It doesn't take much buying to move the price of a thinly traded stock like Monarch. Somebody puts in orders to buy a few thousand shares and as the stock starts to rise, others buy it too. When the stock catches the attention of day-traders who try to make money by jumping onto stocks that are moving up, you can quickly create the momentum for an avalanche like the one that hit Monarch last week.
There are fewer than 900,000 shares of Monarch in public hands. Dott and his dad, founder and chairman Eric Dott, own the rest, about 40 percent of the total. With a stock market capitalization of less than $2 million before the recent run-up, Monarch is considered a "microcap" stock. It trades on the Nasdaq small cap market under the symbol MAHI.
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So how can you trade 3.4 million shares a day when there are only 900,000 shares out there?
"Churning" is the answer. Sure, there is some double-counting; that is, sometimes what is really a single Nasdaq trade gets counted twice -- once when a shareholders sells stock to a Nasdaq dealer or market maker and again when the market maker sells that stock to another customer as part of the same trade.
But mostly it's churning. Not all 900,000 Monarch shares were bought or sold that day, but a lot of shares were bought and sold several times -- bought in the morning as the stock was starting to rise, sold a short time later for a quick profit, then bought and sold again and again. It works like a pyramid or a Ponzi scheme. The loser is the one who gets stuck holding the stock when the music stops and can't find another sucker willing to buy it at a higher price.
The "bag holders," as they are known to spectators of this sport, started feeling the pain Thursday, when Monarch stock fell from $4.64 a share back to $2.98, and 1.7 million shares were traded. The stock kept falling Friday, closing down 57 cents at $2.41 on volume of 437,000 shares.
The best seats for watching low-float running in action are in Yahoo's stock-trading chat rooms, where Monarch generates a lot of action, Raging Bull and other Internet investment sites. There you can see lies so blatant as to be laughable.
For example, one person hiding behind an online alias proclaimed that Monarch is about to start a pornography magazine. "A virtual reality porn mag. . . . Will be featured on all the major news channels tonight," that person wrote.
If you missed that on the nightly news, you're not alone. In reality, there is not going to be a pornographic sister publication to Girl's Life, which is aimed at "tweens" in the 8-to-12 age group. As close to sex as Girl's Life comes is answering reader questions like, "I'm going on my first date and I'm worried about bad breath. What do I do?" (Brush your teeth and chew gum.) Nor is there any evidence to back some of the other claims made by people touting the stock on Yahoo. "Monarch Services is at a critical turning point in its history. It is on the verge of a great creation of wealth from the core magazine and restaurant holdings. Forget the past. . . . Look into the land of opportunity. It is here," another person said.
Monarch shareholders will tell you that the company's past is pretty forgettable. It used to own a board-game business, but sold it to toymaker Hasbro in 1998 for $6 million.
