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Updated @ 8:45 p.m. EST, Monday, February 18, 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.

The biggest mistake that most investors will make in 2008--if they have not made this mistake already--will be to purchase their favorite shares and funds too early. --Steven Jon Kaplan

HOUSING-PRICE DECLINES IN THE SWING STATES WILL LEAD THE DEMOCRATS TO VICTORY IN NOVEMBER (February 18, 2008): There has been a lot of excitement in the U.S. and abroad over the Presidential elections to be held on November 4, 2008. Much has been debated in the media about whether the nearly even Democratic race will cause disunity at the convention, and whether or not that favors the likely Republican challenger, John McCain. The pundits are wondering if the presence of the first serious female or black challenger could tip the balance either for or against such a candidate. The possible future composition of the Supreme Court is a popular topic for discussion. As usual, there are plenty of conspiracy theories and enough misinformation to last for a lifetime.

What is rarely mentioned is that when the average person goes into a voting both, he or she almost always has basic pocketbook issues as the critical deciding factor in that person's ultimate decision. With a roughly 70% home-ownership rate among registered voters, the average person's main worry this November will be falling housing prices. This concern is especially magnified since the value of the median voter's house far exceeds his or her liquid net worth.

Those states which were either staunchly Republican or solidly Democratic in the past two elections are likely to remain that way in 2008. The real question is how the swing states will tilt.

In a rather amazing coincidence that I have not seen mentioned elsewhere in the media, it happens to be the case that several of the most important swing states have had the most serious problems in the housing market. Ohio and Michigan have seen record foreclosure rates, with rapidly falling prices in many cities in those states. Florida, also a key swing state in both 2000 and 2004, has had among the largest percentage declines for housing prices nationwide. Nevada, while it has fewer electoral votes, has also been very hard hit by the collapse of the housing bubble; to a lesser extent, so have Colorado, New Mexico, and Pennsylvania.

By November 4, 2008, you can be sure that in the back of the mind of homeowners of all of the above states will be the knowledge that housing prices will have fallen for three consecutive years. Rightly or wrongly--clearly there was no housing bubble prior to the Bush Presidency--the blame for the collapse will be attributed almost entirely to the Republican Party. (Probably Alan Greenspan was the main direct culprit, but there can be no question that his actions were undertaken with the full knowledge and approval of the current administration.)

Therefore, I think that no matter what else happens in Iraq, with the economy, or on any other issue in 2008, the Democrats will regain the White House in 2008. Even if that prestigious residence has also seen a decline in its underlying land value, its importance remains as high as ever.

COMMODITIES ARE SET TO JOIN EQUITIES IN A GLOBAL DOWNTREND (February 18, 2008): U.S. and Chinese equities began to decline in October 2007; as of a month ago, all other worldwide equity bourses had joined them by initiating major pullbacks, without exception. However, in the commodity arena, many commodities are still at or near multi-decade peaks. Base metals have been forming a pattern of lower highs since May 2007 or even May 2006 (such as copper), but most other commodities are still beloved by the media and by most investors.

Just as we had euphoric peaks for many equity markets such as China, Vietnam, Singapore, and Brazil--among many others--some commodities have touched astonishing peaks which have virtually nothing to do with supply/demand fundamentals and everything to do with pure speculation. Platinum is near $2100 per ounce; wheat and soybeans have roughly doubled in a year; cocoa is at a 23-year peak.

It is just a matter of time, and not much time at that, before commodities join equities in a major multi-month correction that will cause a severe percentage decline for nearly all of them. The most likely trigger will be an acceleration in the U.S. dollar's rally which began on November 22, 2007, but which so far has experienced a rather anemic uptrend.

Once the greenback's surge intensifies, this will force amateurs around the world to close their speculative short positions in the U.S. dollar. The main reason for the U.S. currency's appreciation: the rest of the world will experience a much greater disappointment in actual growth rates compared with anticipated ones.

  • Overview of Gold Mining Shares, updated on February 18, 2008.
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    The U.S. DOLLAR'S RALLY WILL PROVE DECISIVE (February 12, 2008): The U.S. dollar index has completed a very bullish double bottom with its historic low of November 22, 2007 being followed by a higher low on February 1, 2008. The implications of this event are still being ignored by the mainstream media, but will soon be felt profoundly throughout the global financial markets.

    As the U.S. Federal Reserve has been quick to cut interest rates, while other central banks have been reluctant to follow suit, this ensures that the U.S. economy will come out of recession sooner than the rest of the world. In addition, actual U.S. growth over the next year is likely to be very close to expectations, whereas growth in other countries--especially in emerging markets--is likely to fall several percent short of the current consensus levels. This will lead to a continued rally in the U.S. dollar, as currency fluctuations are primarily a function of actual growth rates relative to expected ones.

    In addition, the increasing anticipation of the election of a Democrat as the next U.S. President will imply a return to the higher taxes from the 1990s and a gradual withdrawal from Iraq. Both of these will reduce the U.S. budget deficit, which will also be positive for the U.S. dollar.

    Equity markets around the world are finally beginning to reflect the reality of a global economic contraction. However, commodity markets remain in their own private fantasyland in which precious metals are surging even as physical demand has collapsed, while wheat and soybeans are behaving as though they are about to be declared illegal substances. This will not remain the case for long. Crude oil has already completed its peak on January 3, 2008, while gold mining shares topped out on January 14, 2008. It's just a matter of time--and not much time at that--before all precious metals, agricultural commodities, and energy commodities undergo accelerated declines. The intensity and magnitude of each of these commodities' pullbacks will surprise the vast majority of investors who have not recognized that the apparently relentless move higher in the commodity markets is about to be sharply reversed. The duration of these respective corrections will be brief--likely only a half year or less.

    Meanwhile, most equity investors remain astonishingly complacent toward the likelihood of a substantial additional decline for stock markets around the world, as evidenced by implied volatility indices such as VXO which currently stand at only half the typical peak levels seen at any major correction bottom such as we experienced in 1997, 1998, 2001, and 2002. Just as investors deluded themselves at the end of last year that the August 16, 2007 bottoms for most equity indices would hold strongly to the upside, most investors today believe that the late January 2008 lows will provide strong support. The truth is that the July 2006 lows for nearly all global equity indices will be closely approached over the next few months. This implies that the Nasdaq still has about 20% remaining downside, while most emerging markets will decline by an additional one third to one half from their current levels.

    It is difficult for most investors to envision a world in which the U.S. dollar is rallying strongly, while equities and commodities are declining rapidly. However, that is the world in which we will exist over the next few months, so the sooner that you modify your investment portfolio to reflect this reality, the greater you will profit from it.

    THE LAND OF THE RISING SUN WILL RISE AGAIN (February 12, 2008): Has anyone on a chat site or in your office bragged lately about why they're invested in Japanese equities? Do you even know anyone who has money in Japan's stock market? As emerging markets have become the darlings of investment portfolios around the globe, Japan has been virtually completely abandoned as an investment choice. Many hedge-fund managers specializing in Asian equities have a zero-percent allocation to the island nation that still has the largest total market capitalization outside the U.S.

    Since Japan's stock market had peaked way back on the last day of 1989, brokerages worldwide have had nearly two decades to reduce their staff and their time spent on Japan. This has caused smallcap Japanese equities in particular to become almost totally ignored and therefore absurdly undervalued. Consider also that Japan will be perhaps the only country in the world that will not suffer from collapsing housing prices over the next several years. This in itself will cause economic growth in Japan to easily surpass almost the entire world over the next decade or so.

    The real irony is that in the 1980s when Japan's total GDP actually surpassed that of the U.S. (in absolute terms, not just in per-capita terms), American companies and the industries of many other nations sent thousands of workers to Japan to learn the secret of that country's success. In recent decades, however, almost no one has gone to Japan to study the reasons for their subsequent failures. If this had been given a higher priority, the rest of the world might have learned why promoting housing bubbles can prove deadly, and why too heavy an accumulation of household debt can be a serious drag on the economy. As they say, we are too soon old and too late smart.

    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 (February 18, 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%), 4.5%; 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, 20%; short GDX, 3%; short USO, 4.5%; short SLV, 2%; short DBA, 4.5%; short BIK, 1%; short EWZ, 1%.

    REMINISCENCE OF THE WEEK (February 18, 2008): When my sister Beth was in ninth grade, she began an independent science project that took several months to design and investigate. She created a special colorful display on a wooden board; she accumulated a huge amount of data; and one day after exhausting herself with some meticulous painting, she asked me what I thought. I looked carefully at everything, and finally told her truthfully, "You've done a wonderful job collecting information, and your artistic ability is amazing. What you need is some way of connecting it all together." "Can you be more specific?", my sister insisted. "I'm not even sure what I'm looking for," I admitted. "Let me study it this weekend." That Saturday afternoon after piano and composition classes at the Peabody Preparatory, I went to my favorite hideout, the Enoch Pratt Free Library in Baltimore, and spent a few hours skimming through several science books. I was beginning to get discouraged, when finally I discovered something called the "chi-square test". I borrowed the book, studied it, and explained it to my sister. She immediately realized its importance, and redesigned her entire project as though she had years of experience with significance levels and frequency distributions. In a major regional competition, my sister won numerous awards from the state statistical society and other organizations.

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