The Sedate World of Penny Stocks

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On May 17, 2010, I witnessed one of the most sedate days I’ve ever experienced on the market. I operate in the world of penny stocks. Those stocks traded primarily in the Over the Counter Bulletin Board and Pink Sheets markets.

The volume had dried up and everyone kept saying it was due to Europe’s bailout package of the so called PIIGS nations (Portugal, Ireland, Italy, Greece and Spain). I really doubt that since your average penny stock speculator doesn’t play in the same realm as those funds destined for things like bailouts, or mutual funds or even treasuries.

So what do I think caused the dismal volume that day? Simple. The promoters were getting tired. I don’t mean they weren’t working…I mean they were using the same old, same old type of promoting to try to entice speculators into taking a shot on their particular deals.

Let me give you an example. On Friday May 14, 2010, one of the best known and followed email lists in the business profiled a little company that hadn’t traded all that much before. The company, ticker symbol ECRY.OB, shot up from around $0.50 to over $0.70 and traded almost 3 million shares on the day.
On Monday May 17, 2010, the same list put out an alert on another company FLPC.OB and traded about 400,000 shares up to $0.78.

Both are good companies, so what accounted for the difference in interest? I contend it is the promotion. ECRY.OB had, and still has 30 second commercial spots airing on CNBC. It also is an Alliance Partner with Research in Motion (NASDAQ:RIMM). In short, it is doing the right things to convey a sense of stability in a volatile world on an even more volatile trading exchange. In short, it is doing things differently, counting less on faith and more on substance.
No one in their right mind would advertise on television and invite that kind of scrutiny unless they knew they could stand up to the scrutiny and ensure their claims were genuine. I haven’t seen a penny stock advertise on TV for a very long time – years in fact.

So what kind of measurable impact did this have on speculators? On day one of the promotion, the stock traded huge volumes. On day two of the promotion, May 17, 2010, when other issues were struggling for any type of volume, the company managed to trade close to one million shares. Liquidity is the lifeblood of any exchange and promoters provide it on the penny stock exchanges.

Lets face it, liquidity is the name of the game. That’s the whole reason people invest in stocks rather than real estate. So they are liquid and can get in and out at their convenience. Put another way, what’s the point of being invested in anything, even a stock, if the price of that investment keeps going up, but you can never sell it or monetize it in any way? It is absolutely useless.

Penny stock promoters who provide that liquidity deserve our respect. They are the ones allowing efficient functioning of the market.

The DOW’s Wild Ride

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Anyone who’s in the markets noticed that the DOW opened significantly lower on May 6th, 2010. That in itself isn’t a noteworthy anomaly. What is significant is that around 2:30pm EST, the DOW plunged almost 1000 points in about 15 minutes.
It’s the largest single drop in the history of the DOW.
Now its time to put on our CSI hats and try to figure out exactly what happened.
Four possible explanations have been put forward by the pundits. I intend to analyze each one of these explanations, in plain language so that readers who aren’t experts in world economics or fancy derivatives can also understand, in layman’s terms what’s going on.
First, there’s the fat finger trading rumor. Rumor has it that a trader working for CitiBank accidently pressed the wrong button when selling some Proctor and Gamble stock. The trader apparently typed in a “b” for billion, instead of an “m” for million when making the trade.
To this, I say, let’s get real. A seasoned trader isn’t going to make that mistake. And even if he did, as soon as his position was sold, he would’ve corrected for it immediately before he was short an extra few hundred million shares. So I would be really surprised if that’s what happened.
Second, everyone said that concerns over BP’s oil spill in the Gulf of Mexico had something to do with a coming market correction.
Right! BP stock was actually up after the spill?!?! WTF? Its true. Check it. BP has caused one of the largest environmental catastrophe’s of recent times – in Alaska, fishermen are still complaining about the effects of the Valdez spill 21 years ago – and its stock moved up. Either someone has a great insurer, or a great promoter. Either way, it cannot have affected the DOW.
Third, a lot of pundits have pointed the finger at Greece. A Greek default, they say will cause wide spread havoc in the markets and undoubtedly had something to do with the DOW’s fall.
Not a chance. Here’s why. Take a look at history. That’s the first thing that anyone who’s about to lend money, whether its to a friend, a business or a government, is history.
Greece has one of the worst histories of default in the world. Its as bad as Argentina when it comes to default. So no doubt that was already priced into the debt when it was underwritten.
Greece also was in no danger of not getting their bailout package. A unified Europe, the goal of the EU with the Euro, has been an idea that has been around thousands of years…Alexander, Napoleon, Hitler…all had the same dream, although some of those guys turned it into a nightmare.
And lets not forget…the bailout is coming from essentially the same people who are holding the bonds that were defaulted on in the first place…the European community. So they just gave a dying investment a shot in the arm in order to save money already sunk.
In other words, it has very little to do with America and the DOW. Greece doesn’t produce anything besides olive oil. So it imports almost everything it needs for a quality lifestyle. Unfortunately, America doesn’t produce much…so it won’t be hurt by a lack of imports from Greece.
The final reason postulated for the downturn is high frequency trading. High frequency trading is defined as computer trading programs that can execute up to 1000 trades per second! Here’s how it works. Once a lower limit is hit, and a sell order triggered, all these programs execute 1,000 trades per second to sell. This sends the market into a freefall. Until human heads finally notice and put a stop to it. This in my opinion is the only credible explanation.
In my mind this only highlights the dangers of buying and selling instruments and in ways you cannot comprehend. When markets contain so many derivatives that you require complex computer programs that are capable of executing a thousand trades per second, you’re at their mercy.
And its one more reason I prefer the OTC and Bulletin Board markets. There are no derivatives, and no automated software programs trading the market.

Want a Reason to Like Gold? How About Five?

This is the perfect time to get into gold.  Here are five reasons why:

1.       Hedge books close.  Most major gold producers have closed their hedge books.  This implies they believe spot prices to rise, and for those prices to remain stable, or on an uptrend.

2.       The record deficit in the USA has just been increased by $1.2 trillion dollars.  That’s not the deficit…that’s the INCREASE in the DEFICIT. And with four Euro economies on the verge of bankruptcy, there is little choice for investors to run to anything other than gold.

3.       Four more banks have just closed in the USA. That’s 26 bank closures since January!  Furthermore, the US Federal Deposit Insurance Corporation (FDIC) has warned that the pace of bank failures is likely to pick up in coming months.

4.       China’s stimulus package is working.  And China is hedging against the US dollar.  The higher income of Chinese citizens, along with an exploding middle class will increase demand for gold for industrial and consumer applications.  The lower investment in US dollars will leave investment dollars that must be deployed somewhere.  Since they’ve already invested in their own country and partnered with oil rich nations the US has alienated, and given the recent instability in the Euro, the only place China can place all its dollars is in gold.

5.       US investor opinion is bearish on gold at the moment.  Dr. Steve Sjuggerud, of DailyWealth, recently wrote:

“Back in December, the "sentiment surveys" showed investors were at highs for the year. Now that has changed. Two weeks ago, public opinion hit its lowest level since last April (when gold was at its lows for 2009, below $900. Now THAT was a time to buy). That's what we want to see.

Investors have also fled gold stocks since December. For example, the Rydex Precious Metals Fund saw its assets fall by more than half from December to today (from over $350 million to $177 million now). Traders like to use Rydex funds to chase trends. They were bullish on gold stocks in December. Now they've given up on gold stocks. That's what we want to see.

Meanwhile, gold's "price action" is just great right now. The dollar has soared in recent weeks. But gold is soaring more. Also, investors who didn't want dollars now don't want euros either. They don't want paper currencies at all. They're buying gold. New highs are part of bull markets, and gold is now hitting all-time highs in terms of euros. That's what we want to see.

The bull market in gold is back!

Typically, I'll try to find a crafty way to get into an attractive asset. I try to find a way that has extraordinary upside with little downside risk.”

For all the reasons above, I agree with Dr. Sjuggerud.

It’s definitely time to pick up gold stocks.  But why not have an extra layer of protection? When buying gold stocks, the best stocks to buy are penny stocks.  And the best bet in pennystocks are those that will soon be promoted.

A favorite in the running is Source Gold Corp. (SRGL.OB).  It’s got great assay results, is in the right location and has recently come off in price along with investor sentiment in gold.  But as stated the penny stock jockey website, www.pennystockjockey.com, a site that prides itself on choosing stocks it believes are about to be promoted, SRGL has a long way to grow.

“We had a great run on SRGL.  Especially for those of us who got in early.  It’s still up 29% from our entry point.  And it’s got room to go.  A lot of room.  As you know, a stock can’t just keep going up.  It has to go back and fill in the gaps.  That’s what it’s doing today, and maybe tomorrow.  In the next month, I still believe a double is possible from this level.  The research report, available at the Rimini Investments website, www.RiminiInvestments.com, is estimating a short term Estimated Price Per Share Projection (EPPSP) of $1.64, and a two year EPPSP of $2.73.  I’m bidding the stock again at $0.78.”

The stock is trading today near historic lows and just may represent a great entry price into a great stock in an uptrending industry.  

 Definitely a crafty way to enter the market.

Penny Stock Jockey Math

It’s time to make cents of penny stock math.

The one characteristic of all millionaires, no matter what field, is their ability to know when they’re making money and when they’re not. They ensure they’re not being “penny wise and pound foolish.” Unfortunately, most penny stock investors don’t think that way.

Lets do the math. Sure penny stocks are cheap. But only if you buy right and then sell right. So lets review the rules of penny stock math.

Rule 1: Buy right. By this, I don’t mean you have to buy at the bottom (although that helps!). It means buy the right quantity. And its important to use the right broker.

Rule 2: Sell right. By this, I don’t mean you have to sell at the top (although that helps!). It means sell at the right time, and for the right price.

Let me explain further.

A lot of people make the mistake of buying the wrong number of shares. If the penny stock is really cheap, they buy way too many shares. This is not a problem if the promoter is able and brings in huge volume. However, if he’s not able, no matter how cheap the stock is, without volume, you will not be able to sell your position and make a profit.

By the same token, a lot of people make the mistake of buying too few shares. If the penny stock is priced closer to a dollar or higher, a lot of speculators will buy about 1,000 shares or less. This limits your ability to profit in two ways. If the promoter brings in volume, 1000 shares need to rise in price much higher in order for you to make a decent profit. And the small amount of shares all need to rise in price much higher in order for you to cover your commissions.

And that leads to the second part of buying right. Since most brokers/analysts don’t bother with penny stocks, why use a full service firm? A full service firm is fine for your blue chip retirement funds, but for penny stocks use an online firm that charges a low price per trade and has no minimum dollar or share order. This will ensure more of your profits stay in your account.

The ideal number of shares you should buy is determined by your risk profile. If you’re a beginner, you need to balance carefully. Just as a business has to keep a close eye on cash reserves vs. investments for growth, so do you. I don’t recommend beginners put more than $5,000 into a penny stock that’s priced above $0.50, and not more than $3,000 into a stock priced under. This will give you enough shares that a commission isn’t a problem, enough shares to make a profit, but not too many that you’ll be stuck if volume doesn’t come in.

Just as important as buying right, is selling right. Greed is dangerous, but necessary, and naturally comes into play. After all, if you weren’t a little greedy, you wouldn’t be investing in penny stocks. So the best time to decide your exit price is right when you buy. Pre-determine for yourself the kind of return you’re looking for, and the amount of time you’re prepared to wait. For example, if you said to yourself I’d like 20% in one month. Then stick to it. As soon as you’re up 20%, whether its in an hour or a month, get out. If it hasn’t hit your target in the time you’ve allotted, re-evaluate. Remember, its not the last deal you’ll ever be in and every dollar you have tied up is a dollar you can’t invest elsewhere.

When a stock is rising quickly its tempting to stay in, but remember, they can reverse direction just as fast. Its not something you control. The only thing you control is the amount of return you want and the time you’re prepared to wait.

Do the math and you’ll profit more times than not.

Become a member of the Penny Stock Jockey Winners Circle and start trading penny stocks for profits today.

www.PennyStockJockey.com

The Case for Gold

Gold. Everyone’s talking about it, and a lot of people are investing in gold and gold stocks. Even gold penny stocks are doing well. But is gold really a golden opportunity?

I think it is, and here’s why.

You have countries like India and Sri Lanka and China buying gold from the IMF like it is going out of style – it is not really, but much better than holding the alternative – the US dollar. India actually started the buying rally and is being hailed as a visionary as the price of gold has risen spectacularly since its initial buy.

Which brings me to my second point: the Fed. The US Fed is printing greenbacks like they’re free – which they might soon be – leaving gold as the only viable investment option for the conservative investor.

And lets face it, by historic, inflation adjusted prices, the price of gold is nowhere near its 1980’s high. Adjusted for inflation, the price of gold would have to hit $2300 per ounce to match it.

Also several major companies like Barrick and Newmont are eliminating their hedge positions in gold – a huge economic endorsement for the price of gold since it essentially means that the price of their stock will now reflect the price of gold. (No more hedging, get it?). For example, in the very recent past, Barrick was known as having the largest book on gold hedging. It did this to protect its cashflow from unseen fluctuations (read decreases) in the price of gold. So with a hedge, if the price of gold were to decrease, Barrick would already have received a higher profit by pre-selling. With a price increase, it would have lost extra profit, but the hedge would have ensured its profitability.

Now with no hedge, Barrick essentially is betting that the price of gold will rise. Without a hedge, as the price of gold rises, Barrick will capture higher profits since its expenses to mine gold are essentially unchanged. However, if the price of gold drops, it risks cutting into its margins and in a severe case could see losses.

In my opinion, however, large cap stocks are already priced with reserves and revenues fairly stable and estimates readily available. Further, they are followed by so many investors and institutions, that any new demand for their stock is likely to only have a negligible effect on stock price. A small discovery would also have a small effect on stock price due to the number of shares outstanding. They therefore provide no further opportunity to make outsized profits.

So while the world is buying gold, the Fed is printing money and ironically worried about inflation at the same time, the price of gold keeps rising.

The gold market is essentially just that, a market. And as a market, the price of gold is determined by supply and demand.

Gold production world-wide has decreased by nearly 8% since 2001, while the price of gold and gold producers has risen as much as 46% in 2009 alone.

The case for investing in gold stocks, naturally follows the same logic.

To find the current price of gold at any time, just visit www.kitco.com.

And to get our first penny stock pick for 2010, a gold pick no less, subscribe at www.pennystockjockey.com.

Penny Stocks - The Good, the Bad, the Ugly

Most Penny Stock companies start out the same way: An entrepreneur lists a company on a (usually) junior exchange to raise financing for a new venture. If they're competent, they know they'll want to promote the share price so that the stock is worth more than the company. In this way, management can sell its shares to investors and maintain as much control over the company as possible. Then using the capital, and incentivizing themselves with cheap options, management attempts to develop a profitable company whose share price is eventually worth the promoted share price…and hopefully much more.

Most actively traded Penny Stock companies also share most of the following characteristics:

• Marginal or no sales
  
• Marginal or no cash
  
• Non recourse debt owed to "friendly" shareholders without recourse or time for repayment
  
• Little or negative shareholders equity
  
• Few or no assets
  
• Some form of intangible debt or "goodwill"
  
• Few or no employees
  
• An "incredible story with insane potential" to either become massively profitable quickly or to change the world as we know it
  
• Sometimes, a talented CEO or other executive that has a reputation or blue chip experience
  

Before we ask how they can be categorized, we may want to ask...why should we? Because there are significant differences that allow the astute investor or speculator to determine which penny stocks to invest in, and which ones to stay away from.

Since they all look alike, you may ask how they can be classified. Most penny stock investors have been taught to look at management and structure of the company. The truth is, it always, always, always, depends on the promoter. The best company in the world without a competent promoter will not make a dime for anyone, including management and early shareholders.

So it logically follows that the companies we're looking at investing in can be categorized by categorizing the promoters. And these promoters fall into atleast five classes that I'm going to introduce you to in the next series of blog posts. Stay tuned. This will not only be informative and entertaining, but if you get it right, very profitable for you.

Or you can let me do all the work for you and subscribe to my stock picks at http://www.pennystockjockey.com/

Penny Stocks, Bulls, Bears and Promoters

Unless you've been living under a rock, you've no doubt noticed the action taking place in the penny stocks sector. There are a few things to take particular note of:

• The action isn't discriminating against any penny stock company or favoring any penny stock sector
• Its happening during what some call the beginning of a bull market
• Its happening during what some are calling a bull rally in a bear market
  

What this tells me, and what it should tell you, is that money doesn't discriminate among penny stocks. So the big question in your mind should be what makes some penny stocks move, and others not?

It's not the charts; every penny stock has a different chart...and a different capitalization structure. Every company, if it wants to can tell a compelling story. Most of these penny stocks are similar in terms of their income statements and balance sheets.

Vive La Difference!

So what is the elusive difference? Simple: penny stock promotion. While some companies out there is trying to figure out whether we're in a bull market, or a bear market, penny stock companies that have employed a good stock promoter are increasing their valuations; it doesn't matter if its a bull market or a bear market or a bull rally in a bear market. The right stock promoter will always be able to work within the confines of a free economy.

So Does the Promoter Matter?

Absolutely. The reason I keep mentioning the right "stock promoter" is because the wrong one can completely destroy a company. Its been proven in the past that SPAM does work. - for the spammers. These days, most often, once a stock is spammed, pinksheets puts out a skull and crossbones on the stock and large online brokerages like Ameritrade, Etrade, Scotttrade and Schwab will not allow online trading in the stock. So the company hiring the wrong promoter really does suffer.

Where's the Advantage?

Unless you've been investing in penny stocks for a long time and know the game, its hard to tell the players without a programme. You could sign up for anyone of a multitude of free penny stock pick sites, but generally you'll get what you pay for. These companies are paid to tout stocks having done almost no research, and without even looking at management.
Or you could subscribe to a site that doesn't take any compensation from the companies it profiles. The site, www.pennystockjockey.com takes no compensation from any company we profile. Further, if the company profiled has a market cap large enough (generally anything over $20 million) we'll pay for an independent CFA report to justify our own conclusions. And ofcourse, the whole premise behind the company is that WE KNOW THE PROMOTER behind the deal. We will never recommend a company that isn't interested in promoting its stock, and we're not interested in profiling a company not willing to hire the right type of promotional services.

Are All Penny Stocks Created Equal?

Amazingly enough, a number of American financial sector stocks were thrown into penny stock realm in the past two weeks. In the past few months, even bigger banks declared bankruptcy.

The SEC defines penny stocks as “low-priced (below $5), speculative securities of very small companies. While penny stocks generally are quoted over-the-counter, such as on the OTCBB [www.otcbb.com] or in the Pink Sheets [www.pinksheets.com], they may also trade on securities exchanges, including foreign securities exchanges. In addition, penny stocks include the securities of certain private companies with no active trading market.”

By this definition, the financial sector stocks – stocks like Citibank and Bank of America, are penny stocks.

Last fall, the SEC took the unprecedented action of banning short sales and calling for a short cover on financial sector stocks that had been beaten down by the shorts. It’s a lament that penny stock companies have been complaining of for years, but went unheeded.

And now these established, down-on-their-luck financial companies have convinced the American public that they are deserving of billions in taxpayer dollars because they are established companies and not traditional penny stocks as defined by the SEC.

So what have we really done for these behemoths? We’ve altered the definition of penny stocks to accommodate them. We’ve altered the level playing field by exempting them from short sellers. And now we’re giving them tax dollars like some government sponsored clinic while hard working entrepreneurs have to fight for their place in this shrinking economy.

Are these billion dollar bailout babies really that different from your traditionally defined penny stock?

Traditionally, risk characteristics attributed to penny stocks include:

1. Penny stock companies are usually start ups that lack of information about the company, its history and its management. I would argue that financial sector companies suffer from the same lack of transparency. After all, how could anyone not see the leverage and the misguided asset classifications and still invest in these behemoths? The derivatives are way too complicated for the layman to analyze…so we rely on the banks to tell us the truth, while they have a conflict.

2. Large control blocks. Penny stock company founders traditionally have a large block of stock (albeit restricted) to ensure their interests are aligned with the rest of the shareholders while ensuring they cannot sell their shares for a quick profit at the detriment of other shareholders. In the financial sector, these large blocks are held by fund managers – who similarly cannot sell their blocks quickly without lowering the market price and thereby impairing the return to themselves. What’s more, the CEO’s of the companies barely have any stock in their portfolios – eliminating the alignment with shareholder values. Instead, it’s become vogue to pay these CEO’s via stock options – giving them an incentive to show short term results and then cash out their options while the rest of the investing public holds shares that were sold by insiders.

This is done by using unwitting brokers, paid analysts and unquestioning media to tow the company line. And because the CEO’s and the companies have been held in high esteem, no one questions the use of these tools or their motives.

Penny stock companies often use similar tools – only with a penny stock it’s called stock promotion. And penny stock companies have better motives: without stock promotion, the best company in the world won’t be worth anything because no one would have heard of it – and therefore the enterprise would be hard pressed to raise money for growth. Promotion is a driving investment criterion for choosing a stock to invest in at www.pennystockjockey.com.

The issue with promotion is that the SEC often believes that stock promotion involving a penny stock needs more supervision than the promotion being conducted by billion dollar house hold names. Is there in fact an opportunity for fraud in the penny stock market? Of course there is.

But I contend that the risk is much higher with well established companies that have CEO’s holding stock options (big motive for early liquidation since options expire) rather than actual restricted stock (unsellable) for which they actually paid (as many penny stock companies experience). Empirical proof is offered by the billions lost in the financial sector right under the nose of, and with the blessing of the SEC and other regulatory bodies than has ever been lost on penny stocks.

3. Potential for fraud. Penny stocks are often used by scam artists who sell them through spam email or off-shore brokers. As the recent IRS/SEC probes have proven, many, many, many American CEO’s have offshore accounts making them no more honest or dishonest than the operators of penny stock companies.

Both traditional penny stock startups and the fallen as exemplified by the financial sector have the potential for growth and for fraud. Both are blighted by cash requirements, by short sellers and by image problems.

The difference is that the fallen companies have the government and SEC fighting for them while the typical startup penny stock company is vilified. The dichotomy is even more surprising when we stop to think that economists have long been telling us, and the American experience has long proved that the start-up is what drives the economy, diversifies the job base, creates the most jobs and is lean enough to take advantage of changing times.

So I ask you America: Are all Penny Stocks Created Equal?