How does the old riddle go? Which weighs more - a ton of feathers or a ton of bricks? The knee-jerk answer is that a ton of bricks has to be heavier than a ton of feathers…..since bricks are heavier than feathers. Given a couple of seconds to apply some logic to your answer though, obviously they weigh the same - a ton is a ton no matter what it’s made of.

One of our astute readers asked a similar question regarding some of the data he found in a recent press release….which weighs more - a ton of coal or a ton of CO2?

Specifically, he wondered how every pound of coal that’s burned emits somewhere between 2 and 3 pounds of carbon dioxide, as described by this snippet from China Energy’s announcement earlier this week:

“The energy recovery systems under these backlog orders, upon completion, are expected to generate nearly 174MW heat energy. This is equivalent to achieving a total annual saving of roughly 370,000 tons of coal (coal equivalent), which would otherwise be required to produce the same amount of power, and consequently the reduction of roughly 1,000,000 tons of carbon dioxide emissions from burning of that coal each year.“

The answer? A ‘ton’ of CO2 gas doesn’t actually weigh a ton. Technically gas has no weight, so for anyone to compare the weight of a solid to a gas is comparing apples to oranges (at best). However, scientifically speaking, CO2 gas can be said to have weight or the equivalent to weight….it’s just not the kind of weight you and I understand by putting on a scale.

So to answer the question “Which weighs more - a ton of coal or a ton of CO2?”, a ton of coal actually weighs more.

That’s the simplified, conceptual explanation; you may want to contact the company for a more scientific explanation.

If you’re less interested in math and more interested in China Energy Recovery’s (CGYV) investment potential, sign up for the free e-newsletter today. We’ll keep you in touch with how China Energy is turning science into profits.

Thanks for all your feedback following this week’s early edition “Bearish Pundits May Be Right, But Reason Is Wrong“. Some of you agreed, and some of you disagreed, but any discussion that brings better understanding to either party is a worthy one.

One idea to clarify about the article though…. we weren’t making a bearish or bullish call. We were simply trying to point out that the so-called pundits - mostly from TV - will frequently make calls based on ‘data’ that’s not factual. We will from time to time make bullish or bearish calls of our own, but that edition wasn’t one of those times. So, to those who accused us of being indecisive about stocks’ direction, you’re right in this case (though we never denied that at any point in the article).

With that as a backdrop, here are some of the most pertinent and enlightening Q&A’s.

One reader wrote…

You are way off base….the reason that the markets aren’t going advance to new highs for at least two years is that the government is finding ways for the financial institution to lie about their true issues. The government has screwed up this economy so bad and has allocated so much wasted money into pork projects that don’t mean a damn thing to the people who really need it that this whole stimulus is creating a house of cards. The stress test is a joke manipulated to show what the government wants to the banks to show and if Frank, Pelosi, Reid and Dodds are allowed to run unchecked, then pack your tents boys…the end is near. Our president doesn’t have the guts to tell them to take it easy. At this rate we have a one termer and that can only help save this country.

MCP Response: Respectfully, you’re arguing with us as if we’ve said something we actually didn’t say. We’re simply pointing out that the pundits are off-base in their volume rationale. The market could still implode for other reasons, as you described.

Another reader wrote in…

Here’s what I found in The Daily Wealth letter about volume and the rally:

THE STOCK MARKET NEEDS TO SHOW US THE MONEY. In mid-January, we placed the stock market on “volume watch.”

Back then, the stock market was bouncing of its December lows. Many people were feeling bullish… They thought the worst was over for stocks. But our “volume watch” called for the market to show us healthy and rising trading volume in order to believe in the rally. Instead, the market went on to suffer a 20% decline.

We’re in a similar situation this week. The market just staged a huge rally, as measured by the popular S&P 500 fund (SPY). But look at how trading volume has tailed off in the past few weeks. A truly healthy market has lots of “big money” buyers piling in to support prices. Those buyers are still on the sidelines.

We’re not saying the market will fall 20% again. But we’re still in the Jerry Maguire camp… meaning we need the stock market to “show us the money” in the form of healthy and rising volume during advances. Until we see this money, we’re still skeptical.

The S&P ETF needs to show us the money!

MCP Response: Their argument makes sense, but the volume trend of the ETFs and the volume trend of the actual market are surprisingly different. The market’s volume tends to give (us, anyway) a much better picture of what all investors are thinking or doing. The ETFs serve as a representation of how the indices move, but the ETFs can move with the market whether SPY trades 10 million shares or 10 shares. So, there’s a potential disconnect. Eventually the ETFs and market ‘catch up’ with one another, but we’ve found the total market volume data to be more meaningful. Only time will really tell if it matters either way.

A different reader wrote….

The market might go up, or it might go down, or maybe even stay the same. Pick your reasoning and you would be as right as anyone these days.

MCP Response: Respectfully, our goal isn’t to tell you where the market’s headed next every step of the way. Our goal is to teach you how to do so for yourself…. and what not to listen to when it comes time to do that. Nowhere did we imply we were making a market call in Tuesday’s newsletter (hopefully, anyway). That said, we’ve made firm calls before, and we’ll make them again. That wasn’t what we did on Tuesday, but we do it on a semi-regular basis when we have the time. If you want/need constant guidance and buy/sell decisions, we recommend Adam Oliensis.
And here are a couple of e-mails we got, but just didn’t have the time or need to respond to directly. They’re both good points or ideas though.

Hey, Ed. I really agree with your reasoning, therefore ipso facto you must be wrong. Over the decades, and especially since 2000, I’ve been the boring little optimist, always betting the farm on some entrepreneurial fairy tale and I’m panting again over the next big things. So, even conceding the huge possibility of a political-economic crash, I’m looking for a longer than expected rally in SOME of the microcaps–which ones? Well, I hope I can depend on you for that.

MCP Response: Indeed you can depend on us for that. And, I know what you mean about being in agreement with another person means we can’t both possibly be right. This time’s an exception though, I think.

I’m glad you check the facts before you “say” something. So many of the well known TV so called experts don’t seem to do that. Thanks.

MCP Response: Yeah, we’re almost scientific to a fault, if that’s possible. We view it as ‘disciplined’ though, which is a trait shared by the world’s most successful investors.

Did you miss the article that prompted all these discussions? Don’t miss out on the next one. Sign up for the free Micro Cap Press newsletter today!

It’s been a great ride, but every trip must end sometime. We’re reversing our bullish opinion on small cap home furnishing retailer stocks as well as on small cap tobacco stock Alliance One International Inc. (AOI).

Both trends/stocks are profitable from where we first picked them, but the last few days have demonstrated a little more weakness than we care to face.

We first latched onto small cap home furnishing stocks back on February 23rd, when the S&P Small Cap Home Furnishing Index (wow, talk about detailed) was trading around 60.30. It peaked at 74.85 a few days ago, and has since fallen back to the current level of 68.12. Hopefully you got out of whatever you were in on the 20th to lock in the maximum gain (or from our March 20th advice), but if not, you’ve still got about a 13% gain to lock in.

As a reminder, the two candidates we found in this particular group were Kirkland’s Inc. (KIRK), and Williams-Sonoma Inc. (WSM). Both have gone ballistic since our initial call, up 142% and 62%, respectively. And, though both look like they’re still riding the bullish bullet train, it often make more sense to get out on the way up then on the way down… especially when the industry/group chart is starting to struggle.

Though we will from time to time recommend profit-taking yet remain bullish on an industry, this is not one of those times… we’re retracting our bullish opinion an small cap furnishing retailers altogether.

As for Alliance One International Inc., the current price of $3.74 is still 18% above the February 19th trading level of $3.15, but AOI had been as high as $4.25 less than a month ago. Talk about wanting to get in a time machine.

Our bigger-picture ouotlook on small cap tobacco is still am optimistic one, but we do recommend making an exit now if you were looking to exit soon. (If you were looking to buy, we suggest you wait… the dip could get deeper.)

Do you want to be informed the next time we make or retract one of our industry or stock picks? Don’t lose money by not knowing when to buy or sell…. sign up for our free newsletter today. 

It’s been a wild week for penny stocks and micro caps - but overall a good week. We continue to see various penny stocks pulling themselves up and out of the ashes, and possibly on to new highs. Here’s the latest list of penny stocks that look worthy of further consideration. If you don’t like any of these, don’t worry - we think we’ll be able to update this list with quality names every couple of days now that stocks are rolling again.

To view the full-size charts, click the thumbnail next to ech stocks’ commentary.

Beyond Commerce Inc. (BYOC)

This is probably the prototypical chart penny stock traders want to see. It consists of (1) a major surge on hige volume than breaks the stocks out of a rut, (2) a retreat about halfway back to where it came from as the euphoria wears off, and (3) a rebound takes hold. The only thing we’re not seeing yet that we’d like to is some buying volume behind the rebound effort. It’s only been a couple of days though, so we need to give BYOC a fair chance to give us that volume.

Nevada Geothermal Power Inc. (NGLPF)

This is a well-paced breakout, if you can even technically call it a breakout. It’s rising either way though, and has a lot of room to recover. NGLPF was trading above $1.00 just a few months ago. Even though we’re not facing the usual risk here that stems from a miraculous one-day surge, it still may be wise to wait for a dip and a recovery effort before jumping in.

Zagg Incorporated (ZAGG)

We’re going to take an opposing stance with Zagg and say sell this penny stock if you own it - don’t buy into it at these levels. We applaud the long string of breakout efforts we’ve seen since November, but ZAGG has hit new all-time highs within the past month, and the stock may have moved as far is it can go for the time being. We’d have to see an enormous dip before stepping in, as all the minor pullbacks we’ve seen over the last four months resulted in smaller (percentage-wise) advances.

Broadwind Energy Inc. (BWEN)

Of all the stock charts we reviewed in making this list, this one might be the most compelling… even though it’s not a penny stock. We saw a nice high-volume breakout yesterday that pushed the stock to new multi-week highs, and we’re seeing an even better push today that’s challenging December’s highs. We’re also above some key moving averages for the first time since June, so clearly the overall momentum has been shifting for the better. This is one you definitely want to look at (and not just because we’ve been following the wind power industry for a while).

That’s it for now, though like we said above, check back often - we’re starting to see a lot more viable penny stock breakouts, and we’ll let you know about all of the worthy ones.

Stop losing money because you’re not getting all of our trading ideas and market commentary! Registration for our e-newsletter is free, so sign up today and start profiting. Once or twice a week we’ll deliver ideas like the ones above straight to your inbox. And, you can check the blog daily for additional comments.

It finally happened. The possible changes in banks’ mark-to-market rules were finally approved - though not without some grumbling - by the Financial Accounting Standards Board (or FASB). The idea has been on the table for months, but came to fruition today.

Here’s the crux…thanks to a combination of ARM resets and overextended mortgage customers, more and more homeowners have been missing their monthly mortgage payments. Clearly that’s not good for the lender, as lenders lose money when the payer can’t make said payment, So far nothing new, right?

The problem was/is, those non-performing loans are still sitting on banks’ books as assets (essentially, collateral), but their value determines how much more money a bank is able or willing to lend to other consumers. The reason banks aren’t lending as freely as we’d like them to is just that, technically, those non-performing loans aren’t worth much.

So What? The stated value and the actual value of those loans are not the same thing. Banks say these loans actually worth more than they’re getting credit for, which is why so many banks are still unwilling to make many loans.

There - consider that the thumbnail sketch of the entire financial meltdown.

Transparency is a Matter of Perspective

The reason I wanted to restate what most of us already basically understand was simply to set the stage for a discussion and my opinion on the matter.

The change in the mark-to-market rule could revalue up to $2 trillion worth of distressed loans, mostly for the better. Rather than a strict, rules-based valuation, the new standards allow these loan values to reflect real-world condition. Like I said, though these assets are toxic as described, most of them are not nearly as toxic as the previous mark-to-market rules make them appear. The new rules should improve the assets’ value in most cases.

With that kind of improvement in the lending base, credit could totally thaw out, and investment activity could restart in a major way. Today’s market jump is a hint to that effect.

Opponents of the change argue the new rules could create more problems than they solve. I understand both of their arguments, but respectfully disagree. Let’s address each argument individually, just to keep it simple.

Argument #1 against the new mark-to-market rules: The new rules could weaken transparency of banks’ financial statement.

Actually, yes, there’s the risk of this. However, what baffles me is that none of these opponents mentioned the old rules are also equally un-transparent. The prior mark-to-market rules valued assets not based on the underlying real estate’s reasonable market value at the time (even discounting for defaulted loans), but rather valued these assets based on a technical formula that assumed any defaulted loan was only worth pennies on the dollar. (Frankly, I don’t think any owner of these loan assets thought those mark-to-market rules would ever be enacted, which is why they let them remain so excessively disadvantageous.)

Point being, transparency is a matter of perspective. I’d rather a bank value these toxic assets at a realistic level - for better or worse - than a pre-formulated one that doesn’t reflect a real assessment of a real house.

Argument #2 against the new mark-to-market rules. The government was on the verge of buying these toxic assets back and then reselling them - for a song - to private investors (even though the government was taking the bulk of the risk on the sale). Now this plan is less likely to happen.

Actually, it is true that these distressed assets will not be as attractive to investors now that they’re going to be repriced, but I don’t quite get why this is a bad thing for Joe Taxpayer. I’m so sorry some major investors and institutions won’t be allowed to pay next to nothing for assets that will likely be worth much more in a couple of years. And, I’m even sorrier these investors won’t be able to benefit from the potential reward while the government takes all the risk with our money. Boo hoo. Give me a break….geez.

I’m not saying banks know how to perfectly value these non-performing loans, but by the same token, I don’t think the government has any better ideas at what prices they should be bought and resold to select investors. As bad as the banks screwed things up, I’d rather let them fix it - even if badly - than let the government get involved in the valuation game.

Good or Bad For Stocks?

I’m going to side with the market’s action today and say the FASB’s mark-to-market overhaul is a positive for stocks. On the other hand, I think investors got a little too excited by granting us a 4% rally. They gave the news an A+, where I’d only give it a B-.

Why a low score from me? Because despite the accounting changes, neither the TED spread nor the LIBOR-OIS spread dropped today, telling us banks still aren’t bending over backwards to make loans. If toxic assets were really the problem, these two spreads should have plunged to levels seen in the spring of last year. No, I think there’s more to be worked out. The new mark-to-market rules are a good start, but not the end of credit crisis. (I explained the LIBOR-OIS Spread and TEd Spread here.)

Bottom line(s)

I actually don’t expect the new rules to have an immediate impact on the credit market, so don’t expect too much in the way of a rebound just yet. Banks don’t need to make more loans to be profitable… they just need the loans they do make to be profitable (quality over quantity).  And so far, that’s why they’ve been telling us to expect operating profits for Q1, with some even saying they could produce a net profit. Those are all top-credit loans though; overall loan volume is still low

I say this not to scare you out of the market or to sound bearish. I only say it to caution you to not be disappointed in a few weeks when you realize the new mark-to-market rules didn’t solve every financial problem we’re dealing with. It’s a start, but not the end.

The bigger issue remains unemployment, as employment is typically a prerequisite when applying for a loan. Secondarily, lending standards need to be loosened a tad so more borrowers who are actually credit-worthy can get loans.

Still, I’m actually bullish despite the non-effect today’s news had on the lending market. I firmly believe the market will lead an economic recovery, rather than the other way around. It could be a tough trail to hike at times though, so don’t lose sight of what’s really going on when we get the occasional dose of troubling news.

On that note, we’re going to devote at least part of the next edition to talking about the specifics of the economy’s indicators…. a discussion we started in the middle of March. Some of the updates since then may surprise you.

You’re not getting this kind of insight and commentary from your broker, or from any of the talking heads on TV. You need the free MicroCapPress newsletter to successfully navigate this tricky market that’s trapped somewhere between actual values and extreme emotions. Let us be your foundation - subscribe today.