Rocket science in finance

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

KSC-65P-0205What happens when the laws of supply and demand hits an equity with only four and half million outstanding shares of which less than half are free float?

In one word: Blastoff

Over the last weeks, MTSL, the equity for MER Telemanagement Solutions has twice become the object of desire for someone in the market, resulting in the rapid trading of 200 thousand or so shares per day for each occurrence.

I have written extensively about MER Telemanagement Solutions and MTSL: First, reflecting an unprecedented speculative run-up which occurred over the later part of last year and early part of this year in spite of near certainty that the company would lose its single most important contract (read about the warning signs here,) and, second, reflecting a strong buying opportunity that emerged once the company announced that it had indeed lost the contract and the speculative wave receded with far greater velocity than it had emerged (read about the opportunity here.)

The market’s reaction to the loss of the contract, which was guaranteed until the end of 2013 and, therefore, would not impact the company’s financials before sometime in 2014, was severe with the per share price of MTSL dropping from $5.11 to $1.56 in a very short time period (read about the company’s announcement and the subsequent collapse here.)

The severity and velocity of the reaction was not a reflection of a change of the company’s fundamentals, but rather a reflection of the nature of the speculative run-up in late 2012 and early 2013. In fact, through 2013 the contract, a high revenue, high margin vehicle, would be intact and would allow the company some breeding room to replace the revenue stream in 2014 and/or reduce expenses to offset the loss of the contract.

And that is exactly what the company did, securing three new contracts, which as a minimum establishes the potential for minimizing impact of the loss of the terminating contract. In the meantime, of course, the company’s free cash-flow from the terminating contract keeps gushing pushing the balance sheet, with zero debt and huge amounts of cash, towards the point of absurdity.

A lot of speculators was burned when the per share price of MTSL imploded, and it is not clear if they will be up for a second swing at the home plate, but now, with the quarterly earnings announcement coming up, larger players in the market are certainly taking note and they want in.

Unfortunately for serious buyers, however, there is very limited free float, and, so, any attempt at serious accumulation creates and immediate effect, driving the price significantly up. This, of course, is not surprising given the pent up pressures from the buyers who got caught at the +$5 part of the price curve and have to sit tight.

Over the last month, or so, we have seen this effect clearly when, on two occasions, a buyer has attempted to capture 200 thousand shares:

New Diagram

There is a long way to go to the pain threshold point of $5.11, but it sure is a pretty picture for anyone who bought at $1.56

Caution

This blog posting is getting a lot of hits from Profit.ly, the brainchild of Mr. Timothy Sykes.

Profit.ly is also the base of a fellow named Paul who acts under the handle Super-trades and likes to dress in a Superman outfit while, bizarrely, telling his followers (Profit.ly is a subscription service which purports to be able to make almost anyone rich and Paul is one of its coaches, and, so, he has followers) that he is a CPA and, therefore, he can read data faster and better than anyone else.

I am compelled to tell you that if you arrived at this site by way of Profit.ly in general, and from recommendations from Paul or any other individual in particular, you need to carefully read the disclaimer in the above. Also, I urge you to carefully read Paul’s postings on SeekingAlpha and carefully consider whether or not his analysis and predictions were accurate and whether they presented an unbiased view of the opportunity inherent in MTSL in early 2013.

You can read Paul’s postings here and, including a posting (here) in which he set a pie-in-the-sky, and evidently almost completely unsubstantiated, price target of $10 for MTSL. Also, you can read a posting (here) where, in the midst of the collapse of MTSL’s per share price, he stated that he believed that the per share price would rebound to $6, or so.

I urge you to act prudently and consider carefully if you are running the risk of being caught up in a pattern where you will get left behind at the share price peak (as happened to many when the per share price of MTSL broke down from $5.11) and whether or not your interest at that point is aligned with those of Paul and his fellow coaches at Profit.ly.

Now, don’t get me wrong. I have no issue with the business model of profit.ly or with Paul (except when he claims that he is good at analyzing filings, researching companies, and setting price targets, which, following my You are either criminal or stupid, pick your poison logic, I would assume that he is not.) In fact, if there are people out there who believes that they can make money simply by paying a monthly fee, logging into a chat room, and duplicating someone else’s move, then I say more power to the people that will give them a product that fit with this belief. As the saying goes: “A fool and his money are soon parted.”

I remind all readers, that trading, in general, and momentum based day and swing trading, in particular, is a risky venture where the probability of consistent and considerable loss is overwhelming (although not as bad as ForEx traders 95% loss record — truly the most staggering loss record of any industry, including multi-level marketing and other shady schemes,) and where you, if you do win, do so with very low returns.

Courtesy of Paul B. Farrell’s blog, The Wall Street War Zone (here,) we know from a study that:

  • The average winning trader did in fact repeat as a winner, netting $251 a day after transaction costs. But overall, things were so bad that 82% of all the traders lost money, for an average loss of $45 a day.
  • That’s right: Out of 925,000 traders in the study, about 750,000 of them were losers. And assuming 250 trading days a year, each trader lost roughly $11,250 a year for a total loss of about $8.4 billion annually.
  • On the other hand, the 175,000 repeat winners each made an estimated $62,750 a year after transaction costs, for a total annual gain by the winners of roughly $11 billion. So even the small number of the top-performing traders made only $62,750 a year for all their risk-taking.

Blindly following other momentum traders is, of course, folly, adding additional risk to what is already a risky venture, as the followed traders have a very strong incentive to urge their followers on while — silently, in the manner of Michael Caine’s infamous duck: Calm on the surface, but paddling like the dickens underneath — liquidating their own positions.

Also, I want to emphasize that while I believe that there is explosive opportunity in MER Telemanagement Solutions and MTSL, this belief is mine and, as it is the case with any belief, this belief may be erroneous (after all it used to be a commonly held view that the world was flat.) Moreover, my belief that an opportunity exists is anchored in a number of assumptions, which mostly are unstated and the failure of any of which would completely undermine the potential opportunity.

Finally, the opportunity that I see is a medium to long term opportunity, not a day trading or swing trading opportunity. There may very well be such opportunities, and I would say that the links from Profit.ly and the trading activity on August 6th and August 7th imply that such opportunities are already being played out, but these will be predicated on speculation in momentum and, as such, is something that I neither understand (except that it involves passing a bag up the line until there no longer is someone to pass it up to in which case the person holding the bag, commonly referred to as the bagholder, is hosed,) nor endorse.

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