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.