Sunday Musings on the next bear market...

As all my regular readers know, yes I mean both of you, on Sundays I sometimes like to comment on the things that daze and amaze, astound and confound, the market games that both thrill and send chills down the spines of retail investors.  

The 'Great Financial Crisis' of 2007/2008 is now 10 years in the rear view mirror.  There are players in the market who were still in high school, or even elementary school when it happened.  And that wasn't the first or only time we've seen a recession obviously.  There was the 2000/2002 market crash that came when the 'Dot Com Bubble' finally burst.  Before that the early 1990s saw interest rates explode into the high teens and low twenties.  The world economy teetered during what was called 'The Great Recession', and some pundits suggested we were headed for another depression.  

Boom then bust, boom then bust, boom then bust.  That's the way the market works.  

The broader markets have been on a tear, but obviously the bull will get tired at some point and the bear will come out of hibernation and take over for a while.  Some think that we already hit that point in January of this year, when the market started dropping.  The Dow went from over 26,000 to less than 24,000, it currently sits around 25,000

I don't think we're in a bear market yet.  Even if I'm right though, one is coming at some point, and I think it could be starting as early as this summer.  

The tax changes that were brought in this year by the Trump administration, I believe they will have a huge impact when companies start reporting their first quarter results for 2018.  If I'm right I expect that stock valuations will explode higher as companies report record earnings.  And if I'm also right on this count, then I expect that media talking heads to start proclaiming that the market is poised to go on a huge bull run.

If that happens, in my opinion caution is warranted.  In fact, if it does play out this way I will be afraid.  Contrarian investment strategy at its core means to be bold when the herd is afraid, and afraid when the herd is bold.  Smart money players sell high while the sheep buys high.  Why do the sheep get fooled?  Because they listen to the news and follow the advice of market "experts".  But that's the way it has to be, we all can't be buying and selling at the same time.

Not much more to say than that, happy Sunday everybody. 

Investors shouldn't fear higher interest rates

Back on Febuary 6th a subscriber to this blog sent me an email that included the following question:

"Can you do an article on what happens when interest rates rise and investors pull out for more favorable returns through bonds and if we should hold or sell and buy at a lower price"?

The inference is that with interest rates climbing, that means that fixed income type instruments and other vehicles such as bonds, that they'll be more attractive and could lead to people taking money out of the market.  

My opinion?  I'm not worried about interest rates climbing, in fact I consider it to be extremely bullish for stocks.  This is something I've written about before, and its one of the reasons why I think retail investor so often lose out when playing the market.  

Central banks use interest rate policy in an effort to influence the broader economy.  When interest rates drop retail investors will often get excited, thinking that it bodes well for the future because the cost of money is dropping.  Likewise when rates climb some retail players get scared, fearful that higher rates will lead to money leaving equity markets.  

But investors need to understand that when interest rates climb, it means that central banks are bullish about the overall economy.  Conversely when they drop rates, it means that the broader indicators are showing weakness.  The take away is that when you see interest rates climbing higher, in my opinion its a signal to be bullish on stocks, and when rates drop...that's the time to be fearful.

I'll toss in another couple of thoughts on broader market issues. The question from the subscriber suggests that bonds will be offering more favourable returns as rates climb.  Not true, not in the broader bond market.  Understand that with bond yields, the return is inverse to interest rates.  As rates climb bond yields drop, and as rates drop bond yields increase.

Huh?  When interest rates climb bond yields go down???  Yeppers.

Bonds trade like stocks, and there are two things in play.  The interest rate they pay and the coupon value.  Say you hold a $5,000 government bond paying 1.5%. and interest rates go to 3%.  Who's going to want to buy your $5,000 bond paying 1.5% when the ones being issued now pay 3%.  The coupon value (what your bond trades at) is going to drop, resulting in a lower yield.  

The flip side is when interest rates drop.  You're holding that $5,000 bond paying 3% and then rates drop to 1.5%....now the coupon value of your bond increases because its paying twice the interest as the bonds being issued currently.

I have money in ETFs and Mutual Funds, but its been over a year since I reduced my bond exposure to 0.  I'll look to move back into bonds when the central banks start signalling that cuts to the overnight lending rate are coming.

Okay....and my last thought, its about the volatility the market has been displaying of late.  My opinion, Fughettaboutit.  The reasons?  The changes to the US tax codes that take affect this year.

Right now we're in earnings season, but the numbers being reported aren't for 2018, they're for the 4th quarter and year end of 2017, before the tax changes came into effect.  I expect we'll be seeing companies taking whatever charges and write downs they can to reflect lower earnings than what might have been foretasted and for the capital markets to continue with the volatility we've been seeing of late.

Why?  Its that old buy low sell high bromide.  To buy low you need others willing to sell low, and nothing makes people more nervous than seeing the value of their holdings drop by 10% or more.  But if some people are scared and selling, there have to be others willing to buy.  

Come June when results from the first quarter come out I expect we'll see improved results, with the benefits of lower corporate taxes starting to show up on the books of profitable companies.  Do note that I'm expressing a broader market opinion here, and its with respect to profitable companies....I'm not commenting on money losing speculative companies.  Companies that are simply adding to their accumulated deficits won't see any benefit to lower taxes on corporate profits, because they don't have profits.

That's it for now.....happy trading, be careful out there and remember, nobody ever goes broke taking profits.  

Want to understand Bitcoin? How well do you understand money?

Like a lot of people I have been trying to wrap my head around crypto currencies like Bitcoin and terms like Blockchain.  I think the concept is perhaps more easily grasped by people who've grown up in the Internet age than for a dinosaur like me whose first introduction to a machine for doing simple arithmetic was an abacus in grade school.  

No I don't mean Biblical times, I'm not THAT OLD.  There were adding machines around when I was a kid, but they were expensive and cumbersome and they didn't run on battery power.  

In trying to understand Bitcoin, Ethereum and the rest, I think its helpful if you take into consideration the history of money.  Understanding the evolution of currency won't help with the more technical aspects, but I think it helps explain why digital currencies have caught fire.  

In broad strokes money has evolved from coins, to paper, to digital transactions and now to digitized cryptocurrencies.  And with each step in this evolution there have been dinosaurs who prefer the older and, (for them) more trusted forms.  

When paper money was widely introduced in the 15h and 16th centuries I have no doubt there were some who preferred dealing with a coin containing some precious metal like silver or gold, something with hard and tangible value.  But over time paper money came to be accepted.

Paper money for hundreds of years was backed by precious metals, at one time there were "silver certificates" in circulation, pieces of paper backed by precious metals.  Then the so called "gold standard" was abandoned in most of the developed world and was replaced with what essentially are "fiat currencies".  

In a nutshell "fiat" means that the value of money is based on perception, or belief.  In turn that affects the normal market dynamics of supply and demand.  Why is the US Dollar worth more than the Canadian Dollar?  Because there is more demand for US Greenbacks than for Canadian Loonies.  And now we live in a world where physical money is used less and less, replaced by debit cards, credit cards and people using their cell phones with services like Apple Pay.   

That's a lot of preamble, but it shows money's evolution:

• From something of hard and tangible value, a coin made of gold, silver, copper.
• To a piece of paper leveraged against metals like gold and silver.
• To simply a piece of paper leveraged against nothing.  
• To a world where people transact thousands of dollars worth of monetary exchanges without ever once exchanging any physical currency.  

And now we have crypto currencies that literally do not exist in tangible form, they're digital.  

Alright alright....I can just hear my loyal readers (all three of them) saying:  "Thanks for the history lesson professor, you've told us what crypto currencies are not, now can you tell us what they are".

I can try, but understand I don't proclaim myself to be an expert, however I do think I have a decent enough handle on Bitcoin.

As I concluded at the end of that ham fisted history lesson, Bitcoin and the like are digital.  So it might help to understand them in terms of something else that is digital that pretty much everyone understand, digital pictures.  When you look at a picture on your smart phone you're looking at something that doesn't exist in physical form, its something that is written in digital code.  

Okay okay....I know what you're gonna say.  "Yeah the picture might be digital genius, but I can print it and hold the actual picture in my hand"!!  "How do I do that with Bitcoin"???

The short answer is, you can't.  Well, maybe.....but you might have to chop down a few redwoods for all the paper you're going to consume.  That's because each Bitcoin is line after line, after line after line after line, of encrypted code.  

That's what the blockchain is.  Everyone who touches the coin, every transaction and movement is included.  That's why the so called "mining" of Bitcoin is so expensive, it takes massive computing power and tons of electricity to extract these "coins".

Bitcoin miners all around the world, working as individuals or in teams are trying to unlock bitcoin by solving incredibly difficult puzzles.  I am not a computer programmer, so my explanation is going to fall short of a full and satisfactory explanation.  For those who want to understand beyond my layman's explanation, I'll direct you to investopedia's explanation here:

https://www.investopedia.com/tech/how-does-bitcoin-mining-work/

I am going to add just a bit more, about something else that is essential in the CryptoCurrency equation, something else that is intangible.  That other thing is TRUST.  

For older individuals like myself trusting digital currency is a hurdle.  I grew up getting an allowance, at the risk of dating myself I will tell you how much I got.  Once a week my father would give me a quarter, 25 cents.  He didn't use a smart phone, and there was no electronic transfer of 25 cents  into my account.  I would hold out my hand and be given a physical coin.

Things have evolved since then, I still like having actual physical money in my wallet, but I'm comfortable now paying my bills, my mortgage, and lots of other transactions without ever once touching any actual money.  Each month I transact thousands of dollars in economic activity without once having to hand over something that is physically real.  

The blockchain is what provides this trust for users of CryptoCurrencies like Bitcoin.  I do consider it a leap though for older individuals like myself.  But in another 10 or 20 years?  When debit cards were first introduced a lot of people said they wouldn't use them, and some still don't.  But the world is forever changing and evolving and I'm coming to the conclusion that things like Bitcoin are going to be adopted widely.

I'll have more to say on this later, especially about the market for stocks that are jumping on the CryptoCurrency BlockChain bandwagon. 

When to Take Profits - Why its so hard to sell....

It is Sunday again, a time when I like to reflect on the aspects of the public market that daze and amaze, that confound and astound, the fun and games that can thrill and send chills down the spines of retail investors. 

Life lessons can be hard, very hard.  Often its only through getting beaten up that we learn things. Battle scars, bumps and bruises can be great teachers.  Of course there are stubborn individuals who will never learn, who insist that their way of doing things must be right, even if the results are always bad.  "This time will be different", is a common mantra.  But its often said that only fools keep doing the same things over and over while expecting different results.  

I've never met anyone who's goal in the markets is to lose money, lots do of course, but the goal from the start is to make profits.   However lots of people lose money, tons of people losing tons of cash.  And too often these individuals had ample oppourtunity to put some green into their pockets, but they couldn't bring themselves to hit the sell button, it was too hard.

Well I'm going to tell you some things right now, and in my opinion these are things you're not likely to read anywhere else.  No industry player is going to share what I am about to share, not with some retail schmuck hoping to make a buck in the public markets.

Here it is.

At times when a stock has made significant gains, when investors have big "paper profits" but no capital gains, this is when the market will often employ all its devices and tricks to convince retail investors that sellers are getting screwed, that they're being swindled out of their precious shares.  And this is never more true than with highly speculative stocks for poorly managed companies that are bleeding cash.

Read that last paragraph again, please....

What am I talking about?  What are these devices....these "tricks".  There are far too many, but I can certainly give some examples.  Here are three of my favorites....

The after hours drop on small volume.  

You've bought a stock, 5,000 shares at $2 and now its trading at $10.  That means you've made a 500% return, but only if you sell.  And you're thinking about it, but then you see a 50 share trade after hours or pre-market that drops the PPS to $8.50.  "What the hell"?!?!?  You're incredulous.   

At $10 your 5,000 shares were worth $50,000 but at $8.50 they're only worth $42,500....$7,500 just disappeared.  "The bastids are screwing with it and trying to scare out the stupid, well I'm not stupid....I'm gonna hold tight, hell I might just buy some more"!!!

Beware that Ice Berg!!!  

That $2 stock you bought that's now trading at $10....you still decide that maybe it might be time to take some of those shares and turn them into cash.  You go to execute a trade and you see 5,000 lots bidding at $9.95 but on the ask side there are only 5 lots on the offer at $10.  It looks like demand is massive and supply is limited.  

YOU'D HAVE TO BE CRAZY TO SELL NOW!!!  

Hell, with so much demand and supply so low you might decide to buy some more.  Watch out!!! 

Those 5 lots you're seeing on the ask, they might just be the tip of an iceberg.  

An Ice Berg Order allows a seller to have one portion of their sell order visible, and the other part hidden.  While there may just be 5 showing there could be another 10,000 as the hidden portion.   It looks like there's hardly anything available, when in fact there is tons.  Those 5,000 bid lots could also be a "bluff" placed by the big player who's also behind the massive hidden iceberg order. 

The Scoop

This is the best one in my opinion.  Maybe you still decide its time to take some cash off the table, despite what appears to be massive demand and limited supply, and regardless of that 50 share trade outside of regular market hours.  But you're not 100% sure so you decide to test the waters with a limit order, offering 2,500 of your 5,000 shares at $10.25.  You're not even sure the PPS will go that high, the order might not even fill.

BUT IT DOES....your 2,500 shares are gone, and your buying power now reflects the $25,625.00 you've just made from your trade.  That's over $20K in profits.  BUT WAIT!!!  The PPS is still under $10???  Shares are still being bought and sold at $9.95 and yet someone came and scooped up your 2,500 shares for $10.25 each.   You're dumbfounded, "SOMEONE REALLY WANTED MY SHARES".....it certainly would seem that way.  So much so that they went over the market price to buy them.

But it might just be the same player with those 10,000 lots hidden in an iceberg order who bought your shares, the same party with the big bluff bid. 10,000 lots of 100 shares each equals 1,000,000 shares on the offer side....your 2,500 shares (a piddly 25 lots) are peanuts.  And now you might just buy them back, even if your buying sends that $9.95 price over $10 and up to $10.10....You're still ahead, you sold them for $10.25. 

Think you won?  Think again.

After selling 2,500 shares for $10.25 you had $25,625 in cold hard cash.  We'll say you then bought them back at an aveage price of $10 costing you $25,000.  Instead of $25,625 you've got just $625 in your account.  And the PPS will probably climb some more, but having seen someone go "over market" to scoop up your shares, you're not going to sell them again, especially if there are things like analyst predictions of much higher prices coming.  Obviously those who are selling, they're not as smart as you.  They're taking cash, but you're know your shares are worth more than cash.  Maybe you'll sell some at $15?  

************************************************************************

There's more of course, tons more in fact.  But that's the way it is, and in point of fact I would argue that's the way it has to be. Its a zero sum game, with every trade that takes place one party gets cash and the other gets shares.  You can't have your cake and eat it too, and you can't have your shares and the money they're trading at both at the same time.  Life is a pain.

Why does it have to be this way?  Because this is real life, and real life is about winners and losers, there's no "everyone gets a trophy" in the public markets.  This is a trillion dollar industry.  There are brokerage firms, media outlets, analysts, promoters, and of course the public companies themselves, many of which are using shares as capital to fund operations and pay salaries.  

If everyone wanted to buy at the same time, where would the shares come from?  Or if  everyone decided it was time to unload, there'd be nobody handing over cash.  Imagine a football game with both teams lined up on the same side of the ball at the same time, both wanting to play offence or defence with no opposition.  It wouldn't work.  

In the market game the big players have a multitude of ways to convince retailers to buy high and sell low so that they can do the opposite.  A retail investor can win, but its damn hard and most I would argue will fail.  

But I know retail will keep trying, and now hopefully some are better armed so they'll know what's going on.

The stock market isn't designed to make retail sheep rich...

I normally reserve general market commentary for Sundays, writing about the ways in which the market astounds and confounds, dazes and amazes, the fun and games that can thrill and chill retail investors.  

But every now and again I have an "Aha" moment, Christians will refer to it as an Epiphany.  However there's nothing religious about my latest "AHA".  Although it does have a similarity in that people will often come to a religious revelation, then it will drift away, they will forget about it.  But then it will come back yet again, sometimes over and over.  

The revelation that keeps coming back to this writer again and again, is how the stock market is not in any way designed to make lowly retail investors rich.  While I'm certain there are many individuals dreaming of quick riches from the stock market, I would bet proverbial dollars against donuts that only an incredibly small number will ever succeed.

Do you know someone who's made a fortune from the markets?  I don't, and I'll bet you don't either.  I'm not talking about on-line here, I mean someone in the real world.  There are always Nostradamus types in the virtual world, telling you of the fortunes they've made, and offering to help you do the same.  But you don't actually know them.  Do you?

Is it even possible to for a small retail investor to make mind blowing gains?  Can an individual take a few thousand dollars and parlay it into hundreds of thousands or millions?  I do think its possible, but I also think it is incredibly rare.  I would bet that you're more likely to have first hand knowledge of someone who had a big lottery win, as opposed to someone who bought their dream house from trading or investing in stocks.

I think it was Plato who used to say that the way to understand things was to first understand their opposite.  So in trying to understand how it might be possible to achieve great wealth from the market, I think its important to first understand why its nearly impossible to do so.

And I'm going to suggest, no make that assert.  I am going to assert that the reason why its so hard is because that's not the way the market game is designed.

First consider the players involved.  Let's start with the stocks that typically make the largest percentage gains, the companies whose share prices double, triple and sometimes go up ten fold or more in a very short period of time.  I think it will prove instructive to start at the bottom and work our way up.

I'm not talking about companies like the Apples or the FaceBooks here, or the Amazons and Googles.  I'm talking about highly speculative companies that are losing money, often bucket loads.  It is with highly speculative stocks that you'll most often see monster gains, and that includes Penny Stocks of course. 

Often with highly speculative public companies you will see that their CEO is earning a handsome salary, hundreds of thousands of dollars and sometimes even over $1 million.  This despite the fact that the business itself has an accumulated deficit in the tens of millions, sometimes hundreds of millions.  How can the CEO of a company that is losing money by the bucket full pull in a 6 or 7 figure compensation package?  

How is it managed?  Simple, its a public company.  The company is able to pay the CEO and other key executives big money because investors believe in the future and are willing to hand over cash in exchange for an ownership position.  But the CEO and other executives don't do this on their own of course.  You're not going to see someone wearing an Armani suit standing on a street corner flogging shares in his company, that wouldn't look too good.

No, retail investors aren't getting their shares directly.  Before being offered to the public there's a few steps in between.  Typically a brokerage firm that engages in investor banking services will serve as an underwriter, perhaps more than one.  We'll call our company "Money Losing Industries" or MLI for short.  Their stock is trading at we'll say $1.50 and they're soon to be broke, having just lost $5 million over the last 3 months.  

A large underwriter we'll call "We Love Crap" or WLC for short, steps in and underwrites a 20 million share offering priced at $1.00 per share, they might even bring in other firms to participate with WLC acting as the lead underwriter.  Now the company has $20 million less fees to fund operations, and to pay those big pay envelopes with.  

Am I suggesting that MLI is a scam company?  Nope, far from it.  They could have offices and production facilities for a tech innovation, perhaps even warehousing.  Its not a shell game, they have a real product and real sales, they just don't make any money at their business.  

So now the lead underwriter WLC and its team have 20 million shares to sell.  Are you ready to buy yet retail sheep?  Not so fast.  Before they make their way to the herd WLC and the other underwriters are first going to call on their book.  By book I mean their investor clients, they'll get first crack.  So now a bunch of brokers are calling their customers and they're talking up MLI as a great investment.  These customers are not basement dwelling losers trading on-line with a discount brokerage.  No sir.  These are well heeled professionals who employ the services of industry professionals to buy and sell shares.

And those that do buy in aren't going to be taking a flyer on a few hundred or even a few thousand shares.  At bare minimum they're going to be buying in blocks of 10,000....some will buy 100K or more.  Pikers don't get the benefit of using the services of a full service brokerage house.

Back in the days of the tech bubble some firms engaged in a practice that was called laddering.  Investors buying into an offering had to agree to buy a specified number of shares after their initial purchase.  First they might buy for 50,000 shares, but when doing so they had to agree to buy another 25,000 shares within say 6 months.  It was a great way to ensure a steady flow of buy side demand which would help inflate the PPS.

Okay, back to our lowly retail investors now.  Are you ready to start snapping up those $1 shares of MLI yet?  Of course they're not trading for $1 anymore, that's what the underwriters paid....and they got them at a discount of 50 cents to the market price.  But they've stirred up some activity and interest from their books and now the PPS has climbed over $2.  

But wait.  How's a retail investor to know about MLI anyway?  Down in the basement the Cell Phone reception is spotty at best, and besides....what Boo Radley type has a broker who's going to call.  I'm glad you asked. There are any number of ways it could happen, it might even be on a TV show.  It all depends on how big a profile Money Losing Industries has.  With the stock having moved from $1.50 to over $2 its very possible that there's some mainstream media attention, maybe even a CNBC.  

Now the herd moves in, and if its a perfect storm it can get exciting.  The stock price starts exploding, from $2 to $3....blowing past $4 and going over $5.  The underwrites have made a nice buck, but then they have big expenses.  Their customers who were able to get in early are happy as pigs rolling in their own excrement, providing they cashed in. Now its the retail sheep clawing all over each other, touting their genius on twitter and facebook and stock centered social media sites.

Of course it will end, and it won't end well.

Not for the retail sheep who've now bought into the idea that MLI is going to be a big winner.  Someone who pays $10 for this stock that was recently at just $1.50....he's thinking $20 is a sure thing, and that maybe even $100 is possible.  He might not have even bothered to read one single filing and might not even be aware that this company burned through $5 million in losses in the MRQ.

Man this is going to be a long entry, but what the heck, I'm enjoying myself.  For every 10 people who started reading this, I bet there's only one left now.  No matter.  

But wait wait wait I hear a smart retailer saying.  What if someone got in back before all this happened, when MLI was still trading for $1.50.....Doesn't he have a chance to make money?

Yes, yes he does.  But let me ask you....how much money did this wise individual invest?

Let's say this gutsy player bought 10,000 shares at $1.50 for a total investment of $15,000.....This retail genius bought in when things were quiet, when the PPS was treading water and volumes were very light.  He had the chance to read the financials without fear of the PPS running away while he did his research.  He knows this company lost $5 million in the MRQ but risked $15,000 in cold hard cash anyway.  

I won't say this guy doesn't exist, but he found a company that was quiet and wasn't being promoted and he got incredibly lucky.  The question now is, at what price should he sell?  We'll say that TMI's top price is $12 before it starts the long painful road back down.  So our genius early investor is going to watch it climb from $1.50 all the way to $12....but maybe he'll sell half his shares, we'll say at $6....that's 5,000 shares turned in for $30,000....he's already ahead.  

But what's he going to think when the PPS hits $10.  Is he going to congratulate himself on the $30,000 he has sitting in his account?  Or is he going to cry over the $50,000 he could have had instead if he'd waited just a little longer.  Is he going to read about predictions of the PPS going to $20 and buy back in again?

This is why its so hard for retail investors to make life changing gains in the stock market in my view.  The game is designed to lure the sheep in AFTER the big gains have been made.  And even those lucky enough to have bought in before mind blowing gains, they have to battle a psychological war geared totally toward getting them to hold on tight, and to even buy more.  

And I would further argue that this is the way it has to be.  The companies paying the big salaries, the firms underwriting the share offerings, the media outlets big and small catering to retail investors....combined we're talking about a multi billion dollar industry, and those dollars have to come from somewhere.

I'll leave it there and see if anyone cares to comment.  But anyone telling me they've made huge money on the market, they can get bent.  If they have they're not going to be reading this practically invisible little blog.

Cheers. 

Toronto housing bulls can relax - Buyers should take advantage of the lull

Emotion can have a big impact on a market in the short term, you see it with stocks all the time. Bad news will hit an otherwise profitable company with solid fundamentals, and the stock price will fall. Then sanity returns as the market realizes that nothing truly important happened and the PPS recovers.  

The same thing happens in reverse with highly speculative money losing companies.  Good news comes out and excitement takes over as buyers storm in and push the PPS up to often insane levels. And then reality sets back in and the PPS collapses as people wake up and look at the balance sheet and see nothing but red.  

With housing there are 3 fundamental metrics that drive the market.  The two most important are obviously supply and demand.  The third factor has a big impact on the first two, and that is affordability.  In housing affordability is largely driven by mortgage rates, most people would not be paying $1 million+ for a detached family dwelling in "The Six" if mortgage rates were in and around five or six percent.  

But with interest rates sitting under three percent and a lot of household incomes well into six digits, GTA families can afford to assume hundreds of thousands of dollars in mortgage debt.  

A note of caution though, interest rates are key.  If mortgage rates go up even one full percent, then the supply/demand dynamic will change dramatically.  Many current homeowners would no longer be able to afford to keep up with mortgage payments and would be forced to sell, and the number of buyers would drop as would the amount they could afford to spend.

But absent a sharp jump in lending rates, if mortgages continue to be handed out at less than 3%, then GTA housing bulls have little to fear in my view.  Why?  Let's face it, when it comes to Canada the greater Toronto area "IS DIFFERENT".  Immigration is a big factor, probably the biggest reason that GTA real estate has been a rocket ship performer over the past 10+ years.  

There are lots of people who go to work in UAE states like Dubai and Bahrain or in Saudi Arabia where they make big bucks and pay $0 in income taxes.  After ten years working in the Gulf States its not unusual for a couple to emigrate to Canada with $1+ million in the bank, often in U.S. funds. They can afford a $1 million dollar home in The Big Smoke because they can buy it free and clear, with $0 needed to finance a mortgage.  

There's a very popular blog called Greater Fool authored by shameless self promoter Garth Turner that has been predicting an imminent correction in the housing market for a while now.  Turner is so excited by the recent pull back that I understand he's cancelled the prescription for his boner pills. 

Take note however that Garth Turner has been the Chicken Little of the Canadian housing market for nearly ten years now, starting in 2008.  The Über Moron was telling homeowners to "sell now if you want out at the top" when a single detached dwelling selling for $1.5 million now was going for a paltry $500 or $600K.  

In fairness to Mr. Turner he's an effective communicator and very successful financial adviser.  He goes on cross Canada tours offering seminars to the sheeple who follow his blog, and you have to sound brash and confident if you want the herd to free up the capital in their homes and invest it in the vehicles you're flogging.  

For those who still think Garth's the man, here's what he was saying in October of 2008.  Homeowners, how much has your property gone up since then?

You will be basically unable to sell your home, unless you slash the price or take back financing. Even then, it will take months and months to find a buyer. Your line of credit will be withdrawn, called or the interest rate doubled. Double-digit rates will be common for car loans, if you can get one.

So relax housing bulls, unless interest rates make a big jump, then this latest fear driven dip caused by the foreign buyer tax and Capital Inc's recent troubles will be just another blip like we've seen before over the past 10 years.  By the fall market things will be back to what they've been, steady increases.

Capital Inc will probably survive, and even if they don't...other B class lenders will step in to fill the void.  Foreign buyers might represent 5% of the market, and even that is probably being generous.  When bidding wars start up again, it might mean 18 offers instead of 20.

But if you prefer doom and gloom and like drama....go read Greater Fool.  

  

Gasoline turning into barley and oats?

Its said that a good way to make the wrong decisions in the public markets is to listen to the news. The concept of contrarian investing/trading is to do the opposite of what the news says.  To run in the opposite direction of the sheep and ignore where the media shepherds are leading them.

But the media isn't always wrong, sometimes they're telling it exactly as it is.  As Freud once famously said:  "Sometimes a banana is simply a banana".

I was listening to the radio yesterday and heard a report about a professor of economics at Stanford who put out a paper called "Rethinking Transportation 2020-2030".  Among predictions of driverless vehicles dominating the roads it has some chilling forecasts for the Oil/Gas sector.  Among them a suggestion that gas stations are going the way of the horse and carriage.  Cars and busses and other mass transit systems will be running almost entirely on electricity and battery power if this report is right.  

I have to admit that hearing that news item spurred me to check the story out on-line, and then today I disposed of my oil stocks.  There were only two, and neither was an especially large position, totalling less than $5K.  Both were down from where I'd bought them, but as the saying goes...Pride cometh before a fall.  The stocks were EGL and PWT both on the TSX, Eagle and Penn West respectively.

Oil bulls might see this as part of some conspiracy to convince them to part with their oil stocks at what they consider cheap prices. I've been guilty of that type of thinking many times myself. Sometimes I've been right and other times wrong.  I'm more willing to accept this paper though because it comes from academia as opposed to traditional media.  If this were an analyst providing this info, then I'd be less willing to weight it as strongly as I have.

I don't think its as urgent for players in major oil stocks like ExxonMobils, but for smaller and heavily leveraged companies like the two I owned, I think the worm will turn more quickly.  

100 years ago there were people who thought gasoline run cars would never replace horses, wagons and carriages.  We all know how that worked out.  Sometime last year I had an appointment with a consultant whose office was in a building that was once a thriving business, a carriage works.  

The paper says this will happen in just 8 years....that gas stations will be hard to find and that people will be zipping around in EVs that drive themselves.  Eight years is both a long and a short period of time, and if it does come to pass, no doubt the oil sector will have pops and drops during the run up to this brave new world.  But over the longer haul, whether its eight years or longer, I do think the days of big oil are numbered.  There will always be a need for oil, but if we're all using EVs, whether self driven or not, then predictions of oil at $25 per barrel going forward for the long term are probably close to the mark imo.  

Reverse my ass!!! Its a mortgage

I hate it when I see what I consider to be deceptive advertising, I'm one of those cynics who believes in simple and easily understood language.  Some time over the past ten or so years dead end streets became "cul de sacs".  And the French word Faux, which means "fake", has been slapped on all kinds of plastic products to make them seem sexier,  as in faux oak or faux mahogany. 

And now we have the so called "reverse mortgage".  I don't allow profanity here, but what the FRICK is that???   I'll tell ya what it is, its a mortgage, but the marketing geniuses flogging this vehicle knew that wouldn't fly, so they found a new angle.  And in my view the way seniors are targeted, its on the cusp of being unethical.  Call it what it is, a payment free mortgage but underline that interest owed is added to the principle and compounded.  

Canada's population is ageing, which brings on many challenges for people who've retired, and financial considerations are often top of mind.  There are lots of Canadians retiring without a pension plan beyond CPP, and insufficient RSP holdings to fund their golden years.  But....many own their homes, often free and clear.

Its a big accomplishment in people's lives, paying off the mortgage, some still celebrate by having a party and burning the actual paper.  But there's an old saying in financial planning circles, you can't eat your house.  While it may be feasible and perhaps even desirable to move from a strictly financial perspective, many people in their sixties and older, they don't want to relocate.  And who can blame them?  You've spent 25, 30, 40 or maybe even 50+ years in a home.  So why not stay?

And that's where marketing comes in.  Knowing that many older Canadians have only one valuable financial asset, one they've spent a good chunk of their working lives paying off, these wizards know that the thought of taking out a mortgage is repugnant.  So instead of calling it a mortgage they call it a "reverse" mortgage.  How do they get away with this?

The ads tell people they can unlock up to 55% of their homes value, "and never have to make a payment".  But make no mistake, there is a cost, a big cost.  The interest rates on these so called "reverse mortgages" can range between 5 and 6% and even higher.  All that happens is the interest is tacked onto the principle owing.  

Why borrow money at prices that can be double what traditional mortgages are charging???

Imagine a couple with a property valued at $300,000 who want to "unlock" 55% of their home's value. That's $165,000 which leaves $135,000 of equity.  At a 5% annualized interest rate that's $8,250 worth of interest expense being added to the total amount owing, and its compounding, owing interest charged on interest.  The equity of the home is going to erode pretty quickly, and with people living longer and longer lives this could spell financial disaster. The one asset they've spent years paying off could end up being worth nothing to them.  

Imagine this scenario, a couple takes out this "reverse" mortgage then live another 15 years and get hit with a major expense, like having to move into a care facility.  They can sell the home, but then they have to pay off the mortgage, and the mortgage company is first in line for any debts.  It ain't a reverse mortgage any more.  Its conceivable they could be broke, all the equity in the home pffffffffffft, gone.  

  

I'll end this here....but I would urge anyone considering a "reverse" mortgage to consult with a financial advisor and to explore less costly options before taking out a high interest no payment mortgage.  Even one that uses the term "reverse" to make it seem like something else.  

If you want to read a more detailed, and better written article....here's one from The Globe & Mail from 2010 that still applies today, maybe more so.

http://www.theglobeandmail.com/real-estate/mortgages-and-rates/the-reverse-mortgage-quandary/article1391748/

Sunday thoughts on how the market really functions - An ethical dilemma

Its Sunday again, and though I haven't done this for a while I think its time again to contemplate those things that daze and amaze, astound and confound, the market tricks that both amuse and confuse a lot of retail investors.

Of late I've been doing a fair bit of negative posting on StockTwits (username growacet) on a company called Vuzix, trading under the symbol VUZI.  I had a position on the short side that has been closed for almost 3 months now, but still I chime in fairly regularly expressing a very negative point of view.  Why?  A big part of the reason is all the pumping that goes on, pumping that in my opinion is almost criminal.

Of course VUZI isn't the only stock that gets pumped in this fashion, but because its on my watch list I see it and it gets under my skin.  What am I talking about?  I'm referring to social media posting that paints a highly speculative stock as a "no brainer" type investment.  Here's an example of what I'm talking about:

Oct. 15 at 1:15 PM

joodles33

judy buckey

@jmcekc It will be rewarded! Vuzi really is a no brainer to be invested in. Great company, owner and fantastic products.

That was in October on the 15th, back when the PPS was still around $7, having collapsed after trading up well over $9 in September.  A "no brainer"???  Really???  A company that discloses a lack of long term commitments from its customers in its own SEC filings among a whole page of risk factors that could cause the stock to absolutely crater in value.  This is a sure fire winning investment?

Pumpers must think some investors are complete morons.  Well, sorry to say, a lot of investors are, (as the expression goes) dumber than a sack of hammers.  

The same thing happened with Ziopharm early in 2015 when its PPS shot up like a rocket to almost $15, and I was called an idiot and a moron for not seeing that this was a gold star winner destined to go to at least $20 and almost definitely, much, much higher.  One idiot was on twitter touting ZIOP as a #miraclecure.  

Sell $ZIOP for a mere $13+???  I had to be brain damaged.  

Why do pumpers engage in such reckless, and as I opined earlier, almost criminal behavior?  Because a lot of investors have more money than brains.  But there's more to it than that of course, they also understand basic human psychology at some level.  They know that people will follow strength, conviction and certainty.  If someone is wishy-washy, if they take note of the risks involved, then people aren't going to feel confident about clicking on the buy button and forking over their hard earned cash on an extremely risky stock.

You see it in all facets of life, take religion for example.  H.L. Mencken once quipped that:  

"A church is a place in which gentleman who have never been to heaven brag about it to persons who will never get there".  

Why are some Fundamentalist Evangelical Churches bursting at the seams on Sunday mornings? Because often times the Pastor in the pulpit has "absolute certainty" about what God wants and expects of people.  How does the Pastor know this?  Because he has read and studied the Bible and he KNOWS what God wrote in there and how it is to be read and understood.

Does the Pastor really know?  I don't think so, but that's neither here nor there.  My own personal view is that it takes far more strength and courage to acknowledge doubts and uncertainties, and that many who claim to be experts are simply intellectual cowards who can't face the prospect of not knowing something.  Even something as unknowable as God.

Okay I've covered religion.  Now what's that other taboo topic nobody is supposed to talk about for fear of offending people?  Oh yeah....politics.  The same principle of attracting the brain dead sheep applies in the political arena as well, the voting sheep also follow strength, conviction and certainty. Not everyone, but enough to fill a lot of churches and enough to get someone of dubious distinction elected President of the United States.  Just check out this video:

If you believe 'The Donald' nobody is better at: 

The military, building walls, treating the disabled, on equality, on being Pro-Israel, respecting women, attracting the biggest crowds, understanding the horror of all things nuclear, trade, infrastructure.....and on and on and on and on.  There's nobody better than Donald Trump at all these things.  He's the best at everything, just ask him.

You don't get to be the most senior elected politician in the world's most powerful country without getting an awful lot of people to vote for you.  You don't need a majority, but you still need to inspire confidence in a mass of people to get the job.  And you're not going to inspire that confidence in the minds of the people who behave like sheep if you give thoughtful nuanced answers, it ain't gonna work.  You have to sound like that Pastor who knows exactly what God wants and expects....the sheep will come.  

So what's the ethical dilemma?

While I do my utmost not to engage in this type of pumping, I have profited from it.  By buying stocks in speculative companies when they've been quiet and lightly traded I've been able to sell for higher prices when the herd moved in.  I'm not writing this to toot my own horn, there have been times where I've bought in when things were quiet on speculation that a stock might attract attention, but it hasn't happened, LMD.V qualifies in that regard.

I do write about speculative stocks here, RVX is a prime example.  However if/when a stock I've written about starts attracting wider attention, that's when I typically stop writing and liquidate at least some and often all of my shares...making note in the comment section of the original post and on the social media sites I frequent.

As I'm getting older I'm taking my Christian faith far more seriously, and the core belief of my personal faith is the so called "golden rule" of doing unto others as I would have them do unto me. But I also play the market where the golden rule is more "those with the gold make the rules", that or "do unto others BEFORE they do unto you".

Everyone wants to buy low and then sell high.  But you can't buy low unless there are others willing to sell at those low prices.  And likewise you can't sell high if there aren't buyers willing to pay the inflated prices.  The market machine is highly skilled at getting retail sheep to do the opposite of what the smart money players do.  Lambs get slaughtered by buying high and selling low.  

I reconcile my conscience (perhaps rationalize would be a better way of putting it) by knowing that no matter what I do, the market game will go on and on.  The machinery that entices retail investors to buy highly speculative stocks at grossly inflated prices will continue as it has regardless of whether I play the game or not.  

And I also realize that I'm a bit of a hypocrite, I can see the log in my own eye in other words.  If the market game were more above board, and retail investors weren't enticed to risk money on dubious investments the way they are and have been for ages....then the market machinery itself would break down.  The investment banks, the market makers and analysts....the promoters and chop shop players, they'd have to find other endeavors to earn a living.  And that's to say nothing of the entitled corporate executives and insiders who run these companies that are losing millions of dollars every quarter and yet earn 6, and sometimes 7 digit incomes.

That's enough for now....happy Sunday everyone.  

U.S. President Donald Trump proves how meaningless fundamentals are

For at least the past few months I have been harping on a singular theme here at Avoid The Bag. That theme is that stocks trade on sentiment and not on fundamentals.  Many will argue the value of a company's shares depend on revenues, profits, net asset value and a host of other definable metrics as well as guidance about what those numbers are expected to be in the coming months and years.

Even with a speculative stock that is losing money in the here and now, those who reside in the fundamentalist camp will claim its about projections based on expectations of fundamental performance.  I will channel the late great actor Carroll O'Connor and his Archie Bunker character for my response.

I realize that's not exactly a high brow way to make a point, so I will expand on my reason for giving fundamentals the proverbial raspberry.  I won't have to try too hard though, because all the proof you need is provided by the newly installed President of the United States, Donald J. Trump.  

What do Boeing, Lockheed Martin, Toyota, GM and Ford all have in common?  Aside from all being involved in the manufacture of either cars or airplanes, they have all drawn fire from the Twitter account of "The Donald".  And almost immediately all of them saw their stock prices slammed.  If you've been following media reports on the markets you've likely heard something like: 

"Shares of (Insert Stock) are trading sharply lower in the wake of President Trump's tweet about the company".  

But why would something as innocuous as a simple tweet send the stocks of some highly profitable and fundamentally sound companies markedly lower?  A tweet cannot undermine or alter the fundamental pillars upon which a company is built.  Can it?  Of course it can't, but it can affect investor sentiment.  

And then of course there's manipulation.

Rather than going into great detail I will link up a Washington Post article that explains how some traders have operated in order to profit from the Presidents social media posting.  

Quite simply there are programs and algorithms that have been set up to monitor +RealDonaldTrump and when there's a post about a public company it determines whether the sentiment is bullish or bearish.  If its bearish as with Boeing, Lockheed and the other aforementioned companies, then within seconds short positions are opened.....shares are borrowed from shareholders and dumped back into the market, sending share prices lower.

Here's the Washington Post article:  

https://www.washingtonpost.com/news/morning-mix/wp/2017/01/31/trump-and-dump-when-potus-tweets-and-stocks-fall-this-animal-charity-benefits/?utm_term=.8ab0069a8ef0

So what happens?  Some retail schmo has some of his retirement money invested in a stock like Lockheed Martin that he bought for $265 at the start of December.  All of a sudden he checks in on his investment and sees its fallen to $250 and reading about the President's comments he gets scared and sells for a loss.  Those who went short at $265 buy back the shares they borrowed at the lower price and pocket the difference in profits.

The biggest driver of sentiment is of course price, the second biggest driver is price, and the third is also price.  In real estate they say its location location location, with stocks its location too, but also direction.  The location of the PPS and the direction in which its moving.

And that was with Lockheed Martin, an enormously profitable defense contractor with a lot of seasoned investors and market professionals as stockholders.  Imagine how easy it is to push around the stock of a speculative company without profits and maybe not much in the way of revenue either, like a development stage biotech for example.

I write this blog for retail investors, to hopefully give them some insight into the workings of the markets so that they can hopefully make better decisions.  However it doesn't matter how good you are, how diligent your research is, how flawless your analytical skills.  You will still make bad calls on occasion.  The reason is simple, there are always bigger fish out there.  

Now to end this posting off, and to toss a bone to those who rely heavily on the fundamentals I will attempt to make peace.  Ultimately fundamental performance should affect investor sentiment and solid performance will most often be rewarded and reflected in a company's PPS.  Lockheed Martin still hasn't gotten back to the $265 area it was at before the President's tweet but if they deliver solid financial results in the weeks and months to come I have no doubt they will get back there and beyond.

As always good luck to all retail players swimming in this shark tank, comments are always welcomed but as I always request, no profanity please.  Actually it doesn't matter ultimately, swear all you want...I moderate the comments and just delete those which tell me to do something that is physically impossible. 

MYDX and NBEV - Admitting bad calls....

I haven't been shy about patting myself on the back here when I've written a bullish opinion on a stock that then goes on to make substantial gains.  I've had a number of successes.

The Bullish Calls

I first wrote about LAC.TO at $0.75 CDN and it is now trading for $1.06....I long ago took profits on that stock at lower prices than where its trading now, and when that happens I simply cry into the money I made.

http://www.avoidthebag.com/2016/04/lithium-americas-cup-and-handle-forming.html

EGT.V is one I wrote about at 14 Canadian pennies.  I bailed on it after doubling my money but its still trading up around 25 cents.

http://www.avoidthebag.com/2016/05/the-lure-of-clean-energy-eguana.html

HMPR, which is now trading as XBKS after a merger is one I'm particularly happy about, and while I have taken profits by selling some shares its one I continue to like and have maintained a position in.
It was trading at a split adjusted price of $18.10 when I first wrote about it here, now its at $26.50 after pulling back from as high as $30.

http://www.avoidthebag.com/2016/05/hampton-roads-bankshares-hmpr-great.html

RVX.TO is a stock I first wrote about here when it was trading around $1.30 CDN, its currently at $1.75 after getting up around $2.50 in October and is one I still continue to both like and hold, however fully ackowledging that it is extremely high risk in my view.

http://www.avoidthebag.com/2016/06/resverlogix-phase-iii-clinical-trial.html

ACU.V written about at .16 cents now at .185 is one I doubled down on when it fell to 10 cents.  I took some profits when I climbed up over 20 cents, but I still am maintaining a position and still think there's much more upside potential.

http://www.avoidthebag.com/2016/07/the-lure-of-green-energy-aurora-solar.html

In October I expressed a bullish opinion on RMHB when it was trading around .036 cents American. Now it has climbed to .092....it is another one where I'll have to cry into the money I made, bailing on it after a 50% profit.

http://www.avoidthebag.com/2016/10/hemp-infused-beverages-intriguing-idea.html

KUB.V has been a monster, I wrote about it in October as well when it was 2 cents...and now its settled in around 6 cents after trading as high as 7.5 pennies CDN.  Its one I continue to hold, in fact I just added to the position I started at 2.5 cents by buying more at 6 cents.

http://www.avoidthebag.com/2016/10/an-intriguing-penny-play-kubv-ukranian.html

Not too bad at all, and I'm leaving out more recent gainers like Emblem Corp.

Of course not all my calls were long plays.  I did express bearish views at times when I thought some stocks were bubbling up on nothing more than Promotion, News and Hype.

The Bearish Calls
I wrote a few bearish opinions on ZIOP starting last May when that stock was trading in and around $7 to $8 per share, now its sitting around $5.50

http://www.avoidthebag.com/2016/05/ziopharm-wall-street-sting.html

I did a couple posts on KTOV also in May when that stock was trading up around $6.60 per, now its fallen all the way to around $3.

http://www.avoidthebag.com/2016/05/ktov-what-just-happened.html

And then there's VUZI when it was up at $8.81 on its way to almost $10.  Now its fallen all the way back to $6.40

http://www.avoidthebag.com/2016/09/vuzix-time-machine-back-to-tech-bubble.html

And finally my very recent bearish thoughts on NF.CN from November when it was up around 25 Canadian pennies and on its way to being promoted to over 30 cents.  Its now trading for 11 or 12 cents and in my opinion on its way back to .02 cents eventually.

http://www.avoidthebag.com/2016/11/message-board-fun-and-games-with.html

But enough of the successful calls, I didn't get them all right last year and I am sure I will get some wrong in the future.  Two opinions I expressed were particularily bad, one long idea and one short.

MYDX is a company I wrote about this past November and one I took a position out in.  When I wrote about the PPS was trading for 2.2 cents, and I bought into at .0144 as revealed in the comments. Its most recent closing price was .0021 for a drop of over 80%.  Ouch!!!  Thankfully it was a small position, and I followed my own advice in that post and only risked money I could afford to lose.

http://www.avoidthebag.com/2016/11/mydx-another-way-to-play-marijuana-space.html

I will continue to hold MYDX (the symbol and company name are one and the same).  The company is forecasting profitability in the near future, I'm not going to hold my breath however.  A good recipe for going broke in my opinion is to believe the forward looking bullish outlooks on penny stocks. I've already booked some solid capital gains in 2017 and losses can come in handy at tax time, even if the dollar amount is small.

The bearish short opinion was expressed on NBEV, back when it was trading under the symbol ABRW.  I wrote about that stock in June of last year when it was trading up around $1.75 cents after already made a huge jump from as low as .20 cents in February and March.  Today its trading up around $4.20 and has been as high as $5.50

http://www.avoidthebag.com/2016/06/abrw-great-example-of-stock-promotion.html

My opinion on NBEV hasn't changed for the long term, but I have to admit I was wrong.  The ultimate arbiter in the market is price, and I thought NBEV had been pumped up near its limits in June, so I was incredibly wrong on that one as well.

When I get it right I'm not shy about sharing my success, but that means I have to take ownership of those views and opinions I get wrong too.  Some social media posters talk with extreme confidence when pumping and bashing stocks because they know sheep will follow strength, and admitting to past failures or the possibility that a call could be wrong, well that doesn't inspire confidence, and pumpers and bashers in my opinion (one that is often not humble) is that most are industry hacks.

Professional market players infest social media sites where stocks are discussed, that's opinion but for me its not up for debate.  The way I see things they are manipulators and bullies, trying to dominate the herd so as to shepherd the sheep into the stocks they're dumping, or out of the ones they want to accumulate.

I'll end this post here and wish everyone luck.  I will also once again cite those two maxims that I think are of critical importance to retail investors.  Firstly that nobody has ever gone broke from taking profits, and secondly that if you sell a stock and then see it continue climbing even higher, before buying back in cry into the money you made and think again about that first maxim.

Cheers.

Worried about rising interest rates? Don't be.....

Interest rates affect everyone, whether you're a borrower or a saver.  For borrowers rising rates mean higher carrying costs on debt, for savers it means higher income on vehicles like savings accounts and GICs. 

But in terms of the stock markets there is quite often a disconnect, with retail investors bullish when rates go down and bearish when they rise.  There is some logic to that thinking, because when rates go up so do things like the cost of buying on margin.  And when rates go down, those using leverage to purchase stocks see those costs drop.

But rising rates should be cause for bullish excitement, while falling rates should spark concern.

Quite simply central banks raise rates when the longer term outlook for the economy as a whole is good, and they lower rates when there are fears of recession, or when a recession as already taken hold.  What good are cheap borrowing costs when there are less people working and less money circulating in the economy? Conversely, who cares if the cost of borrowing is more expensive if that means there will be more money circulating as employment levels rise along with those working getting increased wages.

For younger readers though, those who have come of age in the last 10 years or so, rising interest rates might come as something of a shock.  This was only the second rate increase in the past year, and it signals that we're coming out of the emergency low interest rate environment that was spawned by the Great Financial Crisis (GFC) in 2007/2008.  

There are a generation of borrowers who think a fixed mortgage rate of under 3% is normal.  When I sat down with my bank a couple years back to negotiate a mortgage I had a different term, "stupid cheap".  My wife was thinking of shaving a few tenths off by going variable, and maybe buying the rate down some.  But at well below 3% I was more than happy, being able to remember rates much higher, like 5, 6 and 7.....there were even crazier rates back in the early 90s, but I wasn't taking out mortgages back then.

Rising rates will cause some problems, there are some people who are addicted to cheap debt, and they're going to be in for some severe pain if the US Federal Reserve sticks to its guidance of another 3 rate increases next year.  

But for the overall economy in general, and stock markets in particular, this is a very good thing.  

More Sunday Thoughts....Pay it forward

As my multitude of regular readers know, (yes, that's both of you) on Sunday's I sometimes like to write about those things that daze and amaze, astound and confound, the games that both amuse and confuse retail players in the equity markets.

On occasion I also write about my Christian faith and my Church.  You can relax, I'm not an evangelical, nor am I one who takes every word of the Bible literally.  I don't knock on doors and I don't give my testimony on street corners.  

My Christian faith is pretty simple, and it centres on the Golden Rule that pretty much all religions proclaim in one form or another:  "Do unto others as you would have them do unto you".  Its a rule that isn't even exclusive to those of faith, many atheists and agnostics follow this maxim as well.

The market however does not ascribe to this principle.  In the capital markets the axiom is more one of: "Do unto others BEFORE they do unto you".   The market is a zero sum game.  In simple terms that means you have to decide between one of two options, cash or shares.  When a trade takes place one party gets shares and the other gets money, you can't have both.  

And with so many hyped up plays out there, stocks trading on promise and hot air, there will be a lot of people who end up heavy on shares and light on cash.  My goal with this blog is to help retail investors better understand the game and to make better decisions so that they can win more often. But winning in the market game means others are losing.  

I wrote recently about a marijuana stock that was being pumped and promoted, one that went from about 2 cents to up around 36 pennies.  Its now trading somewhere around 15, and in my, (not always so) humble opinion it will eventually find its way back to 2 cents because it is fundamentally worthless with no financial foundation to support any valuation.  

If you manage to make money on a penny stock, (or any stock for that matter) I simply ask you to consider paying some of the money you made forward.  My church is pretty awesome, we sponsor refugee families and migrant workers who come to our area.  We have a free community dinner once a week, support the local food bank and the Church has its own clothing depot.  

This blog earns some money, not a lot but some.  The ads on here have generated some cash which finds its way to my Church, as do some of my trading profits.  When I am winning with my trades I know that there are others who are buying into the forward looking pumps.  And I also know that many will never sell.  Overcome with greed many players are too afraid of leaving profits on the table, and then too proud to admit a mistake and take a loss.

Buy yourself some Karma and consider paying some of it forward.  And keep an eye here on Monday, I'll be writing about a new Marijuana IPO, Emblem Corp.  

Happy Sunday everyone, and Merry Christmas.  

Beware penny stock Marijuana Pump & Dumps - Learn the art of war

Marijuana hype is bubbling again thanks to a number of U.S. states voting to legalize recreational use and with Canada poised to do the same this coming spring.  No doubt there will be some long term winners, but as with any bubble they'll be few and far between.  And even those that do win, the payoff is not going to be as monstrous as many believe.

Why is everyone so excited?

Marijuana as an illicit industry is worth more than $100 billion in North America, so the thinking goes that growing operations stand to cash in huge thanks to legalization.  

Slow down Cheech, put down the Doritos and think for a minute.  

Pot in Canada alone is expected to become a $10 billion a year industry, but only a small portion of that money will end up in the hands of growers. After the crop is harvested it has to be processed, then it has to be packaged, next comes distribution and then retailing.  Oh, and let's not forget the tax man.

All those expecting Cannabis grow ops to be gold mines, they're going to be disappointed.  Some will be profitable, some.....But they'll have to manage their business well in a highly competitive environment. 

Its a bubble, and as with all bubbles there are a multitude of Penny Stock promotions going on right now trying to cash in on the hype.  Its no different from the Dot Com days when worthless companies put a .com at the end of a word and saw market capitalizations explode beyond anything that could reasonably be supported by financial reality, check Pets.Com for reference.

So how do retail investors get roped into these hyped up plays?

Simple, the professional industry players who prey on greedy retail investors understand something the amateur retail crowd does not.  The pros understand "The Art of War" and the herd doesn't.  On top of that the industry players have tools at their disposal to tilt the playing field heavily in their favor with perfectly legal deceptions that many individual traders don't even know about.

First things first though, understand that the market game is a war.....and everyone is battling over the same objective, money.  "The Art of War" was written about 2,500 years ago by Sun Tzu, a Chinese military leader, and the precepts he laid out in the 5th century BCE are still true today.  They have been applied to arenas beyond the battlefield, into the business world and of course the public equity markets.

Sun Tzu taught that the key to war is deception, and he set out a number of rules, including these:

• When you are weak you must appear strong
• When you are strong you must appear weak
• When your force is far away they must appear to be close
• When your force is close they must appear to be far away

I think readers will get the point.  These rules can be transferred to the stock market quite simply and broken down in to two key points that the Smart Money industry players know very well.

• When wanting to sell you must appear to be wanting to buy
• When wanting to buy you must appear to be wanting to sell

Alright, now for another key concept that has to be understood when it comes to warfare, and that is to know your enemy.  Let's look at things from the perspective of a penny stock company engaged in growing marijuana and looking to cash in on all the hype by getting investors excited and buying their stock.

Firstly you need to be publicly traded, and that can be a lengthy and difficult process.  You have to satisfy regulators that you have a potentially viable business and there are significant costs involved in an Initial Purchase Offering.  If you seriously believe your company is going to have a shot at being a long term success, then this might be the best option.  On the other hand if all you're looking to do is cash in on some hype, it would be easier to avoid all the scrutiny and expense by going public via a reverse merger with a publicly traded shell.  

If you don't understand that, then do some research and get reading.  

Companies that enter the market via a reverse merger into an empty shell company, you're likely going to have a stock trading at somewhere around one single penny because an empty shell has no business.  Now that has changed, so informing some investors who are willing to risk some capital should get some trading happening and get the share price up, maybe to a nickel or so.  That jump from empty shell trading around one penny to an operating business trading around a nickel will likely attract some attention, it won't take much to get the PPS up to maybe 10 or 15 cents.

Now we're ready for some fun.  Still with me?

Now you need some attention, you need retail investors to at least put your company's ticker symbol onto a watch list.  For Cannabis/Marijuana companies there are a number of newsletter services and promotional outfits that will get the word out.  It'll cost some money, maybe $10 grand or so for each outfit you hire, but if things work out a big pay day is coming, ya gotta spend money to make money after all.  Besides, if the promoters like the potential some will take payment in stock.

Okay, so now you're pretty much set.  You have your shares ready to sell, just pulling a number out of my nether regions we'll say you and your associates have 50,000,000 shares ready to be sold. Shares you've issued to yourself as compensation, those you picked up cheap after the reverse merger before the market woke up, others via warrant exercises and such.

Now all that is needed is some professional industry types to sell them.  Your job will be to issue some news, something that sounds really good.  You don't have to lie, you just have to be well schooled in the art that is called hyperbole.  For those who don't know the meaning of hyperbole, basically its meaningless words that are made to seem meaningful.  

Still don't know what I'm talking about?  Okay, I will give you an example:

Bogus Marijuana Industries Makes Key Acquisition

Upper Boot Lick Ontario, (Made Up Newswire) December 2nd 2016 -- Bogus Marijuana Industries (SPLFF) an emerging entrant into the Marijuana Growing Industry today announced the acquisition of a new property as the company expands its operations in the exciting Cannabis market.  

Bogus Marijuana has acquired 100 acres of land in Doobie Township British Columbia which it intends to cultivate into its flagship operation as the company seeks to become a major supplier of both medical and recreational marijuana.

Bogus CEO Jay Rolling commented:  "This is a major accomplishment for the company, with Canada and numerous states either legalizing recreational use or soon to be doing so we know this will be an incredibly lucrative market, and with the acquisition of this property Bogus Marijuana is positioned very well with excellent prospects for significant growth".  

Marijuana for medical and recreational use is forecast by experts to be a $100 billion dollar industry in North America in the coming years, with some even suggesting a figure almost double that within the next decade.  For further information on Bogus Marijuana please visit the company's website or contact Investor Relations at IR@bmipot.com

We seek Safe Harbor

Sounds good doesn't it?  

• Lucrative market  
• Excellent prospects
• Well positioned
• Significant growth

Yes, it sounds good, but its all meaningless....its just hyperbole.  Safe Harbor isn't a fishing village in Maine.  It means that forward looking statements are just that, forward looking and they can't be relied upon.  If the excellent prospects don't work out, oh well, if it turns out their position ends up being dead last investors can't complain.  If significant growth means they go from $50,000 in revenue for the first quarter to $50,005 in the second quarter, too bad so sad.  Some other words to look out for are: plans, measurable, synergy, dynamic....there are far too many to list all of them.

Still reading?  Good, because this is where the real fun starts.  

First let's recap and consider some of the costs.  

The reverse merger (also called a reverse takeover or RTO) into the empty shell would cost around $1 million.  The promoters we'll peg at a generous $50,000 and we'll toss in another $50,000 for general expenses.  Then there's the land acquisition which we'll peg at $5 million, but it can be heavily mortgaged and can later be sold.  

That's a lot of cash, over $6 million, but with the land bought using leverage you're only out around $1.1 million.  You know the old saying, it takes money to make money.  

And what's the pay off?  Those shares that were 1 cent when the RTO took place are now trading around 15 cents we'll say.  And the 50,000,000 you've hired a broker to unload, if they're sold at an average of  25 cents, they will be worth $12,500,000 in cash.  If the stock gets pumped up to 50 cents, then double that to $25 million.  

Great, but if they're going to be sold at an average of 25 cents, then there need to be buyers willing to pay that price.  And this is where having a professional broker comes into play, hopefully you have a good one and he'll be able to maximize your profits, it could be a her but chances are its a guy. You might hire more than one.

The promoters have attracted investors, you've put the news out, everything is set.  Some social media posting on stock message boards, FaceBook, Twitter etc would be good to have right now too. And maybe the professional broker you hired will put a big order on the bid side through a number of different trading houses, maybe 5,000 lots we'll say....that's 5,000,000 shares worth of buy side interest.  Given that you and perhaps some of your friends or associates own most of the available shares the broker isn't going to have to worry about too many shares hitting the bid, and if they do....who cares.

Now the sheep are watching, the pumpers are pumping, the Level II quotes are being shared and it looks like there is huge buy side interest in Bogus Marijuana.  Not many shares are made available on the ask side and the PPS starts climbing fast.  15 cents, 16 cents, 18, 20, 25, 30.  The herd goes full retard, falling over themselves to get as many shares in this "no brainer" sure fire winner. 

• Remember "The Art of War".  When the pro is selling he makes the sheep believe he is buying. There might even be some pre-market activity to get people thinking that "something is up,  someone knows something".   

But wait!!!  When those shares show up on the ask, that's going to alert the herd that there's some heavy dumping in store, right?  Wrong.  Not if the broker uses an iceberg order.  When the stock hits 20 cents he can have 10 lots showing as "the tip" of the iceberg, the retail herd will see that. But he can have another 1,000 lots hidden "underwater" so to speak, the unseen and largest part of the ice berg. And he can do that right up though 25 cents, whatever the market will handle.  

The stock trades millions, maybe tens of millions of shares in a single day.  All the shares don't have to be sold on the way up either, some retail players know the game and will start booking profits themselves.  When too much selling hits its time to close the bag, dump a large number and bring the PPS down closing the bag.  Some retailers will average down, convinced Bogus is a winning company and that dark market forces are messing with the share price.  And they are, but now its too late.  

And when its all done and the 50,000,000 shares have moved out of smart money hands and into dumb money retail hands, the game is basically over.  The biggest losers will be those who ride a pump all the way down.  $12,500,000 generated from selling at an average of 25 cents, that cash should be enough to last at least a couple years.  It'll cover the mortgage payments on the 100 acres of farm land and fund business operations.  The company will have a phone line, a web site, maybe an office in one of those shared business operations or a mailbox with an actual street address.  

Its a dirty game, and before you play you should learn the rules the professionals use. The game requires people with more money than brains and lots and lots of greed, and those things are never in short supply.  Most people won't read this miserable and pathetic little blog so the machine will go on grinding away.

NOW PLEASE TAKE NOTE

This is a blog, an opinion piece.  Take nothing I have written here for granted.  If you haven't developed at least a bit of a cynical nature, then start right now with what I've shared here.  Research what I've written about, google things like Ice Berg order and stock promotion.  

Ultimately each person is responsible for their own decisions.  I hope this helps make you a better investor or trader, good luck.   Oh, and if you want to share this blog posting, by all means please do....FaceBook, Twitter, on message boards, its all good.  I have been accused of being an attention whore, and the only answer I can give to that is "mea culpa", guilty as charged.

Cheers