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Updated @ 10:00 p.m. EDT, Sunday, June 15, 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.

Investing is like sailing: the most successful sailor is not the one who most accurately predicts the winds and the rain in advance, but who adjusts most intelligently to changing conditions. --Steven Jon Kaplan

U.S. TREASURIES REPRESENT A FANTASTIC BARGAIN (June 15, 2008): What do June 2006, June 2007, and June 2008 all have in common? I'm not talking about weddings, the summer solstice, or the start of the summer break for students, as important as all of those may be to some.

The answer is that in the month of June for each of the past three consecutive years, investors have become irrationally fearful of rising inflation and the risk of the U.S. Federal Reserve raising interest rates. This caused U.S. Treasuries to slump to multi-year lows one year ago, and also two years ago.

This time, concerns over Fed rate hikes are particularly misplaced. The U.S. economy is not only suffering from rising unemployment and falling housing prices, but also from an equity market which has been progressively declining since October 2007. And that's not even considering that this is a Presidential election year. The chance of the Fed raising rates under this combination of conditions is about the same as the likelihood that there will be a blizzard in Manhattan this summer.

As a result, U.S. Treasuries represent a terrific bargain across the yield curve. Of all of the possible Treasury investments that are available at this time, my favorite is TLT, which is an exchange-traded fund of U.S. Treasuries averaging 25 years to maturity.

As global equities continue their decline, while the commodity bubble bursts in spectacular fashion, U.S. Treasuries and other government-guaranteed bonds will be among the few asset classes which are rising in value. It is likely that TLT will gain roughly 10% in just three months, which represents an annualized yield well in excess of 40%.

The U.S. dollar index, which began a major one-year rally on March 16, 2008, will soon accelerate its uptrend. While most government bonds around the world will benefit from falling equities and commodities, the rising U.S. dollar will make U.S. Treasuries the superior choice for hedge-fund managers and other asset allocators.

GDX, a popular exchange-traded fund of gold mining shares, has slumped by more than 24% since it peaked on March 17. This confirms the equity and commodity downtrend, and is signaling clearly that inflation is an overblown concern. Federal-funds futures show that investors are anticipating not just one, but two rate hikes from the Fed by October 29. Don't believe it for a moment. While all of your friends are buying agricultural-commodity funds or Brazilian equities, purchase U.S. Treasuries instead and enjoy enormous annualized gains with limited downside risk.

  • Special Overview of Gold Mining Shares, updated on June 15, 2008.
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    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.

    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 15, 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%), 1.5%; municipal bonds, including MYJ, 2.5%; TLT, 1.2%; other U.S. Treasury funds, 2%; 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, 2.3%; 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 15, 2008): For many years, I took a commuter train at 9:30 p.m. which stopped in my town exactly seventeen minutes later. I took this train so often that I got to know practically everyone else who rode it along with me, including especially the gregarious conductor who had been in charge of that route since about the time I was born, and was close to retirement. We used to talk about everything from the weather to the financial markets to what we were planning for our weekends. Several years ago, there was a political maneuver by a wealthy nearby town which caused this locomotive service that had operated since just after the Civil War to be permanently terminated in September 2004 in my town and in two other towns. On the last scheduled day of its operation, I had to take an earlier commuter train for an important meeting--but I headed out after dinner to the train station to say a final goodbye to my favorite conductor whom I knew would be passing through my town for the very last time. When he arrived, even though it was after dark, he somehow knew to look for me and saw me standing on the platform. I expected him to wave and maybe say a few words; instead, he completely stopped the train and talked with me for several minutes, lamenting the concept of "progress" before finally starting up the train again and completing his ultimate ride on that line.

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