FaceoffI don’t know why, but when I think about deceptions, Zidane’s comments in an article I read several years back come to mind. For those who don’t know Zidane, he’s one of the great soccer players of our time, he not only has a great technique, but also excels at thinking ahead of the game and making awesome passes.

Zidane’s remark caught me off guard, I’d never given too much thought at deception as a tool to win the game. On reflecting for a moment, it’s obvious, if we reply with a hard backhand ball into the
opponent’s court, it sure helps to deceive him into thinking it was going the opposite way; often, it’s the only way we’re going to score.

Now, deception is one thing – mano a mano, if you will; but with
manipulation you’re dealing with a big player orchestrating a big move.
It’s legal most of the time; specialists and market makers, whom are
highly paid employees, are always present and hoarding prices in their equity to maximize profits for the financial firms that bankroll them, under the amusing pretense to provide liquidity to their issue.

But, let’s not have any qualms about this situation, there will
always be a big fish in any market, liquidity requirements or not; it’s the nature of the game, the biggest player has an edge.

FacemasksMarchand Sage’s fascinating book describes a very interesting and comprehensive story on a stock manipulation; how it’s orchestrated, how it moves from one stage to the next, and how the different players are engaged in the overall plot to deceive the public, -which is totally oblivious to what is going on behind close curtains. 

The fine line to illegality is to use insider information, or what is known by the company’s management and has not been disclosed to the public.

But, I warn you guys, this line is utterly murky.

In the case of the under a $1 stocks, the vast majority of these
companies do not have a product, and if they do, they still have very little sales; so, in other words, this is la–la land, the land of dreams. On the other hand, if the dreams approach reality, the price of the stock skyrockets; IBZT went up in price 15 times in less than a month (mid December 2003 to first week of January, 2004), and the product was only a cradle for the old Palm handheld…

So, how do these little companies finance themselves? They sell – diluting their outstanding shares – to provide income and they take loans. But, who in their right mind would lend money to these dreamers? Well, sharks if you ask me… You find the names of these companies as owning stocks in a myriad of other companies, which they’re buying and selling all the time. So, they’re not lenders only, they trade too!

So, how do these lending-traders make money?
They begin by shorting a targeted small company’s stock. Then, they offer the loan in exchange for interest payments and shares and warrants of the company. Usually, the little company has no other recourse – no loan and they disappear. So, they accept the deal at very depressed prices. The date the deal is to be announced is well known by the lender. Then, the lender starts his buying campaign, just enough to rally traders attention. When the good news that the company found a life saving loan is announced, the price of the stock skyrockets; very soon, the lender will unload his shares making a substantial profit, which fully covers his loan. So, he still holds the lien on the loan to collect principal and interest, which is all no risk profit.

Pretty shady to me…

Attempts have been made to clean up the trading act. But, as I see
it, it’s almost impossible to curtail loose information, especially when enforcement of the existing regulations by the SEC is blatantly weak.

I’ll leave it at that.
Happy trading guys!