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Playing The HDSI "Bounce" Is A Bad Idea

April 5, 2012: A whole slew of promoters are issuing panicking emails today, trying to convince you to play HDS International Corp (HDSI) on a bounce play.  So who's panicking?  Well the company for one, as the share price got clobbered from a high of 15.9 cents from Monday's opening of the Pump & Dump campaign, to a 1 cent close just two days later.  The promoters are also in a panic, as many of their subscribers got killed in the two day 95% drop in the share price.

The only ones who aren't panicking are the insiders/debt holders who financed the Pump & Dump.  This is what they had in mind all along.  Dump their stock.  This has the smell of death spiral financing.


Death spiral financing is a process where convertible financing is used to fund primarily small cap companies, which can then be used against it in the marketplace to cause the company’s stock to fall dramatically and can lead to the company’s ultimate downfall.

Many small companies rely on selling convertible debt to large private investors to fund their operations and growth. This convertible debt, often convertible preferred stock or convertible debentures, can be converted to the common stock of the issuing company often at steep discounts to the market value of the common stock. Under the typical “death spiral” scenario the holder of the convertible debt initially shorts the issuer’s common stock which often causes the stock price to decline at which time the debt holder converts some of the convertible debt to common shares with which he then covers his short position. The debt holder continues to sell short and cover with converted stock which along with selling by other shareholders alarmed by the falling price continually weakens the share price making the shares unattractive to new investors and can severely limit the company’s ability to obtain new financing if the need arises.

An important characteristic of this kind of convertible debt is that it often carries conditions like a quarterly or semi-annual reset of the conversion price to keep the conversion price more or less close to the actual stock price. But a lower conversion price also increases the number of shares that a bond holder gets in exchange for one bond, increasing the dilution of existing shareholders. A lower price will also cause those who are long in the stock to capitulate, adding to the selling pressure and lowering the share price even more, and there's your death spiral.

Even if death spiral financing wasn't the cause of the demolishing of the HDSI share price, it is still the insiders who clobbered this stock. Look at the trading of the last three months:




































































Yesterday's volume in HDSI of 84.6 million shares, is more than 4 times the total volume of the previous 3 months and 8 times the volume if you take out the previous two days, which were also part of the PnD campaign. In fact, during the 3 days of the PnD, 100 million shares traded, most of which were sold into the market.  That 100 million share volume is more than 10 times the total volume traded in the three months prior to the current PnD.  Are we too believe that everybody who ever bought the stock on the street, suddenly had the urge to sell?

HDSI started trading last August and was a Pump & Dump from the word go.  Back then, Awesome Penny Stocks was the one pushing the stock and millions of dollars were lost by investors in the ensuring 66% drop.  Then the stock went suddenly quite with comparably sporadic trading. The company hasn't issued a single press release since that campaign ended back in September, before this morning's obligatory, "we don't know what's going on pronouncement".  Funny how they didn't comment on the "unusual trading activity" during the last Pump & Dump, or the current P&D, until yesterday's demolishing, isn't it?  Now HDSI had no choice.

Can you make money playing today's so-called "bounce"?  Maybe, but guaranteed that the insiders have more stock to sell, and even if you make a few bucks, all you are doing is helping them to line their pockets with even more ill-gotten booty.

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