Block's Conduct Smells Fishy To Me!

[Parsad]

This is not accurate.

 

Take a long investor in ETFs who decides to hedge his position with a 100% short.

 

If he uses Chanos (who earns 1% p.a. after costs, roughly), his total return would be the long ETF return + 1%.

 

If he goes with your method of buying ETFs, his return will be the long ETF return - the cost of the ETF puts. My guess is that cost of the ETF puts would leave the long investor with a return that is less than the risk-free rate of return. This makes sense intuitively - otherwise, we would have found the solution to alchemy by creating a riskless return.

 

This is the reason why Chanos exists and his business model works. In my former example, the investor has enhanced his returns while at the same time significantly reducing his volatility.

 

Oec, my point was that Chanos existence is moot.  The same investor could have gotten better results than being long the ETF and long Chanos, by simply being long the ETF and holding the same capital allocated to Chanos in a T-bill!  You can carve up the turkey any way you want, but it's still a turkey.  Cheers!

[Ballinvarosig Investors]

Oec, my point was that Chanos existence is moot.  The same investor could have gotten better results than being long the ETF and long Chanos, by simply being long the ETF and holding the same capital allocated to Chanos in a T-bill!  You can carve up the turkey any way you want, but it's still a turkey.  Cheers!

I think you misunderstand. The difference between Chanos and yourself is that he is offering a very specific product as opposed to someone like yourself who is driven purely by generating an overall return. His speciality is being short, and he does that extremely well, outperforming the market by 7-8%. For example, if you had the wherewithal to have been invested in him in 2007, you would probably have outperformed the market by 100% in the next two years.

 

As for fishy conduct from Block, Sino Forest got battered again today. The shorts might have been wrong about Fairfax, but it doesn't mean they're wrong about everything, as I suspect they are here.

[Guest Hester]

As for fishy conduct from Block, Sino Forest got battered again today. The shorts might have been wrong about Fairfax, but it doesn't mean they're wrong about everything, as I suspect they are here.

 

Did anyone listen to the CC? That was an odd Q&A.

 

I also find the fact that their internal investigation will take 2-3 months weird. To me this is an obvious admission from the board that MW's claims have at least some meat to them. If MW was just set out to lie and manipulate, how hard would it be to refute their allegations? It wouldn't necessarily take 3 months.

 

BTW, I don't think anyone has posted about this story:

http://www.nationalpost.com/scripts/other+explosive+Sino+report/4903210/story.html

 

An analyst in 2004 had a very negative report on Sino. The similiarities between his allegation's and MW's allegations are extraordinarily striking.

[Parsad]

I think you misunderstand. The difference between Chanos and yourself is that he is offering a very specific product as opposed to someone like yourself who is driven purely by generating an overall return. His speciality is being short, and he does that extremely well, outperforming the market by 7-8%. For example, if you had the wherewithal to have been invested in him in 2007, you would probably have outperformed the market by 100% in the next two years.

 

Actually, I think it's the other way around.  To put this as simply as I can, I think Chanos' product is redundant. 

 

If you view his results long-term, then any investor would have been better off buying T-bills.  If you view his returns short-term, then there are other products that do just as well a job, at a much more efficient price.

 

There is no need in the industry for a short-only hedge fund.  His outperforming his peers by 7-8% is the same as a stool with only three legs...much better than a stool with only two legs, but do you still really want to sit on it?  Wherewithal be damned!  Cheers!   

[beerbaron]

There is no need in the industry for a short-only hedge fund.  His outperforming his peers by 7-8% is the same as a stool with only three legs...much better than a stool with only two legs, but do you still really want to sit on it?  Wherewithal be damned!  Cheers!   

 

Actually a 3 leg stool is technically better then a 4 leg more. A 3 leg stool will never wobble..

 

;)

 

Beerbaron

[Parsad]

Actually a 3 leg stool is technically better then a 4 leg more. A 3 leg stool will never wobble..

 

Ah Beerbaron, that explains it!  I totally misunderstood.  Chanos doesn't wobble!  ;D  Cheers!

[lessthaniv]

Reading up on Orient Paper: ONP tonight.

 

This is another company that Carson Block wrote about. Sounds like his inaugural report. From what I've gathered so far here is what's occurred.

 

1) January 2010: Carson approaches ONP while working for Daddy's firm W.A.B Capital. Tours the facilities.

2) Offers to write a glowing report for a large sum of money and an equity interest.

3) Company turns the offer down.

 

4) June 2010: Carson shows up again under the Muddy Waters banner with a scathing 30-page report calling the company a fraud and alleging the misappropriation of $30M worth of corporate funds and various other dubious acts. Carson is short the stock and in a position to gain significantly from the fall in the companies stock.

5) Given the severity of the allegations, the audit committee is forced to form an independent committee to investigate these allegations.

6) It took the company from the end of June to the end of November to complete the investigation which concluded with a report that the allegations were bogus.

 

Stakeholders have lost:

 

Reputations, market cap, numerous expenses to cover the costs of the Independent committee:

 

 

 

The following excerpt is taken from a June 30th press release issued by the company ...

 

Muddy Waters claims in the report that as a result of its short position on the day the report was issued it stands to realize significant gains in the event that the price of Orient Paper's stock declines. Additionally, Muddy Waters states in the report that they make no representation as to the accuracy, timeliness or completeness of the information they provided. Furthermore, Muddy Waters has no apparent history of providing credible independent research or any research for that matter as they state this was their "inaugural report" and even though their research is "available as a subscription service" to institutional investors and they are available for "confidential due diligence engagements" they were making an exception with this report which is being provided "free of charge." According to their website, Muddy Waters consists of a two-person team that, based on a review of the bios on their website, has no apparent experience in the paper industry in or outside of China. In addition, the team only visited Orient Paper's facility once for 90 minutes after a major snowstorm. One of the team members is a U.S.-educated former attorney and owner of a self-storage business in Shanghai who is "proficient" in Mandarin. The other is a native Southern Californian who owns a business that "supplies products and materials to the global construction industry from China," and claims to have worked as an "equity analyst with a Los Angeles-based investment boutique" without naming the firm or the period of time he worked there or the position he held. The latter team member is also "fluent in spoken and written Indonesian." When this team visited the Company's facility in Baoding they offered to write a paid-for research report on Orient Paper, but the Company declined their offer.

 

For balance, here is the original hit piece:

 

http://chinesecompanyanalyst.files.wordpress.com/2010/06/muddywatersresearch_onp_june-2010.pdf

 

>:(

 

 

[rijk]

sino forest really doesn't need block to make them look bad....

 

anyone who has listened to the conf call and still believes that this is all above board deserves to lose his/her money.....

 

imagine a $5 billion market cap company in the US that has been in business for 17 years but that doesn't pay their own taxes, assumes that these taxes have been paid by key customers, but doesn't have any way to substantiate this and therefore records a contingent tax liability of 100s of millions just in case.......

 

regards

rijk

[Guest Hester]

sino forest really doesn't need block to make them look bad....

 

You're absolutely right. Those who are following and actually doing research on this, and from what I've seen that's few on this board, will know that there are/have been plenty of sell side analysts over the years who have been critical of Sino.

 

I'd love to hear from any longs who actually listened to the CC. How do you reconcile the odd actions during the CC with the belief that this company is just another innocent victim of short seller manipulation? Why will it take 3 months to investigate supposedly blatant lies and falsehoods stated by MW?

 

[libor.plus1]

"Our corporate structure is so simple: Sino distributes timber to offshore units, who sell that timber to AIs. But our offshore units aren't paid in cash, they are paid in more timber!"

 

"We don't know if our AI's pay taxes or not... we have no way of knowing, so we just have 4 year contingencies just in case they don't pay taxes"

 

"We are accused of a 5B fraud, but I don't know why you would want a letter from E&Y that we provided them with the name of our AIs.. that's a strange request.. but I'll try"

 

really? REALLLLYYYY???

[oec2000]

It gets curiouser and curiouser!

 

"You know what, we don't trust our AIs to have paid our taxes on our behalf so we provide for them, just in case. And, you know, we can't really ask them if they have paid because they may not want to tell us, or worse, they may lie to us. But, hey it's cool, we trust them enough to let them hang on to all our cash proceeds from timber sold." Hmm, I wonder whether they can ask the AIs whether the cash or timber is still there. What if they don't want to tell, or worse, lie?!! ;D

 

"Counsel has advised that pending the report by Price waterhouse and the independent committee, we cannot carry out share buybacks." Er, they have enough cash to buy the whole company at these prices. Why not dispense with the report and just buy back the whole damned company? End of story; end of short sellers. Why wait 3 months? Hang on a sec, what if the AIs don't want to give us our money back. Hey, maybe if we say, pretty please.

 

"We will not disclose the names of our AIs because the information is proprietary and disclosure could expose us to undercutting by competitors." I get this part - if their competitors know the identities of the AIs, they could go to them and sell them timber cheaper. Right, so are we saying that their AIs are dumb asses who don't realise there are better deals out there or don't know how to go out there and look for them? But, hey, somehow they are smart enough to find buyers for our timber at great prices; that's why we need to hang on to them!

 

"We don't get to touch any of the cash from the timber sales because our BVI companies that "technically" own the timber can't have bank accounts in China." Is this true?! They can't set up a structure that allows them to open bank accounts in China? I wonder how Li Ka Shing does business in China.

 

Something smells fishy - just not sure whether it's coming from Block or from blocks of wood in the Sino forest.

[cwericb]

I still don't know who's right here but Both RBC and Dundee have come out with positive reports on TRE. Now Credit Suisse joins them.

 

"We believe TRE's shares face a long road to redemption, but the process is fluid and subject to change as new information becomes known. At the current levels, we believe shares clearly highlight the market's loss of confidence as implied metrics on many measures are well below historic levels. Ongoing efforts to improve disclosures, among other things, may help slowly regain market confidence. Our financial model remains unchanged since the start of recent share price volatility, but, we apply an 80% discount to our C$28 NAV to obtain the C$6.00 target. That target is also supported by a conservative liquidation scenario. We retain our Neutral rating."

 

http://community.nasdaq.com/News/2011-06/update-sinoforest-corp-down-14-as-credit-suisse-crunches-the-q1-numbers.aspx?storyid=80825#ixzz1PO4m8OVu

 

What I don’t understand is why some people here are so quick to dismiss the reports from reputable firms like RBC, Dundee, and Credit Suisse and jump on Bock’s band wagon when we already know that he stands to profit hugely from TRE’s demise, who supposedly previously tried to extort money from Orient Paper, who operates a hole-in-the -wall company with a staff of two (?), and who gives no fixed address. AND he distributes this report to the general public absolutely free of charge just out of the goodness of his heart. Perhaps Mr. Block is a philanthropist?

[libor.plus1]

I still don't know who's right here but Both RBC and Dundee have come out with positive reports on TRE. Now Credit Suisse joins them.

 

"We believe TRE's shares face a long road to redemption, but the process is fluid and subject to change as new information becomes known. At the current levels, we believe shares clearly highlight the market's loss of confidence as implied metrics on many measures are well below historic levels. Ongoing efforts to improve disclosures, among other things, may help slowly regain market confidence. Our financial model remains unchanged since the start of recent share price volatility, but, we apply an 80% discount to our C$28 NAV to obtain the C$6.00 target. That target is also supported by a conservative liquidation scenario. We retain our Neutral rating."

 

http://community.nasdaq.com/News/2011-06/update-sinoforest-corp-down-14-as-credit-suisse-crunches-the-q1-numbers.aspx?storyid=80825#ixzz1PO4m8OVu

 

What I don’t understand is why some people here are so quick to dismiss the reports from reputable firms like RBC, Dundee, and Credit Suisse and jump on Bock’s band wagon when we already know that he stands to profit hugely from TRE’s demise, who supposedly previously tried to extort money from Orient Paper, who operates a hole-in-the -wall company with a staff of two (?), and who gives no fixed address. AND he distributes this report to the general public absolutely free of charge just out of the goodness of his heart. Perhaps Mr. Block is a philanthropist?

 

first pharagraph: That valuation report by Credit Suisse is garbage. "I'm just gonna slap on a random percent to my NAV calculation to get it a ballpark figure that Sino could trade around." What is 20% of a number that has a huge probability of being made up?

 

Also, it seems like they already had a neutral rating on the stock when it was trading around $20+. Now they are still neutral when its a fraction of that? This is the exact reason people SHOULDN'T have faith in RBC, Dundee, or any other major bank. Their numbers are garbage. Can you honestly tell me that any of these guys sitting in their Toronto office have spent any credible time on the ground in China to the same extent someone like Block who lives there has?

 

And yeah, Block released his report for free. He made money off his position rather than through subscription. He got paid one way or another for his work. How is that any different from the BB analysts who get paid relative to how well their Ibanking arm can market shares of Sino Forest?

 

 

[libor.plus1]

Also, major banks have a break up of 80% buys, 15% holds, and 5% sells. Are these the type of numbers you want to rely on? Can you imagine an economy where 85% of the public companies grow at 15%+ percent a year?

[alertmeipp]

MW's reports contain errors and he didn't even bother to talk to management yet the impact on the company is so huge.

Give me an example of a BB report that met the the above criteria

[oec2000]

I still don't know who's right here but Both RBC and Dundee have come out with positive reports on TRE. Now Credit Suisse joins them.

 

"We believe TRE's shares face a long road to redemption, but the process is fluid and subject to change as new information becomes known. At the current levels, we believe shares clearly highlight the market's loss of confidence as implied metrics on many measures are well below historic levels. Ongoing efforts to improve disclosures, among other things, may help slowly regain market confidence. Our financial model remains unchanged since the start of recent share price volatility, but, we apply an 80% discount to our C$28 NAV to obtain the C$6.00 target. That target is also supported by a conservative liquidation scenario. We retain our Neutral rating."

 

http://community.nasdaq.com/News/2011-06/update-sinoforest-corp-down-14-as-credit-suisse-crunches-the-q1-numbers.aspx?storyid=80825#ixzz1PO4m8OVu

 

What I don’t understand is why some people here are so quick to dismiss the reports from reputable firms like RBC, Dundee, and Credit Suisse and jump on Bock’s band wagon when we already know that he stands to profit hugely from TRE’s demise, who supposedly previously tried to extort money from Orient Paper, who operates a hole-in-the -wall company with a staff of two (?), and who gives no fixed address. AND he distributes this report to the general public absolutely free of charge just out of the goodness of his heart. Perhaps Mr. Block is a philanthropist?

 

First reason:

 

http://www.theglobeandmail.com/globe-investor/markets/markets-blog/sino-forest-volatility-until-clarity/article2060580/

 

Richard Kelertas, an analyst at Dundee Securities who recently removed his target price and “buy” recommendation on Sino-Forest Corp.....

 

First, he calls MW's report crap. Then, he withdraws his own rating and buy recommendation when there has been no change in fundamentals reported by the company. I don't know how you interpret this but it seems to me that Kelertas is now pretty much admitting that his own previous report was crap. (As for the CS analysts, naming a $6 target price when he has a $28 NAV tells you what he thinks of his own NAV estimate.) How can you respect any analyst who lets Mr Market drive his analysis?

 

Second reason:

 

What do you think Buffett will advise you to do with analyst reports?

 

Third reason:

 

How many reputable analysts protected investors from Enron or the mortgage crisis?

 

Btw, in none of my posts have I said that we should believe MW. My analysis has been based solely on info from TRE and I am just calling it as I see it. Bearing in mind that we all have our blind spots, I am more than happy to hear your comments on where my analysis has been faulty. That would be more productive than simply asserting that some have blindly jumped on the Muddy wagon.

[S2S]

MW's reports contain errors and he didn't even bother to talk to management yet the impact on the company is so huge.

Give me an example of a BB report that met the the above criteria

 

Again you're grabbing at straws. If access to management is so great, then why numerous publishing investors (Peter Lynch, Seth Klarman just off the top of my head) attributed this very factor (sell-side analysts' keeping good terms with management teams in exchange for access and investment banking deal flows) as the one reason why they don't trust Street reports?

 

Many forum members are familiar with this interview: http://www.valuewalk.com/videos-with-text-summary/bruce-greenwald-david-winters-tom-russo-and-bob-olstein-on-bloomberg-tv-part-iii-of-iii/ At [6:40] Bruce Olstein dropped the bomb that he intentionally avoids talking to management. Does that make him an amateur? And even the manager who favors the method, Tom Russo, expressed some not insignificant caveats in applying it to emerging markets companies, at [5:35]

 

And since when are Dundee and RBC "bulge bracket"?

[alertmeipp]

I am not the one who compare BB report to MW's.

[cwericb]

What I got from the article was that the 80% depreciation was a number that they estimated was due to the damage done by the MW report. Of course the 80% is an educated guess, there’s no formula that you can use in a situation like this.  They maintain their neutral valuation and assign the same value, depreciated by what they feel is the effect of Block’s report. IF the MW report is essentially false there is no formula for assessing that damage so they make an educated guess.

 

Certainly Block could be right, and I definitely don’t have a lot of respect for analysts in general and have made comments here before as how they wait for a big move in a companies share price and then. In hindsight, they make a forecast. But this is a bit of an unusual situation. At this point I think few, if any know enough about Block to say that he has more he has more credibility than RBC, Credit Suisse and Dundee. At least they have more reason to make an objective valuation.

 

“Also, it seems like they already had a neutral rating on the stock when it was trading around $20+. Now they are still neutral when its a fraction of that?”

 

Come on now, right or wrong it was the ‘Report’ itself, not necessarily anything that Sino did that caused the price to drop by 80%.  Obviously no analyst would have predicted the price would drop by 80% because of some report that comes from out of left field.

 

It is reported that not long ago Mr. Block visited Orient Paper and then offered to write a glowing analysis if they would pay him $300,00. Orient refused. Block then released a damming report driving the price down no doubt after he had shorted the stock. Several months Orient proved Block’s report was wrong.

 

Is that the sort of person you would have faith in?  Do you believe the MW report is correct? Do you believe Sino is a total fraud and is worthless?

[libor.plus1]

I believe somewhere in the middle.

 

Look, both sides are gonna make their case to the extreme - the same way political parties do. But the truth almost always lies in the middle. Given that, I'm not willing to believe SF is an outright fraud. But I am willing to bet that the company isnt nearly as grand and clean as management would like us to think.

 

The reason I appreciate the MW report, is that it got us talking about the other perspective and looking at some skeletons in the closet, even if all the facts arent substantiated. You gotta admit there does seem to be grounds that something sketchy is going on here, even if not all of MW's points are spot on.

[given2invest]

I still don't know who's right here but Both RBC and Dundee have come out with positive reports on TRE. Now Credit Suisse joins them.

 

"We believe TRE's shares face a long road to redemption, but the process is fluid and subject to change as new information becomes known. At the current levels, we believe shares clearly highlight the market's loss of confidence as implied metrics on many measures are well below historic levels. Ongoing efforts to improve disclosures, among other things, may help slowly regain market confidence. Our financial model remains unchanged since the start of recent share price volatility, but, we apply an 80% discount to our C$28 NAV to obtain the C$6.00 target. That target is also supported by a conservative liquidation scenario. We retain our Neutral rating."

 

http://community.nasdaq.com/News/2011-06/update-sinoforest-corp-down-14-as-credit-suisse-crunches-the-q1-numbers.aspx?storyid=80825#ixzz1PO4m8OVu

 

What I don’t understand is why some people here are so quick to dismiss the reports from reputable firms like RBC, Dundee, and Credit Suisse and jump on Bock’s band wagon when we already know that he stands to profit hugely from TRE’s demise, who supposedly previously tried to extort money from Orient Paper, who operates a hole-in-the -wall company with a staff of two (?), and who gives no fixed address. AND he distributes this report to the general public absolutely free of charge just out of the goodness of his heart. Perhaps Mr. Block is a philanthropist?

 

first pharagraph: That valuation report by Credit Suisse is garbage. "I'm just gonna slap on a random percent to my NAV calculation to get it a ballpark figure that Sino could trade around." What is 20% of a number that has a huge probability of being made up?

 

Also, it seems like they already had a neutral rating on the stock when it was trading around $20+. Now they are still neutral when its a fraction of that? This is the exact reason people SHOULDN'T have faith in RBC, Dundee, or any other major bank. Their numbers are garbage. Can you honestly tell me that any of these guys sitting in their Toronto office have spent any credible time on the ground in China to the same extent someone like Block who lives there has?

 

And yeah, Block released his report for free. He made money off his position rather than through subscription. He got paid one way or another for his work. How is that any different from the BB analysts who get paid relative to how well their Ibanking arm can market shares of Sino Forest?

 

 

 

What a post!    Well said, sir. 

[alertmeipp]

I believe somewhere in the middle.

 

Look, both sides are gonna make their case to the extreme - the same way political parties do. But the truth almost always lies in the middle. Given that, I'm not willing to believe SF is an outright fraud. But I am willing to bet that the company isnt nearly as grand and clean as management would like us to think.

 

The reason I appreciate the MW report, is that it got us talking about the other perspective and looking at some skeletons in the closet, even if all the facts arent substantiated. You gotta admit there does seem to be grounds that something sketchy is going on here, even if not all of MW's points are spot on.

 

The error is one thing, but pre-sell the report and not acknowledging the errors is another.

[cwericb]

libor.plus1 .....

 

I pretty well agree with everything you said in your last post. I am just a little surprised that there are some others here that seem to be taking that report almost as gospel and seem to be convinced that, as Block would like us to believe, that SF is a complete fraud. Time will certainly tell here, and there may well be some truth in what Block says.

 

However, the bottom line is that here we have a company that has been around for quite a while, was trading in the mid-$20's and now is $2+. Now if his report is completely correct, the company is probably a zero. But even supposing that his report has some truth to it, is it damaging enough to cut the value of the company by 90%? Or, let's just say for the sake of discussion that Block's report was concocted for nefarious reasons and is essentially a work of fiction. Then what is the stock worth?

 

So if the truth lies somewhere in between, and that seems more and more likely, than do we have a buying opportunity here?

 

Of course a lot of investors don't think so, but isn't that what makes a buying opportunity? I don't think anyone should be betting the family farm on this, but I certainly think it deserves some thought.

[Guest Hester]

It amuses me that people are still arguing over Block/Dundee reputability. Who cares. There's enough facts and info out now where we can form our own opinions and not rely on appeals to authority. I don't think anyone is taking what Block says as gospel, we're just looking at the facts he's presented. I'd say the other side is/was doing the inverse, ignoring what Block says and calling him an evil short seller.

 

There is no way that Sino is a complete fraud, as they invariably have some trees/business, it would be impossible to fake everything.

But just because it's only a partial fraud doesn't mean the stock has any value. Remember, there's a lot of debt, that would pick through this corpse if it turned out to be a fraud, likely leaving nothing for the equity.

 

The more and more I look the more and more I come to the conclusion that there is some type of fraud here. The sheer type of size of their business gives us clues. They have no Chinese website, little on the ground support for dealing with land sellers/the government. This despite the fact that they are a large player in the Chinese forest market, and occupy mid/high single digit % of the global pulp market. The non-disclosing of AI's is also a little odd. This operation is so big (supposedly), if the company was 100% real and competitors wanted to know the source of Sino's AI's they should be able to find out. This amount of forest can't change hands unnoticed.

 

A commentor elsewhere linked an interesting study on large scale forestry acquisition in China. In short, it took them 8 years to acquire 100,000 hectares. It's very difficult given the fractured nature of land ownership and Chinese government bureucracy. Sino purports to do acquire twice as much land in just a few months.

 

http://www.landesa.org/wp-content/uploads/2011/01/StoraEnso_-_Sept_16.pdf

 

Furthermore, the actions of the company are not consistent with an innocent company getting attacked by shorts. The Conference call Q&A was one big red flag. No buy side, bringing back the mega-bullish analyst for more "questions" even though plenty more people wanted to ask, shutting out critical questions without even acknowledging them. They refuse to do a buyback. They call MW's claims "inaccurate, defamatory, and spurious," and yet it will take them 2-3 months to investigate the claims?!?!

 

[oec2000]

From the conf call transcript posted on TRE's website:

 

While we have been transparent in our practices since we began the business in 1994, but do not feel

comfortable to publicly disclosing certain proprietary information such as the name of our customers and

disclose the exact locations of where our plantations are as it will impede our future long-term replanting

program.

 

I was shocked to hear this on the cc, thought I might have misheard so waited for the transcript to confirm it. I don't understand how anyone can ignore bright red flags such as these. How does disclosing the locations of their plantations impede their replanting program?!! I sure don't see the "reputable" analysts calling out mgmt on things like this.

 

It's amazing that some continue to call this a buying opportunity on the sole basis that the company "must be worth something between zero and $20+" and then rationalising this speculation by saying that it's ok because we are not betting the family farm on it and dismissing the red flags because we don't like or trust the guys waving it.