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.
BUY NOW, BEFORE YOUR FRIENDS AND FAMILY JUMP IN (January 19, 2009): The global equity markets have been forming an important bullish pattern of higher lows over the past two months, while indices of implied volatility including VXO and VIX have been forming a pattern of lower highs since they had surged to 21-year peaks in the fourth quarter of 2008. Whenever this has happened in the past, a powerful worldwide stock-market rally has always ensued.
Most analysts have remained relentless in their forecast of a "deflationary depression", which is completely at odds with the facts on the ground.
GDX, a fund of gold mining shares which is my largest holding (see "current asset allocation" below), has nearly doubled from its bottom of October 24, 2008. If we were really going to have deflation, then the sector which responds most strongly to inflationary fears would not have surged so sharply during the past three months.
Insider buying of commodity-related shares in the fourth quarter of 2008 was the most pronounced in many commodity-share subsectors since the early 1990s. If we were really going to have deflation, then top executives of commodity-producing companies would not have been so aggressively purchasing their own shares. Remember that these same executives were aggressively selling in the spring of 2008, when everyone wanted to buy them at all-time peaks.
Exactly 1-1/2 years ago, there was a nearly unanimous consensus that inflation would remain at multi-decade lows--and then we had the strongest inflationary surge in eighteen years. Exactly a half year ago, almost all analysts agreed that inflation would continue to be the world's biggest economic problem--and then we had the greatest year-over-year drop in inflation since 1931. Now deflation is all the rage--and will be proven just as wrong as the previous two consensus opinions on this topic. You can consistently conclude that inflation will do exactly the opposite of whatever is the current trendy outlook.
Even many bearish analysts agree that stock markets worldwide are undervalued, while bullish analysts are afraid to go on record as saying "buy now". They're going to turn bullish as soon as the market surges another 20% or so, which will encourage momentum players, hedge funds, chart slaves, and much of the public to start buying stocks again.
An all-time record amount of money is currently sitting in risk-free time deposits including U.S. Treasuries and money-market funds, while concerted central-bank rate cuts have caused these deposits to continue to lose money relative to inflation. People will not tolerate negative real returns indefinitely. They are just waiting for others to jump in before they do. Financial analysts don't mind being wrong--they could hardly have been more misguided than they were in 2008--as long as they're wrong along with the vast majority of their peers. Misery may not love company, but it helps to avoid lawsuits.
Fear of losing money will transform itself into fear of missing out on the rally that everyone else will be enjoying. Buy now, before hedge funds and the general public realize what is going on.
Bearish analysts are confident about the S&P 500 soon going below 750. Bullish analysts are desperately hoping against hope for 1000. With too many investors gloomy and equity fund flows having been net negative since early October, the markets will surge far above these overly pessimistic forecasts. The S&P 500 will likely regain the 1300 level in the second half of 2009 which it has not touched on an intraday basis since September 2, 2008.
Be bold, especially on any down day. Act early. Profit enormously.
AS COMMODITY SHARES RISE, SO WILL INFLATION (November 28, 2008): After having been insistent upon the theme that inflation was the greatest risk to the worldwide economy as recently as July, the media have become equally obsessed with the theme of deflation in recent weeks. One analyst after another has been been telling you why prices will continue to decline because of a slowing global economy.
However, the prices of commodity shares are broadcasting an entirely different story. Gold mining shares, as measured by GDX, XAU, and HUI, have gained more than 60% from their opening prices on October 24, 2008. Coal mining shares, as measured by KOL, have risen by more than 40% from their lows just in the past week. Even oil shares have begun a significant rebound, as have the shares of agricultural producers. This commodity-share recovery has been dramatic and intense on a worldwide basis. Insiders in these sectors, who had been selling heavily earlier in 2008, have shown the highest ratio of buyers to sellers in recent weeks since the commodity boom began near the beginning of the decade.
Ignore what most analysts are saying and pay attention to what the financial markets are actually doing. While almost everyone is concerned about deflation, the real threat to the global economy is a sharp resurgence of inflation that could easily achieve two- or even three-decade highs by the second half of 2009 in many countries including the United States. The U.S. dollar index has begun to decline from its highest point since April 2006, confirming that the safe-haven deflationary scenario has already begun to reverse.
Concerted global central-bank rate cuts and massive stimulus packages around the world will inevitably cause a huge rise in inflationary pressures. Since these act with a delay of several months, a world in which instant gratification is expected enables few folks to appreciate what is going on. Imagine you are driving an automobile and you keep pushing the accelerator all the way to the floor, since you don't see any immediate impact from your actions. What you don't realize is that your gas pedal responds with a one-minute delay! A minute later, you're surging 200 miles per hour down the highway and you face an entirely new kind of danger.
A similar event is occurring with the global economy, although it will take several months instead of one minute. Investors and economists alike mostly believe that these all-time-record stimulus packages "aren't working", because they have had almost no visible impact during the past two months. By next summer, the world will realize that they succeeded all too well in reflating the worldwide financial markets. Interest rates on bank CDs and similar time deposits will surge to their highest levels since the early 1990s. The inflation genie will be out of the bottle and firmly in charge, and no one will know how to put her back.
NOW IS THE TIME TO BUY LOW, ESPECIALLY COMMODITY SHARES (November 9, 2008): It is ironic that the investing public talks about buying low and selling high--but everyone instead likes to buy at multi-decade peaks and is afraid to buy at multi-decade lows. No wonder the vast majority of investors lose money in the stock market even with the strong long-term upward bias for global equities. Meanwhile, corporate insiders were heavy sellers a year ago, and have been equally aggressive buyers in recent weeks. It's hardly surprising that the rich get richer and the poor get poorer.
The following statement is cynical but true: the financial markets exist to transfer money from the middle classes to the upper classes. Wealthy people train themselves to buy when the media and the public are most gloomy, and to sell when the prevailing sentiment is either euphoric (as in early 2000) or irrationally complacent (as in late 2007).
Commodity shares in particular have rarely been more undervalued than they have been in recent weeks. Gold mining shares traded at the same levels in late October 2008 as when gold had been $328 per ounce in 2002. Energy shares traded at the same prices a couple of weeks ago as when crude oil was $28 per barrel in 2003. Every single major coal producer saw heavy insider buying by top executives during the past several weeks. Agricultural-commodity shares slumped to five- and six-year lows while the price/earnings ratios of many of these companies reached all-time nadirs.
Numerous other major asset classes slumped to multi-year and even multi-decade bottoms. High-yield corporate bonds, or "junk bonds", plummeted to their lowest valuations since 1933--an amazing 75-year low. Convertible bonds, preferred shares, and similar groups also became absurdly oversold. Japan's Nikkei index fell to its lowest point since October 1982--not only marking a 26-year nadir, but showing a far more ridiculous undervaluation since corporate profits in Japan, especially for small companies, have soared since 1982. With global liquidity at a multi-decade low and hedge funds forced to dump assets left and right, profitability and rationality has been completely ignored.
While global equity markets have been forming a bullish pattern of higher lows, the average investor feels emotionally that they are making lower lows. This is a classic sign of a major bottom and a strong buy signal.
If there is any doubt about whether stock markets around the world will rebound sharply, all you have to do is look at a chart of TLT, which is a fund of U.S. Treasuries averaging 25 years to maturity. As a general rule, the vast majority of Treasury traders are the world's most knowledgeable global investors. TLT has been forming a bearish pattern of lower highs for several weeks, meaning that the smartest asset allocators are positioning themselves for an environment of global economic expansion and sharply higher inflation, along with a weaker U.S. dollar. This is the exact opposite of the media's insistence on "deflationary depression" that is as dead wrong as the media's bullish Goldilocks outlook on the stock market a year ago, or their equally foolish "buy commodities" mantra a half year ago.
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 (fully marked to market on January 19, 2009): My own personal funds are currently allocated as follows: LONG POSITIONS: Gold mining funds GDX, ASA, BGEIX, INIVX, 44.0%; Japanese smallcap funds DFJ, SCJ, JSC, JOF, SPJSX, 10.4%; Global equity fund VIDMX, 10.4%; Coal mining fund KOL, 7.0%; Energy closed-end fund PEO, 7.0%; General-equity closed-end funds ADX, CET, 5.2%; High-yield BB corporate bond fund VWEHX, 1.5%; Russian fund RSX, 0.5%; Natural-gas fund FCG, 0.5%; VINIX, 0.7%; VIEIX, 0.7%; TRBCX, 0.7%; VZ, 0.7%; MYJ, 1.5%; KRE, 0.5%; XRT, 0.3%; TRI, 1.8% (bought at a 15% discount); gold and silver coins and related metals collectibles, 4.7%; other collectibles, 0.4%; Vanguard Municipal Money Market Fund VMSXX, 0.9%; Putnam Stable Value Fund (retirement fund with stable principal paying variable interest), 0.6%; SHORT POSITIONS: None; covered ALL of them in October 2008 which had amounted to just over half of my entire net worth.
REMINISCENCE OF THE WEEK (January 19, 2009): Shortly after I graduated from college, I met a fascinating fellow who was born and raised in the Armenian Quarter of Jerusalem. His name is Mike Benlian. When he was seventeen, his entire family moved to the Boston suburbs, which for him was a huge culture shock. He was also a true contrarian of sorts; I used to suggest that we play tennis at my favorite courts, but he said: why go there since the courts are too crowded? So we drove instead to Glen Burnie, a working-glass suburb, and sure enough there were tennis courts available even at the busiest times while the softball fields and basketball courts were overcrowded.
One of Mike's goals was to find the cheapest falafel place in the Baltimore area, which took on the aura of a holy grail as we would travel from place to place, often not knowing the exact address or the name of the establishment. (At least we got to learn the back streets quite well, even miles away from home.) He often made homemade pizza for both of us and dreamed about opening his own pizza place, which he planned to name "I Love You Pizza". Mike had an incredibly dry sense of humor which influenced my own way of thinking about the world. We usually got together at least a few times per month, sometimes just sitting around talking about how if we were in charge, the world would be a much better place. Whatever he did was performed with incredible energy, with even ordinary household chores always pursued with the most amazing degree of concentration. Sadly, when we both left Baltimore in 1985, we somehow didn't stay as close over the long distance. I hope Mike found his falafel heaven and that there's an "I Love You Pizza" out there somewhere.