Fuzzy Logic, or: Those Who Fail to Learn From History

3 Feb

I firmly believe the influx of people (many “quants” but others as well) in Finance over the past decade who posess little-to-no knowledge of Financial history contributed to the bubble and the resulting collapse.

Unfortunately, many of these people who know not the many, many lessons of financial history are lured into finance by the promise of money and all that comes with it.  More unfortunately, despite the many and various lessons of which we’ve been recently reminded during/after this most recent crash, many of these people are still among us.

Today, I read an article about China Media Express Holdings, and how its going to be the biggest short squeeze the author has ever seen/of 2011.  My 1st reaction was that whoever this author was (I’d never heard of him), he must not have been around for very long.  Remember Volkswagen (to use but one recent example)?

Apparently the short thesis is that the company is a fraud.  I do not know this company well, so I can’t speak to that point, however, I CAN and will now, for your viewing pleasure, proceed to destroy the author’s rationale for why the firm ISN’T a fraud.  He says:

1. CCME has been fully vetted by Starr International — headed by Hank Greenberg –4 months. Also on the board of directors and checks monthly numbers.

Big deal.  Remember AIG Financial Products?  Bang-up job they did!  Surely all the problems started after Greenberg left (debatable).  Regardless, numbers can be fudged, easily.  More on this later.  Additionally, 4 months is not a sufficiently-long track record for this point to be used to support a long thesis in my opinion.

2. CCME has been independently vetted by Global Hunter — 3 months.

What the hell is a Global Hunter?  Is that a video game?  Again, 3 months is not a very long time at all…

3. CCME has a top four auditor, Deloitte.

Deloitte was also Bear Stearns’ auditor

4. It is #1 on the Forbes China List of Small-to-Medium Sized Companies with the Greatest Potential.

If you get your investment advice from Forbes you should just give me all your money now and save yourself the trouble.

5. Its Zack’s Rank is #1.

Its not even on the top 10. What the hell is this guy talking about?  It wasn’t on the top 10 last year, either!  Is there another Zack’s I don’t know about?

6. Investors Business Daily gives CCME top marks, best marks out there actually.

Yea, “top marks” for EPS growth, but IBD doesn’t even rate CCME as the top stock in its group! High EPS growth alone does not a solid long-thesis make.

7. Its CFO is a former auditor of Price Waterhouse Coopers, who just bought $1.5 million of stock.

I’m more inclined to consider this an orange (if not red) flag, rather than a green one.  Sure, it’s good for a CFO to have a solid grasp of accounting, but posession of such knowledge can be used for trickery, as well.  Again, more on this later

8. Dividend policy starting in the next 90 days.

And the point is what, exactly?  No firm that was eventually proven a fraud paid a dividend?  Challenge.

9. Signed contracts with Apple(AAPL_), Nike(NKE_), Sony(SNE_), Adidas, Toshiba, etc.

Have all of these companies confirmed these contracts not only exist, but exist as CCME has represented?

10. Independent investors have visited the company and not found indication of fraud.

Ask Sam Antar, co-mastermind behind the Crazy Eddie fraud(s).   Just because you can’t see fraud doesn’t mean it isn’t there.

11. Mike Koza, who has averaged 33% a year for almost 10 years, owns CCME.

What % of his portfolio does his CCME holdings represent?  How long has he held it for?  What’s his investment thesis?  Is it a momentum play or a fundamental one?  In order for this last point to hold any credibility as a reason to be long the stock, each of these questions needs to be addressed.

Oh, and one last thing: The firm that last year called Rino International a fraud has just initiated coverage on CCME, referring to this firm as a fraud, as well.

Their rationale seems to be a bit stronger than Bradford’s:

Muddy Waters LLC has initiated coverage on China MediaExpress Holdings, Inc. (CCME) with a Strong Sell rating and an estimated value of $5.28.

  • Muddy Waters, LLC believes that CCME is engaging in a massive “pump and dump” scheme whereby it significantly inflates revenue and profits in order to enrich management through earn-outs and stock sales.
  • We estimate that CCME’s actual 2009 revenue was no more than $17 million (versus $95.9 million it reported).
  • The data CCME provides to advertisers shows that it has fewer than half of the 27,200 buses it claims to have.
  • The CTR reports that the Company uses to support its claims contain gross errors that we conclude are due to manipulation by the management.
  • We estimate that over half of CCME’s network buses do not actually play CCME content. Rather, drivers play DVD movies that are often provided by passengers.
  • We caught CCME’s management telling a particularly egregious lie – that its new website (www.switow.com) has entered into an agreement with Apple (or one of Apple’s) distributors. Neither is true.
  • Similar to RINO, CCME is an obscure company in its industry. Media buyers who would have to know it if CCME were to be believed have never even heard the Company’s name before.
  • CCME’s core audience is sub-Greyhound Bus demographic.

Only time will tell how this shakes-out but today, it looks like that call for a massive short-squeeze was not only premature, but extremely naive.  CCME is already down 33% today on this news.

I don’t like engaging in ad-hominem attacks but the author, Glen Bradford’s investing experience/background (provided in his bio), in consists of a bachelors in engineering combined with an MBA (one of those 3+2 programs), which he completed less than a year ago.  It also looks like he’s been trading his own account for 2 or 3 years (maybe more?) quite successfully.

I don’t know Glen, but from reading this article and a few of his others, he strikes me as one of the people I mentioned earlier.  A guy with brains and drive who thinks he can “make it” in Finance, yet possesses little-to-no knowledge of the many lessons learned by investors past.

If you don’t know the stories of LTCMEnron, Tyco, Worldcom, Adelphia, Global Crossing, the S&L Crisis, how portfolio insurance contributed to the 1987 crash, or countless other lessons going back centuries, then you have no business investing your or anyone else’s money.

Actually, wait.  Go ahead and try to be an investor, just don’t be surprised when your ignorance comes around to bite you in the ass.

UPDATE: I’m reminded the Zack’s that the author was referring to may be http://www.zackspro.com/zind_zrank.asp I do subscribe so I can’t speak to whether his claim is accurate or not. h/t BHA


28 Responses to “Fuzzy Logic, or: Those Who Fail to Learn From History”

  1. Nomadder February 3, 2011 at 5:46 pm #

    The writer of the article you ripped apart runs hedge fund money for clients! He is young and just graduated school, but Jim Cramer found him as he traded his way through MBA school. So Jim Cramer and Seeking Alpha and some other blogs pumped this guys stuff.

    Meanwhile he was also pushing DJSP and thought it was deeply undervalued at $5, now its at $.52. That is not a typo.
    Oh yeah and his middle name is “DoNotLose”- Hilarious!!

  2. Johnny905 February 3, 2011 at 5:47 pm #

    I don’t follow CCME, but great article. Nice job.

  3. DL February 3, 2011 at 9:24 pm #

    What a joke this is! Check your facts first. For one here:


    • The Analyst February 4, 2011 at 12:14 pm #

      You clearly did not read or take to heart any single point I made in the article. Way to go, champ! What price did you get into CCME at?

  4. MChambliss February 3, 2011 at 9:52 pm #

    This article was written to jump on the train without much thought.

    Muddy Waters is not a research “firm”, its a guy with some 20 web sights who has no qualifications other than having worked in China once (storage facility) and for his father’s home based firm. His research is very sloppy and can be picked apart on Google and Bidu. BTW: the Apple thing is already put to rest.

    Citron Research is another one-man blog, and this man has a history of civil fraud as well as NFA actions against him for fraud and deceptive practices.

    Starr International’s position and research is well documented. Check their web site.

    You talk about “knowledge learned by investors”. I would have thought that in your vast knowledge, you would have learned the part about doing your own homework and knowing something about those you grant credibility.

    • The Analyst February 4, 2011 at 12:15 pm #

      I wrote this piece before the Muddy Waters report came out, and added it at the last minute before I published it.

      I’m glad you took the time to respond to a single point I made in the post, though. Care to elaborate how “the apple thing has been put to rest?”

    • The Analyst March 17, 2011 at 4:49 pm #

      How do ya feel about those big man comments now, buddy? CV Starr’s board rep resigned. She was on the Compensation committee, not the Audit one, too, btw.

  5. Joseph K. Teng February 3, 2011 at 11:00 pm #

    I might as well make good use of this blog and urge investors to do some DD on IBIO.


  6. Redbull February 4, 2011 at 12:14 am #

    So you’re saying you value the opinion of a guy running an investment research company out of a self storage facility in Shanghai (Muddy Waters) over the actions of Forbes, IBD, Deloitte, and Hank Greenberg.

    That makes sense.

    • The Analyst February 4, 2011 at 12:16 pm #

      Muddy Waters report was added well after I was done with the rest of the piece. If you do not understand the larger points I’ve made then I really can’t help you. Good luck being long that stock as anything other than a momentum trade.

  7. raul February 4, 2011 at 2:35 am #

    how much of a cut of the $200,000,000 lost yesterday are you getting for spouting this flagrantly spurious garbage? you’re a joke

    • The Analyst February 4, 2011 at 12:17 pm #

      I have no position in CCME, thank you for reminding me, I should have put that in, sorry. I have never been either long nor short that stock.

  8. kingfrogcash February 4, 2011 at 7:22 am #

    Feel free to post the CCME chart of 1/27/2011 the day Glen’s article was published. $19.56 the previous close to a intra day high of $23.15 before the Shorts hired Citron and MW the hit men.

    • The Analyst February 4, 2011 at 12:18 pm #

      1. I wrote this well before I even saw the Muddy Waters report.

      2. Whoopdeedoo, a stock went up one day! We’ll see how this one shakes out, k?

      • kingfrogcash February 4, 2011 at 2:49 pm #

        Ummm you wrote about Muddy Waters in the column.
        Before you looked at it. Wow, thats powerful!
        And your link to Deloitte shows a lawsuit in progress.
        I don’t see a conviction of Deloitte in Bear Stearns.
        And based on that link, you must feel that no auditor can be trusted since it names most if not all top 4 world wide firms. Therefore the Short bloggers must have more weight in your eyes, eh?

        • The Analyst February 4, 2011 at 2:52 pm #

          You’re STILL missing the larger point boss. I am not advocating either a long OR short position. I am simply saying that one person’s support for a long position is not nearly as strong as it seems at first glance. The even larger lesson is that, as the title implies, those who don’t learn from history are doomed to repeat it.

          Pick any stock in the world, I can come up with a handful of reasons why its a strong buy, even if its obvious to anyone who knows their ass from their elbow its a dog with fleas.

          Check out a list of cognitive biases, among them, confirmation bias comes to mind here.

  9. Phazer February 4, 2011 at 4:52 pm #

    The guy already said ten times the post was written before the muddy waters thing yet you guys bring the same stupid point up over and over. How about instead of wasting the writers time you guys bring in some new information or ask a good question?

    My question: If CCME is to go down how many more of these fake chinese companies are going to be exposed along side with it?

  10. Redbull February 4, 2011 at 5:19 pm #

    “5. Its Zack’s Rank is #1.

    Its not even on the top 10. What the hell is this guy talking about? It wasn’t on the top 10 last year, either! Is there another Zack’s I don’t know about?”

    A quick Google search is all you needed:


  11. Guest.... June 14, 2011 at 10:33 am #

    Sounds like a sore reply… Did the author fail to raise a fund, even with his superior experience. Picking someone apart like that is not very nice. At least he has the courage to put his name to his thoughts….

    • The Analyst June 14, 2011 at 10:35 am #

      Or, the comments of someone with far superior knowledge and experience.

      As far as the name, see our About page.


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