One longstanding mantra in the investment world has always been, buy on rumor, sell on news. But thanks to social media, and a 24 hour a day business news cycle, this paradigm has gone much further than ever before, and where the media has become the platform for stock manipulation created on many levels.
We can recall a few months ago how weight watchers stock soared in the aftermath of an announcement that billionaire media mogul Oprah Winfrey had purchased a stake in the company, despite the fact that the fundamentals for the company had not changed. And in a unique instance of speculation gone wrong this week, a short seller of a bio-tech company was suddenly crushed simply because an infamous name in the investment community stepped in to buy half the company he was shorting, and it has led to a margin call of extreme proportions.
Less than a week ago, one of the countless fly-by-night biotech penny stocks, drug developer Kalo Bios Pharmaceuticals said it would wind down its operations and that it had engaged restructuring firm Brenner Group to help liquidate its assets. The company said it was “highly unlikely that exploring strategic options could generate a viable transaction within the time frame, given its limited cash resources.”
At that moment the stock was trading between $1-2/share, representing a market cap between $5 and $10 million, or in other words, liquidation value.
As KBIO announced after the close, the company “has been informed that an investor group comprised of Martin Shkreli and associates together have acquired more than 50% of the outstanding shares of KaloBios, and that the company is in discussions with Mr. Shkreli regarding possible direction for the company to continue in operation. Mr. Shkreli is the founder and chief executive officer of Turing Pharmaceuticals, a privately held biopharmaceutical company.
As a result, the stock exploded higher, and has since hit a whopping $16/share in the pre-market, an increase of over 650%. – Zerohedge
This almost instantaneous move caused an online trader named Joe Campbell to not only lose his entire position, but to also become in debt $106,000, requiring a margin call that he currently cannot cover.
So what does a speculator in the casino of Wall Street do when their risky bets go South? They look to crowdfunding of course to bail them out.
I hesitated on doing this but I literally owe Etrade $106,445.56 as of this moment what would you do if you were in my situation? I’ll do whats needed and sell what I have to get them paid but if someone feels my pain and is willing to help out—who am I to say no? – GoFundMe
Investing in paper markets, especially in today’s utterly manipulated ones, is a game that only insiders and absolute professionals can play., and even they know to use stop losses or limited orders to hedge their risks in an extremely volatile market system. And while we hope from afar that Mr. Campbell can find a way to cover his losses without resorting to bankruptcy and hardship, one does not learn from their mistakes by having others bail them out, as it usually leads to even more bad behaviors and choices since pain is very often the necessary lesson for achieving wisdom.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.