Chinese Small Cap Speculators Wiped Out

I had written a series of posts back in late September through early October at the height of the US "Chinese small cap" bubble when stocks were going up 100s of percent for no reason other than some loose affiliation with China/Asia. Some examples

1. This Day in Bubbles: 3 Random Chinese Stocks
2. This Day in Bubbles: China Natural Resources
3. This Day in Bubbles: Let's Review Yesterday's Group
4. This Day in Bubbles: Party on Garth!
5. This Day in Bubbles: Chinese Small Caps are Back!

Literally for a 4 week period, once Uncle Ben gave the green light to speculate and served notice he was here to bail out the speculators, these stocks went on a rampage. Stocks with revenues of $1M, or $2M, some with massive year over year growth of ... 3.4%... were shooting up like mad. Truly what you could do at that point is to go to the highest % gainers list for the day at 3:50 PM, and buy the 5 that had gone up the most (50-60-70% in 1 day), and then sell the next day for another 30-40-50% gain. Madness. And in retrospect that was the time when the general markets hit their highs.

I noticed last night on the CNBC ticker the AMEX largest % losers some familiar names. Or at least familiar symbols... ORS and KUN - both down nearly 40% yesterday. Hmm... I wonder what happened - I thought all these stocks had a market of 1.2 billion customers and hence should be $100s of dollars higher?

This is a healthy sign... the speculation (and speculators) in these stocks getting smashed. Now I will see I am fully sure at some point in the future these names will have a similar run. In fact probably many times over the coming years as speculators run to stocks under $5, and try to run them up to $20, $30, $40. (I am sure the list below will be a great starting point to find these companies ready to take over the world!) But this is the other side of the trade. Somewhere out there some snarky OTC message board operators are laughing at the ponzi scheme they pulled off, and on the other side a lot of newbie (or greedy veteran) traders have lost a lot of money. And it's a healthy thing; should be part of the bottoming process.

Here is an example of that "unending growth to 1.2 billion customers" when put to reality:

China Shenghuo Pharmaceutical Holdings (KUN) posted third-quarter net income of $900,000, or 4 cents a share, compared with $300,000, or 2 cents a share, in the year-ago quarter. Net sales fell to $4.2 million, from $5.1 million in the 2006 quarter, resulting from the company's adoption of more stringent credit policies which caused a shift in its customer base and a decline in sales volume.

The company revised its guidance and now expects full-year revenue of between $20 million and $22 million and net earnings of between $4 million and $5 million, between 20 cents and 25 cents a share for the full fiscal year. It previously predicted revenue between $24 million and $26 million and earnings of between $5 million and $6 million, or between 26 cents a share and 31 cents a share, for the full fiscal year. Shares fell $1.80, or 25%, to $5.52.

-OR-

Orsus Xelent (ORS) likewise took a pounding. Shares of the China-based mobile phone maker were down 26% after the company cut its full-year sales-growth outlook to between 20% and 30%, compared with 2006. Prior guidance had the increase at more than 30%. Third-quarter earnings rose by a penny from last year to 9 cents a share, but shares were still falling $1.20 to $3.39.

So once again this path to world domination by every chinese company is not really a foregone conclusion. Yes they have demographics on their side but for every 1 company publicly traded in the US there are likely 100s of others competing that we have never heard of.... as I like to say, there are hundreds of "me too" companies out there.

As for our markets themselves; S&P saved itself once again at 1440 - that level has now held 3 times. Until it breaks, we are stuck in a range of 1440 on downside to 1490 on the upside. Again, next week is traditionally a very good week for the market as its lightly traded and retail tends to dominate (and speculators) - however I am not sure how many are in the mood right now after getting smacked around so severely in their favorite names of late.

A random sampling