A true contrarian look at investing and at life in general.
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.
CONTINUE TO ACCUMULATE EQUITIES ON ALL PULLBACKS, ESPECIALLY GOLD-MINING SHARES AND OTHER COMMODITY PRODUCERS (October 19, 2008): It is likely that many global equities completed important five-year bottoms on October 10, 2008 which were confirmed on October 16, 2008. Numerous closed-end mutual funds, which can trade at a discount or premium to their net asset values, showed all-time record high discounts that exceeded 20% for the majority of funds for the first time ever, and were greater than 30% for many closed-end funds. This shows a multi-decade aversion to equities by amateur investors, while professionals and insiders have rarely been more eagerly and intensively buying.
The volatility index VXO reached a peak of 103.41 on October 10, 2008, which marked its highest level since October 1987. VIX, another important index of implied volatility which includes out-of-the-money options, reached an all-time record high of 81.17 on October 16, 2008. Whenever investors are so afraid of an additional pullback that they will blatantly overpay for portfolio insurance, it must be the case that global stock markets are set for a powerful rally that will likely continue for roughly one year.
Investors are far underestimating the stimulative impact of concerted central-bank rate cuts worldwide. Since so many countries sharply raised rates during the past year to fight transient commodity inflation, they can now cut rates aggressively--and are already doing so to combat the global economic contraction. Rising unemployment is a far greater political risk than rising inflation, so politicians will be especially eager to lower rates as much as possible. This will result in negative real interest rates in many countries, which will strongly dissuade investors from favoring time deposits and will encourage equity accumulation.
Commodity shares, especially gold mining shares, have become among the most irrationally oversold and undervalued sectors in the financial markets. The ratio of any given basket of gold mining shares to the price of gold is at half its mean historic level, meaning that even if the gold price is unchanged at some point in 2009, gold mining shares will on average double in value as these respective ratios inevitably regress to the mean. Should gold move back above $1000 per troy ounce at some point in 2009, as is likely given its normal historic volatility, funds of gold mining shares such as GDX and ASA will triple from Friday's closing prices.
Energy shares have also become deeply oversold, with coal mining among the most absurdly oversold subsectors which will likely double or even triple before the end of 2009.
As a result of five-year lows for many sectors, and multi-decade lows for numerous closed-end funds, I have been heavily accumulating numerous equity funds. Go to the "current asset allocation" near the bottom of this page to see my current portfolio.
Those who are new to this web site should click on the "Back Issue List" in the upper right corner of this page. You will see that I had over half of my net worth in short positions for the final weeks of 2007 and for the first three quarters of 2008, with a heavy new short position added on August 15, 2008. Therefore, I have shifted from being massively short equities to being even more heavily invested on the long side mostly during the first half of October 2008.
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.
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 19, 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%), 1%; MYJ, 2.5%; Gold mining funds GDX, ASA, BGEIX, INIVX, 38.3%; Japanese smallcap funds DFJ, SCJ, JSC, JOF, SPJSX, 12%; Coal mining fund KOL, 5.5%; Energy closed-end fund PEO, 7.7%; General-equity closed-end funds ADX, CET, 5.5%; VIDMX, 10%; 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.