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

I was attracted to Apple because of its brand. Right now, Apple is hot. It’s iPhone is the coolest phone the market. Mac sales are soaring (because Mac is cool). Ipod sales are slowing, but that’s because everyone already owns an iPod. Pretty much anything Apple sells, there’s going to be a demand for the product.

Apple is now trading just shy of $170. It was previously trading at $200 during its October highs, and it may get back up there. With Apple being the hottest brand on the market, who knows how much it will beat Wall Street estimates. Why did I sell then?

Well, quite frankly, it’s because Apple’s brand is hot right now doesn’t mean its brand will continue to be hot in a few years. Right now, everyone needs an iPhone. People who have absolutely no practical reason to shell out $400 for an iPhone are buying them. I use an Iphone and love it. But I run an Internet business, so I have a reason to check my email every 5 minutes. My little sister in college wants an iPhone or at least a blackberry (she was whining at my parents to buy her one). I told them, under no uncertain terms, should they shell out the money for one since she simply does not need it.

Apple had a great quarter because Mac sells soared. Apple’s brand and image led people to want to buy more Macs (my sister in fact begged my parents to buy her a mac). I have a Mac laptop, and it’s ok. But I chose a PC for a dekstop since, pound for pound, PCs are a far better value for the dollar right now (and shit, I’m rich!) People are buying Macs right now because they are cool, not out of any need.

Apple could leverage its brand into more fields and could continue to grow at a rapid pace. Apple TVs? Apple microwaves? Apple cars even!? Who knows. A hot brand sells. But, a hot brand can also cool off. In my opinion, unless Apple expands its product line even more, it’s going to run into growth issues.

Apple’s moat is its brand. A brand can be a great moat, but who knows how long a ‘hot’ brand will stay ‘hot.’ After all, the appeal of Apple’s products is a sort of quality/elitist sense. If everyone has an iPhone, I’m going to want to buy some sort of souped up Blackberry instead.

Disclaimer: Author is a former Apple shareholder at the time of his posting.

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!

* Don’t hold on to stocks that are making losses. People do this in the hope that there will be a turn around in the price and then they can exit at the buying price.

* Not diversifying sufficiently. Diversification is the basic rule to observe if you desire success, at least desire to minimize risks associated with the stock market investment.

* Investing without studying the stock. You must study every aspect of the company that you wish to “buy” on the stock market. Details of the company’s financial aspects are available everywhere, but still it is found that people just rush in to buying a stock without proper investigation.

* Don’t get attached to the stock. Often people have “favorite” stocks and they hold that stock forever even when it is either not moving, or is going down! Review your portfolio regularly and take actions, even sell it, if a stock is showing negative trends or losses. Emotional investment is not a part of the successful stock market investor.

* Ignoring risks. Don’t ignore the risk factors in the investment.

* Using tips from friends and other sources without doing appropriate research and analysis.
Investing and finding the right stock is never an easy job. To become successful investor, you must do research and analysis of every stock that interests you. Even if you trust the friend, you must still do further analysis before buying the stock.

* Following the crowd. You should avoid crowd mentality in stock market investing. To quote Warren Buffet,” You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” He echoed the same thoughts while warning the investors against following the crowds. “Be fearful when others are greedy and greedy only when others are fearful,” he said.

*Frequent trading.

* Not listing your mistakes and failures. Even the great Warren Buffett, one of the richest man in the world who made his billions on the stock market, lists his mistakes and failures. He then vows not to repeat them. So, knowing your mistakes will make you cautious and will force you to take the right actions the next time a similar situation occurs.

* Focusing on earnings per share and not on return on equity. Earnings per share is a smokescreen, because usually the company retains earnings to increase their equity base.

* Buying a stock and not the business! Warren Buffett has advised investors to buy the business and not just its stock! He has good reasons to say so.

To quote Warren Buffett:
“An investor should only buy shares in a company which he would be willing to purchase outright if he had sufficient capital. From this perspective, an investor should look for a company with business operations that are understood, has favorable long-term prospects, is operated by honest and competent people and is available at an attractive price.

The decision to buy a business is based on:
Business tennets
Management tennets
Financial tennets
Market tenets.”

‘‘The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.’’

– Warren Buffett

If you look a LUB stock chart, you’ll notice the stock has been in a slide since September of 2007. This slide has largely been unrelated to the company itself.

The entire market has been down significantly due to the housing credit crunch. To an extent, Luby’s has suffered along with the rest of the market. Since the company’s market capitalization is only $200M, the stock price can move significantly when one major holder has a margin call placed on his account from other suffering investments. This basically means that there has been a lot of forced selling of LUB for reasons that have nothing to do with the company itself.

A second major reason for the decline has been due to a hedge fund who has been unloading their sizeable holding in the company. Last year, this hedge fund tried to take over the company’s board of directors. The shareholders held a vote and determined they would prefer the company continue to be managed by the Pappa brothers (who have an extensive history of running successful restaurants around Texas). After they lost, the hedge fund threw itself a pity party of sorts and began unloading their position.

There is a ton of upside to LUB. First, they own the land on which 94 of their 128 properties sit. Just this land itself is almost enough to comprise the stock’s current value of 7.20 per share. Additionally, Luby’s has no debt and they’re making money. In the past two quarters, more selling has been triggered when Luby’s failed to meet their projected earnings. By the way, it’s worth noting that only one financial firm makes projections on Luby’s, so there is anything but a mean earnings projection of which they aspire to achieve. Much of the reason they company missed its earnings projection was because of increasing food costs and the expenses of the shareholder proxy vote I mentioned earlier.

To summarize, LUB has been kicked repeatedly, but there’s only so much more it can possibly be kicked. At the end of the day, the stock has no debt, owns most of its land, and it selling a product that people line up for to get their hands on. This is not a get-rich-quick stock. But if you have some money with which to exercise a little patience, bet on LUB to climb to spectacular heights relative to its current basement bargain price.

Disclaimer: The author of this article is a shareholder in Luby’s Inc. (LUB).

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!

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.

What do I mean by this exactly? Well, look at it this way. There are always two sides to a trade. If you are buying a stock, then someone is selling the stock. You each are essentially making bets about the future of the security. The seller thinks it’s good for him to get out, while you think it’s time to pick up shares of the stock. Time will only tell who is right.

It’s difficult to beat the market by investing in large and mega-cap stocks like GE and Microsoft. Sure, these companies are generally safe investments for the long run. But it’s difficult for an average investor to tell which of these companies will have above-average returns. These companies have many analysts covering them, and the major institutions that invest in them do significant amount of research to know when it’s best to buy or sell these types of companies.

For an average investor to beat the market over the long term, he or she often needs to invest in under-followed companies, which are generally small caps. Since fewer analysts and professional investors focus on these companies, the chance for finding good bargains is higher. Of course, the chance for finding total duds is higher too, so small cap investing can be riskier.

How do you find good small caps? Well, generally, it’s best to start off with companies you know well. These companies may be locally-based or they may be in a field that you understand well. If you are in the web industry, then you may have a better understanding of web-focused companies and their prospects and risked, so you may be in a better position to make a calculated judgment about the future of a stock compared to most people in the market.

If you want to beat the market, then view your stock investments as bets. When you buy, do so because you think you know something or understand something that the seller doesn’t. The best way to do this is by investing in companies that you know well.