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A true contrarian look at investing and at life in general. |
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WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable,
and hopefully refreshing viewpoint twice or thrice per month. 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 consider subscribing to my daily update service which I began in February 2006.
SILVER HAS BECOME THE CRUDE OIL OF 2011 (February 21, 2011): As everyone remembers, the price of crude oil surged to an all-time peak of more than 147 dollars per barrel on July 11, 2008. The only question at that time was how long it would take to reach 200 dollars per barrel--with almost no one (except perhaps myself and a tiny minority) questioning whether the primary direction would be higher or lower. Subsequently, of course, the price of crude oil plummeted in less than a half year below 35 dollars per barrel before subsequently rebounding strongly once again.
Apparently no one has learned the lesson of that experience, in which many traders bought crude oil because other assets had switched from uptrends to downtrends and therefore everyone wanted to own the fewer and fewer assets which were continuing to set new historic peaks. By July 2008, people were selling the shares of oil producers, which had begun to retreat, to buy crude oil itself which was still setting new highs. They were selling virtually all other commodities to buy crude oil. The primary reason for buying crude was because "it's still going up, and almost nothing else is".
What has changed since July 2008? Not much, except some of the names and players. Since the Fed made its infamous QE2 announcement in the afternoon of November 3, 2010, an increasing number of emerging-market equity bourses have begun significant downtrends, while the shares of more and more commodity producers have recently joined them in their retreat. With silver being one of the few assets which continues to routinely set new 31-year highs, more and more investors have been irrationally crowding into it. Finding a bearish commentator on silver today is as rare as finding a negative analysis on crude oil in the early summer of 2008. Why should someone buy silver today? Because it's just a matter of time before it allegedly reaches 40, or 50, or even 100 dollars per troy ounce. Is it overvalued? Who cares, as long as it's going up. Isn't its previous support level below 18 dollars per ounce? Sure, but that was way back in ancient history in the summer of 2010, when the dinosaurs roamed the earth. According to a recent post on a precious metals chat site, "silver is never going below twenty dollars per ounce again". Sound familiar?
Of course there are safer investments than selling short silver or SLV, an exchange-traded fund of silver bullion, and most of my recent buying has been of TLT below 90 dollars per share. TLT is an exchange-traded fund of U.S. Treasuries averaging 28 years to maturity. However, it is worth considering that silver would have to plummet by 47% merely to return to last summer's support level. All assets eventually retest support sooner or later. Even if such a decline takes an entire year to mature, it would still provide an excellent annualized gain. As popular as silver has been among the least-informed investors, a rapid change in direction would cause many recent excited buyers to quickly become panicked sellers. The top executives of companies which produce silver have been aggressively selling in recent months, indicating that they don't believe the hype.
In the early summer of 2008, some truly believed that people in China and India were using four times as much oil as they had used the previous year. Some people really believe that there's a global shortage of physical silver today. With any commodity, however, any temporary fantasy inevitably gives way to hard reality. As the U.S. dollar accelerates its three-year bull market, this will put downward pressure on all precious metals. As the global real-estate bubble progressively bursts, this will dramatically reduce anticipated demand for all base metals; copper has already established a meaningful downtrend. Straddling these two worlds, silver will be dragged down from both sides. It's very likely to be a profitable trade precisely because almost no one is willing to make it, just as almost no one besides myself actually sold short crude oil before its plunge in the second half of 2008. In both cases, I began too early, and will eventually reap similar rewards for jumping in when everyone else only wanted to know how much higher we would go.
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LONG-DATED U.S. TREASURIES REMAIN THE SINGLE BEST CHOICE FOR 2011 (January 19, 2011): You would think that the more enduring the bull market in any asset, the more that investors would be eager to jump aboard. Currently, the longest-reigning bull market on the planet is the rally for the 30-year U.S. Treasury bond, which began in August 1981 and which will thereby celebrate its 30th birthday later this year. However, most individuals continue to disrespect this sector, with virtually zero net inflows during 2010 when practically everything from commodities to equities to corporate bonds to almost every possible alternative choice enjoyed strong or even record net inflows around the world.
During the past six weeks, the yield on the 30-year U.S. Treasury bond frequently exceeded 4.5%, which by itself is far above the returns of nearly all other assets with equal or lesser risk. The yield spread between the 30-year and 2-year U.S. Treasuries set an all-time record during the past week, as investors are irrationally willing to lend money in the relatively short term for almost nothing, while demanding an excessive risk premium for lengthier-duration Treasuries. This has provided an ideal buying opportunity in this sector. One easy way to participate is via the fund TLT, which is comprised entirely of U.S. Treasuries averaging 28 years to maturity, and which has tended to yield just below 4.3% annualized, paid monthly. The expense ratio is 0.15%. If you buy TLT at 92 dollars per share and it merely returns to its August 25, 2010 high of 109.34 in one year, then with reinvested dividends this would represent a total gain of about 23%. If you buy it at a slightly lower prices--it has dropped below 91 several times since the second week of December--or if TLT more closely approaches its all-time zenith of 123.15 on December 18, 2008, then your gains could be even higher. Treasuries may be "boring", but I think anyone would gladly accept such "dull" profits.
On November 3, 2010, the U.S. Federal Reserve announced its second program of quantitative easing, which is usually called "QE2". The media unanimously declared that this would lead to a slumping greenback--and yet the U.S. dollar index began a powerful rally the next morning which has continued to the present time. It is likely that, partly because it is so unpopular, the U.S. dollar will continue to strengthen especially against commodity-country currencies which have been so popular during the past two years. In particular, the Australian, New Zealand, and Canadian dollars, along with the Brazilian real and Russian ruble--all of which have been notable speculator favorites--are likely to decline substantially versus the U.S. dollar through 2012. Some of these currencies may even retest their deep lows from the fourth quarter of 2008 and the first quarter of 2009. If you are a resident of one of the above countries, then your total gain from owning TLT or similar long-dated U.S. Treasury funds could be twice the magnitude of the U.S.-dollar profit when measured in terms of your home currency.
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 February 18, 2011):
My own personal funds are currently allocated as follows:
LONG POSITIONS:
Local checking accounts averaging 1.00%, brokerage accounts averaging 0.50%, and other cash equivalents, 5.2%;
TIAA/CREF Traditional Annuity Fund and Putnam Stable Value Fund (retirement funds with stable principal paying variable interest
averaging 3.25%, no ticker symbols), 33.3%;
28-year U.S. Treasuries fund TLT, 13.1%;
22-year U.S. Treasuries fund VUSUX, 9.9%;
Coins and related collectibles purchased in 1997-2005, 6.9%;
Claymore natural gas futures fund CYMGF/GAS-T (Toronto), a losing position, 2.9%;
Volatility futures fund VXX, another losing position, 2.3%;
QQQQ synthetic short fund PSQ, 0.9%;
Thomson-Reuters TRI, purchased at a 15% discount, 0.1%.
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%);
SHORT POSITIONS:
Silver bullion fund SLV, 12.2%.
Nasdaq 100 Trust QQQQ, 9.7%.
South Korean equity fund EWY, 3.6%.
REMINISCENCE OF THE WEEK (February 21, 2011): (I have had to leave out a few details in order to protect the privacy of the individuals involved.) Several years ago, I had traveled to a different part of the world. I stayed at a bed and breakfast which was run by an artistic woman. On the day I arrived, my hostess was scheduled to have a nighttime opening of her latest creations at an art gallery in town, and invited me to attend. I slept for several hours in advance of the event, and when I arrived I was lively and outgoing. This was fortunate, since a planned cocktail party continued for several hours beyond the scheduled time. After being introduced by the artist to several of her friends, a woman approached me and began to speak with me in Spanish. I was a bit puzzled by her choice, but since several languages were being spoken all around me with people switching effortlessly back and forth, I figured that I'd try my best to remember my five years of junior-high and high-school Spanish. After several minutes of initially struggling, I was able to converse more competently than I had expected. We ended up carrying on a lengthy discussion, which eventually turned to a sort of question-and-answer quiz about a particular country, which by pure chance I had been required to write about when I was in eighth or ninth grade. She seemed surprised at my complete ignorance of some facts, and my precise detail about others. We ended up chatting for about two hours altogether--after which she told me in slightly accented English, "I'm impressed. Of course I can speak your native language fluently, but I wanted to test you out. Since I'm the Princess of _________ , I'm entitled to act a bit royally now and then." She left me her business card containing a local address and quickly departed. I turned to my bed-and-breakfast hostess and told her what had happened, and asked if I had been played for a fool. "I can tell you that she really is the Princess of ________ . I met her through the friend of a friend, who told me to invite her to this event, and to promise not to let anyone know who she was or that she would be here." The next day, I stopped by the Princess' local office, but was told that she "suddenly had to leave for ________ and doesn't know when she'll be back". I never saw the Princess again.
· Best of Previous Reminiscences
(c) 1996-2011 Steven Jon Kaplan Your comments are always welcome.