Tuesday, March 21, 2006

As the Share Price Slips, Some Investors Sweat and Some Investors Cheer

It's back to the old bad habits for ERHC Energy shares, judging from the action today. With a solid level of volume - 4,587,431 shares - the price slipped $0.4 to $0.74 after hitting $0.70 earlier in the day. The price was $0.74 x $0.75 at the close, and nothing changed after hours.

According to Doc, the reason for slippage of this kind lies with the concentration of 500 million to 525 million of ERHC's 711 million shares in the hands either of CEO Sir Emeka Offor or members of his extended family and "clan." Doc says they make a few million and then sell uit down to await the next development, then make a few million more when it briefly runs again.

That claim and that pattern is certainly consistent with everything we've seen since at least May 2003, when I first purchased ERHE. It defies any notion of value to focus purely on the inherent value of volatility, the measure of up-and-down movement that allows day-traders and short-term investors to make money.

In countries where no one has ever heard of the capital gains tax, the practice makes a lot of sense; in the overtaxed world of Europe and the United States, however, it makes none, and for that reason many Western investors are left gasping at the seeming irrationality of the fluctuations in the share price.

For those who pay no such taxes, however, it mkes eminent sense to buy the shares as cheaply as possible, and in the largest numbers possible, and to sell them after even short runs that have produced large gains.

As a hypothetical, let's say that one investor was responsible for one quarter of today's volume, or 1,125,000 shares.

Every cent of movement would give that investor an $11,250 gain. Surely, whether you are wealthy or not, a $0.03 gain of $33,750 is a good day's work. While most U.S. brokerage houses won't allow shorting of stocks under $1, those in other countries may not be so "principled" and will legally sell you all the naked short shares you want.

The new SRO regulation won't tip you to the shorting until 10 days have passed.

But can a single investor be responsible for so much of the action on a single day?

To make a guess at that, you have to look for trading patterns. Usually, while investors like these like to cover their tracks and use anonymous accounts and amounts, you can observe that someone - perhps several people - consistently trade lots of 5,000, 10,000, 25,000 or 50,000 shares. Needless to say, on our board the 50,000-share trades would stand out (and there have been a fair number lately), so the number would likely be 25,000 or so. You can usually count on 10 to 20 of those a day.

These smart traders are a lot like fishermen. They dangle a bait of say, $0.77 shares they've purchased when the market is so thin that three or four buys of 2,500 are enough to move it up a few cents. After they've attracted hopeful buyers with their purchase of say, 7,500 shares at a three-cent premium, usually using the margin debt generated by their better holdings, they invested $225 plus $$24 to $32 in commissions.

They collect when the hopeful lose hope, realizing that to close out their positions they must sell at a loss, and create momentum doing so. Then, their $0.77-cent shares go for $0.74 or less.

For a small investment in $0.77 shares, these traders may reap 100,000 $0.74 shares, and that probably happened today. They can sell them at $0.77 tomorrow during the customary morning surge, or repeat the pattern for a few days until they've accumulated enough to make lots of money in a run.
Over 10 days of trading, a small group of traders can patiently accumulate several million shares. When the big news hits - whatever it may be - they may make $30,000 a cent on a $0.10-cent move. They put $300,000 in the bank and start to play again.

Why should they care if it breaks a buck? What they care about is what they can get it for - they want it cheap - and what they can sell it for in the near term - the hard cash they can spend today for dividend-bearing stocks that produce more margin debt, and tomorrow on an Escalade.

Over on I-Hub, PalTalk and Raging Bull, pumpers are hard at work building a base for the next run, while true believers who have accumulated for the big payday worry for the umpteenth time that it never seems to come.

So goes the game; the fearful true believers part with their shares, the pumpers snap them up as they spin tales of golden riches to come, new believers come forward to buy at their feet on the news, and just like business from the beginning of time, fools and their money are parted.

Be careful. Think. Watch yourself. The winners are few.

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