Andy Carpenter

Everybody knows the world is full of stupid people.  You just don’t expect the stupes to be smart enough to admit it.

Yet that’s just what a handful of major investment banks have done.  They admitted their analysts were too stupid to see that Enron was a scam.

And yesterday, the U.S. Supreme Court endorsed that notion.  The high court declined to hear a case brought by major Enron investors.

Led by the University of California’s regents, the shareholders had brought suit against Merrill Lynch, Credit Suisse, and Barclays.  They claimed the banks participated in transactions that allowed Enron to hide its financial problems and unload stock and debt in the years before it fell apart.

The banks denied the claims that they purposely helped Enron scam investors.

But, if it wasn’t on purpose … then …

Their only excuse must be that their employees who followed Enron were too dumb to see the company for what it was.  After all, Enron was so arrogant it didn’t even bother to hide its fraud and corruption.  The telltale traces were in the wide open.

In b!*&#-slapping the investors – including the huge, prestigious one – the court may have set a dangerous precedent.  Apparently, it bought the banks’ stupidity defense.

But Someone Did Expose Enron Early On

But Enron didn’t bamboozle everyone.  One smart financial authority was neither deafened by the Sirens of Greed nor too weak to go against the crowd.

You see, while the big banks and some notable financial gurus were pushing Enron on you, a studious, irreverently funny woman in Baltimore was telling everyone who would listen that Enron was a dead skunk in the middle of the road.

And if you know your rock ‘n roll, then you know how the late Loudon Wainwright III concluded the dead skunk line – “stinkin’ to high heaven.  Take a whiff on me that ain’t no rose.”

The woman who declared Enron a dead skunk was Lynn Carpenter.  At the time she was the editor of the renowned Fleet Street Letter and founder of the Contrarian Speculator options service.

That was back in the early 2000s when Lynn said she wanted to see what all the Enron buzz was about.

What she found was an amazing fact that Enron didn’t even bother to hide.  The company’s cash flow had diminished at a startling rate compared to the massive revenues it claimed to generate.

Once she pulled on that thread, Lynn said the whole Enron story unraveled.  Time and time again though the early 2000s, Lynn’s trading service readers banked some huge profits (200+ percent) as Enron slid.  And all while the big banks, brokerages, and well-read gurus did everything in their power to keep Enron afloat.

In the next couple of weeks, IDE will roll out a new service from Lynn, which is great news for you. 

Could China Harbor The Next Enron

So while it may seem by now that the big point of this piece is to shill Lynn’s new service, that’s actually not true.

You see, the Supreme Court decision came down on the very same day I was looking at a couple of high-flying Chinese stocks.

I was wondering who in their right mind was pushing these China companies.  Who was buying them?

Now I’m not saying companies such as Fushi Copperweld are scams.  But Fushi represents a lot of what I don’t like about many Chinese companies that are new to U.S. stock markets. 

It’s how their corporations are structured … that faint whiff of Enron.

In the case of Fushi, there are a scant 25.1 million shares outstanding.  Insiders hold 67 percent of them.  That, in advertising parlance, is a whopping number.

Worse, when you dig into Fushi a bit deeper, it looks as if it’s not closely held by a family, like Wal-Mart once was.  Rather, it’s tightly held by a web of subsidiaries that are controlled by one company.

On top of that, while Fushi’s CEO is likely a skilled businessman, he’s never run a metal wire manufacturing company.  In fact, his expertise seems to be in hotel, automobile maintenance, and education businesses.

Oh yeah, cash flow plummeted last quarter while revenues continued to fly.  I think I can guess why, but the company is not saying.

And here’s another beauty.  Fushi trades on the NASDAQ.  Two weeks ago today, on the day its shares closed at $21.32, someone in the company sold 2,142,857 million shares – nearly 10 percent of the company – to a small fund for the scary low price of $7.  That’s a massive 66-percent discount.

Guess what?  The fund that bought the cheap shares appears to be controlled by Fushi’s majority shareholder.  So this may be one of those magic-hand accounting deals.

By the way, on the same day (January 10), Fushi’s President, Yue Yang, sold 90,000 Fushi shares priced between $21.01 and $21.07.

Let me do the math for you.  He banked $1.98 million in cash that day.

There may be a good reason for it.  Or it could explain why Fushi lists its management on its website, but makes no mention of its board of directors.

Still, the company made no explanation of the deal.

And to tell you the truth, I’m picking on Fushi because it can take it … I think.

It appears to be properly priced in the high $17 range where it now trades.  It made a nice recent acquisition.  It’s nicely positioned to grow in 2008.

It even has some of Wall Street’s smartest analysts – those at Piper Jaffray – in its corner.

But Fushi still operates in the semi-secretive manner that is the wont of so many Chinese companies on U.S. markets.  They are loath to share information with U.S. investors.

With recent history on their side, these companies, and the banks taking them public, are counting on the fact that U.S. investors are meek followers.

Those who are new to China – investors and gurus alike – have no idea what they are up against.

There are days when I feel sorry for them.  Actually, I only worry about the investors.

For them, following the newer China gurus is like getting treated by Dr. Phil, an unlicensed, non-medical practitioner who calls himself a doctor and who turns up the volume to 10 and passes that off as authority.

Geez, don’t you feel better already?

Lock and Load

Andy Carpenter

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