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Updated @ 7:00 p.m. EDT, Sunday, September 21, 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.

There are those who believe that governments can alter major economic trends, and those who know better. --Steven Jon Kaplan

SELL ALL OF YOUR STOCKS THIS WEEK (September 21, 2008): There is a new euphoria in the financial markets--just as we had several times earlier this year when global government intervention was supposedly going to solve all of the problems in the financial markets.

Don't believe it for a moment. If you really think that the U.S. stock market has bottomed, then answer this simple riddle: What great calamity happened in the U.S. financial markets in 1997? No peeking on the internet.

Don't remember? Neither does anyone else. There really was no great calamity in 1997--and yet VXO, a reliable measure of investors' fear, went above 55 that year. (Go to http://finance.yahoo.com/ and enter the symbol ^VXO .) This index of worry also went above 55 in 1998, 2001, and 2002, among other years. However, the highest that VXO has reached in the past year was a mere 45.81 on Thursday, September 18, 2008.

With all of the terrible economic news that we've had recently, the fact that VXO has not been able to closely approach its highs of previous market bottoms means that investors are still not concerned enough--and therefore that the U.S. stock market must still have a powerful decline yet ahead. It is likely that most U.S. equity indices will plummet about 20% from Friday's (September 19, 2008) opening prices. Even if U.S. equities attempt to rebound once or twice over the next several days, they will likely not exceed their euphoric rebound highs of Friday morning. After that, look out below.

Since there will be a U.S. Presidential election on November 4, 2008, and the U.S. stock market will likely rally in anticipation of that election, the upcoming stock-market bottom is scheduled to occur in October 2008. So we are about to experience a dramatic plunge that will probably begin later this week.

Besides VXO reaching at least 55, there are several other events which must occur before a true stock market bottom can be said to be in place. For one thing, reliable leading sectors such as semiconductors must begin to form a bullish pattern of higher lows. This must happen naturally, without governments intervening to restrict short selling and other such nonsense.

Besides the non-capitalist nature of these regulations against short-selling and similar hedging practices, they will result in making the next stock-market bottom much deeper than it would have been otherwise. At any major low for equities, professional short sellers make substantial purchases to heavily cover their short positions. Without nearly as much short covering, this buying will be notably muted, and will therefore provide significantly less support to the equity market.

There is a far more important psychological effect of the government's intervention. Many investors are now euphoric or at least complacent, thinking that the government will make everything better and will prevent a further stock-market decline. Once we end up breaking below last week's lows, investors will feel betrayed and will be even more panicked than they would have been otherwise. Thus, the intervention, far from restoring investors' confidence, will have exactly the opposite effect--it will destroy it and create pervasive cynicism.

Most financial analysts are telling you to buy stocks now. Instead, you should be selling them. Remember that these were the same analysts who were gushing a year ago about how we were enjoying a "true Goldilocks economy".

Many of these analysts have Ph.D. degrees, Nobel prizes, and other such signs of alleged genius. Many of these paragons skipped several years of formal schooling--especially pre-school and kindergarten. Therefore, they did not learn that in the story of Goldilocks, she is always followed by three angry bears!

We have seen Baby Bear--but Mama Bear and Papa Bear have not yet made their appearances. Do not be fooled. Unlike these geniuses, you attended kindergarten--and therefore you know what will happen as Goldilocks attempts to enjoy her purloined porridge. The biggest bears will soon arrive--don't let them catch you unprepared.

  • Overview of Gold Mining Shares, updated on September 21, 2008 to show precisely how HUI and GDX have completed important three-year bottoms.
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    THE STEEPEST PHASE OF THE U.S. STOCK-MARKET PLUNGE IS ABOUT TO OCCUR (September 7, 2008): Even after declining for nearly eleven months, most investors remain thoroughly complacent toward the possibility that U.S. equities will suffer an additional substantial pullback. Both VXO and VIX, the two most historically reliable gauges of fear, show no more concern today about a significant decline than had existed when the U.S. stock market was close to its seven-year peak in the second half of 2007.

    A continued lack of fear in a falling market is the most dangerous scenario of all. The stock market has never completed any major bottom until the majority of investors were frightened enough to sell their stocks and to move their money into the safety of money-market funds and similar safe time deposits.

    In confirmation of this outlook, the only insider buying by top executives has occurred in the most undervalued sectors, with continued selling in most industries.

    While U.S. Treasuries have rallied to their highest levels since March, the spread between low-grade corporate bonds and U.S. Treasuries is at its highest point since early 2003. Fixed-income traders include very few emotional amateurs or novices, and are therefore generally more knowledgeable than the average equity investor. When the smartest participants have intentionally fled to the safety of U.S. Treasuries and have shown a marked aversion to low-grade corporate debt, this can only mean that the U.S. economy will soon go into a true recession.

    You can forget about all those decoupling myths. Whenever the U.S. economy is weak, the rest of the world has proven to be even weaker. Emerging-market equities and commodities have slumped more in percentage terms than U.S. equity indices.

    Whenever the U.S. government announces one plan of action or another, the stock market enjoys a sharp one-day rally. Friday's announcement about nationalizing Fannie Mae and Freddie Mac could lead to a sharp move higher for U.S. equities on Monday morning.

    But one-day rallies have never been a feature of a healthy market. During the entire bull market from October 10, 2002 through October 11, 2007, there was not a single day when the Dow Jones Industrial Average rose 300 points or more. However, during the bear market from early 2000 through October 10, 2002, there were twelve such days--and six just since November 2007. Sharp one-day rebounds define a market which still has much farther to decline.

    The steepest part of any correction almost always occurs in the final weeks, and even in the final days. It's not going to be a pretty picture. The U.S. stock market is going to reach an incredibly deep low in October 2008 that will be accompanied by three-year and even four-year bottoms for most U.S. equity indices.

    BUY GOLD MINING SHARES AND FUNDS (September 7, 2008): One sector which has become severely oversold is gold mining shares. On Friday, September 5, 2008, GDX--the most popular fund of gold mining shares--touched a new all-time low of 31.65. [GDX had its debut on May 23, 2006.] This was slightly below its previous bottom of 31.82 from June 13, 2006. If you look at the ratio of gold mining shares to the price of gold, they were only this undervalued on one other occasion--when they completed a historic nadir in November 2000.

    As central banks around the world are forced to cut interest rates to respond to a global economic contraction, this will prove to be strongly supportive of precious metals shares even as the U.S. dollar generally continues its rally for another half year or so.

    Therefore, I have increased my holding in GDX to 10.5% of my total net worth (see my total asset allocation below), and will continue to gradually accumulate GDX and ASA on all dips over the next several weeks.

    In the link below, I have updated my outlook on gold mining shares, as my target price of 295 for HUI was finally achieved.

    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), as well as August 25, 2008 (page 32).

    CURRENT ASSET ALLOCATION (September 21, 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%), 4.6%; MYJ, 2.5%; TLT, 3.0%; other U.S. Treasury funds (VUSTX, VBTIX), 1%; GDX, 24.5%; 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, 3.4%; SHORT POSITIONS: short QQQQ, 37.8%; short GOOG, 4%; short EWM, 1%; short ILF, 1%; short USO, 5.5%; short DBA, 0%; short BIK, 1%; short EWZ, 1%.

    REMINISCENCE OF THE WEEK (September 21, 2008): There is a card game called Pit that I learned as a teenager, which is great when you have five people and your original planned outdoors event is rained out. It's easy to learn--you have five different "suits" each of nine cards, and the cards are shuffled, giving nine to each player. (Nine of the Jacks, Queens, and Kings count as a separate "suit".) You repeatedly trade your cards with other players, by shouting out the number of cards that you have of a particular suit (you don't mention the suit) which you then trade with someone else who shouts out the same number. So if you shout "three", then you wait for someone else to also shout "three", and you then give that person three of one suit (such as hearts) for three of whatever suit that person wants to give up. (It's cheating if your three cards traded consist of two or more suits.) Any number from one to eight of one suit can be traded at a time. As soon as you have accumulated all nine cards of any given suit, you put your cards face up on the table and declare victory. If two players get nine of the same suit simultaneously, the first one to place his or her cards on the table wins.

    I made the unforgivable error of playing this five-handed game with one attorney among the five players. Everything went fine for about a half hour. Then, we experienced a hand which seemed to go on interminably. After about ten minutes, I looked over at the attorney; he was just calmly smiling, and not trading with anyone. After several more minutes of being puzzled, I finally realized what had occurred: he had accumulated at least one card of each of the five suits. While he couldn't possibly win that round, he knew that no one else would prevail, either! I'll let you figure out the moral of this true tale for yourself.

  • Best of Previous Reminiscences
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