The Contrarian Perspective

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A big part of law school is learning to use precise language. Law professors delight in picking at every tiny ambiguity, inconsitency, or subtle weakness in your speech and writing. You come away from the experience with a new appreciation for all of the subtle ways words can be used to mislead, exaggerate, or stretch the truth.

I get fine examples every day in my mailbox in the form of investment marketing. Some of the uses of language are quite ingenious. Let me give you an example:

“Government Sanctioned Investment Opportunity Allows an Elite Few Investors to Earn Returns of over 100,000,000%!”

My investment research has uncovered a phenomenal investment opportunity. One that could literally earn you a return of over one hundred million percent, literally overnight! I know you’re skeptical. So was I, until I saw the proof. But the fact is that this investment is real, and has been verified by the Los Angeles Times, the San Francisco Chronicle, and even the United States Government. But you must act now, as this opportunity will disappear forever in only six days. Order my expensive special report today! You could be the next savvy investor to earn a nine-digit return. Order now!

Sounds outrageous, right? What investment could I be talking about? I’ll tell you: tickets for next week’s California Lottery. Now go back and read the previous paragraph again. Every statement in it is true. The Lottery is a government sanctioned “investment.” Winning the lottery provides you a return of over 100 million percent, as can be verified in every major newspaper in the state, along with government records. And I’m talking about next week’s lottery specifically, so there really are only a few days remaining to get in on it. Of course I never mention that there will be new drawings every week, or that your chances of actually winning are next to zero. But that doesn’t change the fact that my statements are true. Misleading, but true.

You don’t have to be a lawyer to see through language like this, of course. But investing marketeers use the same language tricks all the time. Chances are you see stuff like this in your mailbox every day. Frequently it’s no more subtle than my example.

Watch out for key phrases like the following:

• You could make…
• Savvy investors have made…
• This stock is set to…
• I am 100% confident that…
• This stock could…
• Potential returns of…

Statements like these are all speculative and noncommittal. They allow outrageous claims to be made, while avoiding responsibility when the rosy predictions don’t come true. Think about it. Technically, any stock could potentially gain 1000% in the next 6 months. No one knows for sure, including the marketeers making these predictions.

Marketeers often try to distract you from this by making ridiculously “precise” predictions. I’m sure you’ve seen claims like the following: “This stock could go up 1437.2%!” or “Savvy investors could turn $5,000 into $27456.22 in just 6 months!” Marketeers use these very specific numbers to try and convince you that they know exactly what is going to happen with a stock (a preposterous notion, but it’s amazing what greed can make people believe). But the marketeers combine these statements with non-committal language, so they are freed from any accountability for their predictions.

This is one of my favorite tricks, because it makes sorting my mail so much easier. Do what I do. Any time you see a forward looking statement that uses “precise” numbers like this, throw it right in the trash. And think like a lawyer whenever you look at marketing materials. You’d be amazed how many fallacies can crop up in one sentence. The marketeers know this all too well. So should you.

Over the past few years, more and more apocalyptic stories have been

popping up about a supposed phenomenon known as “peak oil.” The

theory is that we’re running out of oil, the big powers are keeping it

quiet, and as supplies dwindle, world-wide economic chaos will ensue.

This is hardly a new theory. According to the Chicken Littles of the

world, we’ve been “about to run our of oil” for over thirty years.

Obviously it hasn’t happened yet. With the recent upswing in strife

in the Middle East, however, the notion has gained in popularity.

The thing is, the theory is utterly false, and can be laid to rest

with a single well-established fact: there is more oil in the Colorado

shale fields than the entire Middle East had at its peak. The only

reason we’re still importing oil is that, at present, it is cheaper to

do so than to extract it from shale. Until recently, getting oil out

of shale has been a nasty and expensive business.

That’s about to change, though, as engineers at Royal Dutch/Shell have

applied for a patent on a new method of extracting shale oil cheaply

and cleanly. (As an interesting side note, it is the largest patent

application in U.S. history.) Amazingly, this method:

• Is cleaner than conventional drilling
• Generates the highest grade of light-sweet crude oil,

  which burns cleaner than other varieties.

• Becomes profitable with oil just north of $30 a barrel

  (which we’ve already blown past.)

In other words, with Shell’s new technique, it actually

benefits the environment to switch to shale oil. I found this

hard to believe at first, but seeing as I am a patent lawyer, I

decided to pull the patent application to see for myself. When I saw

the invention laid out on paper, I was convinced that it would work.

As with most great ideas, the basic concept is simple. In brief,

engineers dig holes around the extraction area, into which they insert

giant cooling rods. The water in the soil freezes, and forms an

“ice-bowl,” which traps the oil and prevents seepage. The center of

the formation is then heated, causing the oil to bubble up through the

rocks, from which it may then be extracted with ease. The ice-bowl

prevents all the nasty chemicals released by this process from getting

into the water table. This

href="http://en.wikipedia.org/wiki/Oil_shale">Wikipedia Article

provides more details.

Shell has been granted rights to a small patch of shale field in

Colorado to make an experimental run with its new method, and all

present signs suggest it will be a success. Make no mistake, however.

Even if Shell’s idea is a disastrous failure, existing technologies

can get oil out of the shale — it’s just expensive. Other new

extraction methods are also being tried by a number of companies.

Here’s a partial list:

• Petrobras
• Shell Frontier Oil and Gas
• Exxon Mobil
• Chevron Shale Oil Company
• EGL Resources
• Milennium Synfuels
• Oil Shale Exploration, inc.

The absolute worst case scenario I can fathom is that oil prices could

get high enough to make existing shale extraction techniques

economically feasible (some estimates put the break-even point at

about $75 a barrel). At that point, we could tap our shale reserves

and continue on, whether any of the new methods work or not, without

any significant changes in infrastructure. Sure, gas would be more

expensive, but probably no more-so than Europeans pay now. The

economy may go through a rough patch during the transition, but the

theory of a global economic meltdown over peak oil just isn’t

credible.

In fact, once shale production takes off, we could easily become the

world’s biggest exporter of oil, with China as our biggest

customer. Strange as it may sound, it is quite possible that, within

our lifetimes, Chinese government officials may take to fretting about

their dependence on “Middle-Western” oil.

In short, don’t buy into the peak oil paranoia. It is nothing more

than a fairy tale, and is dangerous in that it distracts attention

from the real impending crisis within our energy policy: global

warming. It makes no sense to waste our time fretting about running

out of oil when we in truth should be concentrating on figuring out

how to curb our usage of it. After all, even if we were running out,

wouldn’t the best solution be the same?

The Federal Communications Commission decided Thursday to allow public comment on whether it should modify its rules regarding net neutrality. We cannot overstate the importance of this issue, or this opportunity.

The Internet is the most democratic, open channel for communication and exchange of ideas in the history of human civilization. We at The Contrarian Perspective value individuality, self determination, and independence above all else. Until now, the ability to reach a large audience was strictly limited to the wealthy and powerful, due to the great expense of getting the message out. The Internet has changed that. Now, anyone with a great idea can reach a virtually unlimited audience. The only thing standing in the way is whether people find your idea compelling or not. If they do, it is bound to spread and reach its full potential, no matter who you are.

Change is Bad for Them, But Good for Us

Traditional media outlets view this freedom as a threat, and rightly so. They have achieved great wealth and power through maintaining a stranglehold on the channels of delivery of information. The Internet takes their control away, and it seems that every day we hear yet another story about yet another desperate attempt by the media establishment to get it back. From harassing ten-year-old mp3 downloaders, to initiating denial-of-service attacks against file-sharing networks, to suing YouTube, they will do anything to block the free flow of information and ideas, because in truth control over the means of distribution is the only thing of value they ever created. The ideas themselves have always come from the artists, reporters, writers, and musicians who were forced to do business with media outlets in order to get their message out.

An Assault on Meritocracy

On the Internet, competition is based entirely on merit, and this scares the Viacoms of the world to death. Rather than compete on a level playing by creating better ideas, they would much prefer to compete as they have done in the past: on an uneven playing field manipulated by money. And that is the motivation behind their initiatives to create priority traffic based on money. They want to seize control of the means of communication, so they can again make unlimited money by catering to the lowest common denominator. Make no mistake. Whatever rhetoric the lobbyists they employ may spew out, this is their motivation, and it is their only motivation. It is vital that their efforts be stopped immediately, and permanently. Otherwise, we run the risk of reversing the revolutionary ability of individual voices to spread their ideas.

It is especially revealing that Google is one of the greatest supporters of net neutrality. With its enormous resources and staggering traffic load, Google would stand to benefit enormously if net neutrality were rejected. But Google has shown that it understands the great value that freedom of information creates for society as a whole, and is willing to put this ahead of its own pecuniary interest. For that, it should be applauded, and its message deserves close attention.

Speak Up Now

The FCC has stated that comments may be sent to Ms. Heather Hendrickson by referencing docket number 07-52. You may email Ms. Hendrickson at heather.hendrickson@fcc.gov. We urge you to contact Ms. Hendrickson and make your voice heard, if you ever want it to be heard again.

We hereby grant permission for you to excerpt any portion of this article you wish in your communications to the FCC. You may also distribute this article freely in unedited form, so long as you include a link back to QuiteContrarian.com. Get the word out before it’s too late.

As I mentioned a few days ago, I was recently called up for jury duty in a case that was slated to last six weeks. I was one of the first jurors called into the box, and voir dire (the jury selection process) looked like it was nearly complete. But then, counsel for the plaintiff dismissed me with his last peremptory challenge. I’ve been let off the hook, thankfully. I’ve served on a jury before, and while a fascinating experience, once was enough.

Of course, I wasn’t surprised to be dismissed. The only real surprise was how long it took. Personal injury plaintiffs generally don’t like to have a lawyer on the jury, because other jurors tend to defer to a lawyer, and plaintiffs often rely on appealing to the emotions of the jurors rather than legitimate legal issues. They know all too well that other lawyers are more likely to see through this, so lawyers are routinely tossed with the first challenge, not the last. Perhaps I struck him as more sympathetic.

I’m a busy man, and I was glad to be excused, but a tiny bit of regret lingers. The subject-matter of the case was interesting — It seems that there’s still some residual force left in the great tide of asbestos lawsuits we have experienced in this country. I have mixed feelings on the subject. Asbestos is no doubt highly toxic, and mesothelioma is a terrible disease. However, asbestos is also a very useful substance, which can be used perfectly safely if handled properly (and is still widely used in other countries). We use many substances every day which are similarly harmful when mishandled. For example, fiberglass insulation is extremely carcinogenic when inhaled, but nearly every house in this country uses it, and its effects on energy conservation are highly beneficial.

Of course, I have no idea about the merits of the particular case I would have sat on, nor am I prepared to debate the relative toxicity of fiberglass vs. asbestos. What I can say with confidence is that there has been an enormous amount of hysteria and out-and-out fraud surrounding the asbestos issue, which has made things all the more difficult for those who have meritorious cases. Mesothelioma can take up to twenty years to develop after exposure. What is a cancer sufferer to do if the company which exposed him is bankrupt due to a glut of frivolous and fraudulent asbestos cases filed by unscrupulous personal injury lawyers before he was diagnosed? Yet that same cancer patient will likewise be harmed by any efforts to block or limit liability.

Tort Reform

There are no easy answers, but absolute limits on liability appear misguided to me. For all the stories of ridiculous jury awards we hear, there are legitimate cases every day of people who frankly should receive substantial damages. Imagine, for example, if you were slated to have your foot amputated, and the doctor, who was high on pain medication, amputated the wrong foot? Would $250,000, the limit proposed by some lawmakers for non-economic damages, be enough to fairly compensate you for your loss? Put differently, if someone offered you $250,000 to amputate your only remaining foot, would you accept it? (This was a real case, by the way.)

On the other hand, we all can agree that frivolous lawsuits hurt everyone. So what’s to be done? Some states have proposed an intersting alternative. A lawsuit review-board composed of doctors and lawyers would be formed, to make a preliminary judgment about the merits of a suit. If the board ruled your suit to be legitimate, it could proceed normally. If it ruled your suit frivolous, on the other hand, you could still choose to proceed normally. However:

• If you lose, you must pay the other side’s legal fees; and

• Any lawyer who proceeds with, and loses, three cases ruled frivolous by the board, is summarily disbarred.

No limits would be placed on the potential reward, and jurors would never know of the board’s decision. This sort of solution has a lot of appeal in theory, but it has yet to be widely applied in practice. In other words, with apologies, the jury is still out. But it is the best idea I’ve yet seen for preserving the rights of those who have legitimate catastrophic injuries, while curbing the frivolous lawsuit feeding frenzy. I hope more jurisdictions will consider giving it a try.

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QuiteContrarian.com requires disclosure of any position held in any stock recommended on our site or in our newsletters at the time of recommendation. Editors must wait at least 24 hours from publication of a recommendation before taking any investment action relating the the security in question.

Remember the 80s, and all the paranoia about Japan outdoing us economically? Supposedly they were going to buy up the entire country. Obviously, it didn’t work out that way. In fact, the Japanese economy has stagnated for the last 15 years. In an effort to stimulate its sagging economy, Japan has worked hard to keep the value of its currency low. This gives Japan a significant competitive advantage when exporting goods overseas, as it makes its goods cheaper for foreigners to buy.

Free Money for Banks

Japan has accomplished this in part by keeping its interest rates incredibly low. In fact, its prime rate was zero for a number of years. This has resulted in a phenomenon known as the “yen carry trade.” Investors have been busy for years borrowing Yen and investing the money at higher rates in other currencies, and securities in other countries, such as China. This naturally drove the value of the Yen down even further.

The result is that the Yen has been significantly undervalued for a while, now. Experts have estimated that it is undervalued by at least 40%, in fact. This situation can’t last forever. Japan recently increased its interest rates for the first time in many years, and its overall economy is heating up. The recent meltdown in Chinese stocks spooked some carry traders, resulting in a big jump in the value of the Yen on the same day. As the Dollar continues to weaken , the stage is set for a significant shift in the balance of world currency valuations.

Time to Look at Japanese Assets

The end result will be unpredictable, as always, but the odds point to a big jump in the value of the Yen vs. the Dollar. With the Japanese economy strengthening steadily, Japanese assets of all varieties warrant a close look. They will present the opportunity to profit both from the currency shift, and from the rising fortunes of Japan.

Stay tuned for articles on specific Japanese asset classes, and how to get into them.

Until recently, few were aware of the large and growing worldwide shortage of clean, fresh water. Even in the U.S. water infrastructure is crumbling, and will soon require a major overhaul. Awareness of the problem is growing, however, and investing in water stock (called “blue gold” by some) is now a hot topic among investors of all stripes.

The problem is bound to be exacerbated by global warming, as declining soil moisture levels lead to a depletion of fresh water tables world-wide. Therefore, potential government solutions notwithstanding, investing in water stock appears to be a wise long-term move.

The trouble is that the cat has been out of the bag for a while, and many of these stocks have been driven up to dizzying heights by speculators. Thus, while the long-term prospects for the sector are very bright, it can be difficult to choose the right way to play it. Here is a brief overview of some of the available options for getting into the sector.

Individual Global Water Stocks

The following overseas water stocks have been getting a lot of attention recently:

• Companhia de Saneamento Basico do Estado de Sao Paulo (SBS) — is a Brazilian water utility, located in Sao Paulo. The Latin American market for clean water is big and getting bigger. SBS has been growing at double-digit rates for several years, and is a fine way to enter the strengthening Brazilian market.

• Consolidated Water Company (CWCO) — is a water utility in the Caribbean. It serves citizens of Belize, the Cayman Islands, Barbados, the Virgin Islands, and the Bahamas. Tourists have driven growth in demand, especially by golf courses and swimming pools. The problem is that the shares are expensive, making this a risky venture.

• United Utilities PLC (UU) — a major British utility, it provides water and sewage services to a number of current and former Commonwealth countries.

• Veolia Environnement SA (VE) — A big French water services firm, with a large and growing presence in a number of developing markets, including China. Veolia has recently been targeting the sea-water desalinization market, setting up operations in North Africa and Arabian territories. This market has huge potential, especially as global warming puts pressure on fresh water supplies. The trouble is that like other promising water companies, the shares have been driven up to eye-popping levels.

• Suez (SZE) — Another French utility, Suez operates both water and electricity services in Europe. The shares have been volatile because of takeover and merger rumors. In particular, Suez has been eyeing Gaz de France as a possible merger candidate, to protect itself from a takeover by Enel, an Italian utility.

Each provides exposure to water services in general, along with emerging markets and overseas currencies. This is all to the good, but again, the shares are expensive.

Water-Related ETF Options

The Power Shares Water Resource ETF (PHO) is a good way to get broad exposure to the sector in the U.S. Based on the Palisades Water Index (ZWI), its core holdings include bright prospects like Watts Water (WTS), and Insituform (INSU). Insituform is an especially interesting option. Its core product allows damaged water-lines to be repaired in place, without requiring expensive excavation. Future demand for this product should be substantial in the U.S.

Investing in the whole sector by buying the Power Shares Water ETF can help mitigate the risks inherent in an overbought sector. If you want a more narrow focus, though, you might consider cherry-picking from its holdings.

In addition, Claymore-Boenning & Scattergood have released two water-related unit investment trusts: the Global Water Equities UIT (CGWEAX) and the U.S. Water Equities portfolio (CUSWAX). Again, you may consider buying into the UITs for broad exposure, or you can look into their core holdings to get ideas for individual stocks.

Due to the recent speculative frenzy surrounding the sector, you might be best served standing aside for the short term, depending on your time-frame and tolerance for risk. Or you might want to add one of the ETF or UIT options as a core holding. But add a few individual water stocks to your watch list as well. We hate to buy overpriced shares, of course, but in the long run, water stocks belong in any smart investor’s portfolio.

As we discussed in Warren Buffett’s Warning, it’s only a matter of time before inflation heats up. It’s already advancing faster than the official government numbers would have you believe. If you want proof, try travelling overseas nowadays, and see how far your dollars go. And because of the staggering national debt, both public and private, there’s no way for inflation to go but up. The time to prepare is now.

How Diversified Are You?

What’s the best way to combat inflation? Diversify out of the dollar into real property, commodities, and foreign currencies. One of our favorite investment ideas combines all three of these: Canadian timber companies. Timberland as an asset class has outperformed stocks for the past 60 years. The Canadian dollar has been growing against the American dollar at a good clip for a while now, and we believe there is no end in sight. Best of all, the Canadians are one of the chief suppliers to timber-hungry China. The companies tend to pay stable and healthy dividends as well, which can provide a nice, steady income stream even if the stock stagnates or dips.

The sum of these features make Canadian timber an excellent investment overall, and an especially good hedge against the coming acceleration of inflation. There are a number of great prospects, but our present favorite is Timberwest.

Timberwest owns several hundred thousand acres on Vancouver Island, some of the most productive timberland in the world. And it owns large tracts of land near development projects, adding the potential for big gains on real estate sales. You can buy the shares in the U.S. under the symbol OTC:TWTUF. It is currently yielding 6.2%, more than many income investments you can get nowadays. And you have the potential for excellent capital gains in addition.

You should also look at American timber companies. Rayonier NYSE:RYN has one of the best portfolios of prime timberland in the world, and has provided a rock-solid return for decades. And real assets such as timberland should hold their value quite well, even in the face of significant inflation.

Full disclosure: Jack Brynaur owns shares in Timberwest. Our disclosure policy.

I’m sure you’ve heard of high-end stores that have no price-tags on their merchandise. Their motto is, “If you have to ask, you can’t afford it.” The same motto should probably be applied to annuities. The fact is that they are very rarely a good deal for anyone. The only exceptions are people who are so wealthy that their decision in unlikely to affect their lifestyle one way or the other.

Annuities are investment vehicles sold by insurance companies. They come in a number of different varieties which are based on different investment schemes. What they all seem to have in common, though, is the tendency for sub-par returns and high fees. Of course, along with the high fees come high sales commissions. Thus, annuities are among the most over-hyped investment vehicles in the marketplace. Sales agents will talk up their benefits until they are blue in the face. Rarely do they explain all the fine print, however.

Don’t Believe the Hype

Take variable annuities, for example. They are typically tied to the performance of a stock index. Many have guarantees against loss, so that you will never lose money no matter what the market does. It sounds enticing, but take care. Although contract terms vary greatly, they invariably have provisions capping the return you can receive in any given year, shaving points off the actual index performance, excluding dividend payments, etc. the net result is that these contracts by and large underperform simple index investing over time, even with their downside risk protection. And the substantial fees charged eat even further into your returns.

No Good For Retirees, Either

Many retirees see annuities as a good way to generate steady income from their retirement savings. Their simplicity is certainly appealing. But again, over all, this is a poor choice for most, even those in retirement. In nearly all cases, you can generate a superior return with similar levels of safety in other conservative investments.

The Rare Exception

The one aspect of annuities that can make them decent investments for a few people is that many of them are tax-deferred. Thus if you are one of the few people who has maxed out all tax-deferred investment vehicles available to you (and there are more options out there than you probably think), and still have excess cash that you can afford to have tied up for the long term, and are willing to earn an inferior return in exchange for tax deferral, some variety of annuity might make sense. Even then you should think carefully. If you are a ways off from retirement, and your tax bracket will likely be higher then than it is now, it may not be worth it to get tax deferral now, when your tax rate is lower. Many will be better off taking the tax hit up front, but achieving a better return in the long run.

In sum, you can’t go too far wrong by avoiding annuities entirely. If you’re one of the very few people for whom they might make sense in limited cases, chances are your finances will be in fine shape either way.