Pump and Dump

The robber barons of the late 1800’s, names such as Fisk, Gould, Carnegie, and Rockefeller, to name a few, were famous for touting the merits of the companies they owned. Their proclamations sent their stocks to stratospheric heights. However, what happened behind the scenes was a well orchestrated effort to sell their existing shares into the strength of the market, a strength created by their own publicity department. To add insult to injury, they would not only garner profits on the upside, but also short their own companies when the inevitable fall would come. This strategy, totally legal until securities laws were enacted in the 1930’s, was called pump-and-dump.

Unfortunately, the same scenario is happening today. For the past several weeks, the stock market has been led by companies that are fighting for their existence. These companies include banks, homebuilders, and highly leveraged real estate investment trusts. Their PR departments, their accounting departments, and even the Federal government, have been working overtime to paint a rosy picture of the “green chutes.” Sure, first quarter earnings results were positive. Never mind that accounting rules were changed, certain months were excluded, and losses simply ignored. The bank stress test resulted in passing grades for all, but never mind that government criteria was altered after objections from the participants.

With truth in knowledge comes understanding. Unfortunately, it’s too late for those suckered into the infamous pump. For the past eight weeks, insiders have been selling their shares. Most recently, several auto executives sold their last remaining shares of an American icon, GM ($1.15 – 5/12/09)

For those of you who walked into the classic pump, here comes what might be a classic dump. Look out below.

Fisk and the boys would have been proud.

Till next time,

Bill



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