The Contrarian Perspective

With the markets bouncing all over the place, unsure what to make of the Fed’s recent less-than-hoped-for rate cut, we thought we’d take a moment to see how our short picks are doing.

Tubearoo’s crash has continued unabated, falling to $.10 a share, 95% down from the price it was trading at when your editor received his shiny, glossy brochure. While we are still convinced that this stock is worth zero, covering for a 95% gain seems like the prudent choice, so we recommend you COVER you short position in TUBR.

Global Warming Solutions has gotten off to much the same start, declining 42% since our short sale. There’s still penty of downside left here, though, so we are recommending you continue to HOLD your short position.

No new picks as of yet. There has been an odd dearth of individual stock spam in your editor’s mailbox, lately. At one time this would have been a happy state of affairs, but now your editor is oddly disappointed. After all, we have made an average gain of 68.5% in just 5 months shorting these stocks.

If you have a candidate for the Short the Spammers series, though, we’d love to hear about it. Drop us a line at our contact page.

Short-the-Spammers Portfolio

We have a new short pick for our Short-the-Spammers portfolio. The company is called Global Warming Solutions, Inc. (OTC:GWSO). And while we’re all for curbing global warming, this company can’t be helping, as its “business” is just a lot of hot air, as you will see.

But first, let’s see how our first pick is shaping up. As you recall, we recommended shorting Tubearoo (OTC:TUBR) at $2.06 a share, on July 3, 2007. It’s now trading at $0.57, for a 3-month gain of 72%. As you can see, short-selling these hustlers can be quite a profitable venture. It’s tempting to take profits at this point, but at $.57 a share, TUBR still has a market cap of $39 million. $39 million is still quite a high price for a company that’s worth zero. So for now, we will continue to hold our short position in this stock.

Now let’s have a look at GWSO. Your editor received a multi-page full-color pamphlet touting this stock in the mail today. It bears a striking resemblance to the pamphlet we received for TUBR, right down to the lengthy legal disclaimer. Its title is the very official-sounding “Green Investor Report,” and it features a scary photo of the earth on fire. They have actually put up a Web site here, and you can download the pamphlet in PDF form. I highly recommend you do so. Read through it. Examine the breathless language. See if they can pull you in. In particular, let’s look at page 3, where they list their alleged reasons to own this stock. The headline reads: “Own this stock today. The logic is overwhelming.” Well let’s have a look at their “overwhelming” logic, and your editor’s humble response to each claim:

Are you beginning to see a pattern here? Every one of these statements may be technically “true,” but not one of them gives us any material information about GWSO at all. These statements are by all appearances deliberately designed to mislead. The only thing “overwhelming” about the logic of these arguments is its utter and complete absence.

Now to get some information we can actually use, let’s have a very close look at the legal disclaimer. Here’s a choice excerpt:

This is not an analysis of GWSO’s financial position or operations; readers are strongly advised to review GSWO’s financial information in the investors section of www.globalwarmingsolutions.com. Because GIR is a paid advertisement, there may be an implicit bias to its content. GWSO is not profitable and is an early stage company. Investing in stocks, especially early stage companies that are not profitable, is highly speculative and carries a high degree of risk; investors may lose all or part of their investment. Penny stocks may be suitable only for those who can afford to lose all of their investment capital.

As you can see, this “special report” is a paid advertisement, and by its own admission does not analyze the company’s business operations. We’ll have to do that ourselves.

To that end, we paid a visit to the official Global Warming Solutions Web site. We were impressed by the lovely graphics and flashy interface. However, we were not nearly so impressed when we downloaded and read the company’s SEC filings. Here’s a quick breakdown:

• Assets:$741,046
• Cash:$229,096
• Total Revenues:0
• Cash Flow:(302,904)
• Shares Outstanding:62 million
• Market Cap:$65 million
• Shareholder Equity:$741,046

So the company, according to its own estimation, is worth $741,046. That includes a $500,000 valuation for a “hybrid engine” it claims to have. Let’s assume for the moment that that’s correct. That means its stock’s current “value” is $.012 per share. At today’s price of $1.05, it’s trading for 88-times its value.

In truth, even that valuation is generous, because at its present cash burn rate, the company will be broke in a few months. Its real value, in your editor’s opinion, is zero. They have no revenues, and no credible plan in place to generate revenues. Just like the smoggy skies over Houston, it’s all hot air.

Action to take: Sell GWSO short at today’s price of $1.05 a share. It’s already down over 50% from its highs, but it has a long way down to go.

Short-the-Spammers Portfolio

Until next time, good investing, and pay heed to spammers at your peril!

As the overall stock market rally continues, and the Dow has broken reached record highs, now seems like a good time to comment on why we haven’t yet made any short recommendations for 2007. After all, in a bull market, wouldn’t a proper contrarian be betting on the downside?

First and foremost, it’s important to remember that true contrarian investing does not entail simply contradicting what goes on in the marketplace for its own sake. It’s not that simple. Rather, the contrarian looks for situations where the market has mispriced an asset. Naturally this mispricing can occur on the upside as well as the downside, but that does not mean that it’s wise to go short in a bull market.

The truth is that we are not fans of short selling in general. There are a number of reasons for this. First and foremost, selling short is just a bad deal in most cases. Depending on the stock in question, you might have to wait for an “uptick” in price before you are allowed to short. You must borrow the shares in order to sell them, which can expose you to margin interest, depending on your broker’s policies. Even worse, if a dividend is paid out while you hold your position, you must pay it. Plus, you run the risk of the nightmare scenario of a short-squeeze. In simple terms, this occurs when the price of a stock jumps rapidly, and short-sellers find themselves without sufficient margin to hold their positions. The result is they are all forced to buy back the shares at nearly the same time, bidding up the price even further, and forcing investors to close out at the worst possible moment. All this adds up to the cards being stacked against the short-seller right from the start.

Apart from practical considerations, however, short selling just doesn’t jibe with our investment philosophy. We are investors, and we have always viewed short sales more as speculations. A short seller doesn’t take ownership interest in an enterprise — he merely bets on its downward movement. This is not to say we object to the practice. It is an important component of the marketplace, and leads to more efficient pricing. Further, there is no mistaking the fact that it can be very profitable. At the end of the day, however, the potential profits from short-sales are limited, as a stock can only ever go down to zero. The potential losses, on the other hand, are unlimited. We prefer to be on the other side, the side with unlimited potential, which is and always will be the long side.

The upshot is, in a bull market, we look for securities the market has ignored, or beaten down unjustly due to overreaction to short-term misfortunes. Granted, these opportunities are harder to find in a bull market, but they exist, and the beauty of the strategy is that undervalued companies may be swept up by the overall upward trend when the market inevitably discovers its mistake.

P.S. all that said, there are times when the conditions in favor of a downside play are so overwhelming that we can’t help at lest considering going short. Two companies fit the bill at present. Both are American icons, and household names. Both are effectively bankrupt, however much their accounting hocus-pocus may claim otherwise. Stay tuned for more details.

It is often said that once you’ve published one successful book, they’ll publish your laundry list. Well, here’s your proof. Michael Masterson’s previous books, such as Automatic Wealth and Automatic Wealth for Grads, were fine resources, full of sensible advice for getting out of debt and building a nest-egg. This makes Seven Years to Seven Figures especially disappointing.

At 247 pages, this would be a thin volume even if it were dense with valuable information. As it turns out, though, a full 150 of those pages are devoted to stories about various Masterson proteges, and how they achieved their success. Even worse, every one of the people covered followed essentially the same path: copy writing. Case studies have their place, of course, and copy writing can be a fine business venture, but this is excessive. One of these stories would have been ample, and the saved space could have been put to much better use. Masterson attempts to weave some “lessons learned” into the stories, but these amount to little more than standard platitudes. There are no grand insights or hidden gems to find.

The remaining 90-odd pages can be boiled down to small list of bullet points:

• You can’t get rich as an employee, unless your name is Michael Jordan or Bradd Pitt.
• There are in essence only three ways to get rich: by inheritance, investing (especially in real estate), or owning a business.
• Barring a rich uncle dying, the only practical way to get rich quickly is to own a business.
• To raise capital to invest or start a business, either be the best at your job and get a raise, or switch to a higher-paying job. Either way, focus on increasing your company’s profits.

These may all be reasonable points, but I wouldn’t go so far as to say they comprise a “Fast-track plan to becoming a millionaire.” By all means, read some Michael Masterson. He has a great deal of solid advice to offer. But give Seven Years to Seven Figures a pass. I’m certain you have a laundry list of your own to read, should you have the urge.

Independent thinkers like myself and my readers often have a difficult time choosing whom to vote for. Neither national party truly serves the interests of liberty and individualism. Both are much more interested in maintaining their grip on power than in serving the interests of the country. Both parties stay in office by catering to special interests. The only difference is the particular special interests in question.

There is an exception, however. His name is Ron Paul, a congressman from Texas. He is officially registered as a Republican, and unsurprisingly is not popular with Democrats. However, the Republican leadership hates him as well. In fact, they hate him so much they have supported Democrats running against him. A brief overview of Congressman Paul’s record should make it easy to see why:

• He has never voted to raise taxes.
• He has never voted for an unbalanced budget.
• He has never voted for a federal restriction on gun ownership.
• He has never voted to raise congressional pay.
• He has never taken a government-paid junket.
• He has never voted to increase the power of the executive branch.
• He voted against the Patriot Act.
• He voted against regulating the Internet.
• He voted against the Iraq war.
• He voted against funding for thinning of national forests
• He voted against funding a web site promoting storing nuclear waste in Yucca Mountain.
• He does not participate in the lucrative congressional pension program.
• He returns a portion of his annual congressional office budget to the U.S. treasury every year.
• Congressman Paul introduces numerous pieces of substantive legislation each year, probably more than any single member of Congress.

If you are a Blue-Dog Democrat who wants out of Iraq, but is worried about handing the financial reins to the current Democratic front-runners, you should consider Ron Paul. If you are a Republican who thinks the party has lost its way with its massive spending, its war on civil liberties, the disastrous war in Iraq, and its culture of corruption and incompetence, you should consider Ron Paul. If you are an independent who is tired of having to choose between the bad candidate and the even-worse candidate, you should consider Ron Paul. In my mind, he is the only honest man left in Washington.

Over the past decade we have seen a staggering increase in the power of our government over every aspect of our lives. The results speak for themselves. It is plain that the government does not deserve the trust that it has been given. Ron Paul is the only major candidate who is committed to returning that power to the people.

Whatever your political affiliation, I urger you to give him a look. Check out his voting history, his politics, and his character, and make up your own mind. Then pass his name on. Whether or not you choose to support him in the end, his is a message that needs to be heard.

The Rex Agreement is a relatively recent development which offers a new way to cash out the value of your home. It was developed by a finance group called Rex and Company. Here’s how it works: Rather than lend you money against the home’s value, Rex and Company pays you a portion of the value of the home in exchange for the right to participate in any future appreciation. In essence, the company buys an option to purchase your home which lasts between 40-50 years, and allows them to capture their portion of any profits you may realize should you sell you home.

The benefits of the Rex Agreement approach are substantial. First and foremost, since there is no loan made, there is no interest to pay, and no payments to make, ever. It allows you to free up your capital without impediment, to use in any way you wish. Further, in most cases, you should be able to defer taxes on the payout until you sell your home. (Note: we do not give tax advice, and your situation may be different. Consult your tax advisor before considering this technique.)

There are some downsides to watch out for, of course. First, you lose the opportunity to benefit from at least a portion of your home’s appreciation. Interestingly, though, the company also participates in any loss of value your home may suffer, so this cuts both ways. Of more concern to many will be the potential for the company to force you to sell your home. According to the Rex and Company website, this can only occur in the following circumstances:

• You fail to maintain your home as your primary residence
• You become delinquent on your taxes, insurance, or mortgage payments.
• You fail to maintain the property in good condition (subject to ordinary wear and tear).
• You do not maintain proper insurance coverage
• You take out loans that amount to more than an agreed-upon limit against your home

Even if one of these cases occurs you can repurchase the option at its present value instead of being forced to sell. At first blush, the terms appear no more onerous than a standard mortgage or lease agreement. However, consulting an attorney before considering this option would be a wise choice.

So why might one want to choose this option and lose out on the appreciation of a home’s value? The answer has to do with leverage. Few people realize that a house on its own is not all that great an investment, even in a bull market on housing. A 10% annual increase in average values is considered a rip-roaring bull market, but it doesn’t even match the average return of an index fund. What makes homes so profitable for most people is that their investments are highly leveraged. A home owner who puts down 20% of the value of a house and pays another 10% in mortgage payments annually actually earns a 33% return on the money he or she has actually invested from a 10% gain.

The Rex Agreement, on the other hand, only entitles Rex and Company to a proportional percentage of the appreciation in your home’s value. It allows you to free up that money in a non-leveraged manner, and use it however you like, although the wisest choice would be to invest it in a more lucrative asset. So how does Rex and Company make money from this arrangement? They use leverage themselves. The borrow the money to purchase their option, using their ownership stake as collateral.

The Rex Agreement is presently only offered for detached single-family homes which are used as a primary residence by the owner. This is a sign of a solid, conservative strategy, which is refreshing in the wake of recent subprime mortgage lending shenanigans. For home owners looking to get their hands on some cash, but who are leery about present mortgage conditions, the Rex Agreement deserves a look.

Reminiscences of a Stock Operator Edwin Lefevre ISBN: 0471678767 Hardcover 256 pages September 2004

Edwin Lefevre’s investing classic, Reminiscences of a Stock Operator, is not so much an investment guide as a rip-roaring swashbuckling adventure story. The book is a semi-fictionalized biography of Jessie Livermore, who was a market legend in the ’20s and ’30s.

The stock market was the Wild West in those days. There were trading “bucket shops” that allowed 100/1 margin ratios, and operated like casinos. Markets were manipulated by huge investment pools, which ran massive pump and dump operations on some of the biggest companies of the day. The inefficiency of the trading floor system, together with a lack of regulation (compared to today), allowed for all kinds of Machiavellian manoevers, and traders pulled them on each other mercilessly.

Enter Livermore, a shrewd self-taught chartist, who cuts his teeth in the bucket shops, then goes on to build up a massive fortune of tens of millions of dollars (in the ’20s!), then lose every dime. Over and over again. A fascinating store about a fascinating time in our history.

The book is filled with timeless wisdom for traders. There is no better discussion of crowd psychology, and how to exploit it, available anywhere. Livermore’s particular strategies are largely a thing of the past, due to changes in market efficiency and the law. But his wisdom and insight into the markets and herd psychology are as true and valuable today as in 1920.

Reminiscences of a Stock Operator comes with our highest recommendation. Even if you have no interest at all in investing, the larger-than-life story and fascinating history are more than worth your time.

The greenback and the loonie are bouncing back and forth at near parity. The greenback has has a recent little bounce after the Fed’s lower-than-expected rate cut. Read: The Fed printed a little less money than the market had priced into the exchange rates. Some analysts have cited this as a sign that the worst is over for our collapsing monetary system. They are wrong.

The staggering and ever-growing debt load of the U.S. government, corporations, and individuals can only have one effect in the end - inflation, and lots of it. As we have recommended time and time again, it’s critical to concentrate your investments in hard inflation-proof assets. Timberland, water infrastructre, commercial (not residential) real estate, and commodities.

This little bounce in the dollar won’t last, unless by some miracle we manage to elect Ron Paul as president. To that end, your editor is a proud contributor and volunteer for the Ron Paul Campaign. If you have not yet read up on Dr. Paul, we urge you for the sake of the future of this country to give him a fair hearing. Just listen to what he has to say, see what he stands for, and decide based on the issues, not whom the media considers a “viable” candidate.

As always, good investing.

Short the Spammers Portfolio Update - December 12, 2007

With the markets bouncing all over the place, unsure what to make of the Fed’s recent less-than-hoped-for rate cut, we thought we’d take a moment to see how our short picks are doing. A quick look at the charts showed that we’re up 68.5% in just 5 months. Not a bad start. (Read Article).

Short the Spammers 2 — GWSO - October 2, 2007

Time to review the performance of TUBR, our first Short-the-Spammers pick, and add a new short pick: GWSO. This company supposedly is devoted to curbing global warming, but in fact its business is just more hot air. (Read Article).

Changes at Zecco - October 1, 2007

Zecco Trading announced a new commission structure today. So are they still a good deal for traders? Get the details and our take on the changes. (Read Article).

Ron Paul for President Update - October 1, 2007

As regular readers know, I have endorsed Ron Paul for President in 2008. (So have many other financial writers, by the way.) His campaign has flown below the radar for a while, but in recent weeks, as reported by RonPaulFan.com, his fundraising efforts have been kicked up several notches, and the media has finally started to take note. It’s comforting to know that there are at least a few voters out there with some sense.

Charitable Remainder Trusts: You Win. Your Favorite Charity Wins. Uncle Sam Loses. - September 30, 2007

What if I were to tell you that there was a way for you to take a collection of appreciated assets, immunize them from capital gains tax permanently, draw income from them for life, take a large, immediate tax deduction, and benefit charity, all in one fell swoop? With a

charitable remainder trust, you can.

(Read Article).

The Rex Agreement - A New Option for Home Owners - September 24, 2007

A finance firm called Rex and Company has recently begun offering a new way to cash out the value of your home. It allows you to free up equity without moving, taking out loans, or making any payments, ever. So how does it work? (Read Article).

As part of our ongoing series of articles about investment scams, we’d like to have a look at one of the oldest, yet most dangerous tricks in the book — the pump-and-dump. If you have ever given your email address to a financial website, chances are you’ve received spam emails like the following:

HXPN IS GAINING GREAT MOMENTUM!

WE ARE ABOUT TO SEE FIRWORKS!

WATCH IT ON MONDAY MAY 21!

__________

Company: Harris Exploration Inc

Symbol: HXPN

Price: 0.78

5-day Target: $2.5

Rating: Agressive Buy

__________

HXPN HAS GAINED OVER 50% IN 2 DAYS!

WE ARE EXPECTING GAINS TOPPING 200% AND MORE!

GET IN NOW WHILE YOU STILL CAN MAKE PROFIT!

I subscribe to a number of financial sites, so I get one of these practically every day. This particular one arrived on May 20th. It has all the classic signs of a pump-and-dump scam. The trading in this stock is very thin, with an average volume of only about 66,000 shares a day, and the stock price is less than a dollar, meaning that this issue is highly sensitive to even modest spikes in trading.

Let’s have a look at the company in question. HXPN trades on the OTC bulletin board, which is not subject to the reporting requirements of the more stock markets. Unsurprisingly, a search of the major financial websites turned up absolutely no financial information about this company. A search for financials on pinksheets.com resulted only thin the following message: “There are no financial reports available for this company.”

Uh Oh.

This kind of stock is a scammer’s dream. With no data available, they can make any sort of claims they like with no fear of being disproven, and with such a thin market, the share price can be manipulated with ease. Could the price potentially shoot up and make you a boatload of cash? Anything is possible, but we have no reliable way of evaluating the odds, which means that chances are they are razor-slim.

Typically, the senders of these sorts of spam emails buy up a number of shares in a company like HXPN gradually, over a period of time, taking care not to bid up the price themselves. They then aggressively market the stock, claiming it has huge breakout potential, deluging the Internet with hype-filled spam. When unsuspecting victims jump in and buy, the scammers pounce and sell at the bid-up price, raking in a quick profit. The stock invariably crashes shortly afterwards.

Note the mention of a specific date to “watch” the stock. This is a classic tactic. The scammers will typically buy a few shares early in the day in question, bidding up the price a bit to get the ball rolling. Anyone foolish enough to pay attention to their message will see that their “prediction” is coming true, and will be sorely tempted to jump in, not wanting to miss out on the gravy train. If a few of them bite, it can start a chain reaction as more and more jump in. The scammers then dump their shares and leave the rest holding the bag.

Let’s have a look and see how this played out in the market:

As you can see, the scam went off in textbook fashion. HXPN opened on May 21st at about $.87, up over 11% from the previous day’s close of $.78 per share. It spiked up to a dollar, its highest price since March, then dipped as low as $.80, before closing at about $.85. In the few days since, it has fallen to $.55, for a loss of 45% from its high on the 21st. Chances are, anyone who got sucked in by this scheme took a nasty loss, and the spammers walked away with a tidy sum at their expense.

This sort of scheme is illegal, of course, and the perpetrators belong in prison. But chances are slim of their ever being caught, and even if they are, it won’t be long before another outfit comes along to take their place. These schemes have been around as long as financial markets have existed, and are unlikely ever to disappear entirely. So be vigilant, and choose your advisors carefully.

There’s an old saying that will serve you well when an email like this one slips through your spam filters: There’s nothing more expensive than free advice.

P.S. Harris Exploration, Inc. has issued a press release disavowing any involvement with the spam emails. Chances are this statement is sincere — these sorts of schemes are frequently perpetrated by outsiders without the knowledge of the company in question.

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