A true contrarian look at investing and at life in general.
WELCOME TO TRUE CONTRARIAN! I began this blog in August 1996, and continue to update it periodically. In February 2006, I began a daily update service in the style of Dow and Jones who began a similar daily update in the late 19th century. For those who wish to receive an e-mail from me six days per week (every day except Saturday), as well as intraday updates whenever I buy or sell anything, you can subscribe using the link below. If you prefer simply to follow this blog, it will always include a personal reminiscence at the bottom and an introduction to my financial outlook at the top. I have removed my precise asset allocation which is now available to subscribers only.
WE ARE IN A GLOBAL BEAR MARKET, NOT A CORRECTION (May 18, 2011): In order to determine whether we are in a global bull market or a bear market for most risk assets, it is necessary to look at those indicators and signals which have been historically most reliable in making this determination. The evidence can then be weighed in order to reach a reasonable conclusion.
In a true bear market, there are certain risk assets which will tend to be among the first to consistently underperform. For example, during the 2007-2009 bear market, Chinese equities peaked in October 2007, while Indian equities topped out in January 2008. Both Chinese and Indian equities completed their respective peaks in early November 2010, and have been forming bearish patterns of several lower highs for more than a half year. In March 2008, gold mining shares as measured by GDX began an important downtrend; on December 7, 2010, gold mining shares similarly began a downtrend which was not interrupted even with substantially higher prices for both gold and silver since then. These parallels strongly suggest that we may have begun a true bear market.
The U.S. dollar index bottomed at 70.698 on March 16, 2008, and completed an important higher low at 71.314 on July 15, 2008. As the greenback progressively rallied in the second half of 2008, this led to the unwinding of the global carry trade, which greatly contributed to the sharp decline in liquidity and by extension an accompanying plunge for risk assets. It appears that the U.S. dollar index completed another higher low at 72.696 on May 4, 2011. This event may similarly be signaling that investors worldwide will be increasingly seeking out the safe haven of U.S.-dollar time deposits including especially long-dated U.S. Treasuries. Since so many investors today have sold short the U.S. dollar on margin to purchase numerous risk assets on margin including crude oil, silver, and the S&P 500 index, a rising greenback will force hedge-fund managers, commodity-pool operators, and momentum players to close out both ends of this trade.
As additional evidence, VIX slid to 14.27 on April 28, 2011, which marked its lowest level since June 21, 2007, just as the last bear market was about to begin. In both 2007 and 2011, these extremely low readings signaled that the vast majority of investors were dangerously complacent about the possibility of a severe bear market. Whenever the fewest number of market participants are positioned for any given event, it is most likely to occur.
Therefore, I believe that we are currently transitioning from a powerful two-year bull market to what will likely become a severe bear market with similar intensity to the one in 2007-2009. Its duration is unknown, but most similar bear markets have lasted for an average of about two years give or take several months. It is better to err on the side of being overly conservative, and to stick with long-dated U.S. Treasury funds including TLT for another 1-1/2 years rather than owning equities, corporate bonds, commodities, or real estate.
LONG-DATED U.S. TREASURIES REMAIN THE SINGLE BEST CHOICE FOR 2011 (January 19, 2011): You would think that the more enduring the bull market in any asset, the more that investors would be eager to jump aboard. Currently, the longest-reigning bull market on the planet is the rally for the 30-year U.S. Treasury bond, which began in August 1981 and which will thereby celebrate its 30th birthday later this year. However, most individuals continue to disrespect this sector, with virtually zero net inflows during 2010 when practically everything from commodities to equities to corporate bonds to almost every possible alternative choice enjoyed strong or even record net inflows around the world.
During the past six weeks, the yield on the 30-year U.S. Treasury bond frequently exceeded 4.5%, which by itself is far above the returns of nearly all other assets with equal or lesser risk. The yield spread between the 30-year and 2-year U.S. Treasuries set an all-time record during the past week, as investors are irrationally willing to lend money in the relatively short term for almost nothing, while demanding an excessive risk premium for lengthier-duration Treasuries. This has provided an ideal buying opportunity in this sector. One easy way to participate is via the fund TLT, which is comprised entirely of U.S. Treasuries averaging 28 years to maturity, and which has tended to yield just below 4.3% annualized, paid monthly. The expense ratio is 0.15%. If you buy TLT at 92 dollars per share and it merely returns to its August 25, 2010 high of 109.34 in one year, then with reinvested dividends this would represent a total gain of about 23%. If you buy it at a slightly lower prices--it has dropped below 91 several times since the second week of December--or if TLT more closely approaches its all-time zenith of 123.15 on December 18, 2008, then your gains could be even higher. Treasuries may be "boring", but I think anyone would gladly accept such "dull" profits.
On November 3, 2010, the U.S. Federal Reserve announced its second program of quantitative easing, which is usually called "QE2". The media unanimously declared that this would lead to a slumping greenback--and yet the U.S. dollar index began a powerful rally the next morning which has continued to the present time. It is likely that, partly because it is so unpopular, the U.S. dollar will continue to strengthen especially against commodity-country currencies which have been so popular during the past two years. In particular, the Australian, New Zealand, and Canadian dollars, along with the Brazilian real and Russian ruble--all of which have been notable speculator favorites--are likely to decline substantially versus the U.S. dollar through 2012. Some of these currencies may even retest their deep lows from the fourth quarter of 2008 and the first quarter of 2009. If you are a resident of one of the above countries, then your total gain from owning TLT or similar long-dated U.S. Treasury funds could be twice the magnitude of the U.S.-dollar profit when measured in terms of your home currency.
A SINCERE THANK YOU to Barron's for featuring me on page 50 of their November 19, 2007 issue, and then again on February 25, 2008 (page M14) and June 2, 2008 (page 41), as well as August 25, 2008 (page 32). Barron's featured my letter to the editor about investing in Africa in their Mailbag of August 14, 2010, which you can read at the link below:
Most recently, Barron's featured me in their MarketWatch section on March 14, 2011:
REMINISCENCE OF THE WEEK (May 18, 2011): Near the end of 1974, when I was in ninth grade, my father called me into his home office. He loved to sit in an old wooden chair, to spread out all of his papers in a certain way, and to show me whatever he was working on. On top of his desk were about two dozen pamphlets of various kinds. "Can you tell what these are?" he asked me. I read carefully through one of the pamphlets, which was an eight-page summary of the financial markets with perhaps thirty charts of various "aggressive growth funds". All of the funds had lost at least one third of their value in less than two years, with some of them down by more than half; these losses were highlighted in boldface. "Do you want me to guess whether these funds will go up or down in 1975?" I inquired. "No, although your opinion on that topic would also be interesting. I'm going to help your Mom cook dinner. While I'm doing that, I'd like you to read through these carefully, and when you're done, let me know what you think." I spent about an hour comparing about fifteen financial newsletters of various kinds, and then I went to see my Dad who was ready to serve dinner. "Did you reach any conclusions?" he inquired. I told him, "Yes, I have. Even after reading all of these opinions, I don't know whether gold or the S&P 500 is going to go up or down, or what those aggressive growth funds are going to do. But it's obvious that most of these people need help with their writing. Even at the age of fourteen, I could edit all of these and make them sound much more professional and convincing." My dad looked me directly in the eye and replied: "It's a career that you should seriously consider, and it's probably more financially rewarding than being a professional musician or a fiction writer." "I don't know, Dad," I responded, "how do these people advertise their existence?" He thought for a moment and finally commented, "That's a good question, but you have several years to find the answer." As it turned out, I had more than several years, since it was almost 22 years later when I began my financial blog and more than 31 years before I started my daily subscription service. Father knew best, even if it took me a few decades to realize it.
(c) 1996-2011 Steven Jon Kaplan Your comments are always welcome.