In spite of the continued hiccups due to the systemic risks posed by the European debt crisis, equities have just completed a three-year bull market and are entering the fourth year. The movement of the price and volumes illustrate that once again the markets are in a hope phase for a self-sustaining recovery in the U.S., a soft landing in China, stability in Greece, and improvement in the eurozone situation, because of the European Central Bank (ECB) liquidity measures. With regards to the eurozone, the recent policy measures to support the banking system and provide Greece with further fiscal assistance have alleviated part of the near-term systematic risks, but I believe the risks in the region remain high.
However, while the overall stock market is edging higher with 70% of U.S. stocks above their respective 200-day moving average (MA), reverse-merger stocks continue to face a tough climate based on mistrust.
The Bloomberg Chinese Reverse Mergers Index (CHINARTO) has witnessed a significant decline due to the numerous allegations related to accounting frauds.
Cornerstone Research recently published the Securities Class Action Fillings report for 2011. According to the report, the Class Action Fillings (CAF) Index reported 188 fillings in 2011, compared to 176 fillings during 2010, up 6.8% year-over-year. The average number of filings from 1997 to 2010 was 194, so the numbers are not unreasonable compared to the average.
The litigation against Chinese stocks listed on U.S. exchanges through reverse mergers accounted for a major component of filings activity during 2011. Out of the reported 188 filings, 33 were related to the Chinese stocks via reverse mergers, compared to nine in 2010, an increase of 267%. And since 2010, there have been 42 class-action filings with Chinese stocks that listed through the reverse-merger route.
Most of the filings for the Chinese stocks via reverse mergers (24 out of 33) materialized during the first half of 2011, so the situation has improved, with much fewer Chinese stocks listing via reverse mergers. There are reports that four Chinese stocks are set to be listed in the U.S., but none are via the reverse-merger route and instead are via the normal and tougher listing route. What this is doing is making Chinese stocks that list here meet the strict listing requirements, so we could see only the better Chinese stocks list here.
It has been evident from the data that Chinese fraudsters have been taking advantage of easy loopholes in the reverse-merger process, which has cost investors billions of dollars. In light of this, the Securities and Exchange Commission and exchanges have adopted strict rules for reverse-merger listing that will it difficult to cheat. The end result will be a better flow of reverse-merger and Chinese stocks to the market, which should help to add some lost confidence to the reverse-merger process.
George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »
Forecasts Aug. 29, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 29, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)