As a stock trader one of the biggest lessons I learned about stock prices is that parabolic moves are to be sold into not bought. Human nature though is hard to overcome, when things are going parabolic our "instincts" tell us to buy, we fool ourselves that we will buy and sell it quickly and walk out with a quick profit(The so called greater fool theory).
The issue is, once we have that profit its very tempting to continue to hold but the fact is that corrections from parabolic moves are usually vicious, fast. This is specially true in OTC stocks where instant fills are extremely hard to get specially during a panic
The company is trading at about $2.16 pre-split with a market cap of about $1.2 billion dollars
Infitialis and Michael Goode has both provided very solid fundamental reasons on why PWEI.PK (PWEID) stock is almost completely worthless
I won't expand on that front because they did a great job. I don't even believe most shareholders care about the fundamentals of the company anyway. You have to understand that mindset of a OTC promo buyer "investor", this is all about a greater fool game specially when the stock has had a long period of increases. People are in just for another 10-20-30%, there don't care that the stock is completely worthless and the company has no real business. All one has to do is check places like IHub and see what kind of financial IQ most investors in the company have(Hint: Its not very high)
What they do care though is that the momentum game continues and they can get out at a profit before everyone else sells, this is the whole game here, selling before the other people sell. I'm going to present evidence on why PWEID is now close to reaching the point where everybody will head for the exit at the same time. Lets check some of the most successful stock promotions of all time and which price action lead to their collapse
One thing you can notice is that when prices goes parabolic this is usually a good time to sell NOT to buy, this is specially true when a stock promotion has been going on for longer than 1 month. At some point both the promoters and "investors" will want to take profits which leads to a cascade of sellers. What is also noticeable is that slow and steady price action can be followed by huge declines, this type of price action leads to complacency from investors who just buying counting on their "sure" gains till one day things reverse and everybody heads to the exit at the same time. PWEID has only has 1 decline in all its history(And it was a huge one). Volatility expansion is also a sign that the peak is near
Lets look at PWEID action and see what can be inferred
Chart is adjusted for the split. You can notice that the stock had a long period of slow and steady action then went parabolic after the stock split on monday(When the stock rose about 40%), this is VERY worrying price action, I understand the longs will say "well its going up, its a good investment", truth is that everybody that is long is thinking like that and if they all try to sell and cash their profits at the same time they won't be able to because there won't be enough buyers.
Contrary to what the promoters say this stock is NOT heavily shorted because it is in Reg SHO, its very hard to get a borrow and short it, as a result once it collapses you won't have short covering rallies to any meaningful degree
This promotion has been running now for about a month, successful promos don't usually run for much longer than that.
You can check old promos and see that after 1 month most of the gains have been realized and the stock faces a large wave of selling at some point
Furthermore the market cap of the stock is now over $1.2 Billion dollars(Once you factor in shares outstanding plus issued for acquisitions), this is probably the highest market cap for a pump and dump scheme of all time. High market caps act as resistance for the stock since it permits stock promoters and insiders of the company to sell worthless stock and realize a very large profit
PWEID now has gone parabolic and its volatility has expanded, judging by how this type of price action has been met with selling(Usually large and quick selling) most of PWEID gains look like they have been realized.
The greater fool game is now coming to a point where the people will actually have to face the fact that virtually everybody knows that this company is fundamentally worthless and they will all try to sell at the same time, whether they will be able to is another question but history has not been kind to this type of speculative game.
The complacency of investors due to the slow and steady action combined with large quick gains will only feed into the selling because that kind of action draws a lot of people into playing the momentum game but at some point everybody will try to realize their gains and the stock won't have enough short sellers and true fundamental investors to bid for the stock once it collapses. The correction is likely to be vicious and fast
Thursday, November 8, 2012
Thursday, May 3, 2012
Some people asked me why short EUR, my hunch was that the panic there would lead to capital outflows. Let me articulate a bit better
Lets say Greece drops out of EUR, depositors and people who hold financial assets(Lets call them DC Devalued Citizens) will face an overnight loss of something like 60% in their wealth. Non-devalued citizens(ND) will begin to wonder about their own wealth
ND with assets in countries with high spreads over bunds will begin to fear for their own wealth, the correlation between fears and people moving out of their assets from those countries will rise. They will do the following things most of the time:
-Buy EUR denominated debt or deposit it in 'safer' countries
-Buy real assets
But my bet is that when an actual departure from the EUR occurs the level of panic in the high spread countries will be so high that German yields will be driven to absurdly low levels(They are already quite absurdly low). Their real interest rates will collapse for many years out the curve. Low real interest rates will be so bad relative to the US that it will drive flows to the USD. Effectively the people there will be enacting many rate cuts, that is usually bad for the currency
But there are other effects, when a country leaves they are also defaulting in loans by paying in a devalued currency so the banks of other countries who hold those debts will face losses. This means that the pool of 'safe' countries that ND can invest their EUR wealth will decrease(As they have to bail out their banks and people fear that the banks are not safe, perhaps France will be in this category) when the amount of countries where there is a risk(even if the risk is small) will increase. This will only encourage the capital flows to go towards the USD and Real Assets(Will also compress the yields in the remaining safe countries even further)
When the first country leaves and people see the loss for the DC, having money in EUR will be like being in a mine field where you don't know where the mines are. There is a haven(Germany) but if everyone piles up on the same place its valuation looks worse and worse. This would be excellent for USD and gold
To me this mine field analogy is the real killer. IME people totally hate to lay odds in bets, everyone wants to bet getting 6-1 on their money not offer 6 for everyone 1 that is bet.
Having EUR on a country that can devalue will be effectively laying odds on your wealth. You can lose a lot to make a little. This is also why there are excess returns in stocks that have uncertainties in them, they are sold to levels bellow their fair value because people hate a small gain if there is a significant chance of a large loss
This analogy does not apply to extremes, people will lay 100-1 if the chance of the large loss is really small, they will pick pennies in front of a truck sometimes. But the fact that they just saw a devaluation will change things, because now they will be afraid and will increase the probabilities in their minds of the large loss
I believe even the market agrees with my view. Back when Greece was threatening a EUR referendum and full default the EUR dropped 500bps in a few days. Its a matter of what the probability is, the market thinks its small so they keep the currency at the current level. I believe its much higher so I'm short and I expect it to collapse bellow parity IF I'm correct some countries will leave
Other interesting ways to play this trade
-Buy black swan type long-term puts on EUR
-Short right after a country leaves, the currency will probably be down a lot that day, if feels un-natural to 'chase' the trade. But just imagine the people with huge EUR portfolios who now might want to liquidate. For them as a whole its going to take many days if not much longer