Stock Market - June 2 - 6, 2008

[TheSlowLane]

I didn't have much to do yesterday so I listened to almost all of the Financial Sense Newshour broadcast. 

http://financialsense.com/

I thought there were several good segments.  The Technical Roundtable was good.  There seemed to be a consensus that the general market is about to take a leg down, oil has hit a short/intermediate-term top and gold is ready to move up.  The segment with Jeff Christian focuses on the silver market and is definitely worth a listen for anyone interested in that market.  Christian is one of the more knowledgeable folks that I have heard on the metals markets and his position at CPM Group gives him a vantage point that I think is pretty unique and valuable.  Finally, the second part of Hour 3 continues FSN's look into how the markets are gamed by Da Boyz against the rest of us and talks about how to recognize their tactics.  They are starting to talk about what can be done about it, but it sounds like they are planning to give this subject even more attention going forward and are setting up a page on their site to focus on it.

[dananini]

TSL, won't have time for that today. I'm a fairly green trader with no previous experience with small-cap, pink-sheet type stocks. In a sentence or two, could you tell me what it is these guys actually do to manipulate things. I'm assuming it has something to do with the market-makers holding orders. Much obliged..

[maxine]

Oil is high because the dollar is low.  Interest rates will have to rise to offset that. Then there is the demand/supply to consider.  I think the manipulation thing is a red herring which takes the focus off the fundamentals. 

[TheSlowLane]

dananini - There are a couple of issues that they've been talking about in that regard.  For example, a junior mining company needs to do a financing.  They go speak to a financial institution who agrees to arrange one for them.  Then this institution proceeds to short the heck out of the stock.  This drives down the price of the stock and enables them to get their investors in cheaper.  They get a chunk of stock for doing the placement and cover their short positions with the shares.  The remedy for this is for the mining company to require the institution(s) to sign a letter before they enter into a financing agreement saying that they are not short the stock and that they will not short the stock.  If they won't sign, then no deal.  A couple of companies have already contacted Puplava for advice on how to go about doing this.

Another issue is a more general one, but is typically targeted at small-cap companies.  This is the issue of naked shorts.  By law, when you short a stock, you must borrow the shares from someone else and then the shares are returned when you cover your shorts.  Naked shorts are short sales that are done without borrowed stock.  These result in "Failures To Deliver".  Companies (on the US exchanges) that have been the target of naked short sales appear on the Reg SHO list (Google it if you want more detail). 

Overstock.com is one of the companies that has been most vocal about this problem.  It is not their imagination.  For the recent annual meeting, 80 million shares were voted.  There are only 60 million shares outstanding.  That means that there are shareholders that voted 20 million shares that do not exist.  The SEC has been reluctant to do anything meaningful about this situation.  First they said it was too small a problem to merit attention.  When they finally acknowledged that it IS a problem, they said that the problem is so large that enforcing existing regulations would be too disruptive to the markets.

Some of the trading techniques that are used:

- driving stocks down at the end of the day/week to "paint the tape".  A stock might be up 10% all day and then get driven down right before the close.  This can be used to trigger technical sell indicators.
- putting out a monster ask.  If a stock starts to move up, then buyers can be discouraged by putting a huge block of stock out on the ask.  Everyone sees it and says "uh oh, somebody knows something bad".
- Collusion between two brokerages working two exchanges.  They sell a block of stock back and forth to each other on both exchanges, creating the appearance of widespread selling.  Harvey Pitt, former Chairman of the SEC discussed this technique specifically in his call to the SEC to take action on naked shorting.

There's more, but you probably get the picture by now...

[TheSlowLane]

Eric Hommelberg refers to the naked short-selling issue in a recent article posted at Kitco.  He acknowledges that it is a concern, but puts it in the context of what he believes is one of the best buying opportunities that we have seen over the course of the gold bull market:

...I'm hearing persistent rumors about Canadian investment banks shorting juniors since that's been paying off tremendously in the past year. The investment banks/brokers short the juniors and try to cover later on by participating in a private placement. In other words, those investment banks are working AGAINST the interest of the juniors, all they want is to force the juniors issuing more shares at the next financing. Does that really happen? Although I can't prove it, my bet is that it happens over and over again. All one has to do is to watch the trades going into the close in which many juniors are being submarined on low volumes. Sometimes a junior stock gets hit by 15% going into the close through a sale of a 1000 shares only. Sure enough the seller's objective is NOT to maximize a profitable trade but to paint the tape and bring the stock down.

Now why in your right mind would you be buying juniors if powerful investment banks are working against the interest of the juniors?

Well, good question..As mentioned above it's my strong belief these fraudulent activities do take place but on the other hand they don't worry me too much. The thing is that all a major investment bank cares for is a profit. They don't care at all whether or not the profits will be achieved by means of (illegal) naked short selling. My point however is that the short selling won't be a profitable trade for ever since markets always do have turning points. The short sellers can push whatever they want but at some point the bargain hunters will be stepping in big time which will put a floor under the junior share prices. Watch-out what will happen next.

In part I, the technical view, I made a case for the CDNX/GOLD ratio to have bottomed out, which translates itself into the simple fact that we've seen the extremes to the down-side and further down-side risk seems to be limited. Yes, they can try to push the junior sector further into oblivion but it will be increasingly difficult to do so. Pushing the extreme undervaluation of the junior shares into even lower extremes is like pushing a car up-hill by hand on a road getting steeper every single foot. Needless to say that resistance will increase with every single step and at some point you'll reach the limits of your muscle power and have to give up thereby surrendering the car to natural forces (gravity). This will guarantee a spectacular down-hill ride for the car. The car starts rolling down gaining speed and momentum. Nobody in his right mind is going to step in front of this rolling car in order to halt it. People willing to push the car by hand again will wait until its speed and momentum are reduced to zero. The same analogy can be applied to our beloved junior stocks. The short sellers can push the undervaluation of the juniors into oversold extremes but resistance will grow. At some point the short sellers will be overwhelmed by bargain hunters (new longs) and have to capitulate. Now the price starts to rise and will attract more new longs. The short sellers won't think twice and starts to cover their established short positions in order to guarantee their profits. God help them if the shorted company makes a discovery while all this happens! The shorts themselves are adding fuel now to the rise in the depressed shares thereby attracting even more fresh buyers (momentum players). Now this whole thing is gaining momentum and no short seller on the side line will get it in his right mind to step in front of these new long-players in order to halt the rise. No, the short seller patiently waits until upward momentum fades away before attacking again. The trend has reversed itself and the very same investment banks who were making money on the short side of the trade will be happy to be making money on the long side now as well, and will most likely be pushing the juniors into extreme over-valuations within a few years from now.

The set-up for the juniors from both a technical and a fundamental perspective is as good as it can get. We find ourselves in the deepest over-sold territories for juniors in 8 years, while majors will be forced to go after them within the next two years.

http://www.kitco.com/ind/Hommelberg/may282008.html

[jjj000]

interesting article here by Paul Van Eeden, claiming oil price is not manipulated - rather it is US Dollar money supply increase being manipulated - which is leading to high oil prices:

http://www.paulvaneeden.com/pebble.asp?relid=34&t=164

See his second chart showing inflation adjusted oil price (relative to M3).

Funny thing is... I totally disagree with him and think his own chart proves it.  Inflation adjusted price is around $2.40 in JANUARY 2008.  A quick extrapolation from the crude charts [http://futures.tradingcharts.com/chart/BC/78] shows that oil has gone from a Jan price of $90 to $135 in May... a 50% increase.

Now, I don't know the increase in M3 since Jan08, so let's just knock off a 10% value to be fair, leaving a premium of 40% needed to finish his chart there.  So his $2.40 would be around $3.35 in May-08.

Just five years ago it was sitting at $1.00.  So even assuming oil demand has doubled since then, we should still only be max at $2.  I'll be generous and add anotehr 25% to that, so, say $2.50.  Even then, we are still 35% overvalued (.85 cents) at a May-08 adjusted price of $3.35.

So $135 oil (real May-08 price) would need an approx. 35% haircut to level off with his inflation adjusted price normal, when adding in added global demand and further M3 dilution.  That would leave us around $90 oil.

$90 oil... oddly enough, is right where his chart left off, where we were in Jan-08.

Is that going to happen?  No, probably not.  I just disagree with the guy that it is only the fault of USD dilution.  I believe it is speculators and big money driving prices wild, as they did with corn, soy, cattle, rice, uranium, cotton... etc.

[pinetree]

newbie question here...

Can someone explain this part from the Hommelberg article: "All one has to do is to watch the trades going into the close in which many juniors are being submarined on low volumes. Sometimes a junior stock gets hit by 15% going into the close through a sale of a 1000 shares only"

How can a stock price be effected so significantly by such a small numer of shares sold?  I thought you'd have to purchase/sell a MUCH larger block of shares to influence price to that degree.

[TheSlowLane]

pinetree - it all depends on how much stock is being bid and at what price levels.  I don't have access to Level II which enables you to see "market depth" or all of the current bids and asks but you can get it through services like StockWatch.  A thinly-traded, small-cap stock will typically have few shares being bid at any particularly time.  Say it is a $1 stock and the bids are:

$1.00 - 100
$0.95 - 200
$0.92 - 500
$0.85 - 200

In the above example, you would only need to sell 800 shares to take out all of the bids that are over $0.85.  If you do this in the few minutes before the close, then potential buyers don't have time to respond and put in new buy orders as the price is dropping. 

[TheSlowLane]

jjj000 - Sounds like van Eeden.  Peter Schiff makes the same kind of argument, that it's ALL in the Dollar.  I don't dispute that increasing money supply is a component, but it's not like the onset of fiscal responsibility is going to make peak oil go away.  This guy on CNBC last week (don't remember who) was saying that it is Economics 101 that demand can never exceed supply, because they always intersect.  Well...I don't know where he took Economics 10, but if that is the case, wouldn't prices always be constant?  It is BECAUSE demand exceeds supply that producers can increase prices.  At least, that's what the Economics 101 course I took taught me!

Is it speculation, real demand or some combination of both that is driving commodity prices?  I think it is both, but mainly the latter.  Uranium is a little different since the market is tiny and you had hedge funds in there that totally distorted the spot market.  I read somewhere that the spot price is becoming increasingly irrelevant because most uranium is sold under long-term contracts, but spot is what most investors focus on anyway for now at least.

One of my "mentors", someone I have looked to for guidance since I started investing in natural resources is Don Coxe, the global portfolio strategist for BMO.  He is one of the best on the economy and the market, imo.  He has long experience with the market but more importantly, a talent for bringing insight to what is happening that is rare.  He hosts a weekly conference call to discuss his take on things and lately he has been sharing his thoughts on speculation vs. real demand.  Here is a link to a transcript of the call from last week:

"Congress Is Told It's All Speculation"
http://www.cansanocapital.com/sia/dcoxe-2008-05-30.htm

[pinetree]

Interesting stuff, I'll have to give it a more thorough read this evening.  Thanks for the explanation on the price drops, it makes sense now.

Anybody gambling on the Utica Shale stocks?  I notice they're still flying today.  I wasn't sure how much life they had left so I resisted the temptation to let them run and sold most of mine this morning.  My thinking was bulls make money, bears make money, hogs get slaughtered.  I bought Questerre at close Friday figuring I'd sell it on the gap up this morning and my plan worked, pocketing a nice .91 per share profit.  I haven't decided if I'll take anymore risks on these just yet or wait for some profit-taking to pull them back down a bit.  Under normal circumstances I'd consider buying stocks with RSI's over 70 to be insanity but this is just so tempting...

[whatsupdoc]

TheSlowLane - Thank you for your informative transcriptions and links. I especially
like your discussions on naked shorts and  stock price manipulation.

jjj000 - Your link for the Paul van Eeden article takes me to a page
that asks for username and password. I guess it is only for subscriber eyes.

With the high price of oil on everyone's mind it might be
worth reading an  article posted last week by Gary Dorsch
"Is Crude Oil a “Bubble” Ready to Burst?"  at
http://news.goldseek.com/GoldSeek/1212041220.php
that elaborates on the underlying factors driving up oil.
His article in divided in 4 informative sections
"Who is inflating the Bubble in the Global  Oil market?"
"Subsidized Oil Foils the Laws of Supply and Demand"
"India's Buffer for the Global "Oil Shock""
and his final section on "How to Burst a Liquidity driven Bubble"
talks about how China pricked the bubble in the Shanghai stock exchange. .. glta

[jjj000]

Anybody gambling on the Utica Shale stocks?  I notice they're still flying today.

i still have a couple... didn't buy them all.  Just letting them run with 8% trailing stops, like depleted suggested.  I may tighten up the %stop though if the run feels like it's running out of steam, but I am trying to not watch them and just let the math take care of itself


doc, TSL - fwiw here is Van Eeden's reply to my challenge of his article:

"I did not mean to imply that there are no other influences on the [oil] price. In the interview I did on BNN last week I started off by saying that speculation and supply and demand factors are still at work. And I have no disagreement with you that speculators could have driven the price of oil up, whatever, pick 35% if you want to. But what are they speculating about? That oil prices will continue to rise? Why? Because inflation alone has caused the oil price to increase more than 4,000% and the rate of inflation is increasing. So by buying oil they are merely speculating that inflation will continue to drive up the price of oil and when considered in conjunction with the possibility of peak oil and increasing demand from developing countries it all comes down to the same thing: By far the largest influence on the price of oil is inflation and speculation that inflation will continue. Get rid of the inflation and you have gotten rid of 90% to 99% of the rise in the oil price."


So there you go

[Dr George]

Just picked up BRD again under .5... .495... lol
It has always treated me well, and this seems
like a good re-entry point for a producing U.

[jjj000]

pinetree - good timing - looks like the Utica Shale stocks all tanked about an hour after your post. 

I think the pendulum swings down now for a bit.  Will look to see if there is a re-entry point coming up soon...

[honeytart]

Can any of you guys please give your opinion about CZQ DIT RGT & TVC.
Do you think CZQ is now exhausted, macd is as far as it can go, seems to be no more room but i could be wrong.
Do you think any of these are likely to go up in the next month or 2??
In particular if anyone can give their opinion about CZQ and what you think is going to happen to it in the near future, i would appreciate that.
I did ask last week, 1 guy replied and said CZQ was solid but i wanted a little more than that.
So if anyone can tell me their thoughts on thses stocks, would be grateful!
With Thanks