my recent Pink Sheet experience

what the Pink Sheets are

I’ve written about the Pink Sheets before, in much greater detail than here.

Basically they’re an electronic marketplace for trading equities not registered with the SEC.  Some are stocks of foreign issuers and the Pink Sheets is the main place they’re traded.  Others are domestic.  Some of the latter are small, illiquid and haven’t filed financials (if they have any) with the SEC.  This second group, and the rough-and-tumble trading that sometimes occurs with both, are the source of the Pink Sheets’ shady reputation.

In the pre-computer days, quotes for such stocks were delivered to traders in daily lists printed on long strips of pink paper.  That was to distinguish them from quotes for bonds of similar ilk, which were printed on blue paper.  Hence the name.

anyway, what happened–

About an hour before the close in Hong Kong last Wednesday, the Macau casino regulator issued its report of the total amount lost by gamblers in SAR in January.  The figure was a surprisingly weak +7%, year-on-year.  The Macau casino stocks sold off immediately, and were down at the close by about 10% from their pre-announcement levels.  At the New York open, WYNN and LVS sold off  by more than 5% as well.

As the New York morning progressed, reports began to circulate that the Macau market had actually been strong–that the apparently weakness was caused solely by the timing of the Lunar New Year.  The US stocks rallied.

During the afternoon, I checked the Pink Sheet quote for Sands China (SCHYY).  I noted that average daily volume is US$1.6 million vs. US$145 million for HK:  1928 in Hong Kong.  More important, the stock hadn’t budged an inch; it was still stuck at the Hong Kong close.   Weird.

So I bought 150 shares.  Yes, it was a risky thing to do.  It took maybe ten minutes for my (puny) limit order to be filled, another warning sign.  But I was curious.

The Macau gambling stocks rose on Thursday in Hong Kong by around 10%.

SCHYY mirrored the Hong Kong close.  I sold as fast as I could.

The following day, Friday, the Macau gambling stocks were flat to down in Hong Kong.

here’s the interesting part:

SCHYY opened down 3%, at $76.53, on 21, 952 shares.

After that one trade, the market became 200 shares bid at $74.29, 300 shares offered at $76.29.

In other words, liquidity dried up completely.

The stock traded about 10,000 shares during the rest of the day, at what the chart shows as prices below $75.

Monday, the stock traded only 6,866 shares, or about $500,000 worth of stock, all day.

what you should notice

–no mutual fund or pension plan portfolio manager is going to buy SCHYY.  It’s just too illiquid.  So there’s going to be no buying support for the stock from this quarter.  (Let’s say an average position size for one of these professionals is $10 million and that they thought they could be a a quarter of the daily volume without anyone figuring out they were in the market (fat chance).  Even if so, it would take a month+ to buy or liquidate.)

–after the big (for SCHYY) opening trade, market makers widened the bid-asked spread to almost 3% and pushed the market down.  They also committed themselves to only trading a tiny amount of stock at the price they showed–meaning the market would sink further if more stock followed the next trade.

All this is designed to signal they’re only willing to take more stock on their books at a heavily discounted price–that is, to stop the selling.  As the rest of the day showed, this tactic was successful.

–in most cases, the best course of action for a seller who thinks he must get out of the stock for some fundamental reason is to accept the discounted price and be the first out the door.  Yes, selling will be ugly.  But that’s better than having the market 10% lower, with you having sold nothing.

Welcome to the Pink Sheets!!

Shaping a portfolio for 2013(lll): China


Like the US, China is a complex topic with lots of moving parts.  I’ve also been investing in China-related stocks for over 25 years (hard to believe it’s been that long), so there’s an increased risk of my being distracted by details.  So, like my views on the US, I’m down to bullet points:

1.  In the late 1970s, China decided it had to embrace Western economics (not politics), because central planning wasn’t working and it didn’t want to end up like the old Soviet Union.  Like Japan before it, China pegged its currency to the US dollar and concentrated on growth through export-oriented manufacturing.

Two factors separate China from run-of-the-mill emerging countries using the Japan blueprint:

— the huge size of its population, and

–the single-mindedness with which it has pursued economic expansion.

Thirty-plus years later, China is now the second-largest economy in the world.  It’s three times the size of #3 Japan, and 80% as big as the US (using Purchasing Power Parity GDP figures).  In a handful of years, China stands to become #1.

2.  The financial meltdown in the US and the € crisis in the EU depressed demand in China’s two major markets.  China’s (very competent) economic mandarins initially added temporary extra stimulus to domestic activity to counter the effects.  But even while China was doing this, it was clear that the currency peg would, quickly enough, transmit enormous (and unneeded/unwanted) monetary oomph to the mainland economy.

Like other emerging economies, China has been spending the past couple of years trying to cool down an overheating economy.

That task has already been accomplished.

3.  In November, China completed its once a decade Communist Party leadership transition.  In the runup to this event, high-level decision-making grinds to a halt, since bureaucrats don’t know the identities, let alone the intentions, of their new bosses.  That drag on the economy is in the past, as well.

4.  Because of #2 and #2, it seems to me that the year of the Snake will be a strong one for China.  Growth may come in at “only” 8%, but that will certainly be better than most other places on the planet.  The Chinese PMI is already signalling acceleration.

how to invest

You can get some exposure by finding stocks in, say, the US or Europe, that have significant operations in China.

You can get more direct exposure by buying the stocks of Chinese companies.  As with any other equity investment, the basic choice here is whether to pick an index fund/ETF, or to actively manage–either by selecting an actively-managed mutual fund or picking the stocks yourself.

Personally, I own three funds in the Matthews family of China-related offerings.  I also have international accounts with Fidelity and Charles Schwab so I can buy Hong Kong-listed names in the local market.  Many are also available for trade on the pink sheets, although usually at considerably less favorable prices.

I’ve never been a big fan of ADRs.  In general, a foreign company only comes to the US when it thinks it can get a better price for its equity than it can from investors in its home market, who presumably know the firm and its business practices much better than foreigners.  The only exception I see to this rule is the case of EU-based tech companies, where local investors are mostly clueless.

Schwab’s new global trading service

Schwab’s global trading service

My brother-in-law called my attention to the new global stock trading service that Charles Schwab is rolling out.  Although I’m by no means a fan of Schwab (more about this below) , this seems to me to be a potentially very useful tool, especially for anyone interested in investing in Asian stock markets.

my discount broker foreign trading experience

Personally, I now do international trading through Fidelity.  But I’m signing up for the Schwab service.

I used to use e-Trade, which was the first to offer online trading in foreign markets.  But I found its trading mechanism cumbersome.  Customer service was poor.  So I switched to Fidelity as soon as its foreign trading vehicle was launched.

why have a foreign stock account?

Why an international account when most foreign stocks are also traded in the US, either through listed ADRs or over the counter through the pink sheets?  For many large cap stocks, particularly European ones where trading hours for the local market and the US overlap, it’s not necessary.

But there are two important cases where trading in the local market is the far better alternative:

–for smaller, less well-known foreign stocks, the spread between a US market maker’s bid and asked prices may be several times as high (I’ve seen as much as 10x!) as what the market in the stock’s home country trading

–when a foreign market is closed, a US market maker will widen his spread, sometimes by a mile.  This is partly to account for the risk he may be taking in holding the stock until the foreign market reopens and he can sell; partly in reaction to your apparent desperation, or lack of experience, in wanting to unload the shares instantly.  Waiting an extra few hours to make a home market trade can many times get you a 5% better price.

Fidelity vs. Schwab


1.  Fidelity offers trading in 17 countries, Schwab 12.

Both trade in:






Hong Kong






Schwab trades in Finland.  Fidelity doesn’t.

Fidelity trades in Mexico, New Zealand, Portugal, Singapore, Sweden and Switzerland.  Schwab doesn’t.

The coverage prize goes to Fidelity.  To my mind, however, unless you’re a small cap maven dealing in smaller markets, the difference between the two isn’t crucial.


I haven’t done an exhaustive study.  For online orders, they appear to be about the same.  For orders placed with a trader, Schwab charges a percentage of the principal, Fidelity a set price.  For me, Fidelity would be cheaper.  One important caveat, though.

trader availability

Fidelity’s international traders work basically the same hours as their counterparts covering the US.  Schwab says it has traders on the job 24/7.

Schwab’s availability would potentially be a big advantage for anyone wanting to trade during Pacific market hours or during the European morning, times when Fidelity’s international trading desk is shut.

tradable stocks

Schwab has a list of about 3,500 “rated” stocks.  If the stock is not on the list, you’re out of luck.

Fidelity has a similar list, whose size I don’t know.  I’ve always been able to get a stock I want to buy onto the Fidelity list by asking.

Fidelity quirks

Both Fidelity and Schwab say they have real-time pricing during foreign market trading hours.  I have no relevant experience with Schwab.  I do know, though, that as soon as the US market closed on Wednesday, September 26th, all my Asian stocks repriced to their close on Tuesday, September 25th–about 36 hours (and one full trading day) earlier.  They do so every day, which messes up the percentage gains and losses shown online once Asian trading begins.  A minor annoyance, but very unFidelity-like.

A year so so ago, I decided to sell some Wynn Macau (1128:HK) in Hong Kong and use the money to buy Sands China (1928:HK).  I entered an online buy order for 1928 and got a screwy error message saying I wasn’t allowed to short the stock.  The next day I called the international trading desk and was told the issue was a Reg S security.  Reg S is the error message I got a minute ago when I tried to enter a buy order for 1928 through Fidelity.

That’s obviously wrong.  I dealt with Reg S often as a global portfolio manager.  It allows a US company to sell stock abroad without adhering to SEC registration requirements.  Ordinary US citizens are barred from owning such securities.  But Sands China is a Hong Kong company, so Reg S doesn’t apply.  Another small thing, but weird.

In contrast, I can buy 1928 through Schwab.

my embarrassing Schwab past (you can easily skip over the gory details and go to the last paragraph)

Five or six years ago, I bought my first–and, to date, only–Hong Kong stock through Schwab’s international trading desk.  Foolishly, I placed the trade without asking in detail about commissions.

When I received the confirm the following morning, I was shocked to find I had been charged brokerage of over $2,000.  That was 4% of the principal amount of the trade, far, far more than even a traditional “full service” broker would charge.  I had expected maybe $100, $200 tops.

I figured this had to be a mistake, so I called the trader I placed the order with.  He said the commission was correct.

I asked for the commission to be reduced.

I pointed out that Schwab’s out of pocket costs for the trade couldn’t have been much more than $25 (something I knew to be true from long experience).   The trader hadn’t apprised me of the huge commission involved.  The charge seemed to cut against everything a discount broker was supposed to stand for.

The trader replied by stating the law of the jungle–yes, he hadn’t told me.  But I had assumed Schwab would have low commissions and I hadn’t asked    …which was true   …not an inducement to doing any further business, but true.  On the brighter side, I had only been hurt financially.  The sun was out, I wasn’t broke, I wasn’t in the hospital.  I’d also learned a lesson.

my “Talk(s) with Chuck”

A day or two later, I saw a “Talk with Chuck” commercial on TV, extolling Schwab’s great customer service and, as I heard it, saying that CEO Chuck was interested in feedback from customers.  So, still in denial and persisting with the thought that the commission was a bizarre mistake, I wrote a letter to Mr. Schwab making my case.  I figured that at worst I’d get a politely-worded “no.”  And there was always the chance that the benevolent Chuck would overrule a misguided subordinate.  What did I have to lose?

A week or so later, I got a call from an assistant.  She said she would look into the trade and get back to me.

Two months went by without a word.  I sent a second letter to Mr. Schwab, attaching a copy of the first.

I got a call from another assistant.

He explained the first assistant had closed my case as soon as she hung up the phone–which is, naturally, why I had gotten no reply.    …oh.

He also told me that, like a lot of others, I misunderstood “Talk with Chuck.” It doesn’t mean the CEO cares to hear from customers.  Rather, all Schwab employees are so drilled in the founder’s business principles that speaking with any one of them is just as good as speaking with Chuck himself.

The voice of Chuck then said he’d explain in detail why the huge commission was in fact proper.  No reduction, but he’d show me why the charge was reasonable.  But he couldn’t make the numbers add up to anything remotely close to $2000.  He said he’d get back.  Naturally, he didn’t.

why this tale?

Despite my long experience, I made a rookie mistake.  Why dig it up again?

Two reasons:

It shows something about the way Schwab does business.  Not something good, as far as I can see.

It also says that to break the “fool me twice” rule, I must think the Schwab global trading service may have something no one else has.  I do.  But I’m going to tread very cautiously this time, until I can see the reality behind the Schwab promises.

a little more on MTLQQ–Motors Liquidation

The website is better

I happened to look at the MTLQQ website last Thursday.  It has been expanded considerably since my last visit, some months ago.  The site now has links to thousands of pages of bankruptcy-related documents.  And for nostalgia fans, you can also get past General Motors annual reports.

One section of the bankruptcy filing gives 852 pages of pending lawsuits.

Another lists MTLQQ’s properties, which include the Hyatt Hills golf complex in Clark, New Jersey.  HH has nine holes of regulation golf and a miniature golf layout.  It’s being carried at about $5 million.  How did that get in there?  Why only nine holes?

The most important section lists MTLQQ’s assets, as of the bankruptcy, at $2.1 billion and its liabilities at $27.4 billion–meaning a total company  deficit of $25.3 billion.

Monthly SEC filings

The newest are an 8-K and a copy of the monthly report for September to the bankruptcy court, filed on November 12th.


MTLQQ had a $100 million loss for the three months ending September.  That’s not so surprising if you read the interview summary below.

Liabilities have expanded to about $35 billion.  The major creditors are unsecured bond holders ($27.3 billion), unions ($3.5 billion) and product liability claims ($1.5 billion).

A Financial Times interview with the CEO

The interview with Al Koch, a liquidation specialist whose firm was hired by the bankruptcy court, has a few salient points:

1.  he’s developing a ten-year plan to dissolve MTLQQ

2.  MTLQQ is still receiving about a thousand new claims a day, which is more than had been expected.  They fall into three main categories–vehicle liability, tax, and environment.

3.  Koch doesn’t expect to net anything from asset sales.  “It’s not so much about how much we’re going to get as about how much we’re going to pay,” since maintaining an idled car plant can cost $3 million a year.


Yes, MTLQQ does own 10% of the “new” GM plus warrants to buy another 15%.  But, even assuming the liabilities don’t expand from here, which they have already shown a tendency to do, the first $35 billion of that is owed to MTLQQ’s creditors.  In other words, for you to make any money from owning MTLQQ, you have to believe that when it eventually relists, the “new” GM will have a market cap as big as IBM or GE.  What are the chances of that?

You can also see my first post, dated September 9, 2009.

Motors Liquidation (MTLQQ.PK): a pink sheet stock

Q is for bankrupt

My friend Tom (Hi, Tom!) mentioned this stock to me when he and his wife were visiting a week or so ago.  And, yes, an added Q at the end of a ticker symbol does mean the company in question is in bankruptcy.

What is Motors Liquidation?  As part of its Chapter 11 bankruptcy proceedings, General Motors separated its assets into two piles:  those that it thought were economically viable, and the real junk.  It  transferred the good pile into a new corporate entity that is not (yet) publicly traded, in return for a 10% interest in the new company and warrants to buy 15% more.  It left the junk, plus a lot of liabilities, inside the “old” GM, which was delisted from the New York Stock Exchange and re-tickered as GMGMQ.  The bankruptcy court’s instructions to the GMGMQ managers were  to sell what they could, pay the proceeds to GM creditors and then turn out the lights for good.

What’s inside MTLQQ?

Besides the “new” GM stock, there are a bunch of obsolete plants being taken out of service, a lot of debt, plus legal, environmental, and union claims.  MTLQQ has repeatedly said that creditors are highly unlikely to be paid in full and that, therefore, there will almost certainly be nothing left for MTLQQ shareholders.

SEC filings for MTLQQ aren’t chock full of information, but I tend to believe the MTLQQ management.  It would be hard to believe that in such a high profile and carefully scrutinized bankruptcy–one in which unions and boldholders are going to lose billions of dollars–there would be any value left for common equity holders.  Remember, too, that common shareholders are routinely wiped out in any Chapter 11 filing.

In other words, a lottery ticket has better prospects than MTLQQ.  Lotteries are set up to pay out only a fraction of what the state takes in, but that does mean something to some ticket holders.  MTLQQ is set up to pay zero.

MTLQQ generates lots of trading volume…

Yet, the stock has had average daily trading volume of over 25 million shares through July and August.  This big volume has gone through even after the regulators stopped trading for three days, changed the ticker from the initial designation of GMGMQ, doubled the Qs and issued a public warning that MTLQQ was worthless.  Here’s a link to the SEC statement.

Where is the investor interest coming from?  The SEC cites “confusing, potentially misleading information” disseminated by “rumors in fax or email newsletters, Internet message rooms or on web sites offering online stock tips.”  The Washington Post also cites interest from MIchigan residents who want to support the auto industry and who are unaware of the facts, despite having the GM restructuring going on in their own backyard.

…and trades on the pink sheets

as a “Pink Sheets Limited” stock.

True, the stock is labelled as providing “limited” information to potential investors and the pinksheets website makes it clear the company is in bankruptcy.  And, of course, Enron was an NYSE stock, so a listing pedigree isn’t a foolproof guarantee against fraud.  MTLQQ volume was, I think, produced by a combination of laziness and ignorance as well as  deception.

Nevertheless, information is the lifeblood of investing.  Information is particularly important in the case of small- or medium-sized stocks.  Domestic pink sheet stocks, almost by definition, lack this commodity.  So the mere fact of pink sheet trading should mean that you must be especially vigilant and do your own research before buying.

November 15, 2009

See my update dated today.