July 16, 2014


Movie tip:  Karen and I took our visiting teenaged nephew to see Edge of Tomorrow, starring Tom Cruise. Hysterically entertaining. Appropriate for teens (scary monsters but no gore), and gripping for adults!

There was a 1982 movie called The Scarlet Pimpernel (from the 1905 novel by Baroness Emma Orczy) in which the dashing protagonist Percival Blakeney (played by Anthony Andrews in the film) goes around saying, “Sink me!” with a lilting accent. Great movie.

I thought of it when this week’s theme came to us through alert reader Emily Walt at Carbonite, who first gave us a salacious peek at a firm burning up the pink sheets:  CYNK Technology (OTCMKTS:CYNK).

Most of you may now know that CYNK rose from nothing to $6 billion between June 17 and July 10, a return of 20,000%. Last Friday the SEC abruptly halted trading, with market cap still at $4 billion.

The pink sheets or the grey market, or what used to be called the OTC market, should not be confused with “over the counter,” which often refers to shares on the Nasdaq or securities trading between brokers. This is the market where standards are loose and risk is high.

CYNK Technology is run by a guy in Belize. This one fellow is listed as CEO, President, CFO, Board Secretary and the only director. SEC documents suggest the company has no revenues and no real business plan and few if any assets.

But something got folks going and it seems the germinating seed was the suggestion that the company’s website offers introductions to celebrities for a fee.  It aims, we gather, to be the social networking site where common everyday dweebs and goofballs can meet Johnny Depp and Angelina Jolie.

No wonder it went to $6 billion. Charles Mackay’s 1841 book “Extraordinary Popular Delusions and the Madness of Crowds” comes to mind.

It’s a microcosm of a macro-plane problem affecting the US stock market. The pink sheets are booming. Volume averaged 23 billion shares daily in February 2014, though that figure has come down to 9 billion daily now.  Dollar flows are small – about $1 billion daily versus $150 billion in the National Market System. But it’s the last place left where everything isn’t controlled by regulators.

And there’s an apparent desperation in people who shouldn’t be taking these kinds of chances to earn money, because you can’t trust the regulated market and the Federal Reserve has eradicated returns in savings accounts. People wouldn’t be going crazy if something wasn’t first driving them crazy.

If you want to drive your teen batty, tell her what to do all the time.  If you want to drive a free market berserk, tell it what to do all the time.

The SEC said in its July 11 order stopping trading: “It appears to the Securities and Exchange Commission that the public interest and the protection of investors require a suspension of trading in the securities of CYNK Technology Corp.”

“Appears” is an inexact term, not a legal one.  While exuberance had become irrational, is that not the market’s right?  And how is CYNK functionally different than the $1.7 trillion of mortgage-backed securities on the Federal Reserve’s balance sheet?  Those securities were purchased with “fiat” money. The word “fiat” comes from the Latin “arbitrary decree.” The Fed is the biggest buyer of mortgage securities (from Fannie and Freddie and banks), so the real estate market’s value rests on an arbitrary decree.

So does the value of the US government’s debt, of which $2.7 trillion is held by the Fed. Look it up yourself.  The Fed creates money backed by you and me – our assets, productivity – to buy stuff as it deems necessary.  Except current and future obligations of our government exceed every last penny all of us have saved or invested.  The money in a sense is barely more real than CYNK Technology.

In both cases, markets were vetoed.  The market had decided it no longer wanted to finance debt, and the Fed overrode that decision, and said thou shalt invest thy money where we tell you, and to make it so, we decree money unlimited and interest rates zero. And money chased pink sheets and pies in skies.

In CYNK Technology’s case, the market was in a frenzy – and was relieved of its property rights and forced to stop frenzying because it “appears” the public interest hasn’t been served.  Whatever one thinks of CYNK, its value should be set by buyers and sellers, at zero or $6 billion. Not by decrees.

No wonder the economy trudges and consolidation among public companies (at the expense of IR jobs) pulses at eye-popping pace. There can be no greater uncertainty than the loss of property rights and the presence of value derived from arbitrary decrees.

And so volumes are down in the National Market System, and up in the pink sheets, and at record levels in futures. Uncertainty. It seems to us that until governments stop crafting a CYNK Technology world where nothing can really be believed, we’re not going to shake these doldrums.

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