Updated
@ 7:15 a.m. EDT, Tuesday, October 7, 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.
To every thing there is a season, and a time to every purpose under the heaven. --Koheleth (Ecclesiastes) 3:1
BUY STOCKS NOW! (October 7, 2008): Global equities completed important multi-year bottoms in yesterday's trading. VXO, the most reliable gauge of investors' fear, surged to an intraday peak of 69.42, which was its most elevated reading since October 1987. Key support levels for numerous indices and funds were achieved during yesterday's trading, such as the Nasdaq and QQQQ completing bullish double bottoms just above their respective August 2004 lows. Even most emerging markets, which have been notoriously weak in recent months, held convincingly above critical long-term support levels.
There is a time to buy and a time to sell. Now that amateurs around the world have been selling in a panic, now is the time to step up to the plate and do your buying. Don't be shy: another purchasing opportunity like this one likely won't arise for another two or three years.
I had a small purchase order yesterday on JOF, a fund of Japanese smallcaps, for 1000 shares at a price of 6.63. Most of the time, such an order would be filled with a single sale of 1000 shares; after all, that is only $6,630--hardly a massive trade. Instead, there was a single sale of 200 shares, and eight separate sales of 100 shares apiece. Who else but the least informed participants in the financial markets would each be selling a whopping $663 worth of anything in a given transaction?
The mood in the media has been almost unanimously gloomy, which is always a reliable sign of a bottom. There has also been a sharp increase in the number of conversations that I overhear in my daily life which deal with the stock market. This only happens during euphoria, which obviously this is not, or during panic.
When oil was above $140 per barrel, the media were full of stories about when--not if--it would reach $200. You know what happened afterward. When gold reached $1000, all of the gold chat sites asked what day it would reach $2000--instead, it slumped $300 per ounce over the next half year. Yesterday, there was heated discussion on many bulletin boards about when the Dow Jones Industrial Average would reach 7000.
My brother told me about one survey in which there were three choices as to what to do regarding the stock-market pullback: 1) hold onto your stocks; 2) move your money from stocks into a bank; 3) move your money from stocks into a mattress. The third choice was the most popular response. What is really significant is that there is no option in this survey for adding to your equity holdings!
Even the intraday trading pattern was a classic case of amateur participation. One can easily imagine millions or perhaps billions of people discussing the financial markets over the past weekend. "Honey, I think we should finally dump all of that stock stuff. My brother-in-law was wrong. The world has permanently changed and we're just going to end up even worse off if we do nothing." Many of these folks put in sell orders over the weekend, which caused a number of funds to open at or near their intraday lows. Relentlessly negative news coverage for those who watch TV induced many who were sitting on the fence to sell in the morning.
When else do amateurs have a chance to go to the internet and place orders? Most of them have day jobs, so they can only act during a lunch break. It is hardly surprising that lunchtime was thus the scene for yet another sharp equity pullback. This process was no doubt accelerated by chart slaves who perceived various phantom "downside breakouts" and other phony indicators, and who joined the legion of amateurs in a final orgy of selling--probably including significant short selling by clueless trend-following hedge funds--which terminated just after 2:45 p.m. No doubt some major short covering contributed to the late-day rebound.
This pattern of amateur dumping will likely continue at and near the open, and also at lunchtime, perhaps for another week or two. The behavior will be uneven: some days will be calm; others will see sharp rebounds; still others will be mini-panics as we had on the Monday which followed the October 1987 market collapse. Many indices and funds will begin to form bullish patterns of higher lows, even as the media continue to trumpet each "down day" as the certain approach of Armageddon. Take advantage of all pullbacks to add to your equity positions.
Professionals and corporate insiders were heavy buyers at all intraday lows yesterday. The ratio of insider buying to insider selling has been running at levels that have not been seen since the last quarter of 2002 and the first quarter of 2003. Those who are most knowledgeable about the financial markets, and who were selling like crazy in the second half of 2007, have recently been buying aggressively.
It's hardly surprising why the rich get richer and the poor get poorer. The rich keep repeating the successful, rational trading patterns that they have followed for generations, while the poor keep repeating the same emotional mistakes. Don't be influenced by the pervasive gloom; act like Mr. Spock and buy stocks now.
I am currently offering a daily e-mail subscription service at a rate of $119.50 (U.S. dollars) for one year, or $40 for three months. These prices will increase by 25% in less than three months, so act soon. Should you subscribe, I will send you an e-mail every business day, and a special weekly review on Sunday, giving specific timely buy/sell recommendations, as well as long-term guidelines for money management. I will also respond to all e-mail questions that you may have regarding my daily updates. Payment can be made through PayPal, credit card, money order, or check, whichever you prefer. Your e-mail address will not be given to any other person or organization under any circumstances.
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.
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 (October 7, 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%), 20%; MYJ, 2.5%; TLT, 0%; other U.S. Treasury funds (VUSTX, VBTIX), 0%; Gold mining funds GDX, ASA, BGEIX, INIVX, 32.5%; Japanese smallcap funds DFJ, SCJ, JSC, JOF, SPJSX, 12%; Coal mining fund KOL, 2.8%; Energy closed-end fund PEO, 2.1%; General-equity closed-end funds ADX, CET, 3.1%; VIDMX, 7.5%; VINIX, 1%; VIEIX, 1%; TRBCX, 1%; VZ, 1%; 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 VMSXX and the PayPal money-market fund, 3.8%; SHORT POSITIONS: None; covered ALL of them which had amounted to just over half of my entire net worth.
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.
