ANALYSIS: The Curious Case of Yangtze River Port and Logistics
After two successive drubbings,Yangtze River Port and Logistics had enough and filed suit against Hindenburg Research and will take their complaints to a judge.
I learned as a commodity trader that markets fall three times faster than they rise. I also learned that most public (retail) investors participate in the markets only from the long side, i.e., buying shares, while professional traders often enter from the short side, i.e., selling shares. If you took a poll, 90 percent of the investing public doesn't know that short-selling exists, and remain confused how one could sell something without actually owning it.
I don't want to delve too deeply into the mechanics of how short-selling works, as that is an article for another day. For the sake of this article, let's accept that if you "buy" a stock and it goes higher, you'll make money; and if you "sell short" shares in a stock, you make money when it goes down.
Below is a chart of Yangtze River Port and Logistics Ltd. (Nasdaq: YRIV), which primarily engages in the real estate and infrastructural development business in the People's Republic of China. It operates Wuhan Yangtze River Newport Logistics Center, a port logistics center located in Wuhan Newport Yangluo Port, in the Hubei province of China. Professional short sellers have attacked this stock two years in a row on almost the same day, in the same way, and the company is fighting back using the court system to air grievances, filing a lawsuit in New York State against the short seller and partners.
I see this as a trend when the exchanges turn a deaf ear to their listing members who choose litigation. I am not making any determination of who is right and wrong here between the short seller, Hindenburg Research, and the company and its officers. This will take care of itself, but the way to keep score here is the price of the shares and its valuation reflected by market capitalization, and the scoreboard and unlevel playing field put the companies at a huge disadvantage.
Hindenburg took the valuation of Yangtze River from $2 billion to $100 million or from $12 to a penny stock, and they did it using trading technology and a website.
In December 2018, Hindenburg Research issued a research piece attacking the company on nearly the same date that it did in 2017, and, in similar fashion, flooded the market with selling and, using advanced trading algorithms, crushing the share price.
It is a hit-and-run strategy, and the U.S. based Nasdaq exchange is of little help to the company in stopping these holiday lynchings.
The SEC also has little to say, and lets these short-selling funds run roughshod. Brokers are permitted to grant access to firms like Hindenburg to sell short shares without a legal and confirmed borrow in front of the public traders. The short sellers' actions essentially destroy whatever goodwill the company has built with shareholders, and this can happen in just a single day. In this case, Hindenburg's massive attack was swift, calculated, and highly effective.
After two successive drubbings,Yangtze River Port and Logistics had enough and filed suit against Hindenburg Research and will take their complaints to a judge. This drastic action appears to have been inevitable as Trump-era markets continue in a deregulation cycle after the cryptocurrency debacle and government shutdowns. The lack of attention and funds make it seem there is no regulator at all, leaving listed markets in the U.S. to become shooting galleries for hedge funds aiming at Chinese companies regardless of sector.
Now the companies are fed up, and investors should take notice because we don't want good companies run out of town because of greedy short-sellers skirting the rules.
Again, I am not saying the short sellers are wrong and the company is right, as this is for the court and the market to decide. This freedom to attack any company at will, however, is undoubtedly going to lead to legitimate companies being tossed out with the bad.
I can say as a professional trader that the tactics used by the short sellers leave a wake of destruction that isn't a positive development for the investing public. I understand that every market should have short-selling funds that uncover fraud, but this is not about exposing Enron or WorldCom. Rather, this is nothing but a hit-and-run aimed at Chinese companies listed on U.S. exchanges. Snapping one photo of overgrown foliage is not a short investment thesis.
Buyers and sellers make up every market from soybeans to Netflix, but abusive manipulation using trading algorithms and currying brokers' favor with the tantalizing bait of commissions is bad for the industry and for investing in general. Meanwhile, a public becomes further confused as it grapples with how these funds are able to sell something without owning it.
(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has been long shares since 2016. He has not been compensated by the company. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)