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 GLOBAL EQUITY DOWNTREND HAS RESUMED IN FULL FORCE (May 26, 2008): On May 19, 2008, stock markets around the world completed bear-market rebounds which had mostly begun on March 17, 2008. For many developed-market equity indices, including the Nasdaq and the S&P 500, these moves had progressed above their respective 200-day moving averages. This foolishly induced many short sellers to close their positions and encouraged others to buy stocks, just before the next major leg of the correction. Some commodity-producing emerging-market indices reached new all-time euphoric peaks in May 2008, just as many commodity-consuming emerging-market indices had been equally ebullient in October 2007.
The deepest lows of the global equity downtrend lie ahead of us, not behind us. The nadirs from January and March 2008 will be broken to the downside by double-digit percentages worldwide over the next few months.
Over the past several days, major commodity share indices also initiated substantial pullbacks. While crude oil and some other commodities have been able to achieve new all-time or multi-decade peaks during the past several trading days, the shares of the producers of these commodities have been glaringly underperforming, while the incidence of insider selling has increased enormously in recent weeks.
Most financial observers continue to refuse to accept that the U.S. dollar began a major rally on March 16, 2008 that will soon intensify and will continue for a full year. An important side effect of the greenback's uptrend has been a recent sharp drop in the value of the Indian rupee against almost all world currencies. Since India remains by far the world's largest physical buyer of gold and silver, constituting 30% of the entire physical gold sales per year, the weaker rupee will make it more expensive for Indian consumers to buy gold.
The most serious error that most investors will make this year will be to purchase their favorite funds, shares, and commodities too early. Do not make such a mistake. Be patient and wait until there is real "gloom and doom" before stepping up to the plate and buying.
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.
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 26, 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 26, 2008):