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 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.
IT'S CROWDING TIME AGAIN (March 7, 2011): One common feature of any transition from a major bull market to a major bear market is the reluctance of investors to accept that such a change has occurred. In 1929, for example, an increasing number of assets especially including smallcap U.S. equities began important downtrends, so investors responded by crowding into the fewer and fewer names which were continuing to set new all-time highs. Similar behavior led to an unusual extreme in January 1973, when practically the entire U.S. equity market was forming a bearish pattern of lower highs, while fewer than one hundred issues were continuing in their own private bull markets. This group of "select" equities came to be popularly known as the "Nifty Fifty"; most analysts and financial advisors told their followers that no matter what happened with the rest of the financial markets, you would always make money as long as you owned the several dozen stocks which "are immune to the fluctuations of the economy". From January 1973 through December 1974, the "Nifty Fifty" plummeted far more than the overall stock market with losses of 70% and 80% for its components.
Times may change, but the financial world stays the same. Investors are even more eager today than in early 1973 to crowd into the fewer and fewer risk assets which are continuing to set new highs, even as the rest of the financial world is transitioning from the most powerful two-year bull market since the Great Depression to a major bear market which could become as severe as the one we suffered through a few years ago. Most emerging-market equity bourses have already been in downtrends for four months, and it is becoming increasingly likely that most U.S. equity indices had peaked on February 18, 2011. In recent weeks, many other assets including commodities like copper have joined them in meaningful downtrends. Nonetheless, there continue to be assets including silver and crude oil which are continuing to set new multi-year or multi-decade highs. Investors seem allergic to wanting to participate in downtrends, and are therefore crowding ever more frantically into whatever still appears to be going up.
The result will be identical to the Nifty Fifty: those assets which are the last to switch from bull markets to bear markets will not only have to experience their natural cyclical declines, but will also have to make up for all of the artificial gains they have recently enjoyed as a result of their status as "assets which can't go down no matter what the economy does". Disillusion always hits hardest whenever it is least expected. In 2008, crude oil became one of the very last assets to experience a bear market, and ended up plummeting more than 75%. In 2011, crude oil is enjoying a reprise of its favorite role, with silver gladly joining in as best supporting actor (or actress).
One important lesson from 2008, which apparently has been learned by amazingly few investors, is that once risk assets begin to transition from major bull markets to major bear markets, there are virtually no exceptions. Just as a rising tide lifts all boats, a falling tide sinks them without sparing any "special" cases. Those who believe that silver, crude oil, or any other major risk asset can remain "immune" to a major bear market will have to learn the same lessons they should have learned three years ago. For this reason, it makes sense to continue to sell short whichever assets appear to be in the strongest bull markets, since they will end up not only entering bear markets but having to catch up to everything else by plummeting dramatically in percentage terms.
It always amazes me how few investors try to profit from major downtrends. If 99.99% of assets are in bear markets, with only 0.01% in bull markets, investors would rather try to guess the one in ten thousand assets which will rise in price, rather than making the much more certain bet of selling short some of the 99.99% which are in significant downtrends. This is like trying to find a needle in a haystack when the needle is worth less than the hay. Perhaps you are not familiar with selling short, or your friends and family tell you it's too risky, or you're just afraid to try something new. Remember 2008, and act accordingly; 2011-2012 will be a nearly exact repeat with a few minor variations. Be boldest whenever the fewest number of others are willing to do likewise.
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 March 4, 2011):
My own personal funds are currently allocated as follows:
Local checking accounts averaging 1.00%, brokerage accounts averaging 0.50%, and other cash equivalents, 1.2%;
TIAA/CREF Traditional Annuity Fund and Putnam Stable Value Fund (retirement funds with stable principal paying variable interest averaging 3.25%, no ticker symbols), 33.2%;
28-year U.S. Treasuries fund TLT, 14.2%;
22-year U.S. Treasuries fund VUSUX, 10.5%;
Coins and related collectibles purchased in 1997-2005, 7.0%;
Claymore natural gas futures fund CYMGF/GAS-T (Toronto), a losing position, 3.0%;
Volatility futures fund VXX, another losing position, 2.5%;
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%);
Silver bullion fund SLV, 14.3%.
Nasdaq 100 Trust QQQQ, 9.6%.
South Korean equity fund EWY, 3.5%.
REMINISCENCE OF THE WEEK (March 7, 2011): In the early 1980s, I went to visit a good friend from high school who was attending the University of Chicago. We were exploring a part of the city which was far from the university, and stumbled upon an Indian grocery. I spent most of my time perusing the unusual array of spices and foods, and then my eyes noticed a collection of cassette tapes. "These are only 1.50 or two dollars," the proprietor told me, "maybe you would like to try this collection of ghazals, which are love songs." I bought a tape entitled "Main Aur Meri Tanhai" featuring Jagjit and Chitra Singh; the store owner explained that it was one of the best-selling song collections which had come out very recently and was extremely popular in India. As we were about to leave, he told us: "We are just starting a brand-new restaurant in the space next door. Perhaps you two would like to be my first customers for lunch." We looked into the adjacent room and saw a rickety old refrigerator laboring away in the corner; a few spare tables; no decor; and walls which hadn't been touched in many years. Nonetheless, we decided to give it a try. He recommended that we start with mango lassis, and took a fresh mango from the grocery into the small cooking area in order to prepare them. The entire meal took a long time since everything had to be similarly carried by hand from one room to the other, with no assistants. It was excellent and we were delighted to receive constant personal attention. We ended up coming back two more times that week, and enjoyed an entirely different combination of dishes each time. For whatever reason, we ended up not returning until January 1990. We were amazed to see the exact same space, except the grocery had become part of the newly expanded restaurant--complete with white tablecloths, a completely full dining area even during a relatively early hour for dinner, and a small line of people waiting for tables. The headwaiter asked if we wanted to put our names down for reservations, and then looked at us more closely. "Weren't you here a long time ago?" he inquired. "Yes, we were your very first customers." "Ah, the mango lassi and the tape of ghazals!" he laughed. How he had remembered those details I don't know. We received extra special service that evening, and made sure to go back there several times during my next few visits to Chicago. Meanwhile, I have memorized my favorite song on the tape, "Hum Bhi Sharabi", and perform it sometimes at special events.
(c) 1996-2011 Steven Jon Kaplan Your comments are always welcome.