Monday, December 1, 2014

"Call me dummy and write a book for me: If the stock market falls 1%+ on a FAKE tweet, what does that mean when something serious happens?" --Bette Midler

GOLD AND SILVER MINING SHARES ARE POINTING THE WAY HIGHER FOR OTHER COMMODITY PRODUCERS AND EMERGING MARKETS (December 1, 2014): Yes, you heard that right. In spite of, or really because of all the negative media hype about gold and silver, you would think that the sky had fallen and was about to crash on the heads of everyone who invests in commodities directly or indirectly. In my previous post from Halloween, I recommended that readers purchase the shares of gold and silver mining companies and their funds including GDXJ, GDX, SIL, GLDX, and SILJ. As it turned out, all of these bottomed nearly simultaneously on November 5, 2014, and have since formed bullish patterns of higher lows. On November 28, 2014, and again in the morning of December 1, 2014, gold and silver mining shares slumped but didn't nearly approach their nadirs from a few weeks earlier. This was true even though the price of silver itself, as measured by the December 2014 futures contract, plummeted to 14.100 U.S. dollars per troy ounce on Sunday evening, November 30, 2014. The primary impact of this collapse was to cause the sell stops of long silver positions to be triggered, thereby proving once again that those who use stops will succeed only in getting stopped out just before any major move occurs in the opposite direction.

What should you do if a fund of junior gold mining shares like GDXJ had bottomed at 22.34 and is now moderately higher? Of course you could decide to buy it even though it has recently climbed sharply, but a much better idea is to observe the historic pattern in which gold and silver mining shares tend to rally from multi-year lows prior to similar rallies for other commodity producers and emerging-market equities. Funds including FCG (natural gas producers), COPX (copper mining shares), and GXG (Colombian equities), among dozens of others, slumped to five- and six-year bottoms on December 1, 2014. Knowing that precious metals producers are a leading indicator, it is thereby safe to purchase all related assets which are directly or indirectly connected with commodity production. In this way, you are continually accumulating the best bargains which are available and which no one wants to buy until they have rebounded, instead of chasing after the hottest securities which have already been progressively recovering. Eventually, the lagging assets you purchase will enjoy similar rallies.

What reason is there for commodities to rally, given the OPEC meeting and the Switzerland gold referendum? The answer is that meetings and referendums don't determine the future prices of assets, which fluctuate almost entirely based upon economic considerations. Whenever there is a political motivation for buying or selling, such as a street protest or a change in government--or in the case of Brazil, the lack of a change in government--it is almost always profitable to trade in the opposite direction of the media consensus. If you hear even on non-financial cable TV stations why the price of oil will drop because of the OPEC meeting, or why the price of gold will slump because of a Sunday morning vote in Switzerland, then you can rest assured that the behavior of the U.S. dollar and the global economy is ten thousand times more important. The value of the greenback vs. the aussie or loonie isn't going to make headline news, because it's not very exciting and it's challenging for a journalist to create an entertaining and simplistic story line to attract viewers. However, these "boring" facts will be the key elements in determining whether the shares of commodity producers and emerging-market equities will rise or fall during the upcoming year.

If there was anyone who was long crude oil, gold, silver, the shares of commodity producers, Brazilian or Russian equities, or the Australian and Canadian dollars, and emotionally wanted to sell out of disappointment, then the OPEC meeting and the Swiss gold referendum--along with the most recent Fed meeting, the U.S. Congressional elections, and a dozen other newsworthy events, not to mention the handy excuse of tax-loss selling at this time of year--gave these folks plenty of excuses to finally log into their accounts and close out their positions. The remaining owners of these assets are primarily highly committed, knowledgeable, value investors who will not easily be dissuaded into selling by media hype or anything else, thereby setting the stage for a dramatic extended rally. A fund like FCG, if it merely touches its June 23, 2014 intraday high of 24.12, will have more than doubled from today's intraday low of 11.89. Many funds of commodity producers will triple or more if they revisit their respective peaks from past years including 2013, 2012, and especially 2011. While nearly all analysts are concerned about how much lower these assets will go, a far more interesting and pertinent question is how high they can climb after they have reversed direction. At the end of any bear market, nearly all investors become irrationally obsessed with the potential for additional losses and forget that if something has lost 5/6 of its value then it will triple in price if it regains half of its previous top.

Pay attention to fund flows which are ignored by almost all investors. At the same time that there have been record inflows into many U.S. equity funds in recent months, there have been all-time outflows from most assets connected with commodity production and emerging markets. Mining and energy shares in particular have suffered dramatic declines, with the percentage of the S&P 500's total market capitalization devoted to energy close to an all-time low. Relative to almost all other equity groups, the total market capitalization of mining shares is at a multi-decade bottom. In recent months, insiders have been substantial buyers of the shares of commodity producers, while the traders' commitments are near multi-decade bullish extremes of commercial (insider) accumulation. Regarding currencies, commodity pools and other speculative entities have been making all-time record bets on a rising greenback. The media are clearly on the side of these speculators, believing almost unanimously that the U.S. dollar will continue to rise indefinitely along with U.S. equities, U.S. corporate bonds, U.S. real estate and just about everything else connected with the United States.

If the overnight action in gold and silver proved anything, as did similar behavior on November 5, 2014, it is that whenever there is a unanimous consensus that anything will happen in the financial markets then it inevitably proves to be the opposite of what actually occurs. If everyone is convinced that gold will plummet to one thousand dollars per troy ounce, then it will instead surge higher. If everyone is certain that the U.S. dollar is the cleanest dirty shirt in the laundry and will continue to climb versus all other currencies, then the greenback is likely instead to decline roughly through the end of 2015--and perhaps beyond if investors aren't sufficiently bearish toward the U.S. dollar a year from now. If everyone knows that U.S. equities are safer and more reliable than stocks anywhere else in the world, then U.S. equities will suffer a period of prolonged underperformance and almost certainly will decline by more than half as they have done in past decades whenever they have been this dramatically overvalued. It's worth noting that investors made their heaviest outflows from funds connected with the S&P 500 and other U.S. benchmark indices when the S&P was close to its March 6, 2009 nadir of 666.79, and now that it has more than tripled we have enjoyed huge inflows into the same funds. Investors love to buy high and to sell low, because that enables them to do exactly what the media are brainwashing them to do.

Summary: Today's rally for gold and silver mining shares is pointing the way higher for the shares of other commodity producers and emerging-market equities which have continued to retreat toward five- and six-year bottoms. Buy them before everyone else realizes what is going to happen in 2015.

Disclosure: In August-September 2013, and again throughout 2014, I have been aggressively buying the shares of emerging-market country funds whenever they appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares and related assets especially following their most extended pullbacks. Starting in December 2013 I have been buying HDGE whenever it has traded below 13 dollars per share, and more recently whenever it has retreated below 12, with the idea of selling it in 2016-2017 as we are completing the next U.S. equity bear-market bottoming pattern; HDGE is an actively managed fund which sells short various U.S. equities. From my largest to my smallest position, I currently own GDXJ, KOL, XME, HDGE, GDX, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, FCG, VGPMX, BGEIX, VNM, ZJG (Toronto), PLTM, EPU, TUR, NGE, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled; since then, SCIF has been one of the biggest losers of all emerging-market funds. I have reduced my total cash position since June 2013 to approximately 6% of my total liquid net worth in order to increase my holdings in the above assets. I have now sold all of my SLX by acting whenever steel insiders were doing likewise. I expect the S&P 500 to eventually lose about two thirds of its 2014 peak value--with most of that decline occurring in 2016 and perhaps continuing into 2017. The Russell 2000 Index barely achieved a new all-time top on July 1, 2014 compared with its early March 2014 highs and made a lower high on November 28, 2014, while the S&P 500 set a new all-time high on numerous occasions during the same nine-month period. The Russell Micro-cap Index has been even weaker since it completed a historic top on March 6, 2014. This marked a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of past bear markets are doomed to repeat their mistakes.

Friday, October 31, 2014

"The art of investing is not about figuring out what has already happened. It's about anticipating the future and creating the future that others will read about in The Wall Street Journal." --Joshua Rogers

NOW THAT PRECIOUS METALS HAVE MADE A DOWNSIDE BREAKOUT, BUY THE SHARES OF THEIR PRODUCERS (October 31, 2014): If you go to any financial web site, you will find one or more articles about how gold and silver have made downside breakouts and will continue lower until they have plummeted to incredibly low prices such as one thousand U.S. dollars per troy ounce for gold or even lower targets. You'll discover plenty of analyses explaining why deflation is a serious global risk, and how the U.S. dollar will continue to climb because the U.S. has allegedly favorable interest rates and growth prospects when compared with the rest of the world. You'll see cable TV commentators telling you why the U.S. stock market will keep rallying for several more years, and why the U.S. economy will outperform nearly all other countries including emerging markets. You'll receive plenty of literature from mutual fund companies detailing why bond funds are a useful diversification for your stock funds, so you will have a pleasantly balanced portfolio of both.

Naturally, all of the above theories are nonsense, because they assume that multi-year extremes are completely rational and will become even more extreme in upcoming years. It's certainly the case that extremes can go to greater extremes, and they often do in the short run, but eventually everything regresses toward fair value. If something is especially overvalued, it will almost always slump to an equal and nearly opposite point of undervaluation. Buying something which is close to its all-time peak is very dangerous, because you're assuming that there will be an even less knowledgeable person who will be willing to pay even more for something which is already ridiculously overpriced. You might get away with this for awhile, but eventually you'll lose money. You should instead be eager to purchase assets which are trading close to their lowest levels in several years primarily because they're unpopular and continue to receive persistently negative media coverage. A blend of stocks and bonds is not necessarily safe if both are near historic tops, since they have periodically declined in tandem in past decades.

Many funds of commodity producers and emerging markets recently slumped to their lowest points in more than five years. If you look at charts of several of these, including EWZ, RSX, KOL, and FCG, you will see that all of the above have recovered from deep bottoms which had been achieved earlier in October 2014. They are still compelling bargains in most cases, but there is one subsector which just today slumped to a six-year nadir. These are the shares of gold and silver mining companies, along with their funds including GDXJ, GDX, SIL, GLDX, and SILJ. Obsessed with the idea of a perpetually rising U.S. dollar, pervasive worldwide deflation, and similar popular concepts which will all be proven to be transient conditions, investors have abandoned the equity group which will likely deliver the greatest percentage gains between now and late 2015 or early 2016.

It is emotionally difficult for many investors to purchase "falling knives," because they hear, read, or see a flurry of negative commentary about such assets on a daily basis, and become subconsciously brainwashed into believing that it must be true. It was just as easy to be convinced 3-1/2 years ago that inflation would continue to accelerate worldwide, and that emerging markets would continue to outpace developed markets. The current myths will prove to be just as wrong as the opposite beliefs had been in April 2011. As any trend becomes especially extended, more and more people become convinced that it will continue indefinitely, until almost everyone is certain that something must be true just before it is dramatically proven to be false. Everyone "knew" in early 2009 that stock markets around the world would probably "never" recover, and if they did it would allegedly take many years for a moderate rebound. Today, everyone is certain that the U.S. stock market will climb for many more years, mainly because it is difficult to envision the next few years being meaningfully different from the last few years. As humans, one of the biggest mistakes we make in life, with investing and everything else, is to project the recent past into the indefinite future.

There have never been more intense outflows from several funds of assets related to precious metals in their entire history. In December 2013, the total outflows were greater from some of these funds, but they occurred over a more extended period of trading days, and of course the bargains available at that time were also compelling. Other than that, you have to go all the way back to the summer of 1976 to find a similar period in which these were highly disliked for similar reasons: they were slumping at the same time that the overall U.S. stock market was rallying. Investors dislike owning losing assets, but they hate even more to own losing assets when other securities are approaching or setting new all-time highs. This drives an emotional desire to own the winners, no matter how dangerous they are, and to discard the losers usually just before they enjoy especially powerful rebounds.

Gold and silver mining shares appear to be a Halloween trick. They are actually an unexpected treat--buy them.

Disclosure: In August-September 2013, and again during the first ten months of 2014, I have been aggressively buying the shares of emerging-market country funds whenever they appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares and related assets especially following their most extended pullbacks. Starting in December 2013 I have been buying HDGE whenever it has traded below 13 dollars per share, and more recently whenever it has retreated below 12, with the idea of selling it in 2016-2017 as we are completing the next U.S. equity bear-market bottoming pattern; HDGE is an actively managed fund which sells short various U.S. equities. From my largest to my smallest position, I currently own GDXJ, KOL, XME, HDGE, GDX, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, VGPMX, BGEIX, VNM, ZJG (Toronto), PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled; since then, SCIF has been one of the biggest losers of all emerging-market funds. I have reduced my total cash position since June 2013 to approximately one twelfth of my total liquid net worth in order to increase my holdings in the above assets. I have now sold all of my SLX by acting whenever steel insiders were doing likewise. I expect the S&P 500 to eventually lose about two thirds of its 2014 peak value--with most of that decline occurring from some point around the middle of 2015 through late 2016 or early 2017. The Russell 2000 Index barely achieved a new all-time top on July 1, 2014 compared with its early March 2014 highs, while the S&P 500 did so numerous times over the same four-month period. The Russell Micro-cap Index has been even weaker since it completed a historic top on March 6, 2014. This marked a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of past bear markets are doomed to repeat their mistakes.

Monday, October 6, 2014

"I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.'" --Peter Lynch

THE U.S. DOLLAR IS TODAY'S BUBBLE (October 6, 2014): During the current century, there has been an incredible procession from one bubble to the next. Everything from the Nasdaq to Canadian housing prices to small-cap U.S. equity indices achieved multi-decade peaks in both absolute and relative terms. Each time, investors have assumed that it's "the new normal" or that "we've never had this situation before, so it makes sense." The latest absurd overvaluation has occurred for the U.S. dollar, also known as the buck or greenback. Is it different this time?

The correct answer, of course, is that it was created in the same fashion as all of the above extremes, and will be resolved with a similar slump. Especially against emerging-market currencies including the Brazilian real and the Russian ruble, the U.S. dollar has become ridiculously overpriced. The greenback has been in such a strong uptrend that most analysts are no longer debating whether it will continue, and are taking it as an "obvious" assumption that it will keep climbing indefinitely. When a consensus is building, its momentum often carries it forward. However, once such a consensus becomes nearly unanimous, as the bullish consensus is today for the U.S. dollar, then it begins a dramatic reversal which nearly always ends up with a nearly opposite extreme to the one which had previously existed.

Thus, all of the above bubbles slumped after their creation. After reaching an all-time top in March 2000, the Nasdaq plunged 78.4% by the time it bottomed in October 2012. U.S. housing prices lost an average of 34% nationwide following their 2006 bubble top, and Canadian housing prices will likely plummet by an even greater percentage over the next three or four years. Small-cap U.S. equities plummeted in 2007-2009 and will almost surely lose as much in 2014-2017--in case you haven't noticed, they began bear markets on March 6, 2014 with IWC, a fund of U.S. companies with less than one billion dollars apiece in market capitalization, already down by a double-digit percentage. The U.S. dollar index will likely retreat to its lowest level since the fourth quarter of 2011; if this takes about a year, then this will generate a four-year bottom.

If the U.S. dollar is on the verge of a significant decline, then numerous inversely correlating assets are set for dramatic rallies and are worth buying at currently depressed levels. Many commodities and the shares of their producers have gone strongly out of favor during the third quarter of 2014, with many emerging-market assets doing likewise. Numerous securities in these sectors have fallen so sharply that they are approaching or have already reached their lowest levels since the first several months of 2009 when they were completing their previous bear-market nadirs. The mainstream financial media coverage has been almost uniformly positive toward the U.S. dollar and persistently negative toward commodity-related assets and anything related to emerging markets.

Historically, gold and silver mining shares are among the most reliable winners during periods of U.S. dollar weakness. With these assets having rebounded only modestly from their respective 2013 bottoms, they will likely be among the biggest winners for the remainder of 2014 and for at least part of 2015. Other mining shares, many of them near their lowest points in more than five years, will likely gain significantly in percentage terms during the upcoming year. Previously popular emerging-market equities in countries including Russia, Brazil, and most of South America have only moderately rebounded from multi-year lows reached during the first quarter of 2014, and have substantial remaining upside. While almost everyone is bailing out of these securities as quickly as possible, now is the time to gradually accumulate a variety of these assets.

Inflation is a problem which is so certain by most investors to be "solved" that the risk of deflation is considered to be far more serious. In the past, whenever we have experienced a consensus on either side, the opposite behavior has always occurred. Thus, deflationary panic in late 2008 led to a dramatic inflationary climb by 2011; at that point, the belief that inflation would continue indefinitely led to major bear markets for the shares of commodity producers and emerging-market equities. Now we've swung all the way back again, with almost no one concerned about rising inflationary expectations. Historically, whenever U.S. equities are transitioning from a multi-year bull market to a bear market as they have been doing recently, there is a corresponding inflationary surge. Of course many people believe that "it's different this time", and of course it very rarely is different. History repeats itself with boring predictability.

Disclosure: In August-September 2013, and again during the first several months of 2014, I had been aggressively buying the shares of emerging-market country funds whenever they appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares and related assets especially following their most extended pullbacks. Starting in December 2013 I have been buying HDGE whenever it has traded below 13 dollars per share, and more recently whenever it has retreated below 12, with the idea of selling it in 2016-2017 as we are completing the next U.S. equity bear-market bottoming pattern; HDGE is an actively managed fund which sells short various U.S. equities. From my largest to my smallest position, I currently own GDXJ, KOL, XME, GDX, HDGE, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, VGPMX, BGEIX, VNM, ZJG (Toronto), PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled; since then, SCIF has been one of the biggest losers of all emerging-market funds. I have reduced my total cash position since June 2013 to approximately one tenth of my total liquid net worth in order to increase my holdings in the above assets. I have now sold all of my SLX by acting whenever steel insiders were doing likewise. I expect the S&P 500 to eventually lose about two thirds of its 2014 peak value--with most of that decline occurring from some point around the middle of 2015 through late 2016 or early 2017. The Russell 2000 Index barely achieved a new all-time top on July 1, 2014 compared with its early March 2014 highs, while the S&P 500 did so numerous times over the same four-month period. The Russell Micro-cap Index has been even weaker since it completed a historic top on March 6, 2014. This marked a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of past bear markets are doomed to repeat their mistakes.

Friday, September 19, 2014

"Somebody said to me, 'But the Beatles were anti-materialistic.’ That’s a huge myth. John and I literally used to sit down and say, 'Now, let’s write a swimming pool.'" --Paul McCartney

MOST GLOBAL ASSETS ARE ABSURDLY OVERVALUED, WHILE A FEW SECTORS ARE RIDICULOUSLY UNDERVALUED (September 19, 2014): We have experienced numerous bubbles throughout financial history, where various assets have become irrationally overvalued. Often this occurs because an especially popular new technology inspires investors into believing that traditional measures of valuation "no longer matter" because the new technology has "completely changed" the financial landscape. Through the centuries, this has caused investors to believe that assets including tulips, funds which invest in the New World, railroad shares, and internet stocks will keep rising indefinitely and that no price is too high. What makes the current situation particularly problematic is that bank accounts paying almost nothing around the world have encouraged millions of investors to take their money out of safe time deposits and to put them into far riskier stocks, bonds, and real estate. Most people don't even realize how much money they might lose, foolishly projecting their recent steady gains into future years. The problem with so many assets being simultaneously overpriced is that whenever the stock market suffers a significant decline, most other assets could end up declining in tandem rather than behaving inversely. Many investors have portfolio blends of 60% stocks and 40% bonds, or perhaps the reverse, and believe that if stocks retreat then bonds will advance or vice versa. However, there have been times in history when stocks, bonds, and real estate have all plummeted simultaneously. If that happens again, with so many people having crowded into these assets without understanding their risks, this creates a serious possibility of a dramatic total loss of wealth. When people's net worth slumps, even if their incomes remain constant, they tend to spend much less. This is known as the negative wealth effect, and it could be one of the most serious problems facing the economy around the world during the next bear market.

Probably I should call it the current bear market, rather than the next one, because if you look at a chart of small-cap U.S. equities you will see that these have already been in downtrends since March 6, 2014. IWC is a fund of micro-cap U.S. equities, meaning shares of companies with a total market capitalization of less than one billion dollars apiece, which has dropped about 10% from its March 6 top. IWM, a fund which tracks the Russell 2000, hasn't lost as much but has substantially underperformed the S&P 500 Index since March 6, 2014 after having outperformed the S&P 500 for five consecutive years. The financial markets are thereby giving us a useful advance warning, which almost everyone is completely ignoring. Those who have realized that small U.S. company shares are in downtrends have mostly recommended shifting into their large-cap counterparts. This is like being on the Titanic and learning that it has struck an iceberg--and therefore recommending leaving a second-class cabin to move into a first-class cabin which has recently been vacated, rather than heading for the lifeboats. By the time that most investors realize that they should sell many of their risk assets, it will be far too late to obtain favorable prices for them. I'm sure you remember many people prior to September 2008 who insisted that they would know when we had entered a "real" bear market and would be able to get out in time--only to discover after September 2008 that they had badly misjudged the financial markets. Being proactive is almost always rewarding because so few are willing to plan in advance; almost everyone ends up trying to respond to what has recently occurred.

Many measures of valuation have reached all-time highs, including record low yields on many classes of corporate bonds and all-time record or near-record ratios of prices to earnings and prices to book value for many equity sectors. A few measures are still below their all-time zeniths from March 2000, but are above peak valuations for nearly all other bull-market tops including 2007. Whenever too many investors are following nearly identical paths, they almost always end up losing a substantial percentage of their net worth. Many people have deluded themselves into believing that traditionally volatile assets are somehow almost as safe as a bank account, and are about to pay dearly for their willful ignorance.

In an interesting paradox, at the same time that so many stocks, bonds, real estate, collectibles, and other assets are dangerously overvalued by historic measures, a few sectors are especially undervalued. Most emerging-market shares suffered substantial bear markets which began during or near April 2011, and which mostly ended between August 2013 and July 2014. Many of these funds lost more than half their value during this period. Investors are instinctively reluctant to purchase anything which has recently suffered a substantial percentage decline, regardless of how compelling it might be. Nearly all emerging-market funds have been rebounding in recent months, generally gaining more than U.S. equity funds, but continue to mostly be avoided.

Many shares of commodity producers also suffered bear markets which began on or around April 2011, which slid to four- and five-year bottoms from June 2013 through the present time. The total percentage losses, as with emerging-market equities, was more than half for many commodity sectors and more than three quarters for the hardest-hit subsectors. A few of these including GDXJ have rebounded significantly from their lowest levels of the past year, while continuing to receive persistently negative media coverage and with almost all analysts and advisors recommending that their clients avoid them. There's a strange irony in advisors and analysts recommending that investors own dramatically overpriced assets which have tripled or quadrupled since early 2009, while not wanting them to buy the relatively few securities which are trading close to important 2009 lows. Emotionally, investors would almost always prefer to buy something which has been climbing for several years and which has been especially calm in recent months, because it intuitively seems to be safer and superior. Investors dislike buying something which has significantly lost value in recent years and which is experiencing sharp fluctuations in both directions, because something which behaves in this manner appears to be inferior and unpredictable. Not surprisingly, those assets which tend to rally the most are almost always those which recently suffered notable bear markets and which have gyrated choppily rather than rising smoothly in recent months. This ensures that very few people will benefit from the financial markets as nearly everyone ends up buying high and selling low.

Disclosure: In August-September 2013, and again during the first several months of 2014, I had been aggressively buying the shares of emerging-market country funds whenever they appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares and related assets especially following their most extended pullbacks. Starting in December 2013 I have been buying HDGE whenever it has traded below 13 dollars per share, and more recently whenever it has retreated below 12, with the idea of selling it in 2016-2017 as we are completing the next U.S. equity bear-market bottoming pattern; HDGE is an actively managed fund which sells short various U.S. equities. From my largest to my smallest position, I currently own GDXJ, KOL, XME, GDX, HDGE, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, VGPMX, BGEIX, VNM, ZJG (Toronto), PLTM, EPU, TUR, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled; since then, SCIF has been one of the biggest losers of all emerging-market funds. I have reduced my total cash position since June 2013 to approximately one ninth of my total liquid net worth in order to increase my holdings in the above assets. I have now sold all of my SLX by acting whenever steel insiders were doing likewise. I expect the S&P 500 to eventually lose about two thirds of its 2014 peak value--with most of that decline occurring from some point around the middle of 2015 through late 2016 or early 2017. The Russell 2000 Index barely achieved a new all-time top on July 1, 2014 compared with its early March 2014 highs, while the S&P 500 did so numerous times over the same four-month period. The Russell Micro-cap Index has been even weaker since it completed a historic top on March 6, 2014. This marked a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of past bear markets are doomed to repeat their mistakes.

Tuesday, August 12, 2014

"Carpe per diem--seize the check." --Robin Williams

THE SHORT-TERM REBOUND FOR U.S. EQUITY INDICES HAS A WEEK OR SO TO GO, BUT AFTER THAT, LOOK OUT BELOW (August 12, 2014): U.S. small-cap equity indices and their funds including IWM had substantially outperformed their large-cap counterparts including SPY and VOO for exactly five years, starting in early March 2009 and ending in early March 2014. From the first week of March 2014 through the end of July 2014, small-cap funds dramatically diverged from their previous behavior by retreating even as the S&P 500 continued to repeatedly set new all-time highs. IWM barely set a new all-time top on July 1, 2014, and then resumed its lackluster ways. This kinds of divergence had always previous occurred just before a severe bear market, including most recently 2007 and 2000, and before that as we were on the verge of other major downtrends including 1972-1973 and 1928-1929. This was one of the clearest signs that we were transitioning from a powerful bull market to what will likely become an equally dramatic bear market.

So far during August 2014, this behavior has reversed: IWM has consistently been behaving more bullishly than SPY and VOO in August 2014, first by declining less and repeatedly making higher intraday lows, and more recently by gaining more in percentage terms during rally days. Combined with the sudden surge for VIX to a multi-month peak earlier this month, it indicated that U.S. equities weren't yet ready for a serious correction. The recovery is likely to choppily continue for another week or two, or as long as it takes for VIX to return to roughly 12.50--when most investors will foolishly conclude that they had their pullback for the year and that it will all be sunshine and chocolate cookies from now on. Once we experience such a degree of irrational complacency, the next and more severe correction will start and will reach some kind of important intermediate-term low probably in the early autumn of 2014. This will be followed by a classic up-and-down bear market in which some investors will sell because they hadn't expected such dramatic volatility in both directions, and then other investors will sell because they're starting to lose money in the U.S. stock market, and then others will sell because they don't understand what's happening, and then finally a much larger group of participants will sell their stocks because investors repeatedly buy near the top and sell near the bottom of all cycles.

Besides VIX slumping sufficiently to indicate that the recent bout of fear has dissipated, expect to see IWM soon underperforming SPY again. If this happens especially on up days when small-cap equities should be gaining more in percentage terms as they had mostly done for five years, then this will provide what will likely be a final opportunity to establish positions which will gain from an extended bear market. As with most bear markets, including the ones in 2000-2002 and 2007-2009, there is unlikely to be a dramatic crash or anything similar; instead, we'll get a moderate downtrend for one to 1-1/2 years, and then an accelerated pattern of more substantial percentage losses interspersed with periodic sharp rebounds whenever tardy short sellers pile on too late. After the sudden plunge of September-November 2008 and the grinding up-and-down continuation through March 2009, the relatively few investors who are correctly anticipating a serious bear market are probably expecting something similar to 2007-2009, rather than a more likely repeat of a much older downtrend pattern such as 1930-1932 or 1937-1939.

As we are transitioning over the next year or so, some assets will continue to climb, especially those which had become so unpopular that they had suffered bear markets of their own and which in June 2013 through July 2014 had plummeted toward or below their lowest levels in approximately five years. This includes most shares of mining companies and emerging-market equities. The biggest winners of 2014 are primarily in these two categories, and this pattern will likely continue for the remainder of 2014 and perhaps for half of 2015.

I have been buying the actively managed exchange-traded fund HDGE each time it drops another 10 cents. My highest purchase was at 12.99 and my lowest fill was at 11.59. After each bounce for HDGE (i.e., each time U.S. equities retreat), I plan to continue to accumulate HDGE into weakness. I am still losing money overall on this investment so far, but I expect it to be among the best-performing funds through 2016 or 2017. I plan to eventually make HDGE probably my second- or third-largest holding, although that will likely not occur until perhaps the spring or summer of 2015.

Disclosure: In August-September 2013, and again during the first several months of 2014, I had been aggressively buying the shares of emerging-market country funds whenever they appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares and related assets especially following their most extended pullbacks. Starting in December 2013 I have been buying HDGE whenever it has traded below 13 dollars per share, and more recently whenever it has retreated below 12, with the idea of selling it in 2016-2017 as we are completing the next U.S. equity bear-market bottoming pattern; HDGE is an actively managed fund which sells short various U.S. equities. From my largest to my smallest position, I currently own GDXJ, KOL, XME, GDX, SIL, COPX, HDGE, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, VGPMX, BGEIX, VNM, ZJG (Toronto), PLTM, EPU, TUR, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled; since then, SCIF has been one of the biggest losers of all emerging-market funds. I have reduced my total cash position since June 2013 to approximately one eighth of my total liquid net worth in order to increase my holdings in the above assets. I have now sold all of my SLX by acting whenever steel insiders were doing likewise. I expect the S&P 500 to eventually lose about two thirds of its 2014 peak value--with most of that decline occurring from some point around the middle of 2015 through late 2016 or early 2017. The Russell 2000 Index barely achieved a new all-time top on July 1, 2014 compared with its early March 2014 highs, while the S&P 500 did so numerous times over the same four-month period. This marked a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of past bear markets are doomed to repeat their mistakes. 

Thursday, July 10, 2014

"The economy depends about as much on economists as the weather does on weather forecasters." --Jean-Paul Kauffmann

U.S. EQUITIES ARE ALREADY IN A BEAR MARKET (July 9, 2014): Most investors have behaved as though the bull market for U.S. equity indices which began in early March 2009 will continue for several more years. Already this extended uptrend has lasted longer than 90% of previous U.S. equity bull markets, and we have experienced an increasing number of negative divergences. The number of new 52-week highs has continued to contract. The number of investors who are hedging their portfolios against a decline has been sharply reduced, even among institutional investors who routinely use hedging but have decided recently that it's "a waste of money". Investors who were burned by the last bear market, and who made massive net withdrawals in the fourth quarter of 2008 and the first quarter of 2009, have been among the most eager to "get back into the stock market" since the beginning of 2013. The ratio of insider selling to insider buying has recently been increasing, especially among those traders with the best track records. Those groups and individual shares which had been among the leaders in recent years have recently been among the biggest losers, while lagging securities have been the most likely to catch up especially for inflation-favoring assets including mining shares. All of these tend to occur whenever a major bull market is transitioning to a major bear market.

Very few investors pay attention to the Russell 2000 Index and its relation to the S&P 500 Index. From early March 2009 through early March 2014, the Russell 2000 consistently outperformed the S&P 500 during uptrends, gaining nearly 100% more overall in percentage terms from their respective bottoms. Since the first week of March 2014, however, the Russell 2000 barely eked out a new all-time high on July 1, 2014 and rapidly moved lower again. During the same four-month period, the S&P 500 achieved numerous all-time highs. Whenever small-cap equities in any sector are persistently underperforming their large-cap counterparts, a major bear market is usually imminent. One common characteristic of 1928-1929, 1972-1973, and 2007 was the sudden shift from outperformance to underperformance for small stocks prior to the eventual stock-market collapse on all three of the above occasions. The mainstream financial media have barely paid attention to this key negative divergence, thereby making it even more likely to prove to be a significant omen.

Do you know anyone who has been selling stocks to take advantage of their overvaluation? Almost everyone I have met seems to believe that the good times will last indefinitely. Part of this is the human tendency to project the recent past into the indefinite future, which is probably the most consistently negative habit of most investors. As measured by Tobin's Q, the U.S. equity market overall has only been more dangerously overpriced once in its history, which was during the first quarter of 2000.

There is another pattern which is persistently underestimated by investors, which is the S&P 500 megaphone. Since 1996, the S&P 500 Index has made a sequence of several higher highs and lower lows. For example, the lows of 2002 were below the lows of 1998, while the lows of 2009 were below the lows of 2002. In early 2009, many believed that this trend was broken, but it once again proved to be reliable in forecasting the powerful bull-market rally in recent years and especially the new all-time highs. The next step, for better or worse, is therefore breaking below the 666.79 nadir of March 6, 2009, which would represent a decline of nearly two thirds from its July 3, 2014 zenith of 1985.59. Of course the S&P 500 could set one or more new all-time peaks before collapsing, but if any asset is likely to lose two thirds of its value then it is far too dangerous to hold onto it merely to eke out perhaps a few additional percent. The risk-reward ratio for the U.S. stock market has rarely been more unfavorable.

I have been buying the actively managed exchange-traded fund HDGE each time it drops another 10 cents. My highest purchase was at 12.99 and my lowest fill was at 11.59. After each bounce for HDGE (i.e., each time U.S. equities retreat), I plan to continue to accumulate HDGE into weakness. I am still losing money overall on this investment so far, but I expect it to be among the best-performing funds through 2016 or 2017. I plan to eventually make HDGE probably my second- or third-largest holding, although that will likely not occur until perhaps the spring or summer of 2015.

Disclosure: In August-September 2013, and again during the first four months of 2014, I was aggressively buying the shares of emerging-market country funds whenever they appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares and related assets especially following their most extended pullbacks. Starting in December 2013 I have been buying HDGE whenever it has traded below 13 dollars per share with the idea of selling it in 2016-2017 as we are completing the next U.S. equity bear-market bottoming pattern; HDGE is an actively managed fund which sells short various U.S. equities. From my largest to my smallest position, I currently own GDXJ, KOL, XME, GDX, SIL, COPX, HDGE, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, VGPMX, BGEIX, VNM, ZJG (Toronto), PLTM, EPU, TUR, SLX, SOIL, EPHE, and THD. I recently sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election is almost certainly overdone. I have reduced my total cash position since June 2013 to approximately one seventh of my total liquid net worth in order to increase my holdings in the above assets. I sold almost 90% of my SLX near 49 dollars per share in November-December 2013 because steel insiders were doing likewise. I plan to buy more HDGE each time it drops below 13 dollars per share, because I expect the S&P 500 to eventually lose about two thirds of its peak value--with most of that decline occurring during the second quarter of 2015 and extending into 2016 or 2017. The Russell 2000 Index barely achieved a new all-time top on July 1, 2014 compared with its early March 2014 highs, while the S&P 500 did so numerous times over the same four-month period. This marked a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" the lessons of past bear markets are doomed to repeat their mistakes.

Saturday, June 7, 2014

"Money is the opposite of the weather. Nobody talks about it, but everybody does something about it." --Rebecca Johnson

NUMEROUS ASSETS ARE MARKING VITAL TURNING POINTS (June 6, 2014): There's an apt financial quip that "everything you know is wrong". If you were to believe the mainstream financial media, you would conclude that the bull market for U.S. equities which began in early March 2009 will continue for several more years. You would also believe that the 2014 rally for U.S. Treasuries will persist indefinitely--not because of fundamental factors or other logical reasons, but since "there's a worldwide shortage of bonds". You would be sure that gold is going to plummet to one thousand U.S. dollars per troy ounce, since that is what nearly every brokerage analyst is insisting must happen during the next year or two, and you would also be bearish toward almost all other commodities except for those which have surged in recent months and which therefore will allegedly keep rising because "their demand is outstripping their supply". You would be convinced that all rallies for emerging-market assets of all kinds from recent five-year bottoms "must be temporary", and will soon be followed by renewed bear markets. And of course you'd be wrong about all of the above.

Very few people pay attention to the Russell 2000, its related funds including IWM, or other benchmarks of small-cap U.S. equities. Almost all of these peaked along with the Nasdaq during the first week of March 2014. However, the possibility that the Russell 2000 could have already begun a bear market is being ignored or dismissed by almost everyone, just as a similar divergence between the Russell 2000 and the S&P 500 had occurred on numerous past occasions as we were transitioning to a major bear market. The last time this happened was in October 2007, which was greeted by investors piling into U.S. equities just as they have been doing in recent months. Almost everyone loves to buy high and to sell low, so this should hardly be surprising. Believing that "it's different this time" is a dangerous conceit.

As for U.S. Treasuries and their related funds including TLT, these most likely peaked near the end of May when they reached their highest points in nearly one year. The bear market for U.S. Treasuries which began after these had achieved all-time peaks in July 2012 will likely not end until these revisit their lows from the early months of 2011, the last time that U.S. Treasuries had gone dramatically out of favor. Many who had sold short Treasuries have been covering their positions, because they can't bear to be on the wrong side of what appears to be an extended uptrend. These traders most likely bailed out just before their reasons for being bearish were about to be vindicated by favorable market action. The financial markets repeatedly act in whichever way will benefit the fewest number of participants at any time.

Emerging-market funds of all kinds had continued to experience all-time record net outflows through the past winter. These withdrawals have finally subsided, but very few investors have become interested in participating. As long as general U.S. equity indices were nearly all enjoying strong uptrends, very few people cared about potential alternatives. Now that small-cap equities have stopped climbing, instead of embracing the oversold and undervalued losers of 2013, or--gasp--actually selling stocks, most are simply shifting into outperforming large-cap stocks just as they had done in 1929, 1937, 1972, 1990, 2000, 2007, and numerous other past occasions when crowding into fewer and fewer rising assets eventually proved to be an unwise decision. Whenever large-cap stocks slide into corrections along with their small-cap cousins, a lot more investors will be eager to find assets which behave differently; some will buy the shares of commodity producers and emerging-market equities which had been so unpopular last year. If "boring" generic index funds are outperforming, then almost no one will consider anything else; however, as investors progressively realize that additional gains are highly unlikely for most baskets of U.S. equities, they will much more eagerly embrace assets which they normally wouldn't dream of buying.

Disclosure: In August-September 2013, and again during the first four months of 2014, I was aggressively buying the shares of emerging-market country funds whenever they appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares and related assets especially following their most extended pullbacks. Starting in December 2013 I have been buying HDGE whenever it has traded below 13 dollars per share with the idea of selling it in 2016-2017 as we are completing the next U.S. equity bear-market bottoming pattern; HDGE is an actively managed fund which sells short various U.S. equities. From my largest to my smallest position, I currently own GDXJ, KOL, XME, GDX, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, HDGE, ECH, GLDX, URA, VGPMX, BGEIX, VNM, ZJG (Toronto), PLTM, EPU, TUR, SLX, SOIL, EPHE, and THD. I recently sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the recent Indian election is likely overdone. I have reduced my total cash position since June 2013 to approximately one sixth of my total liquid net worth in order to increase my holdings in the above assets. I sold almost 90% of my SLX near 49 dollars per share in November-December 2013 because steel insiders were doing likewise. I plan to buy more HDGE each time it drops below 13 dollars per share, because I expect the S&P 500 to eventually lose more than half of its current value--with most of that decline beginning during the second quarter of 2015 and extending into 2016 or 2017. The Russell 2000 Index failed to achieve a new all-time top since early March 2014 while the S&P 500 did so numerous times, in a classic negative divergence which previously occurred during October 2007. Those who have "forgotten" the lessons of the 2007-2009 bear market are doomed to repeat their mistakes.