Read this article and sorry to say it but I feel that MADI falls into this serious issue of promoting :O(
Speculation is an intricate dance between risk and reward, and if you waltz around in the micro-cap arena, you better have your moves planned out in advance. If you don't, the seductress of illegal stock promotion will lure you into a false sense of security and deceive you. Before you know it, she'll have you tripping over your own feet, and you will fall flat on your face.
Stock promotion is a necessity for a small venture capital firm, and whether you face a legitimate promoter or an incompetent criminal, you need to be aware of the modus operandi for stock promotions. While most market participants are on the level, there are still a few predators swimming the ocean of micro-cap stocks, and this article will hopefully keep you from entering the jaws of defeat.
A promotional campaign begins with company XYZ wherein insiders pay promoters to increase its stock price to either dump shares or to obtain legitimate financing. Fortunately, most prospective investors are sought for long-term financing. However, if insiders are unhappy with the way the company is operating, they can simply pay promoters to run up the price of the stock and then proceed to sell into the promotion. Insiders can also pay promoters to pump up the price of the stock to exercise their stock options with the intent of just issuing more.
If the company needs legitimate financing, it will use promotion to increase the price of its stock to add money to its treasury for the purpose of securing additional long-term equity financing at the highest stock price possible. The higher the company's stock price, the less the dilution of equity ownership at the time of the planned financing. You can see why it makes sense for companies to seek investors via promotion and it is unfortunate that there are some unscrupulous individuals who promote companies in a fraudulent manner. As a result, you need to analyze the company with the vigilance of a loan officer before you buy the company's paper.
It is important to understand the myriad of ways promotion is manifest. One common avenue promoters like to use is a newsletter. Many newsletters look out for the best interests of their subscribers, but some do not. If a newsletter exists to "pump and dump" stocks, then it is a dirty newsletter. The subscribers to a dirty newsletter are lovingly called mooches or sucker-subscribers and are subject to an occasional zinger, which is paid for coverage of a particular stock for reasons other than legitimate financing. The SEC requires disclosure of all payments made to newsletters, so read the fine print. If the company is paying for coverage it is usually for a legitimate reason, but vigilance is always a virtue in the micro-cap market.
The promoter can also creatively contrive a rumor on popular Internet bulletin boards where he plays investors' emotions like a piano. The smarter the promoter, the more deceptive the hype becomes. We have all witnessed the omnipresent guile individuals can use to instigate rumors that inevitably cause the whole forum to bounce off the walls with greed and excitement. The hype sometimes becomes so egregious that it puts infomercial exercise equipment guru Tony Little to shame.
Another common tool a promoter can use is a fleet of brokers. The brokers agree to buy a determined amount of shares of the stock to dump on their clients and in return they get a percentage of the value of the stock, which is either paid in cash or "street name" stock certificates. Beware of high-pressure cold calls. The depth of corruption market charlatans can mastermind is only limited by their creativity. To get a perspective, consider the following example orchestrated by John Doyle, one of the most successful promoters of the 1960's:
When things were quiet with Canadian Javelin and he wanted a little market action, he'd fly to Germany and talk to someone friendly at some major steel producer. A few days later, there'd be an announcement that the steel company and Javelin had entered into a provisional agreement for 10,000,000 tons of ore that the steel firm would take from Javelin. Why would a big steel manufacturer do it? Well, you could always find an executive at a big company who would be tempted with John's offer. He'd say, 'Look, my friend, my Javelin stock is quoted at 8 in today's Paris Herald Tribune. All right, now I'm going to give you a call on 1,000 shares of stock. When It rises, as a result of the good news you are going to announce for your company, why you can sell and make a few points.' Hard to resist that kind of offer when all you have to do is go along with a press release. Then he'd go down to Italy and pull the same stunt. A good trip could get the Javelin stock up 4-5 points. Later, the steel companies would announce that after lengthy negotiations, the deal just didn't go through. Meanwhile, John would have gotten rid of a lot of stock. It was Doyle's perfect kind of stunt.1
Now, as for the predictive nature of such an event, your guess is as good as mine. All you have to go on is the reputation of the company and your hunch. When principals of a company start to work against you in a highly covert manner, there is little hope. Other manipulative events however, can more easily be assigned a subjective probability based on the information you gather. Some of the most objective pieces of information you have are stock price charts. Stock prices do not lie. They contain information about the present and expectations of the future. Unfortunately, we are faced with the onerous task of separating the misinformation from the information behind the intrinsic value of stock XYZ.
Cogitate the following: The price of XYZ has spiked sharply upward. Is the impetus of the movement in price due to an unfounded rumor, a positive news release, or deception on behalf of market professionals? In this particular situation, what you must do is systematically dissect the situation by following steps such as these:
#1. You first must assume any volatile price movement is the result of market professionals manipulating the share price. The professionals are in control because they have the capital and the tools to incite large price fluctuations, especially in thinly traded stocks. Consider a trader at a firm that makes a market in a penny stock. If he is shorting the stock (the subject of a latter editorial), and is facing a short squeeze, he can trade his short position with other firms when the clearing firm demands he cover the position. Remember that market professionals are very resourceful in finding a way to avoid defeat.
#2. Scan news wires for press releases. If there is a release, is the news is significant?
#3. If there is no news release, look for evidence of promotion. Have they recently retained a PR firm? Was the company covered in a newsletter? Have company directors appeared on a radio or television investment show?
#4 Call the company whether or not there is evidence of a promotion. Ask them about their promotion plans. Ask them tough questions. If you get the runaround, the person you are talking to is likely trying to hide something.
#5 Scan investment bulletin boards for egregious hype.
#6 Use your imagination in your detective work (legally).
Let's assume you found out the company in question had a positive earnings announcement. You can assume with reasonable probability that the price jump was due to the positive news. However, if the company in question turns out to be on a massive promotional campaign, you can assume two scenarios: Insiders want to unload their paper to you with disregard to forming capital, or the company needs financing. Since we are still faced with two equally likely explanatory variables, what you need to do is determine the company's agenda. Investigate the management. Does it have expertise in the business? Do members of management tend to skip from business to business over a short period of time? Also look at insider trading reports. If insiders announce they are planning to sell their shares, the scales tip in favor of the possibility you are the target of a fleecing. Whatever the reason or method of promotion, the ability to spot a promotion early will allow you to ride the promoter's coat tails all the way to the bank. However, an ineffective promotion of a fundamentally weak company is a prime target for the market maker looking to sell short. If the company has no fundamentals, it's time to run for the exits.
What if you were unsuccessful in determining the causation for the price spike? You must then revert back to rule #1. The market professional knows something you don't or is trying to deceive you. Deception is ubiquitous in financial markets, so don't speculate without taking it into account. Market professionals will use many tactics to try and deceive you.
Whatever market event you face, you have the ability to increase your probability of successful speculation by striving to live an informed life. The more aware you are of the tactics market professionals use, the more contingency strategies you will have in your arsenal. It is essential to have what-if scenarios in place for alternate courses of action to achieve success.
In the very few instances when you are the target of a rumor or another form of manipulation, the manipulator assumes that the majority of the public is ignorant and that most will buy at the end of the stock promotion cycle when the stock price is high, and then sell low. Now that you have read this essay, you can hopefully spot and avoid possible fleecings! This essay was not meant to present small stocks in a negative light, but rather sought to reveal some of the dangers inherent in the sea of micro-caps. There are many legitimate undervalued and undiscovered small companies that present excellent investment opportunities.
Behind the charmed life any successful person may seem to live, lay years of hard work, study, and continuous improvement. Work hard in your speculative endeavors and you will hopefully be rewarded. |
