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Updated @ 6:00 a.m. EDT, Monday, March 19, 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.

In case you missed the housing bubble, don't worry--it will soon be out on video. The sequel is being written right now; unfortunately, it's likely to be rated R or worse, as it's turning quite grisly. --Steven Jon Kaplan

LOOKING FOR VALUE IN ALL THE WRONG PLACES (March 19, 2007): If you listen to or otherwise digest the mainstream media, there has been a lot of talk lately about "looking for value". It is odd that one never hears this term when the stock market is moving higher; presumably, in a bull market, one can just throw darts and make money. But as soon as a correction is underway, you immediately are treated to a lengthy parade of analysts explaining why you should get out of one particular equity sector group and into another. Or else you should supposedly buy certain "quality" shares that will perform well "no matter what the market environment".

You've heard of looking for love in all the wrong places. This is looking for value in all the wrong places.

The truth, which is almost never mentioned by the mainstream media, is that when we are in a bear market or even a correction, virtually all sector groups will decline. Some will fall more than others, but only a tiny percentage of equities will rise during a market downturn--usually between 1% and 2%. The media doesn't want to say "get out of equities", since that would alienate their advertisers. Therefore, they pretend that if you are in the right stocks, you will come out ahead. But since even a true stockpicking genius cannot hope to find the 1% to 2% of equities that will actually move higher, it is a losing game. And even if you do magically find those few shares which eke out gains, you will likely earn a lower total return than if you had just put your money into a completely safe short-term U.S. dollar time deposit during the correction.

Therefore, don't fall into the trap. Don't go "looking for value" in a correction or bear market. When a ship is sinking, you shouldn't look for the safest corner of the ship--you should be looking for a lifeboat to get yourself off the ship as quickly as possible.

Once your favorite sector group has reached a multi-month low, then it will indeed be time to be looking for value. That is when everyone else will be panicking out of the stock market, selling left and right. Whenever it is time to buy stocks--or any asset, for that matter--the problem should always be an overabundance of excellent choices that are available, so that you have trouble selecting among all the incredibly undervalued bargains. If you have to strain to find those shares which are less overvalued than the others, then you shouldn't be buying anything at all.

In other words, the financial markets swing from feast to famine. When it is famine--like now--don't pursue a futile search for the choicest scraps, but stay as far away as possible. When it is feast, as it will likely be later in 2007, you will have your pick of whatever sectors you prefer, at their lowest levels in years. Only buy stocks when you are overwhelmed by the astonishingly cheap and varied selection that is available across the board.

In order to buy low and sell high, first you have to buy low.

THE U.S. DOLLAR IS SET TO SURGE HIGHER (March 19, 2007): There's a headline that you probably won't see anywhere else on the internet, or even off the internet. Practically every analyst in the world is convinced that the greenback is set for anything between a slow decline and a complete collapse. However, I sharply dissent with this unanimous consensus--in large part because it is a virtually unanimous consensus. In every other worldwide economic slowdown since the U.S. dollar was delinked from gold in 1971, the U.S. dollar has risen sharply in advance of a global recession as it is perceived to be a safe harbor from the storms of declining asset values around the world. The U.S. dollar index is just above a key support level which has held strongly since the early 1970s. As emerging-market bourses are beginning what is likely to be a historic collapse in percentage terms, money which had flowed into the riskiest sectors of the global economy will be gradually migrating toward the most established safe havens. In addition, as worldwide economic growth contracts, there will be significantly less demand for commodities, and commodities have a profound inverse correlation with the performance of the U.S. dollar.

  • Learn more about Steven Jon Kaplan and watch a live interview on MarketWatch.
  • 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 all 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 it will be most timely to purchase gold funds.

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    Your comments are always welcome, or send an e-mail to sjkaplan@earthlink.net.

    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 (March 19, 2007): 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%), 8.5%; 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 IEI and IEF, 11.5%; 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 30.5%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, SMH, NDX, GOOG) and related shorts, 48%; short CFC, 3%; short GLD, 17.5%; short GDX, 2%.

  • Overview of Gold Mining Shares (updated March 19, 2007)
  • REMINISCENCE OF THE WEEK (March 19, 2007): (to be added soon).

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

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