Thursday, April 3, 2014

"A fool and his money are lucky enough to get together in the first place." --Stanley Weiser, screenwriter for Gordon Gekko of Wall Street

U.S. EQUITIES ARE FAR MORE BEARISH THAN INVESTORS REALIZE, WHILE MINING AND EMERGING-MARKET NAMES ARE MUCH MORE BULLISH (April 3, 2014): General U.S. equity funds have been highly popular with investors since the beginning of 2013, and have enjoyed enormous inflows whenever key benchmarks have traded closest to their all-time peaks. Are investors making an intelligent decision by purchasing U.S. equities after they have already enjoyed a bull market of greater than five years in duration? The biggest inflow in history into U.S. equity funds was in February 2000, shortly before the worst technology bear market since the Great Depression; the largest one-month outflow was in February 2009 when the previous bear market had nearly terminated and we had the most compelling buying opportunity for the stock market since the final months of 1974. Thus, investors repeatedly buy high and sell low. Is it different this time?

While the media have been trumpeting recent all-time highs for the Dow Jones Industrial Average and the S&P 500, almost no one has pointed out that the Russell 2000 Index has failed to surpass its highest levels from early March 2014. IWM, a fund which tracks the Russell 2000, reached 120.58 on March 4, 2014 and a lesser-known 120.64 at 8:43:34 a.m. in the pre-market session on March 6, 2014--just after the monthly U.S. employment report was released. Since then, IWM has surpassed 120 several times, although not during April. The media rarely discuss the Russell 2000, which is a shame since one of the earliest clear signs that we had entered the previous bear market was when the S&P 500 and the Dow Jones Industrial Average surged to new all-time highs in October 2007 while the Russell 2000 refused to surpass its July 2007 zenith. In past decades, a similar pattern has also prevailed: the crushing 1973-1974 bear market was preceded by notable underperformance by indices of small- and mid-cap securities in 1972, while the worst bear market in world history during 1929-1932 was foreshadowed by small-cap securities lagging during 1928-1929.

A confirming signal of an impending bear market can be seen with VIX. The most valuable use of VIX is its uncanny ability to tell us whether a major market transition is underway. If we are transitioning from a bull market to a bear market, then VIX will signal this far in advance by first touching a multi-year bottom, and then making higher lows over a period of several months or longer. If we are transitioning from a bear market to a bull market, the VIX does the exact opposite by first touching a multi-year top, and then making lower highs over a period of several months or longer.

Let's test this theory to see how it held up during the past decade. VIX bottomed at 9.39 on December 15, 2006, which was a multi-year bottom. After that, it began to form about a dozen higher lows. Therefore, when we reached June 1, 2007 and the Russell 2000 reached a new all-time high, the failure of VIX to slump to a new low was a warning that the bull market was in its final stages. In October 2007, when the S&P 500 and the Nasdaq reached new all-time peaks, while the Russell 2000 completed a lower high, additional higher lows for VIX ensured us that the negative divergence with the Russell 2000 should be taken seriously, since VIX by then had failed to register a new low for ten months. By the time we reached August 2008, when almost everyone else was overly complacent about a worsening bear market, VIX had been forming higher lows for more than 20 months. This was a loud and clear signal to get out of the market, buy U.S. Treasuries, sell short, or do something other than literally getting sunburned on the beach as most money managers did that month.

Now let's look at the opposite side of the coin. What did VIX do after the U.S. equity (and global stock market) collapse which began in September 2008? VIX peaked at 89.53 on October 24, 2008. While GDX bottomed at the open that day, nearly all other equity sectors weren't done with their declines. On November 20, 2008, when KOL and numerous other shares of commodity producers completed their nadirs for the cycle, VIX made a lower high of 81.48. This was one of the first clear signs that we were in a transition from a bear market to a bull market. If VIX had made a higher high, then it would have signaled that the downturn was still intact. By the time the S&P 500 slumped to its 12-1/2-year bottom shortly after the U.S. employment report on Friday, March 6, 2009--notice the perfect inverse parallel with the first Friday of 2014--the high for VIX was 51.95 on March 6, the same as it had been the previous day, and 51.34 on March 9, 2009. These numbers were enormously lower than their highs from the fourth quarter of 2008, and signaled that a bull market was more closely approaching. Since then, the VIX hasn't reached 50, although it almost did so in both 2010 and 2011 and will almost surely dramatically surpass that level during 2015-2016. Even if you weren't tracking the surge in insider buying, or the sharp decrease in the number of new 52-week lows, or the all-time record outflows from equity funds (admittedly the last one was a huge reason to buy stocks in the first quarter of 2009), VIX gave you valuable signals.

If we look at VIX since the start of 2013, we can see that it reached its lowest point in more than six years on March 14, 2013, when it bottomed at 11.05. Since then, it has formed several higher lows, and is probably completing an additional higher low this week or next week. Even though some U.S. equity indices have recently reached new all-time highs, VIX is putting its foot down and saying "no". By continuing to form higher lows for more than a full year, VIX is stating unequivocally that we are well into in the process of transitioning to a bear market and that selling funds closely correlated with general U.S. equity indices is well advised.

You may be wondering: what does all of this have to do with the mining and emerging-market sectors, most of which at some point during the past year traded at or near five-year lows? The answer is that, as long as the Russell 2000 is continuing to set new all-time highs every several weeks or so, and is gaining maybe 20% annually, then almost no investors--institutional or individual--are going to be interested in looking elsewhere. It's much simpler and effective to stick with your favorites when they're working reasonably well. However, if the Russell 2000 has already begun a bear market which will result in a total 2014 calendar year loss of more than 10%, as I am anticipating, then investors will become progressively more eager to seek alternatives. As a result, more and more people will gradually purchase the least popular securities of 2013 which suddenly turned hot in 2014, including mining and emerging-market names, until eventually investors are buying these precisely because of their recent outperformance. Thus, there is a direct connection between investors wanting to get out of previous winners that are no longer winning into former big losers which have suddenly become the darlings of the financial markets.

Disclosure: In late August and early September 2013 I was aggressively buying the shares of emerging-market country funds. Since early December 2013, I have added moderately to my funds of the most undervalued mining shares and emerging-market equities, especially during their most extended pullbacks. Most recently, I have been buying HDGE whenever it has traded below 13 dollars per share with the idea of selling it in 2016 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, SCIF, REMX, EWZ, RSX, IDX, GXG, GLDX, VGPMX, HDGE, ECH, BGEIX, VNM, URA, ZJG (Toronto), PLTM, EPU, TUR, SLX, SOIL, EPHE, and THD. I have significantly reduced my total cash position since June 2013 in order to increase my holdings of the above assets, and currently hold about 18% of my total net worth in cash and its equivalents. I sold almost 90% of my SLX near 49 dollars per share because steel insiders were doing likewise. I plan to buy more HDGE each time it suffers a short-term pullback, because I expect the S&P 500 to eventually lose more than half of its current value--with most of that decline occurring during 2015-2016.

Tuesday, February 18, 2014

"The easiest way for your children to learn about money is for you not to have any." --Katharine Whitehorn

HDGE IS AN IDEAL WAY TO FADE THE POPULARITY OF GENERAL U.S. EQUITIES (February 18, 2014): General U.S. equity funds have been highly popular with investors since the beginning of 2013. They briefly went out of favor near the beginning of February 2014, but as the S&P 500 Index has approached its all-time peak, most investors are convinced that they are going to remain in the market "for the long run" even though they didn't even bother to participate during 2009-2012 because of negative emotional memories of the 2007-2009 bear market. As a result, it is highly untrendy to consider selling short or to otherwise wager that U.S. equities are likely to be substantially lower in 2016. Since the mid-1990s, the S&P 500 Index has formed a pattern of numerous higher highs and lower lows, which is known as a megaphone formation. The 1997 top was exceeded in 2000, which was surpassed again in 2007, and which has led to a new all-time high in recent weeks. Similarly, the 1998 bottom was followed by a lower low in 2002, a deeper nadir in 2009, and what will eventually become an even more depressed reading in two or three years. Each time that we achieve one extreme or another, investors conclude that prices will either keep climbing or keep declining indefinitely, forgetting that the financial markets have always been cyclical. It would be as though a very cold spell each January convinces people that we won't have summer the following July [you can reverse these months if you live south of the equator].

There are many ways to benefit from a slumping stock market, but perhaps the best one is by purchasing an actively managed fund of short U.S. equity positions with the symbol HDGE. By owning this fund, you won't be forced by your broker to repurchase your shares because your broker can no longer borrow them. In addition, if you sell short directly, then you will achieve a short-term capital gain taxed as high as 43.4% even if you hold your short position for more than one year. However, if you buy HDGE, then if you hold it for at least one year and one day it will qualify as a U.S. federal long-term capital gain which has a top tax rate of 23.8%. If you are in a low tax bracket, then the differential is 15% short-term versus 0% long-term. If you prefer shorter-term trading, which is ideal for a retirement account, then you can buy HDGE whenever VIX is depressed, with the idea of selling it whenever VIX has recently surged to a short-term peak and begins to retreat.

Speaking of VIX, almost no one has noticed that VIX has formed a pattern of higher lows since it bottomed at 11.05 on March 14, 2013. For nearly one year, VIX has been forming a pattern of several higher intraday lows. The last time that VIX bottomed at a multi-year nadir was on December 15, 2006 at 9.39; we know what happened afterward. It's not different this time. VIX measures the implied volatility of a basket of options on the S&P 500 Index; a slow rise in VIX over the course of one or two years indicates that the most knowledgeable options traders are progressively charging more to insure equity portfolios. The media sometimes discuss VIX, but they don't know how to interpret it properly. Similarly, an extended pattern of lower highs for VIX, such as we experienced from October 2008 through March 2009, indicates that a strong U.S. equity bull market is approaching.

There are other "bear funds", but none of them actually sells short equities directly and exclusively. Nearly all of them speculate in the futures market, and therefore will erode in value. If the underlying security is unchanged, you will end up losing money. In addition, the two managers of HDGE have excellent track records of selecting equities which will decline more than the overall equity market during any bearish downtrend. Even though this fund has existed for only a few years, its track record already proves the co-managers' ability to make enlightened bear-market choices. The management fee is somewhat high, but it is justified by the capital-gains qualification, the frequent portfolio adjustments, and above all the past performance during stock-market pullbacks.

Disclosure: In late August and early September 2013 I was aggressively buying the shares of emerging-market country funds. Since early December 2013, I have added moderately to my funds of the most undervalued mining shares and emerging-market equities, especially during their most extended pullbacks. Most recently, I have been buying HDGE whenever it has traded below 13 dollars per share with the idea of selling it in 2016 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, SCIF, EWZ, GLDX, IDX, VGPMX, RSX, GXG, ECH, HDGE, BGEIX, VNM, URA, ZJG (Toronto), PLTM, EPU, TUR, SLX, SOIL, EPHE, and THD. I have significantly reduced my total cash position since June 2013 in order to increase my holdings of the above assets, and currently hold about 20% of my total net worth in cash and its equivalents. I sold almost 90% of my SLX near 49 dollars per share because steel insiders were doing likewise. I plan to buy more HDGE each time it suffers a short-term pullback, because I expect the S&P 500 to eventually lose more than half of its current value--with most of that loss occurring during 2015-2016.

Sunday, January 12, 2014

"The more you chase money, the harder it is to catch it." --Mike Tatum

COAL MINING SHARES ARE BARGAINS, WHILE SEVERAL EMERGING MARKETS REMAIN COMPELLING (January 12, 2014): Since I completed my last web site update on December 13, 2013, investors and analysts have become even gloomier toward commodities and their producers. However, it is becoming increasingly likely that many mining and energy assets and related emerging-market securities approached or achieved multi-year bottoms during the past several weeks, including all of the following: GDX (20.119 dividend adjusted, 8:30:43 a.m., December 6, 2013); GDXJ (28.80, 8:39:33 a.m., December 6, 2013); COPX (8.484 dividend adjusted, December 12, 2013); SIL (10.386 dividend adjusted, December 9, 2013); REMX (33.977 dividend adjusted, December 20, 2013); IDX (20.06, 10:07 a.m., January 7, 2014); EWZ (41.54, 1:48 p.m., January 9, 2014); THD (61.94, January 3, 2014); TUR (43.81, December 27, 2013); and RSX (26.618 dividend adjusted, December 5, 2013). All of the above were extremely unpopular with investors during the past year, mostly experiencing periodic significant outflows and repeated negative commentary on most media outlets.

Most financial advisors believe that the above assets remain mired in downtrends even as they have likely begun what will become powerful rallies. A few commodity producers and emerging-market stocks may not yet have completed their respective retests for the cycle, potentially including KOL, a fund of coal producers. Adjusted for its 44-cent dividend credited on December 23, 2013, KOL bottomed at 16.72 on June 24, 2013, completed a nearly matching bottom 3 cents higher on July 5, 2013, and then slumped to 18.11 on January 10, 2014. This makes coal mining shares a rare bargain which may be nearly ready to recover. Some lesser-known emerging markets may continue to retreat in the short run--including GXG, a fund of Colombian shares that during the past week slid to its lowest point since early July 2012, and ECH, a fund of Chilean shares which slumped to its lowest level since the summer of 2009. There are perhaps another dozen or two related worthwhile buying opportunities which either exist currently or will be created during the next several weeks, mostly to be found among single-country emerging-market funds and related securities. We are likely closely approaching the next major rally phases for these equity sectors which had been among the poorest performers during 2013 and could be transformed into the biggest winners in 2014.

In recent months, inflows into general U.S. equity funds have approached or surpassed their previous all-time record highs. This bodes poorly for the U.S. stock market, since previous instances of massive inflows including February 2000 and October 2007 were followed by severe multi-year bear markets. Unfortunately, 2014-2016 is likely to experience a repeat performance. Just as VIX warned of a stock-market collapse far in advance by gradually forming higher lows following its 9.39 multi-year bottom on December 15, 2006, VIX has recently touched several higher lows after similarly completing a six-year bottom at 11.05 on March 14, 2013. Most investors finally feel confident about "getting back into the market", but for all of the wrong reasons. Their memories of the 2007-2009 plunge have faded with time, thereby making it easier to rationalize as a once-in-a-lifetime event which allegedly can't be repeated. Investors who couldn't bear to buy the S&P 500 below 700 or 800 are eager to participate when it is above 1700 and 1800. Repeatedly buying high and selling low is usually not a recipe for success.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers whenever they have been most disfavored. I completed selling many funds of general equities which I had bought near their important low points in 2012, and which I unloaded on a gradual basis from January 28, 2013 through May 3, 2013. In late August and early September 2013 I was aggressively buying the shares of emerging-market country funds. Since early December 2013, I have added moderately to my funds of the most undervalued mining shares and emerging-market equities, especially during their most extended pullbacks. From my largest to my smallest position, I currently own GDXJ, KOL, XME, GDX, REMX, SCIF, SIL, COPX, GLDX, IDX, GXG, RSX, ECH, EWZ, VGPMX, VNM, URA, BGEIX, ZJG (Toronto), SLX, PLTM, BRF, EPU, THD, EPHE, and SOIL. I have significantly reduced my total cash position since June 2013 in order to increase my holdings of the above assets, and I sold almost 90% of my SLX near 49 dollars per share because steel insiders were doing likewise.

Saturday, December 14, 2013

"A dollar picked up in the road is more satisfaction to us than the 99 which we had to work for, and the money won at Faro or in the stock market snuggles into our hearts in the same way." --Mark Twain

MANY OF THE MOST UNPOPULAR SECURITIES OF 2013 REMAIN VERY GOOD BARGAINS (December 13, 2013): Investors love to act in a synchronized fashion--they prefer to buy whatever everyone else is buying at the same time that everyone else is buying it, and to similarly sell along with the thundering herd. As a result, there have been record inflows into general equity funds in recent months, while the S&P 500 (SPY), the Russell 2000 Index (IWM), and the Dow Jones Industrial Average (DIA) may have completed their bull markets on November 29, 2013. In other words, after nearly five years of rising equity prices, many of the same investors who sold five years ago near the last bear-market bottom are finally buying equities near the exact top. At the same time, investors could be accumulating funds of mining companies and emerging-market equities which are not far from their respective five-year lows, but instead they are disdaining or actually selling those shares. People love to buy high and to sell low because they would subconsciously rather act along with the crowd than to make money.

The behavior of the Russell 2000 is especially important. In 2007, both the S&P 500 and the Russell 2000 set new highs in June and July, but in October, the S&P 500 climbed to a new all-time peak while the Russell 2000 made significantly lower highs. This was an important warning of the impending severe bear market which persisted until early March 2009. If the S&P 500 makes a new high during the next several months, while the Russell 2000 does not, then that would have especially bearish implications for all equity sectors through 2015-2016. It is rare that a true bear market begins with a bang as in 1929 or 1987; much more frequently, it starts with a whisper and is barely noticed for perhaps an entire year, when all of a sudden everyone wakes up simultaneously and realizes that they're no longer making money on their investments. At that point, the downtrend often dramatically accelerates.

As we approach the end of the calendar year, many are implementing foolish tax-loss strategies which gain nothing and which have several negative side effects. While selling for tax-loss reasons may reduce your 2013 tax liability, it will often increase your future tax liability by an even greater amount. If you sell something and buy something else which you end up selling within one year or less, then you will end up replacing a long-term capital gain with a combination of some kind of loss with a short-term capital gain--a clearly unfavorable tax proposition. Most investors obviously can't think beyond December 31 to consider their total tax liability rather than being obsessed with the current year. As a result, some of the worst performers of 2013 are being the most desperately unloaded in the final weeks of the year. This has provided for numerous buying opportunities ranging from gold, silver, and copper mining shares (GDX, GDXJ, SIL, COPX) to Indonesian stocks (IDX), Chilean equities (ECH), and other single-country funds. Rare-earth extraction (REMX) has performed especially poorly in recent weeks, while uranium shares (URA) have done somewhat better while remaining notably out of favor. The best approach is probably to pick a basket of these and others which have been the least popular names of 2013; as investors progressively switch out of 2013 winners to purchase undervalued lagging assets, many of the above choices could soar in price in just one year.

Top corporate insiders apparently agree. They have been buying shares of many of the least trendy mining, energy, and emerging-market securities, while steadily selling shares of many of the most popular names. Whenever insiders are doing the exact opposite of the general public, that is almost always a reliable signal that you will achieve a meaningful profit by doing likewise. The commitments of traders demonstrate that commercials have been persistently buying metals near their lowest points of recent months--including copper, silver, and gold--which they had been aggressively selling one year ago. Commercials, who are those traders most closely connected with any asset and who behave like corporate insiders, have been beginning to accumulate U.S. Treasuries which might thereby become one of the best bargains in the financial markets several months from now.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers whenever they have been most disfavored. I completed selling many funds of general equities which I had bought near their important low points in 2012, and which I unloaded on a gradual basis from January 28, 2013 through May 3, 2013. In late August and early September 2013 I was aggressively buying the shares of emerging-market country funds. During the past several weeks, I have added moderately to my funds of the most undervalued mining shares and emerging-market equities, especially during their most extended pullbacks. From my largest to my smallest position, I currently own GDXJ, KOL, XME, GDX, REMX, SIL, COPX, SCIF, GXG, GLDX, RSX, VGPMX, ECH, EWZ, IDX, BGEIX, VNM, URA, ZJG (Toronto), SLX, PLTM, and EPU. I have significantly reduced my total cash position since June 2013 in order to increase my holdings of the above assets, and I sold almost 90% of my SLX near 49 dollars per share because steel insiders were doing likewise.

Tuesday, October 15, 2013

"If hard work were such a wonderful thing, surely the rich would have kept it all to themselves." --Joseph Lane Kirkland

I STILL LOVE GOLD AND SILVER MINING SHARES (October 15, 2013): There are analysts who disagree about the future of the stock market, and there are other analysts who debate the future of the bond market. However, just about everyone agrees that investing in precious metals is hopeless, and that owning shares of the producers of gold, silver and platinum is even less likely to be profitable. As a result, precious metals mining shares are trading close to their lows of late June, and are not far above their most depressed valuations since the fourth quarter of 2008.

Since the last week of June, most mining shares have been forming several higher lows after they had slumped close to their lowest points in four to five years. The shares of coal producers, rare-earth extraction, steel manufacturing, copper mining, and similar industries have been in moderate uptrends. Since the final week of August, emerging-market equities which had plummeted to multi-year lows have been rebounding even more energetically. The currencies of emerging markets, which had become incredibly unpopular, have been progressively recovering. However, one major subsector hasn't participated in the rally. After initially climbing along with the rest, gold and silver mining shares began a retreat on August 27, 2013 which may or may not have finally ended after a dramatic percentage pullback. This has provided an unusually compelling opportunity for those who are ready, willing, and able to buy when nearly the entire mainstream financial media are proclaiming why it's hopeless to do so, and when even many longtime bulls are convinced that additional weakness is highly likely in the short run.

When almost everyone around you is telling you not to buy or to sell something, then it is almost always a very good idea to do the opposite. Near the end of the second quarter, we had all-time record insider buying relative to insider selling for gold and silver producers; we had the traders' commitments for silver and copper at all-time extreme commercial net long positions, with gold at its most exaggerated level since 2001; we had all-time record discounts to net asset value for numerous precious metals funds; we had all-time record outflows in the second quarter for nearly all assets in this category. Since the beginning of the summer, the price increases for gold and silver mining shares have been among the lowest of all mining subsectors or emerging-market countries with the possible exception of uranium producers (which are also a compelling buy).

Of my current favorite choices, GDX, is a fund of large- and mid-cap gold mining shares, while GDXJ consists of junior producers and would likely achieve even greater percentage gains during a meaningful rally. SIL is a fund of silver producers, and GLDX consists of gold exploration companies which are more speculative. If you are interested in an alternative, URA is a fund of uranium producers which has been an incredibly unpopular subsector and receives persistently gloomy media coverage.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers whenever they have been most disfavored. I completed selling many funds of general equities which I had bought near their important low points in 2012, and which I unloaded on a gradual basis from January 28, 2013 through May 3, 2013. In late August and early September 2013 I was aggressively buying the shares of emerging-market country funds. During the past several weeks, I have added moderately to my funds of precious metals mining shares, especially during their most extended pullbacks. From my largest to my smallest position, I currently own GDXJ, KOL, XME, SLX, GDX, REMX, SIL, COPX, SCIF, GXG, GLDX, RSX, VGPMX, ECH, EWZ, IDX, BGEIX, VNM, URA, ZJG (Toronto), PLTM, and EPU. I have significantly reduced my total cash position during the past four months in order to increase my holdings of the above assets.

Monday, September 16, 2013

"I'd like to live as a poor man with lots of money." --Pablo Picasso

GOLD MINING SHARES REMAIN ONE OF THE LAST BARGAINS, ALONG WITH APPLE (September 16, 2013): Gold mining shares were one of the first important cyclical assets to complete important bottoming patterns in the final week of June 2013, as they had mostly slumped to their lowest levels since the first week of December 2008 and in some cases to their lowest points since October-November 2008. Since then, they have begun to form several important higher lows. Other shares of commodity producers similarly completed multi-year lows in late June, early July, or early August. Emerging-market equities completed multi-year bottoms several weeks later, mostly touching their lowest points in the final week of August 2013. Looking back, these will almost certainly be seen as some of the best bargains of the year.

Interestingly, Apple (AAPL) has followed a pattern surprisingly similar to that of gold mining shares, having reached an important intermediate-term top in early September 2012, followed by a plunge to a bottom in late June 2013, and a subsequent bullish pattern of higher lows. As mining shares and emerging-market equities continue to rally for approximately another half year, Apple is likely to behave similarly. It might seem odd that a premier technology company's share price would act like the stock of a mining company, but the financial markets often generate unexpected parallels. Investors' mood toward Apple has closely tracked its valuation: whenever it is elevated, people are confident that the company will continue to create unbelievable innovations; whenever its stock price is recently depressed, investors will obsess over the prowess of its competitors and worry about its long-term survival. Sentiment always follows the market.

If you ignored my previous update in which I strongly recommended the purchase of funds of emerging-market shares, it's not too late to participate, although the best bargains have likely already come and gone. Those assets which are still below their respective 50-day simple moving averages probably represent the most compelling opportunities.

My favorite funds at the present time include GDXJ, SIL, GDX, GLDX, and PLTM. These consist of gold, silver, and platinum mining companies. Although their valuations are not as depressed as they had been on June 26, 2013, they have given up more than two thirds of their recent gains on average while the media have become once again almost unanimously gloomy toward their future prospects. Analysts are once again confidently predicting gold prices near one thousand U.S. dollars per troy ounce and lower, just as they had done in the early summer when the true nadir was being completed. If you own these shares in retirement funds, you can do a rollover into a Roth IRA and thereby pay taxes at their depressed valuations. This could save a lot of money in the future, especially since all of their subsequent gains will be tax free.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers whenever they have been most disfavored. I completed selling many funds of general equities which I had bought near their important low points in 2012, and which I unloaded on a gradual basis from January 28, 2013 through May 3, 2013. In recent months I have also been buying the shares of emerging-market country funds. During the past several trading days, I have added modestly to my funds of precious metals mining shares. From my largest to my smallest position, I currently own GDXJ, KOL, XME, SLX, GDX, REMX, SIL, COPX, SCIF, GXG, GLDX, RSX, VGPMX, ECH, EWZ, IDX, BGEIX, VNM, ZJG (Toronto), PLTM, URA, and EPU. I have significantly reduced my total cash position during the past three months in order to increase my holdings of the above assets.

Monday, August 19, 2013

"People are living longer than ever before, a phenomenon undoubtedly made necessary by the 30-year mortgage." --Doug Larson

POSITIVE DIVERGENCES HAVE BEEN INCREASING FOR COMMODITY-RELATED ASSETS (August 18, 2013): Gold and silver mining shares quietly completed major bottoms at 4-1/2-year lows in late June of 2013. During subsequent weeks, one commodity subsector after another has similarly begun what will likely become an extended rally. The traders' commitments for copper and silver reached all-time simultaneous extremes in the final week of June, when commercials demonstrated their highest-ever net long position for copper futures and their smallest-ever net short position for silver futures (commercials have never been net long silver since the first day of 1972 when these metals began trading on the Comex). Gold commercials, meanwhile, demonstrated their smallest net short position since December 2001. Commercials are traders whose business involves trading a particular commodity, currency, or other asset; with copper, for instance, those who actually utilize physical copper for homebuilding, jewelry, smelting, or other operations are commercials.

Emerging-market equities have remained sharply out of favor with investors. Especially with the S&P 500 Index recently climbing to a new all-time zenith, the dramatic underperformance by emerging markets is an irrational disparity which will be resolved partially through lower valuations for U.S. and other developed-market equities, but primarily through higher prices for stocks in countries including Brazil, Russia, Chile, Peru, India, and Vietnam. Some other emerging-market countries including China have already been experiencing moderate recoveries in recent weeks. Meanwhile, certain subsectors are especially depressed: SCIF, a fund of just under one hundred small companies in India, has been slumping as smallcap Indian shares are at their lowest valuations since the summer of 2009. Even after its recent modest pullback, most U.S. equities have more than doubled from their July 2009 lows and have gained even more if you go back to early March 2009. It doesn't make sense that U.S. price-earnings ratios are roughly double those of many emerging-market countries which have higher GDP growth rates and comparable future earnings' potential.

Therefore, I believe that it makes sense to purchase the shares of those commodity producers and emerging-market equities which have barely begun to rebound from their recent irrationally oversold conditions. Other than SCIF which I mentioned in the previous paragraph, EWZ and RSX remain undervalued, while ECH and EPU are two other funds of South American shares which are surprisingly cheap. As of July 31, 2013, SCIF had an average P/E ratio of 7.87, while RSX sported an average price-earnings ratio of 6.21.

Why have investors not been buying the shares of mining companies or those located in emerging nations? There are many explanations which you will find on the internet, but the real reason is that no one wants to buy something unless lots of other people have also been buying. Investors perceive a low price as proof of an asset's inferiority, regardless of the fundamentals of the situation. Most people are followers rather than leaders, and don't want to be among the first to participate in any idea. This is why they say that the best time to buy anything is always last year; whenever it is most timely to purchase something, the media are telling you every day why you should avoid it. By the time that you hear positive coverage on cable TV and analysts begin to upgrade anything, it has already been in a strong uptrend and it is too late to obtain a compelling bargain.

Nearly all financial advisors and the vast majority of analysts have been recommending assets which pay above-average dividends, thereby causing many such securities to become dangerously overvalued. These include consumer staples, health-care stocks, telecommunications companies, REITs, and similar holdings. I believe that all of the above have initiated multi-year bear markets which will be especially devastating since so many people have decided to participate in these overcrowded concepts.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers whenever they have been most disfavored. I completed selling many funds of general equities which I had bought near their important low points in 2012, and which I unloaded on a gradual basis from January 28, 2013 through May 3, 2013. In recent months I have also been buying the shares of emerging-market country funds. From my largest to my smallest position, I currently own GDXJ, KOL, XME, SLX, REMX, GDX, COPX, SIL, GXG, GLDX, VGPMX, RSX, EWZ, SCIF, ECH, VNM, EPU, FCG, BGEIX, ZJG (Toronto), and PLTM. I have significantly reduced my total cash position during the past two months in order to increase my holdings of the above assets.