There was a lot of collective head scratching last week surrounding shares in a so called “pink sheet” (effectively a very lightly regulated OTC market in the U.S. whose companies do not meet typical listing standards) stock CYNK Technologies. From trading at just 6 cents only weeks ago, the shares reached a peak of nearly $22 on Thursday this week resulting in a market capitalisation of almost $6bn. That, for the non mathematically minded by the way, is a rise of a cool 35,000%…
For a company with just one employee, a barely functioning website, negative net assets and no discernible turnover, it is the ultimate example, perhaps ever, of why those proponents of “Efficient Markets Theory” should be collectively drummed out of the business!
Madness in motion!
What caused this almighty rise? Well, there were many factors at play…
First off is the limited free float with over 70% of the stock in the hands of the CEO Marlon Luis Sanchez. This particular chap briefly became a multi billionaire – on paper. When a stock has very few shares available for trading (the so called free float), then it becomes more volatile. What adds fuel to the fire is the classic “short squeeze”. Essentially, if no new stock is made available (which we’ll come back to) then those shorts that sell stock to another market participant, and very likely sell them “naked” (that is without the borrow arranged), absent new supply coming on stream to halt or force the supply/demand point lower, then these new shorters wind up with losses as the stock rises in a type of vacuum. They are thus forced to become, irony of irony, buyers of the stock to limit their losses. These short traders who attempt to exploit the overvaluation in fact actually proceed to create even more incremental demand into an already very tight stock supply situation…
The difference with CYNK and most other full list stocks is that the principal owners of the stock were very likely unable, from a regulatory perspective, to sell their stock. Given the magnitude of the rise that was experienced, a charge of market manipulation could very well have been levelled at Mr Sanchez. And so, we have the situation where more shares are being sold short than there are available for immediate cover. A classic virtous rising cycle, albeit in this case of a super extreme variety.
Cynk Tech was originally incorporated in Nevada as a, yes you guessed it, a “social media” company (in other words lots of eyeballs, information and “gossipy” exchange but not a cat in hells chance of EVER making any money to justify a modest valuation. Twitter anyone?). According to its filings, the company is in fact a social media development company. This company has $39 (no zero’s missing, you read it right – $39 only) and wth a negative equity reporting of $51,572 it is actually insolvent. This didn’t stop it being valued at more than the likes of Jetblue, Domino’s Pizza etc until it was dramatically suspended on Friday before the open with the SEC finally stepping in to halt the madness. In theory, if not new stock was sold and more shorters were tempted to the flame then the stock could have continued rising. Whenever you short a stock remember this story and how suppy/demand can literally take your eyes out.
According to the company’s statements, Cynk is at the “development” stage, and is seeking funds to create a social network business. Cynk’s main business is in fact a website called introbiz.com which bills itself as somewhere to “buy and sell the ability to socially connect to individuals such as celebrities, business owners, and talented IT professionals” (quite who would want to do this on both sides is personally beyond me). The front page features a host of stars, including Angelina Jolie, Channing Tatum, Johnny Depp, Benedict Cumberbatch and Peter Dinklage and there seems to be precious little in the way of activity on the site.
To us, the likes of the CYNK madness that we have witnessed in recent weeks is yet another side effect of the pernicious result that derives from the ultra accommodative monetary policy taken by most of the major central banks in the world at the same time. Investors seem to believe that systematic risk is now non-existent as evidenced by the chart below which shows that over the last 20 years rarely has the perception of risk been priced so lowly. In fact it is closing on a 3 standard deviation move from its long term average – an almost unprecedented event.
Vix chart displaying periods where it has moved by 2 and 3 standard deviations from its long term average
At the major turning points in the markets, collectively, investors, analysts, fund managers etc are ALWAYS wrong. Here at Titan we are thankful for this fact as it provides us with the opportunity to position AGAINST consensus. This is precisely what we have done this last year in our Precious Metals and Natural Resources funds that are in unloved, underowned and most importantly, CHEAP sectors. Below are the returns we have achieved YTD (to 30 June) in these funds.
In our Global Macro fund we are also now leaning into a net short stance in the expectation of a decent drawdown in equities over the coming months. Again, below are the returns we have achieved here YTD (to 30 June).
Returns are gross and exclude Titan’s fees.
Incidentally, I personally shorted a decent lump of CYNK Tech stock at just under $20 last week and bought them back the same day at just over $14.60c! The trick is finding the point of maximum madness – and that is always more judgement than science.
If you’d like to learn more about how we are pioneering a completely new approach to fund management – one that is not rigid in “style” but bends with the market environment, one that can go both long and short and apply leverage judiciously, one where we have our OWN money invested alongside you and where our fees come almost exclusively from the production of absolute returns – in total contrast to the fund management industry en masse, then click the banner below. Best of all, the returns we generate are totally tax free too!
R Jennings CFA, Titan Inv Partners.
Tax legislation can change and you should always take independent advice in relation to your own personal financial circumstances.