiny by hedge fund standards, with $20 million under management. But Adrangi has promoted his bets through newsletters and online postings that savage U.S.-listed Chinese companies he views as “scams.” In doing so and doing well, he has grabbed the attention of eager U.S. investors and fearful Chinese executives — not to mention U.S. regulators who are trying to keep track of about $20 billion worth of small- to medium-size Chinese companies listed on U.S. exchanges. 

Here are a few samples of Adrangi’s scathing assessments: 

China Education Alliance “is mostly a hoax,” he wrote of a Chinese for-profit education firm, which then had a $150 million market value on the New York Stock Exchange and is now worth less than $25 million. 

The company’s Harbin “training center” — which CEA said had “17 modern classrooms” for 1,200 students — had no desks and was all but empty, Adrangi said. It boasted of online revenue, but its Web site didn’t work. 

China Biotics claimed to have more than 100 outlets for its nutritional supplements; Adrangi said he hired researchers who checked all the company’s business addresses and found only four outlets. Later, on June 22, the company’s auditors resigned, citing “irregularities” that might “constitute illegal acts” and for which the board had “not taken timely and appropriate remedial actions.” The company is contesting a shareholder suit in Washington that makes the same allegations. 

China Marine, a maker of snacks and an algae drink, reported revenue to China’s State Administration of Industry and Commerce that was 85 percent lower than what it reported in U.S. filings, Adrangi said. The company reaffirmed its U.S. reporting, but on Aug. 8 (considered an auspicious day in China), it announced just $1 million in quarterly profits, down 85 percent from a year earlier. 

Noting extremely high profit margins claimed by one of China’s battery manufacturers, Adrangi wrote that he believed the firm was “fabricating its SEC financial statements.” He added that the company’s battery plant “is either the world’s most spectacular battery manufacturing facility or the company’s financial statements are fiction. We believe it’s the latter.” The companies have disputed Adrangi’s assessments, insisting that they are not misleading U.S. investors or regulators. 

[...] All of their targets are drawn from the more than 300 Chinese companies that since 2004 have taken advantage of a technique known as the reverse merger. It is a sort of backdoor way into the prized U.S. capital markets. It works like this: A Chinese company seeking access to U.S. capital markets swaps its shares with the shares of a U.S.-listed company that has fallen on hard times and has been reduced to nothing more than a shell. Usually the U.S.-listed company takes on a new name, appoints new directors, reports glowing results from its new Chinese operations and raises millions of dollars by issuing stock and luring new investors. And it does this without having to go through the regulatory steps that would be required for a newly listed company, especially one based in China. 

[...] Adrangi has taken an accidental route to the China investment field. Born in Iran, his parents moved to California when he was 5 and then to Vancouver. His father, an engineer in Iran, bought a fencing company. Adrangi attended a prestigious boys’ school and then went to Yale. When he arrived, he was an activist.[...] But he wasn’t able to turn those internships into a full-time job. So he moved to New York and went to work for Deutsche Bank. He applied to law schools and deferred three of them. He never went. Instead, he moved to Long acre Management, selling distressed assets of bankrupt companies. Then he went out on his own. 

Initially the fund wasn’t focused on Chinese companies. Even today it has invested in about 100 non-Chinese companies, including wireless companies in Africa, a Costco-like retailer in central America and an Internet bank in the United States. But then Adrangi read about Bird and called him for advice. Bird told him that looking at the books of Chinese reverse merger firms was like listening to someone claim they drove 300 mph to arrive on time for dinner. “The sales were outstanding, but it didn’t make sense,” Adrangi said. 

Adrangi’s first forays into attack mode were anonymous because he feared retaliation or lawsuits. He created a Web site and posted brief items pointing to companies he believed to be hyped. The SEC forbids hedge funds from soliciting customers on the Web, so Adrangi made no mention of his firm, Kerrisdale Capital, or his fund. Then he read signed reports about Chinese reverse merger companies and he began to do the same. He took aim at China Education Alliance. The company went public in 2004 through a reverse merger. [...] The company said it distributed educational materials online, but Adrangi found through researchers that the Web sites didn’t work, payment mechanisms didn’t function [...] , he sent researchers to the company’s training center. They took photos and video of the virtually empty building, which he posted. CEA said it had more than $12 million of revenue from the center. Since Adrangi first posted his attack on CEA, the company’s stock has plunged from $4.50 a share on Nov. 26, 2010, to 76 cents on Aug. 22 — even though the CEA chairman has bought $1 million in shares to bolster the price, chief financial officer Rogers says. 

Adrangi also made money shorting China MediaExpress, a firm that operates television advertising on inter-city express buses. A darling of China investors, the company’s auditors resigned, the stock price collapsed and in time trading in the shares was halted. 

And Adrangi profited from the collapse of Rino, a Dalian-based maker of industrial pollution control equipment. The stock, which once traded as high as $35 a share, has since been taken off the exchange. 

[...] In 2010, its 81.5 percent return (before fees) crushed the Standard & Poor’s 500-stock index’s 15.1 percent gain. Aside from its bets on a few U.S.-listed Chinese companies, its portfolio “roughly tracked the market,” Adrangi said in a letter to investors, warning that “we do not have a magic formula” for “generating outsized returns.” Three months later, more Chinese reverse merger companies “imploded,” Adrangi told investors, and his firm Kerrisdale Capital rang up more big gains. Its top five investments were all shorts of U.S.-listed Chinese firms. The run continued in the second quarter, when the fund returned 54 percent (before fees) against 0.1 percent for the S&P 500. 

[...] Although Adrangi has skewered many Chinese companies listed in the United States, he has little sympathy for investors who lose money on them. “The responsibility belongs with investors who make these investments,” he said. “No one should be relying on the SEC or underwriters to protect them.” He said that if investors “end up holding the bag, that’s just the way capital markets work.” But he conceded it can be hard to see through the stories the companies spin. “Historically, stock scams are promoters promoting stories. The actual numbers will tell a more truthful story,” he said. “If it’s a mining company and there is nothing in ground . . . the numbers don’t lie. The people do. The trick here is that the numbers are made up.”

Jim Chanos On China and the European Debt Crisis

Jim Chanos was interviewed yesterday on Bloomberg TV. I'm not embedding the videos as I'm tired of the Bloomberg videos starting automatically, but here are the link to the 15 minute interview: Chanos's Investment Strategy in China, U.S