Chinese Internet Carnage Continues, Market Stabilizes

The market held the gap up this morning and has been trading in a tight range, relieving some pressure on this oversold market but not able to stage any sort of meaningful bounce. There have been some calculated longs and shorts on the board, but the big story continues to be the beatdown of the Chinese Internet stocks.

At one point earlier this year, the Chinese stocks were leading the market higher and investors were enthusiastically snapping up shares, looking forward to the next big investing horizon. Fast forward a few months, and the picture could not be any more different.

A wave of frauds have swept through the markets, centered mainly on Chinese reverse mergers. As fraud after fraud has been exposed by Muddy Waters, Citron Research, et al, investors have started to grow skeptical of the group as a whole. Astronomical valuations were no longer ignorable, and the mass exodus has been shocking.

A focus for me starting last week were the recent IPOs, E Commerce China DangDang (DANG) and Youku.com Inc (YOKU), whose IPO share lockups end this week. Both have been taken to the woodshed, and with triple the shares floating now for DANG) and soon to be almost double for YOKU, the selling pressure should persist for the next few weeks. Before it’s all said and done I wouldn’t be surprised to be YOKU in the $20 range.

The selling has not been limited to those though, SINA Corporation (SINA), Sohu.com Inc. (SOHU), Qihoo 360 Technology Co Ltd (QIHU), Baidu.com Inc. (BIDU) have also gotten sold off hard, to various degrees, hard based on Chinese stock skepticism. Compounding the problem over the weekend was margin requirement increases from several brokerages on stocks domiciled in China.

By: John Darsie

Disclosure: Scott Redler has no positions

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