Chinese Stocks: Why They’re Under Scrutiny

When you trade micro-cap stocks or small-cap stocks, there is added risk. And when you trade Chinese small-cap stocks, there is even more risk.

Just take a look at the media these days and you’ll find some small Chinese company making the news…but for the wrong reasons.

There has been a rise in discussions on the strategy of reverse mergers in the media. The speculation is that numerous small Chinese stocks debuting on the domestic exchanges (via reverse mergers) are currently being investigated for pump and dump schemes and questionable reporting practices on their statements.

Reverse mergers or takeovers occur when a private company that wants to go public finds a shell company that is trading and buys the shell. The private company then transfers its assets into the empty shell and, after some minor reporting, the company becomes public.

The advantage is that it is much easier to take over a shell company than it is to get listed via the traditional method. The reporting requirements are much less stringent in a reverse merger. This appears to have attracted numerous Chinese companies.

I’m not saying all of these Chinese reverse mergers should be the subject of investigation; but, as this strategy is the easiest method of listing on domestic exchanges, I’m not surprised to hear of wrongdoings in this area.

It appears that there’s a witch hunt on for these small Chinese companies, many of which are likely legit. Yet, we are seeing short sellers, bloggers, and anyone with access to writing on the Web posting negative reports on small Chinese companies.

China MediaExpress Holdings, Inc. (NASDAQ/CCME) saw its share price plummet by over 30% on surfacing news that the company would be the target of an investigation for a pump and dump scheme. The allegation is that the company, via a reverse merger, pumped up the positive news, driving up the stock price, and then dumped the stock for massive profits. Again, it’s only an allegation and is yet to be proven.

China Electric Motor, Inc. (NASDAQ/CELM) hit a wall on Thursday morning after announcing the delay of its 10K, Q4, and 2010 reports.

China Education Alliance, Inc. (NYSE/CEU) announced on Thursday that it would need to delay its earnings conference, but said it was not due to accounting issues. But you have to wonder…

China Century Dragon Media, Inc. (AMEX/CDM) is under investigation and could see delisting from AMEX.

FUQI International, Inc. (formerly NASDAQ/FUQI; now Pink Sheets/FUQI.PK) was delisted. It currently trades on the Pink Sheets.

Other Chinese companies subject to allegations include China Green Agriculture, Inc. (NYSE/CGA), China Agritech, Inc. (NASDAQ/CAGC), AutoChina International Limited (NASDAQ/AUTC), and China Valves Technology, Inc. (NASDAQ/CVVT).

I have covered many of these stocks based on what I believe were factual results and information. You cannot always differentiate the good information from bad. When a sole short seller attacks a company, you have to take a step back and wonder.

Worst yet is that we are seeing stock bloggers rip into companies, driving the stock down. When a sole blogger can drive a share price down, you come to understand the extreme nervousness in the market.

The way I see it is that we have to be careful here. There are some suspicious companies, but I feel that the majority of Chinese companies are legit, including some of those that formed via reverse mergers.

While there are problem companies, many of these Chinese stocks are unfairly being dumped upon. I suggest you take the opportunity to buy on weakness, unless there are numerous allegations against the company, especially from reputable sources. In these cases, AVOID.

George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.

No comments yet.

View the original article here

Precious Metals Investments: How They’re Affected by the Middle Eastern Unrest and Devastation in Japan

Libya is getting bombed by American, British, and French fighter jets. The situation in Libya could spill over to other Arab countries in sympathy.

Japan just suffered a horrific tsunami and related leak in one of its nuclear generation plants. The damage could impact the country’s economic renewal.

In all of this, after declining to just north of $1,300 an ounce, gold has been rallying. It is trading at a key level of $1,430 on the chart.

Investing in gold is a safe haven play when the market risk rises.

Gold has rallied in each of the last 10 years and shows a beautiful bullish price chart. My gold advice would be to accumulate gold on weakness. The situation in Libya could worsen and there are also tensions in Iran and other Middle East countries. This means added global risk. Oil is trading at over $105.00 per barrel on the threat of more disruption in oil from Libya.

In my view, the key determinant of how gold will fare will depend on the direction of stocks along with the geopolitical tensions.

A strong and bullish stock market tends to drive some selling in gold, as capital flows into equities from gold. This could materialize, but my feeling is that gold will receive support from the global uncertainties in the Middle East and Japan, along with higher expected demand flowing out of China and India as the countries’ per-capita incomes continue to edge higher.

If the Middle East situation worsens, it would drive up oil prices, which would impact economic growth at a time when the economies continue to be at risk. I would not be surprised to see gold move towards $1,500 an ounce over the next year.

Also don’t forget about the mounting debt and deficit in the United States. The country has over $14.0 trillion in debt and is paying billions in interest daily. Many states are struggling to make ends meet and are looking at severe cuts in the state budgets.

On the chart, the Relative Strength for the April gold has strengthened, so there could be additional upside moves in the near term. There remains a bullish golden cross on the chart, with the 50-day moving average of $1,384 above the 200-day moving average of $1,321. Look for resistance at the 13-week high of $1,434.1 and $1,440. The recent move above $1,440 failed to hold.

Silver has also followed gold higher, with the May silver futures contract above $36.00 an ounce. Silver is a play on the economic recovery, as it’s found in electronics.

I also like copper as a play on the recovering global economies, especially in industrial applications and housing.

My advice to play the commodities is to buy gold stocks, silver stocks and oil stocks on weakness, especially if the situation in Libya and the Middle East worsens and Japan weakens.

George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.

No comments yet.

View the original article here