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Updated @ 6:45 p.m. EDT, Sunday, August 17, 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.

Everything popular is wrong. --Oscar Wilde

IT'S TIME TO BUY GOLD MINING SHARES, AND TO SELL SHORT U.S. EQUITY FUNDS (August 17, 2008): This year has continued to provide fabulous opportunities throughout the financial markets. GDX, an exchange-traded fund of gold mining shares, had peaked at 56.87 on March 17, 2008. On August 11, 2008, it touched a low of 33.86, which represents a total pullback of 40.46% in five months.

This demonstrates fairly typical volatility for this sector, and is not surprising in itself. What is startling is that the same investors who were falling over themselves to buy GDX when it was near its peak, currently want nothing to do with it. As Mr. Spock would say, humans are indeed curious! Since gold mining shares have been in a powerful bull market since November 2000, this represents a very good buying opportunity for those who were patient enough to wait for a compelling value situation to present itself.

It is probable that the recent low for GDX represents a left shoulder in a typical head-and-shoulders bottom, rather than the ultimate nadir. However, any price near 34 or below is a compelling buying point for GDX, and therefore I covered my entire short position and invested 5% of my net worth in GDX as a long position. I plan to increase this allocation, especially if gold mining shares experience a final plunge at some point over the next few months. GDX is likely to enjoy periodic sharp upward bounces several times before it commences its next strong rally.

It should be pointed out that the 2006 bottom for GDX was 31.82 on June 13, 2006, while the 2007 low was 32.76 on August 16, 2007. So GDX is roughly repeating its support levels from each of the past two years.

Meanwhile, U.S. equities have been forming a pattern of marginally higher readings--rising just enough to shake out misinformed or uncommitted amateurs who do not realize that we are about to enjoy the sharpest phase of the entire U.S. equity correction which began in October 2007. QQQQ is a fund of the top 100 Nasdaq companies by market capitalization; the next several weeks will likely see this and similar funds plummet by 25% as U.S. equities retest important support levels from 2005-2006. I have therefore added to my already substantial short position in QQQQ in recent days, as its price moved above 48 dollars per share. Recent astonishingly low intraday volatility readings, including VXO at 20.94 and VIX at 19.57, confirm that U.S. equity investors are overly complacent when they should be maximally defensive.

Near the bottom of this update, you can find my current asset allocation. In the next paragraph is a link which provides much more detailed information about the behavior of gold mining shares during the past eight years, and where this sector is likely headed over the next few months.

  • Overview of Gold Mining Shares, updated with important comments on August 17, 2008.
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    THE U.S. STOCK MARKET IS SET FOR A DRAMATIC PLUNGE (August 10, 2008): The S&P 500 index has been declining for ten months--and yet the incredibly low levels of implied volatility indices including VXO and VIX show that the vast majority of investors still do not believe that an additional pullback is likely. This state of denial is especially dangerous now that emerging-market equities and commodities have joined developed-market equities in their downtrends, demonstrating beyond any shadow of a doubt that the worldwide economy has been noticeably contracting.

    QQQQ makes an excellent short position at this time. It has fallen only 14% since October 31, 2007, even with the worst housing collapse in U.S. history and a major global credit crisis. The recently rising U.S. dollar will cause significantly lower profits for many U.S.-based technology companies which derive a substantial percentage of their total profits from overseas sales. The dividend yield on the top 100 Nasdaq companies is also absurdly low by historic standards--unless of course you are comparing it with the Nasdaq's bubble peak from March 2000.

    With the U.S. Presidential election arriving on November 4, 2008, there are fewer than three months to go until that important event. U.S. equities generally rally in anticipation of any Presidential election, and that is likely to be especially true this year when a very unpopular incumbent is about to be replaced. Therefore, whatever pullback we get as a result of the global slowdown has to happen now or never.

    In case you're tempted to place your money on "never", keep in mind that in years including 1997, 1998, 2001, and 2002, the U.S. stock market was not able to rally until VXO moved above 55 each time. This elevated level of fear showed that enough investors had panicked so that they had created an essential source of additional buying power in money-market funds and similar safe time deposits. Until we see a similar level of panic in 2008, the U.S. stock market will have to continue to form a pattern of lower lows as it has been doing consistently since October 2007.

    The media will tell you that lower commodity prices are positive for equities. Don't believe it for a moment--remember that just one month ago they were claiming that lower equity prices were positive for commodities. The media are simply attempting to create a plausible explanation for whatever has just happened--they have no ability to put two and two together to tell you what is just around the corner. Bet on lower U.S. stock prices and you will profit handsomely over the next several weeks.

    FINALLY, A SINCERE THANK YOU to Barron's for featuring me on page 50 of their November 19, 2007 issue, and then again on February 25, 2008 (page M14) and June 2, 2008, page 41.

    CURRENT ASSET ALLOCATION (August 17, 2008): My own personal funds are currently allocated as follows: LONG POSITIONS: stable value fund (retirement fund with stable principal paying variable interest, currently 4.50%), 6.1%; MYJ, 2.5%; TLT, 2.4%; other U.S. Treasury funds, 7%; GDX, 5%; KRE, 1%; XRT, 0.5%; TOC, 1.7% (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, 8.0%; SHORT POSITIONS: QQQQ, 37.8%; GOOG, 4%; short EWM, 1%; short ILF, 1%; short GLD, 0%; short GDX, 0%; short USO, 5.5%; short SLV, 0%; short DBA, 8%; short BIK, 1%; short EWZ, 1%.

    REMINISCENCE OF THE WEEK (August 17, 2008):.

  • Best of Previous Reminiscences
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