Takeaway: The SEC has issued a bulletin explaining Trading Suspensions. Here’s a quick takeaway.

The SEC has issued a bulletin explaining Trading Suspensions, available in full here.  Here’s a quick takeaway.



Why Suspend Trading?


The SEC has the authority to suspend trading in any stock for up to ten business days for investor protection purposes.  The SEC typically suspends trading in a stock where there is:

  • A lack of information, such as a company that has failed to make required filings,
  • Questions about the accuracy of information in regulatory filings, press releases and other public information, or
  • Questions about trading in the stock, including possible insider trading or market manipulation.

What Happens Next?


The expiration of the ten-day suspension is generally not the end of trouble for a company’s shareholders.  There is frequently an ongoing investigation into either the company, or into certain holders or traders of the shares, or into brokerage firms that promote or trade the stock.  SEC practice prohibits discussing ongoing investigations, and unless there is a formal investigation, with a notification to the subject entities (see last week’s Hedgeye Investing Ideas for the Investing Term: SEC Inquiry) so shareholders may never find out about the investigation until after its results are announced – if at all.


Brokers who wish to trade in the shares for their customers must go through a post-suspension process including an internal compliance review, updated due diligence on the company, and often a regulatory filing through FINRA, the brokerage industry self-regulatory body.  Since this filing alerts FINRA that you intend to actively market the now-tainted shares, it is often the equivalent of an engraved invitation for a FINRA letter of inquiry, and perhaps an audit of the firm.  This goes a long way towards answering the next question in the SEC’s Bulletin:


If the suspended stock resumes trading, why is it trading at a lower price?


Aside from the taint in the mind of the investing public, brokerage firms are reluctant to put their name alongside that of a stock if they believe there may be a regulatory investigation underway.  As we have seen in recent years, fraud investigations often go beyond the civil parameters available to the SEC.  No broker wants to put his customers into the stock of a company that might be raided by the FBI.


What About Shareholders?


The SEC is sensitive to the reality that current shareholders of a company will be harmed by a trading suspension.  While the suspension is in force, they will not have access to their assets – they can’t liquidate their stock.  After the suspension expires, the shares will likely trade at a fraction of the price at which they were bought, and trading is likely to be highly illiquid.  The Commission suspends trading only when there is a palpable concern that investors may be making decisions based on incomplete, inaccurate, or deliberately misleading information, or where there is a concern about fraud, or other investor protection concerns that, in the Commission’s estimation, are more compelling going forward than the potential damage to existing shareholders.

Note that a Trading Suspension is not the same as a Trading Halt – which the exchanges impose when there is an order imbalance in a stock during the trading day.  Halts can be imposed by the exchanges, or at the request of a company if they are about to release news that management considers likely to have a significant impact on the price of their stock. 


News issued in the middle of the trading day can cause pandemonium among shareholders and traders.  Unexpected good news – a takeover bid, for example – can cause a feeding frenzy, while unexpected bad news – oops, the merger didn’t go through after all – can cause panic selling.  A trading halt can’t prevent outsized moves in the price of a stock, but it dampens volatility and permits market makers to match up orders in a more orderly process. 



Give the SEC credit for trying to educate the individual investor.  The more of these releases you read, the better sense you will have of what regulation can, and can not accomplish.  If you don’t know what a Trading Suspension is, you should read the SEC release.  The Commission thought it important enough that they posted it on Twitter. 


In our experience, suspensions generally happen in the stocks of more speculative companies, often stocks you may have bought on a hot tip, or perhaps off a tout sheet from “HOTT STOXX!” that mysteriously appeared in your email in-box.  By the time the Commission gets around to suspending trading, the company has probably already done lasting damage to your net worth.  People who believe they know which highly speculative stocks are safe to invest in – and that they will be the only ones who know when to get out – remind us of kids who practice jumping out of the way of a speeding locomotive: isn’t it smarter not to play on the tracks in the first place?

Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on Hedgeye's radar screen.

Keith McCullough – CEO

China reports weaker than expected trade data (via BBC)

Hockey Hall of Fame class announced (via ESPN)

Thailand Holds Rate as Baht Retreat Reduces Pressure to Ease (via Bloomberg)


Morning Reads on Our Radar Screen - earth2


Howard Penney – Restaurants

The Periodic Table of McDonald's (via BBW)

Wendy's Pretzel Bacon Cheeseburger Almost-Not-Quite Pretzel-y, Bacon-y (via Houston Times)

Coffee shops look to oust 'laptop hobos' (via MSN Money)


Josh Steiner - Financials

Consumer Bureau to Sanction Banks Over Collection Methods (via Bloomberg)

Fairholme Fund to file suits, geared to protect rights of Fannie Mae and Freddie Mac preferred shareholders (via Miami Herald)


Matt Hedrick – Macro

Spain's Mariano Rajoy 'implicated after publication of slush fund documents' (via The Telegraph)


Tom Tobin – Healthcare

Mergers not just among public hospitals Saint Vincent, Highmark deal now in effect (via GoErie)

Ripples From China

Client Talking Points


Chinese exports were horrendous at -3.1% year-over-year in June. But don’t worry - Western style bailout begging is all over the tape. You want to buy China exposure on that? We don’t think there’s anything remotely close to Bernanke/Draghi style “stimulation” coming. Despite the Hang Seng’s positive +1% move into the close, it remains bearish TREND. For that matter, so does every other Asian Equity market with the exception of Japan.


Go ahead and ask German exporters if they care about negative year-over-year Chinese import demand. The DAX failed right at our TREND resistance of 8062. Meanwhile, the rest of European Equity markets with the exception of the FTSE all remain bearish TREND in our model. Greece? Still crashing big, down another -2.1%. It's down a whopping -29% since May 20. Troika that.


Brent Oil is back above our TAIL risk line of $108 and change this morning. That is easily the biggest threat to what has been solid US consumption aka #GrowthAccelerating for the last six months. Incidentally, oil is now back in the black year-to-date. We are watching this level very closely as it has serious implications.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


Fundamentally, with Chinese #GrowthSlowing and Oil rising – not a good day to be buying US stocks



"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change" - Charles Darwin


21%: The amount the yen has weakened against the dollar since Oct. 31, when Japanese Prime Minister Shinzo Abe started his campaign to lower the currency in an attempt to spur Japan. (Bloomberg)

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Uncertain China

This note was originally published at 8am on June 26, 2013 for Hedgeye subscribers.

“Nothing is certain but the unforeseen.”

-J.A. Froude


No stranger to intellectual debate, British author James Anthony Froude (1818-1894) was well-known for stirring the pot – perhaps even more so than @HedgeyeDJ (Daryl Jones, our no-holds-barred DoR) and @HedgeyeENERGY (Kevin Kaiser, our oft-controversial senior energy analyst).


Froude’s generally polemic works were often met with fierce debate and rejection among the British intellectual elite – perhaps none more so than his seminal work The Nemesis of Faith (1849), which was carefully crafted to call into question blind acceptance of the popular Christian doctrine of the time. Widespread public backlash in response to the novel ultimately cost Froude his fellowship at Oxford University.


Eventually Froude’s avoidance of institutionalized groupthink won out. Froude and his wildly contentious ideas ultimately found a permanent home when he was appointed Regius Professor of Modern History at Oxford (i.e. a really big deal) in 1892 – the very institution he was driven away from nearly a half-century prior.  During his regrettably brief stint at Oxford (he died in 1894), Froude quickly earned a reputation for being among the most popular lecturers of his time.


If nothing else, Froude’s journey from the top to the bottom and back again is a lesson for analysts young and old to avoid the safety and comfort of groupthink. Never is this advice more important than when a time-tested, comprehensive and repeatable research process leads one to hold a counter-consensus view. Hold the LINE [short], Kaiser!


Back to the Global Macro Grind


Incorporating another one of Froude’s lessons, we call attention to the aforementioned quote in the context of China’s banking system woes – which, thanks to the recent spate of legacy media coverage, are now as obviously present as a 6’3”, 325lb left tackle in one of Froude’s 19th century lectures.


Specifically, anyone even tangentially following recent press will arrive at the conclusion that a growing consensus among analysts across both the buy and sell sides believes with a fair amount of certainty that China’s credit binge and alleged housing bubble are sure to cause a Western-style financial crisis.


We aren’t so sure. With less than 2% of all financial assets held by foreigners, strict capital controls have, thus far, prevented a mass exodus of liquidity through the capital account. Domestically speaking, the PBoC’s own words from yesterday should douse any hopes of a crisis:


“Financial institutions’ cash reserves stood at about 1.5 trillion yuan ($244 billion) as of June 21, compared with the 600 billion yuan or 700 billion yuan sufficient under normal circumstances to cover payment and clearing needs. The present liquidity is not insufficient.”


Indeed, by comparing China’s present-day banking woes to the early tremors of Bears Sterns or juxtaposing China’s property market – rife with “ghost cities” – with our own pre-crisis froth, consensus has undeniably fallen victim to the availability heuristic. We don’t think that’s a prudent call to make at the current juncture; the Chinese sovereign has the resources, political will and mobility to prevent any Western-style financial crisis.


We’ve become a broken record on this, but it’s critical to remember that China’s present day economic woes are actually a function of very deliberate macroprudential policies. While highly unlikely, at any given time, Chinese officials can reverse course and keep the credit bubble inflating longer than any of us short-sellers can remain solvent.


On the contrary [to consensus], we think the outlook for China’s banking sector is likely to resemble that of a slow bleed, rather than sudden cardiac death. We’ve published a ton of work recently backing our conclusions with detailed analyses, but for those of you who weren’t able to tune in until now, we’ll take this opportunity to rehash our views:

  • Alas, it remains our view that the headwinds facing China’s banking system are structural (i.e. NOT cyclical) in nature.

Please email us if you’re interested in reviewing the full compendium presentation materials and research notes backing these conclusions, and we’ll get them right over to you. We also have a list of ancillary securities and asset classes to underweight/sell/short if you’re interested in those as well.


At any rate, we urge you to embrace the uncertainty of this situation by running full speed away from anyone who tells you they know how this all ends.


In fact, the only certainly anyone can promise you regarding these risks is that the outcome is presently unforeseen and, quite possibly, hidden deep within the “shadows” of China’s financial sector.


Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):


UST 10yr Yield 2.35-2.69% (bullish)

SPX 1560-1614 (bearish)

DAX 7619-8108 (bearish)

Nikkei 12,406-13,449 (bearish)


VIX 16.59-20.98 (bullish)

USD 82.21-83.39 (bullish)

Euro 1.30-1.32 (neutral)

Yen 96.25-99.17 (bearish)


Oil 99.18-103.39 (bearish)

NatGas 3.64-3.82 (bearish)

Gold 1226-1324 (bearish)

Copper 2.98-3.12 (bearish)


Keep your head on a swivel,



Darius Dale

Senior Analyst


Uncertain China - Chart of the Day


Uncertain China - Virtual Portfolio

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