CREG - A case of blatant manipulation?

Trading in shares of China Recycled Energy Corp cooled off a bit from Thursday and Fridays frentic action.  Of course volume of over 6 million is still eye-popping for a company with only 8.3 million shares reported as outstanding.  But its signficantly lower than the 25+ million that traded each of the previous two sessions last week.

If you're reading this miserable and pathetic little blog in hopes of finding some fundamental justification for shares of CREG to climb substantially from the most recent closing price of $5.36, then you're going to be disappointed.  Its not that I think China Recycled Energy Corp is a bad investment based on anything fundamental, its just that I don't think the fundamentals matter one iota at this juncture.  

Fundamentals don't matter???  That's what I hear some saying.  Nope, not with this stock, not right now as I see things.  What matters in my opinion is who owns shares, and who is short shares.  Its the old golden rule.  Not the "do unto others" rule you find in The Bible, but the more cynical: "He who has the gold makes the rules".  

In my opinion the surge in buying that took CREG by storm, it wasn't supposed to happen.  The company didn't put out a bullish press release, there were no promoters hyping this as a winning play, and no analysts were touting CREG to their books.  None of that was going on as near as I can tell.  

What did happen is that news came out about China Energy Investment Corp signing an $83.7 Billion MOU for engergy projects in West Virgina.  Coupled with Donald Trump's visit to China and a reported $250 Billion in trade deals that were announced, and you had a perfect storm.  Investors poured into CREG and sent the PPS soaring from around $1.25 as recently as this past Wednesay, to as high as $9.39 this past Friday.

Instead of buying shares of China Energery Investment Corp, investors were buying into China Recycled Energy Corp.  So what were they buying?  A profitable Chinese company which provides roof top equipment for industrial plants like steel mills.  This equipment captures the heat and converts it into electricity.  That's the 100 mile up version of the business, for more in depth information I invite readers to do their own research.  

Why am I not going into greater depth?  In case you missed it, I don't believe the fundamentals here matter.  Well, perhaps one fundamental metric does come into play with CREG, and that would be share count.

In this writer's opinion retail players, both big and small, they stormed in and started demanding shares...putting in buy orders through their brokerages.  From whom are buyers purchasing shares?  Not from sellers directly, but from Market Maker Broker Dealers (MMs for short) engaged in making a market for shares of CREG.  

And that's the problem.  I believe buyers overwhelmed MMs and forced them to go short to fulfil the demand.  And because MMs are exempted from regulations designed to eliminate naked short selling....well I think there's a massive open and naked short position in CREG right now.  

I'm going to be a bit harsh here and suggest that those who don't understand the concept of short selling in general, and naked short selling in particular....that you really don't have any business playing around with stocks in the first place, that's my view.  

Regulation SHO requires that short sellers first make positive determination that the shares they're going short on, that they're actually available to be borrowed.  When short sellers are unable to locate the shares they sold short, its called a delivery failure.  A delivery failure means the short seller is naked, and its against the rules.  There is an exception however, and it involves...yes, you guess it, Market Maker Broker dealers.  Here's the cut and paste from SEC.GOV, just click to go directly to the site:

• Failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period. A fail may also result from “naked” short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.

• “Naked” short selling is not necessarily a violation of the federal securities laws or the Commission’s rules. Indeed, in certain circumstances, “naked” short selling contributes to market liquidity. For example, broker-dealers that make a market in a security[4] generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks as there may be few shares available to purchase or borrow at a given time.  (All emphasis is mine)

That's exactly what's happened with CREG as far as as I'm concerned.  I can envision MMs having a collective short position in the 10s of millions of shares....I imagine that there may very well be shops that by themselves alone are looking at 5 million shares or more they need to cover.  And that's in a company with only 8.3 million outstanding shares reported.  

How can they cover?  I would suggest that the chances would be zero if the PPS had kept running higher and higher.  No, in my view....they had to slam the brakes on, hard.  But wait I hear some saying:  "So what"???  These MMs compete with each other, so here's a chance for those houses that aren't short to screw the shops that are.  Not so fast.

Years ago the US Department of Justice uncovered a practice called "Moves on Request".  Call it professional courtesy if you will, or better still maybe 'honor among thieves'.  It works like this, a broker who is looking to manipulate a stock will ask his fellow MMs to change their bid/ask based on the direction he needs the price to move.  Up when he's long and down when he's short.  Other MMs comply because they know that they'll be in a similar situation at some point. 

Its a quid pro quo situation, and for those who's Latin isn't great "quid pro quo" basically means "you scratch my back I'll scratch yours".  Here's that related info from the DOJ:  

• First, the investigation uncovered numerous examples of what are often referred to as "moves on request." A "move on request" occurs when trader A calls trader B and asks him to change the price he is quoting for the purpose of affecting the market in that stock.(18) When B complies, his move will generate a misimpression that there is an additional buying or selling interest in the stock, from which A will possibly profit. Trader B benefits because A will return the favor when B wants to influence the market in a stock.

If you're checking social media and seeing confident claims that CREG is a pump and dump, or a scam or other such drivel, then you're probably reading the posts of someone attached to a brokerage house that has found itself massively short, that's my opinion.  

But...like it or lump it, that's the public markets.  There are garbage stocks out there with accumulated deficits of $100 million or more, that are only surviving because they keep printing more and more shares to meet expenses and to enrich company executives.  And these companies will have Market Captializations of $100 million or more.  But MMs are not short on those stocks, in fact they may have clients who are dumping.  CREG's market cap isn't even $50 million, and its profitable as per the most recently available filings.  

But again, fundamentals don't matter....its the Cynic's Golden Rule and the players who control the market are short on CREG bigly, so the trend is going to be down in my opinion.  I will hold out one bit of hope, and its for this reason that I still am holding some of the shares I'd bought before this big move.  That hope is an announcement of some kind of dividend payment, even if its just one single penny per share.  A $0.01 per share dividend would only cost $83,000 for 8.3 million shares.  Those caught short would have to pay the dividend on the shares they borrowed, whether those shares exist or not. 

Comments of course are welcome, but no profanity or attacks.