Unlike foreign currencies which trade in a huge, global marketplace, stocks of small companies can lend themselves to manipulation and fraudulent practices more readily. The primary reason for this has to do with the nature of the stock market and the comparative lack of liquidity which does not usually present an issue in the currency market because of its size and depth.

As a result, stocks tend to be more carefully regulated and monitored by agencies such as the Securities and Exchange Commission which was founded in the aftermath of the huge stock market crash of 1929. A variety of different fraudulent practices involving stocks are listed in the sections below.

Corporate Fraud

Corporate stock fraud usually involves officers of the corporation disseminating false or misleading information in order to increase the value of the company’s stock. They do this in order to later sell the stock at the artificially inflated price. Enron was a classic example of a corporate stock fraud.

Other ways that corporate executives perpetrate fraud to manipulate the stock market include: making large purchases amongst several colluding investors in order to make the stock appear to be under accumulation by third parties. This might then prompt other investors to buy the stock at inflated prices.

After taking the stock price higher through these pre-arranged transactions, the stock is subsequently dumped by the perpetrators at the inflated price. This falls into the general category of a “pump and dump” stock scam.

Churn and Burn

Another type of stock fraud involves unscrupulous stock brokers that overtrade in their customer’s accounts in order to charge an excessive amount of commissions. This type of fraud is widespread and is not particular to the stock market.

Any financial market where a broker performs executions of financial instruments, especially on a discretionary basis, is subject to this type of fraud. Unfortunately, many people have no idea their broker is doing this if they have given the broker power of attorney over their account and do not monitor it closely.

Pump and Dump

This form of securities fraud has become especially widespread since it now often uses the Internet for the pump part of the scheme to artificially inflate a stock’s price. Con artists employing this scam disseminate fraudulent information via chat rooms and by spamming people’s e-mail accounts.

The false information will typically produce a rise in the stock price. At this time, the fraudsters dump their stocks and the subsequent investors lose out. This type of stock fraud works best with thinly traded and illiquid stocks that have little public information available about them.

Insider Trading

This type of securities fraud is performed by the corporation’s key personnel, directors and holders of a large percentage of the outstanding stock or other corporate insiders.

Basically, the fraud involves such insiders who trade on information which is yet to be made public. This might include such things as a pending corporate takeover or a disappointing earnings report, for example.

Other Stock Fraud Situations

Corporations can sometimes “cook the books,” which involves the corporate accounting of the firm, making it appear the company is doing much better than it actually is, making the stock price reflect the distorted information and defrauding investors. This sort of fraud came to light recently in the huge Refco case that forced the company into bankruptcy shortly after its Initial Public Offering or IPO.

Shorting stocks, which involves borrowing stock in order to initiate a short position, can also be fraudulent if done with the intent to profit by subsequently disseminating false or misleading information to make the market in the stock drop. “Short and distort” is the common term for this sort of stock fraud.

I believe politics and government will affect the economy significantly. With our current economic crisis and the people’s belief that the government must “do something,” I think we’ll see a lot of intervention.

During the fall crash, it was primarily a deflationary moment. While gold did decently as a safe haven, most commodities crashed along with the stock market. The dollar and treasuries roared. People bought dollars to deleverage their debt (which was primarily in dollars) and bought US treasuries as a safe haven investment (which also increased the value of the dollar). I believe these actions were misguided and the opposite will be the case in the future.

America is a society drowning in debt, and the signs point the society will become more deeply in debt. Government debt is approaching 100% of GDP. This in of itself is not terrible; however, the deficit itself is about 20% of GDP this fiscal year and I think it will likely stay as high as 10% of GDP. Even though the government will likely do less stimulus programs in the future, the unfunded liabilities of medicare and social security will take their toll.

Besides government debt, people and corporations are drowning in debt too. The US government debt had been primarily bought by foreigners, particularly China, since the US people didn’t have the money to loan to the government. However, China will likely not be so quick to give a blank check to the US government. Not only are their exports suffering (thus less money to lend), there is more US government debt than ever and China is wisening up to this potential calamity.

I dont’ think we will see amazing economic growth anytime soon, which the Obama administration seems to happily assume. Our politicians are attempting to transform America into a social welfare state, similar to European countries, where growth there is 1-2% in good years (not 3-4% as Obama expects, and this makes a big difference over time). The stimulus package mainly went to entitlements, not investments. Corporations face a higher corporate effective tax (as Obama has said he will close loopholes). Small businesses (people making $250k+) will face higher taxes soon. More regulations are coming. Environmental regulations will likely increase energy costs.

The outlook for growth is pretty abysmal, but the outlook for debt increasing is crystal clear. People like their entitlements, particularly social security and medicare. Politicians are slow to change the system that does anything but expand these entitlements. The sluggish growth will be a continued drain on tax revenues, so less revenue will come into the government, but more and more demands for entitlements and social welfare programs will continue. Our debt will balloon.

What’s the best way out of debt if you can’t default? How can you magically make the debt worth less? Inflation of course. With more US debt being issued, the yields will likely rise on the debt (hence my short position on treasuries). People won’t be willing to loan to the US at 4%, they may want 8% (or as high as 12%, like it was during the early 80′s). That will of course kill all lending to business and consumers, so the Fed will be pressured to buy more debt to lower yields. This will trigger inflation.

I like silver as the best hedge against inflation since I think it is more attractively priced compared to gold. The gold/silver ratio is still in the high 60′s, something that I think is a bit absurd since silver provides many of the investment advantages of gold. However, silver is ‘cheaper’ so I think the jewelry market for silver won’t get hit as badly as gold…people simply can’t afford gold jewelry compared to silver. Also, silver has many industrial uses much like copper. If you look at the early 80′s gold/silver boom, the ratio fell closer to 30 at the peak.

The deficits we are running and our debtload as a percentage of GDP are unheard of in peacetime. The last time our government was borrowing at such a massive rate was WWII, and prices nearly doubled between 1941-1950. Since our whole society is in debt, the easiest way out of this dilemma is a period of moderate inflation, which will allow for the debts to be wiped away and hopefully positive restructuring to be done for the future. The process will be painful. Cash holdings will drop in value and holders of fixed-income debt (particularly treasuries) will get slaughtered. Holders of commodities, especially precious metals, should make out like bandits though .

Note: Author is long SLV, SSRI, GLD, USO. Short TLT.

When the public starts to believe that a certain type of asset has nowhere to go but up, generally it’s a good bet that it’s going down. There is widespread debate over the cause of the increase in the price of oil. Those bullish on oil claim it’s a simple supply/demand issue. The supply of oil is relatively stagnant, but the increase in demand from countries like India and China are rocketing up the price. Furthermore, the decline of the US dollar has also raised the price of oil.

However, many believe that oil speculation has resulted in an increase in the price of oil. People are buying oil as a hedge against both inflation, the weak dollar, and any economic slowdown caused by an increase in oil prices. The volume of trading of the USO ETF more than hints at the public’s raised interest in the price of oil.

I’m no oil expert, so I’m not going to pretend like I have some special insight into the supply/demand fundamentals of oil. However, one thing I consider myself pretty good at is spotting where the ‘dumb’ money is placing its bets. From what I can tell, these investors seem to love the oil trade, since they it seems like oil will only go higher and higher. They keep repeating the same old logic of the raised demand/stagnant supply, which while it merit’s a rise in oil prices, doesn’t mean that oil prices will rise forever.

Disclaimer: Author is short USO

Now, however, there are increasingly viable, cheap alternatives. Google docs, its free online service, is almost identical to Word/Excel, except you don’t have to pay a dime. Also, since it is saved online, there is no worries that your computer may crash. You can also access these documents from any computer, as well as easily collaborate on them with other people. In the past, I did all of the accounting for my businesses on Excel. Now, I use Google Docs because it is both free and superior in my opinion.

In addition to Google Docs, the increasing use of Macs should be cause of concern for Microsoft. Right now, Apple is the “hot” brand and people can’t get enough of these types of computers. No Mac user in his right mind will shell out $300+ for Microsoft Office for Mac, when he can get Apple’s version for about $89.

I also don’t see Microsoft expanding its online presence anytime soon. Few people use the msn.com search engine, and it’s likely not going to attract anymore users anytime soon. There’s simply no reason to, as Google is still the superior search engine. Its portal, msn.com, is also vulnerable if Google starts a portal site similar to it. Google is already moving into the portal space, with the launch of its beta finance site (finance.google.com), as well as the success of Gmail.

In my opinion, Microsoft’s failed attempt at buying Yahoo is a sign that the company has run out of ideas and is desperate to remain a player in the consumer sphere. Microsoft’s products are no longer cutting edge; the main reason people use them is simply because they have been using them in the past. With Google and the increasing competition from Apple, Microsoft is increasingly on the defensive, and I expect its stock price to take a hit over the next couple of years.

Disclosure: Author is short Microsoft (MSFT) and Yahoo (YHOO) and long Google (GOOG).

When most people see a stock continually going up, they think “buy.” On the other hand, when they see a stock going down, they think “sell.” Instead of thinking of the reasons why these stocks are going up or down or the fair value of the company, they mainly think of the trend of the stock. Also, most people want to invest in “hot” or “safe” stocks. If everyone else is investing in a stock, they figure, it must be a good buy! In reality, since everyone is investing in the stock, it is vastly overvalued. This is why it is so difficult to have stock market success for beginners, psychology plays against them!

The extreme cases of “buying high” result in asset bubbles. The most famous of asset bubbles is probably the Dutch tulip bubble,when people were mortgaging their homes and businesses to buy tulip bulbs in the hopes that someone else would pay a higher price for that tulip bulb. The most recent bubbles were the tech bubble of the late 90’s and our most recent housing bubble.

When stocks were at their March lows, many individual investors were panicked and sold out (or certainly did not put new funds in the market). The market has since recovered by about 8%. Since the market is still risky, it is likely that many investors won’t invest until the market goes up more and more, at which point, the market may well be due for another contraction.

Our emotions are not our friends when it comes to investing. Relying on emotions is a quick way to buy high and sell low. This is because people give into their greed when they see everyone else making money in a specific stock or asset class, and then they give into their fear when that stock or type of asset plummets from being overvalued.

The downsides of going short are obvious. In general, the stock market goes up. If you think a particular stock goes down, and you are wrong, you are liable to lose an unlimited amount of money if that stock keeps on going up forever. Of course, practically speaking, if you short $5,000 of a stock, it is unlikely that the stock will increase 100X anytime soon, but the dangers are pretty clear.

A major reason investors to choose short a stock if they think that company has become grossly overvalued. For example, during tech boom, many tech companies that had few revenues and negative earnings were valued in the billions. Investors kept buying these stocks on the hope that they would somehow, magically have future profitability. Those that shorted these stocks often made a fortune.

Shorting a stock and betting that it is a bubble is a nice way to make some money. It also lowers your overall exposure to the stock market (assuming you have a significant amount of money in stocks). Stock bubbles can be broad-based, such as the late 90’s tech bubble, or individual stocks. For example, Crocs (CROX) zoomed up from its IPO price in the teens up to $80 a share and then quickly cratered back to its IPO price. Those that bet that its shoes were nothing more than a one-trick-pony fad were right. Here are some tips if you hope to short bubbles:

1. The news and commentary about the stock should be almost universally optimistic. There should be a lot of talk of pie-in-the-sky growth, without clear indications how the company will ever be able to realistically achieve that growth.

2. It is very important that you understand the company and its sector in question. The way you have an edge in the market, in general, is by understanding a company better than the market does. If you are going to bet against a stock, you better be able to justify to yourself why you are making that bet.

3. Just because a stock has a high PE does not mean it is overvalued. Its last year’s earnings may have been artificially depressed or there may be extremely good reason to believe that its earnings will significantly expand soon.

4. Often, the dumb, hot money will chase bubbles. You know the type of guy that always bets on the hot sports team or was sure that Amazon and Yahoo could only go higher in 1999? If you see the type of dumb money chasing a certain stock or sector, it may be time to short them.

This simply shows that the trend during those recession years showed some familiarity. The rise from bottom was around for 5 to 6 months, and returned between 28 and 35 percent. What shall be the picture this time?

A long recession is not in the interest of the US, nor is it in the interest of the world. The US is expecting changes in the Government this time. If the recession is not reversed in the next 6 months, then we can assume it then to be a longer version this time. Assuming this recession to be a shorter one, like the earlier ones, we should be expecting a similar trend this time too. The market hitting the bottom around October, and then turning upwards for the next 6 months. This is a possibility. It is therefore prudent to watch the downwards trend carefully, especially 6 months hence. There could be a return between 15 to 40 percent if the trend follows the past pattern!

Some experts have already suggested that the markets have already hit the bottom levels this January, and if the recession is a shallow recession this time, then it is a good time to pick growth companies in healthcare, industrials, energy, and technology.

These are assumptions, and one should invest very carefully. But, a study of the history of the trends will display some interesting patterns and may well give directions to investing. The Fed interest rate cuts, the tax stimulus rebates, and the November presidential election might just boost the stock markets around the end of the year.

It is interesting to also read what Chris Orndorff, a portfolio manager in Los Angeles, says that there are always ways to make money, even during the recession. According to him, investors place their faith in the companies with stable earnings. Other analysts say this is the time for such growing and earlier proven companies with good stability to begin their rise now after the stocks took a beating during January 2008, due to the housing, financial, and other issues sank the stock markets. Some expert analysts say that this is the right time to look for a good buy!

I took advantage of the drop to buy some stocks that I liked at very cheap prices. Here’s some bargains that I found, as well as the reasons I bought the stocks. In full disclosure, I obviously now own these stocks, so I’m biased in their favor. Don’t take my opinions as financial advice.

Jack In The Box (JBX): This major fast food company has taken a beating lately. I’m not exactly sure why this stock is down so much. Even if a recession hits, people aren’t going to eat fast food less. If anything, they’d eat more! I like JBX’s low price/sales ratio, and the company has excellent growth prospects. It’s flagship restaurant, Jack In The Box (it also owns Qdoba), still has a lot of room for expansion in the Eastern United States. Its ratios are all much smaller compared to peers like McDonalds and Burger King. For example, Jack In the Box’s P/S is .5, whereas Burger King is 1.34 and McDonalds is 2.67. These other companies do get much of their sales outside the US, and there seems to be a premium for international exposure in today’s market. But this huge of a gap is silly, especially considering Jack In The Box has much better growth capabilities in its home country. I was able to scoop up quite a few shares around 22.60 when it opened down by a few percentage points, and the stock ended up closing at 25.55 for the day.

Jamba Juice (JMBA):: This is a major smoothie chain that is based in California (where most of its stores are located as well). This stock has been beaten down a lot lately as well, off about 80% from its highs. From what I can tell, the legitimate arguments against the stock are that smoothies are a dying fad and that the company is not currently profitable (and it’s not clear when it will or ever be). Also, a recession caused by housing would likely hit California pretty hard, which might cause people to drink less smoothies.

Here’s the reasons I bought the stock though:

1. The whole smoothies are dying fad thing is well-priced into the stock at this point.

2. It’s difficult to tell what Jamba’s profitability prospects are. Gotta figure it can achieve it though; might just need to shut down some bad stores. After all, it doesn’t take a nuclear scientist to figure out how to run a profitable smoothie store.

3. What I like a lot is the enterprise value/revenue ratio. Jamba has a lot of cash, no debt, and a lot of revenue. It’s enterprise value/revenue is .28. Compare that to Starbux’s of 1.54! Granted, Starbux is actually profitable right now, but I’d find it hard to justfiy buying SBUX over JMBA. McDonalds Enterprise/revenue is 2.88 (Jack in the box is .64, which makes me want to buy more JBX as well.) There seems to be a weird market momentum where people are viewing Mcdonalds as a recession proof stock, but the declining housing market is going to stop everyone from eating at JBX and Jamba Juice. I just don’t think this is the case.

I was able to buy some JMBA at 2.15 (it had closed at 2.34 previously). The stock ended up closing up a little for the day, at 2.37. Sometimes, a sharp drop can provide good buying opportunities!

Most of the Asian and European indices were down by close to 10% between Monday and Tuesday. The American market was closed on Monday due to the Martin Luther King holiday.

Prior to the market’s open, the Fed cut interest rates by .75%, which was the reason why American stocks were not down by much more by the end of the day. The interesting thing about today was the deep sell off at the market’s open. Apparently, many people were still scared and decided to sell at a deep discount. About an hour into trading, rational heads had prevailed and buying propped up the Dow by about 300 points.

2. Be clear about your exit strategy. If you are dead sure a stock will tank long run and will hold a stock short even if it goes up 50%, then only short an amount where you are comfortable losing quite a bit in the short run. In other words, if you are certain that stock XYZ is going to zero in the next few years, but believe it may shoot up in the short run due to investor irrationallity, give yourself some margin of safety so you don’t risk a margin call if the stock goes up. On the flip side, if you hope to make a quick buck off of a stock’s negative momentum, set an exit point where you’ll cover your short no matter what as to avoid escalating losses.

3. Don’t short a stock just because you think it’s overvalued. Many stocks are overvalued; it doesn’t mean they will go down anytime soon. Also, an overvalued stock may just stagnate for awhile instead of diving down. It’s better to short a stock because you think the company is bad than because you think people are overpricing it by a little too much. Also, you may be overlooking the stock’s growth or book value, which may give the stock good reason for its valuation.