Sunday, November 13, 2016

“Trump is about to make inflation great again.” --Luke Kawa and Sid Verma

TRUMP WON'T TRUMP ENTRENCHED TRENDS (November 13, 2016): There has been a "yuge" amount of chatter on the internet and in the media about the alleged impact of Donald J. Trump as the next U.S. President. As with most simplistic theories, there is a kernel of truth and a pile of confusion. It is important to figure out what makes sense logically, and especially not to be overly influenced by the short-term reaction by the financial markets which will often be the opposite of what will happen over the next year or two.

The long-term trend is your friend.

In the financial markets, trends which are in place tend to remain in place for years no matter what happens with news events, because these trends are based upon economic cycles which have existed for decades or centuries and are only modestly affected by whatever happens along the way. In 2016, there are two primary trends which will continue at least for several more months and probably much longer: 1) On January 20, 2016, nearly all shares of commodity producers and emerging-market securities completed bear markets which had mostly begun in April 2011 and initiated major bull markets. Because of the extended and severe nature of their previous declines, including all-time record outflows in the months prior to their final bottoms, most investors psychologically have not yet accepted the fact that these assets are in powerful uptrends. 2) In July and early August 2016, high-dividend and low-volatility shares which had been in bull markets since October 4, 2011 and had enjoyed all-time record inflows for any sector in history transitioned to major bear markets. Because these assets had become so popular in the media, and because investors embraced these investments since it gave them 3%-4% dividends which banks and mutual funds were no longer paying on money market savings accounts, investors have been reluctant to acknowledge that these have switched to severe downtrends.

Enter Donald Trump. What has changed?

While the election of Donald J. Trump as U.S. President was a dramatic and unexpected event, even the most dramatic and unexpected events in the past have had little impact on the financial markets in the long run. On 9/11, the worst terrorist attack in U.S. history had occurred while U.S. equity indices were in the middle of bear markets since March 2000 which was 1-1/2 years earlier. Following 9/11, there was a one-week slump for U.S. stocks followed by a rebound into early January 2002. However, the bear market then resumed in full force until it bottomed on October 10, 2002. Similarly, gold had been in a bull market since April 1, 2001. The events of 9/11 caused a brief upward spike, then a retreat, then sideways movement into the middle of December 2001. Gold's bull market then continued in full force. Thus, even something like 9/11, after a brief interruption, merely delayed two major financial trends by a few months.

Thus, while Donald J. Trump is likely to lead to new policies and other changes, with some expected and some surprises, the two primary trends for inflation-loving and deflation-loving assets listed above are not going to be meaningfully altered. These trends exist due to long-term cyclical behavior in the global financial markets. The trajectory of these trends will be somewhat impacted, which I will discuss in this essay. However, do not believe analyses which tell you that everything is going to be entirely different, because patterns which have been established for centuries or longer will always repeat themselves with minor variations.

Be careful not to reach false cause-and-effect conclusions.

In the financial markets, if a particular news event occurs and there is a sharp market reaction afterward, then far too many investors will conclude that the event caused the reaction. Almost always there is a very different kind of behavior which is occurring. Consider how gold, which can be measured by the exchange-traded funds GLD and IAU, acted around the U.S. election. Gold has been in an uptrend with periodic corrections since December 14, 2015, two days before the U.S. Federal Reserve made their first rate hike. Gold is likely to remain in a bull market until almost exactly the time when the Fed decides to begin cutting rates again--which perhaps will be in early 2018, although it is too early to say with any accuracy. However, there was a lot of media hype about how Hillary Clinton was allegedly bearish for gold while Donald J. Trump was supposedly bullish. Therefore, gold had been retreating in price for a few months leading up to the U.S. election. It then rallied sharply on Tuesday night until around midnight when the initial surprise of a Trump victory became increasingly probable. After ascending rapidly to 1338.30 U.S. dollars per troy ounce, gold thereafter plummeted to 1218.70 at 1:35 p.m. on Friday, November 11, 2016. This is a drop of almost exactly 120 dollars which even for a volatile year like 2016 is a significant percentage loss.

A simplistic conclusion would be that Trump is actually "bad for gold."

Many investors therefore revised their initial opinion of Trump to conclude that since he was elected, and gold subsequently slumped, then Trump must be bearish for gold. Since he will be around for either four or eight years, this encouraged panic selling in the assumption that this three-day trend would continue indefinitely. As a result, there have been massive outflows in recent days from funds of precious metals and the shares of their producers including GDX, GDXJ, SIL, and related assets. This is a dangerous example of what is known as outcome bias. If a particular event is followed by a particular form of behavior, then we tend to believe that the event caused the outcome. However, it is far more likely that when gold moved above 1300, there were many technical buyers who jumped in just as they did after Brexit when gold made a similar upward spike. The financial markets will always defeat any large group of participants, and did so by knocking out these new buyers with a subsequent pullback below 1300 to trigger their sell stops. When other investors saw this decline, they falsely concluded that gold was in a new bear market.

The 200-day moving averages were broken to the downside for GDXJ, SIL, and similar securities.

When the 200-day moving averages were broken to the downside for many gold and silver mining shares, this encouraged additional selling by technical traders--as well as those who were disappointed that Trump's victory didn't lead to higher gold prices and sold for emotional reasons. As a result, most assets in this sector plummeted to their lowest levels since early June or late May 2016. However, the fundamental reality of being in a Fed rate hike cycle which had begun at the end of 2015 hasn't changed. All the reasons for being bullish on gold prior to Trump's election are just as true today, and more so because of the likely magnified pro-inflation slant.

Increased government spending and lower taxes are a recipe for rising inflationary expectations.

The shares of all commodity producers including gold and silver mining shares are helped whenever inflation expectations are climbing most rapidly. Similarly, high-dividend shares such as utilities (XLU, VPU, FXU), REITs (VNQ, IYR, RWR), consumer staples (XLP, VDC, FXG), and low-volatility favorites (SPHD, USMV, EFAV) are harmed proportionately by such behavior, since their yields then have to compete with higher yields on other investments including complete safe bank accounts and certificates of deposit (CDs). The downtrends for high-dividend and low-volatility assets have been accelerating in recent weeks, well before Trump's election, and have continued after the election. Clearly it doesn't make sense that rising inflation would be bearish for high-dividend shares but not bullish for commodity producers.

There are also divergences within assets which favor rising inflation.

There are also divergences within assets which love the prospect of rising inflation. The shares of copper producers and their funds including COPX, along with other base-metal producers, have been mostly accelerating their uptrends in November 2016. Financial shares including banks which had suffered huge negative effects from deflation have been rebounding sharply in the expectation of rising inflation and steepening yield curves. At the same time, as mentioned earlier, gold and silver mining shares have recently slumped. Since these assets have a strong positive correlation with rising inflationary expectations, those which are diverging will eventually have to get back in line with the others. It is like kids who are friends on a playground during recess; one or two might split off from the group to check out the sandbox or some interesting game, but eventually they will go back to their group of friends. Acting differently is anomalous and inconsistent with centuries of history. Birds of a feather flock together.

If something seems to be illogical than it usually is.

There is a famous test, repeated in various forms, in which participants are given a list of facts and asked to reach a conclusion about what will happen next. Usually they reach the correct conclusion. In a variation, some participants are given exactly the same facts, but are given one of four possible outcomes. They are told that a particular outcome actually occurred, and then asked like the first group to give a cause-and-effect explanation. When told what the correct outcome has been, the explanations are completely altered from those of the first group to reflect the known result. What the participants don't realize is that each of four test groups is told a different final outcome. Regardless of the twisted logic required to incorporate actual events with what makes sense, people will consistently alter their explanations dramatically to fit what they believe to be the actual behavior. When investors observe what has recently been happening with asset valuations, such price changes cause most people to entirely alter their previous expectations--even when their original conclusions had been valid.

The financial media are experts at repeatedly rewriting history to try to fit the latest facts. I have frequently seen news stories which tell you in the morning why a particular government news report was bullish for a certain asset which has since moved higher; if this asset slumps later the same day, they will unashamedly tell you why the same government report was allegedly bearish for that asset.

If logic enables you to reach a reasonable conclusion, do not allow yourself to be swayed by recent contradictory behavior.

As a result, if most people observe that gold has plummeted after the election of Donald J. Trump, then it doesn't matter if they had correctly reasoned that Trump's victory would mean greater spending, lower taxes, much higher deficits, rising inflation, and thus significantly higher prices for precious metals and the shares of their producers. Investors are discarding those clearly accurate conclusions and allowing the short-term price movement to override their logical thinking.

The same kind of false reasoning happens repeatedly in the financial markets.

A useful example would be when U.S. housing prices had peaked near the end of 2006 and then began to slump in 2007. Many observers in the media and on the internet correctly concluded that if housing prices were falling, especially when combined with the prevalence of subprime mortgages and other dangerous lending tactics, it would lead to a recession and much lower stock prices. However, after an initial pullback, U.S. equity indices climbed and then surged through October 2007--even as housing prices continued to retreat and mortgage defaults skyrocketed. Thus, investors concluded based upon the market behavior that there was nothing to worry about after all; the climb in the S&P 500 "proved" that the stock market wouldn't be negatively affected by the housing collapse. Afterward, of course, we experienced the most crushing bear market since the Great Depression. Investors' and analysts' original conclusions about the negative effect of the housing bubble were accurate, but the market's interim rally caused almost all of them to foolishly change their minds.

The U.S. dollar index is a useful and much-maligned barometer.

In 2015, the U.S. dollar index completed a March peak at 100.39 and a slightly higher December 2, 2015 top of 100.51 which had marked its highest point in 12-2/3 years. Throughout 2016, most people think that the U.S. dollar index has remained in an uptrend, but it may have begun an important bear market which will eventually accelerate to the downside. In typical fashion, it has been making several last-gasp efforts to move higher, with three moves during the past month above 99. Instead of climbing to 110 or 120 as most analysts are anticipating in upcoming years, it is far more likely that the U.S. dollar index will instead retreat below 90 and will eventually trade below 80 probably within 1-1/2 years. The U.S. dollar index dropped below 80 for at least part of each year from 2007 through 2014, so this would merely be a return to its normal historic behavior.

The bull markets for mining and energy shares have been in place since January 20, 2016, and will eventually accelerate.

The bear markets for high-dividend shares since July 2016 and the bull markets for commodity producers and emerging-market securities since January 20, 2016 will remain intact at least through much of 2017 and perhaps considerably longer. These trends are an inevitable result of the end of the deflationary monetary stimulus cycle and the beginning of the inflationary fiscal stimulus cycle. With the end of gridlock, higher government spending, and lower taxes, these trends won't be fundamentally changed but they will likely become more intense and could perhaps last longer than they would have with a Hillary Clinton victory. Whatever is diverging in the short run from this pattern is therefore providing a trading opportunity. Whichever deflation-anticipating assets are rallying should be sold or sold short, while whichever inflation-anticipating assets including gold and silver mining shares which have been irrationally retreating should be purchased. The only reason investors aren't doing so is because recent market behavior seems to "prove" the opposite, which will end up being a false signal just like the rally for the S&P 500 in 2007.

Mexican equities and their funds including EWW make excellent investments for classic contrarian reasons.

Think back one year ago to when the Brazilian real and the Russian ruble were collapsing. Investors concluded that their weak currencies and political uncertainty would lead to lower equity prices. However, a weak currency led to increased exports and much lower wages when measured in U.S. dollar terms, while they were selling the same goods in U.S. dollars in world markets. Thus, their profit margins soared and, after an initial slump, Brazilian and Russian stocks have been the top two emerging markets in 2016. Following Brexit, the British stock market similarly plummeted on June 27, 2016 out of fears that a lower British pound would lead to a long-term economic slowdown in that country. Instead, the cheap British pound has led to British stocks being among the top-performing global bourses since then.

While Donald J. Trump is seen as allegedly negative for Mexico, that country is likely to be among the biggest beneficiaries of increased U.S. government spending and lower taxes.

The identical pattern can be seen in the recently plunging Mexican peso and a dramatic loss for Mexican equities and their funds including EWW. Far from being negative, the undervalued Mexican peso is making wages lower in U.S. dollars while increasing the total amount of exports given currency competitiveness. This will lead to much higher profit margins and Mexican stocks being among the top-performing emerging markets during the upcoming year. It is the exact same pattern as the above examples, and as with nearly all similar circumstances going back decades or longer.

I first noticed this common pattern as a much younger investor when Pinochet gave way to a Democratic government in Chile. The two listed Chilean securities on the NYSE, a telephone company and a closed-end equity fund, both plummeted to multi-year lows on the exact date of the transition out of fear and uncertainty about the future. The Chilean stock market was thereafter among the world's biggest winners over the subsequent five- and ten-year period.

Bridge players make the best traders, because they understand the difference between method and results.

Some investment firms only hire competitive bridge players (i.e., the card game), and there is a good reason for this. I have played bridge at a high competitive level, and the top players who are far better than me consistently make decisions based upon the probability of success. Thus, while a beginning bridge player is likely to frequently take a finesse--an easily-learned play which has a 50% chance of victory--a more experienced player will use end plays, squeezes, and other complex strategies which in combination will have an 80%-90% chance of prevailing. Being a card game with some element of luck, the most experienced players can tell you a day's worth of tales about tournaments where the inferior play actually succeeded. However, expert bridge players won't alter their strategies based upon periodic unfortunate results. They know that they won't always win, but they also know that if they make consistently logical and superior decisions then they will come out far ahead in the long run. Emotional investing methods or chasing after technical trends will sometimes work, but sticking with rational conclusions regardless of what the market does in the short run is almost always a superior method which will produce far greater profits over any period of decades.

Assets in bull markets which slide below their 200-day moving averages almost always represent ideal buying opportunities.

The S&P 500 was in a bull market starting on March 6, 2009, and may still be in a bull market or may have transitioned to the early stages of a bear market. When was the best time to buy it, other than obviously at the exact bottom? It has been whenever the S&P 500 slumped below its 200-day simple moving average. In the beginning of October 2011, the S&P 500 made a brief plunge below that mark, and it was one of the most rewarding purchase points of the entire cycle. If you review the 35-year bull market for long-dated U.S. Treasuries, as measured by funds including VUSTX and TLT, these were also exceptionally good buys whenever they have dropped below their 200-day moving averages. Thus, funds like GDXJ and SIL, which even after their recent slumps remain among the top winners from their respective 52-week lows, are providing superior buying opportunities now that they have fallen below their respective 200-day moving averages. The selling by technical-minded traders and many disappointed investors when those levels were broken to the downside are providing even better discounts than would otherwise have been available.

Avoid succumbing to the outcome bias.

Do not allow yourself to be easily seduced into believing that assets which have made sharp moves following Trump's election are sending some kind of messages or indicating the "true" outcome--and especially be wary of concluding that the market behavior of the past few days will continue into the next several years. Following President Obama's initial election in November 2008, the shares of commodity producers slumped through November 20, 2008 and thereafter began powerful bull markets which persisted until April 2011. After Obama's re-election in November 2012, the S&P 500 and other U.S. equity indices slid for nearly two weeks and thereafter climbed strongly. The initial reaction can be either the "right" or the "wrong" one--or, more often, simply people chasing after what others have been doing in the frantic belief that doing something is better than doing nothing.

Trends which are intact will remain intact no matter what happens, because they are determined by events and cycles which unfold over periods of years or decades. The election of Donald J. Trump will eventually intensify and perhaps extend some of these trends, but don't expect any major changes in direction. Maintain your focus and gradually buy more of whatever has become irrationally undervalued while progressively selling whatever has become most overpriced.

Disclosure of current holdings:

Whenever they have appeared to be irrationally depressed, I have been buying the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years will transition to a completely new set of investors' darlings. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 within 1-1/2 years instead of climbing above 100 as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The election of Donald J. Trump as U.S. President means "yuge" U.S. government spending and modestly lower taxes, which is a combination for a massive increase in the deficit along with higher inflation and interest rates. The latest irrational pullback for many commodity producers has created some compelling buying opportunities, so be sure to seize them before they disappear. From my largest to my smallest position, I currently am long GDXJ (many new), SIL (some new), KOL, GDX (some new), XME, COPX, EWZ, RSX, GOEX, URA, REMX, VGPMX, HDGE, ELD, GXG (some new), IDX, NGE, BGEIX, ECH, FCG, SEA (some new), VNM (some new), NORW, DXJ, BCS, EWW (many new), PGAL, GREK, EPOL, RBS, TUR, RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG, SOIL, EPHE, and THD. I have short positions in IYR, XLU, FXG, and SPHD, in that order, largest to smallest.

I expect the S&P 500 to eventually lose two thirds of its August 23, 2016 intraday top of 2193.81, with its next bear-market bottom perhaps occurring near the end of 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then. While the media have been quick to trumpet new all-time highs for many U.S. equity indices throughout 2016, almost no one has noticed that several broad-based sectors have failed to surpass their peaks of June 2015 including IWC, a fund of 1,377 micro-cap U.S. companies (i.e., with total market capitalizations which are less than 300 million U.S. dollars). IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&P 500 by roughly 3:2 from the nadir in March 2009 through March 2014, but has since been generally underperforming and has barely surpassed its June 2015 peak. The failure of small-cap indices to outpace their large-cap counterparts as a group has frequently signaled major bear markets in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing had created valuations in July 2016 at roughly double fair value for most consumer staples, real estate investment trusts, utilities, and low-volatility shares, all of which have been underperforming most other sectors since then and will eventually lose 60% or more of their peak valuations.

Monday, November 7, 2016

“There can be few fields of human endeavor in which history counts for so little as in the world of finance.” --John Kenneth Galbraith

COMMODITY-PRODUCERS' RALLIES DON'T GET NO RESPECT (November 7, 2016): If you sort all unleveraged exchange-traded funds based upon their percentage increases from their respective 52-week lows, then you will discover that the top 50 are all involved with commodity production or emerging markets. The top three funds consist of silver mining companies (SILJ, SLVP, SIL), followed by coal mining (KOL), then junior gold mining (GDXJ, GOEX, SGDJ), then general metals mining (XME), steel (SLX), gold mining (RING), Brazil and Russia (EWZS, EWZ, RSXJ, BRF), large-cap gold mining (GDX, SGDM), copper mining (COPX), Brazil again (BRAQ), gold mining again (PSAU), more Brazil (FBZ, BRAZ), Peru (EPU), base metals mining (PICK), Canadian commodity production (CNDA), and then a mix of commodity producers, master limited partnerships, and emerging-market equities including ILF, FCG, GML, PSCE, XOP, and ENY. However, most of these funds have continued to experience outflows whenever they are experiencing short-term corrections. Partly this is because they had been in bear markets from April 2011 through January 20, 2016, so most investors don't trust their 2016 rebounds. Partly it is because they remain highly volatile, so that after they surge for some period of time they will slump by 20% or 30% and discourage participants into believing that they are incapable of sustaining bull markets. Even those funds which have more than doubled from their January 20 nadirs have mostly suffered from periodic outflows and are almost never recommended in the mainstream financial media.

The longer that investors ignore the best-performing funds of 2016, the more extended their uptrends will become.

From September 2008 through December 2012, nearly all U.S. equity index funds based upon the S&P 500 or some other benchmark equity index continued to suffer more outflows than inflows. This was partly because many investors had lost more than half their money in these funds during the crushing 2007-2009 bear market, and partly because these securities remained highly volatile even after they had begun bull markets in early March 2009. The strongest percentage increases usually occur when investors don't trust recent gains and are unwilling to participate. So far, there are no clever acronyms for commodity producers, and the only well-known acronym for emerging markets is BRICs which have been out of favor for 5-1/2 years.

High-dividend shares have been in bear markets since July 2016.

In sharp contrast to the choppy fund flows for commodity producers and emerging-market securities, high-dividend and low-volatility funds had enjoyed all-time record inflows in recent years. These including IYR, XLU, FXG, and SPHD had become so popular that their total inflows in many cases had sent new all-time records for all sectors, even surpassing the huge inflows into technology shares in 1999-2000. Partly this is because normally conservative investors who for decades would put their money into bank accounts to get 3% or 4% couldn't accept getting only 1% or less from such time deposits, and decided to do the same as everyone else and pile into funds paying similar yields as dividends. These incredibly trendy funds have been underperforming since July 2016, experiencing mostly double-digit percentage declines. However, investors haven't yet figure out what to do with their money; they haven't made notable inflows into any major asset class during the second half of 2016. Selling has begat selling; even ordinary U.S. equity index funds have mostly experienced outflows in recent months. Investors are taking their money out of most stocks and bonds, but so far they haven't decided what to do with it. The money is mostly sitting in cash, waiting for a particular concept to become popular.

We have the ingredients for a perfect storm: plenty of buying power among investors, no conviction about what to do with it, and a compelling list of 2016 winners.

One characteristic of any transition from a U.S. equity bull market to a bear market is that, as the months pass, fewer and fewer securities are setting new all-time or 52-week highs. This process of the narrowing of the equity base has been underway for almost 1-1/2 years. The Russell 2000, which can be measured by IWM, has never surpassed its June 2015 top even as the S&P 500 and most other well-known U.S. benchmark indices did so repeatedly during the first several months of 2016. This is how bear markets classically have always begun. Investors will ultimately gravitate toward the biggest winners, which in this case are nearly all commodity producers and emerging markets. With so much money sitting around looking for a home, sooner or later those investors who tend to act first will notice what is going on and act accordingly, with everyone else eventually climbing aboard the bandwagon. Many investors won't realize which funds are 2016's top performers until they see the lists of such funds when they become widely publicized around the beginning of 2017.

Both mining and energy producers have experienced multi-month corrections and are likely resuming their powerful uptrends.

Most shares of gold and silver mining companies had peaked on August 11 or 12, 2016 and slumped for several weeks, bottoming on or around October 6, 2016. GDXJ slid from 52.50 to 36.96 over this time period, which is a total loss of 29.6%. Such a steep pullback discouraged many recent buyers from remaining committed to these and related assets. Energy shares including URA, FCG, KOL, OIH, and TAN also suffered corrections, with the price of the December 2016 crude oil futures contract falling to 43.57 U.S. dollars per troy ounce on Friday, November 4, 2016 which was its lowest point since June 11, 2016. Between now and the end of 2016, the shares of commodity producers will likely improve both their relative and absolute positioning even further, so they end up as almost exclusively the biggest winners of the year when people are deciding how to make allocations for 2017. Emotionally, many people like to use the new calendar year as an impetus to changing their asset allocation and revamping their portfolios. This will probably result in even more money being withdrawn from retreating high-dividend and low-volatility shares, with some of it going into commodity producers and emerging-market stocks and bonds.

The greenback seems to have completed additional lower highs as it has been doing for nearly one year.

If you mention the U.S. dollar to most people, they will tell you that it is in an uptrend. As measured by the U.S. dollar index, a 12-2/3-year top of 100.51 was reached on December 2, 2015 and has been followed by a pattern of several lower highs. Two additional lower highs were just completed, with the U.S. dollar index touching 99.119 at 10:15 a.m. on October 25, 2016 and then another lower high of 99.026 at 12:40 p.m. on October 27, 2016. Since then, the greenback has continued its choppy descent, which will lead to additional lower highs and eventually a downside acceleration. Instead of climbing above 100 as most are anticipating, is much more likely that the U.S. dollar index will plummet below 80 within 1-1/2 years or less. While this probably sounds like an irrationally aggressive projection, the U.S. dollar index was below 80 at least part of each year from 2007 through 2014. As emerging markets went out of favor worldwide during 2011-2015, many currency traders crowded irrationally into the U.S. dollar, but that is unsustainable as emerging markets have been experiencing higher GDP growth rates along with stronger stock and bond gains than their U.S. counterparts for most of 2016. This pattern is likely to continue into 2017 and perhaps into early 2018, thereby encouraging investors to move progressively away from the safe haven of the greenback.

This will serve as a supportive factor for assets which correlate inversely with the U.S. dollar, including most shares of commodity producers and emerging-market securities.

There has been far too much media hype about how assets will allegedly "respond to" the U.S. Presidential election.

There is usually a brief, intense emotional reaction to any widely-broadcast news, and that will likely also be the case with Tuesday's November 8, 2016 U.S. elections for President, the Senate, and the House of Representatives. However, even the extreme post-Brexit excesses were mostly resolved relatively quickly, while any alleged post-election response has already been mostly factored into current asset valuations. If there is any activity which goes in the opposite direction of their established trends, such as unusual lows for commodity producers or strong rebounds for high-dividend shares, then these should be used as opportunities to buy whichever commodity producers become most oversold and to sell short whichever high-dividend assets bounce the most euphorically. In general, the more that any news event is believed to exert a "permanent" influence on asset valuations, the more likely that trends which were in place prior to these events will resume shortly thereafter. The strong bull markets for commodity producers and emerging markets which began on January 20, 2016 will probably continue for another year or more in spite of periodic sharp corrections, while the bear markets for high-dividend and low-volatility shares which mostly began in July 2016 will continue perhaps into 2019 with occasional upward bounces.

There was a fascinating academic study published recently about why most people make inferior investing decisions:

  • Irrational Tossers


  • Disclosure of current holdings:

    Whenever they have appeared to be irrationally depressed, I have been buying the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities are wildly overvalued, these irrational favorites will accelerate their bear markets which aren't even recognized by most investors. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 instead of climbing above 100 as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The latest multi-month pullback for many commodity producers has created some compelling buying opportunities, so be sure to seize them before they disappear. I was a very heavy buyer on June 27, 2016 when I made my largest total purchases since October 4, 2011 to capitalize upon the ridiculous post-Brexit panic. From my largest to my smallest position, I currently am long GDXJ (some new including today at 39.99), SIL (some new), KOL, GDX (some new), XME (some new), COPX (some new), EWZ, RSX, GOEX, URA (many new), REMX, VGPMX, HDGE, ELD, GXG (some new), IDX, NGE, BGEIX, ECH, FCG (some new), SEA (some new), VNM (some new), NORW, DXJ, BCS, PGAL, GREK, EPOL, EWW, RBS, TUR, RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG, SOIL, EPHE, and THD. I have short positions in IYR, XLU, FXG, and SPHD, in that order, largest to smallest.

    I expect the S&P 500 to eventually lose two thirds of its August 23, 2016 intraday top of 2193.81, with its next bear-market bottom perhaps occurring near the end of 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then. While the media have been quick to trumpet new all-time highs for the Dow Jones Industrial Average, the Nasdaq, and the S&P 500 Index, hardly anyone has pointed out that the Russell 2000 Index and its funds including IWM had handily outperformed the S&P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. The top for the Russell 2000 had occurred in June 2015 and so far has not been surpassed in this cycle. The failure of small-cap indices to reach new all-time highs as a group has frequently signaled major bear markets in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing had created valuations in July 2016 at roughly double fair value for most consumer staples, real estate investment trusts, utilities, and low-volatility shares, all of which have been underperforming most other sectors since then and will eventually lose 60% or more of their peak valuations.

    Thoughts or concerns about your investments in the light of the election? Feel free to email sjkaplan@truecontrarian.com 

    Sunday, September 11, 2016

    “If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.” --Benjamin Graham

    STEP RIGHT UP TO THE THREE-RING CIRCUS (September 11, 2016): The global financial markets in 2016 have become a three-ring circus. The most popular sideshow by far has been high-dividend and low-volatility shares which had enjoyed all-time record inflows and overvaluations earlier this summer, and have since become the worst-performing sectors of the past several weeks. On the opposite side of the ring are commodity producers and emerging markets, which everyone hated at the start of the year and have been by far the biggest winners in powerful bull markets. Finally, ladies and gentlemen, in the center ring we have the U.S. dollar itself, beloved by everyone and believed to be rising, but which has actually been in an important bear market since December 2, 2015.

    As is true for every bubble throughout history, high-dividend and low-volatility sectors have begun what will become crushing bear markets.

    Whenever I argued in late 1999 and early 2000 that internet shares would become huge losers, as I often did, people were convinced that I had some serious mental instabilities. Today, if you tell someone that they are taking dangerous risks by purchasing high-dividend or low-volatility shares, most will insist that these shares have consistently behaved more steadily than the broader equity market for decades, and they have no choice anyway because they need income to pay their expenses. The inflows into these sectors during the past year are astonishing, far outpacing nearly all other all-time record one-year inflows for any asset at any time in history. Since banks were no longer paying anything close to the 3% or 3.5% yields that investors "needed" on their money, with other safe choices including U.S. Treasuries not providing sufficiently high returns, investors have wildly crowded into utility shares (XLU, FXU); real estate investment trusts (IYR, VNQ, REM, RWX); telecommunications companies (IYZ); tobacco producers; consumer staples (XLP, FXG, VDC); and similar sectors. As a result, many of these shares reached all-time record overvaluations and their lowest overall yields in history.

    What is the difference between participating in the internet bubble of 2000 and the high-dividend, low-volatility bubble of 2016? Other than the passage of sixteen years and somewhat smarter smartphones, not much has changed. In both cases, investors perceive that there is little risk in doing whatever everyone else is doing, as long as they have some rationalization for their actions. However, the financial markets have always punished those who invested the same way as most other investors, particularly when valuations reached all-time record overpricings. Not surprisingly, since they had completed all-time tops in July or early August, high-dividend and low-volatility securities have been among the biggest losers in percentage terms. While everyone seems to love owning these, whether for their yields or for any other reason, they can be comfortably sold short perhaps for as long as three years while providing annualized double-digit gains even after paying the dividends.

    Just because something is perceived to be safe doesn't make it so. If anything is trading near twice fair value, it runs a risk of dropping by more than half.

    Nearly everyone is underestimating the potential downside risk for high-dividend and low-volatility assets. Many of the above funds had gained 300% or 400% from their previous recession bottoms. They aren't likely to surrender all of their gains, but they could easily fall by more than half and still remain far above their previous bear-market nadirs. Usually, the most popular sectors become the most detested, which had happened with internet shares when they plummeted nearly 90% overall from March 2000 through October 2002, and with the overloved Nifty Fifty from January 1973 through December 1974 when they slid by roughly 75%. Just because investors perceive stocks with higher dividends and lower long-term volatilities to be "safe" doesn't mean that they are.

    Real estate is really another high-dividend, low-volatility asset which has begun a major bear market in most global cities.

    Real estate near all bubble peaks has been popularly perceived to be solid, but anything which reaches roughly double or especially triple fair value is always at risk of a dramatic subsequent decline. Many people have become aware of incredible, unsustainable gains for housing prices in cities including San Francisco, London, Tel Aviv, Vancouver, and New York, but very few people are aware that the total number of apartments available for rent has reached multi-decade or all-time highs in many of the above and similar well-known cities. Whenever prices are at double or triple fair value, regardless of the reasons (think of all the phony talk about "Chinese buying" and "unique local circumstances"), prices will inevitably regress toward the mean and beyond sooner or later.

    Previous bear markets are still perceived to be intact, even though commodity producers and emerging markets are by far the biggest winners of 2016.

    If you were to look at a list of the top-performing exchange-traded, open-end, and closed-end funds of 2016, very few investors would correctly guess which securities are to be found there. The strongest-performing sector of 2016 by far has been silver mining shares, followed closely by gold mining shares. In spite of their powerful bull markets, whenever these experience sharp corrections as both have done during the past several weeks, they mostly experience net outflows and gloomy media commentary along with negative sentiment. According to Daily Sentiment Index, only 23% of traders are currently bullish toward gold and only 22% are bullish on copper. The two previous best buying opportunities during the past several months had occurred on the mornings after the bullish sentiment for gold had slumped to 15% on May 30 and 18% on August 31. The best time to buy any asset is when it is in a powerful uptrend but most traders are staunchly bearish.

    A drop exceeding 20% is not necessarily a bear market. A bear market can exist with a decline of much less than 20%.

    Since many funds of gold mining shares had recently retreated more than 20% from their three-year highs, some commentators and technical analysts concluded that they were in bear markets. A bear market has nothing to do with the percentage drop from the previous high; it is defined by a sequence of lower highs from a multi-year top. Instead, most gold and silver mining shares had plunged to multi-decade bottoms on January 20, 2016, and have since formed several or more higher lows. Thus, they are in energetic bull markets when many think they are in bear markets. In addition, the previous bear markets for most commodity producers and emerging markets had become both severe and extended from April 2011 through January 20, 2016. Following such a sustained downtrend, it is emotionally difficult for most investors to accept that there has been a reversal. The longer that investors remain skeptical toward any new trend, the longer it will persist and intensify.

    Following silver and gold mining shares, the biggest winners of 2016 have been a variety of other commodity-related and emerging-market selections: base metal mining companies; Brazilian equities; coal mining shares; master limited energy partnerships; and other South American and Russian equity funds. If you had polled ten thousand traders at the beginning of the year, how many would have forecast that mining, energy, and South American/Russian stocks would be by far the biggest winners of the year? Especially now that previously outperforming high-dividend and low-volatility sectors have been among the biggest losers and have probably begun three-year bear markets, investors will progressively switch some of those trillions of dollars into other kinds of assets including commodity-related securities.

    Is the price of gasoline in a bear market? It had been in a multi-year downtrend since 2011, but it has increased substantially from its February 11, 2016 lows while notably retreating from highs set earlier in the year. Gasoline is still cheap, as the following photograph indicates, but it has been making several higher lows as is characteristic of a true bull market:

  • Cheap Sunset on September 11, 2016


  • Most people believe the greenback is still in a bull market, but after it achieved a 12-2/3-year top on December 2, 2015, the U.S. dollar index has made over a dozen lower highs.

    Unlike some of the mainstream financial media who foolishly believe that a 20% decline for an asset causes it to be in a bear market, very few investors realize that a sequence of a dozen or more lower highs following a multi-decade zenith means that an asset is suffering a true bear market. The U.S. dollar index has been doing exactly this for more than nine months, with very little media attention. The U.S. dollar is critical for all global investors, since it serves as the world's reserve currency and as the safe-haven asset of last resort. If people are piling into U.S. dollars, as they classically do during recessions or deflationary episodes, then it will discourage investing in most other currencies, in emerging markets, in commodity producers, and in assets including TIPs, I-Bonds, and other inflationary hedges.

    Be the first on your block to recognize that the greenback is in a bear market. Once you realize this, everything else fits into place. Other investors will eventually be forced to acknowledge this situation, but not until it is far too late to benefit from it. Before everyone else piles into assets which benefit from a slumping greenback, you can take advantage of prices which aren't as compelling as their multi-decade lows of January 20, 2016 but remain far below their historic averages and have mostly retreated moderately in recent weeks. Among the best choices are silver mining shares (SIL, SILJ, SLVP); gold mining shares (GDXJ, GLDX, RING); non-crude energy shares (URA, KOL, FCG, TAN); copper mining and other base metals shares (COPX, XME); and emerging-market equities (EWZ, RSX, GXG, NGE). It is no surprise that 1) all of the above are among the top-performing sectors of 2016; and 2) almost no one knows it.

    Here is a brilliant model of a three-ring circus on display at the Shelburne Museum in Vermont:

  • Three-Ring Circus Model, Shelburne Museum, Vermont


  • Disclosure of current holdings:

    Whenever they have appeared to be irrationally depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain wildly overvalued. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 instead of climbing back above 100 as almost everyone is still expecting, this will lead to a major upward revision in global inflationary expectations. The latest pullback for many commodity producers has created some compelling buying opportunities, so be sure to seize them before they disappear. I was a very heavy buyer on June 27, 2016 when I made my largest total purchases since October 4, 2011 to capitalize upon the ridiculous post-Brexit panic. From my largest to my smallest position, I currently own GDXJ (some new), SIL (some new), KOL, GDX, XME, COPX, EWZ, RSX, GLDX, REMX, URA (some new), VGPMX, HDGE (some new), ELD, GXG, IDX, NGE, BGEIX, ECH, FCG, SEA, VNM, NORW, DXJ, BCS, PGAL, GREK, EPOL, EWW, RBS, TUR, RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG, SOIL, EPHE, and THD. I have recently increased my short positions in IYR, XLU, and FXG, in that order, largest to smallest.

    I expect the S&P 500 to eventually lose two thirds of its August 23, 2016 peak valuation of 2193.81, with its next bear-market bottom perhaps occurring near the end of 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then. While the media have been quick to trumpet new all-time highs for the Dow Jones Industrial Average, the Nasdaq, and the S&P 500 Index, hardly anyone has pointed out that the Russell 2000 Index and its funds including IWM had handily outperformed the S&P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. The top for the Russell 2000 had occurred in June 2015 and so far has not been surpassed in this cycle. The failure of small-cap indices to reach new all-time highs as a group has frequently signaled major bear markets in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing had created valuations in July 2016 at roughly double fair value for most consumer staples, real estate investment trusts, and utilities, all of which have already begun to slump by half or more within three years or less.

    Tuesday, August 2, 2016


    THE FIRST AND THIRD SHALL BE FIRST, WHILE THE SECOND SHALL BE LAST (August 1, 2016): There is a fascinating pattern to the trading during the first seven months of 2016. The strongest sectors by far have exclusively been silver and gold mining shares, in that order, followed primarily by other commodity producers and mining-related emerging-market equities. The second-biggest percentage winners have mostly been high-dividend, low-volatility assets including consumer staples, utilities, REITs, tobacco shares, telecommunications companies, and long-dated U.S. Treasuries. The third-best performers of 2016 have been mostly energy companies and a variety of emerging-market stocks and bonds.

    This is puzzling is because the first and third groups are inflation-loving assets, whereas the second group performs well when deflation reigns. How can the financial markets be both inflationary and deflationary?

    The deflation trade is nearly over, but it has remained in a bull market due to huge inflows from investors desperate for yield.

    High-dividend and low-volatility assets including FXG and XLP (consumer staples), IYR and RWR (REITs), XLU, IDU, FXU, and VPU (utilities), along with TLT and ZROZ (long-dated U.S. Treasuries) have been among the second-best performers of 2016. They have also been among the top winners of the past five years. Many of those who have retired or who need to pay their monthly expenses have become overly dependent upon income-producing investments to generate yield. That's fine as long as high-dividend assets are either bargains or reasonably priced, but it creates a dangerous situation when they are trading at all-time highs even compared with previous historic peaks. There have been all-time record inflows into high-dividend and low-volatility funds which have far outpaced their previous records. A person who has retired with a half million or a million dollars might perceive that he or she "needs income" in order to maintain a basic lifestyle, and most of these investors don't realize that if everyone goes to their financial advisors and wants the same level of "safe" income then they are all going to end up owning the exact same assets. What would be reasonable for a tiny minority of investors has become an inevitable catastrophe since millions of others are acting similarly without realizing the consequences of collectively being in such an overcrowded trade.

    The inflation trade has only been in a bull market since January 20, 2016, and has a long way to go to recover its losses since April 2011.

    Unlike most high-dividend assets which had bottomed in the first quarter of 2009, most commodity producers and emerging markets had been in severe downtrends from April 2011 through January 20, 2016, and even after their subsequent strong rebounds remain far below their previous peaks. Earlier this year, many of these assets completed multi-decade nadirs, with some of them touching levels not seen since the 1970s. Therefore, they remain substantially below fair value. Silver and gold mining shares including GDXJ, SIL, GLDX, SILJ, and GDX have tripled on average in just over a half year, and have thereby outpaced nearly all energy producers which had initially rallied but have gone out of favor along with most emerging-market equities during the past several weeks. This has created the best bargains for those assets which are in the process of completing important higher lows including URA (uranium), GXG (Colombia), FCG (natural gas), and FENY, a more diversified and less volatile fund of energy producers.

    The Daily Sentiment Index for crude oil, indicating the percentage of traders who are bullish toward any asset, plummeted to 10% at the close on Monday, August 1, 2016. This is an incredibly low level for anything which is in a primary bull market, as energy commodities have been since February 11, 2016. The shares of energy producers mostly approached or reached multi-decade bottoms on January 20, 2016. Whenever it is possible to buy at higher lows during a major uptrend, this is ideal because a sequence of several higher lows is often followed by an accelerated rally.

    The high-dividend and low-volatility bull markets are very stale and incredibly popular, while few know about the uptrends for commodity producers or emerging markets.

    Almost everyone knows that high-dividend shares have been the biggest winners of the past several years and are still eager to jump aboard the bandwagon, while few realize how overcrowded this bandwagon has become. Historically, the most wildly trendy and popular trades have always proven to be disappointing. Although it is rarely compared with the internet bubble of 1999-2000, the Nifty Fifty overvaluation of 1972-1973, or the blue-chip top of 1929, high-dividend and low-volatility names have become the bubble of the decade. The total assets in USMV, a frequently-touted low-volatility fund, have tripled in one year. Just as in 2000, almost no one who has invested in these securities realizes that they can lose half or more of their money. Almost no analysts, even those who know how overvalued these popular securities have become, can emotionally imagine them plummeting. They might know intellectually that it is possible, but they can't really imagine it happening any more than anyone at the beginning of the century could envision the Nasdaq plunging by more than 75% within three years. Alas, a similar fate awaits those who are participating in high-dividend and low-volatility shares and funds.

    Just because you're in the water to get exercise doesn't mean you can ignore the great white sharks.

    When I point out the dangerous of owning high-dividend and low-volatility shares, I often hear the refrain that "I'm not in these due to their extreme popularity" or "I only own these to generate the income I need to pay my expenses." The market won't treat you differently just because your motivations are allegedly pure. You might be the nicest person on your block, you might generously donate to charities, and you might frequently help old ladies to cross busy streets. Even if you're swimming in the water just to get your daily exercise, you're not magically exempt from being eaten by hungry great white sharks that are lurking nearby. If any given trade has become desperately overcrowded, then no matter why you're involved in it, you're going to be as badly hurt as the ignorant buyer who is doing it to keep up with his poorly-informed friends. As Warren Buffett has stated, when we strip off the clothing and pretense, we're all fully exposed underneath. When the U.S. housing bubble collapsed in 2006-2011, as it about to do again in 2016-2021, it won't spare those who are nice to animals or who do good deeds. I will discuss real estate in more detail in the near future.

    Disclosure of current holdings:

    Whenever they have appeared to be irrationally depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain wildly overvalued. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 instead of climbing back above 100 as almost everyone is still expecting, this will lead to a major upward revision in global inflationary expectations. The latest pullback for energy-related assets has created some compelling buying opportunities, so be sure to seize them before they disappear. I was a very heavy buyer on June 27, 2016 when I made my largest total purchases since October 4, 2011 to capitalize upon the ridiculous post-Brexit panic. From my largest to my smallest position, I currently own GDXJ, SIL, KOL, GDX, XME, COPX (some new post-Brexit), EWZ, RSX (some new post-Brexit), GLDX, REMX, URA (many new), VGPMX, HDGE (very new), ELD, GXG (many new), IDX, NGE (many new), BGEIX, ECH, FCG, SEA (some new post-Brexit), VNM, NORW (many new), DXJ (all new post-Brexit), BCS (all new post-Brexit), PGAL (mostly new post-Brexit), GREK (mostly new post-Brexit), EPOL (all new post-Brexit), EWW (all new post-Brexit), RBS (all new post-Brexit), TUR (mostly new post-coup), RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG (previously PLTM), SOIL, EPHE, and THD. I have very recently increased my moderate short positions in FXG, IYR, and XLU, in that order, largest to smallest.

    I expect the S&P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring near the end of 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then. While the media have been quick to trumpet new all-time highs for the Dow Jones Industrial Average and the S&P 500 Index, hardly anyone has pointed out that the Russell 2000 Index and its funds including IWM had handily outperformed the S&P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. The top for the Russell 2000 had occurred in June 2015 and is not likely to be surpassed in this cycle. Small-cap U.S. equities typically lead the entire U.S. equity market lower whenever we are transitioning from a major bull market to a severe bear market. This has happened in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing has created valuations at roughly double fair value for most consumer staples (FXG, XLP), real estate investment trusts (IYR, RWR), and utilities (XLU), all of which will likely slump by half or more within three years or less.

    Tuesday, June 28, 2016

    “Generally, the greater the stigma or revulsion, the better the bargain.” --Seth Klarman

    WHO'S AFRAID OF A BIG BAD BREXIT? (June 28, 2016): It is amazing that after centuries of history which investors can peruse at their leisure to see how the global financial markets have behaved in past decades and centuries, people keep repeating the same mistakes and experiencing identical emotional reactions. In the U.K., the day after the Brexit vote, the most commonly googled question was "What is the EU?" The overall impact will be zero, as these kinds of news headlines usually are; the only difference is the degree to which it has been broadcast around the world and how many people are convinced that something has actually changed. If you believe that a vote by confused citizens in the U.K. will impact corporate profits in Mexico or Poland, to cite two countries whose equity markets have been most negatively affected by the panic in recent days, then you can ignore the rest of this essay. Otherwise, you can take advantage of some amazing bargains in assets which had already been in bull markets since January 20, 2016, and which are likely to soon experience accelerations in their uptrends due to the reality--rather than the fantasy--of a falling U.S. dollar and a significant asset reallocation into emerging markets and commodity producers which in hindsight will have been one of the key themes of 2016-2017.

    Brexit is one of a series of periodic panics which have no long-term impact and are totally forgotten afterward.

    It is interesting that Brexit was reported early on Friday, since that is the time of the week when news events tend to exert their greatest psychological impact on the markets. People begin to panic immediately, and then after a sharp drop on Friday they have the whole weekend to fret about how much worse things are going to be. This will consistently lead to a follow-through plunge on Monday, sometimes just during the first hour of trading, and on other occasions persisting throughout the trading day. Sometimes this will carry through further into Tuesday, as it had done during the October 1987 stock-market collapse and again at the beginning of October 2011, each of which were preceded by substantial gains. On other occasions, the panic ends at some point on Monday and is soon followed by an energetic recovery.

    The most compelling choices for purchase had been in bear markets since April 2011, are historically undervalued, and have been in bull markets since January 20, 2016.

    I have recently been buying mostly funds of emerging markets and commodity producers which had been in severe extended bear markets since April 2011 which finally ended on or around January 20, 2016, and which had caused these securities to become dramatically undervalued and out of favor. Since then, many of them have made several or more higher lows which is characteristic of the early months of a bull market, while sentiment remains generally gloomy and had worsened considerably after Brexit. These include URA, a fund of uranium producers; COPX, a fund of copper mining companies; and the emerging-market funds GREK (Greece), EPOL (Poland), NORW (Norway), PGAL (Portugal), GXG (Colombia), and RSX (Russia). Most of the above, except perhaps for RSX, aren't even familiar to most investors and wouldn't be considered under most circumstances. Another fund which is rarely followed is SEA, a fund of sea shipping companies which has been almost entirely forgotten and is dramatically oversold. I purchased all of these on Monday (June 27, 2016) due to the likelihood that they are completing important higher lows in their bullish patterns of higher lows which had begun on January 20.

    Many British financial institutions have been incredibly punished merely for being headquartered in the U.K.

    As proof of the highly emotional nature of investors' response to Brexit, the companies which are best known and which are most closely associated with Great Britain have experienced the biggest losses. Everyone has heard of BCS (Barclays), Royal Bank of Scotland (RBS), and Lloyd's of London (LYG), so these have been unusually hard hit since the Brexit vote. There have been an astonishing number of brokerage, analyst, and advisor downgrades of these and similar companies, even though their corporate profits will likely be almost completely unaffected by the news. As usual, if the actual impact is one or two tenths of a percent, the market reaction is twenty or thirty percent (or more, in some cases), thereby providing an ideal buying opportunity in all of the above and in similar companies.

    The Brexit overreaction has been even greater than for events which actually impact corporate profits.

    Sometimes there is an event which will negatively impact a company's stock price and receives worldwide media coverage, such as the Exxon Valdez disaster or the British Petroleum catastrophe in the Gulf of Mexico. Other examples would include drug companies which don't receive approval for a particular drug, or which will have to pay money for widespread side effects. Even though Brexit is meaningless, it had roughly the same percentage effect on many companies as the above events which actually did affect corporate profits--although even in those cases the overreaction by investors was so severe that they presented worthwhile buying opportunities. A meaningless panic which is widely believed to be important is an even better buying opportunity than when there is something which will affect corporate profitability. In general, political events are treated with a much stronger emotional response than economic ones, and almost always have essentially zero impact on earnings growth. High-profile resignations, impeachments, elections, accusations of corruption, and similar news reports, especially when they are widely broadcast to the public, often provide the best opportunities to make money. In India, there was persistently negative political news in the summer of 2013 which created historic bargains, and then incredibly positive coverage of Modi's election in the spring of 2014 which caused most small-cap stocks in India to more than double in price within a year without anything actually changing for India's corporate profits.

    Ignore the hype and accumulate the most oversold securities.

    Most funds of emerging markets and commodity producers had been at or near multi-decade bottoms on January 20, 2016, and have since begun what will likely become major bull markets. It had appeared that the best buying opportunities had already passed and would not likely be seen again, but Brexit has provided an opportunity to purchase many of these at true bargain levels. There are exceptions such as gold and silver mining shares, which is only because some media types recommended buying gold bullion after having disparaged this idea for many months. GDXJ is a fund of junior gold and silver producers. From their respective intraday lows (1067 for gold bullion, 16.87 for GDXJ) on January 20, 2016 through the close on Thursday, June 23, 2016, GDXJ had gained over 7.5% for each 1.0% rise for gold bullion which can be measured by GLD or IAU. Since then, however, the post-Brexit behavior has shown roughly a 1:1 ratio, indicating that gold will soon slump below 1300 U.S. dollars per troy ounce and could retreat further in order to shake out recent buyers who acted totally out of emotion and have no commitment to this sector; they will be out of the market as soon as their sell stops are triggered near 1300 and perhaps in smaller numbers near 1275 or thereabouts. In general, whenever gold and silver mining shares far outperform gold bullion, a major uptrend is underway; the recent underperformance by the shares of the producers is thus a warning not to chase after this sector until the shares once again outperform bullion. This will likely happen as funds like GDXJ, SIL, GDX, GLDX, and SILJ repeatedly recover from early intraday selloffs during the next several trading days even as gold bullion continues to generally slump lower. Once the ratios of June 23 are restored, this sector will be ready to enjoy the next phase of its powerful uptrend.

    I closed out my position in HDGE, but retained and added to my short positions in high-dividend shares.

    I sold all my HDGE between 11.20 and 11.29 on Monday which I had purchased earlier in the month between 10.06 and 10.29. The intensity of the fear in the global financial markets made this action necessary, as I had similarly done when I sold all of my HDGE in early February 2016. There will be a better opportunity to repurchase HDGE at some point during the next several weeks or whenever VIX is near 13 again. I have continued to hold and to periodically add to my short positions in XLU (utilities), IYR (real estate investment trusts or REITs), and FXG (consumer staples), because these continue to be irrationally owned by millions who are desperate to achieve the 3%-4% yields they used to get from safe bank accounts and don't appreciate the extreme danger of participating in one of the world's most incredibly popular and therefore soon to be devastatingly money-losing trades. I am short FXG instead of XLP, a similar fund of consumer staples, because FXG has a much higher expense ratio.

    When in doubt, do the opposite of whatever you hear most frequently.

    In the early months of 2009, this was the most common refrain: "I sold all my stocks and I'm cutting back as much as I can with my spending, and I can't understand why the economy has become so bad." If you hear every day, several times a day, why the global economy won't recover for many years, you will do exactly the opposite of what you should be doing. If all you read about is how Brexit means that the sky is falling and the end of the world will soon arrive, then you're likely to sell in a panic rather than buying aggressively. Those who voted for Brexit mostly had no idea what they did, and if they had to vote again many of them would choose not to leave. Even if Britain does leave the EU, the only impact will be a complex series of negotiations which will last for years or decades and will have close to zero impact on corporate profits or the interrelationships between assets. It is puzzling why so few people are able to realize the obvious, but that just makes it better for those who understand reality because it has created compelling buying opportunities for many emerging-market securities, the shares of commodity producers, and numerous British-related securities--as well as anything else which has suddenly plummeted in price since Friday morning. June 27, 2016 was my single heaviest day of buying since October 4, 2011. Be sure to gradually accumulate the most worthwhile assets before everyone else gradually realizes that the world will continue and the sun will keep rising in the east even over the U.K.

    Since the reaction by many assets is even greater than it had been during World War II, 9/11, and some "real" news instead of this meaningless vote, the following song by Dame Vera Lynn should inspire you to do some buying:


  • Dame Vera Lynn: White Cliffs of Dover


  • Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain wildly overvalued. As the greenback surprises most investors by suffering a bear market, with the U.S. dollar index moving below 80 instead of climbing back above 100 as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The latest Brexit panic has created a new set of compelling buying opportunities, so be sure to seize them before they disappear. From my largest to my smallest position, I currently own GDXJ, SIL, KOL, GDX, XME, COPX (some new), EWZ, RSX (some new), GLDX, REMX, VGPMX, URA (some new), ELD, GXG (some new), IDX, ECH, BGEIX, FCG, NGE (some new), SEA (some new), VNM, RSXJ, EPU, RGLD, SLW, SAND, GREK (some new), NORW (some new), PGAL (some new), EPOL (all new), TUR, SILJ, SOIL (some new), BCS (all new), EPHE, and THD. I have continued to increase my modest short positions in FXG, IYR, and XLU. I expect the S&P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then--as is evidenced by the media falsely proclaiming in March 2016 that the bull market had celebrated its seventh birthday. The Russell 2000 Index and its funds including IWM had handily outperformed the S&P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. Small-cap U.S. equities typically lead the entire U.S. equity market lower whenever we are transitioning from a major bull market to a severe bear market. This has happened in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing has created valuations at roughly double fair value for most consumer staples (FXG, XLP), real estate investment trusts (IYR), and utilities (XLU), all of which will likely slump by about half within three years or less.

    Question: What are the main implications you see Brexit having on the U.S. Economy? 

    Friday, June 17, 2016

    “The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” --Seth Klarman

    NEARLY ALL ASSETS ARE EITHER ABSURDLY OVERVALUED OR WORTHWHILE BARGAINS (June 17, 2016): It has been considerably less trendy to discuss the concept of fair value in recent years. Investors have been obsessed about the political situation and how that will impact the financial markets, or what is the latest trendy sector, or what will happen with Brexit, and many considerations which have nothing to do with whether something is overvalued or undervalued. If you analyze thousands of assets, both liquid and otherwise, you will soon discover that these fit into one of two categories. Either they are at or near their highest levels in history, both in absolute and relative terms, or else they had slumped to multi-decade bottoms during the first several weeks of 2016 and have since been moderately rebounding while remaining far below their tops from the past decade. Not surprisingly, most investors remain eager to buy the most overpriced assets, while remaining indifferent to accumulating true bargains.

    Most people today are following the dangerous path of stretching for yield.

    Many investors think to themselves or say to their financial advisors something like this: "I need income in order to meet my living expenses. I used to get 3% or 4% from my savings accounts, but now they pay less than one percent. So I want to invest in whichever are the safest and most reliable assets which will give me an income of three or four percent each year." If only a few people thought this way, then there wouldn't be a problem. However, since perhaps a billion people suffer from this exact situation and are approaching it in the same way, it has created an extremely dangerous form of herding in which assets like utilities (XLU), consumer staples (FXG, XLP), and real estate investment trusts or REITs (IYR, RWR) have become so popular that they are trading on average for about twice their usual historic ratios of prices to profits, prices to dividends, and other classic measures of valuation. Some investors have purchased commercial or residential real estate where rental yields are similarly 3% or 4%, believing they are getting a worthwhile rate of return on their capital because it is considerably more than they would receive in a money market fund. U.S. Treasuries (TLT, IEF, IEI) are also exaggeratedly overvalued as those who don't trust corporations believe the government will always pay on time. The chance of default is essentially zero, but you can still lose a huge percentage of your money from Treasury yields moving higher especially when such an outcome seems impossible to most participants. I will go way out on a limb and forecast that the yield on the 10-year U.S. Treasury bond will exceed 3% in 2017, which almost surely seems absurd to most people because we have become irrationally accustomed to a much lower yield range in recent years.

    Regardless of how well-intentioned or intelligent its participants may be, any heavily overcrowded trade will always lose badly in the end.

    Whenever any trade becomes incredibly crowded, there will inevitably be a subsequent severe shakeout. It's not different this time, and within a few years it is likely that those who are investing in the above assets will be severely disappointed. I expect all of the above, including listed securities and actual houses, to mostly end up losing half or more of their current valuations by the time their respective bear markets terminate in 2018 or 2019, and perhaps a year or two later for physical real estate. About a dozen people have contacted me to say they didn't personally buy these assets in order to be like everyone else, but for completely different reasons. The problem is that if you are swimming with great white sharks then it doesn't matter if you're only in the ocean to get your daily exercise; you have to deal with your fellow swimming companions. If you have been purchasing high-dividend shares for years for any reason, and all of a sudden everyone else is doing likewise, then you have to do something different until your method becomes unpopular again. The result will end up the same as it did for those who were crowding into internet shares in 1999-2000 and mortgage-backed securities in 2007. I could have also listed railroad shares in 1872 or canal companies' shares in 1836; the world may change through the centuries but the financial markets are always the same. If you own what everyone else also owns, regardless of your reasons or their reasons, you will all end up losing money together.

    Commodity producers have been the biggest winners for five months, with emerging markets second.

    If you were to ask most investors which assets have been the biggest percentage gainers of 2016, very few would know that commodity producers led by gold and silver mining shares have gained the most especially when compared with their intraday bottoms of January 20, 2016, while many emerging-market funds have also outperformed the broad U.S. equity market. The sole exception among the top several dozen is a lone fund of zero-coupon Treasuries. Out of all non-leveraged non-ETN funds which invest in stocks or bonds, according to xtf.com, the biggest year-to-date winners of 2016 in order are SILJ, GLDX, SLVP, GDXJ, SIL, RING, SGDJ, SGDM, GDX, and PSAU, which all invest in gold and/or silver mining shares. Next are XME (metals mining), EPU (Peru), CNDA (Canada), RSXJ (Russia), SLX (steel), KOL (coal mining), NANR (natural resources), EWZ, EWZS, BRAQ, BRAZ, BRF (the last 5 all Brazil), DBS, SIVR, SLV (the last 3 all physical silver), COPX (copper mining), LIT (lithium mining), TPYP (energy pipelines), REMX (rare earth mining), and at long last ZROZ which is a fund of zero-coupon long-dated U.S. Treasuries.

    While many are aware of the persistent strength of high-dividend assets in recent years, very few people are aware of how well commodity producers have been doing during the past five months. These had mostly suffered dramatic bear markets from April 2011 through January 20, 2016, and thus became extremely out of favor with nearly all investors including institutions, advisors, and analysts. Their powerful rebounds haven't encouraged very many people to jump aboard the bandwagon, at least so far. It is rare to see someone dressed in a fancy suit on cable TV extolling the virtues of energy producers or mining companies, and just as uncommon to see someone telling you why you should invest in South America, Africa, Australia, or just about anywhere outside of the best-known developed equity markets. Just five years ago, you couldn't avoid hearing analysts tell you why you should have your money in the BRICs, and which mining companies were superior to others, and which energy subsector was likely to be the biggest winner in the upcoming year.

    Investors love owning whatever has been climbing for years, and shun whatever has been in an extended bear market.

    The reason for the unpopularity is entirely emotional. Following the 2007-2009 bear market for U.S. equity indices in which the S&P 500 plummeted 57.7% and the Russell 2000 slumped 60.0%, no one in early 2009 wanted to hear about the latest index fund or which high-yielding securities were the best bargains. Since the bear markets for nearly all commodity-related and emerging-market assets had lasted for nearly five years, investors have emotionally concluded that they are hopeless and aren't interested regardless of the fundamentals. On the other hand, since high-dividend shares have been rallying for more than seven years while real estate in most parts of the world has surged since 2011, these assets psychologically appear to be superior and investors feel highly confident of additional increases. Paradoxically, when risk is lowest and upside potential is highest, most people are indifferent or are afraid to participate, while the situations of lowest additional upside and greatest risk of price collapse are usually greeted with sunny optimism and complacency about potential losses.

    Almost nothing is trading close to its fair value.

    At their intraday lows on January 20, 2016, many shares of commodity producers and emerging-market securities had traded at their lowest points since the previous century, in some cases going all the way back to the 1970s. They are almost all less glaringly underpriced today, but they remain at just one third to one half their average prices of recent decades. Thus, considerable additional upside remains in their rallies. Many people will finally discover these strong uptrends at the beginning of 2017 when they look at lists of the top-performing securities of 2016 and are surprised to see which names appear. While global equity and corporate bond markets are unlikely to collapse during the next twelve months or so, there will likely be significant declines for the most overcrowded sectors including especially the high-yielding ones mentioned near the beginning of this essay. Ironically, as investors at first gradually and later in a panic rush to get out of high-dividend assets, they will end up piling irrationally into commodity producers and emerging markets which have the potential of creating their own overvaluations perhaps in 2017. This could end up creating a situation roughly a year from now in which it will be necessary to sell commodity-related and emerging-market assets because far too many people will have jumped aboard these bandwagons. That would be especially true if investor excitement is accompanied by notable insider selling by top executives of these companies as there had previously been in years including 2008 and 2011. However, that is something to worry about next year. This year, gradually accumulate whichever undervalued assets are currently the least desired.

    Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain wildly overvalued. As the greenback surprises most investors by suffering a bear market, with the U.S. dollar index moving below 80 instead of climbing back above 100 as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, SIL, KOL, GDX, XME, COPX, EWZ, HDGE, RSX, GLDX, REMX, VGPMX, URA, ELD, GXG, IDX, ECH, BGEIX, NGE (some new), FCG, VNM, SEA (some new), RSXJ, EPU, RGLD, SLW, SAND, GREK, NORW (new), PGAL, TUR, SILJ, SOIL, EPHE, and THD. I have continued to increase my modest short positions in FXG, IYR, and XLU. I expect the S&P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then--as is evidenced by the media falsely proclaiming in March 2016 that the bull market had celebrated its seventh birthday. The Russell 2000 Index and its funds including IWM had handily outperformed the S&P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. Small-cap U.S. equities typically lead the entire U.S. equity market lower whenever we are transitioning from a major bull market to a severe bear market. This has happened in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing has created valuations at roughly double fair value for most consumer staples (FXG, XLP), real estate investment trusts (IYR), and utilities (XLU), all of which will likely slump by about half within three years or less.

    Friday, May 20, 2016

    "We don't have to be smarter than the rest. We have to be more disciplined than the rest." --Warren Buffett


    WHEN BUYING ASSETS, SELECT OLD BEARS AND YOUNG BULLS (May 20, 2016): There are many criteria which investors use in making buying and selling decisions. Unfortunately, the vast majority of these decisions are emotional rather than rational. People buy assets which appear to be superior, without realizing that this perceived excellence is actually due almost entirely to outperformance in recent years. Similarly, investors will tend to sell assets which they believe are inferior, without understanding that if something has been in a severe extended downtrend then it will almost always appear to be hopeless when it could be ready for a powerful rally. In other words, most investors subconsciously project the action during the past several years into the next several years, thereby nearly always ending up buying assets which will soon begin bear markets and selling assets which are about to enjoy spectacular percentage gains.

    A tale of two outperformers: commodity producers and emerging markets versus high-dividend favorites.

    The top sectors of 2016 have fallen into two completely different categories. The best performers have been gold and silver mining shares (GDXJ, GDX, GLDX, SIL, SILJ), with other commodity producers in mining (COPX, REMX) and energy (OIH, KOL) along with emerging-market assets in numerous countries (EWZ, GXG, RSX, NGE). Not far behind are high-dividend sectors, especially utilities (XLU), real estate investment trusts (IYR), and consumer staples (FXG, XLP). This is somewhat surprising, since both groups of securities behave very differently. Commodity producers and emerging markets normally love rising global inflationary expectations and worldwide GDP growth, while high-dividend shares tend to perform best when deflation reigns and there are fears of an economic contraction. Which of these two is likely to persist in its powerful uptrend?

    With most commodity producers and emerging-market assets having approached two- and three-decade bottoms on January 20, 2016 and/or February 11, 2016, their bull markets have been in existence for only four months on average. In most cases, their bear markets had begun following major tops in April 2011, and had suffered total declines averaging 70%-90%. A young bull market following a historic washout often leaves huge remaining upside, since even if these shares merely return to their highs of 2014 or 2013 then they could double or triple from their current levels; some of them have already more than doubled since their respective January 20, 2016 nadirs. Almost anyone who wanted to sell shares of commodity producers or emerging markets had plenty of opportunities to do so, as is evidenced by all-time record outflows from many funds in these sectors during the second half of 2015 and the first few weeks of 2016.

    In sharp contrast, most high-dividend shares had bottomed either during the fourth quarter of 2008 or during the first quarter of 2009, and thereafter enjoyed bull markets which lasted for more than seven years. A seven-year bull market is like a 100-year-old person running the marathon: you are quite impressed, but you know he or she won't be running many more marathons. It is possible and perhaps even likely that most high-dividend shares have already begun bear markets, although this won't be known for sure until after significantly greater losses have occurred. One major drawback to owning shares which pay 3% or 4% yields is that far too many investors have become disenchanted with bank deposits paying 1% interest or less, and have therefore crowded into high-yielding assets in a desperate attempt to achieve a modest income. There have been all-time record inflows into many high-dividend sectors in recent months. When too many people are pursuing the same concepts, regardless of their reasons for doing so, such assets become dangerously overpriced. On average, high-yielding assets have price-earnings ratios which exceed the overall price-earnings ratios for the S&P 500 Index and the Russell 2000. Utilities, real estate investment trusts, and consumer staples overall have never been more overvalued in their entire history, even when compared with major past bull-market peaks.

    Begin with fair value, and tilt toward buying into the longest bear markets while selling into the longest bull markets.

    Before making any trading decision, it is important to calculate fair value for any asset which you plan to trade. If you believe that something is far below fair value, then ask yourself why this is the case. If something has been declining for several years, then many investors will tend to sell it regardless of fundamentals. They may be disappointed about its persistent underperformance, or they can't bear to miss out on chasing after something which has been climbing or which is mentioned frequently in the media, or they may hate to wake up and look at the securities in their portfolios which seem to keep going down, or they may actually believe that they can make money by following various momentum strategies. Generally, the best assets to purchase are those which are either in bear markets which have persisted for a very long time and have lost a dramatic percentage of their previous peak valuation, or else had recently fit into this category and have been choppily rebounding in recent weeks or months. There are pros and cons to buying into the most oversold points on the way down versus buying into higher lows as they are created on the way back up, which I will discuss in more detail in a future update.

    A key principle is to assiduously avoid buying anything which has been in a powerful extended uptrend for several years. Such assets will attract the attention of many investors who become enamored by its apparent invincibility, or who love to chase after recent outperformance, or who emotionally like to think they own winners even if they missed out on most of the gain to be enjoyed because they bought far too late, or because something which has been climbing for several years has usually received persistently optimistic media coverage which tells people why they should own such assets. Even if something is far above fair value, you will almost never read anything negative which will warn you against purchasing something which is clearly overpriced. You only see negative stories about something which has already suffered sharp declines, as analysts "explain" why those losses have occurred and tell you why they will get worse. It is easy to become brainwashed by these messages simply by hearing them repeated frequently.

    Prefer youthful bull markets following extended bear markets. Disfavor ancient bull markets.

    Even though you may wish to own anything which has been outperforming in 2016, stick with those assets which had suffered multi-year bear markets and have just been recovering for four months, rather than assets which are wildly overpriced and have been mostly in uptrends for more than seven years. The former group will continue to rally strongly because they remain intrinsically undervalued and are still unpopular, with most brokerages and analysts continuing to shun them and even to downgrade them in recent weeks. Some of these funds like GDX have continued to experience net outflows regardless of their spectacular gains since January 20, 2016. High-dividend shares have become so popular with amateurs, institutions including hedge funds, and just about everyone that they make excellent short positions. This is especially true for U.S. assets in these sectors which had enjoyed the massive global surge into U.S. stocks, bonds, real estate, the U.S. dollar, and just about everything else with a United States pedigree in recent years. Commodity producers located in emerging-market countries had been the world's most depressed and undervalued securities four months ago, and in spite of having doubled or tripled in some cases would have to double, triple, or quadruple again to finally surpass their April 2011 highs.

    Choose assets for which there is no reason to own them.

    The financial markets have always been a paradox. If there is a valid reason to own any asset, especially if that reason can be easily explained to others, then almost everyone else will have heard and believed the story and will have already purchased it. This will cause such assets to become dangerously overvalued. On the other hand, if there is no easy explanation for why you should own something, then very few people will be eager to participate, and the asset will tend to be substantially undervalued and thus an excellent bargain. Low bank interest rates give investors a perfect excuse for possessing high-dividend shares, and therefore you must avoid the temptation to own them along with everyone else. No one can easily comprehend why they should own shares of commodity producers or emerging-market securities, and therefore you should capitalize upon their unpopularity. Once you hear on a daily basis about why you should own these as an inflationary hedge, or because so-and-so genius has been buying them, or just because they're going up, then it will be getting close to the next selling opportunity.

    Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain dangerously overvalued. As the extremely popular U.S. dollar stuns investors by suffering a bear market instead of continued gains as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, GDX, COPX, HDGE, REMX, EWZ, RSX, GLDX, VGPMX, URA, GXG, FCG, IDX, ECH, BGEIX, NGE, VNM, RSXJ, EPU, TUR, SILJ, SEA (new), SOIL, EPHE, and THD. Yes, HDGE is back on the list as of my previous update (see below) after having sold all of it just before it had peaked near 13. I have continued to increase my modest short positions in FXG and IYR, and I am also modestly short XLU. I expect the S&P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then--as is evidenced by the media falsely proclaiming in March 2016 that the bull market had celebrated its seventh birthday. The Russell 2000 Index and its funds including IWM had handily outperformed the S&P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. Small-cap U.S. equities typically lead the entire U.S. equity market lower as they have done in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by conservative investors deluded into believing that these are nearly as safe as government-guaranteed time deposits; these make excellent short positions and include consumer staples (FXG, XLP), real estate investment trusts (IYR), and utilities (XLU).