The Contrarian Perspective

We are in the process of moving to a new hosting provider, and a new platform.  We had a number of technical issues with our previous host, and decided it was time for a change.  We’ve also switched to Wordpress as our publishing platform, for its flexibility and elegance.  We’re working on ensuring all our old links work, but anyone who has migrated a website across platforms knows this is a daunting task, so please bear with us.

Thanks for continuing to read our thoughts on the markets.  There are difficult days ahead, and we have a great deal to say about the present environment, so stay tuned.

Please click here to visit the home page.

Zecco.com announced some changes to their commission structure this weekend. For those of you not familiar with Zecco Trading, they are an innovative new brokerage that offers commission-free stock trades, and provides a uinique social networking platform where traders can share data about their real-money trades.

Zecco’s plan was to earn its revenue primarily through margin interest, option commissions, and adsense revenues. Up until now, Zecco had offered 40 free trades per month. However, over the weekend they made some adjustments to their structure. The new structure will be as follows:

As you can see, the free trade allowance has been reduced to 10 per month, and the commission for additional trades has been increased from $3.50 to $4.50. So why the change?

Sabin Speiser, Zecco’s head of marketing, explains it as follows:

Free trading is here to stay. Our mission today is the same as it was a year ago, to level the playing field for the everyday investor. If you’re like the majority of our customers (and over 98% of online investors), you trade less than 10 times per month, much less than the 40 free trades we now offer. You are, however, clamoring for more sophisticated trading functionality and the superior customer service you deserve. We hear you and we’re adjusting our offer to get you more of what you need.

Instead of paying for free trades you may not use, we’re investing that money in the tools and functionality that you will. Over the coming months you can expect:

• Significant investments in the number of service representatives and training.
• Addition of 3 and 4 legged options strategies so you can trade butterflies, condors, and more.
• Release of a sophisticated options analytics platform.
• Access to ZeccoShare, the ground-breaking investor social network at zecco.com. Independent of Zecco Trading, ZeccoShare lets you share your brokerage holdings, trade history and performance anonymously, and view the same of others’. Now, you can debate stocks with other investors and know that they are putting their money where their mouth is.

And much more, including fantastic new premium services at a typically fantastic Zecco price:

• Streaming quotes, news and charts.
• Tax planning and performance tools powered by GainsKeeper®

You can read between the lines and see that Zecco has had to make some adjustments to its revenue model. This is hardly surprising — it’s a young company with a new model, and there were naturally going to be some kinks to iron out. Some traders have criticized the somewhat thin toolset Zecco presently offers, so it’s good to see that they’re planning on expanding it.

At the end of the day, $4.50 per trade is still close to the cheapest commission you can get anywhere, and if you keep your trades to under 10 per month (as most investors do), you’ll still be able to trade 100% free. In short, we believe Zecco is still one of the best values available.

Warren Buffett recently released his

annual shareholder letter for 2006. I read his letters every year, and so should you, whether you’re a Berkshire investor or not. Hidden in this year’s letter was an ominous message about the outrageous fiscal excesses our country has perpetrated in recent decades.

Our government has been the biggest offender, racking up staggering amounts of debt, and pushing the responsibility for paying for it off onto future generations. It is a shameful state of affairs. And one can’t help but wonder if the fiscal irresponsibility of individuals isn’t caused at least in part by he misdeeds of our government. After all, if our leaders, who are supposed to be role-models, can maintain a negative net savings rate without worry, why can’t we?

The Omaha Sage paints a disturbing picture:

“The ‘investment income’ account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse compounding” as we pay ever-increasing amounts of interest on interest… Our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual ‘tribute’ so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a ’soft landing’ seems like wishful thinking.”

At some point the party must end, and the piper must be paid. And the mounting evidence suggests that day is coming soon. As Mr. Buffett notes, the exact repercussions are impossible to predict. But we can make an educated guess. First and foremost, it’s difficult to imagine a future that will not include massive inflation. Productivity growth can’t keep up with the deficit forever, and when we can no longer service our debts through production, the only solution is to devalue the currency.

The Internet is full of doom-and-gloomers and gold bugs writing about the demise of the dollar. I don’t go quite that far. Plenty of currencies have undergone massive inflation and survived. (Remember the peso the 80s?) But it would be wise to prepare for a big drop in the dollar’s value. How do you do this? Diversify out of the dollar. Warren Buffett has been doing it for years. You can do it, too, by investing in assets like the following:

• Precious Metals
• Real Estate
• Overseas Stocks
• Foreign Currencies
• Commodities

Which of these is best? Stay tuned for future articles on that topic.

George S. Classon’s timeless classic won’t tell you how to pick the latest breakout stock, nor will it teach you any fancy trading strategies. In fact, it has little in the way of specifics or modern strategies on anything. None of that changes the fact that the Richest Man in Babylon is one of the greatest investing books of all time.

Books on finance and investing are not generally known for their entertainment value. That’s what makes the Richest Man in Babylon so unique. Rather than a turgid textbook full of figures, arcane terminology, and writing to make your eyes glaze over, like many investing books, Classon teaches the foundations of success in the markets and in life through a collection of fables about old Babylon. His depiction of everyday life on the streets on the great, ancient city are fascinating for their own sake, and the reader can hardly guess he is learning about how to handle money at the same time.

The book is geared toward the beginner, and as such it is the ideal book to give to kids to start their financial education. Yet its wisdom is sound, enduring, and timeless, and is an excellent dose of reality for old pros who have become absorbed in whatever trading technique is presently in favor.

To that end, your editor re-reads this lovely little book every year. Pure pleasure would be reason enough, but the inspiration and wisdom to be found in these pages make it all the more rewarding.

Christopher Browne’s The Little Book of Value Investing is a fine introduction to the logic and philosophy behind value investing. Written in plain, accessible language, it is an excellent resource for the beginning investor who wants to learn the secrets of achieving long-term investing success. It may also be helpful for investors with experience with other investment strategies, who are looking to branch out into value investing.

There can be little doubt that Christopher Browne knows value investing about as well as anyone alive. He has over 37 years of professional market experience. Christopher Browne’s father, Howard Browne, was co-founder of the famous Tweedy Browne and Reilly brokerage, where the author now serves as managing director. In the early days of the firm, Howard Browne served as broker and trusted advisor to both Benjamin Graham, and his protege, Warren Buffett. The names Buffett and Graham have become nearly synonymous with value investing and its great profit potential. Indeed, value investing has made Warren Buffett the world’s second-richest man. Mr. Browne and son plainly learned from the best.

The Little Book of Value Investing is filled with timeless wisdom about investing in general, as well as crowd psychology, and the intrinsic value of great companies. Mr. Brown introduces the reader to the traditional methods of determining what a company is worth, and explains why the market price is often out-of-whack with a company’s true value (in both directions). Along the way, the author makes an excellent case for why value investing works so well, and so consistently. Every bit of advice and sage wisdom offered is the result of decades of successful experience, and is thouroughly supported by historical studies and back-testing. (The final chapter discusses a number of these supporting studies.)

The book is written in a light-hearted, witty style which makes it a quick, easy read, and leaves the reader eager to get started. Ultimately, though, this strength is also the book’s only real weakness. It is very brief, and lacking in detail. To be fair, the title is The Little Book of Value Investing. This book is about as good an introduction as could be wished for, but I would advise that the reader channel the enthusiasm it creates into further study, rather than jumping right into markets. I’m sure Christopher Browne would agree.

Regrettably, the book is only available in hardback. It’s a bit annoying to have to pay hardcover prices for a book that is easily finished in a couple of hours. Still, value stocks have outperformed growth stocks by significant margins for as long as records have been kept, and if The Little Book of Value Investing inspires you to learn how to find them, it will be well worth the price.

The newsletter will be back up soon.  Thanks!

One thing you will never see on this website is a claim like the following: “Stocks Ready To Soar! Hot News Alert, Huge Profits 1000%+! Stock Near Explosive Breakout!” So when this ridiculous claim appeared in one of our adsense areas, we immediately banned the advertiser. There was no need to visit the site. Only an unscrupulous provider would run an ad like this.

All marketeers engage in “puffery,” talking up their products, and there’s nothing wrong with that per se. But extravagant marketing claims such as the above are at best misleading, and at worst downright fraudulent. If you see similar language in your mailbox at home, it belongs in the garbage can. If you get an email from one of these characters, hit the spam button and move on.

Keep Your guard Up at All Times

Unfortunately, there is no shortage of shady characters out there. Run a Google search on “penny stock,” and you’ll see. And if you make the mistake of giving your contact information to any one of them, rest assured that you will be deluged with spam and junk mail for the rest of your natural life.

If you’ve read our introduction to contrarianism, you’ll recall that the four great enemies of investors are ignorance, fear, hope, and greed. Spurious stock hypesters know this, and their marketing messages tend to be based on one or more of these. The most common form relies on a combination of greed and ignorance. Our first banned ad is a typical example.

1000% gains! Turn $5,000 into $1 million! Stock set to explode! Statements like these are designed to ignite your greed. Of course, most investors know that claims like these are unrealistic. Most, but not all. The advertisers rely on the ignorance and inexperience of some investors to prey on them, enticing them with promises of grand fortunes made overnight. Even knowledgeable investors who should know better can sometimes be sucked in by the urge to gamble and hope for a big score.

Penny stocks are one of the more common vehicles, but unscrupulous marketers target all areas of the markets. So caveat emptor.

Lastly, if you see an ad like this in any of our advertising areas, please contact us and let us know. We can’t control the content of the ads that end up in our adsense areas, but we will ban any spurious advertisers we become aware of.

Single stock futures are a relatively new product, and are yet not widely known, but they should be. They are an excellent investing tool. So what are they?

Single stock futures are similar to the more familiar futures contracts on indices like the S&P500 or the Dow. They trade on the the OneChicago Exchange. Like stock options, they are sold in units called “contracts,” each of which controls 100 shares. They also have a strike price, and an expiration date. Unlike an option, though, a futures contract creates both the right and the obligation to buy or sell the stock at the strike price on the expiration date.

A Near Perfect Hedge

The effect of this is that single stock futures contracts track the performance of the underlying stocks almost exactly, with a couple of caveats. Specifically, for a long position, the price of a single stock futures contract is generally equal to the current stock price, discounted for any dividends that are scheduled to occur prior to the expiration date, plus interest according to prevailing rates. Similarly, for a short position, the price is the current stock price, plus any dividends to be paid, less interest.

Like options, pricing of futures contracts varies according to supply and demand. Plus, unexpected changes in dividend payments can cause the performance of a futures contract to vary from the underlying to a certain extent. Thus, these contracts will always be a near-perfect, but not 100% perfect hedge. Still, they track their underlying stocks so closely in general that they are excellent hedging devices.

Putting Stock Futures to Use

So, how can you put single stock futures to use? Firstly, single stock futures generally require only 20% of the value of the underlying to be put up as margin. Thus they are an easy way to create leveraged positions.

Never Sell Short Again

More importantly, if you like to sell stocks short, you may want to consider selling a futures contract, instead. Why is this? Because selling short has a number of disadvantages. You must wait for an uptick in the price before you can enter the position. Then you must borrow the stock. If there’s no stock available to borrow, you’re out of luck. On top of all that, you might be exposed to hefty margin interest if the position moves against you and you don’t have sufficient excess cash in your account to cover the loss.

Selling a single stock future eliminates all of these problems. There is no need to wait for an uptick or borrow the stock. And instead of having to pay margin interest, you collect interest on the position. Lastly, only 20% of the price is tied up in margin. You can invest the other 80% in a safe income instrument and collect even more interest.

Cheating the Tax Man (Legally)

Futures can also be helpful for tax management. Say you hold an appreciated position in a stock which you would like to sell, but you don’t want to pay short-term capital gains taxes. (Who does?). You can instead sell a single stock future contract for the stock and lock in your return. You can then wait until the long-term capital gain cutoff, collecting market interest on the size of the position in the meantime. Once the minimum holding period has passed, you liquidate both positions, and collect your short-term profits while paying long-term capital gains tax.

Stock futures have many other uses for creative investors. You can learn more at the OneChicago website.

Not many brokerages offer stock futures at present. If your broker doesn’t offer them, put in a request that they add the feature. Stock futures are a flexible tool with a wide variety of applications. They belong in your investing arsenal.

Today we launch a new series of articles and a model portfolio entitled “Short the Spammers.” I have long claimed that investors would likely do far better selling short any stocks mentioned in unsolicited ads they receive than buying them. It’s time to put the theory to the test, and perhaps to have a little fun at spammers’ expense.

Let’s make one thing clear from the start, however. We do not recommend taking these positions with real money . The sort of stocks we will be looking at tend to be highly volatile, and their financial information tends to be thin at best. That means they are dangerous, but the danger cuts in both directions. While we believe there is far more danger to the downside than the upside, we don’t like to take positions without solid facts backing them up — and such facts tend to be scarce for these issues. Which is the whole point.

Our first stock is “Tubearoo, Inc.” (OTC:TUBR). Your editor received a full-color brochure touting this stock in the mail yesterday. It was the third such brochure that has arrived in my mailbox in the past month. It was made up to look like a research report, with the title “Vision Investor Report.” The tag-line: “This Stock Could Run Up Over 600%!”

Regular readers may recall our article on misleading language in financial marketing. This headline is a perfect example. The truth is, any stock technically could go up 600%. Statements like these are designed to ignite your greed, while revealing no information at all about the company in question.

Inside the pamphlet is more of the same. Amidst lots of flashy pictures and graphics (all prominently featuring the TUBR stock symbol) there is a list touting “5 reasons to own this stock.” They are: 1) TUBR could rise by more than 600%, 2) Internet video is red hot, 3) 500% market growth predicted for Internet video, 4) Google bought YouTube for $1.65 billion, 5) TUBR could be one of the hottest stocks of 2007.

Read over that list again, and consider: there is not a single fact about Tubearoo in it! Rather, a few enticing facts about the industry in which Tubearoo supposedly operates are presented, along with completely unsubstantiated “predictions” about TUBR. In fact, not a single fact about Tubearoo, Inc. appears anywhere in this advertisement. The fine print at the end of the report makes this abundantly clear, stating “This is not an analysis of TUBR’s financial position or operations,” and “Because VIR is a paid advertisement, there may be an implicit bias to its content.” No kidding?

If we want facts, we will have to look elsewhere. Pulling up TUBR’s SEC filings turned out to be far more entertaining than your editor expected. Financial statements are not generally regarded to be “fun” reading, but this one made your editor laugh out loud.

In brief, the financial statement lists total assets of $463,377. Further down, it lists total liabilities of — that’s right — $463,377. In other words, according to their own balance sheet, the company is worth precisely zero. (It seems your editor and the good folks at TUBR can agree on at least one thing.)

The company shows a loss since inception of $395,000, while producing a grand total of $960 in revenues. That’s a return on investment of -99.75%. Yet at $2.06 a share, the company’s present market cap is over one-hundred-forty-three-million dollars!

Reading over these facts, ask yourself this: What business to you think TUBR is really in? They claim to be in the Internet video business, but I have never seen their site advertised, and as their own balance sheet reveals, their grand total revenues from their website are $960 since the company was founded. On the other hand, I have received multiple glossy, full-color advertisements touting the company’s stock, and the management has raised over one-hundred-forty-million dollars in market capitalization from its shares.

It is therefore your editor’s humble opinion that TUBR is in the business of selling worthless stock certificates, not Internet videos. And they appear to be doing quite well at it. Why not join them?

Our first entry into the short the spammers portfolio, then, is TUBR. We will enter a short position into our portfolio at today’s closing price of $2.06. It’s already down over 50% since May, but we see no reason why the trend won’t continue all the way down to TUBR’s true value of zero.