My guest on Hedge Fund Radio this week is penny stock trader and Internet entrepreneur, Tim Sykes. Every once in a while I run into a natural born trader, someone who crawls out of the crib quoting options spreads, price earnings multiples, and book values. His first spoken word was “Sell!” While other kids were practicing their ABC’s, Tim was pouring through prospectii.
During his college years, Tim skipped classes and turned a $12,415 Bar Mitzvah gift into $1.65 million by trading the market from his dorm room. By the time he graduated from Tulane in 2003, he was already running his own hedge fund. Barclays Bank rated it the number one short bias fund during 2003-2006.
Tim argues that if you cut through all the hype and manipulation in the penny stock market, it is clear that there are huge opportunities on the short side. Most of the companies trading there are frauds, and most will fail. Mini Enron’s and mini Madoff’s abound.
Defined as trading under $5 a share, these stocks are purchased mostly by individuals desperate for “get rich quick” success. Promoters buy lists of email addresses from major online publishers, sometimes paying millions of dollars, to launch a never ending onslaught of “pump and dump” schemes. Email barrages and Twitter spam have replaced the dinnertime telemarketing calls and junk mail of yore.
The SEC is so inundated with tips on Madoff copycats and competitors ratting out each other, they don’t have time to pursue gripes about $1,000 losses emanating from penny stock scams. It’s like expecting the FBI to pursue shoplifters of 99 cent items from Seven Eleven stores.
Some of the claims made by these bogus IPO’s boggle the imagination. Tim’s favorite was one company’s efforts to promote vitamins infused with stem cells. Another offered a solar spray that turned you house into an energy source. Then there was the BP Gulf oil spill that threw up innumerable crude eating forms of algae. As for my own experience, I’ll never forget the aquaculture farm in the middle of the Saudi Arabian desert. To separate out the obvious rip offs from the legitimate companies, Tim spends hours a day gleaning through voluminous SEC filings, some of which are blatant cut and paste jobs from earlier failed floatations.
Even though most of these companies are fake, prices can run away to the upside, wiping out the early short sellers. So some risk control discipline is required. When a stock truly rockets, “buy-ins” of shorts can also be a problem. A few hundred penny stocks are launched each year, but only about five a month catch on fire. And remember, Apple (AAPL), and True Religion (TRLG) jeans were once penny stocks.
To avoid being taken to the cleaners by unscrupulous con men, Tim offers some very basic advice. If it is too good to be true, it generally is. It also helps to read the SEC filings, which can be obtained online for free.
Tim claims to have a success rate with his short strategy of 75%, which has delivered a 56% return in 2010, proving he still has the golden touch. His problem is that the strategy is not scalable, and can only be executed with a small amount of money. No mega hedge fund for him.
That’s why Tim has turned to online education instead of ramping up a big hedge fund. Today, he is offering several subscription newsletters, trade alerts, chat rooms, along with a DVD course on making money in the penny stock market at his website at http://www.timothysykes.com/ .
To listen to my highly informative and entertaining interview with Time Sykes on Hedge Fund Radio, please click here at http://www.madhedgefundtrader.com/december-22-2010-time-sykes.html .
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
I’d bet cash money that whatever reforms he has in mind are either mostly symbolic or will quickly be abandoned once he and Pelosi start to butt heads, but since stories like this are always good for a five-alarm freakout in the comments about the GOP selling out, let’s do it.
On Wednesday the new speaker of the House of Representatives plans to offer a package of rule changes that, he says, will give minority-party members more of a say and decentralize power. In short, Ohio Republican Mr. Boehner is promising he’ll be a different figure from many speakers throughout history—from Republican Joseph Cannon a century ago to his immediate predecessor, Democrat Nancy Pelosi—who kept a tighter leash…
“New speakers always say they want to have a more open process,” says Rep. Anthony Weiner, a New York Democrat. “Then the sheer demands of making the trains run on time and getting things passed requires that you change your mind.”…
Mr. Boehner has promised to give more power to committee chairmen, and to put cameras in meetings of the powerful Rules Committee, which sets guidelines for congressional debate…
Rep. Kevin McCarthy of California, the No. 3 Republican in the new Congress, acknowledges that Mr. Boehner’s proposed changes could make the chamber harder to manage, at least in the early going. “You will have some tough times,” said Mr. McCarthy. “People will play games with it. People will use it for mischief. We’ll just have to work through that.”
What powers, specifically, will Boehner be granting the Democrats? Oddly enough, the Journal doesn’t say. Presumably the leadership doesn’t want that leaking out on the eve of tomorrow’s festivities lest it spoil the mood among the base. But we can probably guess based on this open letter to Pelosi from House Republicans published two years ago protesting her own rules changes that cut them out of the process.
The American people … stand to pay a price if the Majority further shuts down free and open debate on the House floor by refusing to allow all members the opportunity to offer substantive alternatives to important legislation — the same opportunities that Republicans guaranteed to Democrats as motions to recommit during their 12 years in the Minority. The Majority’s record in the last Congress was the worst in history when it came to having a free and open debate on the issues.
This proposed change also would prevent Members from exposing and offering proposals to eliminate tax increases hidden by the Democratic Majority in larger pieces of legislation. This is not the kind of openness and transparency that President-elect Obama promised. This change would deprive tens of millions of Americans the opportunity to have a voice in the most important policy decisions facing our country.
I.e., more amendments and more floor debate, a perennial demand from the minority caucus. So perennial is it, in fact, that Pelosi herself proposed a “Bill of Rights” for the House minority back in 2004, before the Democratic takeover, calling for both of those powers plus greater participation for members in conference committees. Actual quote from then-Minority Leader Nancy, now glazed with irony: “When we are shut out, they are shutting out the great diversity of America.” And a fun reply from Republican David Dreier, who was chairman of the Rules Committee at the time and will be chairman again come tomorrow: “Yes, we have done, as we have had the responsibility of governing, some of the things we criticized when we were in the minority.” Looks like Boehner’s going to try to correct that mistake. For a little while, at least.
Speaking of rules changes, Dan Foster at NRO notes that the GOP’s new budgeting rules require offsetting cuts for any new spending increases — except, er, in case of “emergency” — and gives the Budget Committee chairman the power to exclude the deficit impact from the Bush tax cuts and ObamaCare repeal from any budget estimates. That’s a horrible first step to take if they’re serious about fiscal responsibility, even granting the fact that the “savings” from O-Care are smoke and mirrors. Once you start exempting expensive programs from the ledger on political grounds, I don’t know where you stop. The one saving grace here: The Budget Committee chairman is Paul Ryan, a guy who’s built a national reputation upon his willingness to look at hard realities that other alleged deficit hawks run screaming from. I can’t imagine him hiding any huge costs just to make his numbers look pretty; if he does, then it’s advantage: Reason.
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