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Updated @ 5:00 p.m. EDT, Sunday, October 31, 2010.


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.

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. --Warren Buffett

NEGATIVE DIVERGENCES DRAMATICALLY INCREASE WORLDWIDE (October 31, 2010): In my last update on September 26, 2010, I proposed the "outlandish" thought that GDX, the most popular fund of largecap gold mining shares, would be unable to hold above its March 2008 peak of 56.87. Since then, GDX has reached as high as 59.30 in the pre-market session on October 14, 2010, but remains in a struggle to merely keep pace with its March 2008 highs. Meanwhile, gold and silver bullion have performed strongly, which makes the underperformance by GDX even more dramatic by comparison.

The recent attempted upside breakout was blatantly false and is transitioning to a severe 12- to 18-month bear market, since gold mining shares are continuing to dramatically underperform their median historic gains relative to gold bullion. The normal historic ratio is a 2.5% increase for GDX for each 1% rise in GLD. From its intraday low of 15.83 on October 24, 2008 through its intraday high of 47.45 on September 8, 2009, GDX soared 199.75%. GLD climbed from 69.07 to 98.65 over the same period of time, which is an increase of only 42.83%, and therefore a ratio of more than 4.66:1. From its intraday low of 46.80 on July 28, 2010 to its pre-market high of 59.30 on October 14, 2010, GDX gained 26.71%, whereas GLD rose from 113.08 to 135.39 which is a rise of 19.73%. The recent ratio is therefore just over 1.35:1, which is less than 30% of the prior ratio. Similar underperformance by gold mining shares from early November 2007 through the middle of March 2008 preceded the 72.1% plunge for GDX from the peak on March 14, 2008 through the open on October 24, 2008. I would anticipate a pullback of at least 60% for GDX from its recent peak to its ultimate bottom in late 2011 or during 2012.

As a rule, historically reliable leading indicators including commodity-share funds, emerging-market funds, and funds of semiconductor producers have been having great difficulty in surpassing their respective recovery peaks from January or April 2010. This includes KOL, XME, EWZ, RSX, SMH, and similar securities which were among the top performers in the previous bull market and were also among the biggest decliners in the subsequent bear market. Traditional lagging sectors, such as the Nasdaq 100 Trust (QQQQ) and many of the most popular emerging markets, have been among the strongest performers in recent weeks. It is clear that investors are crowding into the fewer and fewer assets which remain in bull markets, thereby making them irrationally overvalued and ideal for selling short. The same behavior of dramatic divergences between leading and lagging assets happened in January 1973, February 2000, and June 2008, with the same results each time: a major equity pullback for nearly all sectors.

In late February and early March 2009, one clear sign that global equities were set for a powerful rally was the fact that the number of new 52-week lows was enormously below its peaks from October and November 2008. Similarly, during the past several weeks, the number of new 52-week highs has been far below the levels of April 2010, and even below the levels of January 2010. The paucity of new highs indicates that fewer and fewer assets are leading the broader market. The great global bull market of 2008-2010 is transitioning to a major global bear market. The sooner you recognize this critical shift, the more handsomely you will profit from it.

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·  Overview of Gold Mining Shares, updated substantially on November 9, 2008 to show precisely how precious metals shares have completed important six-year bottoms.

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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). Most recently, Barron's featured my letter to the editor about investing in Africa in their Mailbag of August 14, 2010, which you can read at the link below:

CURRENT ASSET ALLOCATION (marked to market at the close on October 29, 2010):
My own personal funds are currently allocated as follows:
Local checking accounts averaging 1.00%, brokerage accounts averaging 0.50%, and other cash equivalents, 51.1%;
TIAA/CREF Traditional Annuity Fund and Putnam Stable Value Fund (retirement funds with stable principal paying variable interest averaging 3.75%, no ticker symbols), 24.9%;
Coins and related collectibles purchased in 1997-2005, 6.4%;
Volatility futures fund VXX, a losing position, 4.1%;
Claymore natural gas futures fund CYMGF/GAS-T (Toronto), another losing position, 3.3%;
Thomson-Reuters TRI, purchased at a 15% discount, 0.1%;
U.S. Treasury fund TLT, 0.0% (sold entirely in late August 2010; average gain 22.2% including reinvested dividends);
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);
Silver bullion fund SLV, 5.6%.
Nasdaq 100 Trust QQQQ, 3.5%.
South Korean equity fund EWY, 1.0%.
I closed all of my other short positions in October 2008, which had amounted to just over half of my entire net worth.

REMINISCENCE OF THE WEEK (October 31, 2010): In the 1980s, I was very fond of the "Travel" section of the Sunday New York Times, which unfortunately has since badly deteriorated in quality. I would often read only that section and ignore the remainder of the newspaper. In the more sophisticated sections of Manhattan, one could find as many as a dozen discarded Sunday papers in any street-corner wastebasket. One Sunday morning in 1989, I went jogging and didn't leave myself enough time to take a shower afterward before leaving to meet a few friends. I headed out in my clothes from the previous day, with my hair unbrushed and not having been cut for several weeks. Being in a rush, I took less time than usual to arrange myself, so my belt was asymmetric, my shoelaces were lopsided, and my clothes were more badly mismatched than I had realized. It was quite hot and humid, so I began to sweat as I walked quickly in the westernmost part of Greenwich Village, with its cobblestone streets and expensive row houses. I realized that my hair had become so stringy that I had difficulty keeping it out of my eyes, while my shirt was hanging out of my trousers and looking sloppy. I decided that before I would enter the meeting place with my buddies, I would go into a restaurant restroom and spend several minutes making myself more presentable. I spotted an ideal place for that purpose, but before entering, I noticed out of the corner of my eye that the Sunday New York Times "Travel" section was conveniently located on the top of a wastebasket just a few feet away. I reached over to pick it up with one hand, and put the other hand out to balance myself. I suddenly felt something metallic in my open hand. Puzzled, I looked to see that a well-dressed older woman had placed a quarter in my palm, and was walking away with her back to me. She must have perceived me to be a homeless man.

·  Best of Previous Reminiscences

(c) 1996-2010 Steven Jon Kaplan Your comments are always welcome.

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