06.29.08
Posted in All Categories, Fraud, Microcap, Stocks at 1:58 pm by michael
Perf Go Green Holdings (OTC BB: PGOG) is a standard pumped-up penny stock, although it has former NY governor Pataki as a director to lend it “credibility” (although anyone who know’s Pataki’s record knows that he has no credibility at all). The New York Post had a good article about the company. Carol Remond had a great article on Perf Go last week (only available on DJ Newswires, a pay service), in which she brought up some interesting history about the company’s CEO:
“Then, there is the issue of company Chairman and Chief Executive Anthony Tracy’s involvement with an extortion attempt a few years back. According to a court docket available to online subscribers, Tracy pleaded guilty to one count of extortion in state court in Pinellas County, Fla., in August 2002. Joseph Cartolano, a lawyer who represented Tracy, said he is “pretty sure” that his client pleaded no contest instead of guilty, neither admitting nor denying guilt. The judge in the case sentenced Tracy to three years probation and withheld adjudication of guilt - which means that as long as he didn’t violate the conditions of his probation, he wasn’t convicted of a crime.”
…
“According to information available online, Tracy and George Cappelli in November 2001 threatened a Palm Harbor businessman named James McGuire to get back $30,000 he owed to another individual. Michael Holbrook, a detective who investigated the case, said Tracy took McGuire’s watch and said he would keep it until the debt was paid. The detective said that about the same time as Cappelli was arrested, an attorney from Miami called the Pinellas Sheriff Department looking to return the watch without naming his client. Tracy was later identify through information contained in one of Cappelli’s notebooks. Tracy’s lawyer Cartolano said he (Cartolano) called “the owner of the watch to return it.” Cartolano, who explained the affair as “an argument between two guys”, said Tracy was given the watch as a collateral and then returned it.”
The fall of pumped penny stock Perf Go Green is yet another testament to why people should never speculate in penny stocks.
Disclosure: No position in any stock mentioned. I inadvertantly published this article two days previously, violating my disclosure policy (as I had just closed a short position in the stock a day earlier). I regret the error.
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06.28.08
Posted in All Categories, Stocks at 7:39 am by michael
I have changed my disclosure waiting period to 48 hours from seven days. That means that I can now write about stocks up to 48 hours before and after I trade them. I will disclose if I plan to trade a stock I hold immediately after that period.
My previous policy prevented me from writing about certain timely news as my trading always comes before my blogging.
Disclosures and Disclaimers
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06.27.08
Posted in All Categories, Alternative Investments, Bonds, Fraud, Microcap, Personal Finance, Real Estate, Stocks at 2:42 pm by michael
I am not one to use the term Armageddon lightly. But when major banks like National City (NCC) and Washington Mutual (WM) are trading under 30% of book and Wachovia (WB) is trading at under 50% of book value, what othe term is appropriate? The market is pricing in a fair probability of a number of very large banks being bought out at firesale prices (like just happened to PFB) or being taken over by the FDIC and then being dismantled.
That being said, while the coming two years will be a very bad time to own bank stocks or bonds or to have uninsured deposits at banks (over the $100,000 FDIC limit), the economy will not completely collapse (though we should have a decent recession) and the world will move on.
The main thing to do is make sure that you and any friends and relatives never have more than $100,000 at any bank. If you wish to keep more, you may want to visit the FDIC website to see if your type of account is protected for more money (some are). You can search for your bank here and find out if it is insured by the FDIC and you can view financial information on your bank, even if it is private. For example, try searcing for “Home State Bank NA” in zip code 60014* (see random note at bottom of post). Then click on “Last Financial Information”, and on the next page click on “generate report”. This brings you to the bank’s balance sheet. If you click on the link towards the bottom for “past due and nonaccrual assets”, you will be taken to the good stuff. You can see that past-due loans have more than doubled over the last year. Unsurprisingly, much of the increase ($2.5m) was from “construction and land development loans”. It also pays to note that this big increase in past-due loans was solely in the 30 to 89 days late category. A more agressive bank might still be accruing interest on those loans. However, this is a conservative community bank and as you can see towards the bottom of the page, all loans that are more than 30 days late are non-accrual. (An interesting discussion of regulatory vs. tax requirements for deciding which loans are non-accruing can be found here.)
If you go back to the main balance sheet page and click on “net loans and leases” you can find the breakdown of loans. This is a good place to find out how risky your bank’s loan portfolio is. Unfortunately for Home State Bank, 20% of their loans are construction and land development loans. This bank is based in the far northwest exurbs of Chicago, so I think it likely that the bank will take a huge hit here. If you click on “1-4 family residential” you can see the breakdown of these loans. Luckily, most of these are first mortgages. Overall, Home State Bank looks okay. What about your bank?
If you have accounts as a credit union, visit NCUA to see details on insurance of your deposits. You can find your credit union and then request that a financial report be emailed to you. As an example I uploaded the report on my credit union. You can download the Excel Spreadsheet here. When analyzing credit unions, be aware that they will generally have more real estate exposure than similar commercial banks. Important things to examine are delinquent loans as a percent of assets (sheet 2, line 21 in the spreadsheet), asset mix including the amount of REO (sheet 4). If you are afraid of a bank run sparked by articles similar to this, take a look at the amount of uninsured deposits (sheet 5, lines 46-50). Delinquent loan info is always interesting (sheet7). For most of the data in the spreadsheet, an average of peer group credit unions is provided as well, making comparison easy. Overall, I think West Community looks quite safe.
What should you do if your bank doesn’t look safe (such as National City, where I have multiple accounts)? First thing that you should do is make sure your deposits are insured. Then make sure that you have enough cash in safer banks so that you can last awhile if you temporarily lose access to your money. Up until now the FDIC has been very good at getting depositors quick access to their insured deposits at a failed bank, but if things get really bad and big banks go down the FDIC could become backed up and take weeks or months to grant depositors access to their money. It pays to be prepared for such a scenario, even if it is unlikely.
*This bank, by the way, provided me with my first mortgage. Easiest mortgage I ever got — my father and I ran into Steve Slack, the bank president, while dining at the local country club, and I mentioned that I was buying a house in St. Louie. Slack gave me his card and told me to give him a call when I get close to finding a house. There are benefits to relationship banking–my extended family has banked there for three generations and uses the bank for a family company.
Disclosure: I am short several regional and local banks.
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06.17.08
Posted in All Categories, Fraud, Microcap, Stocks at 10:14 am by michael
Finally, a lawyer after my own heart. See this article about Peter Strojnik’s class action lawsuit against “Triple Play Stock Alert” and those behind it. From the article:
The Complaint alleges that Triple Play Stock Alert is a fictitious name used by stock manipulators who want to conceal their identity to avoid liability for their illegal activities. The suit was filed in the United States District Court for the District of Arizona under case number 2:08-cv-1116.
Hopefully he wins, although I am never optimistic about pursuing scammers, fraudsters, or spammers. If you have received spam faxes from “Triple Play Stock Alert” and you wish to join the class action, please contact Peter Strojnik, 602-524-6602, ps@strojnik.com.
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06.16.08
Posted in All Categories, Fraud, Microcap, Stocks at 7:46 pm by michael
Here are a few questions that I would like the management of Maxlife Fund Corp to answer. Investors should consider what they believe the answers to these questions to be before investing in the company’s common or preferred stock.
1. I saw that you announced a dividend on the preferred stock today. How many shares are outstanding? As of February 29, there were no outstanding shares (as shown in the last 10Q).
2. Is Victor Delaet still working with your company? While the company has moved ahead with its joint venture with CGP, it has not announced any more developments with its joint endeavors with Delaet (see the original commitment agreement here). Furthermore, Delaet was to “agree to sit on the Board of Directors of Max Life”, and I have seen no announcement of such an event. One of Delaet’s responsibilities was to “promote the preferred share offering through Focused Money Solutions Inc” (quotes from the commitment agreement linked above).
3. If Delaet is no longer working with the company, who is working to promote and sell the company’s preferred stock? Has the company retained an investment bank?
I do not believe that the 10% yield on the preferred stock is sufficient to compensate for the risks to preferred stockholders of investing in Maxlife Fund Corp. For that reason, I believe that the company will not be able to raise substantial funds by selling preferred stock. The company’s ability to raise capital is the crux of the investment case for or against Maxlife Fund Corp. No matter how brilliant CGP’s management is, any insurance business requires capital and Maxlife Fund Corp has precious little of that (tangible equity of about $500,000 as of 29 February 2008), particularly in relation to its market capitalization of $848 million.
Disclosure: I have no position in MXFD. I have a disclosure policy.
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Posted in All Categories, Fraud, Microcap, Stocks at 4:56 pm by michael
Evidently someone forgot to tell investors or management of GMC Holding Corp about the law of conservation of energy. The company reported tests on a motor that produced more energy than was put into the device. According to the SEC’s complaint in the matter, the company did not mention that “the efficiency lasted only a few moments and that they were unable to duplicate the results in subsequent tests.” The company also put out a press release stating that it was negotiating to sell the technology to a company in the S&P 500. However, again according to the SEC, “GMC and Brace never contacted, much less negotiated with, an S&P corporation, or any other company, regarding the sale of the company’s technology.”
The SEC today received an injunction against Richard Brace, formerly of GMC, preventing him from serving as the officer of a public company. I presume that the SEC will continue its case against Brace in the pursuit of monetary penalties.
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06.03.08
Posted in All Categories, Fraud, Microcap, Stocks at 12:58 pm by michael
Growth investors like to talk about inventions and new ideas. The pull of growth investing is all you have to do is find a great company with a great product that will soon be big and you can just buy the stock and sit back for incredible gains. There are several problems with this thesis.
American Technology Company (ATCO: $1.35 -2.88%, market cap: $41.2M) was the first stock that ever interested me. I was into high-fidelity music at the time and it was in an industry magazine that I first read about its technology to use multiple point sources of sound waves to project sound to a specific location (rather than all around).
If I had invested in ATCO 11 years ago and held until today, I would have lost over half my money.
ATCO 10Q
Graph.
Disclosure: No position in ATCO.
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05.14.08
Posted in All Categories, Microcap, Stocks at 9:00 am by michael
The Company
Ener1 (HEV: $6.51 +0.15%, market cap: $651.4M) is in the exciting business of developing safer and more powerful lithium-ion batteries for use in hybrid gas-electric cars and in other applications. This is a laudable goal. From a business standpoint, however, there is a lot of risk. There are a number of other companies pursuing similar products at various stages of research, development, and production. A123 Systems is a private company that is already supplying Black & Decker with batteries for portable power tools as well as supplying test batteries to GM for possible use in the Chevy Volt. The MIT Technology Review has a positive article about A123 in the May/June 2008 issue. One public competitor, Altair Nanotechnologies (ALTI: $1.59 -1.24%, market cap: $134.4M) has not produced much and has become a target of short sellers.
Ener1 does not yet have any products on the market; it is currently only at the working prototype stage (and that prototype has been independently tested and verified). I am not an expert on batteries so I cannot comment on how Ener1’s prototype compares to Altair’s prototype and to A123’s production batteries and prototypes. I can point out the financial difficulties that Ener1 will face, though. Stated in its recent prospectus is the stark fact that the company “will need additional capital to fund development and production activities.”
Contracts
Ener1 has a supply contract with Think Global to supply it with batteries for its electric vehicles. This contract, however, requires Ener1 to provide satisfactory batteries meeting the specifications of Think Global. Ener1 has yet to meet that requirement. Also, even if everything goes according to plan, this will only result in $70 million in sales for Ener1 through 2010. Here is the company’s description of the contract from its most recent 10K:
On October 15, 2007 we entered into a two year Supply Agreement with Think Global of Oslo, Norway, (”Think”) to supply Li-ion battery packs for the Think electric vehicle, Think City. Under the Agreement, EnerDel must deliver production prototypes in March 2008 and pre-production parts in July 2008 in exchange for approximately $1.4 million. After completion of the production prototypes and delivery of pre-production parts, if Think’s design and test requirements have been met, Think will order battery packs on a rolling six-month purchase order. If these requirements are met, the first order is expected to be placed in July 2008 with the first delivery expected by the end of 2008. We estimate orders of approximately $70 million based upon Think’s minimum forecasted vehicle delivery schedule for 2009 and 2010, although quantities may increase from the estimate. Think may increase the number of units on six months notice. Think is not obligated to buy any units if design and test requirements are not met.
Valuation
After a recent 1 for 7 reverse split effected on April 24, Ener1 has 98.81 million shares outstanding. At a recent price of $6.49 per share, this gives Ener1 a market capitalization of $641 million.
As of the year ended 2007 (see the 10k), Ener1 had cash of $24.8 million, total assets of $31.3 million, and about $12 million in liabilities (after accounting for the company calling its Senior Secured Convertible Debentures and extinguishing the related liability on the balance sheet). The company has a book value of $19 million and it has lost a total of $241 million over its lifetime. With negative free cash flow of $27 million in 2007, Ener1 will almost certainly have to raise more money before the end of 2008 if it is to remain in business.
Ener1, with a market cap of $641 million, is trading at a P/B ratio of 34.
PIPE Dreams
As my readers should know by now, a PIPE is a private investment in public equity. Hedge funds or other investors buy shares, often at a steep discount, and after a lock-up period (typically of 6 months or 1 year), they can then sell those shares to the public. Ener1 just filed a prospectus for the sale of 9% of the common stock outstanding. Keep in mind that the company will receive none of the proceeds of the stock sale; only the PIPE investors will benefit.
In a very negative sign, all but one of the investors listed in the prospectus has listed every single share they own for sale. While they will not necessarily sell every share, it is a bearish sign: in other prospectuses of PIPEd shares that I have seen it is common for holders to not list all their shares for sale.
Naive investors will often become more bullish when they see ’smart money’ investing in their favorite speculative penny stock. However, PIPE investors do not need the stock price to go up to make money. As an illustration of how lucrative PIPE investing can be, consider the Quercus Trust, which is a trust for David and Monica Gelbaum (who have previously invested in some of my favorite companies, such as Octillion and Lighting Sciences Group). The trust is selling all 5.43 million shares (38 million pre-split shares) it owns.
Of those shares, 2.86 million shares (20 million pre-split) were bought last November for a total cost of $10 million (see the 13D for details). Warrants to buy the other 2.57 million shares (18 million pre-split) at a split-adjusted $5.25 per share were included in this purchase price. Here is the relevant excerpt from the 13D filing:
(1) The above reported 20,000,000 shares of Common Stock were acquired pursuant to Securities Purchase Agreement dated 11/19/2007, attached hereto as Exhibit B and incorporated herein by reference. In connection therewith, the Reporting Persons also acquired certain registration rights and warrants to purchase up to 18,000,000 shares of Common Stock, with an exercise price of $0.75 per share and an expiration date of 180 days following 11/19/2007. A copy of the Registration Rights Agreement dated 11/19/2007 and a form of Warrant to Purchase Common Stock of Ener1, Inc. are attached hereto as Exhibit C and D, respectively, and incorporated herein by reference. The total purchase price of the private placement (including both Common Stock and warrants to purchase Common Stock) was $10,000,000.
The Quercus trust exercised those warrants. At a recent stock price of $6.49, the 5.43 million shares held by the trust are worth $35.2 million. If the trust is able to sell these shares at the current market price, it will have reaped a profit of $11.7 million or 50% in under a year ($10 million was invested originally plus $13.5 million was used to exercise the warrants). In fact, the stock price would have to fall to $4.32 before the Quercus Trust starts to lose money.
Conclusion
Like in all areas of technology, either a few companies will come to dominate the market for advanced lithium batteries or the batteries will become commoditized and sell for low margins. An investment in Ener1 is a bet that it will come to dominate the market and that the market will be large. In every other possible situation the company would be unable to create enough sales and earnings to justify its current market capitalization. Even if it does become a large player in the battery market, it will need to raise hundreds of millions (if not billions) of dollars more in capital it is is to produce the batteries. Such capital raising would likely be dilutive to current shareholders.
Unless you are an expert in the field and are absolutely sure that Ener1’s technology is better than its competitors’ technologies, I see much risk and little reward in investing in the company.
Further Reading:
Prospectus
10K for 2007 Fiscal Year
Quercus Trust 13D
Disclosure: I have no position in HEV. I have a disclosure policy.
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05.13.08
Posted in All Categories, Alternative Investments, Fraud, Microcap, Stocks at 2:09 pm by michael
An SEC enforcement division press release today shows why penny stock manipulation remains popular and why I hate the SEC. According to the SEC:
“The Commission’s complaint alleged that, in August and September 2002, Hayden, Marc Duchesne, and others carried out a scheme to manipulate the price of Nationwide’s stock. The scheme was orchestrated by Duchesne, and began with a matched trade between Duchesne and Hayden that artificially inflated Nationwide’s stock price from pennies to $9.35 per share. The Complaint further alleged that, thereafter, Duchesne, Hayden, and others bought or sold Nationwide shares at inflated prices to increase the price of Nationwide stock, to generate volume, and to stimulate market demand for the manipulated shares. The scheme collapsed on October 1, 2002, when the Commission suspended trading in Nationwide securities. “
The judge “entered a Final Judgment of permanent injunction and other relief, including a bar against participating in offerings of penny stocks, against Jeffrey A. Hayden on May 7, 2008.” Hayden agreed to the judgment “without admitting or denying the Commission’s allegations.”
Midway through reading the press release I thought to myself, “Hey, maybe the SEC finally is starting to care about penny stock manipulation!” The description of the financial penalty imposed upon Hayden destroyed any last shreds of hope I might have had that the SEC cares about doing its job (emphasis mine):
“Hayden was liable for disgorgement of $290,798, together with prejudgment interest of $116,330, but payment of these amounts was waived based upon Hayden’s sworn Statement of Financial Condition. A civil penalty was not imposed for the same reason.”
There you have it! The only penalty to Hayden was a promise not to manipulate penny stocks. He did not have to pay one penny. That is less than a slap on the wrist. This is yet another reason why I believe that we should abolish the SEC and most stock regulations and instead pursue stock market fraud under the common law definition of fraud. Penalties would be far harsher and might actually scare people away from penny stock manipulation.
(Note–I am not a lawyer; if you are one and I am spouting nonsense, please let me know!)
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05.08.08
Posted in All Categories, Bonds, Fraud, Personal Finance, Real Estate, Stocks at 12:49 pm by michael
Many people have argued that the current high house price to income ratio is not reason for house prices to decline, considering that interest rates are very low now. These people argue that what is important is not the actual price of the house, but the mortgage payment required to carry the house (for an example see user jcrash’s comments on my previous aritcles on the coming mortgage crisis at SeekingAlpha).
To some extent, these arguments are correct. Most home buyers use mortgages, and the difference in monthly payments between a 5.5% and a 8% mortgage is staggering. However, there are two important reasons why low interest rates do not mean that houses are affordable now: household debt is at an all-time high and mortgage rates will certainly go higher.
Total Debt Matters
Housing affordability is not independent of the affordability of other consumer goods. What matters for the affordability of housing and all consumer goods is the money available to pay for those goods (ie, money not spent on necessities). Total household debt is at an all-time high. The savings rate is close to zero. The most instructive number to look at is the household financial obligation ratio, or the ratio of income to household debt servicing and house or apartment-related expenses. To quote the Federal Reserve definition, “Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance, and property tax payments to the debt service ratio.”
Keep in mind that these ratios do not include other non-discretionary expenses such as food and gasoline, the price of both of which has been increasing at staggering rates, which means that consumers have less ability to service their debt than even the following graph shows (click for a full-sized image). The data are available from the Federal Reserve. The key number to look at is the FOR Homeowner Total (light blue). Over the last decade this has increased from about 15% of income to about 19% of income.
These are the costs on debt and home-related expenses that current homeowners pay. Because these are broad averages (many homeowners do not have mortgages after paying them off, reducing these ratios), it is important to look at the change over time. The ratio is currently about 4 percentage points higher than anytime prior to 2000. While this may not seem like much, consider that house prices are set on the margin and that approximately 40% of homeowners do not have mortgages. The marginal home buyer has much larger debt payments of all kinds than ever before, reducing his ability to buy. This alone indicates that home prices need to fall. However, the picture gets even bleaker when we look at mortgage rates.
Inflation Matters
Those that argue that house prices are affordable would agree that lower interest rates make houses more affordable, ceteris parabus. This is true not just for houses but for all capital assets. As interest rates increase, asset prices decrease. As interest rates fall, asset prices rise. If a buyer finances a high-priced asset with cheap financing and does not sell when financing becomes expensive, that buyer will do fine. However, a buyer who cannot hold indefinitely must pay attention to asset prices. Even when payments are equal, it is better to buy a cheap asset with expensive financing than to buy an expensive asset with cheap financing. The reason is simple: interest rates change. Interest rates are more likely to fall when they are high than when they are low. If they do fall, the seller who had bought when interest rates were high will have a capital gain as the price of the asset increases. However, the seller who buys when interest rates are low will take a capital loss if he sells after rates rise.
Inflation in the US is at a 4% annual rate as of March, and investors expect inflation to continue or get worse, as evidenced by the low yields on TIPS (Treasury Inflation Protected Securities). With 15- and 30-year fixed rate prime mortgages near their lowest rates since before the 1960s/1970s inflation epidemic, there is little place for mortgage rates to go but up. Even if housing were fairly affordable now (which the FOR ratios above show that it is not), higher interest rates will ensure that it becomes less affordable and that house prices need to continue to drop.
See Also
Option ARMageddon take on this issue
The Coming Mortgage Crisis: Part 1
The Coming Mortgage Crisis: Part 2
Disclosure: I have significant real estate holdings and I plan on selling short one or more regional banks.
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