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 from time to time. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence. Those who believe in this investment philosophy should subscribe to my daily update service which I began in February 2006.
THE GLOBAL EQUITY DOWNTREND IS NOT OVER IN THE SHORT RUN, AND ESPECIALLY NOT IN THE LONG RUN (July 12, 2010): Recently, there has been a sharp increase in media bullishness toward the stock market, partly inspired by the strong rally during the past week. Do not be fooled. The most reliable leading indicators, such as 1) the behavior of the U.S. dollar index, which is completing an intermediate-term bottom; 2) the action in commodity-country currencies such as the Brazilian real, Russian ruble, Australian dollar, and New Zealand dollar, which have all been forming bearish patterns of several lower highs since the autumn of 2009; 3) the behavior of shares of commodity producers, which have been in significant downtrends since the first half of January 2010; 4) the action in U.S. Treasuries, which have been forming higher lows since the first half of April 2010--are all simultaneously confirming that the primary trend for stock markets worldwide is downward.
Another significant factor which is often overlooked is that since the S&P 500 index completed a 19-month peak of 1219.80 on April 26, 2010, there have been four days when this index gained over 3% on a single trading day. Powerful up days are very rare during bull markets, but are quite common during bear markets. While there has been an increase in bearish talk and sentiment, it's all talk and no action. When all is said and done, remember that a lot more is said than done. Investors are not putting their money where their mouth is: they are continuing to withdraw money from safe assets like money-market funds and bank CDs, and are putting their capital into high-yield corporate bonds, emerging-market equity funds, and similar highly volatile and highly risky assets. They are set to lose more than half of their net worth in these assets, just as they did two years ago.
There are millions of people who are following obsolete charting concepts from a half century ago. They believe that if the August 17, 2009 support level of 978.51 is broken to the downside for the S&P 500, then they should sell since the next support level is the July 8, 2009 support level of 869.32. Therefore, we are likely to get a brief panic as chartists and momentum players all simultaneously scream downside breakout and sell--including some short selling--with the intention of buying back at much lower levels. To their surprise, the market will go down to perhaps 950 as a result of their panic, and will then sharply rebound, thereby forcing them to cover at 1000, or 1050, or 1100. This will provide the only notable rebound over the next several months. Most likely, such a rally will begin in late July or early August 2010 after the selling panic has run its course, and will result in the S&P 500 climbing from 950 to somewhere above 1100.
The long-term direction for global equities can only be described as gloomy. During every past major bear market since the 1700s, the dividend yield on the S&P 500 (or its equivalent) has always gone above 6%. I highly doubt that this will be the first-ever exception to such a well-established rule. On March 6, 2009, when the S&P 500 bottomed at 666.79, its dividend yield was only 3.5%. In order to get to 6.0% or higher, the S&P 500 has to slump to 400 or lower. This may seem outrageously bearish, but if the S&P 500 index were to plummet to 400, it would still be higher (after adjusting for inflation) than its historic bottoms in months including June 1949, September 1974, December 1974, and August 1982, and far above truly depressed nadirs such as July 1932. The S&P 500 had slumped by 57.7% from its zenith of 1576.09 on October 11, 2007 to its bottom of 666.79 on March 6, 2009; I expect the current bear market to result in a total pullback of 60%-70% for this index by the time it completes its bottom in 2012, thereafter rallying strongly for several months in advance of the next U.S. Presidential election on November 6, 2012.
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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 (marked to market at the close on July 12, 2010):
My own personal funds are currently allocated as follows:
Vanguard Municipal Money Market Fund VMSXX and other cash equivalents, 41.6%;
Putnam Stable Value Fund (retirement fund with stable principal paying variable interest averaging 4.0%, no ticker symbol), 23.0%;
U.S. Treasury fund TLT, 14.3%;
Volatility fund VXX (a losing position), 8.9%;
Coins and related collectibles, 5.5%;
Claymore natural gas futures fund CYMGF/GAS-T (Toronto), 4.7%;
Thomson-Reuters TRI, purchased at a 15% discount, 2.0%;
Gold mining funds GDX, ASA, BGEIX, INIVX, 0.0% (GDX mostly sold at 50.12-50.17 on January 11, 2010, some sold at the open at 49.48 on January 12, 2010, average gain 81%; ASA sold at 80.00 on January 12, 2010, average gain 100%);
Coal mining fund KOL, 0.0% (sold near 40 on January 6, 2010; 8th-best mutual fund in 2009, average gain 212%);
Russian fund RSX, 0.0% (sold near 33.25 on January 6, 2010; 11th-best mutual fund in 2009, average gain 202%);
Natural gas producers' fund FCG, 0.0% (sold slightly below 19 on January 6, 2010, average gain 81%);
High-yield BB corporate bond fund VWEHX, 0.0% (sold on January 6, 2010, average gain 48%);
Japanese smallcap funds DFJ, SCJ, JSC, JOF, SPJSX, 0.0% (sold on January 6, 2010, with JOF at 7.58, average gain 28%);
Energy closed-end fund PEO, 0.0% (sold on January 6, 2010);
General equity closed-end funds ADX, CET, 0.0% (sold on January 6, 2010);
Crude-oil futures fund USO, 0.0% (sold on January 6, 2010);
None; covered all of them in October 2008 which had amounted to just over half of my entire net worth.
REMINISCENCE OF THE WEEK (July 12, 2010): In February 1999, my wife and I visited an ancient site in Mexico called Monte Alban. These ruins included a ball field where winning and losing could literally be a matter of life and death three thousand years ago. Most of the visitors were obvious tourists, but one couple stood out in their native dress and manners. Since my wife can speak Spanish fluently, we walked over and began to talk with them. They told us about how they appreciated the traditions of their ancestors which had sadly been lost through the centuries, which is why they wore clothing which had to be made laboriously by hand. Their lunches consisted of old-style recipes which had been passed down through generations and included no concessions to modern times. All of a sudden, I heard a cell phone ringing; the man pulled out his handset, which was much more modern than my own, and took the call. He quickly placed several buy and sell orders, since he was the head trader for an investment fund based in Mexico City. In much of the world, old and new have been learning to coexist in amazing ways.
· Best of Previous Reminiscences
(c) 1996-2010 Steven Jon Kaplan Your comments are always welcome.