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Updated @ 11:20 p.m. EDT, Sunday, June 1, 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.

Those who invest in haste usually repent in leisure. --Steven Jon Kaplan

INVESTORS ARE ANTICIPATING THE END OF A RECESSION WHICH HAS NOT YET EVEN BEGUN (June 1, 2008): Since March 17, investors have been increasingly shifting their money from safe havens such as U.S. Treasuries into the riskiest segments of the equity and junk bond markets. As a general rule, the more speculative the sector, the more that it has rebounded over the past 2-1/2 months. The prevailing belief among most participants is that recession fears have been overblown, and that the U.S. and global economies are recovering from their weakest points.

Nothing could be further from the truth. The worldwide economic slowdown has been underway for nearly a year, but it still has many more months to go. The early spring rebound in the equity market is the typical eye of a hurricane; the strongest gales and the deepest lows for stock markets around the world lie ahead of us, rather than behind us.

Complacency has reached such extremes that implied volatility indices such as VXO and VIX which quantitatively measure investors' fear showed even more complacency in recent weeks than had existed in October 2007, when worldwide equities were routinely setting new seven-year daily peaks. Whenever there is less fear at lower price levels, this is a reliable recipe for a major decline in the immediate future.

Global equity bourses are completing double tops with their recovery peaks of May 19, 2008. These double tops may be retested once or twice more during the coming week, and will then be followed by a steep pullback which will probably persist until shortly before the next rate announcement by the U.S. Federal Reserve on June 25. By September of this year, equities worldwide will be substantially lower than they had been in January or March. Support levels from 2005 will likely be retested for most U.S. equity indices.

Commodities are now all in major downtrends, even including crude oil which finally peaked at $135.09 per barrel on May 22, 2008. Most grains have been declining since February; nearly all metals since March; and energy commodities just recently. Because of the extreme investor euphoria and excitement about commodities in recent months, nearly all of them with the sole exception of precious metals have seen peaks that will probably not be experienced again for at least another four or five years. Just as importantly, we will soon get amazing undervaluations in rough proportion to the severity of the recent overvaluations, as speculators who caused recent extreme peaks eventually panic and cause equally exaggerated bottoms.

Over the next several months, the continued rise in the U.S. dollar, which completed a historic nadir on March 16, 2008, will put substantial downward pressure on all commodities and their shares. The positive side of this sharp correction is that it will provide ideal buying opportunities for some commodity-share funds later in 2008 and perhaps also in early 2009.

I would like to extend a special thank-you to Barron's for quoting me on page 41 of this week's (June 2, 2008) issue.

  • Special Overview of Gold Mining Shares, updated on June 1, 2008.
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    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.

    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 (June 1, 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 (June 1, 2008): Each year, the city of Montclair, New Jersey has a special festival in their largest open meadow entitled "May in Montclair". One of the most popular features is an exhibition of real Scottish border collies by world-renowned trainers of those dogs. The handler wows the audience by showing how sheep and geese will move together in the exact direction that he requests, by using his dogs to herd them. Several years ago, he began the demonstration as he usually does, by letting three sheep out of their holding pens. He didn't expect that his sheep would dash off toward the end of the meadow and beyond, traveling well over 20 miles per hour. You should have seen the looks on the faces of a pair of joggers on a nearby running path when these three sheep suddenly bounded in front of them, practically knocking them over, followed shortly thereafter by one very eager border collie.

  • Best of Previous Reminiscences
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