The Iconoclast Investor

I recently made the acquaintance of Foster Aborn, who started John Hancock Financial Services’ bond investment programs decades ago and retired from the firm in 2000 after serving as Chief Investment Officer, overseeing an $80 billion portfolio.  (The firm was bought by Manulife of Canada in 2003 for $10.4 billion, and the John Hancock name is still used for the firm’s U.S. business.)

I was warned before I met him that Foster was a great one for asking questions, and I found that all too true.  Foster revealed that he was happy with the way Manulife was running John Hancock, but mostly he wanted to talk about the credit markets of today … and tomorrow.

He was clearly annoyed–even dumbfounded–at the irrational behavior of both lenders and borrowers in recent years, and he was eager to hear opinions about what might come next.  So I gave him my two cents, which is informed not so much by any bond market expertise but by my vision of how we Americans got here and where we are going.

And now I’ll give it to you.

In the short-term, we remain in the midst of a contraction of liquidity, as the reverberations from the collapse of the sub-prime credit markets continue.  Eventually, these markets will stabilize, and when the smoke clears we’ll see a market that is smaller, cleaner and saner … and liquidity will return.  We’ll have fewer lending institutions–I’ve long believed we have too many banks–but the players left will be the cream of the crop.  How long this will take I have no idea.

Longer-term levers that are important are these:

• The demographic forces that propelled baby-boomers to acquire increasingly valuable housing–and spurred lenders to grant them increasing amounts of credit–are gone.  Our generation, the most powerful in the country, will now work to reduce debt and increase equity, typical actions for a generation preparing for retirement.  And the banks will help us do it.

• Our country has been on a debt binge as well, and if the folks in Washington wise up, we’ll act quickly to balance our budget.  The odds are, though, that politics and greed will continue to trump sanity until the pain becomes unbearable.  Looming just over the horizon, meanwhile, are enormous commitments to both Social Security and Medicare, but there is no rational plan for paying them.
• And then there’s the cost of energy.  I think the price of fossil fuels will remain high, simply because the earth is a finite vessel and the rate of fossil fuel extraction we now demand is increasingly costly.  Yes, Americans have reduced their appetite for fossil fuels a bit in recent months, and that helps reduce our individual bills, but it doesn’t come close to offsetting the major increases in demand by China and India.
• Finally, I think Peak Oil is real.  This is still a fringe opinion, but I think that as more and more people come to share my opinion, demand for alternative energy sources will increase.  The good news is that the cost of alternative energy will soon reach parity with the electric grid in many places.  Eventually, as we harness the sun, the wind and the atom, alternative energy will become far cheaper!

The Festival of Frugality is up today (you’ll notice one of our posts there) and it contains a lot of great information from around the Web about budgeting and saving money.

For an investment opportunity you can take advantage of today, I suggest VisionChina Media (VISN).  Both Cabot Market Letter and Cabot China & Emerging Markets Report recommended it as a stock to watch last month, and I like the way the stock has acted since then.  It looks like it’s getting ready for a good run.

Here’s what Michael Cintolo, editor of Cabot Market Letter, wrote back on July 2.

“VisionChina is following in the footsteps of Focus Media (FMCN), a former leader that pioneered the use of flat-panel TVs in high traffic areas in China to rake in advertising fees.  Focus Media’s concentration was in places like grocery stores and elevators, but VisionChina has taken the idea to buses and subways, where it finds a captive audience.

VisionChina has differentiated itself by inking deals with local broadcast stations, allowing it to provide real-time content (mainly sports and news) on its TVs … along with the advertising.  The firm already has more than 48,000 displays in place, and that figure is rising rapidly as more deals are signed.

Growth has been stunning, with revenues up 495% and 304% the past two quarters, and earnings totaling $0.08 per share each quarter, up from losses a year ago … VISN could be in the middle stages of forming a new launching pad, so keep it on your watch list. WATCH.”

Back when Mike wrote that, the stock was at 16.  Since then it’s been up to 25, and down to 17; it’s quite a mover!  But the volume trends tell us the stock is being accumulated, and that the next big move–though it may take some time—is likely to be up.  I suggest you put it on your watch list, too.

This weekend I asked readers to comment on the Olympics being held in China. Thanks to all who wrote in and if you didn’t yet, leave you comment here. Here are some of the great responses that I received.

“Dear Elyse,

China is a fantastic place and culture. The basis of all of our modern technology eminiates from China, they are the East, we are the West, therefore different. Just enjoy the Games for what they are a huge event that come once every 4 years for a few reasons, not the least of which is a huge PR stage for the host country.

We do not have the cashe or the right to impose our POV on the rest of the world, our position in eastern Europe has opened us the great devide between us and Russia once again, and lives will be lost, but money will be made.

Have a happy day today!

Peace,

P.”

And another one:

“I’m not watching the Olympics at all, other than the short clips that come on the late night news and sports.  Basically all the Beijing Olympics are anyway is a political circus.  Not that it’s just Beijing.  All Olympics, with their flag waving, national pride at hosting, anthems, medal counts are just too jingoistic.  I’d like a games with all nationality banned - no flags, no anthems (if a winner needs music, choose something from Sesame Street!), no national symbols or medal counts.  Even the opening parade would be organized by athletes, rather than countries.  Imagine all the runners together, all the wrestlers together, all the jumpers, all the swimmers - and not a flag in sight!

Maybe then we could revel in the joy of athleticism, rather than the tawdry jingoism of presenting an image.-L.T”

One last letter:

“I would like very much to visit China some day, although I would have to remember to leave my cap with it;s logo, Korean War Veteran and proud of it, home.”

We believe that education is the key to becoming a successful investor. So if you’re looking for more financial information, head over to the Carnival of Financial Planning or the Festival of Stocks. You’ll see some of our articles posted there, along with a lot of others that contain great information to help you become a more informed investor. Enjoy!

The SEC announced on July 30 that it was extending the ban on naked shorting of the stocks of companies with high exposure to mortgage debt.  This included Fannie Mae, Freddie Mac and 17 big investment banks.  Shorting is the practice of selling a stock short, i.e. borrowing shares to sell now in the hope that you can buy the stock to pay back later at a lower price.

For instance, if I think American Beanbag, which is selling at 10, is going to decline in value, I can borrow 100 shares for a week (for a small fee, of course), and sell them, pocketing the $1,000.  When I have to return the shares a week later, if the stock is trading at 5, I buy 100 shares, pay the $500 and book the $500 (minus the fee).

If, however, the stock goes up, say to 20, I’m on the hook for a $1,000 loss.  It’s buying low and selling high in reverse.

In naked shorting, everything works the same way, except that the person who wants to sell a stock short doesn’t actually bother to borrow the stock.  And among the people who enjoy this high-stakes game there are a few who don’t like to leave things to chance.  They sell the stock short (naked) and then set about making sure that it goes down.

All you have to do, especially in the world of small, lightly traded stocks, is to start a negative rumor about the company.  Among active traders, a little bit of bad buzz about a stock is enough to send them for the exits, which then leaves the naked short artist with a bargain basement price at which to fulfill the contract.

This technique is called “distort and short,” and it can be highly profitable for a trader who knows how to work the financial blogs and drop pearls of poison wisdom into the cups of volatile stocks.  If you read stories about the stock-trading legends of the past, you’ll probably run into more than one false rumor floated into the stock trading community with malice aforethought.

The pressure from this kind of market manipulation has only gotten worse with the advent of the Internet, which allows anonymous posting of just about anything on financial blogs and chat sites.  A good negative rumor can get around the Internet with astonishing speed.  As Mark Twain said: “A lie can travel halfway around the world while the truth is putting on its shoes.”

Or at least the saying is attributed to him.  But it could be a lie; after all, I found it on the Internet.

If you’ve been watching the Olympics, you’ve probably been taking advantage of the technology produced by the company I’m featuring today.  It’s Axsys Technologies (AXYS), a designer and manufacturer of surveillance and imaging systems for the defense industry.  The precision optical systems turned out by Axsys usually go to work on tanks and military helicopters, and in border surveillance cameras and earth-orbiting satellites.

But the Bush administration recently approved the use of Axsys hi-definition cameras on helicopters, boats and ATVs to provide stunning coverage of events from the Beijing Olympics.  With high-precision optics and incredibly accurate motion control, the images these cameras provide will knock your socks off.

Axsys camera systems can reportedly detect a man-sized object at a distance of more than 15 miles, so tracking a mountain biker should be a piece of cake.

The company had a bad year for sales in 2006, and the stock has been riding a wave of enthusiasm that followed a huge recovery in that area.  Results for Q2 showed earnings up 69% on a 40% jump in revenue, with after-tax profit margins topping 10% for the first time.  Institutional ownership is growing, but with just 47 whales on board, there’s lots of room for growth.

AXYS isn’t a perfect stock.  It’s thinly traded, which increases volatility, and it’s already up from 16 to 77 in about 15 months, so you need to be very careful about how you buy (preferably on pullbacks and in small amounts) and keep your eyes open for any big-volume selling.

But the most bullish thing a stock can do is go up, and AXYS has shown it knows how to do that.

Good morning! I wanted to announce that one of our posts has been re-published over at the Finance Fiesta blog carnival, along with some other great finance-related articles. Enjoy!

Since people began marrying each other, money has been a factor, but now a more modern twist has been put on the centuries-old tradition. People are now choosing to marry or (not) divorce because of soaring health care costs and the ability of each partner in the relationship to get his/her own health insurance. A recent New York Times article highlighted this phenomenon with tales of people rushing to the altar, people stopping divorce proceedings and people considering divorcing someone they love, all to maintain, or get, increasingly elusive health insurance.

One of the couples interviewed in the article was considering divorce as a way for the wife to get subsidized health insurance that she needs for a liver transplant. The husband was adamantly against it and the couple was able to take a different route, but this is something no one should have to go through. Another woman told of learning she had breast cancer right before her divorce was to be finalized. Her husband agreed to stop the proceeding and they stay married a while longer so she could keep his health insurance. One couple rushed to the altar so one of them could have desperately needed insurance to deal with an chronic health condition, while another is contemplating marrying after only a few months of dating for a similar reason.

While marriage started off as an institution that often involved money passing hands, we have been able to turn it into an institution of love. This is because of the enormous wealth in the modern world. Rising health care costs, and other large financial burdens, are bringing money back into the picture in a big way. Is this affecting you or anyone you know? Have you heard about anyone marrying or stopping a divorce to get or keep their health insurance?

Good morning readers! If you’re looking for more information about investing and building wealth check out the Simply Investing blog carnival. One of our articles is featured there, as are many others that you might find helpful.