Thursday, September 29, 2011

Focus Media (FMCN) - Is China A State Backed Accounting Fraud Epidemic?

FMCN is trading $21.37, down 14.1% with IV30™ spiking up 33.9%. The LIVEVOL® Pro Summary is below.

Focus Media Holding Limited (Focus Media) operates an interactive digital media network. The Company offers interactive digital media platforms aimed at Chinese consumers.

I can't find any company specific news about this company today other than the generic Chinese systematic report from DOJ. Here's a news snippet from WSJ:

Chinese stocks are getting crushed today, partly because of a report that the US government’s investigation of their accounting is gaining some muscle power.


Many of these names have already been hammered on such concerns for several weeks now. Some of them have political risk at home to contend with, too, along with growing worries about the strength of China’s economy.
Source: Chinese Stocks Crushed on Report of DOJ Probe

For those of you new to this story, suffice it to say a number of Chinese stocks have had egregious fraud claims surrounding their accounting, including one in particular that threatened to not let Deloitte auditors leave the company premises with audit papers in hand. You can read more about that one here:
The Audacity of Chinese Frauds from The New York Times and written by FLOYD NORRIS.

IMHO, if there is a Chinese bubble, it has a risk of being several fold -- one is just a normal bubble, like we had. The other is an absolute unabashed outright government sponsored accounting fraud epidemic. Now, before we point fingers, need I remind us of... Enron, WorldCom, HealthSouth, Tyco, Global Crossing, Arthur Anderson, etc, etc.

Given that our NASDAQ fell ~70%, I would say that's possible in China as a catastrophic worst case. Yeah, 70%.  But it won't happen like the US, it will be drips and drabs surroundned by GDP growth slowing.

Let's start with the Skew Tab for FMCN (below).

We can see the front is elevated to the back. The ATM vol diff is ~5 points. To the downside it grows to over 25 vol points.

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

We can see this was a $27.41 stock on close 9-27-2011 and as I'm writing this it's already down to $20.35. The vol has absolutely exploded from 58.13 on 9-27-2011 to now 98.46 as I'm writing, or ~ 70%.

Finally, let's look to the Options Tab (below).

Potential Trades to Analyze
So here's the deal with these guys -- some of the Chinese companies have been halted for multiple months -- that leaves option positions absolutely ambiguous. Having said that, I have dabbled in a few of these names (couldn't help but sell that vol) so, ya know... Buyer (or seller), beware, but the stocks are at the very least interesting to analyze.

This is trade analysis, not a recommendation.

Legal Stuff:
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