I’ll bet that each and every one of you has received an email that went something like this:
IMAGINE IF YOU HAD THE CHANCE TO BUY A WAL-MART FRANCHISE IN MEXICO RIGHT WHEN IT FIRST OPENED ITS DOORS, AND ALL YOU NEEDED WAS A SMALL STAKE TO GET IN.
HURRY, WE SEE THIS STOCK STARTING TO MAKE THE TURN NOW. BIG WATCH IN EFFECT FOR NOVEMBER, 15TH, 2009!!!!
What a great guy this must be to send me this information and to be so concerned about my financial well-being! The truth is that this email is a classic example of bait for a pump and dump scam.
Pump and Dump definition:
This is a form of microcap (companies with under $250 million in market capitalization) stock fraud which attempts to artificially pump up the price of an equity through false, misleading, or exaggerated statements. The perpetrators of this scheme, who already have a position in the stock, dump their securities after the hype has caused a higher share price. The victims then lose a considerable portion of their investment as the price subsequently plummets.
Perhaps that fellow who sent the email wasn’t such a nice guy after all!
In the past, pump and dump schemes were initiated through cold calling, but the internet has opened the door for a new breed of fraudsters. The internet provides a cheaper, easier and faster avenue by which these scammers can reach huge numbers of unsuspecting victims. We must not let greed and temptation overtake our sense of reality. We know how to locate great investment opportunities through fundamental and technical analysis. This is a far superior approach than listening to “some guy” who we never met.
Oftentimes these scams take on multi-level, more sophisticated formats. There can be email and telemarketing campaigns supported by newsletters highlighting the company as a “hot stock pick.” Chat rooms are flooded with pleas for investors to “hurry-up and buy this red-hot stock.” Give me a ____________break (feel free to fill in the blank).
Why Micro Caps?
Pump and dump scams work best with small, thinly traded companies called “penny stocks.” These are equities that trade at a low price (under $5 per share) and have a small market capitalization (# of outstanding shares x share price), generally under $250 million. Micro cap stocks usually trade over-the-counter through pink sheets and bulletin boards, and are considered high risk due to their lack of liquidity, large bid-ask spreads, and limited analyst following and disclosure. There is also a class of even smaller companies called Nano Caps which have market capitalization under $50 million.
Impact on crooks and victims:
It is estimated that 15% of spam email messages involve pump and dump scams. Spammers can make a quick 6% return, while victims typically lose 5% of their investment within 2 days, and could very well lose all of the money they invested. The SEC regards this problem as one of the most common investment frauds perpetuated over the internet. Accordingly, pump and dump schemes have encouraged the development of software programs designed to locate spammers before they hurt hard-working investors. John Stark, the head of internet enforcement at the SEC, put out the following statement: “This is basic lying, cheating and stealing, and the message to anyone engaging in these shenanigans is they are going to get caught.”
Painting the Tape:
This is a related illegal action taken by some market manipulators wherein they buy and sell securities amongst themselves to create artificial trading activity which is then reported on the ticker tape. Unsuspecting investors may falsely perceive the seemingly high volume of activity as institutional interest and take positions in the stock. The fraudsters then sell their own stock after the price of the stock is artificially inflated, while the unsuspecting retail investors take the hit. The SEC is all over this one as well.
Forget about that Wal-Mart in Mexico and let’s stick to our system of fundamental and technical analysis to locate our investment candidates. This will protect our hard-earned money and force those con artists to get real jobs, just like the rest of us.
Market Volatility- Amazing Statistics:
From mid-May, 2003 through the end of February, 2007 (over 1300 days) the S&P 500 did not decline by 2% or more in any one day. In August, September and October of this year the benchmark had the following 1-day declines of 2% or more:
- August 4th: 4.78%
- August 8th: 6.66%
- August 10th: 4.42%
- August 18th: 4.46%
- September 2nd: 2.53%
- September 9th: 2.67%
- September 21st: 2.94%
- September 22nd: 3.19%
- September 28th: 2.07%
- September 30th: 2.50%
- October 3: 2.85%
- October 25th: 2.00%
It is more important than ever to educate ourselves so that we can meet the challenges the world economy is creating. This can absolutely be accomplished through fundamental, technical and common sense principles of investing. Education is power and I thank all our members for assisting me in creating this venue where we can all learn from each other.
Video on homepage- Stock Trading vs. Covered Call Writing:
A few financial radio programs have contacted me about discussing my new book. I will post the dates and times when finalized.
This week’s economic reports were generally positive:
- Both producer and consumer prices fell in October for only the second time in 2011
- The Conference Board’s Leading Economic Index (LEI) increased by 0.9% in October, better than expectations. This eased fears of a double-dip recession
- Retail sales rose 0.5% in October, beating analysts’ expectations
- Building permits rose 11% in October aided by a 30% increase in apartment permits
- Industrial production rose by 0.7% in October also beating expectations
For the week, the S&P 500 declined by 3.8% (ouch!) for a year-to-date return of (-) 1.6% including dividends.
The chart below shows that the S&P 500 is testing recent support and a breakthrough on the downside with high volume will be a bearish technical signal. Recently it has bounced off support and headed back north:
The chart of the VIX as shown below reflects a reading slightly above our comfort level of “30”:
IBD: Market in correction
BCI: With excellent economic reports and a market declining by 3.8% this week, the need for a defensive approach to investing our hard-earned money makes perfect sense to this investor. This site remains cautiously bullish selling predominantly in-the-money strikes.
A happy and healthy Thanksgiving Holiday to one and all,
Alan and the BCI team ([email protected])