A true contrarian look at investing and at life in general.
Back Issue List
Updated @ 6:05 p.m. EST, Sunday, December 19, 2010.
If you continue to invest with your eyes firmly in the rear-view mirror, eventually you're going to crash through the front windshield. --Steven Jon Kaplan
LONG-DATED U.S. TREASURIES BRIEFLY BECOME FABULOUS BARGAINS (December 19, 2010): As a rule, whenever global equities, corporate bonds, commodities, and real estate become as dangerously overvalued as they are today, U.S. Treasuries become a compelling bargain. This is exactly what occurred during the past week, as TLT, a fund of U.S. Treasuries averaging just over 28 years to maturity, slumped to its lowest point (90.47) since April 26, 2010. I recommended that subscribers begin to purchase TLT as soon as it touched 93 dollars per share, and to continue to purchase it each time it fell another 50 cents. From Thursday's intraday low to Friday's intraday high, TLT soared more than 3.6%, but additional pullbacks are certainly possible over the next several weeks. Should that occur, TLT should once again be bought into weakness. Investors throughout the world are convinced of the certainty of a continued economic recovery. However, all of the following signals are profoundly bearish for risk assets: 1) the rising U.S. dollar index since the morning of November 4, 2010; 2) the near-record level of insider selling to insider buying by top corporate executives throughout the fourth quarter of 2010, especially near all market peaks; 3) the recent intense amateur accumulation of the riskiest assets since late August 2010. Most analysts are busy debating whether stock markets will gain less than 10% or more than 10% in 2011. Since so few analysts are willing to stick their necks out and proclaim their bearishness, I'm doing precisely that. In addition to my recent purchases of TLT, I have been progressively selling short SLV, QQQQ, and EWY into strength, as all of the above assets have become substantially overvalued. Silver has been among the most overhyped commodities and rose nearly vertically in the early autumn; QQQQ consists of the most popular technology shares including AAPL which have become dangerously popular with mom-and-pop investors; emerging markets like South Korea have experienced unsustainable real-estate bubbles as housing prices there and in many other countries including China, India, Brazil, Indonesia, and Malaysia have soared to roughly three times fair value.
During every era of economic stagnation since the 1700s, U.S. largecap equities have at least briefly yielded average dividends exceeding 6%. With the dividend yield on the S&P 500 index currently standing at merely 1.89%, this will require the S&P 500 to slump to roughly 400. While this is derided as impossible by nearly all equity analysts, I think this is exactly what will occur. Because of the U.S. Presidential election two years from now, the most likely timing for such a deep equity nadir will occur during 2012. Just as had been the case exactly three years ago, since so few investors are currently prepared for a double-dip recession, we are likely to experience a severe pullback for risk assets which will be as devastating as or even worse than the 2007-2009 bear market.
http://truecontrarian.com/
