Wednesday Washout

Pink-sheet sham?

This column goes out of its way

not

to report on pink-sheet companies. But in this market, where fundamentals appear to be irrelevant and where new investors are likely to feel invincible after a few good trades, an exception might be

GK Intelligent Systems

(GKIS)

. Here's a company that was the topic of a

Houston Chronicle

story last summer about how its executives left and its Web site and phones were disconnected -- a company that the newspaper said has "vanished" -- yet it trades (and fairly actively in recent days) on the pink sheets at around 31 cents a share. The stock actually rose 16% on Friday for no apparent reason; it rose again yesterday by another 15%.

How can a stock that doesn't exist trade? More likely than not, it reflects year-end covering by short-sellers, according to Cromwell Coulson, chairman of the

National Quotation Bureau

, which operates the pink sheets. He says shareholders and short-sellers need the stock to continue trading, even if the company is on what he calls "life support," so they can unwind their holdings. In fact, he says companies that are defunct are likely to continue trading unless they've formally filed for bankruptcy. (GK's incorporation has been suspended by the state of Delaware, but it can be reinstated if the company pays current and back fees of $4,200.) Don't laugh: These defunct companies can and do spring back to life when promoters buy their shells.

In the interim, isn't it dangerous to allow a stock to keep trading when the company itself has disappeared? Couldn't people be duped into buying what is nearly a worthless company?

Indeed, says Coulson, but he adds that "you cannot regulate against stupidity. You have to do homework before you invest. You have to look under the hood. You should know how to invest in these companies. This is an area that can be very inefficient.

"Look at

Iridium

(IRIDQ)

," he says. "The 'Iridiots' are not going to get anything. And yet the stock recently traded for $6. But go look at a daytrader who doesn't care what

Iridium is doing. He may have got in at $2 and got out at $4.

"I wish people were smarter. But you cannot regulate against 'Iridiocy.'" (His words, not ours.) We tried calling GK, but, as the

Houston Chronicle

reported, there doesn't seem to be anybody home.

Taking out the Garbage:

After considerable deliberation with Greenberg's

Garbage Index selections committee (

Martinez

and me), we've decided to refine the index to only include stocks that, in the past, were no-hit wonders or flashes-in-the-pan or have no profits. That means

Corel

(CORL)

is out and

WebLink Wireless

(WLNK)

is in. Corel, while up on little more than the Linux love-fest, is making money, and besides, there are simply too many Corels out there; Linux stories should be

Red Hots or something else. WebLink, meanwhile, was called

PageMart Wireless

until Dec. 1. It did and does operate a large network. Then it created a new focus and put "Web" in its name. What next, Linux? (I'm sure WebLink fans will argue that it had positive earnings before interest, taxes, depreciation and amortization, but the company has never earned a dime of real earnings, and in fact, it has an accumulated deficit of $392 million.) Ever since, its stock, which had been given up for dead, has come back to life.

Since its creation last week, the Garbage Index has slipped nearly 6.5%. And this note to those who have griped about the inclusion of a favorite stock in this index (after all, nobody wants to see their company labeled "garbage"): The index was compiled with suggestions from Wall Street's sharpest short-sellers, who have tracked these stocks, on and off, for years. (Most were surprised to see their recent phoenix-esque performances.) The index's purpose is to shine a light on today's highfliers that have a history of not living up to expectations -- stocks that are swept up in the euphoria of a market that has no limits. One or more may turn out to be a great company, but until that happens, investors have nothing but their history of broken promises and/or wacky financials.

Speaking of which, a great idea sparked by an comment from a regular on my message boards: The Greenberg Family of Indices is proud to introduce the

Greenberg Effect Index. These are stocks that rise, as if out of defiance, to items here that have questioned their fundamentals and valuations. The current index:

Lernout & Hauspie

(LHSP)

,

Ancor Communications

(ANCR)

,

Cree Research

(CREE) - Get Report

,

Scient

(SCNT)

and

Diamond Technology Partners

(DTPI)

.

Join the discussion on

Herb's Latest or the

Greenberg Garbage-Index

.

The purpose of this index? To serve as a reminder that, historically, most stocks that experience the Greenberg Effect also experience the reverse-Greenberg effect. And

that

usually happens when investors expect it the least. Just go back and look at

Iomega

(IOM)

,

Sabratek

(SBTKE)

,

Engineering Animation

(EAII)

,

Network Associates

(NETA)

,

CHS Electronics

(HS)

,

HMT Technology

(HMTT)

,

Stewart Enterprises

(STEI)

, etc., etc., etc.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.