SO THE LAST WILL BE FIRST, AND THE FIRST WILL BE LAST (May 27, 2013):
Because of recent all-time highs for many well-known benchmark equity
indices, most investors are unaware that there is an all-time disparity
between the winners and losers of 2013. High-dividend assets of all
kinds
have been incredibly popular with nearly all investors, and have thus
achieved all-time record overvaluations and inflows. At the same time,
the shares of commodity producers and emerging-market equities have been
trading near multi-year lows while experiencing all-time
record outflows. At the peak of its popularity in the late summer of
2011, the exchange-traded fund of gold bullion GLD boasted a greater
asset total
than SPY, the most popularly traded fund which tracks the S&P 500
Index. During the past week, the total assets in GLD have collapsed all
the way
back to where they had been in February 2009.This disparity is going to be resolved via significant losses for assets including utilities (XLU), consumer staples (XLP), health-care stocks (XLV), real estate investment trusts (IYR), and telecommunications shares (IYZ). The reason why so many people have been buying these equities, other than the fact that they have generally enjoyed the biggest consistent percentage gains in recent years, is that they are perceived to be almost as safe as time deposits such as bank accounts and money market funds. Financial advisors have been recommending these even for their most conservative clients, so that investors have convinced themselves that they can't lose more than a few percent even in a worst-case scenario. Most investors also believe that bond funds can't drop by more than a few percent, and are continuing to pour money into them at a rapid clip.
If high-yielding equities and REITs and bond funds merely return to where they had been in 2011, many investors will end up suffering huge losses. Because very few people are psychologically prepared for such a possibility, they are likely to panic and to desperately seek alternatives. Many chartists and institutional money managers also own high-dividend assets for a different reason: at least until recently, they appeared to have "unstoppable" upside momentum. Utilities recently slumped to their lowest levels since March, thereby disillusioning those who were convinced that they had made a one-way bet. Whenever too many investors are convinced that they won't lose money and then end up in the red, they behave even more emotionally than if they had expected possible losses because they can't believe what is happening.
Many funds of commodity producers and some emerging-market bourses have been trading close to four-year lows. In some especially undervalued instances such as gold mining shares, they have plummeted all the way back to where they were trading when they had registered multi-year bottoms in the autumn of 2008. Last week, GDX--a fund of large- and mid-cap gold mining shares--slumped to its lowest point since December 9, 2008. The U.S. dollar index during May 2013 climbed to its highest point since July 2010, thereby convincing many analysts that we have entered a global deflationary wave. One of the biggest surprises to the professional investment community for the remainder of 2013 will be the reemergence of inflation as a major worldwide phenomenon just when almost everyone is convinced that it will continue to decline in intensity and importance.
Investors should therefore be selling or even selling short the most popular high-dividend assets, while simultaneously accumulating the least desired equities which will benefit from rising inflation. Mining shares of all kinds are probably the best choice, followed by energy producers and the shares of emerging-market countries which are closely related to commodity production. Related industries including steel manufacturing and agriculture are also likely to outperform for the remainder of 2013 and perhaps also during the early months of 2014.
The biggest winners of recent years will suffer the greatest losses, while those assets which have lost the most in percentage terms will become the star performers. While almost everyone is concerned about the level of the Dow Jones Industrial Average, the real action will be the transition out of deflationary favorites into currently unpopular cyclical equities which will benefit from rising inflationary expectations. The U.S. dollar will experience a "surprise" retreat against virtually all global currencies as it returns to its lowest levels since the autumn of 2011.
Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they have been forming higher lows. 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. From my largest to my smallest position, I currently own GDXJ, KOL, XME, REMX, SLX, COPX, SIL, GDX, VGPMX, FCG, GLDX, ZJG (Toronto), RSX,
