Simple Logic for Trading Herbalife (HLF)

The current situation regarding Herbalife is getting a lot of media attention so I thought I'd throw some cold logic into the mix.

The premise is that Herbalife, a multi-billion dollar multilevel marketing nutritional distributor, stands accused of operating a pyramid scheme. It seems that the main proponent of this accusation is Bill Ackman, a successful hedge fund manager of Pershing Square Capital Management LP which essentially placed a billion dollar bet that Herbalife was fraudulent and thus worthless.

While these accusations aren't new, Senator Edward J. Markey has recently asked regulators to investigate the issue. There have also been reports that Canada's top regulator has begun looking into the issue.

A quick scan of the twitter buzz on $HLF will make it clear that there are innumerable ways to spin and convolute the issue at hand. To me though, things are pretty cut and dry.

Does it really make sense to buy a stock that is under immediate threat of being found fraudulent?

It doesn't really matter what's true and what's being exaggerated for the short term. At this point, the risk of a major drop greatly outweighs the potential gain of treating this as a bounce play.

Just As I PHOT

There's no denying that the chart of PHOT looks good today. It could be on the verge of a breakout which would be a huge buy indicator. It also has good volume and plenty of investor interest. It's a medical marijuana company which is a hot sector. Unfortunately, it seems that it is a little bit too good to be true, which is what I first thought as soon as I saw the word marijuana paired with OTC. Much of their success should be attributed to hype rather than solid fundamentals (the latter being what you should prefer in a breakout play).

So What's Wrong?

The first question I ask myself when visiting a company's website for the first time is: "Are they selling products or stock?" In other words, is the company profiting from what they claim to specialize in, e.g. medical marijuana accessories, or just from convincing investors that they're a good company worth giving money to.

Below is a screenshot of their company webpage which at first glance is absolutely selling the stock rather than any products. Go look at any company you trust and check out their website. Chances are, you won't even see a ticker symbol on the page. If you do, they're usually hidden in the footer with a link for investors. Growlife on the other hand features everything you need to know about buying the stock rather than real products. It even includes a headline on the front page that predicts the stock will double in share price. That alone would be a big red flag for me.

 Fundamentals

If you're still wondering if you should give them the benefit of the doubt, check the numbers. They aren't pretty. According to their latest 10-Q, the company has less than a quarter-million cash on hand but they have doubled their total liabilities to over three million since last December. Operating losses are growing rather than diminishing over time which doesn't bode well for their future. As of June 30th of this year, they've experienced a net loss of ~2.8 million dollars compared to a loss of ~878,000 that time last year. Not exactly the kind of success story I'd like to buy into.

How Do I Trade It?

Same as anything else! It depends on price action. If that 10 cent level breaks on high volume, it's a buy indicator regardless of how poor the company is. Hype moves stock and there's no reason you shouldn't be profiting from that. That being said, you'll be one of the smart buyers who will know that this company doesn't deserve to be breaking out to new highs. I'm hoping you know enough not to hold onto it if you do buy it.

If you were thinking about shorting it, you've got the right idea but it probably isn't worth it. At 10 cents and solid support at 5 cents, there just isn't enough downside to make the risk worth it. Personally, if the stock fails to break 10 cents I wouldn't pay much more attention to it.

Farewell Awesome Penny Stocks

It is a day of mixed emotion for penny stock traders all over the world. A major player in the penny stock promotion game has announced it's retirement after recently attracting an unusual amount of attention from the Securities and Exchange Commission.

While APS was no doubt a venomous amalgam of ill-intentioned evil-doers, I can't help but miss them. If nothing else, they were fun to hate and crusade against. For now we can only celebrate the defeat of a parasitic giant while we wait patiently for the void they left to be refilled by the promotional scumbags they left behind. I imagine we won't have to wait long. I for one, am going to put on some tea. Any takers?

FAQ: I Have A Small Account, Where/How Should I Trade It?

I get this sort of question a lot from people looking for advice on how to get started with a smaller account. Now it would probably be in my best interest to do what everyone else on Wall Street seems to do and feed you some investing strategy while encouraging you to come back to my blog for future tips and tricks. That being said, I created this blog to help people and the best way to do that is this:

Don't trade with less than $10,000!

While it's certainly possible to make money with smaller accounts, I have to strongly discourage it because the odds are simply stacked against you and trading is all about odds. 

I'll explain further.

For small accounts, the fees charged by brokerages represent a larger percentage of your worth than they would for a big account. That translates into requiring a larger percentage gain from your stock trades in order to stay profitable. Here's an example: Small account holder Average Joe buys 800 shares of XYZ at $2.50 a share. Millionaire Max buys 7000 shares at the same price. Within a short time, the price rises to $2.60 for a 4% gain on your investment. Not bad! That's a profit of $80 for Joe and $700 for Max. Unfortunately for Joe his broker charges $7.50 per trade, and $30 dollars a month for software and data feeds. which represents 56.25% of his profit! Those same fees represent only 6.43% of Max's gain.

To compensate for this problem, most novice traders will hold their positions longer, hoping for big percentage gains. Unfortunately, trading isn't that easy and most likely holding longer won't get you any more gains. In fact, you may end up in the red on that trade since more time in the trade equals more risk. In that scenario, all the fees stay constant AND you're going to lose money on that trade. This means that your next trade would need to net you even more money to make you profitable. Thus, your chances of success become less and less likely. You should be starting to understand now that all the little problems traders face are magnified by small accounts. And chances are, since you're new, you're going to be making more mistakes than quality trades.

Small accounts are also at greater risk of going bust than large accounts. You should never invest your entire account into a single trade because you can never be sure if you're right. If trading were that easy, everyone would be making money but the sad fact is that most people lose money because most people don't read this blog. Good traders only risk around 10% of their account on any one trade. If you have less than ten-thousand dollars though, that leaves you with a very small amount to trade and compounds the issue illustrated above. If you go all-in on every trade, you're probably just going to bleed your account into oblivion.

"But hey! I'm making millions on my paper trading account!"

Practicing on paper trading accounts does little more than acquaint you with a particular broker's software. Many of the variables that make trading challenging are diminished or removed in the paper trading world which can mislead you into thinking you're a bit more skilled than you actually are. One big reason is that paper trading is mentally distinct from actual trading because it doesn't punish mistakes in a meaningful way. Introducing the risk of losing your real-life hard-earned money is likely to influence the way you trade. Most notably your ability to accept a loss and get out of a bad trade rather than holding and hoping.

Furthermore, and much less obviously, paper trading diminishes the influence of liquidity and your role in that liquidity (if you want some clarification on liquidity and other basic terms, click here). In the real world, your trade order can influence the price of the stock. While this wouldn't be noticeable if you were trading GOOG, small accounts are probably going to be trading small cheap stocks which are much less liquid. These stocks are going to behave in ways that may not have been apparent in the paper world.

Shorting in particular is not well represented by paper trading. The biggest factor for this trading strategy is the availability of shares. The only way you're going to get an accurate sense of this issue is by actually trading. You have to short early (which is much higher risk) in the real world before the shares become unavailable to borrow. Once the odds are obviously in your favor and the risk is lower, the stock is probably not going to be available to borrow because everyone wants them at that point! As such, these borrows are often only available to large account holders who can manage these higher risk trades. Large losses don't put them out of the game. Shorting also involves borrow fees and fees, as I explained earlier, are bad for the small account holder.

4 Huge Reasons Bitcoin is Worthless

Bitcoin, the first digital cryptocurrency introduced in early 2009 by the by pseudonymous developer Satoshi Nakamoto, was designed to circumvent institutional influence by offering a more direct person to person exchange of currency. It is, in more ways than it's supporters would like to admit, analogous to cash. Additionally, and the reason why I was interested in writing about it, is that it seems to possess a similar anatomy to that of a penny stock pump and dump.

At the time of this writing, a single bitcoin is worth around $121 USD. Back in April it was valued around $260. Some people have even been so ridiculous as to speculate that it will be worth $100,000. That's certainly impressive but also brings to light the unsettling issue of volatility considering it's worth plummeted by more than half in about a month's time.

Don't fix it if it ain't broke

It's a mantra we hear a lot, and for good reason. It's a waste of time and resources to replace things that are still working without serious issues. Cash already provides us with a deregulated method of trade. If you don't trust institutions, no one is forcing you to keep your money in a bank. The fact is, more often than not, institutions aid us in the safekeeping of our money and governments work to ensure they do it properly.

While the European dept crisis certainly demonstrates the disturbing possibility of what can happen when those plans go south, it's not difficult to point out why bitcoin doesn't offer much in the way of a solution.

Bitcoin is overly technical and nonintuitive

Even the most basic explanations of how Bitcoin is structured and expanded will make the heads of the average reader begin to spin. There is in fact a reason why things like gold and silver have high values; they're tangible, easy to understand, and pleasurable to look upon. Bitcoin, by contrast, is none of those things, barring the way to wide adoption. And of course wide adoption is absolutely necessary for a currency to work because if people don't accept it, they consider it worthless.

This problem is compounded by the currency's dependance on a network. While traditional currencies can be minted and printed to facilitate quick and painless trading, Bitcoin only offers the bulky series of numbers and letters called an address which look like this: 16yXE5cEbKTRbm4U8LFydp1Q9egWHcpcQ9

Bitcoin still relies on institutions

If Bitcoin hopes to survive in the world of traditional currency, it needs some way to be converted between them so as to establish its relative worth. For this it must rely on several loosely regulated groups such as Mt. Gox and Dwolla with essentially no safeguards as to their stability or longevity.

Bitcoin owners are also vulnerable to the same vulnerabilities as people who decide to keep all of their money under a mattress. Computer failures, fires and theft can all result in the loss of your digital wallet and thus your money. While there are workarounds for these problems, a similar level of effort and care can be used to protect your traditional forms of currency which again begs the question, "why switch?"

An internet based currency is plagued by internet users

You don't need a degree in social psychology to notice that anonymity brings out the worst in us. Reading a handful of YouTube comments will prove that point to anyone. In this regard, Bitcoin at an even bigger disadvantage than traditional currencies.

Honest Bitcoin users must traverse a minefield of scams and thieves while using their money in any transaction. Without the sort of regulation that traditional currencies are subject to, Bitcoin users have little recourse to fall back on when they're cheated. Take, for example, an interaction in which two people agree to trade a laptop for a number of bitcoins. Person A sends 5 bitcoins to Person B who then decides not to send that laptop after all. Person A has no one to seek justice from as their government likely doesn't acknowledge Bitcoin as a true currency, thus making it legally unclear if a theft actually occurred at all.

Furthermore, Bitcoins are no longer the sole digital currency which exposes another problem with unregulated currencies. Anyone can make one. The new cyptocurrencies, known as altcoins in the Bitcoin community, serve to make the value of the original more arbitrary and diluted. There are also many rumors that some of these altcoins are controlled by organized crime networks, which makes sense given the lack of concrete legislation overlooking these digital creations.

Personally, I'd rather work on improving the currencies we already have before I start investing in a new one that seems to have a dismal future and no clear hope of overcoming the problems we currently face.

Why XUII Dumped & What's Next

Today XUMANII (XUII) crashed following the release of a lawsuit put forth by George Sharpe. Mr. Sharp alleged that the promoters were in violation of anti-spam laws.

According to the article on yahoo:

Named as defendants in the case are: Degroupa Tenner Morales Media Corp. and Centro Azteca S.A., the current and former publishers of the Awesome Penny Stocks series of newsletters; and, Victory Mark Corp Ltd., the publisher of newsletters Select Penny Stocks, Preferred Penny Stocks and Penny Stock Heroes.

The problem is, I don't think any of the promoters actually are in violation of the anti-spam laws. Their subscribers voluntarily sign up for the alerts, and all of the emails come with links that allow you to unsubscribe. Consequently, I don't expect the lawsuit to stick or the pump to be over yet. As I write this, it is already on its way to at least partial recovery. While I'm not confident enough to buy this myself, I think it's more likely than not that it will return to the .40s tomorrow. That being said, if you're unfamiliar with the nature of pump and dumps, and you're reading this because you are completely confused by what has happened today, I advise you to close your position. This stock already has too many red flags even before you start looking at fundamentals.

4 Reasons I Don't Trust XUII as the New APS Pick

1. Awesome Penny Stocks usually releases their picks on Tuesdays or Thursdays, not Mondays.
2. While XUII traded millions of shares in premarket and many traders considered this confirmation of the alert, the pick wasn't confirmed by email until around 10:30am. Lot's of speculation creates sketchy unpredictable price action.
3. XUII started getting pumped by Victory Mark Corp. on May 1st which has made it more crowded and less relatable to previous APS pumps
4. $ACCS which was speculated to be the new pick before the open did have a classic pre-pump chart. While I'm just guessing here, it made me wonder if they intended this as the pick, then switched to XUII to kill frontrunners. That would also explain the alert being delayed until around 10:30am.

I was hoping that APS would recall their pick but that seems less likely now that they have placed an XUII banner on the website. Regardless, I won't trade this like I would other APS picks. It's just too different which I consider to be risky.

Watchlist: LOTE, WSGP, POLR

Lot78, Inc. (LOTE)

The size and strength of this pump is so anomalous that it's rather scary to trade. It wouldn't surprise me to see this thing to hit $20 but it also wouldn't be very shocking to me if it crashed all the way to $6 tomorrow. While that sort of volatility is exciting and worth watching for, I haven't traded it. I much prefer lower risk plays. I'll continue to look for shares to short but even if a bunch become available, I'll keep my position size low just in case this thing isn't done being ridiculous yet.


Western Graphite Inc. (WSGP)

A Tobin Smith pump and dump with a disclosed budget of $1,813,286. I first received an email about this on the 22nd of April which also linked to the pump's landing page. I imagine that the landing page went up on the 19th from looking at the volume in the chart. Considering that this pump is getting a bit old, I wouldn't want to hold a sizable long position for very long. The price action hasn't been very bearish yet so I'm not ready to start shorting. It might be an option to buy some dips and sell the bounces but I'm hoping for some strong upward spiking in the next few days that I can feel confident to short in to.


Polar Petroleum Corp. (POLR)

Sort of similar to WSGP in pump style, this one has a disclosed budget of $700,000 on the landing page. It doesn't seem to be getting quite as much attention as other pumps in the market so I highly doubt it will have the momentum to breakout past it's previous highs around $4.25. Everyday that it continues up, I am looking to short it more aggressively.

GOFF: Fool's Gold For APS Subscribers

Earlier this morning AwesomePennyStocks (APS) released GOFF as their latest pick. APS describes Goff Corp. as a mining exploration company with interests in the Aguadas, Department of Caldas, Colombia area. The goal of this promotion seems to be to convince naive investors of the great potential in gold, diamond and silver discovery within this area.

The reality of course is that Goff Corp. is a terrible company that doesn't deserve to be trading at anything more than a penny per share. And that's being generous.

Goff Corp. wasn't always a mining company. It was originally incorporated on July 12, 2010 and aimed to "provide web-based networking and job-placement services for employers and individuals seeking employment in the UK and Ireland" (Form 8-K). The company failed to meet this goal due to inadequate funding.

Goff Corp. has only been a mining company for a grand total of 11 days including today. The recent change in company focus coincides with a change in management as well. The shell had previously been run by Gary O'Flynn and Patrick Corkery, both of whom resigned on February 26th of this year. The sole director of the company is now Warwick Calasse who bought his controlling position in the company (108,750,000 shares) for a mere 25 grand. That amounts to just 0.0003 dollars per share and provides a good indication of what the previous directors considered the worth of the company to be. Previous financial reports confirm this by showing zero income and substantial expenses resulting in a net loss of $29,000 this past year alone.

 If you tend to be an overly trusting person who falls victim to the fluffy bullshit of promotional emails, write down this quote from the companies own 8-K filing and stick it to your monitor:

Since we are an exploration stage company, there is no assurance that a commercially viable mineral reserve exists on any of our current or future properties. To date, we do not know if an economically viable mineral reserve exists on our property and there is no assurance that we will discover one. Even if we do eventually discover a mineral reserve on our property, there can be no assurance that we will be able to develop our property into a producing mine and extract those resources. Both mineral exploration and development involve a high degree of risk and few properties which are explored are ultimately developed into producing mines.

The task of discovering said minerals seems further complicated by the fact that the company doesn't have any employees.

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SWVI: The Dangers of Golf Apparel Mining Companies

Swingplane Ventures, Inc. (SWVI) is an overvalued company poised for a massive collapse in stock price. According to the description found on Yahoo Finance,

"Swingplane Ventures, Inc., a development stage company, manufactures and sells men’s and women’s golf apparels. Its clothing line consists of tailored-fit golf shirts, pants, and skirts. The company focuses on marketing its products under the Swingplane name through online sales directly to the consumer. Swingplane Ventures, Inc. was founded in 2010 and is based in Broomfield, Colorado."

Strangely, and according to the company's own website, the company actually operates as a mining exploration company that concentrates on the acquisition of copper ore.

The company is currently being promoted by AwesomePennyStocks and its affiliates which is why it is currently trading at levels far above its actual worth. Unsurprisingly, the company didn't have a single news release from the time of its inception in 2010 until late this January when the stock promotion began.

Considering the 472.5 million shares outstanding, the company currently has a market cap of around 190 million dollars. So how much money does this company make in order to be valued at that price? Zero. None. Nothing. As of the last quarter ending September 30th, 2012, SWVI has no income and a debt of  25 thousand dollars in net tangible assets.

Looking back at the last APS pump FARE, counting from the first day of massive volume to the peak of the pump, we see that the promotion lasted about 14 days.

Counting in the same manner we can see that SWVI is due for a similar collapse.

WUHN: One day wonder

Wuhan General Group Inc. (WUHN), was pumped last night and early this morning by Penny Stock St★r (Tribeca Investments Ltd.) and Marquee Penny Stocks (MHC Inc.). Both entities claimed not to have received compensation for the promotion. In conjunction with this pump, Equities Awareness Group LLC, another pumper, released a press release which could be seen on yahoo finance. The PR featured WUHN along with several other promoted stocks that also had big moves today (MKRS, PIEX, GMEC).

Since neither promoter was compensated with shares, there wasn't as much selling pressure and the price actually held up reasonably well throughout the day. Unfortunately for the followers of the newsletter, the stock gapped up around 350% making the potential for further upside rather dismal. In fact, the high of the day was hit just 35 minutes after the open and showed few signs strength for the remainder of the day.

Despite the fact that the average trader wasn't given a very good opportunity to make money on this stock, the promoters can still call it a job well done. Now they get to brag about their 1,034% intraday profit (which they have in after-hour emails) as well as post a little badge on their website saying they alerted the ticker before such a big move. As you might have gathered, the purpose of these uncompensated pumps is less geared towards making money and more towards building a following of gullible traders. The lazy trader who didn't do their research might read those celebratory emails and decide to invest lots of money into the next pump by Tribeca and/or MHC, with dreams of their money being increased 10-fold. Such reasoning is dangerously flawed and will more likely than not result in a large loss.

For one, future picks by these pumpers will likely be compensated which significantly alters the price action of the pick due to promoter/insider selling. As such, the performance of an uncompensated pump cannot and should not be used as a predictor of performance for compensated picks even from the same promoter. Furthermore, and as we saw today, the intraday percentage gains of these pumps are highly misleading. In reality, the stock only uptrended for a small fraction of the day making it difficult to sell for a profit.

Even if you're familiar with the risks of pump and dumps, these sorts of promos can be dangerous to short sellers. The huge gap up was attractive to shorts and shares to borrow seemed to dry up close to the open around the 0.25 level. Those who shorted that low had to sit through a terrifying squeeze up to 0.45 and are still underwater at this point. Since uncompensated pumps can run so wildly and may not be subject to a catastrophic dump in the near future, there is a whole lot more to lose than to gain with these sorts of plays.

To summarize, read the disclaimer at the bottom of the pump emails/alert pages and be aware of the dangers that uncompensated pumps pose, both for longs and shorts.

Best Damn Penny Stocks: ZPPB

Best Damn Penny Stocks (BDPS) released Zippy Bags Inc (ZPPB) as their new promotional pick this morning. On the alert page, BDPS reported being compensated $500,000 for the promotion. I received my first email at 9:39am although I heard that others received emails as early as 9:32am.

This time difference is of critical importance if you hope to trade these sorts of moves considering the price had quadrupled within five minutes of the open (before I even received my first alert). Unfortunately, buying after the first few minutes of trading is exponentially more risky with less potential for profit.

That being said, there is still the opportunity to make money later in the day so long as you can tolerate greater levels of risk and can afford to lose your investment should things go sour.

I personally fall under that category of high risk tolerance so I bought 20,000 shares at $0.27 just for 3pm. Unfortunately, I can't say that it was a great trade but I can explain my thoughts to give you an idea of how one can trade these pump and dumps.

Before making such a trade, you need a decent background in pump and dumps, especially BDPS pumps since each promoter's picks behave differently. Previous pumps also offer a better idea of how current picks will perform so it's useful to look back at old charts (in other words, this post will be helpful in the future).

Honestly, I didn't find as many intraday charts from previous BDPS pumps as I perhaps should have before entering into my trade. Instead I was relying on my memory that BDPS pumps rarely dump on the first day of the pump. Another somewhat sloppy mistake that I made was entering my buy order while the stock was hovering in the 0.28-0.29 range during the hour before I was executed. I knew there was support at 0.27, which is why I set my buy there, but it would have been much less risky to simply wait for that level before sending my buy order. As you can see from the chart, the price actually broke through the 0.27 level and even touched 0.25 for one tick which gave me a nice little heart attack. Had the stock continued to fall, I probably would have lost most of my investment.

In order to avoid such panic attacks, you can set price alerts using your brokers software which will audibly alert you to a specific price level. That way you can decide whether the bid support looks firm enough to buy or if it looks like there may be more dipping before a bounce. Watching Level II will greatly aid you in this decision. The caveat though is that many other traders will be doing this as well, making it difficult to get an execution once the price begins to bounce. That though is the quintessential obstacle in trading pumps; it's difficult to buy at the lows when there is strength and it's difficult to sell when the stock is falling and you're watching your money disappear in front of your eyes.

Lucky for me, the stock didn't collapse at that moment and I went on to make a profit. I knew from the previous BDPS pump BFLX that I wrote about here, the price tends to uptrend in the final hour and close strong. From looking at daily charts of previous pumps, I had decided that it would be too risky to hold my position over night since these pumps don't last for very long compared to Awesome Penny Stocks (APS). I set my sell at $0.30 since price action seemed to consider it a key level throughout the day. I initially thought it would even break .30 for a very strong close considering the rise in volume during power hour so I thought I didn't think I was being greedy. Unfortunately the highest tick was 0.2999 and I didn't get executed. A good lesson there is to take safe profits when you have them especially when building a smaller account.

Contrary to my predictions though, the stock actually dipped during the final minutes of trading and I had to exit at an average of 0.286. I also failed to close my entire position and remain long 2.5k overnight. Based on previous pump performance and the tiny position size, I plan to sell my remaining shares tomorrow at the open. After that I may look for shares to short in anticipation of the dump.

Update: Closed the last of my position for a small additional profit. As I expected, BDPS does not provide good setups for gap-up plays. If that's your thing, consider the next APS pump keeping in mind that for each additional day into the pump, the risk of the dump becomes greater and may even occur on the first day if the pick is recalled, the stock is halted, or the company releases a PR stating they have no involvement in the pump and don't know why the price is jumping so much.

The myths and mistakes of amatuer traders

Even if you only trade occasionally, you've probably consulted some form of internet community for advice, be it a trading forum or chat room. If you haven't, well, you're doing it now. There is a plethora of great information out there, unfortunately it too often seems that for every good tip, there are 5 poor ones that are more likely to steer you into the habits of an unsuccessful trader. In this post I hope to list and debunk some common myths that I often encounter online.

• "I want to play BLAH but I don't know how... should I buy or should I short?"
• "I know it's a bad short, so it must be a good buy."
• "I know it's a bad buy, so it must be a good short"

If you don't have a good idea of which way a stock is going to move, don't play it at all. Just because something is a bad buy or short, does NOT mean that it is a good idea to play the stock in the opposite direction. A stock may be a poor short because there is strong technical support close to where the stock is currently trading. There may also be strong technical resistance above where the stock is currently trading, meaning that it would be a bad trade regardless of whether you went long or short.

• "BLAH is going to teh moon!!!"
• "Long BLAH"
• "All in... BLAH"

It is also imperative that you consider all aspects of the trade. Do not fall victim to the false security of seeing several other traders make the trade you are thinking about. Since 90% of traders lose money, the odds say that those traders just made a bad call and you would be wise to think before blindly following. Read all recent news, and check if there are any planned announcements on the horizon. There are also much less obvious factors such as the release of share lock-ups that could take you by surprise and cause you to lose money. The more research you do, the better you will be prepared to make a good trade.

• "BLAH is still being pumped/promoted... it will go back up/it isn't dead yet"

Stock promotions can take many forms ranging from internet forum hype, paid internet ads, spam emails, to mentions of the company on TV. Many people mistake these promotions as a risk free cue to buy. While it is true that many stocks rise initially, even that isn't a certainty. Furthermore, a promotion can go on for weeks as the stock continues to drop. The purpose of a promotion is to allow shareholders to sell so anything being promoted will be inherently burdened by selling pressure. Many times this selling pressure outweighs buying interest, causing price to fall and you to lose money if you buy into the promotion hype.

• "BLAH heading north, guarantee that it will hit 5.50 by next week."

There are times when all factors may point to the stock behaving in a certain way. However, even in these cases it is important to shift your thinking into terms of risk and reward. If all your research seems to indicate the stock moving in a particular direction, you may have low risk, but there is always some risk. There are NEVER guarantees in the trading world and you should certainly never take the word of an anonymous internet user of any such "guarantee."

• "Any trade that makes you money is a good trade!"

False. Good luck can make you money on a bad trade. If you fail to recognize a bad trade (even if you made money on it), you are liable to continue making such trades which will ultimately come back to bite you in the ass.

• "I'm in BLAH now but I don't know when to get out."

You should plan your exit before you ever enter a trade. If you find yourself in a trade and don't know what to do, it is best to get out.

What is a pump and dump?

According to investor.gov,

"Pump and dump" schemes have two parts. In the first, promoters try to boost the price of a stock, typically in a microcap company, with false or misleading statements about the company. Once the stock price has been pumped up, the promoters seek to profit by selling their own holdings of the stock, dumping shares into the market, which typically causes the stock price to collapse.

While this is true, this definition is incomplete. For one, the purpose of the promotion is not solely to raise the stock price. Often the people paying for the promotion are insiders or investors who were compensated by the company with shares at a fraction the current market value. Because of this, their interest is merely to create volume to sell into since selling at any price would provide them with a handsome profit.

The important thing to understand though is that the people being paid to promote the stock are biased by the compensation. Their motivation is to paint the picture of a healthy company worth buying into. Thus, their claims can be exaggerated, misleading, or just plain lies. If you are ever advised to invest in a company, closely inspect the communication for some sort of disclaimer that may indicate the person has been compensated. Often times, this disclaimer appears at the bottom of emails.

Since the purpose of the promotion is to sell shares, there will be a constant downward pressure on the stock price. In the beginning of the promotion though there are usually enough enthusiastic buyers to counteract this selling to cause the price to rise. Once this hype and excitement wares off, the stock price usually falls dramatically. Often, such promotions occur on bulletin board exchanges where there is less liquidity. As a result, it is difficult to sell out of these stocks once they begin to show signs of weakness making them a dangerous investment even if you are aware that it is a pump and dump.

The safest way to play pump and dumps is to buy at the very beginning of the pump if you know the promoter has a solid track record of raising stock prices. The time you hold that stock should relate to your level of risk tolerance. Selling quickly for smaller gains is the least risky strategy and is a good way to build a small account. Holding the stock longer may allow for larger gains but it also presents the risk of large losses due to the difficulty of exiting just before and during a crash. Such a strategy should only be performed by more experienced traders who understand the risks at hand.

A sample promotion email:

GWBU closed green on Friday with a gain of 3.50%. This week could be very significant after one week of being relatively flat.We believe GWBU could be ready to break $2.00 in the very short-term and potentially reach $10.00 or more as predicted by a recent Seekingalpha Analyst.If the Analyst's prediction is achieved, members could be looking at over 800% in gains.Let's look at the TOP 10 Reasons why everyone should consider GWBU before it is too late!#1- According to the company, GWBU focused on developing technologies that reduce fuel consumption by as much as 15% and cut emission by over 70%. This is a technology in huge demand around the world.#2- Just in the States alone there is over 250 million vehicles that could use this technology to reduce fuel consumption and emission. Globally we are talking over 800 million vehicles that could potentially use GWBU's technology.#3-Currently, the global clean-tech market is estimated at $284 Billion and is projected to grow to more than $1.3 Trillion by 2017. Start Technologies Europe I.G.’s technology (GWBU) increases energy efficiency, reduces pollution and is applicable on a global scale.#4- ELASIS Research Centre( part of FIAT Group, 6th largest automaker in the world) worked with GWBU in the past.
Results showed emission reduction by over 40% and fuel consumption by over 10% on a 2003 FIAT Scudo. (see the full report here: http://www.starttechnologiescorp.com/technology/research-reports/)#5- GWBU recently announced contracts that could be worth over $50 million USD. Could there be more contracts on the way?#6- A recent positive test with the Transport Ministry of Barbados showed that GWBU's technology increase fuel efficiency by 20% and significantly cut emission. More evidence that the company's technology is working!#7-  Recent Analyst stated that "majors like Ford, Chevy, and Dodge could be interested in GWBU's technology!" This interest could significantly increase the value of the company in the future.#8- After a week of consolidation, we think GWBU is ready to make a move North. We've seen this in the past, and we believe history will repeat itself very soon!#9- The Reg sho on GWBU shows over 10 million shares in short volume just in the last few weeks. A major short squeeze could propel GWBU much higher!#10- If GWBU can replicate our last pick's percentage gains it would soar to
around $10 in the coming weeks!At these levels, we think GWBU could be a steal and we urge our members to start looking into the company.Sincerely,The Free Investment Report Team

And the associated disclaimer:

(Note the $100,000 expected payment in the final paragraph)

GWBU: Why you shouldn't buy

The following research will hope to reveal why you should think twice before buying into this company. This post will mainly be geared towards those of you who are inexperienced traders as the main goal of this blog is really to protect people from huge losses. I'll be going into as much depth as possible though so I expect this to be of value to experienced traders who already understand the pump-and-dump nature of this stock.

To begin, according to the yahoo business summary, Great Wall Builders Ltd. (GWBU) is...

...a development stage company, focuses to provide homes in the United States and China. It plans to design and sell homes with solar integrated systems, such as solar integrated roof tiles, solar hot water heaters, and solar electric photovoltaic systems. The company intends to market its products through commissioned employees and independent real estate brokers. Great Wall Builders Ltd. was founded in 2007 and is based in Houston, Texas.

It based on the price as of this writing, it has a market cap of 575M which is actually a bit low for past APS pumps (may be one reason to expect the price to increase in the future). The company has zero revenue, zero cash on hand, and according to the latest 10-Q: "As at December 31, 2011, the Company has a working capital deficit of $63,283 and an accumulated deficit of $126,783."

The company has very recently seen a change in management which could be seen as suspicious. The previous CEO had been Peter Evan Bell. According to the financial times:

Mr. Daniele Brazzi has been appointed as President, Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer, Director of Great Wall Builders Ltd., effective March 23, 2012. Mr. Brazzi has studied general electronics, electrical engineering and applied electronics. He has collaborated with prestigious brands such as Sony, Kenwood, Clarion and Alpine in the automotive area, developing new technologies. He graduated in medicine for the construction of medical electrical, specific for bio-resonance to treat pathogens, and iris scanners, to detect early disease of human body. Mr. Brazzi has also worked in the orthopedics are for the Rizzoli Institute, Bologna, on ambulatory equipment. Over the past 10 years, Mr. Brazzi has worked in the specific area of the combustion engine, specifically in reducing emissions in the combustion engine. His most recent experience has let him to develop the START device, which boasts more than 800 worldwide installations.

Mr. Jay Almeida has been appointed as Treasurer, Secretary, Director - Operations, Director of Great Wall Builders Ltd., effective March 23, 2012. Graduated from the University of Chicago with a degree in economics. In addition, he graduated as an engineer from Universidad Santa Ursula, Rio de Janeiro, Brazil. Mr. Almeida has a masters degree in Marketing from Universidad de chile, Santiago, Chile. Mr. Almeida also has a Phd. in Engineering Economics from Bonn University, Germany. In 1999, he was nominated as Ambassador of Commerce of Florida for all Latin America and Caribbean countries. After a career as a bank industry for 14 years, Mr. Almeida moved to the US in 1989. Since 1990, Mr. Almeida has served as the President and CEO of PHN Group. PHN Group is an international business group of 5 companies involved with foreign trade (importation, exportation, business representations, international business consulting, trade finance and security technology) in all Latin America, Caribbean and European countries.

According to a marketwire report, the company also took on Mr. Dominico Chiovitti, as a Board Member:

From 1967 to 1992, Mr. Chiovitti was a Senior Chemist and supervisor of the Petro Canada Laboratory in Montreal, Canada. During his career, Mr. Chiovetti controlled and researched several new products, specifically Vanadium Pentoxyde derived from fly ash. Mr. Chiovetti was responsible in the design and development of a method to control CO & CO2 levels for industrial gas discharges into the environment, while collaborating with the Center of Emissions Control. Mr. Chiovitti is a member of the Order of Chemists since 1979 and graduated from the University of Montreal with a Bachelor of Science in Chemistry in 1967.

Although none of these new individuals seem to be involved in any significant issues, the most damning piece of evidence is that Mr. Brazzi also currently serves as the director of research and development at Dpollution International Inc (RMGX.PK). This company has also been previously involved in several stock promotions which include Wall Street Grand, a Lebed pick, a stock egg alert, and several StockMarketLife promotions.

To give you an idea of the success of this company and promotional strategy, RMGX once traded at 80 dollars a share and now is only worth 4 cents a share.

On March 19, 2012 GWBU actually entered into an Asset Acquisition Agreement with RMGX in exchange for 27,306,793 shares of restricted common stock. According to this same SEC filing, "Following the completion of the Agreement and the SPA, Daniele Brazzi control approximately 50.3% of the issued and outstanding shares of the Company." Thus he has a lot to gain from such a promotion if he plans to sell those shares into the promotion.

Another interesting tidbit that seems sketchy and was pulled from an SEC filing is that Peter Evan Bell, one of the previous CEO's quit his position 14 days after taking it on before being reappointed a while later: "On August 3, 2011, Peter Evan Bell was appointed as President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and a member of the Board of Directors. On August 17, 2011, Mr. Bell resigned from all positions with the Company."

As with any pump-and-dump the moral of the story is that the stock will eventually crash, usually within a month. Based on recent past APS picks, these stocks don't make it much past 2 dollars before tanking although this pick began its official promotion at a significantly higher price. Therefore, it is uncertain as whether 2 dollars can be used as an accurate historical measure of the top. Either way though, being long in this stock will become increasingly risky for each passing day.

Another significant factor with this pick is that there are actually shares available to short which has not been the case for the APS picks of the recent past. This means that there will be an awesome profit potential for shorts at some point in the future but I would not suggest shorting this early. It is possible and I think likely that the promoters will manipulate the stock higher in an attempt to squeeze these shorts would could allow the price to reach higher levels than we have recently seen.

If you are still skeptical about the level of sketchiness with this company and the associated promotion, I suggest you check out my post on the most recent APS pick, SNPK to get a sense of how right I was in predictions of what would happen over the next few months while it was being promoted.

The Danger of Facebook

If you're reading this I assume you are thinking of, or already are trading the Facebook IPO today. I would like to urge people to reconsider and leave this one alone. Here's why:

You have no advantage. As I've said before on this blog, good trading is all about taking superior risk/reward trades. This company is commanding the attention of every big trader and firm not to mention thousands of other people who have no idea what they're doing. The IPO will trade nonsensically at first because of this so how can you hope to predict any clear directionality?

With a company like this, there are a million different opinions about what it is worth. Only a few of those people know what they're talking about. If you're only knowledge of FB's worth is derived from the latest news articles you've read, what makes you think that you're better equipped to make money than any of the other people that also read those articles? Remember that trading is a zero-sum game. Someone has to be losing for you to be winning and when you're up against tons of people who understand the details of an internet company, you're starting off at a disadvantage.

I know you're thinking that you don't need to understand to ride the hype that will carry the price upwards. You may even be right. But the risk is just too great. It is my personal belief that this hype will create artificial inflation that is unjustified by the companies fundamentals. If that is the case, you may be setting yourself up for a nasty fall down the line. Perhaps sooner than you think.

I just want people to be careful. If you understand how Facebook makes its money and you feel comfortable taking on the risks than go for it. I just fear that too many new traders will be throwing money at this thing without any knowledge of how the market works.