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Updated @ 8:45 p.m. EST, Monday, January 21, 2008.


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.

You must adjust to the financial markets' schedule, as it will not adjust to yours. --Steven Jon Kaplan

IT'S DECOUPLING, IT'S DIVERGENCE, IT'S DE-NONSENSE! (January 21, 2008): There has been a very popular myth in the financial markets during the past several months which has found its insidious way into the mind of many investors. As the global economy shows clear signs of accelerating its contraction, there continue to be those who insist that certain sectors will be able to diverge positively from the overall downtrend.

I'm really surprised that the media doesn't also tell these folks that if they click their heels together three times, they'll be immediately transported to Kansas in the 1930s.

In real estate, for example, there remains the absurd belief that prices which are already at double or even triple fair value will continue to rise as long as you're in the "right markets". Manhattan, for example, is thought by many, who perhaps also believe in the tooth fairy, to have real estate "which can only go up because of all that foreign buying". Maybe foreigners are not allowed to sell in Manhattan? It's obvious to anyone who has studied the fundamentals that Manhattan real estate will soon collapse by far more than 50% in order to catch up to the downtrend that has already affected the rest of the United States.

Real estate is far from the only sector in which a grand delusion is the order of the day. In the equity market, until just a few weeks ago, there were numerous largecap names such as Apple Computer, Coca-Cola, Procter and Gamble, Google, etc., which were assumed to be immune from any stock-market correction. The fact that a nearly identical fairy tale was popular in January 1973, known as the "Nifty Fifty", has obviously been forgotten by nearly everyone. At that time, it was assumed that as long as you owned the "right stocks", you would continue to make money even in a bear market. Then came 1973-1974, and the Nifty Fifty of course collapsed far more than the broader equity market.

Even during the past few weeks, as the few very popular names finally began to collapse, analysts insisted, "Energy and oil shares are still going higher, buy those!" A week later, those collapsed, so the media shouted "Gold mining shares are still surging, switch into that group!" Then they plunged by double-digit percentages, so the hype of the week became "Get into the agricultural-related sector, it's red hot!" Just in the past few days, that equity sector also has suffered sudden sharp declines.

You can choose to invest as though you are Peter Pan in NeverNeverLand, but you're going to make a lot more money if you can recognize the general trend that's taking place right here on planet Earth. If your ship has hit an iceberg and is sinking, you shouldn't look for the place on the ship with the best view or the most trendy people--you should look for the lifeboats so you can get the **** off the ship as soon as possible. Why so many participants in the financial markets can't figure this out is a mystery that even Sherlock Holmes would find unsolvable.

There was a fantasy a few weeks ago that if you owned the "horsemen" of the Nasdaq, you couldn't lose money. At the very end of 2007, the horsemen ran into a huge pile of horse****. The most nimble of the momentum traders quickly shouted neigh and dismounted, leaving the army of amateurs left holding the reins. These clueless folks will continue to ride these poor overworked beasts all the way to the slaughterhouse, as they eventually become horsemeat. These weekend warriors had no idea that the momentum traders were just horsing around with these shares, and thought they represented real bargains or great long-term ideas, or whatever complete lack of horse sense the TV analysts were promoting so loudly that they became hoarse. Amateurs will almost surely continue to hold these shares until their huge losses accelerate later this year, at which point they will be thrown unceremoniously from their mounts, and sell in an emotional panic. The only real winners will be the thoroughbred horsy executives, who kept their equine-imity, and more importantly who were heavy sellers of these shares in late 2007.

Commodities, also, have not been immune to this mass denial. Base metals began to decline in May, but people simply crowded into whatever other commodities were hot. They loved oil at $100 per barrel; they adored gold at $900 an ounce; and in recent days, the same hedge-fund folks and their fawning masses have been buying agricultural commodities, sending them to new multi-decade peaks. It's just a matter of time--and probably very little time, at that--before soybeans, wheat, etc., give back their 50% gains since August 2007. Sure, a lot has happened in the past five months, but I'm absolutely sure that people aren't eating 50% more food now than they were then.

All along the way, the mainstream media have been misleading investors right and left. Usually, something easy to repeat to the gullible, along the lines of "Chinese and Indian demand coupled with reduced supply", has been the catch excuse for buying anything that's going up. Instead of recommending that people make real money by selling short equities and commodities which in some cases have been at multi-decade highs, they have been continually recommending buying whatever is a few days away from a historic collapse.

Is it decoupling? Is it divergence? It's de-nonsense! When the global economy is slowing, all equities and commodities will eventually decline in tandem. It has always been that way, and it will always be that way. Once the contraction slows its rate of descent, then divergences become possible--but that's for future consideration. The present is all about convergence, not divergence. All that rises must converge. (My sincere apologies to Flannery O'Connor.)

While precious metals shares have been in a strong long-term bull market for just over seven years, there have been five pullbacks averaging more than 1/3 for gold mining shares in less than six years. More details about this and similar information about precious metals investing can be found in the link immediately below:

  • Overview of Gold Mining Shares, updated substantially on January 21, 2008.
  • Learn more about Steven Jon Kaplan and watch a live interview on MarketWatch.
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    Your comments are always welcome, or send an e-mail to sjkaplan@earthlink.net.

    FINALLY, A SINCERE THANK YOU to Barron's for featuring me on page 50 of their November 19, 2007 issue, which appeared on newsstands worldwide.

    CURRENT ASSET ALLOCATION (January 21, 2008): 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%), 12.5%; municipal bonds, including MYJ, 2.5%; KRE, 1%; XRT, 0.5%; TOC, 1.5% (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 and in the PayPal money-market fund, 7%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, NDX, GOOG, in that order), 38.5%; short EWM, 1%; short ILF, 1%; short GLD, 17.5%; short GDX, 2.5%; short USO, 4.5%; short SLV, 1%; short DBA, 1%; short BIK, 1.5%.

    REMINISCENCE OF THE WEEK (January 21, 2008): In May 1984, I decided to drive from Baltimore to Chicago to visit a good friend from high school who had moved there. His older sister was also living in the Windy City at that time. I usually flew, but for whatever odd reason, for the first and only time, I decided to drive. After supper, I began to head west into the sunset of the Blue Ridge Mountains at 6 p.m. on a Wednesday evening and arrived at 4 p.m. the following day, having driven for 16 hours and taken two separate 3-hour naps on my car seat in the parking lots of two chain motels. I didn't bother to stop for food along the way. (That's what I call traveling in style!) When I finally arrived in Chicago, I contacted my friend and invited him out to dinner. We had quite a full meal, after which his sister unexpectedly called and invited both of us to have dinner with her an hour later. Naturally, we accepted, and all of us went to a popular Thai restaurant where I eagerly downed a second and even larger feast. My friend, not surprisingly, was barely able to eat anything. "What's wrong with you?" his sister worried. "Don't you have a good appetite these days?" "Maybe he's not accustomed to the spicy Thai seasoning," I suggested with a sly smile.

  • Best of Previous Reminiscences
  • (c) 1996-2008 Steven Jon Kaplan Your comments are always welcome.

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