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What the LinkedIn IPO and Lithium Stocks Have in Common


Lithium Exploration and LinkedIn both had the same parabolic blow-off chart before the crash. Of course, neither one earns money.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

I haven't done any OPM since 1997. Although it clearly can have intoxicating effects leading to irrational actions, OPM is not a narcotic, it is "Other People's Money." Playing with OPM can lead to the obvious heads, "I win big with a management fee and 20% of the gains," tails "It's not my money" syndrome. But that is not what I am driving at. Once you commit to OPM, as soon as you achieve any reasonable amount of money under management, let's say $20 million, you can no longer play in the most exciting, riskiest, most dangerous, and most potentially profitable on a percentage basis area of the market, which is pink sheets and OTC stocks. Thus, you don't pay attention.

Let me present a couple of charts to give you an idea of what's going on there over the past few months. The first is the chart of Lithium Exploration (LEXG). LEXG popped up after it put out a press release on February 1, 2011 stating that it was getting into the lithium exploration business. Lithium will be critical for the development electric vehicles, so as such the news was mildly positive. The market reacted as shown below.

Click to enlarge

As has been said many times in Minyanville, the reaction to news is more important than the news itself. This was pretty impressive reaction. By the time the parabolic move started, let's say April 21, a number of traders wouldn't chase LEXG, but they were looking for the next "Sympathetic Play"; in other words, another start-up mining company getting into the lithium business. They had to wait until Lithium Corp (LTUM) came out with a press release (just look at the chart below and guess which day).

Click to enlarge

Sympathy plays typically condense the action into a much shorter time frame because the "smarter" late money understands that it is just a quick trade and bails earlier. At this point many of you may be asking why a Minyanville author is aware of these "pump and dump" situations that would never be mentioned on CNBC or any other "respectable" financial news organizations including Minyanville.

When I went out on my own in 1998, without any OPM, I could and did trade anything I wanted. In 1998-1999 there was CNBC and a bunch of chat rooms on the IRC network. CNBC did their best to tout stocks through their "double your money picks" at 10:40 a.m. each day. After CNBC, the IRC chatrooms had their own gurus, the most famous one "Cheetah." Trading these picks was easy as long as you followed the critical rules: You can't own this crap after 10 minutes. Overnight was suicide.

After the 2000 collapse, 90% of the day traders in these rooms disappeared and ended up getting "real jobs." The chat room business has evolved since 2000. The primary reason is Twitter. All the old big IRC chatrooms still exist, but the action has moved to smaller private rooms where the leader charges a monthly fee, but the players have bigger bucks to move a stock. In 1999, almost everybody had dial-up Internet connections. Screening software for quick movers was non-existent. Now, every daytrader has high speed and has software to pick up unusual moves. A chat room starts to move a stock? LEXG, never heard of it. Check the news. Lithium, I get it. Worth a day trade. Self-fulfilling prophesy? Easily.

This new generation of day traders never knew the capital destruction of 2000-2001, but they really know how to trade stocks today, and they have the money to do it. The LEXG maximum trading dollars was over $200 million on the peak day. Below in the first day LinkedIn (LNKD) chart. Just a classier company than LEXG, both with the same parabolic blow off chart before the crash. Of course, neither one earns money. LEXG was daily, LNKD is a five-minute chart.

Click to enlarge

I have no problem with LNKD's business model. In fact, I've had a personal profile with them for seven to eight years. I haven't used it, or been approached to be a governor of a Federal Reserve branch, but I can see how it is a reasonable business model. But, at this valuation, it's back to 1999. Is LNKD tradable? Obviously. Should you own this at night? I doubt it. It's a Yogi Berra moment; Déjà vu all over again...
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No positions in stocks mentioned.

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