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.