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 a few times each month. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence.
THE U.S. DOLLAR RALLY HAS BEGUN IN DRAMATIC FASHION (October 8, 2007): Just when everyone was convinced that the U.S. dollar was set for a certain collapse, it has enjoyed a powerful rebound from its all-time low on September 30. In just the past eight days, the greenback has rallied past one key resistance level after another.
Of course, this should not have been a huge surprise, since any asset with such a record low percentage of bullish participants is almost certain to move higher, since there is no one left to sell it (or, more to the point, to sell it short). While Japanese housewives and average-Joe speculators all over the world are trying to figure out how to "diversify away from the dollar", the greenback has begun a powerful upward move which will last for at least a half year, and perhaps for more than a full year.
Gold mining shares had signaled this move well in advance, as they completed a very bearish double top on September 21--nine days before the U.S. dollar index completed its historic bottom. This high on September 21, 2007 almost exactly matched its peak of May 11, 2006, and thus has significantly negative implications for mining shares--and probably for global equities in general--over the next several months. Gold mining shares then notched a nearly matching peak on October 1, to confirm the existence of this double top.
Historically, the first five or six months of a U.S. dollar rally are very negative for precious metals and their shares. After about a half year, investors have fully anticipated continued gains for the greenback, and therefore additional increases no longer have any negative impact on gold or silver. This was seen most clearly in 2005: as the U.S. dollar began a powerful rally at the very end of 2004, gold and its shares continued to move lower until May 16, 2005, when gold mining shares completed a historic bottom. The U.S. dollar continued to advance for another half year, but gold and its shares were able to rebound--eventually in dramatic fashion--as the dollar's increase was no longer a surprise.
Therefore, the decline in gold and silver and its shares will likely end sometime around March 2008, with an estimated total pullback for gold mining shares of between 30% and 40% from their September 21 peak.
The October rise in the U.S. dollar has barely been mentioned by the media. Commentators continue to act as though the U.S. dollar were still falling. Whenever there is this much skepticism and indifference toward a major trend change, it is certain to intensify and create even greater surprise among market participants.
THE HATED U.S. DOLLAR IS ABOUT TO STAGE ITS BIGGEST RALLY IN SEVEN YEARS (September 23, 2007): If there is any asset which is currently reviled by nearly all analysts around the world, it has to be the U.S. dollar. Not only is there nearly a unanimous consensus that the greenback will decline, but people are going out of their way to say how badly it will inevitably plunge, how the U.S. Federal Reserve is ensuring its collapse, and so on, ad infinitum, ad absurdum. Perhaps my response would be clearer in pig Latin: onay ayway!
We all know the U.S. dollar is unbelievably unpopular. Hey, even the worst garbage rock band has its own web site--the U.S. dollar, incredibly, does not. Reliable surveys show that the percentage of those bullish on the U.S. dollar today is very close to an all-time low. Any virtually unanimous consensus in the financial markets has always been wrong, and this is not going to be the first exception to the rule. As shown by the traders' commitments and other reliable indicators, commercials such as corporate treasurers, who are the most knowledgeable participants in the financial markets, have rarely been more heavily long the U.S. dollar. Speculators, especially small speculators like Japanese housewives, have never been more heavily short, to the tune of more than a trillion dollars. In this case, central banks are heavily on the side of the commercials. Do you think that these housewives will be right, while multinational corporate treasurers and central banks will be wrong? Dream on.
Here is a one-sentence reason why the greenback will rise substantially: the U.S. dollar will rally because expectations of growth outside the U.S. will suffer a significantly greater disappointment than anticipated growth within the U.S.
The U.S. dollar index currently stands just above its all-time low of 78.19 from September 2, 1992. Over the past three decades, critical support has been tested several times, and has held strongly each time. Every global economic slowdown since the U.S. dollar was delinked from gold in 1971 has been accompanied by a rising U.S. dollar, without exception.
For those who think that the Fed rate cuts are negative for the greenback, check out the historic record. About 80% of the time, when the Fed begins to cut interest rates, the U.S. dollar rises for a period of roughly between six and twelve months. More importantly, when the Fed begins to cut rates and the U.S. dollar is not far above its long-term support level, the U.S. dollar has always rallied for a period of at least six months, and usually by a substantial percentage.
As the U.S. dollar rallies, while global economic growth slows, this will have a profound negative impact on virtually all equities and commodities. Most notably, gold mining shares will plunge to retest their lows from December 2005, when HUI was well below 300. Remember that as recently as August 16, which was less than six weeks ago, HUI touched a low of 284.85. On Friday, September 21, 2007, HUI touched a high of 402.27, thus almost exactly matching its 401.69 peak from May 11, 2006.
Volatility cuts both ways. What goes up must come down, and for exactly the same reasons--corporate insiders are always selling to eagerly buying amateurs at the top, and buying from panicked amateurs at the bottom. Notice that recently, commodity shares have almost always performed best in the first hour of trading--this is when most amateurs participate, while professionals as a rule generally wait until the markets have been open at least one hour before taking action.
There has been a lot of speculation about when--not if--gold will reach $1000 an ounce, and even $2000 an ounce. This kind of talk is always a sure sign of a peak for any asset class.
Meanwhile, the price of oil will similarly stage a sharp pullback, and will likely retest January's bottom below $50 per barrel. Top executives of both gold mining companies and energy companies have been heavily selling to the excited public in recent days.
Do you think that the public will be right this time, and the CEOs will be wrong? No wonder you think the commercials and central banks will also be wrong. Dream on!
As Lieutenant Columbo used to say, just one more thing: what might be the world's largest-ever gold deposit was just announced by BHP Billiton as having been discovered at its Olympic Dam mine in South Australia. What do you think the reaction was by other gold mining companies who have no rights to this huge deposit? Give yourself full credit if you guessed that their share prices also rose. Are investors acting emotionally or rationally? Hint: is a huge discovery of any commodity bullish or bearish for that commodity?
CURRENT ASSET ALLOCATION (October 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 5.00%), 0.5%; long-dated U.S. Treasuries and their funds, and long-dated municipal government bonds, including TLT and MYJ, 35%; Treasuries between 2 and 10 years in duration, such as IEI and IEF, 12.5%; 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, in that order) and related shorts, 52.5%; short CFC, 3%; short GLD, 17.5%; short GDX, 2.5%.
REMINISCENCE OF THE WEEK (October 8, 2007): Just over a year ago, I was in Alaska during the beautiful autumn season that lasts for only a couple of glorious weeks in September. While driving on the highway to Seward, I noticed a photographer standing patiently by the side of the road, so I parked and walked over to him. "Look at that," he pointed to a craggy stone hill nearby, "that's a family of Dahl sheep. I've never seen them at such close range." I asked him, "Do you live around here?" "No," he replied as he began to rapidly take one photo after another, "I freelance for National Geographic. They're going to love this." As he took dozens of photos, I slowly took out the digital camera that I had not had time to familiarize myself with before the trip. I had the owner's manual with me, but it took several minutes to figure out how to use the camera properly, during which time my amused pro had taken probably two hundred shots. Finally, when I had everything set, the sheep had gradually moved well up the mountain, so even using the zoom lens my photos looked like indistinct white dots on an autumn landscape. At least the colors turned out brilliantly.
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