Tag Archives: financial markets

The strange case of Inovio Pharmaceuticals

Since I moved in Dubai for the second time almost one year ago, I have been receiving daily calls from wealth managers, hedge funds and other similar companies willing to get a slice of my monthly income to be invested. The majority of the people that contacted me proposed investments with high and captivating yields, life insurances with fantastic benefits and retirement plans that were supposed to be the best thing I could have done with my money. Most of the time there are hidden costs that devour the invested capital, reducing the potential returns of the investment, but at least they were offering known products (Generali, Allianz and other providers’ schemes) with a real possibility of getting some benefit.

However, I am afraid other companies have a fraudulent intent as the four that started calling me few months ago about an extraordinary investment opportunity. As far as I was told over the phone, two were based in Luxemburg, one in London and the other one from the British Virgin Islands or something similar. They all warmly invited me to invest a considerable amount of money in the shares of a pharmaceutical company: INOVIO PHARMACEUTICALS inc negotiated on NASDAQ.

When the first company called, I was informed that “we have privileged information about INOVIO. We know that a major contract has been recently signed and will be divulged in the next 3/12 weeks. Now, the major contract is due to bring the shares value up to +60% in few days after the news has been circulated. If you want to take advantage of the situation, just name myself as your wealth manager and invest a minimum of 50,000 USD and I guarantee you that in 3 to 6 months you will get at least 80,000 USD”. As usual, if it sounds too good to be true, it is a scam I thought and declined the invite saying that I had to study INOVIO before accepting anything.

Inovio Pharmaceuticals Graph

Highlighted the price of Inovio shares at the moment of the call. On the left the value on 18-Aug-15 – photo from MS Money

Almost two weeks later, INOVIO value was slightly increased when I received another call. Same modus operandi, same exceptional gain to be cashed in few weeks and the like. They were even more aggressive than the first company. Inovio shares were at around 10 USD per share and the guy told me “I am saying that most probably the shares will be touching 20 USD very soon and the guarantee threshold for this operation is at least 16 USD”.  I have asked about the nature of the privileged information they were sharing with me and why they were involving me (mr. no one) instead of some big money manager. The answer was elusive.

I repeatedly refused the invitation of these gentlemen that periodically came even with falling prices. From the very first call I received, the Inovio shares dropped of a considerable -25%.

Still waiting for the new contract to be announced? 

Financial distortions – The debt crisis explained in a Pub

Mrs Robinson is an amiable lady that bored by her daily routine and in order to keep herself busy while the husband is away for work, decided to open a pub. The job was really stimulating and remunerative and soon it became a significant source of profit for Mrs. Robinson’s family.

Unfortunately for them, the global financial crisis stroke the local economy system and Mrs Robinson experienced a dramatic reduction in the incomes due to the significant reduction of the number of clients and consequently in their consumption of beers and liquors. Most of them now are, in fact, unemployed therefore they are forced to cut their expenses at the pub.

To face the critical period, Mrs Robinson adopt an aggressive marketing strategy. She is sure that the difficult period is just temporary and she allow people to  “drink now and pay after”. People without money can, with this system, drink as much as they want and record their debts towards Mrs. Robinson in a dedicated “Credit Book”.

The marketing strategy is a success!! Dozens new costumers come in Mrs. Robinson pub, drinking like hell and writing down their debt in the ‘book’.

Thanks to this aggressive initiative, the volume of beer Mrs. Robinson sell daily is the highest of the City and her pub is now one of the most important in the region. From time to time she increases the drinks’ prices without any complain from the customers because they are just making a note in a book without paying on the spot. The turnover increases significantly attracting Mrs. Robinson’s bank, which is now willing to increase the line of credit already in place to boost the earnings of the pub (and obviously its own). The bank’s risk managers say indeed that the line of credit is guaranteed by the huge amount of  credits the pub has towards the clients. This is the so called “guarantee collateral” of a “secured loan“.

The Investment branch of the bank takes advantage of the situation and uses Mrs. Robinson credits as guarantee for a brand new Bond to be sold in the international market: the ‘hangover bonds‘. The bonds are rated AA+ as the bank and the investors buy them eagerly because of the high yield offered, but without paying much attention to the fact that they are actually guaranteed by credits collectible from unemployed and poor drunk men.

As a direct consequence of the massive amount of bonds bought, their price continue progressively increasing and soon Funds, ETFs, pension and hedge funds start buying a lot of them. The portfolios around the world are now rich in “hangover bonds”.

After a period of regular trading of these bonds on the financial markets, a new Manager is assigned to Mrs. Robinson’s bank. He knows that there could be problems to find new funding sources in future and therefore he reduces the lines of credits in place, including the one of Mrs. Robinson who has to start re-paying the borrowings. For such reason she opens the “Credit Book” and start asking people to re-pay their debts. But unfortunately, the unemployed still do not have money to do so and the others have drunk all the savings they had.

In light of the above, Mrs. Robinson is not in position to re-pay the bank that consequently cut the line of credit foreclosing Mrs. Robinson properties.

Mrs. Robinson pub go bankrupt and the dozens people working there remained suddenly unemployed. The news is of public domain now. The “hangover bonds” price decrease of 90% in few days.

The bank faces a significant loss caused by this devaluation and is therefore forced to freeze all the line of credits opened with other farms and companies. The local economy is therefore completely spoiled and paralyzed.

Mrs. Robinsons suppliers, that conceded her a long payments terms, are now owners of credits that Mrs. Robinson cannot re-pay. Moreover, they bought a lot of “hangover bonds”, as ordinarily suppliers do, on which now they lose 90% of the invested amount.

The beer producer and supplier starts to fire people and then go bankrupt as well.

The wine producer is forced to sell the company to a Chinese enterprise that close the local branch and relocate it in a cheaper country far far away.

The government saves the bank with a special bond at 0% interest without any guarantee. To get the necessary money, the government simply apply a new tax to all the people that have never been at Mrs. Robinson pub because abstinent or busy at work.

Easily applicable to the past years financial crisis in the States and Europe. . . . well are you among the drunk or the taxed?

The secrets of debt – A funny, but sadly true, story about financial/economical indicators

Once upon a time there was an hotel manager that fell into debt with the butcher for an amount of 100 Euro. Unfortunately the period wasn’t good and the tourists were very few and therefore he had no money enough to repay his debt. One day a couple showed up in the  hall of the hotel asking for directions because they got lost and didn’t know what to do. It was late evening and the hotel manager suggested them to stay in the hotel for the night and that the day after someone would have taken them to the highway in the right direction.

He promptly informed them that the price was only 100 euro only inclusive of breakfast and parking.

The guy, an old man of 65, replied that he would have liked to see the rooms available before decide whether to stay or not. He left a 100 Euro note on the table as a guarantee saying: if we like the room we stay directly there and here you have already the fee paid, otherwise we will take back our money and we will proceed further. The manager expressed his agreement nodding.

As soon as the doorman disappear in the lift with the couple, the manager took the money and run to the butcher to repay his debt and then hurried back hoping the couple liked at least one room in his hotel.

The butcher, almost in the same situation, run to the Prostitute he met a week earlier to repay his 100 euro debt. The prostitute, a friend of the hotel manager, took the money and went to the hotel to pay the rooms she used during the last week with her clients.

The hotel manager was really relieved in see a 100 Euro note that he quickly put on the table where the old man left his own note. Few seconds later the couple appeared from the lift screaming “WTF this hotel is a s..t. We can’t stay any longer here”, and with a disgusted expression they approached the table, took the 100 Euro note and left the city disappointed without even getting the directions.

The moral of the story?

“No wealth was produced and no money was introduced in the City’s economical system. Nevertheless all the debts were repaid and now people can look towards the future with hope.”

It is an easy example of how our financial/economical indicators could be wrongly represent the real situation in a city / region / country.

Traders: why do we tend to get the wrong decision?

It is not only the economic crisis or the market uncertainty that affects our modern time to complicate the decisional process of each and every one of us, but real ‘psychological traps’ that affect our judgement ability. Here below there is a list of the most common traps that affects the majority of the traders (either they are expert or newbie) including myself.

The first and most common trap is the so called “snake bite effect” that affects the 51% of the “normal” investors. The concept at the base of this effect is very easy to understand: if you get bitten by a snake while you are looking for mushrooms in the forest, the next time you do it you would most probably be deadly scared about the possibility of having it happen again. Therefore, if you lose a great amount of money invested in something, the next time you would like to invest in the market you will remember the bad occurrence and most probably change your mind.

This aversion to the risk can also manifest immediately by feeling the need to reduce exposure to the asset class that see a loss or abandon it all together. A simple example to better understand: a young investor decide to invest some money by buying shares of an Automotive company at 10 € per share. After a while the stock fell to 7 € owing to some cyclical effects. The young investor most probably would panic and sell the stock and even though the share’s price start increasing significantly reaching 25 € per share he/she is too afraid to get back in the market.

Another common trap, quite in contrast with the previous one, is the so called “disposition effect” that is the result of the fact that pain of an investment loss hurts much more than the pleasure of a gain. For this reason the 41% of the traders are always fearing regret and seeking pride more than any other thing. As consequence the investor tend to sell stocks too early to seek ‘easy and immediate’ pride while the fear to fell the painful regret associated with taking losses can keep them from selling bad assets to buy new, better positioned, ones.

Then there is the “Home bias” that consists in the perception of the domestic market as more familiar and therefore less risky than a foreign market. For this reason an Italian is more likely to invest in Italians equities than to buy an American one even though diversifying the portfolio is the best way to minimize the risks. Origin of this block could be the fluctuation in the foreign currency value, law restriction and thinking that since the stock you have just bought is domestic, you know its dynamic much better and therefore you can manipulate it more effectively.

If you have been so lucky to have earned some monies during your trading, you could experience the “overconfidence”. You will start unconsciously thinking that you are smarter than the average trader and that you are so prepared and know the markets at such an extent that it is really unlikely for you to commit a mistake. And that is the moment when you will buy huge quantities of a financial product underestimating the potential risks and ending up losing a lot of money. While it is one of the most common mistakes that a Financial Promoter could do, it is also affecting normal traders.

There are many other mental traps that can affect your ability to profitably trade and if you would like to investigate a bit further, you could find interesting www.investopedia.com and other similar websites.