Cytocore: Management by Hype and Distortion

It is one thing for a speculative company low on cash to get more money in a PIPE at a discount to the stock’s market price. It is quite another for such a company to give that opportunity to insiders and then to shamelessly announce in a press release that it was good news. Yet this is exactly what Cytocore (OTC BB: CYOE) just did. Daniel Burns (a director) and Robert McCullogh (CFO and CEO) each purchased a large number of shares from the company for $2 per share on January 22. This was an 18% discount to the stock’s close that day. And still the fools who “invest” in the company’s stock rejoiced by pushing the share price up 51% in the three weeks since then.

At the end of the quarter ended September 30, 2007, Cytocore had under $1 million in cash and a negative cashflow from operations of about $1.5 million per quarter. So despite what the press release said, this was not an investment to “assist in the scale up” of the company’s manufacturing, but rather a necessary investment to keep the company up and running.

I have written about Cytocore’s travails before and I have received some kind comments in response to my previous article.

Disclosure: I have no position in CYOE, although I do confess to a visceral hatred of a few of the company’s investors. I have a disclosure policy. An earlier version of this article referred to the cash flow from operations as the cash burn rate. This was incorrect and I regret the error (there was negligible cash burn over the last 9 months due to the sale of stock and the exercise of warrants).

Document Security Systems Getting Desperate for Cash

I just ran across an interesting article on SeekingAlpha on my old friend Document Security Systems [[dmc]]. The author of the article is short DMC, so take it with a grain of salt, but he does bring up some good points, including some past failures for the company’s new Chairman of the Board. Shareholders will be very disappointed if the company does not actually collect any cash from its patent lawsuits. If that happens, his estimation that the stock could fall 85% seems conservative.

When I last wrote about Document Security Systems, I was decidedly negative. The stock price has since fallen by 50%.

For more information, see DMC’s most recent 10Q.

Disclosure: I have no position in DMC. I have a disclosure policy.

Update on my stock picks and pans

My bearish calls have been pretty accurate over the last couple months. Life is not too good right now if you were an investor in Cellcyte Genetics (OTC BB: CCYG), Noble Roman’s (OTC BB: NROM), or Octillion (OTC BB: OCTL). After having almost doubled since I wrote about it, Cellcyte has now fallen 90%. Noble Roman’s is down over 40% since I first wrote about it. Octillion is down over 60% since I wrote about it.

Home Solutions of America (OTC: HSOA) is down over 80% since I first highlighted questions regarding fraud. Skinns (OTC BB: SKNN) is down 30% since I called its whole business ‘silly‘ while praising the quality of management. My old favorite, Continental Fuels (OTC BB: CFUL), is down 25% since the most recent time I mentioned how overvalued it was.

My recent positive calls have been few and far between. I was positive on TSR Inc. [[tsri]] and I still am. It is down only slightly since I wrote about it in mid-December, about in line with the market. Also, my positive call on Tecumsah [[tecua]] has been a good call.

While basking in my glory, I should also highlight my painfully bad call on ACA from last August, after which it fell 90%. (I blame this on my call being on video and not in writing.) In my defense, I did say that I did not understand the company enough to invest in it.  IDO Security (OTC BB: IDOI) has also been a bad call. Since I wrote about its promotion by junk fax the stock is up over 40%. It will eventually go back down, however.

Disclosure: I am long TSRI and have no other position in any stock mentioned. I have an iron-clad disclosure policy.

I Matter!

The mark of someone who is making a difference is that they make enemies. I guess someone thinks I’m making a difference! Dan said this to me in response to my article on CytoCore (OTC BB: CYOE):

Your article on CytoCore was total [bull feces]. Seems a little odd to have picked
it out of the blue. A virtual unknown company that you decide to short.

Seem to be trying to gain financially off the article. Best watch your [derrière].
Front and back.

Dan, if you had bothered to research me you would have found out that almost all the companies about which I write are tiny and unknown. Also, watching my tush “front and back” makes no sense. Oh, and I have never shorted Cytocore.

Disclosure: I have never shorted Cytocore. My disclosure policy, though high on life, is far more lucid than Dan.

My advice to Bill Ackman and anyone else short the bond insurers

I have some advice to any of you who think that now is a good time to short the bond insurers: don’t do it. Don’t mess with the government. By all rights, the bond insurers are already insolvent, dead, and it is only a matter of time before they are gone. However, politicians do not like turmoil and they love bailouts. They also love cheap insurance for government bonds. Therefore, there will be a bailout in some way. It may not save current shareholders, but the bailout has the risk of killing the shorts. For that reason, now is a good time to stay away from MBIA [[mbi]] and Ambac [[abk]].

A theoretical trader who shorted the infamous Semper Augustus tulip bulb at 5000 florins during the Dutch tulip mania would have had a great win snatched by the government’s cancellation of all tulip contracts. This is a similar case where it would be smart to stay out of the government’s way.

For why I think the bond insurers are dead, see Bill Ackman’s letter to the rating agencies about the bond insurers.

Disclosure: I grow no tulips and have no position in any stock mentioned. I have a disclosure policy.

A day in the life of a short seller

What is it like to be a short seller? What is it like to be reviled? What is it like to be feared utterly? It is the most wonderful experience known to man. To give you a glimpse into my wonderful life as a short seller, I give you here a glimpse of what my days look like.

I wake up every morning at 5AM and run 10 miles. I get home and punch a punching bag until my fists are bloody. Each day I pretend it is someone different. Yesterday it was William Telander (of US Windfarming). Today it was Richard Altomare of Universal Express. Tomorrow it will be the despicable Judd Bagley.

My breakfast is the same every morning: oatmeal flavored with ox blood, followed by a banana. I then peruse my favorite blogs before the market opens. There’s Gary Weiss, Herb Greenberg, David Milstead, David Baines, Sam Antar (blah blah blah former CFO of Crazy Eddie’s and convicted felon; okay, we get it Sam, now shut up!), Tracy Coenen, the SEC litigation releases, and the Forbes Informer.

I usually spend my mid-morning tweaking my stock positions. I run a few quantitative screens to search for new stocks to target. I also search all SEC filings for certain phrases that indicate bad companies (such as “Our CEO is a convicted felon who is also a registered sex offender”). I do not stop for lunch. Rather, I grab a few Ks and Qs and a bottle of whiskey and settle down to find weaknesses in the companies I have targeted. Depending upon the companies I am short my midday reading may also include patent applications, scientific articles, and policy papers.

If my energy starts to flag during the day I rip off my shirt, stand in front of the mirror, and shout the following:
“I am a wolf among sheep!”
“I am a master among slaves!”
“I am a god among men!”
“I shall not only destroy my enemies, but I shall annihilate them, wipe them from existence. When I am done they will be gone, forgotten, they will cease to ever have been!”

To really get the blood boiling, I pump my fists and shout, “I am MICHAEL GOODE and I am a SHORT SELLER. I AM ALL POWERFUL! I CANNOT BE STOPPED!” After this motivational interlude I can face the market even if I am down seven digits on the day.

In the afternoon I always call up Patrick Byrne to harass him. I actually get through to him once in awhile. I once pretended I was his father and he believed me for 10 minutes into my diatribe against his conspiracy theories. Late afternoon there are usually more phone calls to many of the big short-selling hedge funds. So far I’ve got a better IRR than Jim Chanos and I like to shove that in his face. He is too much the gentleman to point out that he manages 10,000 times more money than I do. I then call up the Sith Lord, Patrick Byrne’s best friend. I had a bet with him about Overstock.com’s [[ostk]] inventory turns and it looks like he won that.

Sometimes I call up my journalist buddies. I have several journalists on the take, although I do not use their services too often. Anyway, when I focus on truly deplorable companies I have no need of any help. After I am done with phone calls I will usually look up the new financial research (shout out to my buddy Dr. Sloan! Booya!).

By the time I am done with all this it is usually 7pm and I stop for a quick bowl of rice and steamed vegetables. I then settle into my easy chair for another 4 hours of reading financials. And that is a day in the life of a short seller.

Disclosure: If you cannot guess what I should disclose about the above article then I cannot tell you.

Comcast to Shareholders: Screw You!

Comcast [[cmcsa]] has agreed to pay its founder a salary for a full five years after he has ________. The logical (and upsetting) conclusion of that sentence is “retired”. No public company or even private company with minority shareholders should ever pay an executive who is retired or otherwise not contributing. However, Comcast has decided to take callous disregard of shareholders to a whole new level by agreeing to pay its founder for five years after he has died. He will even be paid a bonus in that time. Ouch.

Disclosure: I have no position in CMCSA, nor am I a customer. I have a disclosure policy that shall never die!

Echostar’s $63 million dollar mistake

Oops. Echostar [[dish]] lost $63 million more over the last few years because they included the same income in multiple years. A new SEC reg requires companies to disclose financial errors that are not material but through repetition have become material in aggregate. Sadly, companies do not have to run this through the earnings statement and can take it straight to the balance sheet. Unsophisticated investors may never even notice. See the original article by David Milstead over at the Rocky Mountain News. I recommend subscribing to his column via RSS.

Disclosure: I have no position in DISH; I am a customer. I have a disclosure policy.