Price action and stocks vs options

[Bondguy8]

when do you guys think piper jaffray will lift suspension? that will glve it a kick. in the meantime i picked up a few more shares today as this has room to run short and long term.

What is piper's rush?  If we think they suspended coverage bc of CYA issues then they will wait for Deloitte as well...

[harry2013]

[/quote]

Maybe this goes without saying, but the audit from Delloitte still is the biggest near term catalyst.  Many is the mutual fund/insurance community (excluding hedge funds) I believe will not buy any shares till Delloitte gives a clean bill of health.  That is just how it works.  Every one here has done a ton of due diligence, but for these large money managers the risk of being 99% sure MW is wrong is not good enough.  I am of the opinion that the audit will take 3-4 months.  So assuming Delloitte started on Nov 1 then don't expect the audit till end of Jan or Feb.  Delloite is going to be very thorough and check and double check everything.  Deloitte's reputation is on the line and they don't want to make an error on something that is so public.  Deloitte will be checking all trails of cash from original point of sale through SP  and finishing with NQ.  This takes time as NQ has customers all over the world.  This is going to be a lengthy audit.

i agree with Kevin on the short term.  I don't see any catalysts that can knock the stock back to 10 in the near term.  We have not heard from MW since analyst day and I don't think NQ left MW with anything else they could challenge.  I see a scenario where Deloitte issues the audit and MW challenges it as saying it was a biased audit...bla bla and then MW never makes another comment about NQ again.

Since we are discussing options here, I have been taking advantage of the high implied vol in Dec and recommend the same for the group as no new news should be coining out in Dec maturity.  Maybe another 13G of a new fund holding a stake or another partnerhip but that's really it.

[/quote]

Taking New Oriental Education (EDU) as the base case scenario for what happens re: special investigation and audit report I have found some observations which I think are applicable and of interest.

(1) 20 Jul 2012 EDU establishes Special Committee to investigate MW claims. 30 Sep 2012 EDU announces results of investigation. So base case Audit should take about 2 months. We are nearly 1 month from NQ special investigation announcement.

Take 10 days off for X-mas / NY period => I am expecting to have audit results very early in the new year.

(2) Actual announcement of EDU Special Audit investigation was buy the rumour sell the news event. From MW low to Audit announcment stock had recovered from $9 to $18. Post the announcement it took over 2 months to break push past $18. I would however note that EDU had its own special considerations at the time including concerns that pace of learning centre roll out was too fast and negatively impacting bottom line. I think mkt was looking at next two ER as confirmation that earnings growth and margins were still healthy. In addition the SEC was still looking into whether EDU had correctly used VIE structures post MW allegations.

Based on EDU price action, I expect NQ to continue to drift up untill Audit results and expect a small sell off at that point. Since NQ doesnt share the similar SEC / Margin concerns  I would expect such sell off to be much shorter lived.

(3) EDU special committee didnt investigate every MW allegation. Most were without any pointed evidence or merit. It did investigate three of the main MW allegations re (1) disguised franchises used to inflate revenues (2) VIEs not used correctly (3) Financials did not reflect income tax paid overstating earnings.

In each case the conclusion was "no significant evidence" found to support thesis. This implies even if some evidence is found to support MW in the case of NQ, there will still be a test for significance presumably with a high threshold.

I therefore think if the audit conclusion if presented in the same fashion, will easily clear NQ, if similarly performed on the main MW allegations i.e. (1) No cash (2) YDT independence (3) YDT sales (4) L2 Cash (5) VIE IPO fund transfer mechanism. I think these are easy to verify although (3) might take longer. I dont think audit will stretch to NQ Mkt shr.

I suspect we drift higher to $18-20 by christmas. It seems a lot of the swing traders have left the name and there is a lot of accumulation and consolidation going on.

[admin]

Thanks for that Harry.

["EDU special committee didnt investigate every MW allegation. Most were without any pointed evidence or merit."]

How depressingly familiar..

[vermut]

If you examine other Chinese stocks like QIHU, YY, BIDU, YOKU you will notice that they have been going nowhere since September. Every pop gets sold off right away. Huge resistance at key numbers. You don't need to go far. Take some of the US internet names like FB, YELP, Z, TRLA, LNKD which were rocking in summer. They are just stuck either in a sideways action or in a correction. The market environment does not favor momentum growth stocks and Internet momentum growth stocks in particular. Now the market is pumping big cap US companies. For example, FB had huge earnings beat but the stock price collapsed. QIHU today reported earnings above all estimates and was crushed -9.5%. Earlier YY was devastated on excellent ER. I ran scans for stocks with super EPS/revenues growth and QIHU, YY and FB pop up every time. But nevertheless they are just getting killed. The market suddenly started hating all the momentum Internet names. it happens now and then. Some stocks become favorable, some fall out of favor. It's a rotation.

NQ just got super unlucky that the recent precipitous drop in the stock price happened exactly when the large summer move in the momentum internet stocks was over. I am inclined to believe that there will be no big move in NQ's stock price before this consolidation/correction move in other Chinese names is over (no idea when, but could take another 3 months, could be half a year). I also noticed that many Chinese stocks have been getting shorted heavily recently. And the summer inertia is still strong with retail investors so they attempt to pick bottoms and buy dips in YELP, YY, QIHU, FB thinking that the big move is just round the corner. Usually every bounce caused by dip buying is very short lived and gets shorted again. This process will continue until 90% of the longs after getting ruined financially by this whipsaw will realize that their stock did not get anywhere in several months and will throw in the towel and leave. Shorts will drop the stock prices to the levels where institutions will create a floor. Many shorts will get burned and will eventually lose interest and cover. The volatility should calm down and this is when the new move usually starts again.

The growth is still strong in NQ as well as many other Chinese stocks so it is a temporary pause before the market starts liking these names again (in 6 months valuations of many names will catch up to their price and the pumping will start all over again).

[AlphaMine]

I was just headed here to see what everyone thought about today's price action because i couldn't find any news or obstensible reason for the drop.  My conclusion was multiple compression/sector rotation which I think is basically what Vermut is suggesting as well right?  However what doesn't make total sense for me is that NQ had already been hit pretty hard and I think it's trading at a dirt cheap forward multiple.  If the stock were to languish for three months GAAP earnings should soar because the stock incentive expense won't crush the earnings.  GAAP is silly to me but people seem to care, in my mind the fact that they doubled the free cash that the biz is throwing off is a much bigger deal.

I do have one other theory to float here, what do you all think about the possibility that some investors were comparing NQ to GOMO and rolling funds out of NQ and into GOMO.  They are somewhat similar anf GOMO's earnings APPEAR a lot healthier at first blush. So maybe people are thinking they can get similar exposure with less headline risk. We here know NQ has a lot of sticks in the fire that make them preferable to GOMO at least IMO but maybe most people don't.

One more last thing, lol. QIHU has been basically range bound with roughly 78.50 being a safe entry point AND a lot of the Chinese and momentum names seem to nearly always be highest in first 25 minutes of trading which I've never seen before the last 60-80 days. I bought QIHU four times right near $78.50 and sold it every time near $85 in the last 60 days roughly. So it'll be very interesting to see if it catches a bounce tomorrow morning and then where it goes from there. Personally I thought the ER was strong.

[vermut]

I just want to warn everyone to be careful now. Goldman Sachs published a report which says that Hedge Funds shorted $545 bln worth of single stocks and ETFs this month. The buy side is getting exhausted and has no power to make strong upwards moves. So many funds start looking for money on the dark side. The same ones who were helping to rise the stock price in the summer could be now on the other side now. The valuations in many stocks are rich and the defenders are weak.

Obviously HFs feel that there is more money to be earned on the short side now. The way NQ is trading looks like it is still getting shorted heavily.

[Haggerston]

I just want to warn everyone to be careful now. Goldman Sachs published a report which says that Hedge Funds shorted $545 bln worth of single stocks and ETFs this month. The buy side is getting exhausted and has no power to make strong upwards moves. So many funds start looking for money on the dark side. The same ones who were helping to rise the stock price in the summer could be now on the other side now. The valuations in many stocks are rich and the defenders are weak. Obviously HFs feel that there is more money to be earned on the short side now. The way NQ is trading looks like it is still getting shorted heavily.

This makes sense as many of the momentum stocks have been down lately. Thanks.

There's a separate thread on YMB talking about yesterday's high put/call ratio as a trick of short sellers and see it as a positive sign and that Dec 11 puts will expire worthless. I'm not certain..

http://finance.yahoo.com/mbview/threadview/?&bn=850dc71b-17ef-3bd2-838a-a16820445433&tid=1385398444458-e3654186-19b0-4be9-bd91-4e02977fd4b1&tls=la%2Cd%2C12%2C3

in any case, many china stocks have been down and we need to see returning confidence in the sector and momentum stocks, as NQ is being taking down with the group at the moment, IMO