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The SEC recently suspended trading in a little-known stock, Neuromama (NERO), which trades on the Pink Sheets.
The stock had gone from $15 in April to $56 with a market cap of an eye-popping $35 billion. With no revenues. This for a company that appears to be little more than an internet search engine, though it claims it is much more.
The SEC suspended trading until August 26th "because of concerns regarding the accuracy and adequacy of information in the marketplace about, among other things, the identity of the persons in control of the company's operations and management, false statements to company shareholders and/or potential investors that the company has an application pending for listing on the NASDAQ Stock Market, and potentially manipulative transactions in the company's stock."
Yikes. I won't go into details about what roused the SEC's suspicion, but you can get an inkling here.
Neuromama and the SEC did not immediately respond to CNBC's request for comment.
This has brought on the usual howls of incredulity about how this could possibly happen in the 21st century. How could a company that appears to be little more than a search engine (though they claim differently) get to a $35 billion market cap?
It can happen because this is a Pink Sheets listing. That is the bottom of the barrel of stock listings.
We all know the NYSE and Nasdaq have stringent listing requirements. But there are thousands of small companies that can't pass those stringent requirements. For them, there is over-the-counter (OTC).
OTC listings have become consolidated through one company, OTC Markets. There are three "levels" of markets: OTCQX, the "best" market with the highest standards, the OTCQB or "Venture" market which still have standards but are lower than OTCQX (annual verification and management certification processes), and OTC Pink, the "open" market that is sub-categorized by the level of information they provide.
NERO was listed as "limited information" which is "designed for companies with financial reporting problems, economic distress, or in bankruptcy to make the limited information they have publicly available."
In other words, this thing had a red flag a mile wide on it. It didn't quite say "You ought to have your head examined if you play with this" but it might as well have.
In fact, it had more than a red flag on it. On June 16, after the stock had its first run-up, the OTC Markets itself pasted its "Skull and Crossbones" on the NERO markets page. This "caveat emptor" or "buyer beware" sign is put up when OTC Markets believes "there is a public interest concern associated with the company, which may include a spam campaign, questionable stock promotion, known investigation of fraudulent activity committed by the company or insiders, regulatory suspensions, or disruptive corporate actions."
From that point on, it's unlikely any broker would be chatting this stock up.
Amazingly, a few people apparently didn't get the memo. Or maybe they didn't need to. The stock kept rising, from roughly $40 to roughly $53 before it was suspended on Monday.
How could this have happened? With a skull and crossbones on the OTC Markets page? It's possible that there was a short squeeze of some kind. But no, there is no short interest in the name. In fact, there is no appreciable stock available to borrow.
What does that mean? "This implies that principal shareholders are holding on to most of the stock," Ihor Dusaniwsky told me. Ihor is with S3 Partners, a financial analytics firm.
The trading pattern might also suggest this. Volume has been minuscule. Only 3,713 shares traded in July, when it went from $50 to $56, and only 250 shares in August!
The stock goes from $50 to $56, an increase of 12 percent, on just 3,713 shares? Bear in mind, this increased the market cap of the company by roughly $3.8 billion.
What does this mean? Here's Ihor again: "It suggests to me that a very small amount of people are buying the stock among themselves."
What can we learn from this? There were certainly ample warning signs.
The SEC should act more quickly in cases like these. A stock with no revenues and a market cap of $35 billion should be looked into. It likely did not arouse the SEC's indignation because the level of trading was so low and it obviously has not impacted many people. True enough, but a quicker response was certainly warranted.
As for the OTC Markets, it's easy to say it's a land of crazy people and scammers. There's certainly some of that, but keep it in perspective.
There are 10,000 securities that trade on the three OTC Markets platforms. OTC Markets officials I have spoken with regard their market as a breeding ground for companies to be able to grow and potentially "graduate" to the Nasdaq or NYSE. In the last three years, over 200 companies have moved from the OTC Markets to the Nasdaq or the NYSE.
Stocks: Where are we now? Forget the narrow trading range, low volume and low volatility. Beneath the August doldrums, stocks are moving.
The old Wall Street chestnuts aren't working ... or are they? Several traders have inquired why the old Wall Street chestnuts don't seem to be working any more:
Have we entered some weird new universe? Is the Fed causing these signals to fail? (That's what a lot of traders think.)
Macy's takes the lead and finally starts addressing the overstored retail landscape. Macy's CEO Terry Lundgren showed up on "Squawk Box" to talk about his company's earnings this morning, and threw out one of the more interesting stats I've heard this month.
He noted that the United States has 7.3 square feet of retail space per person, while France and Japan both have 1.7 square feet, and the U.K. has 1.3 square feet.
The United States has almost five times more retail space per person than France, Japan and the U.K.? Yep. Terry rightly described the situation as "ridiculous."
Lundgren is addressing that by announcing Macy's will be closing 100 underperforming stores out of a base of 728. That is quite a reduction. The annual sales loss could approach $1 billion, but that might be offset somewhat by expense savings.
CNBC on Monday is initiating a new way to look at the global economy —specifically a new way to look at a very important part of that economy: the "new economy."
We're launching a new set of tools in conjunction with our partners at Kensho that we — and our viewers — can use to better understand the rapidly changing economy and investing landscape.
They're called Kensho New Economy Indices, a series of 16 indexes that provide ways to invest in disruptive technologies and trends using the existing public markets.
By the "new economy," we're talking about industries that are poised to grow rapidly in the next decade, and grow fast: The phrase "exponential growth" is often used. But what exactly is it? And more importantly — how do you measure it, and how can you invest in it?
Markets are at new highs. Everyone seemed stunned to discover that we have moved to another historic high on the S&P 500.
Why? We were never more than about 1 percent from an historic high for the past few weeks. The action has been so muted, and on such light volume, that everyone forgot. Forgot what? Forgot that we have hit historic highs on an intraday basis nine times — in the last month!
Two large exploration & production (E&P) companies have reported: Devon Energy and Occidental Petroleum. We now have enough data points to make some broad generalizations about what oil companies are doing to cope with $40 oil.
Both Devon and Occidental:
1) Declined to predict where the price of oil was going. No one is in the oil predicting business any more, instead the emphasizing is on factors that are under their control: production, costs, and asset sales.
2) Said production was high and would continue. Why, with an oil glut, is production still high? Because everyone needs to keep their cash flow up! Between capital spending and dividends, most oil companies are still cash flow negative. The good news is that the more they produce, the lower the per-unit costs. The bad news is, the more they keep doing this, the longer they prolong the oil glut.
3) Are continuing to cut costs, in part using better technology. Devon noted that production exceeded expectations and they were able to do that with dramatically lower costs, on pace to reduce operating and general & administrative (G&A) expenses by nearly $1 billion in 2016.
4) Are continuing to sell assets. Like Chevron, they continue to acknowledge that many of their assets will not be profitable in the near future if oil stays in this price range, so they are selling. Devon sold $3.2 billion in assets, more than they had previously indicated.
What are they doing with these cost savings and asset sales? They are reducing debt and, in some cases, continuing to invest modestly in new technology.
Bottom line: it's a long and winding road, but E&P companies are continuing to slowly improve their balance sheets.
One key point: OXY reiterated that the dividend was safe. Occidental has one of the highest dividends in the business — 4.3 percent dividend yield — and they are not only not cutting, they are increasing it modestly, from $0.75 to $0.76 a share.
Considering everyone is talking about how well the consumer is doing, the news on Tuesday reflects a perfect little storm for consumer names:
Retailers: Disappointing auto sales from Ford, GM and Fiat Chrysler are weighing on the retailers, particularly department stores, where Dillard's, Kohl's, Macy's and Nordstrom are down 5 to 7 percent
The markets started positive, but as oil dropped below $40, the markets again fell apart. Can oil companies — specifically exploration & production (E&P) companies — survive if oil remains at $40?
We'll get a better idea in the next couple days. Nearly two dozen E&P companies will be reporting Wednesday and Thursday, including Devon Energy on Tuesday.
The narrative for Big Oil has been that earnings bottomed in the first quarter, that the companies will benefit from higher oil prices and lower costs with earnings set to recover in 2016-2017.
Except oil is not cooperating.
Famed short-seller Jim Chanos is putting Netflix and other entertainment content providers in his crosshairs.
Jim Cramer explained the "stupid" market action after the Federal Reserve's Wednesday meeting.
Famed short seller Jim Chanos took another shot at Tesla on Thursday, saying the company is worth nothing.