Chanos interview on Bloomberg short Ag bank of China http://finance.yahoo.com/q?s=1288.HK My comment: other Chinese banks that may be good shorts are http://finance.yahoo.com/quotes/128...08.hk,2356.hk,0998.hk,1988.hk,3328.hk,3968.hk Of these, Bank of China is the closest to its 52-week low http://finance.yahoo.com/q?s=3988.HK Chanos: H share market (Hong Kong listed) is liquid http://topforeignstocks.com/2011/08/06/what-are-the-types-of-stocks-traded-in-china/ http://topforeignstocks.com/wp-content/uploads/2011/08/China-Stock-Types.png
Daal Are you thinking of any specific examples? It's hard to answer your questions without having a stock(s) to refer to. To point out the obvious, low price does not necessarily equate to low market cap. eg. AMR is at about $1.65 but it still has a market cap of 550 million. So plenty of downside remains as it progresses towards bankruptcy. ALU has a share price of $1.59 but has an even higher market cap of 3.43 billion. If it is heading to bankruptcy then it has even more downside. When deciding upon position size, I keep the market cap of the company in mind. My short position in UAL DAL is larger than CLWR, because the latter could be acquired by Sprint at a high price. Whereas the chance of UAL DAL getting a buyout is close to zero. Also as the stock price declines, the size of the position reduces automatically. You are right that as these stocks approach zero, they start to act like a zero-strike-price call option. A lot of the time "investors" take the bet that "it can't go much lower, and if it does, I will only lose $x". If you have a lot of people doing that (look at MF for example) then I am often happy to take the other side.
The thing is, this 'lotto bias'(people wanting to make a lot by using a little) can be countered by fact that during panics and large declines, usually, the equity premium rises(VIX spikes historically have lead to market beating returns in the short-term) So to me, its not entirely clear that there is some kind of edge here. To put another way, even though there is a decent market cap out there I'm not highly confident that market cap is mispriced. I'm not sure which of those 2 elements is stronger
I think it comes down the specifics of the individual situations. If I read in an article that the company's bonds are yielding xx%, then it is rarely consistent with a company having a $xxx market cap. ie, if you "believe" in the company you should buy the debt and not the equity. Often the best-case scenario for equity investors is a dilutive capital raising. That's what happened with YRCW. A whole lot of overly-optimistic "investors" buying the stock, when they were weeks or months away from suffering 98% dilution.
The thing is, if these investors were counting on a 10x return if the company did not go bankrupt they would only have to be right 9% of the time to have a positive expectation trade What I'm saying is that when all the headlines are bad and people are bearish on the stock usually the equity premium rises(Ala BP last year), low priced stocks also draw these gamblers. These gamblers might be bad investors but their silly plays could actually be correct sometimes My instinct tells me the gambling bias is larger in very low priced stocks when bankruptcy is likely but I don't think is there kind of massive edge. It only takes one GGP type loss to wipe out dozens of gains That said I'm talking about these situations IN GENERAL. I'm speculating whether a long-term index of low priced stocks near bankruptcy would have positive returns or not. In terms of specific plays I'm sure a trader can find some stocks that are so likely to be bankrupt that the common investors are wrong(Specially if buyouts are unlikely). But in that case the trader is earning excess returns because an edge he has doing his analysis of financial statements against other market participants not because there is an particular edge in this play in general
At the risk of being immodest - I think I have that edge. Of the top of my head from recent months: AIB (or AIBYY), IRE, YRCW, MF. But there have been others as well. Edited to add: I did not short GGP in the weeks leading up to its bankruptcy (can't remember why). However those types of situations / recoveries are rare. Also the stock didn't go from $0.30 to $17.45 in one day. It took 21 months for that climb to happen. There would have been plenty of opportunities for anyone short the stock (with a bankruptcy thesis) to get out before it reached double digits.
What is your opinion on the likely long-term return of a index of low priced stocks that the bonds indicate have a decent chance of going bankrupt?
very high, especially if you buy the corporate debt as a hedge. Look at AAR and AMR. You get a $1.96875 coupon from AAR (yield 22%), and people want to buy the stock for over $1.60 ? Just crazy.