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 most investors make in general is to project the recent past into the indefinite future. The two greatest errors in 2008 will be 1) many investors purchasing their favorite assets too early; and 2) many other investors (and some of the same ones) selling in discouragement when we are finally completing important bottoms. --Steven Jon Kaplan
DO YOU REMEMBER SEPTEMBER 2000? (May 11, 2008): This is not just a rhetorical question, or a trip down memory lane. The Nasdaq had plummeted by 40% in just 6-1/2 weeks following its all-time peak of 5132.50 on March 10, 2000. Over the next several months, it gradually regained more than half of its losses, thereby convincing many investors that the worst had passed, and that the global economy would soon recover. Reliable measures of fear showed that most investors were not as confident in September as they had been a half year earlier that they would continue to make 30% per year in the stock market, but they also did not fear that the May 2000 lows--which were above 3000 for the Nasdaq--would be broken.
Since hindsight is 20/20, we know that these hopes proved to be false. There was a global economic slowdown which did not end until the second half of 2002 or the first half of 2003 in most parts of the world. The Nasdaq ended up plummeting nearly 75% from its lower peak in September 2000 to its final bottom on October 10, 2002.
We are in a nearly identical situation today, although the time frame is somewhat compressed. After the rapid pullback in global equities from October 2007 through January 2008, along with modestly lower lows for most sectors through the middle of March, we have since enjoyed nearly two months of a worldiwde equity recovery. Investors' fear of a renewed pullback, as measured by VXO, VIX and similar indices, has returned all the way back to its lows of the second week of October 2007.
The slowdown which began last year is still in its early stages. The Nasdaq and most agricultural commodities still face at least a 25% decline from current levels before they have any chance of completing an intermediate-term bottom. Crude oil and some emerging-market indices such as Brazil and Russia are probably going to experience a plunge which is closer to 50%.
Corporate insiders are aware of what's really going on. They have increased their ratio of selling to buying so that it has returned close to the levels of last October--and with even heavier unloading by top energy executives who know that current energy prices are set for a major plunge as crude oil soon retests $100 per barrel and eventually bottoms close to $60 per barrel.
Always beware the eye of any hurricane. That is when the most amateurs end up getting badly hurt, by thinking that the worst is over just as the next major danger zone is about to commence. Until the media are fearful instead of exuberant, stay away or sell short.
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GLOBAL EQUITIES WILL SOON RESUME THEIR RESPECTIVE DOWNTRENDS (May 4, 2008): There has been far too much optimism and even outright excitement over the rebound in global stock markets since March 17. Many investors are anticipating the end of the worldwide slowdown even before it has barely gotten underway. The recent move above their respective 200-day moving averages by many U.S. equity indices has encouraged many momentum players and others to jump aboard the bullish bandwagon.
A more rational analysis would show that the U.S. equity recovery over the past several weeks has been accompanied by much lower volume than was the case during the downtrend. In addition, many worldwide indices stand only modestly below the multi-year peaks that they had reached several years ago. It is absurdly unrealistic to think that the beginning of the worst global real-estate collapse in history could have ended with such a shallow pullback for global equities. The total magnitude of the declines for other benchmark indices are also significantly less than their normal periodic cyclical retracements.
The recent rebound in the U.S. dollar, which has been moving progressively upward since March 16, along with the final gasps of the commodity rally, which has left the energy complex as the only sector which has not yet experienced a significant retreat from its highs, are both highly uncharacteristic of a market which most analysts believe is supposedly set to continue higher. Even more importantly, long-dated U.S. Treasuries appear to be building a critical base of support at their respective 200-day moving averages. This generally occurs just before a major equity pullback. Meanwhile, top corporate insiders have sharply increased their selling. This demonstrates that the most knowledgeable investors are positioning themselves on the side of greater safety just as amateurs--many of whom sold in the first quarter near the lows--have been eager to jump back in.
The rotational pattern has also been bearish. The strongest performers in recent weeks have been precisely those sectors which had previously experienced the most substantial declines, including the so-called "four horsemen of the Nasdaq". In a bullish rotation, those sectors which most strongly resisted the overall retreat would generally take over as the best performers during the subsequent rebound.
The media have also turned almost giddily positive on stocks, just as they had been far more gloomy in the middle of March when global equities completed a short-term bottom.
Don't be fooled by the hype and by obsolete methods of technical analysis. The Presidential cycle correction is alive and well. The recent rebound is simply a head fake to fool amateurs into buying when they should be selling. Most global equity indices will slump toward much deeper bottoms over the next three to four months as recession fears spread from the U.S. toward most of the world, even including emerging markets. The U.S. dollar will continue its recovery--which will put additional pressure on multinationals, commodity producers, and other sectors which have benefited disproportionately from a weakening greenback and of investors falsely anticipating the resumption of a declining U.S. currency.
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, and then again on page M14 of their February 25, 2008 issue.
CURRENT ASSET ALLOCATION (May 11, 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%), 2.5%; 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, 4.5%; 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, 5.5%; short SLV, 2%; short DBA, 8%; short BIK, 1%; short EWZ, 1%.
REMINISCENCE OF THE WEEK (May 11, 2008): In July of 2000, my wife and I stayed at a bed and breakfast place in Bermuda that was owned by a wonderful man named Westmore Bean, who rented out the basement of his house to us. Mr. Bean taught me the rules of cricket, cooked some local specialties, and reminisced about life on the island going back to the 1920s. In preparation for the trip, I had printed out roughly 200 pages from the internet which dealt with all aspects of the history of Bermuda: why people wear Bermuda shorts, what to see in each of the individual islands, and so on.
On the night before our flight home, our place was covered with randomly scattered internet printouts, as I had been too lazy to put them into any kind of meaningful format. I wasn't eager to bring the huge amount of paper back on the return flight, so I tried to throw it out--but I could not fit it into the trash can, since it was in such disorganized form. I therefore sat down to put it into a single pile that could be easily discarded. While I was doing that, I began to organize the papers into categories: by island, west to east; by historical significance, earliest to latest. Before I knew it, the whole pile was perfectly arranged--and so I couldn't bear to throw it out! So I simply left it for Mr. Bean to take care of after we left. As a gift after we got back to the U.S., I mailed him a videocassette of "That Touch of Mink", starring Cary Grant and Doris Day, which Mr. Bean had watched being filmed just one block away from his house.
In April 2004, we returned to Bermuda. His bed and breakfast was no longer in operation, so we stayed elsewhere. We decided to pay Mr. Bean a surprise visit. It turned out that he converted the basement into a long-term rental. We sat for more than an hour, talking about everything that had happened since we were last there. Unfortunately, his wife had recently passed away. As we were about to depart, Mr. Bean thanked me for the video, and said, "Before you go, let me show you something which you'll find interesting." He returned with a book, bound by hand, which contained all of the 200 pages that I had left in a pile. A friend of his who was cleaning the place after our departure had noticed it, and decided to surprise him by having it specially bound at a local print shop. Mr. Bean showed off the book proudly to everyone who came to visit.
In his early 90s, Mr. Bean died less than a half year ago. He will be missed.
