Bernie Madoff scandal spells the end of funds of hedge funds

Not one of the hedge funds of funds or banks that steered investors to Bernie Madoff’s funds has admitted their idiocy in failing to spot huge red flags. They have all tried to blame the SEC and other regulators. While the regulators failed spectacularly, even a successful effort on the part of regulators could not have stopped Madoff before he had harmed many investors. That was the case with Enron, with Bre-X, with US Windfarming, and with every penny-ante Ponzi scheme. A regulatory authority cannot act until a crime has been committed, and because of the need to prove a crime, there is little chance of stopping frauds when they begin.

On the other hand, investors (particularly funds of funds and banks, which have the skills and money to conduct thorough due diligence) only need to suspect that something is not right to choose not to invest and avoid losing money to a fraud. That is why I chose not to invest with US Windfarming (even though at the time I knew nothing about investing). If the large investors had done even a modicum of due diligence they would have seen the red flags such as the size of Madoff’s auditor and his insanely consistent returns.

Some commentators have argued that the Madoff scandal will harm hedge funds. That is likely, but the effect will be much greater on funds of funds. If an annual fee of 1.5% of assets under management does not mean that a FOF will perform basic due diligence, then FOFs are doomed. Even in the best of circumstances there is little point to FOFs. I predict that the number of funds of funds and their assets under management will shrink by over 80% in the next couple years. The world will be a better place as a result.

Calling the Bottom on Junk Bonds

Okay, maybe it is not the bottom, but I am willing to bet that junk bonds will offer a good return on investment for those who invest now. At current yields, over 20% of the companies in a junk bond portfolio would have to go bankrupt for the portfolio to lose money. Large investors of course should pick and choose, avoiding bonds issued by private-equity backed companies. For smaller investors, the JNK ETF may be worth considering. It currently has a 19.99% SEC yield. The NAV at yesterday’s close was $27.22. I may buy a small bit of JNK in the near future.

Disclosure: No positions.

Some topical poems (with apologies to Carl Sandburg, WH Auden, and WB Yeats)

PILE the forclosures high in Las Vegas and Bakersfield.
Shovel them under and let me work—
I am the deleveraging; I cover all.

And pile them high in Phoenix
And pile them high in Detroit and DC.
Shovel them under and let me work.
Two years, ten years, and people ask their friends:
What place is this?

Where are we?

I am deleveraging.
Let me work.

—
The Banker does what bankers can,
Deeds quite impossible for Man,
But for one prize he shall always yearn,
The Banker has no ability to learn:
Among his grand earthly things,
the emptiness of his soul now stings,
The Banker stalks one last deal,
as in pain around him we all now reel.

—

COME play with me;
Why should you run
Through the empty streets
As though I’d a gun
To strike you dead?
Oh I’m just a taxpayer
and you’re a bailed-out banker
Run fast or die!

Who is reading my blog?

Employees at some of the following institutions have been reading my blog in November. In parentheses is the number of visits (not hits) from each.

CIBC World Markets (26)
Raiffesen Pension Fund Management (20)
Stifel Nicolaus (9)
Visual Trading Systems LLC (9)
Google Inc (5)
JP Morgan (5)
Wachovia (3)
Singapore General Hospital (3)
Deutche Bank (3)
Forbes (2)
Morgan Stanley (2)

In November I had visitors from 68 countries and every state in the US except for Alaska.

Help your friendly blogger: Touchscreen monitors

I have not written much for this blog recently.  The primary reason for this is that I have been suffering from RSI on my wrists.  This has made using the computer difficult and painful; I’ve tried to minimize my use of the computer.  Using voice control software for my has helped.  However, I am also looking into getting touch screen monitors to replace the four normal monitors on my computer.  That way I will not have to use the mouse (the source of my wrist problems) at all.

I’m looking at monitors from Planar Systems and Elo Touch Systems.  If you have any recommendations for a brand of touchscreen monitor or for a type of touch screen monitor (resistive, capacitive, SAW, etc.), I would be much obliged.

PhotoChannel Networks: I’m Right, Once Again

I just thought I would highlight my comments on a Seeking Alpha article praising PhotoChannel Networks (OTC BB: PNWIF) from four months ago. Since I wrote my bearish comment on the article the stock has fallen over 50% and the company has continued to report significant losses.

Unfortunately, while I had been short PNWIF back in June, I covered my short before the stock fell.

Disclosure: I have no position in PNWIF.

Now is a Good Time to Buy Back Stock

Many companies borrowed money to buy back stock when their stock prices were high. Now that stock prices have fallen they are conserving cash. That is backwards. One tiny little company did the opposite. That company is TSR, Inc. [[tsri]]. I have previously written about TSR, recommending it when its stock price was about twice as high as it is now (oops), and then writing about my attempt to get the company to spend its cash hoard. The company instituted a buyback plan but bought few shares. Then today it announced that it had just bought back over 10% of the outstanding shares at a price of $2.30 per share. At this price the company bought its stock for 80% of its net cash + receivables + Treasury bonds. This will be accretive to book value per share and will not harm the company’s liquidity. That is how companies should use buybacks.

From the press release:

TSR, Inc., (NASDAQ:TSRI – News) a provider of computer programming consulting services, announced today that it had repurchased 456,523 shares of its Common Stock in a private transaction at a purchase price of $2.30 per share. The repurchase is in addition to repurchases that may be effected from time to time pursuant to the Company’s previously announced stock repurchase program. Pursuant to the stock repurchase program, the Company’s Board of Directors has authorized repurchase of up to 300,000 shares, of which approximately 61,000 have been repurchased. There were approximately 4,500,000 shares outstanding prior to the purchase.

At current prices I believe TSR to be an excellent investment. By my calculation, the company’ recent buyback increased the per-share net quick assets (net cash plus marketable securities and receivables, including non-current treasury bonds) to $2.97 per share from $2.90 per share. At $2.30 per share it is at under 80% of net cash plus marketable securities and it trades at a P/E of 11. The stock is illiquid, so anyone buying it should use limit orders.

Disclosure: I am long TSRI.

How to Get Rich Trading Penny Stocks

I first heard about Timothy Sykes at the beginning of this year. I was skeptical of his claims of making lots of money trading and even more skeptical about his ability to teach others to trade successfully. My article, “Timothy Sykes is Full of Bullship,” started a dialogue between Tim and myself. I started reading his blog and following his trades. I read every single blog post he had ever written. I became convinced that he was a talented and profitable trader and that his trading system worked. I then decided to subscribe to his TimAlerts trade service, where he sends out pre-market watchlists and alerts of his trades via email, to see if I could profitably follow his trades.

In the chart below you can see my profits from trading Tim’s system. Sometimes I followed his trades, sometimes I didn’t, and sometimes I traded stocks he did not even find. I started out trading small and increased the size of my trades over time (the red and fuchsia dots indicate where I increased my max position size).


(note: while the blue squares represent trades, many of them are me just adding to or gradually closing positions in what is essentially the same trade)

As you can see from the chart, I have done well. In just over 3 months I have made $40,000 trading his system. In one trade yesterday I made $19,000 in two days. But the amount of money I have made is not nearly as impressive as the lack of drawdowns that I have had. The one large (percentage-wise) drawdown I had (on 7/29) was my first trade after increasing my position size and it was an accidental trade that I did not even mean to make! Otherwise, my maximum drawdown was 15%, and even that was due to making a dumb mistake–getting too large of a position in an illiquid stock.

After my success trading Sykes’ system, I became the first lifetime subscriber to TimAlerts and wrote a blog post, “Why I Paid Timothy Sykes $2,000.” So, if you ever consider trading stocks (and not just buying and holding index funds as an investment, which everyone should do), then why not learn from Tim Sykes, one of the few people who makes money trading and has demonstrated an ability to teach others how to profitably trade. I recommend reading his blog, buying his book, and signing up for TimAlerts.

If you doubt my performance of Sykes’ performance, I suggest visiting Covestor, where all of Sykes’ trades and some of mine have been verified directly from our brokerage accounts.

Disclosure: I am a customer of Timothy Sykes and am the first TimAlerts for Life member. I am an affiliate of his and make a 25% commission on any sales he makes through the links on this article.

Cytocore: I was Right (of course)

It is always nice to be right. It is even better when I am right after being heckled and threatened by fans of a junky little penny stock. I first criticized Cytocore last autumn for making inadequate disclosures of a reverse share split (I should note that the company did apparently fulfill its legal duty to report the split in its 10k, but for four months there was no way for a visitor to EDGAR or to the company’s website to ascertain the true number of shares outstanding).

I then reported on some of the vitriol I received in response to the first article (which surprised me, because that first article was rather tame in its criticisms). Most recently (back in mid-February) I criticized the management of Cytocore for painting an overly rosy picture of the company.

I am happy to report that so far this year Cytocore (OTC BB: CYOE) stock is down 60% to $0.75. Despite having touted its many distribution agreements (including in Italy, Spain, Portugal, and the USA) for its cervical cell collecting device (for use in pap smears) over the last year, the company’s most recent 10Q reports a negligible $82,000 in revenue for the first half of this year.

While I wish the company luck in its endeavors, Cytocore’s business performance and disclosures leave much to be desired. Investment in the company would be foolhardy.

Disclosure: I have no position in Cytocore. I have a disclosure policy.