A true contrarian look at investing and at life in general.
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.
AS CHINA GOES, SO GOES THE WORLD (May 8, 2007): The great unreported financial story of 2007 is the wild bubble in Chinese equities, which on average have quadrupled in the past 1-1/2 years. If the Chinese stock market were to lose half of its value, it would still be far above where it had been in August 2006--and there's no international law which says that it must remain above that particular support level. Buying the Nasdaq in March 2000, when it was above 5000, was an example of ultraconservative behavior compared with buying Chinese equities today. The number of working-class Chinese who are literally lining up at brokerages to buy stocks because their names sound lucky would in sheer numbers exceed the total number of participants in all previous worldwide asset bubbles combined.
While this is the most important financial story of the year, it's not considered "news" by the mainstream media. It will only be reported once the Chinese stock market collapses--and then every single commentator will say "it was blatantly obvious that their market was way overdue for a serious correction". Okay, if it's so obvious, then how come no one is saying it now--BEFORE it happens? Ha! These so-called analysts are all afraid of stating the obvious; it's the emperor's new clothes all over again. No one wants to be the first on their block, because they honestly have no idea what's happening in China, and if the Chinese stock market moves up another 10% or 20% or 50%, they're worried that they'll be thought of as idiots instead of geniuses.
To be fair to the media, this story was reported in the New York Times and elsewhere for three whole days near the end of February--only to be completely abandoned thereafter in favor of puff pieces about "the Chinese miracle" and plenty of nonsense about "why the Chinese stock market will remain strong for the next century".
Because the worldwide financial markets are so closely interconnected, the world's stock markets no longer have to automatically follow what happens in the U.S. When China's stock market plunges, the rest of the world will follow--including the United States. That's one of the beauties of globalization and the internet--a financial collapse in one part of the world immediately leads to a financial collapse everywhere. Those who recently purchased real estate or modern art may want to keep this in mind.
So remember, after the Chinese stock market collapses by more than half before the year is over--you heard it here loudly and clearly, with no punches pulled.
POPULARITY SHOWS THE WAY IN THE FINANCIAL MARKETS (April 11, 2007): Currently, the least popular trade in the financial markets is to buy the U.S. dollar. The financial media and its analysts, regardless of background, are virtually unanimously bearish toward the greenback at this time. This negative attitude is completely unwarranted, as the U.S. dollar has been making a bullish series of higher lows dating back to December 31, 2004, and is now completing a strong intermediate-term double bottom with its nadir of December 5, 2006. With technical strength and such a gloomy viewpoint, one can be certain that the U.S. dollar will rise sharply in value over the next half year, if not longer.
Meanwhile, the most popular trade, which is inspiring many millions to participate, is to buy the shares of emerging markets worldwide. Working-class people in China, India, Malaysia, Singapore, Vietnam, and elsewhere are literally lining up with their lifetime of conservatively accumulated savings in order to buy stocks because the names of these stocks sound lucky, or because a distant acquaintance or relative got a "hot tip" from someone else. This equity buying in emerging markets by the middle class, and below, is even more frenzied than the incredibly eager participation by Americans in the great Nasdaq bubble of early 2000, and will lead to exactly the same result--a collapse of at least half. Consider that if the Chinese equity market were to lose half of its value, it would still be higher than it was in August 2006.
Therefore, the path to investing for the remainder of 2007 is clear. As emerging-market equity bourses collapse worldwide, this will put substantial downward pressure on all equity indices, including those in developed countries such as the United States. Globalization cuts both ways--now we are about to see the dark side of closely linked global markets. The collapse of emerging-market equity indices will curtail the anticipated double-digit growth in those countries, reducing the demand for base metals and energy products. Base metals are likely to suffer a bear market in which they do not regain their current levels until at least 2012. Meanwhile, as consumers in emerging markets lose money in their equity portfolios, they will feel poorer and will thereby cut back on their discretionary spending. Since people in these countries are the largest per-capita consumers of precious metals, gold and silver will likely return to their lowest levels of 2006.
As the U.S. dollar is rising, while equities worldwide are declining, there will be an increased demand for U.S.-denominated time deposits and the safe haven of U.S. Treasuries and their funds such as TLT. At relatively low valuations, these make for a compelling purchase at this time.
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.
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 (May 8, 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%; long-dated U.S. Treasuries and their funds, and long-dated municipal government bonds, including TLT and MYJ, 32%; Treasuries between 2 and 10 years in duration, such as IEI and IEF, 12%; TOC, 0.5% (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, 49%; short CFC, 3%; short GLD, 17.5%; short GDX, 2%.
REMINISCENCE OF THE WEEK (April 11, 2007): When I turned 13 years old, like most Jewish adolescents of that age, I had a Bar Mitzvah. There were months of preparation in chanting the Torah and Haftarah, and in preparing for relatives and friends to visit--some of them from quite far away. By the time the day arrived, I felt I was ready, but I had not expected the crush of people who surrounded me almost nonstop during the Bar Mitzvah weekend. One of the features of the occasion is receiving gifts--which seemed to happen in frenzied clumps. I tried as best I could to make sure that I did not misplace any of these presents, and meticulously wrote down the name of the giver along with each gift in a special book. About one week after the celebration was over, and life had returned to normal, I wrote thank-you notes to each of the gift givers. At least I thought I had; as the months slowly passed thereafter, about a dozen people began to make subtle remarks--mostly to my parents--about not having received thank-you notes. They also made puzzling comments such as "are you people loaded--how come you haven't cashed my check yet?" My parents and I concluded that some of the gifts must have been overlooked somehow, but even after turning the house upside down, we didn't find any additional ones.
In those days, I was studying music at the Peabody Preparatory Institute. About once or twice a year, I would be invited to give a piano recital or to enter a competition. I was in one such competition about a half year after my Bar Mitzvah, waiting backstage with my piano teacher who was helping me with final preparations. She told me, "I'm not worried about how you're going to perform--I only get a little nervous about how you look. Why does your jacket look tilted?" I had no idea what she was talking about, and told her so. "See that; it's not balanced properly. Let me help you fix it." She opened up my jacket--and out of its pocket dropped a dozen envelopes. The other students in the competition looked at me strangely as I began to laugh uproariously, since nervousness is usually the only emotion just before going on stage. I think this strange incident helped me to perform more calmly that day. As you can guess, those envelopes were Bar Mitzvah gifts that I had placed there during the rush of receiving presents six months earlier, and had totally forgotten about. Since I only wore my "fancy" jacket a few times each year for special occasions, the recital was the first time that I had worn it since my Bar Mitzvah.
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