December 2005


Naked shorts are ruining small business. They are moving money from the average investor to hedge funds and their wealthy clientele. It is a great injustice not only to these smaller investors but also to the American Dream, entrepreneurship, and the growth of ideas. Let me explain.

As an investor, when you short a stock, you are selling the shares at the current price, in hopes that it will go down in the future, at which point you will be able to buy it back at a cheaper price. Perhaps you feel the stock is overvalued. Perhaps you think future earnings won’t be as good. Whatever your reason is, selling a stock short is legal.

Naked shorting on the other hand, is illegal. When a stock is shorted naked, what it means is that the shares are sold, but there is no intention of ever buying them back. These shares are sold, but never delivered. That’s great, but what does it mean? This artificially increases the float creating downward pressure on the price. Think about it, you have all these people selling shares short, yet never delivering, never having to cover their position. With enough money, they can technically sell any stock short to the point where the shares are worthless. You don’t see this happening in the large cap stocks because enormous amounts of money would be required. But in small caps, with smaller floats, it can happen quite often.

In 2004, the SEC issued Regulation SHO, which stated that if 10,000 or more shares are failed to be delivered or if the level of fails is equal to at least .5% of the issuer’s total shares outstanding for 5 consecutive settlement days, it must be placed on the Regulation SHO Threshold Security List. Every exchange has its own threshold list. These lists have done nothing other than to provide these illegal trades with a more wide audience. No SEC investigations have taken place, even when it has been acknowledged that naked short selling provides downward pressure on a company’s stock.

The most publicized instance of this has been with the shares of Overstock.com. The abuse is rampant throughout Wall Street. Ironically, the SEC appears to want no part of regulating these actions. It is up to Washington to deliver any regulatory change. There are a few organizations that are speaking out against these illegal actions. Two are the
National Coalition Against Naked Short Selling and Counterfeit America. I strongly suggest joining these groups, and doing anything possible to stop these abusive, illegalactions.

If you would like more information on naked shorting, two well maintained sites with always up to date information are Investigate the SEC and The Faulking Truth.

Naked shorting must be stopped. It is taking money out of the public’s hands and placing it directly into the pockets of greedy Wall Street bankers and traders. It is ultimately hindering economic growth and could ultimately be a major factor in a collapse of the US financial markets.

 

To answer Mike’s question of whether True Religion will beat earnings in the 4th quarter, I would have to say I expect them to blow out the $.23 number. In fact, I think they may even beat 3rd quarter earnings of $.33 share.

First, I feel that the True Religion brand is still small enough that it will not yet be affected by seasonal ordering that the larger apparel companies are affected by. There is still plenty of room to grow for this company, particularly in the international market.

Second, the last time the company had an almost 4 month backlog, which was in July, the company reported a record quarter (3rd quarter). In the November 10 conference call, there was a backlog that was extending towards the end of March, going into April.

Third, all of the company’s year end bonuses were already expensed in the 3rd quarter. This will help margins and will increase earnings for the 4th quarter even if there is no significant increase in sales.

Fourth, management has a history of under-promising and over-delivering. If you look at all their numbers for the past year, they always low-ball estimates and beat them signicantly. Last quarter for instance, even after raising guidance significantly, they beat the high end of the rang by more than 10%.

I expect to see between $.31-$.35 per share for the 4th quarter. I’m not sure if they will up guidance, but if they do so, I don’t think it will be raised to more than $1.25 per share.

The part that I am most uncertain about is how management will announce. Last quarter, they made an upward revision the second week of October and then beat that number the second week of November. Will they do the same thing again for the 4th quarter? Or will they wait and blow away the low estimate of $.23?

How they tackle this is of more significance to me, mainly because of the short, and more importantly the naked short position that is out there. Since being listed on the Nasdaq in August, the company has had a power struggle with the shorts. The illegal naked shorts are what have been keeping the stock price down, and under what I feel is a fair value of $20. I will be elaborating more on this in another post, and how as individual investors Wall Street and the SEC are taking advantage of us.

The long and short term yield curve inverted for a moment this morning, meaning that for a brief moment, short term bonds had a higher yield than long term bonds. This inversiThe long and short term yield curve inverted for a moment this morning, meaning that for a brief moment, short term bonds had a higher yield than long term bonds. This inversion has preceded the last 4 recessions that this country has seen. Although listening to analysts speak on Bloomberg today saying there shouldn’t be anything to really worried about, this does bother me. I am thinking cutting my positions between 50-75% and holding the rest in cash until I see some bargain prices. I will post more information as I read up more on this, and will post my plan of action. I must note that even if I do plan on reducing my stakes in my holdings, with True Religion I will be waiting until after their 4th quarter earnings call which will most likely take place the 2nd week of February. After that, I will decide what I want to do.on has preceded the last 4 recessions that this country has seen. Although listening to analysts speak on Bloomberg today saying there shouldn’t be anything to really worried about, this does bother me. I am thinking cutting my positions between 50-75% and holding the rest in cash until I see some bargain prices. I will post more information as I read up more on this, and will post my plan of action. I must note that even if I do plan on reducing my stakes in my holdings, with True Religion I will be waiting until after their 4th quarter earnings call which will most likely take place the 2nd week of February. After that, I will decide what I want to do.

I’ve been meaning to write this post for a couple of days now. This is an arbitrage opportunity that I have found to be successful and requires the minimal use of capital for about 2 weeks at a time. Rather than go public via an initial public offering, some companies are going public via a reverse merger. What these private companies do is purchase a public shell, which is a stock that is publicly traded but is basically out of business. The private company gets issued preferred stock which is convertible to normal shares on a 10:1 basis (varies on each deal).

With all these preferred shares converted to regular shares, the private company takes control of anywhere from 90-95% of the float. Talk about dilution of shares huh? So at this point you’ll have anywhere from 50 million to 300 million shares outstanding. Anywhere in the range of these numbers, the stock price will be worth pennies for years until it grows into its valuation.

So once the private company converts its preferred shares, it immediately completes a reverse merger, maintaining the private company’s equity stake of 95%. Here’s where the opportunity of arbitrage presents itself. When the company completes its reverse merger, in an effort to preserve round lots, it usually includes a provision to for any shareholders holding either 100 or 99 stocks or less to not be affected by the reverse merger.

So to illustrate how its done, let me show you what was done in the two instances that I was involved in.

In the first instance, I purchased 99 shares of MJET on May 25, 2005 at $.22 a share for a total of $21.78. In the company’s current report at the time, it stated the company’s plan of action. After the 1-29 reverse merger occurred, I then sold those 99 shares at $9.00 a share under the company’s new symbol, BLHL on June 10, 2005 for a total of $891.00.

In 17 days I received a 4090% return on my investment! In the second instance, it was still a profitable trade, although the return wasn’t as high mainly because the initial share price was so much lower.

I purchased 99 shares of TDIH at $.058 on August 25, 2005 for a total of $5.75. In the company’s current report at the time, it stated its plan of action. After the 1-21.8 reverse merger occurred, I then sold those 99 shares at $1.25 a share under the company’s new symbol, FHHI on September 1, 2005 for a total of $123.75

In 8 days I received a 2152% return on my investment. Even though it wasn’t as good as the first deal, it was still free money. I must note that later I did get back into FHHI at $.79 a share and that it is currently one of my holdings. I will be posting on the company in the near future.

So arbitrage opportunities do exist in the stock market. The reason this one exists is because so little money is involved when you compare it relatively to the rest of Wall Street. One note I need to make though: I have friends that have Scottrade and I know they had trouble with it because of some problem within Scottrade’s back office I believe. I use Etrade and experienced no problems. I believe they still kept their shares, but had to wait a little bit longer.

Although I have not been as up to date with this market as I should be, I will post on here when I know of any new reverse merger arbitrage opportunities.

Jeff brings up some valid points in the comments to the post on risk and leverage. Before I elaborate on my discussion in my earlier post, let me point out that Joel Greenblatt’s fund has had an annualized return of 40% over the last 20 years, and let’s not forget Warren Buffett with an annualized return of 22%. There are numerous others, but at the moment I’m too tired to go out and find them. Regardless, it is possible.

I don’t rely on analysts’ opinions to make my purchases, and I don’t claim to know more than them or anybody else that formulates an opinion about a company. All I can do is trust my judgement, which I feel is very good. Before I begin to build my position in a company I will review all the recent press, google management, read the most recent quarterly and annual filings, see the latest insider transactions, and check some internet message boards. I have often times found that analysts will formulate their opinion with an ulterior motive.

And I completely agree with you about external factors influencing prce action of the underlying security. Everyone has experienced it. Interest rates, war, terrorism, oil, exchange rates, and numerous others that I’m sure I’m leaving out. Its for all these external factors that I am developing hedging strategies utilizing options.

As far as being able to achieve 24% growth per year… By utilizing my account’s margin, at 50%, I will only require a 12% return from my investments. I understand it is riskier, but its a risk I am willing to take. I have not mentioned this yet, so there could be some misunderstanding, but I am not a passive investor that picks my stocks and doesn’t check them for another week. I am always tracking them and am always ready to make a move if markets turn. Something I did not state in my original post though, was that I am not looking to achieve these kinds of returns indefinitely. If I do so for 5 years, I will be more than pleased and at that point will be able to “retire” if I desire to do so.

I appreciate your feedback. You seem to have the right idea in mind. Good luck to you.

I love to use leverage. I leverage my money every chance I get. It provides me with the opportunity to make the most of my money in the shortest amount of time possible. It magnifies my gains. I must also note that it magnifies my losses.

I’m a firm believer in having my money working for me at all times. I’m even a firmer believer in having money that’s not mine working for me at all times. Is it riskier? Yes it is. But that’s a risk that I’m willing to take at this time. Let’s face it, I’m not going to reach early retirement hoarding my money in a savings account earning 4% per year. My goal is to double my money every 2.5 – 3 years. Leverage lets me do that.

Even at 4%, putting money in the bank is not risk-free. I’d say the biggest risk you have right now is the of inflation, which is currently a bigger risk than you might think. If the rate of inflation rises above the interest earned in a savings account, you’re actually losing money by putting it in the bank. In fact, if you have the money to do so, you could buy a T-Bill and make more money in what is considered worldwide to be risk-free.

So I’ll take the risk. I’ll make my picks, and I’ll read up on them. I’ll become my own analyst. In fact I’ll know more than the analysts do. Information is king here. Investing is so easy to do, that alot of people don’t do it right. You have to know everything that happens within the company. You have to know everything that could affect it. It’s tough at times, yes, but its reward is ten fold.

As I grow older, and accumulate more money, I imagine that my inclination to take risk will lessen. To be honest, I won’t know until I get there. But for now, my advice for anyone that wants to retire young and retire rich, is that you don’t do so by saving money. You do so by making it work.

I have been reading some articles lately which have brought alot of concern to myself. I was always a believer that US economy is and would in my lifetime be the strongest economy in the world. But to be honest, after seeing the movie Syriana, I don’t think so anymore. Don’t get me wrong, I will always be pro-US, but right now I’m in a situation where I have doubts.

My first concern, is from what I have read of the oil producing nations’ wanting to receive gold and euros instead of US dollars. This shows that they are beginning to lose faith in the dollar. And rightfully so. Given the data that was released yesterday, it appears that the Fed will do whatever it can to keep the country from entering into a recession. Even if it means printing money.

So if the government were to continue printing money, what would happen? The dollar would fall against every currency in the world. People would rather have money in other hard currencies, thus increasing the rate of return on US bonds to make them attractive. There would be economic chaos, and fortunes could technically be lost or made overnight. Even more importantly, the US T-bill, often considered the safest investment in the world, would no longer be it. The economic world would be turned on its head. I would think the British Pound or the Euro would take over, I’m really not sure.

My biggest concern is how I would keep and possibly grow that money. I am thinking precious metals to be the best route. Gold, silver, and platinum. Other currencies would carry the same risks as the US, since every central bank can choose to produce more money. My next question is, if a recession were to occur, how soon would it happen? 3 months? 3 years? 10 years?

I’m going to have to be prepared with a plan for when this happens. I know what I pointed out was the worst case scenario. But nonetheless, even a much less extreme version would cause money to be lost. And for that, we should all be ready.

 

I saw the movie Syriana on Sunday, and it really gave me a different perspective on the financial markets. I have read some articles, and have decided that it is time I begin to learn commodities trading. I had opened an account back in September and even had cash sitting in there waiting for me to start investing, and so I figured today would be the perfect day.

I had traded crude oil, on the hopes of the hurricane that was coming after Katrina would not be downgraded to a tropical storm. I bet the wrong side of that equation, and closed out my position at a couple point loss.

This time, I decided I would trade gold, as it has been climbing as of late, and has been more volatile. With the Federal Open Market Committee making its anouncement on whether or not to raise interest rates today, I figured it would move the gold market more than any other commodity.

I started my position by opening up a long position for Feb06 at 527.255 and a short position for Apr06 at 530.90. After noticing that I wasn’t going to be going anywhere with this all day because both securities advanced and declined in tandem, and after seeing continuous downward movement in the morning, i decided to sell the Feb06 contracts at 523.10, for a loss of 4.155 per ounce.

I figured I would try to regain ground by holding the short position as the price of gold moved lower. It was then that the price starting moving against me. After watching the chart for a little while, I finally covered at 527.995, making 2.905 per ounce and offsetting the loss generated by my previous trade.

By just watching the graph, I knew I’d be able to trade out of the loss and into the green. So I re-bought into the Feb06 contracts at 523.80 and then sold half at 525.90 and half at 526.00. This wasn’t my strategy, I just had not adjusted the number of contracts on the trade screen by accident. So I made 2.15 per ounce on this trade.

After these trades, waiting for the Federal Open Market Committee anouncement, I was up .9 per ounce on my trades (2.15+2.905-4.155). My gut feeling was that gold was going to go lower because the interest rates were going to be raised and the wording towards futures raises would be changed. I felt this would drive the price of gold down, since investors and speculators would be taking money out of gold and putting it into US dollars.

So I sold Feb06 contracts at 524.10 2 minutes before the anouncement, expecting the price of gold to decline. The FOMC raised a quarter point, and changed the wording, exactly as Wall Street had anticipated. But when I saw prices begin to rise, I panicked and thought I made a mistake. I bought at 524.80 for a loss of .70 per ounce.

I then turned around and bought 20 Feb06 contracts at 525.00 thinking it was going to go higher. After thirty minutes of trading down, I decided to close out the position at 523.40, losing 1.60 per ounce. Those last two trades had completely wiped out all my gains from the morning.

If I had held onto the contracts I sold at 524.10, I would have made some good money considering gold closed at 521.60 today. I will definitely have to not second guess myself, and the only reason, I know I did, was because this is a new market for me. The leverage is alot higher, so the gains and losses will be alot more extreme.

I plan on going into leverage and risk in the near future and why I think its a great tool, especially for younger investors. I will also continue to trade commodities, as I feel there is a great opportunity in these markets once I understand the movement in them a little better.

One thing I have noticed thus far is that while investing in company stock is for the long term in that you can hold onto them for months at a time, commodities are the exact opposite. The volatility and prices fluctuate second to second. To be honest, I like them both, and I feel I will be just as successful trading commodities as I am with stocks.

True Religion Brand Jeans,TRLG, broke above $17 today. We’re finally returning to the levels we reached back in August, before the stock was listed on the Nasdaq. My first purchase was at $4.95 in November of last year. I have been steadily purchasing more as the stock has appreciated in value over that time, and is now, by far, my largest holding.

I personally view this company as one of the greatest growth stories out there right now. Management has consistently delivered, and has even over-delivered on their promises to shareholders. Consider this: In the company’s conference call in February of 2005, I believe management stated they expected to make $.55/share. When all is said and done, I think they’ll make a little under $.90/share this year.

Now past performance is one thing, but future prospects is the reason I’ve kept on buying more. The company recently opened its first store in Manhattan Beach, and plans to open 3 more stores in Las Vegas, New York, and San Francisco during 2006. The company is going to enter into between 10 and 20 new countries this year. They are also expanding their products selection and plan to enter into 2 new licensing agreements in 2006.

There is a huge short interest in the stock. Over 4 million shares short as of November 15th. Although the company has been on the SHO list for over 2 months straight, it has begun to climb incredibly. I think that at this point, we are about ready for a short squeeze. And it is for this reason that I think we could see $20 before the end of the year.

One thing to note is the insider selling of Lubell. He announced his plan to sell approximately 12% of his stake for an average price of $17.90 per share, selling no more than 300,000 shares per quarter. If you notice, he hasn’t sold anything since the stock has come back from its recent low. In fact, the board of directors have recently begun their buying of the stock at around 15.50. I feel this is a very bullish sign, and asserts management’s belief in the company.

Until management does not deliver on the promises they make each quarter, I will continue to hold my shares. Their track record has been very good so far, and I believe we are at the starting line of the next Diesel, Lucky Brand, Coach, Guess Jeans.

Along with the shares of common stock, I also own January $15 calls as well as January $17.50 calls. Depending on where the stock closes today, I will determine what I will do with the $17.50 calls.

The story on this stock is insane. IPO’s at $85 and jsut never looks back. I’m not going to lie, I initially thought it was overpriced. But when the stock was trading at around $220, I took the opportunity to buy some January 2007 $280 calls. I decided to buy into the hype.

And you know what? So far its paid off. Yesterday Google closed at 410.65. Since my initial investment on April 25th, I have had a return of 342% on my money. Not bad for 7 months huh? And the best part, is it gets even better.

This morning, Citigroup raised its price target from $430 to $490, slightly below other analysts’ opinions of $500. But here’s what I like even more than that. The possibility of Google being added not only to the Nasdaq 100, but also to the S&P 500. This would send the stock up TREMENDOUSLY. The reason? This would open up the market to institutions that are only limited to certain indexes. In fact, the Nasdaq anouncement could come out as early as this weekend. This is great short term news.

Yes I think Google is overpriced. But I’ve seen this before. And when the market prices it higher, all you can do is go with the flow and make some cash.