Re: Sage advice from the Quatloos winter newsletter
Note: the following are just excerpts
This Month's Topics:
Domestic Stock Fraud Cleans Out Billions
Offshore Credit Cards
Pure Trust Prosecutions In High Gear
Omega Scam Busted
Bank Debenture Scams Continue
Le Club Prive
Harris Organization Loses Appeal
PT Movement Gets Neutral Rating
Omega Scam Busted
FIBG Scandal Continues
Global Prosperity Scam Resurgence
IRS Combats Tax Protestors
Bogus Dominion of Melchizedek In Another Security Scam
Kingdom of Enen Kio Slammed by SEC
Newsgroup Porn Warning
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Acquisition Fraud
The truth is that many of the smaller dotcom companies defrauded investors by presenting unrealistic business plans, although it is hard to find sympathy for the (greedy) investors who swallowed those business plans without even a glance at business reality.
But much worse were the larger internet companies which defrauded investors by a method which we shall call “Acquisition Fraud”.
Acquisition Fraud is more subtle than either outright securities fraud (Pixelon) or unrealistic business plans (Boo), but ultimately defrauds investors out of much more money.
Here’s how it works: Say you have a company with a good product and a bright future, and is trading at some astronomic multiple of its value, say a Price to Earnings (P/E) Ratio of 100:1. People love your company, and you can raise as much cash as you want.
Well, you can raise money and put it into Research & Development and try to come up with some new stuff. But R&D tends to be long term, and really isn’t that glamorous from a stock valuation perspective. This would seem to be the logical thing to do, but it doesn’t help your current stock value.
So what you do instead is find companies that have some revenue stream and a low P/E ratio, say 8:1 and you acquire the company.
Now, logically you would think that if you have a high P/E ratio and you buy a acquire a low P/E ratio company that you would dilute your own P/E ratio. That makes too much sense, and defies the illogic nonsense of being in a Speculative Bubble. Instead, what happens is that your stock value will increase according to the 100:1 instead of being diluted by the 8:1.
So, having found this to work once, you now go on a buying spree and acquire any and every company you can which has any earnings whatsoever. With each acquisition, your P/E stays at 100:1 and the value of your stock portfolio shoots through the roof.
Having driven the value of the stock you own to stratospheric levels, and bought that third and forth Lamborghini, you now cash out – hopefully before anybody figures out that you have acquired so many low P/E companies that your stock ought to have significantly lower value.
We’ve seen this happen with a bunch of companies this year. So here’s the warning: If you see a company out acquiring a lot of other companies, you can pretty much count on their stock value eventually having a huge fall, as one day an analyst will wake up and declare the P/E to have been diluted by the acquisitions.
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Market Shorts
Here at Quatloos! we get many complaints from people about “market shorts”, being people who sell stock they don’t own, in anticipation of being able to buy it back later at a less price.
Mostly new investors with little experience in the markets, are convinced that selling short is a scam, and that stock prices wouldn’t fall if people didn’t short the stock.
Actually, the short sellers are often the only people who keep stock prices honest. Were it not for short sellers, prices would skyrocket well past reality meaning that when the stock finally comes down, that many people would have been hurt worse.
But can “market shorts” hurt a good company? Not likely. If the company is good, it will be earning money and can attract additional capital without the shorts, or it can raise money by issuing debt instruments.
Truth is that shorts will almost never take on a good company, because shorts can really get burned if the stock price appreciates. So, by and large, shorts stick to the weak and unstable, being companies that probably need to be weeded out of the market anyway.
Our experience is that only bogus or overvalued companies are susceptible to shorting, and that shorts play a very important role in the marketplace.
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Cold Calling
While we’re talking about investment fraud, we might as well talk about its close cousin, which is cold-calling.
Cold-calling is not a crime. However, what the brokerage firms who cold call often do to clients ought to be a crime.
You see, many investment firms make big money trading for themselves. That is, they see what they think are good positions in the markets, and bet their own money. Usually, they make good bets and make a lot of money on these positions.
However, not a small number of times the big firms make bad bets, and are stuck with stocks or bonds that they paid too much for and really don’t want. So what do they do?
This is where “customers” come in, in particular, customers who have been attracted by cold-calling.
When the financial firms make bad bets, they have to unload their positions, and they do so by selling to their own customers.
You’d think that customers exist for the firms to make trading fees off of, and they do. But the larger truth is that customers are all too often seen as a big reserve of unsophisticated suckers, who are readily available to take bad positions. The larger a firm’s customer base, the larger its capacity to gamble because it knows it can dump bad bets on its customers.
Now, with individual brokers and advisors, there is some degree of customer loyalty, because loyal customers are the ones who trade regularly and put bread on the broker’s or advisor’s dinner table.
There is no such loyalty for customers who have been attracted by cold-calling. These people are seen as mega-suckers (who would buy anything on a cold-call from a stranger anyway?), and can be assured of nothing except a high likelihood of being force-fed a really bad investment.
Many of the firms who cold-call are also guilty, directly or indirectly, of “pump and dump” schemes. What happens is that they cold-call enough people to buy a particular stock that the stock goes up in value only and exclusively for the reason that so many people are buying it. So who is selling? Usually the firm that is promoting the stock, either directly in its own name, through an offshore account, or indirectly to help out a sister firm which is cold-calling people to assist with the first firm’s scheme.
The bottom line: Say “No Thank You” to cold-callers, because they do not have your best interests in mind.
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