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Updated @ 6:45 a.m. EST, Tuesday, January 16, 2007.


WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable, and hopefully refreshing viewpoint roughly once per week. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence from my journal.

Life consists not in holding good cards but in playing those you hold well. --Josh Billings

BECKHAM MARKS A MULTI-DECADE PEAK IN LIQUIDITY (January 16, 2007): In each era, there is often a defining event which is so extreme that it demonstrates an incredible distortion of the financial markets just before a major shift in the opposite direction. Sometimes the event underlines how out of favor a particular asset class has become, such as in the late 1990s when an Australian gold mining company closed its mine and opened an online shop selling sex toys. Its stock price immediately quadrupled. [No, I'm really not making this up.]

More recently, in 2005 to be exact, one saw the literal day trading of residential real estate in the U.S., in which people in Naples, Florida were buying houses in the morning and, in some instances, selling those same houses in the afternoon. In 2006, the same city of Naples experienced one of the sharpest pullbacks in housing prices in the U.S. in percentage terms. One might look in amazement at the recent record prices for racehorses, which will never be compensated even by winning the Triple Crown. No doubt one could write an entire book about the overvalued, overspecialized, overhyped state of modern art throughout most of the world. What all of these have in common is that people are paying extraordinarily inflated prices for assets, partly because they are completely indifferent to what is supposed to be the prime principle behind investing, which is the likely return on those assets over the next several years. It's liquidity gone amok.

The greater fool theory states that any ridiculously priced asset should still be bought, because someone else will be willing to pay an even more absurd price for it in the near future. This theory seems downright old-fashioned when compared with the recent decision by the Los Angeles Galaxy soccer team--has anyone ever even heard of the team's name before?--to pay David Beckham 250 million dollars over a five-year period to play soccer. If one does not live in the U.S., it should be understood that soccer is hardly ever even shown on television, or broadcast on the radio. When such broadcasts are made, their viewer ratings are notoriously low. As with someone buying a piece of obscure modern art for millions of dollars, the team's owners have given zero thought to the actual return on equity. It almost makes one nostalgic for the good old days when the Nasdaq above 5000 was considered a fabulous long-term investment.

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  • I am currently offering a daily e-mail subscription service for $110.50 (U.S. dollars) for one year, or $37 for three months. Under this service, I will send you an e-mail every business day, and a special weekly review on Sunday, giving specific timely buy/sell recommendations, as well as long-term guidelines for money management. I will also respond to any e-mail questions that you may have regarding my daily updates. Payment can be made through PayPal, credit card, or check, whichever you prefer. Your e-mail address will not be given to any other person or organization under any circumstances.

    The price of this subscription will increase to $119.50 for one year and $40 for three months the next time that HUI goes below its weak triple bottom of 270, since that is when I will give my specific recommendations for purchasing gold mining and other precious metals shares.

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    BASE METALS LEAD THE WAY FOR THE WORLDWIDE EQUITY MARKETS (December 21, 2006): The most important development in the financial markets in the past two months has been the progressive deterioration of base metals prices. Beginning in mid-October, copper began to decline; it has since fallen to its lowest level in several months, with almost zero media coverage of this event.

    After hitting new daily highs so frequently that it became almost boring, nickel and zinc--which had each experienced incredible percentage gains in 2006--have begun to stage a moderate pullback. Other base metals have grudgingly begun to follow them lower. Nickel and zinc still have an incredibly long way to decline before they reach anything resembling support levels.

    When base metals are falling progressively in price, this means that the actual rate of worldwide economic growth is going to be significantly lower than most observers have been anticipating. Thus, the recent decline in copper, nickel, and zinc will soon translate into a corresponding pullback for worldwide equity indices.

    Very quietly, even with the headlines about new Dow highs being broadcast practically every day, major exchange-traded funds such as QQQQ have recently touched their lowest levels in several weeks. The number of new daily highs on all major exchanges has been systematically contracting. Meanwhile, according to Bloomberg, the dollar ratio of top executives' selling to buying recently touched 63.18, the highest such ratio recorded since at least 1987. The question is not whether equity indices will decline sharply worldwide, but exactly how much and when.

    GO GREENBACK GO (December 8, 2006): There are currently many differences of opinion in the financial markets. Some, like myself, believe that equities have completed a major peak in advance of a significant correction; others have given optimistic forecasts for a much higher stock market in 2007. There are many diverse opinions on interest rates and commodities. However, one thing on which everyone seems to agree is that the U.S. dollar will decline. The Economist is so certain of this that they made it a feature story last week.

    As far as I know, although the U.S. dollar is the world's foremost reserve currency, it has no web site. There are no greenback chat sites. There is no U.S. dollar fan club, and there is not even one U.S. dollar guru to quote on those days when the dollar is higher, to tell you why it will continue to rise in value. The U.S. government may spend billions on defense and has literally an army of employees on its payroll worldwide, but it hasn't spent a penny to promote its own currency.

    Nonetheless, even without a PR man (or woman) to pump (or should I say pimp?) the U.S. dollar, it will gain substantially in value over the next half year or more. The U.S. has the highest rates on time deposits in the developed world. With a Democratically-controlled House of Representatives and a Republican President, there will be much less spending and higher taxes, which means a lower budget deficit and therefore a stronger greenback. The U.S. dollar also has a history of gaining in value in advance of a recession, as was seen in 1980, 1990, and 2000.

    Most importantly, however, is the sentiment itself. When there is a virtually unanimous consensus on anything in the financial markets, the opposite inevitably occurs. It's not different this time. As everyone is waiting for the U.S. dollar to collapse, it will stage a strong rally that will likely bring the U.S. dollar index close to 90.

    As the dollar rises, most equities and commodities will decline. If you want to know when to buy gold and silver, just turn on your TV. No, don't waste your time watching CNN or CNBC. Look at the travel shows instead. When they tell you that because of the strong dollar it's a great bargain to visit Europe, that will be your signal to purchase precious metals and their shares.

    GOLD MINING SHARES ARE HEADING AT LEAST 25% LOWER (November 12, 2006): Gold mining share indices and funds attempted to break and hold above their 200-day moving averages in the past week. This false "breakout" will soon be reversed sharply to the downside. As the financial markets slowly but surely realize that U.S. political gridlock means substantially less spending and higher taxes, and therefore a significantly lower budget deficit, the U.S. dollar will progressively strengthen, which will depress the prices of precious metals and their shares. Simultaneously, the Congress will tilt toward stricter environmental regulations, which will erode the profit margins of all hard-asset producers. Most importantly, equities worldwide will be experiencing a sharp decline in price-earnings ratios as we experience a global economic slowdown, which means lower prices for all equity sector groups, including gold mining shares. I am still expecting HUI, the Amex Index of Unhedged Gold Mining Shares, to reach 248, probably by the spring of 2007.

    HOW LOW WILL HUI GO? (September 10, 2006): HUI is the Amex Index of Unhedged Gold Mining Shares. How low will HUI eventually go, exactly, over the next several months? One very useful guide is to observe that on December 2, 2003, HUI reached a peak of 258.60 which was not exceeded for about two years. (November 28, 2006) As a rule, during its bull market which began on November 25-26, 2000, HUI has gone modestly below each such high-water mark during each subsequent extended correction. Another guide is found by measuring the entire gain in HUI from its May 16, 2005 bottom of 165.71 to its May 11, 2006 peak of 401.69. If HUI surrenders exactly 61.8% of this increase--known as the key Fibonacci retracement--it would put HUI at 255.85. It's no coincidence that these two numbers are so close. If history is any guide--which it almost always is--then HUI should move a few percent below each of these numbers, and bottom near 248.

    CURRENT ASSET ALLOCATION (January 16, 2007, marked to market): My own personal funds are currently allocated as follows: LONG POSITIONS: stable value fund (retirement fund with stable principal paying variable interest, currently 5.25%), 10%; long-dated U.S. Treasuries and their funds, and long-dated municipal government bonds, including TLT and MYJ, 31%; Treasuries between 2 and 10 years in duration, such as IEF, 10%; TOC, 2.5% (bought at a 15% discount); gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents including a long position in VMSXX, negative 30%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, SMH, NDX, GOOG) and related shorts, 47.5%; short CFC, 3%; short GLD, 17.5%; short GDX, 2%.

  • Overview of Gold Mining Shares (updated January 1, 2007)
  • REMINISCENCE OF THE WEEK (January 16, 2007): When I was in Tokyo in October and November of 1987, I walked east of the Sumida River late one afternoon into a working-class neighborhood where few tourists bother to go. I found a small park where there is a bronze statue of a bull. It is considered good luck to rub the part of the bull which corresponds to that part of your body which is feeling pain. The brightness or dullness of each area showed where most people had chosen to touch the bull. After examining this, I decided to slowly wander around the park, not having any particular purpose in mind. I saw a park bench and decided to take a break. Soon afterward, an old man who was similarly wandering around the park sat next to me. Neither of us said anything for a few minutes. Finally, I decided to attempt my very poor Japanese and remarked, "Good day, is your health well?" To my great surprise, the man responded in fluent, unaccented English, and proceeded to tell me his story. His parents had been killed by the atomic bomb in Nagasaki, so he was raised in an orphanage by Americans for several years during the occupation. He had always been interested in visiting the U.S., but had been poor his entire life, and so never had the money to afford such a journey. The man told me I was the first American he had ever met in that park. I hardly knew how to respond, so I told him that I just wanted to learn more about the world. He responded with a nod. We each sat in silence for a few more minutes, and then slowly went our separate ways.

  • Best of Previous Reminiscences
  • (c) 1996-2007 Steven Jon Kaplan Your comments are always welcome.

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