Tuesday, August 9, 2011

"Money is better than poverty, if only for financial reasons." --Woody Allen

IT'S TIME TO BUY STOCKS NOW (August 8, 2011): It has been a very long time since I advocated purchasing equities. Mostly this was because there was far too much confidence by the average investor, and an even greater degree of complacency about the possibility of a significant equity pullback. On April 18, 2011, VIX slumped to an intraday bottom of 14.27, which marked its lowest level since June 21, 2007. VIX is probably the most accurate gauge of investors' fear about a possible imminent bear market. With all of us having fresh memories of the last bear market when stocks lost more than half their value, such a degree of indifference toward the possibility of losing money was truly shocking, and ensured that we would have to suffer a crushing pullback--which is exactly what happened. Today, VIX reached 48.00 in the late afternoon and would likely have been even higher if it had traded in the after-hours session when equities continued to slump lower in extended-hours action.

We have therefore completed a full round trip in which the average amateur investor has gone from virtually complete confidence in the stock market to a degree of panic which is usually seen only during a severe bear market. During the past several days, wherever I go, people who usually couldn't care less about financial matters are suddenly worried and looking for any guidance they can obtain about what the future will hold for their retirement or their children's college education. It's an unfortunate part of human nature that when assets are irrationally high and can be readily sold for inflated prices, people congratulate themselves on having bought them and have no interest in selling. When assets are absurdly low and can only be sold at depressed prices, people are illogically eager to unload them. Instead of being able to perceive excellent bargains, investors become obsessed with how much more money they might lose if they continue to hold on.

Therefore, this is almost surely an ideal time to purchase equities, especially those of old-fashioned companies with reliable profits which have fallen sharply out of favor during the past month. Examples include steel manufacturing and sea shipping. Therefore, I have started to buy the exchange-traded funds SLX and SEA which consist of each of the respective industries listed above. Both of these funds have been especially hard hit in recent weeks, and both of them have several components which have recently enjoyed significant buying by top corporate executives. The overall ratio of insider buying to selling, which had plummeted to an all-time low a month ago, has soared to its highest level since August 2010.

Thus, we have a situation in which the wealthiest investors with the most profitable track records are most eager to buy stocks, whereas those amateurs with histories of repeatedly losing money have been most eager to sell. This is a classic setup for what will soon become a dramatic equity rally. Additional weakness is possible and probably even likely in the very short run, as today's after-hours session is probably pointing the way toward a lower open on Tuesday morning, August 9, 2011. I have ladders of numerous purchase orders for my favorite oversold and undervalued equity funds including SLX and SEA mentioned above, and I am also considering purchasing the mining fund XME. All three of these are liquid exchange-traded funds which have a proven history of rebounding more energetically than the general equity market during any upward surge--even if it does turn out to be a relatively short-lived rally. If you make a 30% profit within a few months, then who cares whether it's "only" a bear-market bounce?

For similar reasons, I sold my entire large position in TLT, a fund of long-dated U.S. Treasuries, and closed all of my short positions except for SLV which is a fund of silver bullion. Silver recently experienced a bubble which is very similar to the Nasdaq bubble in 1999-2002, and which is following nearly an identical chart pattern if you divide the Nasdaq levels by 100 and extrapolate eleven years forward to 2010-2013. Just like the Nasdaq, silver will end up losing more than 70% of its peak value of 49.820 U.S. dollars per troy ounce by the time it ultimately bottoms within a couple of years.