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GOLD STOCKS

2008-01-28T04:45:00Z

A "Perfect Storm" of Gold Price Drivers

Article by The Research Works, LLC

Gold is seen by many financial professionals as a safe-haven investment for hard times and a hedge against inflation. The inflation-adjusted price of gold has remained stable on a centuries-long scale, although it has varied dramatically over shorter periods in response to such factors as war, inflation, monetary policy and consumer demand.

We are presently experiencing growing uncertainties regarding a large number of considerations, including runaway government spending, terrorism, Iran's nuclear ambitions, oil prices, the U.S. trade imbalance, entitlements gridlock, elevated residential housing prices, growing foreign markets, and an absence of confidence in both the President and Congress.

Gold Industry Statistics

Of the estimated 152,000 metric tons of gold that have been produced in the history of the world, approximately 129,000 metric tons remain in human hands. The remaining 15% of production has been consumed in dissipative industrial uses, lost or is otherwise unaccounted for. Holdings are in the form of world bank official stocks (approximately 33,000 metric tons), jewelry, bullion and coins. At year-end 2005, the U.S. Treasury held 8,140 metric tons, representing 24.7% of all central bank holdings. The recent advent of exchange-traded funds, which hold gold bullion, has boosted demand for bullion.

Mine production of gold for 2005 is estimated to have been 2,450 metric tons, representing a 0.8% year-to-year increase. South Africa accounted for 12.2% of the production, Australia 10.4%, the U.S. 10.2%, China 9.2%, and all of the remaining countries combined 58%. Of all of the gold produced in the U.S. in 2005, an estimated 83% was from Nevada. (Source: U.S. Geological Survey, Mineral Commodity Summaries, January 2006)

Investments in Gold

Holding physical gold might be a plus if economic conditions were to deteriorate into widespread chaos. Barring such a calamity, there are several drawbacks to taking physical delivery. These include costs for dealer markups, storage and insurance. In addition, some states charge sales tax on certain gold purchases.

Gold exchange-traded funds have advantages over physical holdings of gold. These funds take possession of gold and charge relatively modest amounts for overhead. In addition, broker dealer markups are not onerous. There are no state sales taxes, although the U.S. income tax code does not allow gold exchange-traded funds to benefit from the reduced 15% tax rate for long-term capital gains.

Investments in gold mining companies boosts the risks of investing in gold but also offers the possibility of leveraged upside potential if the commodity price were to rise. Risks include exploration, environmental concerns, permitting, production costs and fluctuations in the commodity price. The leverage stems from the fact that since production costs of established properties are relatively fixed, changes in the gold price can have a dramatic impact on margins and income.

Risks in Gold Exploration

Many gold exploration companies are striving to define reserve positions of significant size and richness to justify the start-up of production activities. These companies generally must drill a great number of core samples before engineers can decide whether the quantity, concentration and distribution of mineral are sufficient to sustain a profitable mine at prevailing prices. Even if mining looks economical, there are often complex and restrictive environmental permitting processes to be completed. A large amount of funding must also be secured, usually from a lender, to build the mine and any satellite facilities such as ore mills and leaching plants.

Every step of the process from the initial acquisition of the property to the production of metal adds value to a company, so long as it enhances the likelihood of actual profits. Valuations for sparsely explored properties are very low, often just a few million dollars, but if a company reports a few good drill intercepts, the market should take notice. The concentration of mineral required for economical production varies in the case of gold from as little as 0.05 ounces per ton (opt) to 0.5 opt, depending on other cost factors.

After tens of thousands of feet of drilling and consistently encouraging lab results, companies will submit their compiled data to a third party mining engineer to produce a resource calculation. This is the total quantity of mineral that can be inferred from the drilling thus far, and investors place great importance on it, as there must be enough to justify the company’s continued exploration activities. A promising exploration company at this stage might report a resource of a few hundred thousand to a million ounces or more of gold. The market may value the company at a few tens of millions of dollars at this point, still a substantial discount to the value of a producing company.

Once still more drilling is performed, often several years and several cycles of fund-raising after the founding of the company, management may decide that it is time to conduct a feasibility study to decide whether or not to build a mine. A green light from a third party engineer is a key announcement, and at this point the shares are likely to have appreciated an order of magnitude or more from their initial value.

Superior Risk-Reward Ratios Among the Smaller Companies

The Research Works focuses on opportunities in small stocks, and for risk-oriented investors, there is a strong case to be made for considering small exploration and mining companies rather than large, established producers. The large companies are typically thoroughly researched by the investment community, contributing to an efficient pricing of their shares to reflect their reserve positions, production costs and the current price of gold.

Smaller companies in all sectors are often under-researched, and gold stocks are no exception. In this bull market, there are a great number of small companies striving to take advantage of higher metals prices. Properties that were uneconomical when gold was $300 now offer the potential of profits. This is all part of the commodities cycle, as demand drives prices higher, luring the new investment that will increase supply and bring prices back down. However, these cycles can be quite long, as it takes a vast amount of exploration work before a mine can be even planned, let alone built and brought into production.

A Preference for North American Properties

There are sizable deposits of gold throughout many parts of the world. Our preference is for companies that focus their exploration efforts in the U.S. and Canada. Operations in other countries involve a host of political and other risks that are often difficult to quantify and diminish the appeal of the stock.

The Short Squeeze - A Powerful Stock Trading Hint

2007-10-02T15:42:00Z

The Short Squeeze. Looking for a good stock trading technique? There are the obvious methods a trader can use to figure out where a stock is likely headed to next...chart reversal patterns, technical momentum, improving fundamentals, etc. The challenge with these methods is, thousands of other traders are looking at the exact same tips and tools. Sometimes, the more obscure stock trading tools like short sale interest can offer an advantage. Never heard of it? Don't worry - short interest is one of the relatively-untapped trading tools out there. Yet, finding a so-called 'short squeeze' scenario may well generate enormous stock returns in a very short period of time.

First things first though - a quick explanation of short selling for anyone who may not be familiar with it. Unlike conventional 'buy low, sell high' strategies, traders also have the option of selling a stock short...just meaning they're selling a stock they don't own. Why would they want to do this? If they believe a stock is going to decrease in value, they can sell it now at a higher price, and then buy it back later (called 'buying to cover') at what is hopefully a lower price. Essentially, it's the 'buy low, sell high' process done in reverse. *

The attraction to the strategy is clear...a trader does not have to rely on a bullish market to sustain growth of his or her portfolio.

That said, short selling presents a much different kind - and much greater degree - of risk to those who engage in the practice. Whereas the maximum risk in owning a stock ('going long') is simply the amount of the invested capital, with a short sale, the risk is theoretically infinite. How so? There's a cap to how much a stock can fall - it can't be valued at less than zero. However, there is no cap at all on how high a stock can climb. As such, for someone betting against a stock (expecting it to go lower), there is no monetary limit to how wrong they can be.

Let's walk though an example. Say trader-A likes XYZ stock, and it's currently trading at $5.00. He invests at $5.00 per share, then the stock falls all the way to $0. What's his loss? Only $5.00 per share. Now say trader-B dislikes XYZ stock and thinks it's going lower. He sells XYZ short for $5.00 per share (and pockets that $5.00 immediately). But, rather than falling, XYZ rises to $10.00. How much is trader-B's loss? It's also a $5.00 per share loss. But what happens if XYZ moves to $20? Now it's a loss of $15 per share. At $40, now the loss is $35 per share. There is no maximum loss.

Fortunately for their own sake, most short-sellers know the risk they're assuming, and have taken defensive measures. Those measures, though, are also the basis for the short squeeze strategy...looking for a scenario where a whole lot of short positions are going to have to be covered.

Remember what we said above? To 'cover' a short trade, those shorted stocks have to be bought by the short seller. Now think back to your early trading lessons....specifically, supply and demand. If a short seller - or a bunch of short sellers - are forced out of a short position all around the same time, then XYZ stock's market 'auction' process is injected with a huge dose of demand - all those traders covering their short positions are simultaneously being forced to buy shares back, sometimes at any price. This cumulative buying demand, ironically, can cause a stock's price to rise even more than it would without the newly-created demand.

So, a 'short squeeze' situation is created when a stock has a major portion of its float held as short positions, and the stock moves up just enough to start what is essentially a chain reaction of short covering.

Since each trader has a different 'uncle point' (different prices at which a short trade has to be exited before any more losses are taken), the stops or exit point for all those short trades may be pegged across a range of price levels. A small move may shake out the short positions with a lower exit trigger, but that influx of buying may trigger the next tranche of short exits when the stock's price moves higher. Then, that next wave of buying may force the stock's price to move up into the next level of short-exit triggers, and so on, and so on.

The irony is, the worse it gets for the short sellers, the better it gets for the owners (long positions). Why? A short squeeze can really force a stock's price higher in a short span of time.

Needless to say, a high short interest can actually be a bullish thing, provided the stock is starting to move upward again...at least enough to start shaking out that lowest first level of short stop-out levels.

Looking for a specific number? There's no set rule, but a short interest ratio greater than 30% is pretty high. Yet, we've seen short interest as high as 80% in some cases. For larger companies, you'll rarely see short interest larger than 1% of the float, simply because so many funds and pensions own big stocks. For smaller companies (and even bulletin board stocks), short ratios of 30% or more are not uncommon. Just keep the trend in mind...you want to get bullish when short interest is shrinking as the stock's price is rising - not the other way around. The 'other way around' isn't a short squeeze at all.

And how does a trader get this information? There are a few data services providing it...some free, some paid. Shortsqueeze.com sells the information via a subscription on over 14,000 stocks, and the data is relayed to subscribers before it's published as public domain (i.e. free) data. The New York Stock Exchange and NASDAQ will provide the information for free, but only on monthly basis...and it's delayed a few days.

In many cases, the basic short ratio data can also be found on the free portion of a financial/investment website. Yahoo! Finance updates short interest data on all major stocks about once per month. BigCharts.com also lists some of the biggest short interest ratios for NYSE-listed equities.

Though you do indeed get what you pay for, just because you get short interest information faster than the general public doesn't mean you can necessarily do more with it. More often than not a short squeeze uptrend lasts for a few days to a few weeks, meaning the free information might be sufficient.

As far as being a stand-alone trading technique, it may be tough (though not impossible) to use a short squeeze strategy alone. You'd probably need a way of monitoring the subtle changes in short ratios for hundreds if not thousands of stocks. Doing that work on your own is too much for the average investor to take care of. Instead, we suggest using short interest information as supporting information. In other words, if a stock is trending higher and short interest is shrinking (yet is still strangely high), then you may be seeing a short squeeze in action. Scenarios like that can have better bullish success rates - and bigger rallies - than an uptrend not fueled by a hefty amount of short covering.

Are you a subscriber to the Small Cap Network newsletter? If not, you're missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You'll be joining thousands of other subscribers who have already benefited from our news and views.

* A margin account is required to sell short, and most traders need to pre-qualify with their brokerage firm to take on short positions. Also, the exchanges are quite strict on the practice of short selling, and it can not be done nearly as easily as making a straight-forward purchase of a stock. Nonetheless, the practice is not uncommon, and can be fruitful.

Are Better Bets Abroad?

2007-05-01T15:49:00Z

Tue, May 1, 2007 @ 08:49 am

One of the toughest parts about sharing the latest and greatest concerning the market is deciding whether or not to follow the crowd. I don't particularly like to do it. In fact, it seems as if I'm a contrarian more often than a lemming. As an example, I pretty much scoffed at 'Wall Street's' 2007 prediction that large cap growth stocks were finally primed to pave the trail. Growth stocks, maybe, but large cap? I don't think so.

Yet, despite my innate yearning to provide something completely different on this site (something I know you won't get anywhere else), I have to apologize in advance - I caved.

After E-Trade introduced it as a mainstream service a few weeks ago, today I'm offering up two bits worth of opinion about international investing.

No, I'm not talking about American Depository Receipts (or ADRs)...the U.S. exchange-traded proxies for some foreign stocks. They're just a single-foreign-stock ETF. There are a few hundred of these securities.

What I'm talking about is full-blown online access to foreign exchanges using a U.S. domiciled brokerage account. While some select firms already offered international trading via a 'live' broker, it was clunky, and certainly not a preferred choice for all those self-directed traders who like to do things themselves on the web.

Though I have mixed feeling about the online option - and probably always will - I still have to admit I'm salivating about the whole new world that just opened up. Of course, it's not all sunshine and roses - there's a whole new world of headaches too. But still, I know in my heart this newest, sweeping change will end up being much more than a client acquisition tool for the biggest online trading firms.

Here For The Long Haul?

I'd be the first to admit a few weeks ago when I first heard E-Trade's news, I figured international stock trading (aside from ADRs) would come and go like a fad, sort of like the exchange-traded fund craze of the late 90's and early 2000. Then I remembered...ETF's are back in vogue again - big time!

So, I don't think international investing is any more of a fad now than ETFs were then. On the other hand, ETF's took about seven years, one raging bull market, one bear market, and one pretty solid recovery after a bear market, to really find a place in the investing world. But, they did it.

I expect foreign stocks to run a similar course. Right now it's something of a novelty. Eventually the novelty will wear off, and they'll actually have to offer risk-adjusted potential. When this happens, I'd be willing to bet it will appear as if they've run their course. Then, once the dust really settles, I believe investors will be contending with these key factors....

The Fine Print

This evolution could further divide the nation's professional traders and the amateurs. The 'I know more than you' game will not likely ever change - but now there will be more playing fields on which to play the game. Good information is already hard enough for the average investor to get, compared to the big firms with well-funded research departments. If the little guy has to rely on getting information from overseas, he may find the challenge a tad overwhelming.

Hurdle number two...if the United States Securities Exchange Commission looks like it lets a few companies slip through the cracks, wait till you see other countries' version of the same agency. Certainly not all of them are problematic, but foreign publicly-traded companies don't have the same set of rules most American investors are used to seeing. And yes, in many cases, the standards are considerably lower. In other cases though, the standard may be a little higher.

Finally, and perhaps an extension of headaches number one and two, there still may be the same rotten food on the expanded buffet. Foreign companies aren't necessarily any better than domestic companies. As in the U.S., there are some clear leaders, some clear losers, and bunch of companies somewhere in between. The key problems though - like shrinking earnings, limited sales growth, weak management, etc. - are problems that know no borders.

Good News

Believe it or not, foreign markets are not as synchronized with the U.S. market as much as we like to think. That's primarily because foreign economies aren't as dependent on U.S. demand as they used to be.

This is great news for U.S. investors. As Jim Cramer says (who I have a love/hate thing for), "there's always a bull market somewhere." Jim, you don't know how right you are. With access to more markets, even the average investors will have a shot at finding such a bull market, even if U.S. stocks are in the gutter. By the way, three out of four stocks tend to move the same direction as the market. Even the best stock picker in the world can't overcome those odds if the market starts to sink....unless they can look elsewhere?

A secondary side effect (and a much less perceptible one, I'm guessing) will be some pressure on U.S. corporations to keep their stocks attractive. Venture capital and interest was relatively easy to drum up, even for a mediocre opportunity. Now with thousands of other opportunities being offered up to domestic investors, it seems to me like American businesses - particularly those needing to raise some capital - are going to have to get on the horse and show something incredible to the market

Just a Suggestion

The next hot market? Though my ideas are subject to constant change, here are three geopolitical areas I've seen consistently strong results from lately.

Australia - If any regulators run a tighter ship than the SEC, I think it may be the Australians. Ironically, they don't necessarily need too. The economy there has shown consistent growth for years, and their stocks have reflected it.

India - The world's fourth biggest population is on track to become the biggest. They're also on track to become the biggest population of Internet users in the world, and at the same time are materializing as the new Hollywood ('Bollywood'). Point being, they seem open to interacting with the international community - a big step towards growth. So, I can see many opportunities popping up there in the coming years.

Latin America - Growth, Part II. Though not quite in the same way as India, I see an economic coming of age here.

My long-shot was, and still is, Russia. Their economy is still fragile, but there are some interesting companies there. The region is also - though somewhat unbeknownst to most - one of the world's biggest oil producers. Information is tough to find, but may be worth a little digging.

When's Your Turn?

As of right now, E-Trade is the first to offer international stock trading in their brokerage accounts, complete with a way to convert dollars into the appropriate currency. The launch is already underway, but they're rolling the offer out to customers in stages - not sure where they are just yet in the process.

I suspect the other big online names will follow. Schwab was actually working on an international trading platform, but abandoned it in the height of the bear market. I have to think they'll be dusting the technology off now. TD-Ameritrade may also step up to the plate as well, if my hunch is correct. Others will follow.

In any case, while strong caution is advised, celebration is merited. The United States is rarely the top-performing equity market on an annual basis. So, let's go out there and find that bull market.....just as soon as your broker opens the door.

Force Protection, Inc. Moves to NASDAQ Capital Market

2007-01-19T14:36:00Z

Force Protection, Inc. Moves to NASDAQ Capital Market

This entry was posted on 1/19/2007 7:36 AM and is filed under Company News.

Force Protection, Inc. (NASDAQ:FRPT) officially listed its securities on the NASDAQ Capital Market yesterday, commemorating the Company's listing by opening the market at NASDAQ's MarketSite location in New York City.

"We are thrilled to be here today," said Force Protection Chairman Frank Kavanaugh. "We recognize and deeply appreciate the efforts of Force Protection's executive management team, its investors, and workforce who have supported our mission to produce vehicles that protect and save lives, and who have made this important opportunity possible. We especially dedicate this moment to the men and women of our armed forces for whom these vehicles are built."

Shareholders do not need to take any action as a result of the NASDAQ Capital Market listing. Company stock certificates will remain valid.

Popular with troops who credit the vehicles with saving lives, Force Protection's Buffalo and Cougar blast- and ballistic-protected vehicles have an unmatched record for troop safety, protecting against attacks on vehicles led by improvised explosive devices and roadside bombs. Combined, the vehicles have logged more than 1.6 million hours of combat operations since their initial deployment with U.S. and Allied forces in 2003.

About Force Protection

Force Protection, Inc. manufactures ballistic- and mine-protected vehicles through its wholly owned subsidiary. These specialty vehicles protect against landmines, hostile fire, and Improvised Explosive Devices (IEDs, commonly referred to as roadside bombs). Force Protection's mine and ballistic protection technologies are among the most advanced in the world. The vehicles are manufactured outside Charleston, S.C.

For more information on Force Protection and its vehicles, go to www.forceprotection.net.

This release contains forward-looking statements, including, without limitation, statements concerning our business, future plans and objectives and the performance of our products. These forward-looking statements involve certain risks and uncertainties that ultimately may not prove to be accurate. Actual results and future events could differ materially from those anticipated in such statements. The company cautions that these forward looking statements are further qualified by factors including, but not limited to, those set forth in the company's Form 10-KSB filing and other filings with the United States Securities and Exchange Commission (available at www.sec.gov) and the company's public statements. The company undertakes no obligation to publicly update or revise any statements in this release, whether as a result of new information, future events or otherwise, except as required by law.

Full Speed Ahead in 2007

2007-01-04T13:30:00Z

2007 is setting up to be a Great Year. The market is simply ready to take off. There are several factors leading us to what could be a great year for the stock market- in everything from the micro cap stocks to the largest of the large caps.

The stars are aligned for stocks in the coming year. The environment is perfect for the first time this decade. Here are some of the major contributing factors:

Stabilzed energy prices- lowering inflation expectations

Low bond yields- making stocks more attractive

Strong earnings and reasonable earnings growth amongst large cap companies

Strong balance sheets

the collapse of the speculative real estate market, bringing aggressive investors back to the stock market

A number of long awaited new mega trends in technology

In fact, we are going to get something in 2007 we haven't seen this decade: Multiple Expansion. Yes, over the past several years stocks have, in general, done ok. However, stocks have gone up commensurate with corporate growth. There was no multiple expansion, meaning PE Ratios have remained extremely low and about at the same level.

For example, in 2001 the PE Ratio on the S&P 500 for the trailing 52 weeks was about 14.5- it was 20 for the forward 52 weeks. Currently, the trailing PE for the S&P 500 is about 15- 16.1 for the forward 52 weeks. This means valuations are actually a bit weaker at the end of 2006 vs 2001 relative to earnings.

There's a clear and easy argument for the market to be 30% undervalued presently. If you were to buy one share of every S&P 500 company, and save the profits and dividends in a separate account, do you know how long it would take you to double your money?- approximately 13.7 years.

If you were to clip every coupon from the 30 year US Treasury at 4.6%, do you know how long it would take to double your money? - yes, that's right- 29.6 years.

Well, you might ask how about income property? The average income property in the US today costs 23 times rentable income. Therefore, it would take 23 years to double your money, or get your capital back from income property.

Averaged out over many years, the difference between stock values and bond yields has been much closer- in fact 30% closer. Therefore, in order for the markets to return to equilibrium, stocks must either be 30% undervalued, or bond yields have to go up 30%. The only factors that could push bond yields up 30% are an overheated economy or raging inflation- neither of which seem to be in outlook for 2007.

After surviving the Dot Com demise, 911, Enronitis, corporate scandals, rocketing energy prices, and capital flight to real estate, the stock market is ready to return to its former place at the top of the investment pedestal.

What could go wrong in 2007

There's plenty of scary things out there that could derail this scenario and flush the market down the toilet. Foremost is, of course, the ever present geopolitical risk- which is politician speak for terrorism.

Terrorist activities, short of cataclysmic events like the World Trade Center, do not derail the economy. However, they do cause oil prices to rise, which is public enemy #1 for the markets. Rising energy prices equal inflation, which in turn equates to higher interest rates, a slower economy, and lower stock prices.

In my view, another major risk factor out there is the massive and unprecedented growth of hedge funds. Hedge funds are now responsible for trillions of dollars in trades every day, and have a major impact on the market.

2006 was a year of extremes- The May to August sell off was one of the most continuous and relentless sell offs I can remember. The Mid August to year end bull market was likewise- one of the longest and most sustained rallies I can remember. In my view, this is due to the trading practices of hedge fund manager. Here's how it works, and here's why they are so dangerous:

You start a hedge fund and raise $100 million. You take the $100 million and leverage it into $1 billion in trading capital. You charge a 2% annual management fee, and keep 20% of the profits. You only get $2 million of the $100 million to run the fund, but if you can make 5% on the $1 billion you trade with, that's $50 million, or $10 million for you. Now you understand why hedge fund managers are reluctant to take any risk.

Now, if you are leveraged 10 for 1, and the market goes against you, the losses can add up quickly. If you perform poorly, and your investors want their money back, you have to dump shares rapidly to meet the redemption demand.

This massive slew of capital is leading to a new generation of investors that buy and sell more on price movement, and less on fundamentals. However, the pendulum is swinging back, and the more successful managers are now starting to invest in value for the longer term.

A collapse in hedge funds could be very negative for the markets.

What's Positive and exciting about 2007

Want some good reasons to be optimistic about 2007- especially in the tech space? Here you go:

The Vista Upgrade Cycle: Every dollar spent upgrading to the Microsoft Vista operating system creates $12 or more in related IT spending. This will result in a worldwide spending cycle of at least $200 billion.

The IPv6 Upgrade Cycle: The U.S. government is kicking off this $125 billion upgrade (at least) staring with the military to a new network Internet protocol that allows electronic devices to exchange data over a packet-based network. In short, it's a major cycle upgrade in networking. The entire US Government is spending $125 billion to go 100% digital in phone systems over IPv6 equipment. Asia and Europe will follow suit to the tune of $200 billion in PCs, routers, and switches.

High-Def/Digital TV Transition: Finally analog broadcast will come to an end by 2009. This means that within about two years every tv in the US will have to be digital and hi def. Expect 150 million TVs to be replaced in the next two years.

IPTV is coming (TV over the internet). There is a major fight brewing between ATT and Verizon over digital content. Worldwide telecom providers will enter the fray with IPTV systems featuring 300-plus channels - most with high-def 1080i or 1080p signals. Cable systems will fight back with 100% digital cable boosted to 1080i bandwidth, too. This will be great for consumers.

The Real Broadband Wireless Cycle: Oh yeah- you can still make a phone call on your cell phone. The mobile revolution called WiMAX does not use a cell tower. GenX doesn't care whether they get their messaging, TV, movies and Web sites over WiMAX or 3G or whatever ; they just want it and they want it now. The cell phone evolves along with mobile internet access.

Clean Energy Technology: Mandates and subsidies from 46 countries and 23 U.S. states puts energy technology spending on a 30% annual growth rate for the next 10 years and a 50%-plus ramp for the next 36 months. Green is cool, and it will stay cool for the next 5 years.

Bio Pharma Advancement: $68 billion of branded pharmaceuticals go off-patent in the next three years. Big Pharma, which has evolved from innovative to giant marketing companies, will need to replace those blockbuster drugs by looking to smaller, innovative companies for new products.

And, there's one, last, big reason to be very optimistic in 2007 that is microcap specific, compliments of the SEC. There is a new SEC rule which went into effect in 2006. It severely limits the number of shares small companies can register on behalf of investors. Therefore, financiers of microcap companies will not be able to engage in the aggressive "death spiral" type financings of the past.

For microcap investors, it means the following. Less companies will be able to get capital, but the ones that are able to will be of higher quality than microcaps of the past. There will be less toxic supplies of stock hitting the market, and floorless convertible securities are behind us. Fund managers who engage in these kinds of financing will have to be prepared to take risk. Therefore, they will have to put their money in better companies.

Less microcap companies will have their shot, but the ones that do should trade much better.

September is here!

2006-09-06T18:08:00Z

September 6, 2006

September is historically the worst month of the year for the stock market.

Here are some eye opening statistics: Since 1962 the S&P 500 has closed down in the month of September 57% of the time- 70% of the time at the end of a four year cycle- this is the 4th year. The average loss in a down year is 5.7%. The only other month that is down more often than up is July.

September '05 was not bad. In lieu of the strong August, my guess is September could be tough this year. I have a couple of theories about September. Investors have a renewed enthusiasm for the market after the long, boring summer months come to an end. Not so fast- fund managers return from their summer haunts loaded for Bear- why- because seasonally Q3- the quarter that ends at the end of September, is one of the weakest of the year. Corporate performance mirrors the efforts of people, and in general people don't put out as much effort in June, July, and August.

Q3 is followed by Q4- generally the best time of the year to be positioned in stocks. Why? Holiday shopping combined with year-end effort by the people who work at companies.

The money managers are selling now out in front of Q3 numbers. They will be back in October and loading up for the traditional year end run.

I have three new microcap ideas to introduce for the Q4/Q1 run. The first will come early next week. This would be a very good time to get some capital ready for new ideas.

One last thought- if you invest in microcap stocks, whether they are OtcBlog ideas or from other sources, you are going to have losers. It's part of the process. The most successful microcap investors accept this, and have the ability to sell the losers and move on without looking back. Unsuccessful investors sell their winners when they get up a few percentage points, and then moan and complain about their losers, blaming everyone but them selves. If you believe you have a loser in your portfolio, get rid of it and move on. Believe me, you will feel much better, and you will improve your odds of making money.

Here's a quick review of the current offerings in order of my view of which have the most upside at the current time:

Advanced Cell Technology (OTC BB: ACTC)

These guys are on the forefront of Stem Cell research, and they will continue to make headlines. The current financing is done and I believe the market has absorbed every share. Nowhere to go but up!

I realize there are a lot of microcap newsletters. Whether you love or hate the OtcBlog, or love or hate stem cell research; ask yourself this- how many microcap newsletters have you read that gave you ideas with the White House and the President of the United States commenting directly on their technology achievements?

This company has developed technology, which requires the attention of the most important single person on planet earth. Love it or hate it- the choice is yours.

When I first heard the story and studied their achievements I knew I had to report on this company. Short term- impossible to call but I'm inclined to believe higher- long term- look out above.

Force Protection, Inc. (OTC BB: FRPT)

Force Protection has been a huge winner for us. When we first began covering FRPT the stock was trading around $2.00 with little volume. We saw the stock take off after only a few months and recently traded over $7.00. The stock continues to make new highs and demand for vehicles is tremendous.

We would be taking some profit now, however, the long term looks great. You will see some pullbacks but I would not be surprised at all to see this one on NASDAQ soon. Can you say "Money Managers"?

Pick your spots and always use limit orders.

Groen Brothers Aviation (OTC BB: GNBA)

Great company-for the time being bad stock. This company has the kind of story microcap investors dream about.

I'll be the first to admit. The GNBA saga is wearing me out. Everyone wants to know why the company is doing so well, but the stock is trading so poorly.

Since first covering the stock at about $0.20, we have seen a high of $0.49, and a low of about $0.13. The volume has dried up a bit and the stock has drifted down on little or no trading. This is a great opportunity to own this one cheap. It will take little buying to see the stock pop back up. Market Makers are looking for some stock at a discount and any significant volume will move them out of the way.

With the recent announcement on the progress made with DARPA. The Company will realize significant revenue and will open the door to even more contracts. The contract with DARPA is worth a potential 40 million and GNBA has already reached the third milestone for phase 1 of the four-phase program. The Company just needs to successfully work through the contract with DARPA.

If they pull this off, watch for the stock to trade much better. I can't give you any timing indications, but I can say they are working hard on it right now. Still looks great!

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ACT UP!

2006-08-28T13:37:00Z

August, 28 2006

There isn't much else to write about this weekend. ACTC was clearly the story of the week in an otherwise dull, listless, last week of summer. However, ACTC is providing all the fireworks we need for a little excitement.

Friday, the company held a conference call to discuss recent developments. I had the opportunity to listen to the replay late in the day, but didn't realize I would have to budget an hour for the call.

The call was extremely enlightening. I found it interesting as much for what was said as what wasn't said. CEO Bill Caldwell and Stem Cell pioneer Michael West discussed at great length the importance of their breakthrough. In short, the company can take a one to eight cell Blastomere (an early stage human egg) and extract and cultivate fetal stem cells. From there, the Blastomere can become a viable egg from which a human life can be born. Why is this important?- Because it meets President Bush's rather Draconian demand that new fetal stem cells lines be created without harm to potential human life. It allows the NIH to fund more research.

Here's what wasn't said. During the conference call, management did not address the company's ability to infuse a Blastomere with some else's DNA. This gives ACTC to create a custom fetal stem cell just for you. This discussion gets into the moral issues associated with potential cloning. At this stage I believe the company wants to focus on the less controversial aspects of what they have achieved.

The high print on Thursday was $2.30 (up from $.40 early in the week), at which point the rally turned the other way, and the stock tanked. The sell off was sparked by ACTC disclosure of a financing.

The original group that had invested about $17 million in a debt deal with the company was holding approximately 14.2 million warrants with conversion prices of $2.53 and $1.27. The shares underlying these warrants were already registered. In a move designed to use their new found fame to load up their treasury with cash, the company reset the price of all the warrants to $.95, and forced their conversion.

Net result: The company issued another 14.2 million shares, and will receive in return $13.5 million in cash, which buys them another year of operations. I think this was a great move. They needed to raise more money. They achieved it in one day, and it all happened as a result of the market's recognition of their achievements. They took advantage of a hot market to reload their treasury. Imagine the arrangement they would have cut had the stock been trading at the depressed $.40 level with little or no volume? This was much better for existing shareholders.

Here's what happened to ACTC this crazy week. The stock runs from $.40 to a high print of $2.30 in 1 1/2 trading days. Then it tanks. Why does it sell off so abruptly? - because the company announces they just sold 14.2 million free trading shares at $.95.

Here's the typical sequence on an event like this. The first money to pounce on the stock comes from investors who read the new information, understood the significance, and wanted to own a piece of the company. The next money in, perhaps later that day or early the next, is the hot money- traders who are buying the stock because it is trading huge volume and going up.

Then, behind the scenes you have the warrant holders who make their deal with the company. Believe me, this is a risk averse bunch. They don't put their capital at risk long term. They structure "no lose" arrangements. I absolute guarantee this bunch has sold every single share they could, and sold them as quickly as they could. It would not surprise me to learn that all 14.2 million shares have already been dumped. Also, as the hot money learns about the massive issuance of shares below the current market, yesterday's buyer becomes today's seller. Hence, the rapid blow off in the stock.

I believe the stock could now well be a great opportunity for both investors and traders. Here's why: If I had to make an educated guess, I would say the market has already absorbed the excess supply from the newly issued 14.2 million shares at $.95, and will now head back up as supply dries up.

In the meantime, there is probably more high profile publicity in store for this company. Look for a number of major news organizations have an interest in a small Stem Cell company that has met Bush's challenge on the moral issues. A Wall Street Journal reporter was on the conference call asking questions.

If you are a trader and want to jump in, your SSL is $.75 once again. If you just want to own a piece of this technology for the long term, own some now and don't worry about where it goes in the short term- either up or down.

More on the technology sometime next week.

Where To From Here?

2006-08-21T14:40:00Z

After a couple of brutal months, August has seen a re-surgence in the market. The "micro-cap switch" has not flipped back on, but it is still August. September probably represents the last opportunity to do some bargain basement shopping. For those of you who need a reminder, September is generally the worst month of the year in the stock market.

Overcoming the early summer sell off appears to relate to interest rates and inflation. The ideal scenario for the markets would be slowing but sustained growth with little sign of inflation. This would allow the FED to continue to stand pat, and perhaps lower interest rates if the economy appears to be slowing.

Over the past several weeks, both the bond market and the stock market appear to be buying into the "soft landing" scenario. Three economic reports in a row indicated a slowing economy with little inflation- CPI, PPI, and housing starts all have moderated. The FED has succeeded in cooling off an absurdly hot real estate market. However, there still remains one major threat to the tame inflation picture: Commodities, and specifically oil remain the scariest potential source of inflationary pressures.

I've heard a wide variety of opinions about the future of oil prices. Despite all the varying and dire predictions, one theme is universal. Nearly all analysts and "experts" agree there is about $20 per barrel of "risk premium" built into the price of a barrel of oil. $20 per barrel has nothing to do with supply and demand, and everything to do with geopolitical turmoil and unrest in the Middle East.

If the soft landing scenario plays out, and oil remains tame, we could be in for a very strong market in Q4. One important thought: September is usually the worst month of the year for stocks. I believe investors sell stocks in September out in front of Q3 earnings reports, which tend to soften a bit over the summer vacation months. Once Q3 numbers are in the rear view mirror, the market tends to trade well out in front of the holiday shopping season.

You have been warned. September is seasonally a great month to be a buyer. Get ready to pounce on oversold opportunities.

Blog entries posted this past week, GNBA, FRPT, and Trading Alerts.

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Fundamentals of Investing

2006-08-15T03:07:00Z

Every investor has been told to research the fundamentals before buying. This involves knowing the company and its business inside out as best as possible. After doing your homework you need to determine the growth prospects and the amount of risk involved. Fundamentalists ask, is the company undervalued relative to what it should currently be worth, or will be worth in the future?

You must look at management and their track record to determine if you are comfortable trusting them to run your company. You must consider the stock market outlook and expectations for the industry that your company participates in. In other words is your company in the right business at the right time?

You must review their financial statements to determine if they have enough capital to keep going and growing. Is their debt manageable or will they have to continually borrow or issue stock, diluting your ownership, to pay the rent?

Every investor must consider fundamentals! Investing is different from speculating because it requires research and analysis, which takes time and patience. Speculators tend to get caught in the momentum of stock price changes and volume, "the action", and ignore the fundamentals. The action tells them whether to buy or sell. In other words speculators have a short-term outlook and herd mentality, they tend to do what everyone else is doing. Who wants to buy a falling stock? If the fundamentals are good the investor buys and waits, the speculator sells and moves on.

The key points to fundamental investing is buy-low sell-high, or buy and wait to sell when the stock is overvalued. The key points to speculating are buy-high sell-higher or sell-quick and minimize losses.

Fundamental investing is great for large corporations with long track records of growth of sales, earnings, dividends, market recognition etc. The problem is this does not help the small investor who wants to buy a promising new company for its growth potential. Everyone would like to own Microsoft stock at 1985 share prices with 1995 fundamentals.

Investment newsletters mention small cap stocks and often talk about fundamentals. The companies mentioned usually don't have sound fundamentals, which implies risk. Some newsletters are great at uncovering overlooked promising growth stocks, just don't be fooled by talk about fundamentals. What they usually refer to, as fundamentals, are expectations and buying momentum.

Momentum trading is a technical term for determining worthy stocks based on the action. Momentum trading assumes the market action of a stock is indicating something shareholders need to know. It assumes the market is the truth teller of a stocks real value. If a stock is moving up or down on big volume a momentum trader does not wait for news, to buy or sell.

Why Read A Financial Newsletter?

Investment newsletters occupy a unique and valuable niche within the financial advisory industry. They often are small operations centered on one individual: their editor-advisor. Their primary distinguishing characteristic is agility in responding to market trends.

This is why investment newsletters stand out from Wall Street. Huge overheads, decision-by-committee, and a herd instinct, for example, plague the major Wall Street institutions. For them, innovation and flexibility is next to impossible. As legendary investor Peter Lynch put it in his best-seller ONE UP ON WALL STREET, "Under the current system, a stock isn't truly attractive (to an institutional investor) until a number of large institutions have recognized its suitability and an equal number of respected Wall Street analysts have put it on the recommended list. With so many people waiting for others to make the first move, it's amazing that anything gets bought." He concludes: "If you invest like an institution, you are doomed to perform like one."

Why is flexibility in responding to changed market conditions a virtue? Because the markets are quick to discount--and thus eliminate--strategies that otherwise would continue to beat the market. It's rare for an investment approach to work forever. More typically, a promising strategy works for a while--until everyone hears about it, jumps on the bandwagon, and it stops working. More often than not, as investors climb off that bandwagon, they find that it was an Investment Newsletter that had been there first.

This doesn't mean that all investment newsletters beat the market, as is also true of mutual funds and professional money managers, most of them don't. But we all are better off for their trying, since in the process we discover those promising new strategies that otherwise would have gone unnoticed. "Investment letters are the guerrilla troops of the financial world," writes Forbes senior editor Peter Brimelow in his classic work on the investment letter industry, WALL STREET GURUS. "By following them, and halting if they terminate in a smoking crater, you can see what techniques work."