Small Cap Network Blog

To my memory, this is the worst single-day loss the S&P 500 has taken since October of ‘87. It fell 21% on October 19th of 1987, but had lost 5% on the Friday before that (the 16th). It fell 7% on August 31st of 1998, and only fell 5% on September 16th, 2001 …the first day back from the 9/11 attacks. Some of those days were part of bigger bearish moves, but this 8% selloff is the biggest one-day drop I’ve seen that I can recall. (If anybody can think of a bigger, more recent one, chime in below.) 

Anyway, this kind of plunge gets me thinking….

I’m admittedly hesitant to even bring it up - as it potentially could put egg on my face - but I’m wondering if it’s time to buy. In all three cases above, the horrifying plunge was also at least a short-term bottom, if not a long-term bottom.

I know that seems crazy, but it also seemed crazy in 87, in 98, and 01, yet all those buyers were rewarded to some degree.

Valuations? They suck, in most cases. However, I think the aim in this scenario is to find stocks that will be worth more six months from now than they are now. They’ll still be worth very little six months from now, but that’s not the point. 

In the short run it’s still anybody’s guess. In the long run though, I still believe the current crisis will be overcome. They always are. Today’s selloff is just a protest of Washington’s failure to get a plan - any plan - in place. Will it all be reversed once the plan is in place? Could be.

Don’t hear me wrong - throwing $700 billion at the problem won’t solve the problem. It will go far in investor’s minds though.

I’m going to stay on the sidelines here for today and tomorrow. I may do something tomorrow afternoon though. I don’t want to make it an official Small Cap Network trade, but for those of you who see where I’m coming from, I think you’ll agree today could be a pivotal day for all of us. History is on the buyer’s side here, it seems.

Stay tuned.

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As I blogged on Friday afternoon, Washington was shooting to get a bailout deal in place by 6:00 PM EST on Sunday. The deadline would come just in time for Asian markets to open with a little confidence in the U.S. market. Clearly the deadline came and went, and we barely have half of a plan in place. I’m not entirely surprised.

Nor am I surprised about the reaction - stocks are selling off (quite a bit).

Anyway, I was at a wedding this weekend where all the recent economic turmoil came up. I generally steer clear of the debates (particularly at a wedding), but a few folks who know what I do for a living felt compelled to pull me into the loop. At first I thought it was because they wanted some other insight. I soon figured out they just needed someone else to throw things at - not literally, but metaphorically.

(I am getting to a point here.)

I don’t know why it didn’t hit me until then, but I was reminded of a lesson I learned long ago….as an investor, your only job is to make money, regardless of how unfair life is.

The complaints are all justified - we got shafted. The frustration is all understandable - volatility is at its highest in years. The confusion is completely normal - getting into and out of this mess has yet to make sense. None of that matters though…your job is to play the cards you’re dealt, or choose to fold and come back another day. Conversing over the water cooler won’t make a recovery happen any faster though.

Don’t hear me wrong - I’m not happy either. None of us can waste time complaining though. Washington has to ‘fix it’, if they can. We have to wait on them, and then wait to see if stocks respond.

The reason I bring it up at all? A lot of these guys at the wedding were talking about just getting out of the market altogether for a while - perhaps months, if not longer - until it was clear things were better.

I think that’s a big mistake, for two reasons. The first reason is, we don’t know when things will improve. The second reason? There are other opportunities to reap in the meantime. What if things don’t ‘get better’ for years? That’s a lot of wasted time.

I would have preferred these guys say they’re going to do something else…trade forex, buy put options, invest overseas, become more of a trader than an investor, anything. There are dozens of ways to make money, even in a crappy environment. You just have to adapt to it, rather than abandon it.

Ultimately, I think it’s all a matter of attitude.

I rarely ‘preach’, but I think this may be a time for it. We have to get past thinking like victims, even if we are victims. We have to start focusing on what works in terms of making money, rather than focusing on what’s broken.

With that in mind, here are a handful of positive, pro-active things we could do that will allow us to make money when everyone else is crying about it.

• Explore shorting stocks if you don’t already.
• Look at option trading; put options let you profit when a stock declines.
• Forex - though wildly risky - can be traded in any environment.
• Those 1% and 2% scalps are better than nothing, especially if captured consistently.
• There are actually a lot of stocks pointed higher - see if you can find a new resource for finding them.
• Buy a new book that will teach you how to make money in a way you don’t currently know. The local bookstore may not have anything useful (too mainstream), so look in odd corners.

In all cases above, I also encourage you to ‘paper trade’ if you’re trying something new. That will let you build confidence before you commit capital. Plus, they’re just positive exercises.

The point is, as wrong as the whole debacle is, there’s nothing that can undo it.

I’m neither ‘pie in the sky’, nor ‘gloom and doom’. Those two extremes are what’s killing investors. I’m just advocating being realistic about odds and opportunities. More than that, I’m advocating not losing sight of opportunities that might be obscured by all the pie in the sky or gloom and doom.

Bottom line - stay cool here while everyone else is losing their head.

P.S. We’ve been through this kind of downturn before, and we’ll go through this again. Each time is a little bit different, but the root of the problem is always the same - investors assume the status quo will hold, they assume things make sense, and they assume what worked in the past will work now. That’s one of the pitfalls of getting comfortable….it doesn’t let you be nimble or adapt.

Records were meant to be broken, as WaMu (WM) showed us this morning by executing the biggest bank failure ever. J.P. Morgan (JPM) was fortunately waiting in the wings - since last night - to pick up the pieces. Just so you know, WaMu would have been broken with or without a timely bailout plan. Speaking of….

Here’s the latest - the self-imposed deadline for the bailout bill is Sunday night at 6 PM EST, which is right before Asian markets open on Monday morning. There were rumors that the House had a bill in front of them yesterday, but now we’ve learned the plan never even made it that far because its proposers (I know it’s not really a word) knew it wouldn’t pass in that format. Why bother, right?

The impasse is one I’m at least glad to see. Some of these guys don’t want to stick innocent citizens with an average cost of just under $5000 to bailout someone else who made a mistake. Maybe these people up in Washington have a heart after all. Or, maybe they just want to be re-elected.

Anyway, be sure to start poking around Sunday afternoon if you want some insight about what Monday could hold.

The more I think about it, the less impact I think the bailout will have. I’m not a congressman though, so my vote doesn’t count. (My odds of becoming a congressman just got a whole lot better though, don’t you think?) No, unfortunately I think the $700 billion being put on the table is being flushed down the toilet - at least from what I can see in all the proposals so far.

On the other hand, I’m also not convinced things will get worse than they are now if there’s no bailout. The time for the bailout was weeks ago. It doesn’t matter now - we’re close to (if not at) the worst. I’m just not buying into the ‘more gloom and doom’ sermon.

Anyway, that’s not what I came here to talk about.

I rarely care about articles I stumble across on the web, particularly when they come from BusinessWeek. However, I ran across one today.

Michael Thompson’s “Ending the Credit Crunch: Four Benchmarks to Watch” is actually a pretty clean look at the big, tangible things we should all be looking at as hints that the credit crisis is over, or at least near over.

I won’t recite the story here, but you may want to take a look at his credit crisis article and tuck those four things away in the back of your head. Here’s the link.

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The rumors of coal’s death have been greatly exaggerated. That applies in every sense - the commodity’s price, the underlying stocks, and even coal’s place within the global energy machine. Coal’s not going anywhere, and like oil once was, coal could actually be a brilliant long-term idea.

Admittedly, part of the reason I’m now interested enough to bring it up is our recent profile of China Energy Recovery (CGYV). By prepping our coverage of the company, I learned quite a bit about how coal is used for energy creation by prepping our coverage of the company. Along the way though, it also became clear we don’t have a lot of choice in the matter - we need coal if we’re going to meet our growing energy demands. The fact that China Energy Recovery makes using coal cleaner and cheaper is just icing on the cake.

Anyway, given that so many coal stocks were so rewarding in the early part of 2008 - and so destructive in the latter part of 2008 - I think there’s enough of a reason to start looking at the commodity and the trading opportunities it presents. (Or, maybe I’m just tired of talking about oil.)

Here’s a chart of the spot prices for Appalachian coal, which is generally the standard for the coal commodity market. There are other types of coal, but they’re of lesser quality/heat yield. Any of the charts would work, as they all tend to move in unison. The Appalachian coal price seems to be the focal point though.

What’s interesting is how the underlying stocks in the coal industry trade in tandem with coal prices, much like oil stocks do with oil prices. The cool part about coal, however, is that it’s not exactly synchronized with oil. Sometimes, it’s totally disconnected from oil.

I just wanted to officially launch our newest addition to the laboratory/research arena. I’ll be adding forecasts and additional thoughts soon, because I really think coal’s going to become the next oil in the foreseeable future. That’s not to say alternative energies won’t eventually take over, but that’s decades down the road. Coal’s going to have to fill the gap.

Any thoughts? Leave ‘em below. Let me know what’s on your mind when it comes to our newest topic.

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We were surprised by how little response we got regarding Saturday’s thoughts about SpongeTech’s (SPNG) potential privatization. Maybe it was because the market was going to hell in a handbasket. Or, maybe it was just because we had no evidence or facts to back the idea up - it was merely an idea. Either way, we finally got a response back from a reader who’s been thinking about it. Since it’s a discussion worth putting out there in the public, we will….

Sir,

Concerning Spongetech, does the management not already control the stock/company? I believe they gave themselves the majority voting power/control in the July 8K:

“the Company agreed to issue an aggregate of 4,000,000 shares of Class B Stock to Mr. Moskowitz. Such Class B Stock is entitled to 100 votes per share on all matters for each share of Class B Stock owned”

My only concerns with the stock is if the big AR will be collected from last quarter, if a bank line to fund operations can be achieved to eliminate future dilution and the seemingly constant manipulation of the stock on the market through German exchanges and within OTC market. The volume has certainly been interesting recently as the price per share has dropped yet Accumulation/Dist line has gone up.

A new concern of privatization has surfaced with me too. As a shareholder of course, I dont want the company to be taken private now. It would be stealing the company away from me as I have invested for a year, been diluted to help grow the company, but have seen no Return on Investment (as far as the stock price is concerned). The company valuation in my book, is worth at least .10 a share (even if a $50 mil market cap) if not more based on future probable growth. As you have pointed out, it is definitely undervalued here. Please do NOT give the company any ideas about buying the long term shareholders out for pennies when this stock ’should’ be 25 cents (if not more) in the not too distant future.

Looking foward to a reply from you.

Thanks for the e-mail.

Yes, management already had a controlling interest in the voting stock, one way or the other. They didn’t really need to add any more voting shares in July, so it didn’t matter at that point. Still not sure why they did, but whatever.

I hear what you’re saying about actually collecting on that nice AR (accounts receivable) line. However, they’ve had a nice, fat AR line for a couple of quarters now, and haven’t seemed to have a problem collecting yet. So, I think we’re ok there…

I agree - if they can get some cash on hand and stop selling stock to finance growth, that would be huge. That’s the story I’ve been telling for close to a year now … as the company has continued to pile on dilution. (Geez.) Maybe the end of it is near though - they now seem to have more cash than ever before. Only the next 10Q will really tell us about more dilution, or lack of it. I assume nothing until then.

As for the manipulation, the more I think about it, the more I don’t think the shorts and the naked shorts are killing this stock. I just think the stock can’t get traction. That’s more market-related than company-related. Stinks. However, I do think Metter’s wrong on that matter. We’ll see. One way or the other though, this stock should be trading higher than it is.

I also noticed how the AD line was climbing while the stock was falling. That can persist for a while, but it’s lasted too long now. If it was going to ‘get right’ based on buying volume, it should have by now.

Don’t worry - I don’t think I planted any privatization seeds with the company they weren’t already thinking about. The rumor has been batted around before; it just seems more plausible now. That’s why I brought it up.

I’m with you on this thing being undervalued. SpongeTech is one of the few companies actually getting great results right now, and it just hasn’t paid off for investors. As bad as the dilution has been, the benefit has been even better. The market doesn’t get it though. So, even though we’re ‘right’, it doesn’t matter. I don’t mind losing money when I’m wrong about a company. But when I’m right and still lose? Irritating.

The only thing I can say is if the company does try to go private, hold onto your shares for dear life. They’ll probably be able to pay a nice premium, and I suspect current owners will be able to hold out for something well above five cents. That’s still a relatively big ‘if’ though.

In the meantime, I remain cautious but optimistic. I’m not buying any more, but I think SPNG could eventually take off if the market can get over its bigger problems.

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I was probably one of the few people who didn’t blame the market’s recent problems on the short sellers…at least not entirely. Ultimately, it was poor fundamentals and unmerited risk that drove stocks lower - the financials in particular. The short sellers were just doing their job by selling a stock that was headed lower.

To stave off some of the volatility, the SEC temporarily banned shorting about 800 financial stocks. Since then, about 100 more have been added to the list.

It’s important to point out that the SEC never actually ‘blamed’ the short sellers for the market’s recent implosion. They were just concerned that short selling was making a bad situation even worse. The commission was just trying to protect the average buy-and-hold investor.

So, I thought little of the ban. In fact, I thought it was a good idea for the time being…we’ve got to get a handle on things.

Then this morning I read a Reuters article that gave us a glimpse of what’s going on from a short-seller’s perspective. Two words came to mind - guilty conscience. It’s as if these guys were going on the defensive, but were never actually being questioned.

Here are a few quotes from the Reuters story, provided by folks who are basically pro-shorting, for one reason or another…

• 1. The ban “will result in the exactly the opposite in what they want to achieve,” said Doug Kass, founder and president of hedge fund Seabreeze Partners Management, who is also a short seller. “It will scare the longs into selling, exacerbating stock price declines.”
• 2. Short sellers have been blamed for nearly every financial meltdown since the 1929 crash
• 3. Critics say they are interfering with the basic functioning of the markets, including taking away liquidity provided by the shorts, at a time when things are already enormously shaky.
• 4. “My concern is that a total ban really does not comport with free market principles and I also think it leads to very potential dislocations in our markets that don’t need to have been created this way,” said Harvey Pitt,
• 5. The potential harm, short selling experts say, comes from discouraging shorting overall. Because short sellers borrow shares and have to buy them back later, they represent forced buying in the market, purchasing shares when no one else will.
• 6. “The SEC has done a fantastic job blaming short sellers for nearly every problem in the financial markets today,” said Eric Newman, a long-short portfolio manager at TFS Capital.

I’ve got some thoughts one each one, and then I’ll wrap up with a bigger idea….

• 1. It will scare the longs into selling? What? The whole reason they weren’t buying was the fear of short sellers taking over.
• 2. Blamed for every meltdown since ‘29? Sorry - false. The market starts to fall apart when the longs get nervous….every time. Short sellers pounce on the wounded stocks.
• 3. Liquidity has been fine since the ban. There’s always a buyer and a seller at the market price. There may not always be a balance between all the long-sellers and short-sellers….where are the buyers in that equation?
• 4. This is actually true, but ‘free market principles’ also include fiduciary responsibilities to shareholders, as well as transparency. When one principle is tossed out the window, they all get tossed out. Otherwise, someone is disadvantaged.
• 5. Huh? The logic makes no sense. It’s true that short sellers will often buy shares when nobody else will. However, they’re also selling shares when nobody else will. If they didn’t short in the first place - which drives the price lower - perhaps a stock wouldn’t get to the point where nobody wants to touch it. Or to say it a shorter way, if short covering can hold a stock’s price up, then by default the practice has to hold a stock’s price down. You can’t have it both ways.
• 6. Sorry - the SEC has not blamed short selling for every problem with the market. The SEC is just trying to protect the average investor who’s not able to, or interested in, short selling.

My bottom line? Methinks they do protest too much.

In the interest of fairness, I’ve sold stocks short before, and I’ll do so again. I’m under no illusion though…the market is centered around the idea of appreciation of stock prices - not the destruction of them. Rising stocks are the norm; falling stocks are supposed to be an exception. I’m ok with that.

What I’m not ok with is the opinion of some that their short selling activity doesn’t impact the market in a negative way. It does - I’ve seen it firsthand.

They have every right to keep selling stocks short; it’s their money. They have no right to say they’ve been blamed for something nobody’s actually blaming them for. I’ll be the first and last to say this - it’s a company’s management team that’s responsible for making sure the stock is fairly valued. The short sellers are just taking advantage of times when management hasn’t done it’s job. However, short sellers can also overlwhelm the longs - unfairly - by inspiring too much fear.

So, to come full circle…

The SEC’s role is not to protect speculative strategies. Their role is to protect the average investor, and the integrity of the market. If short sellers capitalize on their size and clout, sorry, that’s a threat to the average investor and the market’s integrity.

I just thought it was odd how heated and strong some of the statements in the article were. Seems a little suspicious to me.

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Well, as I worried would be the case after a magnificent open on Friday, stocks closed well under their highs from Friday, and are sinking again today. In fact, they’ve been cut roughly in half - the 4% gain is now a 2% gain - in just the last few trading hours. Don’t get me wrong…they’re still up since Thursday’s close. However, anybody who bought in at Friday’s open (on the news) is now more than a little under water.

That’s the risk you run when you respond to the news without thinking about what it really means. That’s why I don’t do it anymore - I’ve been burned too many times early in my investing life. I’ve seen too many times how emotional reactions just don’t last long enough to create a sustained trend. Add in the fact that there were (1) no details about the bailout plans, and (2) Morgan Stanley’s problems were still lingering, and you don’t really have the most stable trading environment.

Ultimately I think Friday morning’s buyers will be ok. Why? Despite the pullback since then, I’m still net bullish for the reasons I mentioned Tuesday.

However, I also think we’re going to close Friday morning’s opening gaps sooner than later. That’ll be the second chance buy-in for anybody who wasn’t in a trade before Friday morning’s news. Sorry to all the quick buyers - I don’t think you actually gained any advantage by jumping on the news. No biggie.

That being said, I do think a deeper explanation of my forecast is on order. I have to use two charts to make my point, so bear with me.

The first chart is a daily chart of the S&P 500 ETF (SPY), which shows you the opening gap, the opening price, and the current price. The second chart is also of SPY, but an intra-day chart that shows you how hollow that bullish opening was, and how many sellers pounced on that relatively tiny profit opportunity.

The point is, this isn’t exactly a sign that buyers are going hog-wild here. A few did - very few - on Friday, but most didn’t take the bait. Today’s action tells me most of the market isn’t convinced we’re going to head straight higher from here.

The crappy part for the rest of us is not so much that we’re suffering volatility, but what that volatility did to our potential recovery. Had we opened on Friday roughly where we left off on Thursday, we could have made a nice, quiet rally, and followed through today. When you open at 4% higher though, somebody’s going to be making exits.

So, here’s the point - I’m doing nothing for now. I want to see what happens when and if we close the gaps from Friday. If we rebound and follow-through, I’ll be more bullish. However, my worry is that the gaps will be closed, and the market will just keep on sinking. It’s a coin toss at this point though, and I don’t trade that way.

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When I posted a blog/rant yesterday about the SEC’s ‘new’ ban on naked short selling, I had a gut feeling about something; today I’ve got the facts to support my gut feeling.

You may remember I gave the Securities Exchange Commission a B+ for effort, and a C+ for results. The reason I wasn’t all that impressed? They should have been enforcing this rule a long time ago (it’s hardly new), and the impact the rule will have isn’t going to fix all the lingering problems.

I want to change my grades to a B- for effort, and a D+ for results. As the details started to roll in, the less and less the ‘new’ rule meant.

Care to know why? ‘Naked’ short selling accounts for a whopping 1% of all short sales. I knew the figure was low, though I didn’t know it was that minimal until today. Even if the new rule was perfectly enforced from this point on, it wouldn’t make a noticeable difference.

Not that it will solve the problem, but I vote to bring back the uptick rule. This has nothing to do with ‘naked’ short selling, but if the SEC really has a problem with short selling, they need to attack 100% of the problem instead of 1% of the problem. By requiring an uptick of a stock prior to a short sale, at least the major short traders won’t be able to drive a stock into the ground…mercilessly.

Now don’t think for a minute that bringing back the uptick rule will prevent stocks from losing the same kind of ground they can lose without an uptick rule. At least with an uptick rule though, they won’t get pounded so quickly. That’ll give some investors a chance to get out before too much damage is inflicted.

Interestingly, the uptick rule was repealed on July 6th, 2007. The SEC’s research suggested it was an antiquated rule that no longer benefited the market. It didn’t seem to phase the market at the time, suggesting the SEC’s research was right. But, within a few weeks we started a pretty nasty bear market. I’m not saying rampant short selling was the cause of the bear market (it was dumb lending practices), but it sure didn’t make it any easier.

I wasn’t going to jump on the “Fire Chris Cox” (SEC Chairman) bandwagon, but now I think I will.

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Every day this week has been an adventure in the capital markets. If it were a book it would be a good one. As an investor immersed in the middle of the adventure though, I think I’d just as soon be reading a book. Back to that in a second.

Perhaps you heard the latest installment in the saga…the Treasury Department basically guaranteed (or at least facilitated a guarantee) of U.S. money market funds. Investors/deposit owners were starting to feel a little uneasy about letting any bank hold their cash after the Lehman debacle. The concern was they’d get worried enough to actually go take the money out of the bank, which would really magnify the problem. Now money markets are risk-free again. Crisis averted, and boy did the market like that news.

On top of that, the SEC has temporarily banned the short-selling of financial stocks…about 800 of them. That will help investors feel better as well.

The two actions really aren’t directly related - one protects bank customers, and the other protects investors. However, what’s good for one is ultimately good for all.

The net result was stunning - index futures shot up to nearly 4% higher than yesterday’s closing levels. Wow! I don’t recall the last time I saw the futures (or even the market during exchange hours) that strong. Then again, I don’t recall the last we saw a nightmare like we did the first three days of this week.

I don’t know that the news merits this kind of rally. Don’t get me wrong - it’s good news. I just don’t know that stocks are nearly 4% more valuable than they were yesterday.

My fear is the news will pull a lot of buyers in this morning, and then the market will fade later in the day. If so, anything bought this morning will actually be in the red by the close. That’s not exactly inspiring.

In the end I’m still bullish (with or without today), but I’d rather buy on a dip than chase a shooting star.

Stay tuned - I’m sure I’ll be busy today as things progress.

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For what it’s worth, both the Dow and the S&P 500 touched big-time support lines today. More importantly, both of them pushed off of those support lines to move into positive territory. In the grand scheme of things this may not mean a whole lot, but it does point to a short-term rally.

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Believe it or not, this actually isn’t the worst week of the year. There was a week in January that was worse. I know - little comfort. There is some good news in all of this though…at least I think so. The market got hit so hard and so fast, it looks like all the potential sellers went ahead and did their thing. The only interested party left is the buyers. And, we can see they’re mulling it over. They just haven’t dug in yet.

Anyway, I’m not pulling my bullish outlook (a very short-term one, by the way) out of a hat…or anywhere else, if you know what I mean. I’ve actually got a couple of pretty sound rationales.

The first one is the VIX. It just hit multi-YEAR highs today. So far it’s eased off of that high, but the damage is done. That’s not to say the VIX can’t stay up here, but I can’t imagine why now would be any different than recent instances of VIX peaks.

The other driver behind my bullish expectation is the ridiculous number of NYSE stocks that hit new lows on Monday and Wednesday…1113 and 1142, respectively. The last time we saw anything close to that was July 15th, and August 16th of last year. Both occurred right at major market bottoms. Of course, both were short-term bottoms, but still trade-worthy. Take a look, but keep readin’…

There is one problem with my theory though. Stocks sure aren’t acting like they’ve got enough strength to actually get out of the gate. We’ve seen a couple of rebound attempts, but you have to string a few bullish hours together if you want to get anybody else excited.

I partially blame expiration week, which will fortunately be over after tomorrow. It’s a triple-witching week, which may be particularly disruptive to either side of the market’s table.

Anyway, I’m not pulling the trigger just yet. If I see a good hint of an upside reversal though, I’m acting on it. The rebound potential from here is considerably better than further downside.

Let me repeat - this is only a short-term view, and I reserve the right to change my mind. However, I’ve just seen these VIX and new low signals work too well in the past to ignore now.  

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I just got off the Voyant International (VOYT) conference call. I hope you had a chance to listen in, but if you didn’t, there’s a replay available. I would summarize it here, but I didn’t get a chance to take notes. So, I encourage you to listen to the call. However, for those of you who are as busy as I am, there are a few highlights I think are worth knowing if you can’t do the replay. 

RocketStream is going well, and a fourth customer group is starting to solidify. They’d been focused on direct sales, sales through embedding, and sales through bundling. However, the fourth venue now coming into play is telecommunication carriers like Korea Telecom (KT). Basically, it’s a referral resource. KT’s customers who are dissatisfied with their Internet speeds are being told to purchase RocketStream.

If it were just one telco company in support of RocketStream, I might think little of it. However, a U.S.-based telco has also asked Voyant to possibly help them speed up their broadband connection. The deal, if it went through, would mean installing Voyant’s technology on 6 million modems (for starters). The sweetest part about the deal? Recurring revenue, and I guess a lot of it.

They didn’t say who the telco was, or where the technology trials were. Interesting, though, that they were approached.

Nevertheless, Voyant still feels embedding and bundling is the big-time venue for RocketStream.

Aviation Broadband - the much-awaited passenger-jet broadband service - is still in the works. They just completed their second test flight, topping the results from the first test, and exceeding their own expectations for this test. This 2nd test showed high capacity at an even greater distance from ground.

The concerns about existing competition came up (inevitably), and here’s what Voyant had to say…

Aviation Broadband will be better than current satellite services. Satellite connections are very expensive, costing about 100 x the cost of Voyant’s cost to deliver the same amount of data. As for current ground-based versions, those can’t scale up because they still have to share bandwidth. The more users they add to current ground-based services, the slower it gets. Voyant’s ‘pipe’ is bigger (and has higher capacity).

What about AirCell (Aviation Broadband’s big competition already taking on market share)? AirCell is priming the pump, but Voyant can steal the market once cultivated.

Voyant provides 10x more bandwidth than Aircell, and AirCell can only provide service in North America. Voyant is focused beyond the United States, and said Europe may be the first Aviation Broadband market. Plus, Aircell’s limited bandwidth is shared among all the planes in the sky. [It became clear the competition they were panning earlier in the call was AirCell.] Voyant plans to transmit at 35 Mbps to each plane, no matter how many planes are in the air.

Voyant also added they used RocketStream to deliver movie content from Voyant Productions via Aviation Broadband, integrating all their technology. We hadn’t heard much about Voyant Productions (TV and movie content) until now, but their interest in the business is becoming a little more clear - it fits well with the jet/broadband technology. Voyant Productions is still in formation, but there is some clear monetization potential here.

Harris Corporation is the partner they’ve got to help with testing and implementation. They now have a formal collaboration agreement in place, which wasn’t in place when the trials began.

Oh, and the wireless Internet radio deal - the $2 million contract from this summer - is ahead of schedule. They didn’t say what ‘ahead’ meant, so I still don’t know when they’ll be booking revenue from that.

All in all I learned a little. There wasn’t much discussion about numbers, but now we have some more framework in place to hang the dollars on when that data starts to flow in. 

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In a not-entirely-surprising move, the Securities Exchange Commission has decided to take a bite out of naked short-selling by requiring broker/dealers to actually take delivery of shares being shorted by their clients. The move assumes a lot of the current short-selling is indeed illegal ‘naked’ short-selling, and more importantly, is creating too much volatility (most of which is bearish). By taking the practice away, the goal is to control at least some of the unfair pain inflicted on the buy-and-hold crowd.

I give the SEC a B+ for effort, and a C+ for results. The move will help a little, but it’s not going to patch up all the problematic holes. (Every little bit helps though.)

A quick explanation of the mechanics of short selling….

A short seller doesn’t have to own the shares he or she is selling. In fact, they usually don’t. They have to be borrowed (per the SEC) from other investors who already own them in another account, and it’s the broker’s responsibility to go find those shares to borrow among their client base. Or, the client has to physically deliver those shares to the broker to ‘cover’ the short. This second procedure is where the ‘naked’ comes in.

Technically, when a client doesn’t intend to deliver shares on a short sale, a broker is supposed to identify which shares are being shorted. In other words, if Bill Smith is shorting 100 shares of Microsoft, then the broker has to be able to point to another of their client’s accounts and say ‘those 100 shares are being borrowed from John Jones who owns Microsoft in XYZ account’.  

By doing so, the practice of ‘naked’ short selling is essentially impossible…at least via this method.

The obvious question is then, how does the ‘new’ SEC rule change anything? It prevents naked short selling through the more common method…

By forcing a short seller to deliver shares that have been sold but not borrowed from someone else, it is believed there will be a lot less short selling in the future. Those traders don’t have, and never intended to have, any shares to deliver. They were going to buy them in the future at what they hoped was a much lower price.

So, the ‘new’ SEC rule will crack down on those short sellers who have told the broker they intend to physically deliver the stock later.

Most brokers do an OK job with finding shares amongst their customers to borrow when short sellers need them. However, brokers don’t have much control if someone doesn’t deliver shares they said they would deliver. This rule will pressure the brokers to nip the practice in the bud from their end…they don’t want to suffer the consequences of the SEC’s punishment.

Bottom line - it’s not a new rule, but it looks like the SEC is getting serious about enforcing the existing rule. I’ll take it.

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I think Lehman (LEH) deserves whatever fate they’re given. They botched it, badly, and apparently refused to see the writing on the wall when they should have….when they could have staved off bankruptcy. Dumb. That’s why the stock fell from higher than $81 - when the credit crisis really started a little more than a year ago - to the current price of 15 cents. That’s close enough in my book to call a 100% loss.

At this point though, I’m not surprised. Seems to be par for the course among the big financial names.

What I’m baffled about is how Fitch Ratings (a credit rating agency) just now finally decided to downgrade their default rating to ‘D’, and downgrade their other debt to ‘CCC’ or ‘C’. Preferred stock went to ‘C’ as well. All are considered to be ‘junk’ status within the industry.

I’m not saying Fitch was wrong to make the downgrade. I’m just saying what’s the freakin’ point of doing it now? The time to make the call was months ago.

I know nothing is certain - at least it wasn’t certain until Lehman officially filed Chapter 11 today - but if these guys are supposed to be helpful for investors, they need to see this stuff coming.

Along those same lines, it’s worth noting that since Lehman started its tailspin in the middle of last year, there were actually two upgrades to ‘buys’ from some major research firms. Citigroup’s (C) was the latest upgrade, on March 28th. It doesn’t really speak well of Citigroup. Then again, it’s pretty clear Citigroup can’t see their own problems, so why would they see someone else’s?

It’s one more reason to become self-sufficient as an investor, and make your own conclusions based on common sense.

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The current bid/ask for our small cap stock pick China Energy Recovery (CGYV) is 3.30 by 3.40…plenty low enough (and narrow enough) for anyone to get into a trade. In fact, it looks like the market for CGYV is trying to move even a little lower. That’s great news - looks like we won’t have to fight to get in at a price close to where we left off on Friday. A market order should be fine.

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Actually, it doesn’t look like China Energy Recovery (CGYV) is going to open too high to buy into. The current bid/ask is 3.39/3.49. I think 3.49 is a decent limit; let’s see how things take shape after the open.

Well, just when I think the market can’t get any more unpredictable, I’m unpleasantly surprised. Not complaining; just saying. I do indeed need the dramamine I mentioned in Tuesday’s newsletter though.

Anyway, the last three days of trading (counting today) have prompted me to look at something I don’t normally consider…candlestick analysis. Or, in layman’s terms, I think the shape of the daily bars - the high, low, close, and open - may be telling us something right now about the market’s near-term direction.

If you’re not familiar with candlestick theories at all, I don’t have time or space to explain it completely right here. I recommend visiting the Wikipedia candlestick chart page for a primer. (It’s actually not a hard concept to grasp…2 minutes tops.) As long as you’re moderately familiar with the candlestick idea, my comments will make plenty of sense.

I really want to zoom in on the last three days, and talk about the last two. I think they may be telling us something. The guinea pig is the QQQQ’s, as I think they best make the point.

In short, Wednesday’s bar could be considered an ‘inside day’, as the high and the low for the QQQQ’s was lower and higher (respectively) than the high and the low for Tuesday. In fact, technically it was an ‘engulfing’ day, as yesterday’s entire range (high to low) was still fully between Tuesday’s open and close….which I guess actually makes it a reverse-engulfing day.

Anyway, the point is that whatever was going on during Tuesday’s session was definitely not going on during Wednesday’s session - the selloff just stopped, and both sides just took Wednesday off. The tame bar from Wednesday makes that pretty clear.  Any engulfment day is a good sign of a reversal, though not a complete sign. In this case, it simply hints that the downtrend is trying to reverse.

Today’s bar is also an engulfing day….a bullish one. The open was under Wednesday’s low, and the high (and close as of right now anyway) is above yesterday’s bar.

Two bullish reversal hints back to back? I know anything can and will happen, but this at least has me curious. And, Thursday’s strength is on pretty good volume too. The clincher would be some upside follow-through on Friday….even just a little. Check in tomorrow or this weekend for morw.

That said, there’s a reason I chose the QQQQ’s….they have considerably more clarity if we are indeed at a candlestick reversal point. That’s not to say other index ETFs won’t reverse, but they aren’t giving us the same clear shapes and patterns we’re seeing with the QQQQ’s right now. (That’s the downside to candlesticks….they don’t catch every reversal, not every one they do spot actually is a reversal. Still, it’s a decent odds tool.)

HOWEVER, don’t forget we’re launching our newest small cap trading idea on Friday after the market closes. You’ll want to be around for that anyway.

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I promise it’s not a vendetta; I just truly believe in my heart that newspapers are in their twilight years. The web has killed ‘em, and made them lousy investments.

I said so on June 6th, and then again on July 24th as a follow-up to a ‘Tech-Ticker’ interview with a former NY Times editor.

Well, we’ve seen yet another layer of evidence of the same notion - this one from MorningStar.com. Same story… shrinking ad revenues have forced newspapers to scale back on staff and coverage. In turn, circulation has suffered. In turn, ad revenue shrinks even more.

The reason I bring it up is just because there’s a pretty good data table that puts some data behind the theory. You can check it out here.

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Looking to get up close and personal with a budding bulletin board company? Here’s your chance. It’s not like you’re going to be a fly on the wall of the boardroom, but Voyant International’s (VOYT) upcoming investor conference call may shed some light on things we didn’t know about.

The call is scheduled for Wednesday, September 17th, at 2:00 PM EST.

To listen in, dial 877-741-4248 five to ten minutes prior to start time for registration if you’re in the U.S. or Canada. International callers should dial 719-325-4763. Either way, the event passcode is 5794266.

I don’t know if there will be an opportunity to ask questions or not, though based on the information in the press release it seems to be a ‘listen only’ call. I’ll let you know if I see something to the contrary between now and then.

There will be a replay available if you can’t make the call.

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While the rest of the market was floundering last week, the paper mills found a way of putting up a nice gain. The Dow Jones Paper Index (DJUSPP) rallied 3.36% last week, mostly thanks to a strong Friday. Nevertheless, those results easily trounced the broad market’s loss of about 3.0%. Sometimes a move of that magnitude is nothing more than sheer chance. Other times it’s an omen. Either way, the results are good enough to merit finding out exactly what’s going on … there may be more of the same on the way.

Back in April – following a wave of rumored and actual selloffs and acquisitions – I started to fear the worst for all these stocks. Rising input and commodity prices were making it tough for the smaller operations to remain competitive with the big boys like International Paper (IP) and Packaging Corporation of America (PKG). I suspected the end result would be more unions and acquisitions, with the intent of survival in this price-competitive arena. And, we did see some acquisitions in the aftermath.

The market has a way of dishing out surprises though.

For its investors, the great part about International Paper’s domination of most of the paper and containerboard market is the company’s ability to offset low margins with higher volume. Smaller outfits can’t achieve the same economy of scale, yet are largely selling their product at a price established by IP. It stinks for the smaller paper companies and their shareholders, as margins can be a big problem unless International Paper decided to raise prices.

Well, as it turns out, the reason for this past week’s strength in paper stocks can be pinpointed to one catalyst – International Paper did indeed decide margins were important again. As of Oct. 1st, IP is pushing the price on 42-pound containerboard to a $670 per ton…a record-setting level. (L2)

Translation: Other paper companies can raise their prices - and therefore margins – as well.

And it’s a decision that couldn’t have come soon enough. The average net margins for the industry are a pathetic 3.3%.

The only question mark was whether or not the new prices would ’stick’; the theory was that IP would hit a headwind with the price increase. Based on what we saw immediately after the IP announcement though, I don’t think for a moment International Paper is going to back down…they don’t need to. RockTenn (RKT) announced a similar price increase two days later, and rumors of price increases from other companies are starting to surface as well. It looks like the industry is going to play along with IP’s new pricing structure, since it’s a standard all these companies benefit from.

Bottom line? If you’ve been waiting on better days for paper stocks, I think they’re here. As always, some choices are better than others, but at least the epidemic won’t be industry-wide any longer.

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