Financial Blog #105 (Market Update #33)- December 5, 2011 (4:16 PM) EST

I have not felt compelled to post a market update recently, because the week to week volatility has made it tough to recommend any type of long term position. While there will always be opportunities for profit, any positions created in this market should be liquidated in a short period of time, win or lose.

Even Gold and Silver prices have been sputtering, and I am not as bullish on the pair as I have been in the past. Silver is still the better pick, but realistically I don’t see the price stabilizing near or above 40$ any time soon.

I am in the process of preparing my growth and income stock portfolios for 2012, and I should be finished by the end of the month. The YTD performance of my 2011 growth pick Dominos Pizza (DPZ) illustrates what I am striving for with my growth picks, however this year I will probably be selecting a more conservative basket of picks. My price target on DPZ was only 20$ (which would have meant a roughly 25% gain), and the price targets for most of my growth picks will probably be in that 20-25% range. My income stock portfolio will have an amount of conservative risk similar to the 2011 portfolio, because investors searching for any type of legitimate dividend are not looking for a high risk or a high return.

While my trading system is going to be based around quickly buying and selling high risk growth stocks that are being pumped through advertising campaigns, I think it is important to provide investors with selections from a range of different risk levels. This way each individual can ideally select their own basket of diversified holdings, based on the individual’s risk/return preferences. 

Outside of my growth and income stock portfolios that I post on an annual basis, I will be focusing most of my research/trading energy toward finding high risk stocks that are in the process of being pumped. For example, this afternoon I created a position in UHLN.PK because a third party has paid for a 170k$ advertising campaign that began today. This means that over the next week multiple stock newsletters will be advertising the stock to countless email inboxes, and accordingly the buying pressure from new investors should push the short term price upward. The key with riding a pump like this one is to liquidate the position before the promotion ends, because the stock price normally tumbles after an advertising cycle is complete. 

While this type of stock advertising is deceitful and immoral to the general public (because average investors end up holding long term and losing while the insiders and stock promoters quickly sell their stock), it is theoretically legal as long as the newsletter promoting the stock discloses who is paying them and how much they are making. In addition it is obviously legal for an individual investor to purchase a stock as an advertising campaign begins, and sell it before the campaign ends. This strategy takes away the advantage held by insiders, because they are planning on most investors simply buying into the story and holding long term. Also, quickly buying in/selling out increases account liquidity by not having a significant amount of cash stuck in one place for an extended period of time. 

The graphs of pump and dumps almost always have a large pop during the advertising campaign followed by an even larger drop after the advertising is complete (as pointed out by Timothy Sykes), and the ideal strategy is to buy a pump on the way up only to short sell the same stock once the promotion ends. Quite a few successful traders have used a similar strategy, and the documented success of Timothy Sykes has convinced me that this general strategy maximizes account liquidity while still leaving room for significant profits to be earned. 

After completing my growth and income portfolios for 2012 I will occasionally be posting other pump candidates under the small cap updates section of my blog, and it should be assumed that any stock picked in that section is only a recommendation to buy for a short period of time. This means that if you are reading one of my small cap picks from 3 weeks ago, it is too late to consider anything besides a short sell on that individual pick.

In review, I plan on posting my growth and income stock portfolios for 2012 as soon as they are complete, however after that most of my energy will be focused on profiting from the buying pressure that is created by stock advertising campaigns. 

(Disclosure: I have a position in UHLN.PK that I plan on liquidating by the end of the week)

Financial Blog #104 (SFIO Update #35)- September 23, 2011 (5:09 PM) EST

I decided to do some research on the details of disgorgement before posting an update, because up until this point I was unfamiliar with the process.    

I found a website that clearly explains the process of how the SEC calculates the amount to be disgorged, and below I will paste some of the important parts.

• As an equitable remedy, disgorgement is not intended as tool to punish, but as a vehicle for preventing unjust enrichment.  The SEC is therefore only permitted to recover the approximate amount earned from the alleged illicit activities.  Disgorging anything more would be considered punitive. (In the case of SFIO, this means that the amount disgorged from the company will probably be in the range of 40k$, unless the SEC attempts to impose additional penalties)
• Establishing any reasonable measure of predictability when it comes to disgorgement, however, has proven challenging.  This is due in large part to the aforementioned lack of detail accompanying SEC disgorgement orders, specifically how the SEC calculates revenue and profit as well as how it weights variables such as the existence of parallel investigations by the DOJ, differing sets of facts, and varying levels of cooperation. (In the case of SFIO this means that while 40k$ would be a reasonably fair settlement, the actual number will not be predictable until the SEC presents the company with their requirements)
•  As things stands now, corporations involved in settlement talks with the SEC over potential FCPA violations have to rely on best-guess estimates in assessing how much the SEC may seek to disgorge. The SEC may ask a company to calculate its profits from alleged violations and outline any assumptions it made in producing these figures; however, this is no guarantee that the SEC will use such calculations. The SEC may challenge a company on assumptions it has made or seek to make its own approximation of profits (In the case of SFIO, this means that a big factor of the total fine will be how the SEC interprets the financials of SFIO, because there are not any paper profits thus far that they can disgorge)
  

(http://www.corporatecomplianceinsights.com/2010/disgorgement-fcpa-how-applied-calculated/)

The bottom line is that this is a positive development for the company and its shareholders, because the first step to regaining trust in the market is settling any legal issues with the SEC. Once that process is complete, the company can continue the long term plan of setting up distribution/marketing partners.  

In addition, the company filed a PPH with the US patent office on August 2nd. Basically, once approved for the Patent Prosecution Highway the examination process is sped up to a maximum of 3 months. This means that by November 2nd the company will receive a decision on the patent approval, and needless to say if approved the patent will be one of the most valuable parts of the company as a whole. 

Finally, I think the Letter of Intent to sell the Belgian Subsidiary for 1M+ in cash plus stock options is good news, but until a concrete agreement is reached there is no point for me to comment further. 

Overall, the company is in as good of a position as shareholders could hope for given the circumstances, and hopefully the Board of Directors continues to meticulously analyze the array of options before them.

Financial Blog #103 (Market Update #32)- August 18, 2011 (2:45 PM) EST

I haven’t written about the market as a whole in awhile, and considering the recent turmoil it seems like a good time to post some thoughts.                                                    

I have been admittedly bearish on the markets for some time now, however I didn’t think everything would hit the fan at the same time. While the S&P downgrade of the U.S. credit is more of a symbolic move than anything else, it nonetheless illustrates the potential problems that lie ahead. The situation in Europe doesn’t look much better, and for these reasons Gold and Silver continue to be a safe haven for weary investors. 

I find it interesting that investors are purchasing treasury bills/bonds (10 year yield hit an all time low today, implying heavy demand from upper end investors), because I wouldn’t touch our government bonds with a 10 foot pole. Why any investor would choose to tie their money up for such a minimal return is beyond me, especially when the returns logged by Gold and Silver are examined in detail. 

I think that everyone (including people that normally don’t invest) should have a minimum of 10% of their assets set aside into Gold and Silver. Even if our country finds a way to elect a conservative President in 2012, I think he will be inheriting such a mess (from the future Senior PGA tour pro who is on vacation as I write this, most likely playing his 5th round of 18 this week haha) that I wouldn’t wish the job on my worst enemy.

Basically, I am predicting a short term rebound if a regular conservative is elected, but those gains will be wiped out once the bigger picture comes back into play. However, if a Libertarian Conservative (my current political stance) like Ron Paul is elected and he chooses to severely cut government programs, I think stocks might be able to have a sustainable run. On the other hand, if the Chief Golfing Officer of the country finds a way to convince emotional and uninformed citizens to vote for him again, I think the markets will continue to plummet. 

All of this implies a limited upside to the market, while acknowledging the fact that significant downside is still present. I would not start looking for individual bargains until the DOW average falls below 10K/S&P 500 average falls below 1K.

I have been researching the positives/negatives of short selling, and I think that put contracts are the correct way to play this market. Unlike short selling they only bear 100% downside, however the upside is normally well over 100%. For example, the 2.50 puts on CIGX were selling for a huge discount (around 10 cents) when the company was priced around 4.00. Even though a short seller would have made less than 50% when it did fall near 2.50, the put contracts jumped in value to a bid of 1.00 (implying a 1,000% return if purchased at 0.10)

Overall, the sidelines look like the place to be at this point, and I don’t recommend average investors to try and correctly time this market. There were a couple of dead cat bounces (penny stock term for a short term increase that is unfounded, and undoubtedly will be followed by a pullback) during the crash of 2008, and the same general pattern will follow in late 2011/early 2012. When a manipulated government report comes out saying that it created 15,000 jobs, day traders use that information to run up stock prices. On the other hand, when bad news comes out of Europe (like today) the markets sell off. It is almost impossible to predict the day to day swings in a volatile market, so I recommend anyone that doesn’t work in Finance to stay on the sidelines for the time being. Good luck to all, because everyone needs luck to make money in this market (that is beginning to feel more and more like a poker table with hustlers taking advantage of average players).

Financial Blog #102 (SFIO Update #34)- July 8, 2011 (3:38 PM) EST

I have been receiving numerous questions about SFIO since the former CEO was indicted for fraud, so heading into the weekend I want to update shareholders on a few things.

First off, I have finished the consumer survey of the ecig, and it turned out to be better than even I anticipated.  I polled 25 people (giant sample size haha), but out of the group not one person said they wouldn’t consider purchasing the product. The main issue arises with the taste of the American filter, because either the Menthol or Virginia flavor was selected as the best taste of the 3 flavors from all of the participants.

This means that the company either needs to improve the taste and aftertaste of the American filter (one user said that they loved the menthol, but the American left a weird aftertaste in her mouth), or heavily promote the Menthol/Virginia flavors to be included in the initial starter kits. I did have a few people that said they didn’t hate the American and that they would use it if there weren’t other flavors, but the Virginia flavor still has a tobacco taste with a soothing aftertaste. I would personally recommend moving the American Filters down to the bottom of the web site (http://www.smokereal.com/pages/Filters-%26-Blends.html), because by listing it first new customers may be led to believe that it is the best/most popular flavor of filters. Overall, this study illustrates a minor problem that can be quickly fixed, but it also shows evidence that the product is well received by the public once it is introduced to them.

That leads into the discussion of marketing, because the nicotine industry is defined by it. Plenty of low quality tobacco items have sold well simply because of a strong advertising campaign, so the company needs to look into an agreement with a high profile figure to promote the product. Both Johnny Depp and Katherine Heigl have been using e-cigarettes in public and on camera, so offering shares in the company to a celebrity (just like OPMG did with Justin Beiber) actually makes alot of sense. The minimal dilution would be more than offset by the increase in market exposure/revenues/attractive distribution offers/etc.

In addition, I think the Board of Directors needs to use their connections to find someone with experience within the nicotine industry to become the new CEO. At this time, the Board of Directors could offer shares of the company to entice an experienced veteran from within the industry to take the position. By issuing shares in lieu of a salary payment, the new CEO would have plenty of incentive to make the company succeed in the short and long term (by increasing his own net worth when the stock increases in value). 

On a side note, the company has been/still is still up and running. The website (http://www.smokereal.com/) is still taking orders and processing them quickly. I received a new starter kit with Menthol and Virginia filters three days after I ordered (with free shipping, I expected it to take much longer). I hope that the new executive team is first and foremost dedicated to integrity, because one fraudulent action can ruin the reputation of an individual/company for a long time.

I would recommend Mr. Roth to immediately look into making the company a fully reporting company, because even horrible financials filed through the SEC give any company legitimacy (as far as integrity is concerned). The product is so impressive that as long as the company is dedicated to legally rolling the product out with no strings attached, Venture Capitalists and other investors will begin to seriously consider large investments. Until then, the company needs to focus on shipping new orders as fast as possible, as well as devising a marketing plan that will expose the smoking public to the product. 

Financial Blog #101 (SFIO Update #33)- July 1, 2011 (1:10 PM) EST

In my post yesterday, I noted that the stock would likely be shut down by the SEC. However, after reading the charges against Tom, and the announcement of his resignation, I can confidently say that the company is alive and well. If the SEC planned on shutting the stock down, it likely would have happened before they announced the charges, so it looks like the company is clear of any wrong doing. 

Accordingly, SFIO ran as high as 225% today, and I am officially back on board for the long run. With Tom out of the way, hopefully the press releases will be free of typos and our ecigs will be free of defects. Enjoy the long weekend and take a deep breath, Joe

Financial Blog #100 (SFIO Update #32)- June 30, 2011 (3:20 PM) EST

I was planning on posting my consumer reviews of the e-cig today, but instead I was forced to sell most of my shares when the CEO of SFIO was charged with fraud. 

This obviously changes everything, because the product means nothing if the company can’t be trusted. The only hope for shareholders would be if the CEO and his cohorts are replaced with a new management team, however the likely scenario is that the SEC will be shutting down the stock.

The penny stock market is obviously a risky one, but I doubt that any of the long term shareholders were prepared for this news. Overall, I am pretty sickened by this news and don’t want to write anything else right now- except that shareholders should sell what they can while they can.

Update (2:11 AM)- I just read the document that details the charges against the CEO and his cohort, and I am shocked that the SEC waited 2 years to charge the CEO with 20K in fraudulent activities (while meanwhile million dollar pumps {LEXG/JAMN/POTG/etc.} fly free as a bird).

Basically, the FBI had an undercover agent posting as a broker, and they offered to purchase restricted shares for a 30% kickback. Even though the FBI shipped 20K directly to SFIO while they were setting them up, it still took them 2 years to actually press the charges. I fully agree with the charges against the defendants, and I think Tom and his cohort should be locked away for years. However, I think their sentences should have started about a year and a half ago after the investigation concluded with 20K being shipped to them. Most of the current shareholders would not have even heard of SFIO if the SEC concluded their investigations in a timely manner. 

In review, the defendants have been proven guilty and they deserve to pay the price. However, the SEC does not deserve a pat on the back for waiting 2 years to actually file a legal claim against the defendants. How can they sit back for 2 years and let the company grow in value (and grow in market exposure) without even hinting at any legal issues???

This whole scenario has me thinking long and hard about how manipulated this market really is (billion dollar hedge fund stock schemes that run without a hitch/Market Makers basically deciding the price of a stock on their own/etc.), and from now on I plan on daytrading with the preconceived notion that I need to liquidate positions quickly (since the market is just like college football in regards to overall corruption, and SFIO is simply the market version of Ohio State in regards to being an example in order to make the average investor feel like the markets are safe and well monitored).

I hope that the CEO understands how many people he has hurt with his actions, and I hope that the SEC finds a way to streamline their process of charging defendants that are obviously guilty. Both parties deserve some blame here, but at the end of the day I hope everyone learned something from this unfortunate development.

Financial Blog # 99 (SFIO Update #31)- June 13, 2011 (2:52 PM) EST

The message board bashers/day traders have continued to scare away potential investors, even though the management team of SFIO continues to meet with various worldwide distributors to discuss the potential of RE/AL. I think it is funny that day traders are posting comments like “bought in at the end of last week hoping for news, didnt get any so im selling this junk”, because the long term shareholders understand that success within the nicotine industry does not happen overnight. 

I honestly don’t know what the daytraders were hoping for in the short term, because competing with the likes of Phillip Morris and R.J. Reynolds needs to be carefully accomplished over time. If the company tied up most of their money in ordering too many starter kits/filters they would risk having stagnant inventory that needed a large amount of storage space (that would need to be rented for a steep price). I fully agree with the idea of entering the U.S. market with a small sample size, because it gives the company a chance to analyze the feedback/results from a limited sample size. If they sold 20 Million starter kits in 2 days and then found some form of deficiency, the name and brand of the company would be severely tarnished.

The product needs to be meticulously rolled out over the next 6 months- 1 year, with each shipment increasing in size and frequency. The company needs to look into renting a storage facility of some kind to store inventory, because they should continue shipping orders on a regular basis regardless of the day to day revenues. I am confident that an established distributor of some kind will agree to take care of the storage/supply/marketing duties in exchange for half of the revenues/profits/etc. (as an example), and I think that is a realistic deal that could benefit both parties over the long run. 

Overall, I am sure that most of the long term shareholders are holding tight, but I want to encourage new shareholders to give the company more than a week or two before selling. This is not the type of industry that allows for astronomical growth over night, but over time the company can efficiently grab 0.5-1% of the worldwide market. Honestly, anyone hoping for news of a Phillip Morris buyout/etc. this month needs to sell their shares to someone that knows what to do with them, because these unrealistic expectations quickly lead to disappointment. I am happy with the progress so far, and assuming that there are no further issues with customs I expect this stock to make a lot of people a lot of money. 

Financial Blog #98 (SFIO Update #30)- May 23, 2011 (2:30 PM) EST

This morning, SFIO officially took a piece of the billion dollar nicotine market with the creation of smokereal.com 

(http://www.smokereal.com)

http://finance.yahoo.com/news/Smokefrees-REAL-Products-Now-iw-263136806.html?x=0&.v=1

For once I don’t feel the need to expand on this news, because it speaks for itself. My order was #525, so assuming a minimum order of 30$ (to keep the numbers conservative) the company has earned themselves a minimum of 15-20K (30-40K will be the likely revenue range for the day) that needs to immediately be allocated for advertising and marketing expenses. 

This is an important stage for the company, because they need to be reinvesting most of the revenues earned back into the business. If the product is properly marketed/advertised to the general public, distributors will be much more likely to offer favorable deals to the company. In addition the new website will need to constantly be updated and reinvented, so cash needs to be allocated for that as well. 

Overall, this is the news that shareholders have been waiting years for. Now that the product is officially on the U.S. market, hopefully the company can get to work on efficiently marketing the product to the masses. On a side note, unless your credit card payments from buying the ecig are due at the end of the month (and you need SR funds) I wouldn’t recommend selling a share.

Financial Blog #97 (SFIO Update #29)- May 18, 2011 (3:20 PM) EST

It has been an exciting week for everyone involved with SFIO, and some shareholders have requested that I make regular or even daily updates about the company. While that may sound like a good idea, I do not want my blog to be viewed as simply a stock promotion site. I only plan to make updates on SFIO when I think I have something important to say, or when the company makes new information public. This will help the credibility of each post I make, because making daily posts will dilute the message I am trying to send.

The volume of shares sold short has been roughly 25% of the daily volume over the past few days, so I think the recent consolidation of the stock price is actually a positive for the company. Normally, when short sellers attack a penny stock it falls near or below its levels of support, thus causing the price to tank even further when stop losses are enacted (on a side note NEVER use stop losses on a penny stock, because the day to day price volatility is large enough that your LOSS will be triggered during any pullback).

There are both positives and negatives that come with having widespread market exposure, but I think the negatives are not fully understood by the long term shareholders. We do not want penny stock flippers to continue trading our stock, because they serve to increase price volatility and uncertainty. On the other side of the coin, the short sellers have been making 100′s of message board posts to scare new shareholders into selling, but for the most part long term shareholders are too smart to fall for their tricks. Overall, anyone that buys or sells stock based on a message board post from some random person needs to look themselves in the mirror and think about whether or not trading stocks is what you should be spending your time on.

This morning, SFIO combined two important pieces of information into one press release, but I think the news of hiring a new director might be more important than RE/AL clearing customs (since it was a given that customs could not hold up the shipment after the FDA ruling that declared e-cigarettes to be nicotine delivery devices).

Tammy Dunn has over 25 years of executive experience, so her addition as a director can only be viewed as a positive development. The company would not be hiring new board members if they were not confident in the long term prospects of the company, and as I recently learned in my Integrated Business policy class, hiring board members from outside the company increases value by bringing new contacts and talents to the company. 

http://finance.yahoo.com/news/Smokefree-REAL-Components-iw-3188988657.html?x=0&.v=1

In addition, I recently found some interesting information about William Whalen (the Vice President of Sales/Marketing). He is the President and CEO of EBS worldwide, an established private company that has distribution contracts with large companies. He graduated from the Wharton School of Business with an Entrepreneurial Management degree, so his pedigree is well established. Some people have been talking negatively about the marketing strategy of SFIO, but I am confident that the best business school in the world gave him the knowledge to know the most cost effective way to market the product and company.

I also found out some interesting info about the type of filter used on the new RE/AL cigarette. EVERY OTHER COMPANY BESIDES SFIO uses an awkward plastic filter that does not feel like a cigarette when people put it in their mouth. SFIO has exclusive rights to use a filter that is soft and not made of plastic, meaning that cigarette smokers will not feel awkward using it for the first time. This is an important fact that continues to differentiate SFIO from all of the competitors, and I am anxiously awaiting the opportunity to purchase a few packs and conduct a satisfaction survey with friends/family that currently smoke cigarettes. 

Current shareholders need to maintain their positions, and liquid shareholders should be adding more shares during any pullback. It is perfectly natural for the stock price to pullback every now and then, because it is nearly impossible for a stock to continue to rise without any resistance levels. I have not sold a single share yet, and I do not plan on selling anytime soon. Feel free to comment below and let me know what you think, but generally speaking the company is continuing to move in the right direction. 

Financial Blog #96 (SFIO Update #28)- May 11, 2011 (5:52 PM) EST

I have not written about SFIO for nearly a year, but I want to take a minute to congratulate the patience of shareholders.  The bashers on the message boards have been ruthless over the past year, in one case even scaring away a potential distributor from signing with the company. While it is illegal to post false information about any stock, it is also costly and difficult to prosecute those that are guilty (not to mention that the SEC is too worried about billion dollar Hedge Fund Frauds to care about OTC message board posts). 

Even though risk aversion is normally a healthy and positive trait, in the case of SFIO I recommend assuming the risk associated with creating or maintaining a position. My reasoning is simple- the risk of losing a few hundred or thousand dollars during a pullback is worth assuming, because the potential return is so astronomical it can only be accurately calculated with an excel spreadsheet. 

The worldwide market for nicotine is worth billions of dollars, so the impending release of the REAL cigarette can not be emphasized enough. The legal team SFIO retained has previously advised them to avoid the U.S. market due to possible legal concerns, however the recent FDA ruling that declared e-cigarettes to be nicotine delivery devices (instead of DRUG delivery devices) has opened the door for healthy competition within the states. The time to spring into action is now (before cash cow competitors saturate the industry), and that is exactly what SFIO is doing.

One of the more damaging rumors involved a fake email supposedly sent from the filter supplier stating they had no business relationship with SFIO. This obvious fabrication caused the stock price of SFIO to plummet, however last friday they announced that their filter supplier has agreed to be the exclusive worldwide distributor of the REAL e-cigarette.

http://finance.yahoo.com/news/Filter-Manufacturer-Signs-iw-1038707595.html?x=0&.v=1

In addition, this morning SFIO announced that shipment of their REAL e-cigarette has arrived, and is it clearing customs in time for next week’s product launch.

http://finance.yahoo.com/news/Smokefree-REAL-Cartons-iw-4026315713.html?x=0&.v=1

Accordingly the market has reacted by snapping up shares, and in the process the price has risen over 1000% in the past week even after day traders started to take short term profits this afternoon. Unless the money in your SFIO account is needed for short term expenses, I highly recommend holding as long as possible. A number of stocks have quickly risen from 1 or 2 cents to over a dollar, and once this breaks resistance levels the sky is the limit. 

Personally, I will not be looking to take any profits until the stock hits a minimum of 25 cents per share, but realistically I am hoping to hold most of my shares until the price reaches a minimum of 50 cents per share. The nicotine market offers multiples comparable to the pharmaceutical industry, so projecting a potential market cap of 100-200 million is not pie in the sky thinking. If SFIO can even acquire 1 or 2% of the market they will have no problem reaching a 100M market capitalization, and once that point is reached a buyout from a large cash cow will become even more likely. 

In review, I recommend all current shareholders of SFIO to maintain their positions, and I recommend anyone that has guts to create and maintain some form of position in SFIO. In a worst case scenario the product will be successful enough to justify a 20-25 M market cap, meaning the current market cap of roughly 12.21 M is still undervalued. The average scenario will see a moderately successful product justifying a 40-60M market cap, but the best case scenario will see a differentiated and value creating product that justifies a 100M+ market cap.

While different investors might think a certain scenario is more likely (based on each person’s natural pessimism towards risk), the point here is simply that SFIO will continue to appreciate in value as the product takes a piece of the U.S. market. I want to thank the executives of SFIO for persevering through the rough times and rewarding the patient shareholders by creating additional value, and I want to congratulate the shareholders of SFIO for owning part of a company that will make a positive difference across the globe.