Muddy Waters Could Be Dangerous for Hogs

by Todd Shriber

By now, many avid market observers and traders have heard of the research firm Muddy Waters Research. Hedge fund manager John Paulson certainly has as Muddy Waters is the primary reason the chart of Chinese-Canadian timber firm Sino-Forest (SNOFF) looks so ugly.

With just minimal poking around and some reading of the tea leaves, it’s not hard to figure out what Muddy Waters does, and it is to the firm’s credit that it broadcasts as much on its website. The long and the short of it is the firm looks for opportunities to make money from the financial chicanery of some Chinese companies, and that usually doesn’t mean initiating long positions in those stocks. Again, to its credit, Muddy Waters made no bones about its short position in Sino-Forest when it published the research report that spelled doom for the stock earlier this month.

Not content to rest on the laurels of causing massive damage to Sino-Forest and becoming a pain in Paulson’s neck, Muddy Waters may have another target in the form of Hong Kong-listed pork producer Yurun Food Group. The stock was down during the Hong Kong session Tuesday on speculation that Muddy Waters may issue a report on the company, Bloomberg reported.

The bears are coming out on Yurun. The proportion of Yurun shares sold short rose to a record 4.5% on June 23, Bloomberg reported, citing research firm Data Explorers. That’s bad news for Yurun if a Muddy Waters report comes to pass. This speculation might be having an adverse impact on another Chinese stock, Zhongpin (HOGS), which as you can tell by the ticker, is in the same business as Yurun.

While there has been no news that Muddy Waters is targeting Zhongpin, the recent performance of the Nasdaq-listed stock indicates perhaps some U.S. traders are using Zhongpin as a derivative play on negative rumors regarding Yurun.

Obviously, when a stock slides roughly 56% from November through June, it has problems of its own, and that makes Zhongpin all the more vulnerable to a “sympathy slide” should Muddy Waters whack Yurun. Making Zhongpin all the more vulnerable is the fact that the stock is optionable and can be sold short. Muddy Waters might kill two birds with one stone without even intending to do so.

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