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Updated @ 12:40 a.m. EDT, Monday, April 4, 2011.


WELCOME TO TRUE CONTRARIAN! I began this blog in August 1996, and continue to update it periodically. In February 2006, I began a daily update service in the style of Dow and Jones who began a similar daily update in the late 19th century. For those who wish to receive an e-mail from me six days per week (every day except Saturday), as well as intraday updates whenever I buy or sell anything, you can subscribe using the link below. If you prefer simply to follow this blog, it will always include a personal reminiscence at the bottom and an introduction to my financial outlook at the top. I have removed my precise asset allocation which is now available to subscribers only.

RISK ASSETS HAVE BECOME EVEN RISKIER (April 4, 2011): On Friday, April 1, 2011, VIX slid to an intraday bottom of 16.44, its lowest level since February 18, 2011. As probably the most reliable gauge of investors' fear, this indicates that as risk assets have become increasingly overvalued, most investors are becoming increasingly complacent about the possibility of losing money in the financial markets. Barely two years after a powerful bull market began in early March 2009, almost no one is concerned that we are going to get a repeat of 2007-2009. Nearly everyone has apparently forgotten that the last bear market in equities and other risk assets occurred because we had housing bubbles in countries including the United States, Ireland, and Spain; when real-estate prices slumped in those countries, it led to a global liquidity crunch, and subsequently caused a plunge of more than half for nearly all equities and commodities. Today, we have a lot more of the world's population living with real-estate bubbles, most dramatically in China where prices are at an all-time record ratio to rents and to incomes in many urban neighborhoods. Housing prices are also dangerously overvalued in numerous other highly-populated countries including India, Brazil, Malaysia, and Indonesia, as well as in other important parts of the world such as Australia and Canada. Top corporate insiders during the past half year have demonstrated unusually high ratios of selling to buying of their own shares, which constitutes a nearly exact repeat of their behavior during the final months of 2007 and the early months of 2008. As global real-estate markets collapse, equities worldwide will again lose more than half their value. One of the few beneficiaries of the global economic contraction will be undervalued long-dated U.S. Treasuries and their funds including TLT. TLT has been slowly forming a bullish pattern of higher lows since it had bottomed close to its lowest point since the summer of 2007 at 88.14 on February 10, 2011.

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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). 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:

Most recently, Barron's featured me in their MarketWatch section on March 14, 2011:

REMINISCENCE OF THE WEEK (April 4, 2011): In October and November 1987, I spent two wonderful weeks in Tokyo. One morning I took the subway to a sushi restaurant in Nihonbashi, the traditional business center of the city. It was about 11:15 a.m., and there were surprisingly few people in a carryout place which had a reputation for having among the best-prepared lunch dishes in the financial district. The owner spoke with me, partly in his poor English and partly with my poor Japanese, and we ended up chatting for more than a half hour. Suddenly, he told me in clear English: "You should leave the restaurant now." I was puzzled why he would suddenly behave so brusquely after we had such an intimate conversation about our personal lives. Disappointed, I went ahead and took his advice. Within a minute of my walking out, a huge crowd of people suddenly emerged, pushing and elbowing their way into the restaurant. Puzzled, I asked someone nearby who from his mannerisms appeared to be an American expatriate who was fully familiar with the local scene. "Everyone around here hates to take a break from work for lunch unless everyone else is also taking a break at the same time. People don't even like to take a vacation unless their co-workers are all taking vacations the same week. So exactly at twelve noon or a few minutes afterward, when the head boss in any office gets up from his desk to go to lunch, a thousand lower-ranking co-workers will follow his lead and do likewise. The restaurants all suddenly get crowded simultaneously and everyone tries to be first in line. Hopefully the owner was kind enough to warn you in advance so you didn't get trampled." I responded, "Indeed, he did exactly that, although I thought foolishly that he was being rude rather than being considerate." I ended up returning to the same sushi place several times during my stay, and was smart enough to remember to leave on my own each time in advance of the noon crush.

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(c) 1996-2011 Steven Jon Kaplan Your comments are always welcome.

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