Flashback to March 2009

Here is a video segment taken from March 2009 after an awful jobs report was released.  The title of the video is "US Economy on the Verge of Total Collapse":   http://track-cell-phones.com/us-economy-on-the-verge-of-total-collapse-cnn/   Notice the panic, the desperation and the hopelessness in this video clip.  This was the day of the bottom.  In hindsight, this was the very best day to buy stocks since perhaps the previous major market bottom in 1982.    What can we learn from this?   Today, the exact opposite situation is occurring.  Surely the contrarian investor philosophy of selling and selling short instead of buying is correct.

Popular Slogans

Some current market slogans like "Buy next week when the market is at a peak" are shown in the screenshot below.  It will be interesting to see how they change over the next two years as the bear market returns.

The Stars

Unfortunately in life, there are days like this.  An important key to being happy is to minimize these awful days.  There are no surprises in life.  Nothing "just happens" out of the blue.  There is always an event or a chain of events preceding the "surprise".  Still, it hurts a lot when your dreams in life are busted.  It hurts incredibly more when you see the dreams of people you love being busted and there is nothing you can do.  These intense emotions are part of being human, I guess.  In a recent email message, Greg Mortenson of the Central Asian Institute (CAI) quoted this ancient Persian saying: "When it is darkest you can see the stars."  I am seeing a lot of stars tonight, but it is difficult to appreciate their beauty right now.  It does not help that my portfolio has been getting relentlessly clobbered for 8 months now.

Euphoria & Despair

The S&P 500 is setting yet another new high today, around 1350.  The VIX has fallen to about 15, which is still above its low of 14.30 from last week.  The investing world is full of complacency and euphoria as it is a given that stocks are going higher.  Of course, this means my portfolio is getting absolutely clobbered and I am feeling despair.  My portfolio has been getting hammered for 8 months now, and there is still no sign of letting up.  This is awful and is difficult to deal with, but unfortunately I have gotten used to this.  To rub more salt in my wounds, TLT is up again today at around 93.5.  I was considering selling my losers and purchasing TLT around 89 in February, but decided against it.  This is difficult to take.    P.S. I private email received today from a Senior Vice President (Investments) at UBS ended with the following:   "P.S. Our technical analyst, Peter Lee, who has a great track record going back 20+ years, predicted this AM on a break-in call (VERY unusual) that we will see S&P 500 at 1440-1450 probably by the end of summer !!. That's nearly 10% in 4-5 months on top of the 100% gains since March 2009 ! Did Brandon predict that huge bounce off the bottom ??. Did any of the scaremongers ??.   Bernanke has set things up for an eventual bubble in equity prices but you can't live in a hole waiting for an eventuality while there is so much money lying on the table."

Chinese Real Estate Bubble

China currently has the mother of all real estate bubbles.  As pointed out in earlier posts, this bubble is already starting to burst.  With it, wealth of a nation and the price of world wide risk assets will eventually burst as well.   It is fascinating to look into the factors that created this bubble, and this article is excellent:   http://www.nytimes.com/2011/04/15/world/asia/15bachelors.html?pagewanted=1&_r=1   Decades of the "one child policy" has left China with a large imbalance of men to women.  Therefore, women can be very discerning in their relationships, and they demand a man who owns an apartment.  If you are a Chinese man and you do not own your own pad, then chances are you are single and you will stay that way.  This is incredible!  Chinese women value wealth and real estate over anything else.  Emotionally, that creates a huge incentive to own real estate at any cost even though prices are exorbitant.   In addition, the article correctly points out that the Chinese do not have anywhere else to invest their capital.  Their money will lose purchasing power if it is put into the bank due to negative real interest rates.  The only other option appears to be housing.   The article is interesting for a number of other factors as well.  It points out that over 70% of women in China value money over any other qualities in a man, while 50% of men value beauty the most in a woman.  In addition, by the next decade, there will be 24 million single men without a partner due to the shortage of women in China.  I believe this is insightful into the Chinese psyche.  Given these facts, it makes perfect sense why things like "business ethics" or "saving the environment" do not appear to be important priorities in general for the Chinese when it comes to doing business and earning money.

Morgan Stanley Fund Defaults

Today, there is news that a Morgan Stanley real estate fund has defaulted on a 3.3 Billion USD debt payment for a building that they "owned" in Tokyo, Japan.  The real losers will be the investors who bought the repackaged loans from the fund:   http://www.reuters.com/article/2011/04/15/us-morgan-stanley-real-estate-idUSTRE73E63E20110415 In June 2007, the first cracks of the bubble appeared in the form of defaults of two different highly leveraged real estate funds that were managed by Bear Stearns.  That was the first sign that the economy, and particularly the real estate bubble, was starting to come apart at its seams.  The news was dismissed by nearly everyone, including Jim Cramer, and the markets recovered and made new highs.  However, all was not well below the surface and we know how the story ended.   Last week, we learned that Chinese real estate prices plunged 26.7% month over month, and now we learn of this large default by Morgan Stanley.  The nuclear situation in Japan is deeply saddening, and this has hugely negative consequences not only for the people  but for the global economy as well.  Anything can happen in the short term, but this is not going to end well.

The $6,390 Toilet

Near all bull market peaks, there are lots of tales of lavish luxury consumption.  In 2008, I remember hearing about the $1,000 hamburger in New York City.  This hamburger was special because it was "hand crafted" with "exotic truffles", etc.  After the market crashed, we were bombarded with stories about "recessionistas" and "cloth diapers", etc.    Fast forward to today.  A week ago, there was a story about a gold plated car in China.  And today, we learn about the $6,390 toilet:     http://lifeinc.today.com/_news/2011/04/14/6471845-6390-toilet-is-fit-for-a-king   This is a fitting analogy, because over the next two years, the prices for most risk assets will be going into the toilet.  Yesterday, we received news that the greatest real estate bubble in history has begun to collapse in China.  Real estate prices in Beijing were down 26.7% from the previous month:   http://imarketnews.com/node/29203   This is probably the most important financial story at this time, but it is not getting much attention in the mainstream press.  This is the first big dominoe to fall.

Bearish Sentiment Lacking

In the Barron's article from last weekend by Alan Abelson, titled "Where Did All the Bears Go?", he relates the latest Investors' Intelligence poll in which 57.3% of the respondents were bullish, versus 15.7% who were bearish.  The bearish reading is the 17th lowest percentage in the history of this survey which dates back to 1975 (more than 1800 weeks).  The spread of 41.6% between bulls and bears was last experienced in October 1987, when many general U.S. equity indices including the S&P 500 completed their all-time peaks.  The author also cites the recent low S&P 500 dividend yield of 1.86%, which is just above its all-time historic low reading of 1.76% from October 2007.  The author has been derided in the media as being a "perma bear", but these are facts rather than opinions and the comparison with the last bull market peak from 2007 are valid.   Elsewhere, a recent Market Vane survey showed that just 7% of traders were bullish towards the U.S. dollar index.  With this type of sentiment, it is doubtful that the USD can fall much farther.  Who is still left to sell?  Even in the face of all this negative sentiment and news, the USD has so far refused to collapse.  Contrarian investors know that the most overcrowded trades must always fail in the end.  A sharp rally for the U.S. dollar has significantly negative implications for risk assets such as stocks, corporate bonds and commodities including gold, silver, copper and crude oil.   Lastly, I received this short message from a coworker and friend of mine today: "BUY THE DIP IT IS FOOL PROOF!"  The market is down today, and amateur investors will continue to step in and buy what they perceive to be bargains due to the recently lowered price, but eventually the bottom will fall out and prices will go significantly lower.  It is only a matter of time.

Only Yesterday

I finished reading a good book this weekend called "Only Yesterday".  It is a first hand account of the 1920's, and it ends with the stock market crash and the Great Depression.  Some of the parallels between that era and ours are so striking.  They say that history does not repeat, but it does rhyme.  The emotional make up of humans has not changed much in thousands of years, and people are fundamentally the same as they always have been.  100 years ago, they rode horses instead of cars, but their emotional make up was the same as ours today.  Hence, we can learn a lot about the future by studying what happened in the past.  The sad part is that the lessons of the past are mostly forgotten after two generations have passed, so that is one reason why human beings are doomed to keep repeating their same mistakes over and over again.   The most striking aspect of this book, to me, was the concept of "buying the dip".  This concept, today, is affectionately referred to as "BUY THE DIP!!!!!!!!!!" or "JBFD" where the "F" stands for a four letter word + "ing".  The concept is that any market pullback is an opportunity to buy because eventually it will recover and surge a lot higher.  You can look at recent history since September 2010 and see that this strategy has been very successful.  Hence, millions of amateur investors have concluded that this strategy will always be successful.  This can perhaps explain the huge optimism towards risk assets, the low levels of VIX (16.xx), and the extreme bullishness and complacency that currently exists.    In response to a story today that a trader took a large bearish bet in silver which has been surging to close above $41/oz (which is a  31 year high), here is the first quote after the article:   "I'm glad this bet was taken as we can proceed to BTFD. Currently, wouldn't touch a silver long above 39, but hopefully we can see lower price to get back into."   The lesson from "Only Yesterday" is that the Great Depression was full of dips.  And each time investors "bought the dip" and were handsomely rewarded.  There were about four instances of this just in 1928 & 1929 alone.  The market would pull back, people would rush in and buy "at bargain levels", the market would recover and move higher, and these people would make money.  People then, as now, became conditioned like Pavlov's dogs to just "BTFD".  It was very easy and it worked every time...until it didn't.  Investors who bought during the final plunge of 1929 mostly were ruined in the end.   Corporate insiders have been selling stocks at an aggressive pace since last fall.  Amateurs have been buying at all the dips.  History does not repeat exactly but it does rhyme.  We are headed for the worst stock market decline since the Great Depression in the next year or two.  This will not bode well for the dip buyers in the end.

OT: A Better Way to Live

This blog is about contrarian investing and finance.  However, sometimes when the going gets tough, and you are getting trampeled by the herd each and every day, it becomes difficult to write about this topic.  Bearish sentiment has recently plummeted to multi year lows, the VIX has plummeted as well, and the dollar is finding support, and I believe the markets will very powerfully reverse in the future.  I believe that my positions will eventually turn green, but who knows when in the future that will happen.  Until then, I am living my life and doing my best to be happy and make the most of each day.  Money and results are very important, but you should not lose your focus on what is the most important in life - family, friends, health, relationships, faith, etc.  We live in a fast paced world and we are bombarded with so much information every day, and it is easy to get caught up.  Sometimes it is necessary to take a step back, breathe in deeply, exhale and relax.

This is an Off Topic post.  I am reading a book by Og Mandino, and I would like to post an excerpt from it that I find inspiring:

Excerpt from "A Better Way to Live" by Og Mandino

            Back in the fifteenth century, in a tiny village near Nuremburg, lived a family with eighteen children.  Eighteen!  In order merely to keep food on the table for this mob, the father and head of household, a goldsmith by profession, worked almost eighteen hours a day at his trade and any other kind of paying chore he could find in the neighborhood.  Despite their seemingly hopeless condition, two of Albrecht Durer the Elder's children had a dream.  They both wanted to pursue their talent for art, but they knew full well that their father would never be financially able to send either of them to Nuremburg to study at the academy.

            After many long discussions at night in their crowded bed, the two boys finally worked out a pact.  They would toss a coin.  The loser would go down into the nearby mines and, with his earnings, support his brother while he attended the academy.  Then, when that brother who won the toss completed his studies, in four years, he would support the other brother at the academy, either with sales of his artwork, or, if necessary, also by laboring in the mines. 

            They tossed a coin on a Sunday morning after church.  Albrecht Durer won the toss and went off to Nuremburg.  Albert went down into the dangerous mines, and for the next four years, financed his brother, whose work at the academy was almost an immediate sensation.  Albrecht's etchings, his woodcuts and his oils were far better than those of most of his professors, and by the time he graduated, he was beginning to earn considerable fees for his commissioned works.

            When the young artist returned to his village, the Durer family held a festive dinner on their lawn to celebrate Albrecht's triumphant homecoming.  After a long and memorable meal, punctuated with much music and laughter, Albrecht rose from his honored position at the head of the table to drink a toast to his beloved brother for the years of sacrifice that had enabled Albrecht to fulfill his ambition.  His closing words were, "And now, Albert, blessed brother of mine, now it is your turn.  Now you can go to Nuremburg to pursue your dreams, and I will take care of you."

            All heads turned in eager expectation to the far end of the table where Albert sat, tears streaming down his pale face, shaking his lowered head from side to side while he sobbed and repeated, over and over, "No … no ... no … no."

            Finally, Albert rose and wiped the tears from his cheeks.  He glanced down the long table at the faces he loved, and then, holding his hands close to his right cheek, he said softly, "No, brother.  I cannot go to Nuremburg.  It is too late for me.  Look … look what four years in the mines have done to my hands!  The bones in every finger have been smashed at least once, and lately I have been suffering from arthritis so badly in my right hand that I cannot even hold a glass to return your toast, much less make delicate lines on parchment or canvas with a pen or brush.  No, brother … for me it is too late."

            More than 450 years have passed.  By now, Albrecht Durer's hundreds of masterful portraits, pen and silver-point sketches, watercolors, charcoals, woodcuts, and copper engravings hang in every great museum in the world, but the odds are great that you, like most people, are familiar with only one of Albrecht Durer's works.  More than merely being familiar with it, you very well may have a reproduction hanging in your home or office.

            One day, to pay homage to Albert for all that he had sacrificed, Albrecht Durer painstakingly drew his brother's abused hands with palms together and thin fingers stretched skyward.  He called his powerful drawing simply "Hands", but the entire world almost immediately opened their hearts to his great masterpiece and renamed his tribute of love, "The Praying Hands."

            The next time you see a copy of that touching creation, take a second look.  Let it be your reminder, if you still need one, that no one--no one--ever makes it alone!

            Of course, you don't have to try to make it alone.  Whether your faith is great or almost non-existent, you still have your own set of praying hands.  All you need do, whenever things get tough, if just touch your palms together, extend your fingers, raise your eyes, and say "I need help."  I've done it at least a thousand times in my life.  Results?  You might be surprised when you discover how close help is if you just ask for it.

           

Preparation

"The area was known to be an idyllic sanctuary. Snow-capped mountains, crystal clear lakes, warm summers, a gentle autumn . . . you get the picture. For nearly 180 years, Mount St. Helens remained silent, towering over the beautiful scenery below. However, there were early warning signs pointing towards a potentially catastrophic eruption of the volcano. Most viewed them as nothing more than hot air (no pun intended). Doug, a farmer who lived close to the foot of the mountain, refused to evacuate. "My mountain wouldn't do that to me," he said. Less than 24 hours later, Doug and his farm were buried beneath 70 feet of mud and volcanic debris. What's the moral of this story? 1) Even subtle signs can foreshadow a significant event; 2) Just because an event doesn't occur regularly doesn't mean it can't happen. What does the 1980 eruption of Mount St. Helens have to do with the stock market? More than you'd think . . . . When preparing for a bear market (we'll discuss in a moment why we have been preparing for a bear market), it is prudent to start early." ~Simon Maierhofer, "Should You Bear-Market Proof Your Portfolio?", Finance.Yahoo.com, July 7, 2010.

Sentiment Extremes

"When I address investment conferences near the extremity of a market trend, I show a dozen times in the past when extreme sentiment led to major market reversals, up and down. I show how each and every time, be it in stocks, real estate, commodities, gold, oil, tech stocks, penny stocks, mining stocks, or whatever, there was always an airtight fundamental argument for a continuation of the trend as it neared its end. An airtight argument in favor of continuation and widespread acceptance of it are in fact two signs of an approaching reversal. I also try to mention that even an extreme consensus can become larger, so a consensus is not a pinpoint signal. It's just a warning that one should always heed. If an investor won't act on a large consensus, he will be powerless against a huge one. If you are safety conscious, recognizing a strong consensus doesn't mean you must take the risk of investing in the opposite direction; but it does mean that you must avoid investing in the direction of the consensus. People in audiences often agree that my presentation is logical and a great guide to investing. But the agreement ends when I show them the markets sporting extreme sentiment now. These are the markets that investors have recently embraced, to which they finally succumbed after years of reading articles, books and websites on why the trend in force would continue. Suddenly the logic of my case evaporates in their minds. They all respond, "But X has to go up/down anyway because...." They think I'm logical about the historical evidence but simply wrong in this case. They think I'm sadly blind to the obvious forces in play. They judge the other speakers, who explain fundamentally why the trend in X must continue, as just as logical as I am but with the difference that they are right, this time. They crowd around the advocates, because their every word supports the overwhelming intensity of their own herding impulse with respect to the market in question. They concede that sentiment extremes worked in the past, and they concede that they will assuredly work in the future, but they never agree that they will work today." ~Robert Prechter, "Jam Yesterday and Jam Tomorrow, but Never Jam Today", www.ElliottWave.com, March 31, 2011.

Sign of a Top?

Here is an article from MSNBC "Billionaire Pays $100 Million for Mansion".  The subtitle reads "Highest known price ever paid for a single-family home in the U.S."   http://www.msnbc.msn.com/id/42357594/ns/business-real_estate/   When all the popular talk is about recovery and consumption and luxury, that is the sign of a top (i.e. sell stocks).  When all the popular talk is about depression and unemployment and cutting back, that is a sign of a bottom (i.e. buy stocks).   The S&P 500 is up 85 points in the past three weeks (currently at 1335), and emerging markets are en fuego.  My short portfolio is getting crushed.  It does not feel like there will ever be a top.  The first car experience occurred the week of October 10, 2008.  The second one occurred today.  I hope my portfolio recovers and improves.

Yahoo Message Board Post

Here is a Yahoo Message Board post from the SPY board this morning.  This post is very typical of the attitude in the markets:   ***** Subject: Why are futures down this AM Message: only 20 cents but still bizarre   Reply 1: If you knew it was going higher, wouldn't you rather buy 20 cents lower rather than 20 cents higher?   Reply 2: Check again at 10:00...and then 11:00.  This is just getting tooooo easy. *****   That pretty much sums up the attitude in the financial markets these days.  Stocks only go up.  They rarely if ever go down.  If they do drop, just buy the dip because they will go right back up.    Complacency is rampant, and with good reason.  Since September 2010, over six months ago, stocks have only gone up.  The move has been large and nearly vertical.  Shorts have been slaughtered.   A contrarian investor knows that this can not continue forever and that the trend must eventually change.  But markets will always go to greater extremes before reversing.  And who knows just how extreme that will become.

The Pain

Today is not a fun day to be a contrarian investor.  This week has not been a fun week.  These last two weeks have not been fun.  These last two months have not been fun.  These last six months have not been fun.  Since September 2010, it has not been fun to be a contrarian investor.  Do you hear me?   Today is the day that I officially have given up hope for the near term.  The markets have risen yet again, and it seems that just about every risk asset (except, of course, for those assets that I own) had a big up day.  Several leading indicators such as KOL, commodity currencies such as the AUD and BRR, and the Russell 2000 all reached new 52 week highs today.  Several emerging market stocks such as South Korea (EWY) also made new 52 week highs.  The etf of gold mining shares (GDX) vastly outperformed the underlying commodity (GLD) - another positive sign for the bulls.  The only negative sign I can see is that copper was down which may be significant.  Also, the semi conductor stocks underperformed while long dated treasury yields fell.   But all in all, I feel like is March 2009 all over again except that I am short stocks now as opposed to being long two years ago.  The grind has got me down big time.  Every day, day after day, has been a struggle.  I have always had hope and expectations that the market would decline "over the next several weeks".  For the past six months, this has not happened ever and I have been creamed.  My hopes and dreams have been (temporarily) dashed.   This has affected my life in many ways, the majority of which are not good.  I continue to hang in there and hope for better days that might not come for a long time.  I dug my hole, and then I dug it deeper, and then I went deeper and deeper, and then I went deeper still, and here I am today.  It is what it is.  Tomorrow is a new day and will probably be just as frustrating if not more so.  I have come to expect this.    The end of the quarter buying is powerful and it does not appear that it will ever stop.  Stocks only go up.  That is the new normal.  Until, of course, they don't go up and they plunge.  One day that might happen.  I can only hope.

Complacency

For the contrarian investor, the link below is classic.  Here is a poll from last week:   http://carnalstock.com/stock-market-poll/2011/03/poll-is-sp-forming-v-type-bottom-or-w-type-bottom/   Notice that this poll asks which type of a bottom is forming.  Is it a V-bottom where, after having moved down, the market will now move straight up?  Or is it a W-bottom where the market will make one more down move before moving straight up?   Notice that both conditions presume that the market will move straight up.  There is no mention of the possibility that the market may move down.  This is text book complacency and it is very prevalent.  The bulls are back and everyone is asking how much higher the market will be going.  This past week showed the biggest loss of the VXX in percentage terms ever.  Everyone is looking up, very few are looking down.  The amateur masses are looking up.  Contrarian investors, like the smart money (i.e. top corporate insiders), are looking down.

China Property Video

I came across this very interesting video today about China's ghost towns:   http://www.sbs.com.au/dateline/story/watch/id/601007/n/China-s-Ghost-Cities   The China real estate market is one big bubble.  All bubble's end bad and this will be no exception.  In order to achieve their high growth rates, the Chinese continue to build housing everywhere and anywhere.  The huge cities they are building are nearly empty (which is very eerie) and the housing is priced out of reach of the majority of the population.  Per the video, it is common for many working people to share very small spaces together, while there are 64 million empty apartments in China!  The social aspects are tragic, in my opinion, and they are going to get much worse.  The owners of these speculative properties are going to be left holding the bag when the pyramid collapses.  This will create massive social unrest and possibly revolution.  This property bubble can not go on forever.   Contrarian investors will see the potential for negative Chinese GDP growth in the not too distant future.  The implications of this will be severly negative for the world of risk assets including stocks, corporate bonds, commodities and even race horses and artwork.

Still No End in Sight...

Today was another miserable day to be a contrarian.  Global assets rallied strongly, except for the US dollar and treasuries of course.  It is quite difficult to be a contrarian investor and to constantly lose money as the topping process continues.  In the end, I will triumph.  But the end is not in sight.  At least, I can not see it from where I am sitting.  The amateurs own the market right now.  They have owned the market for the past 6+ months, and nothing is different today.  However, everything has a beginning and an end.  All manias have an end.  The internet stock bubble ended in March 2000.  The US housing bubble ended in 2006.  The tulip bubble ended in Holland in the 1600's.  This strong surge for global risk assets will end too.  Goldilocks is always followed by the three bears.  The S&P 500 closed the day near 1310.

Fake Left, Go Right

Days like this are tough and they make me want to rethink my strategy.  It is not easy to be a contrarian investor.  The S&P 500 is hovering around 1300 and emotionally it feels like this will never change.  Rationally, however, I know better.   The primary function of the markets are to ensure that the majority of participants (i.e. amateur investors) lose money.  Therefore, before the markets make a major move down, they will first make a major move up.  That way, the majority of people will be fooled into covering their shorts and going long stocks.  I believe that we are nearing the end of a massive head fake up.  This is similar to basketball.  If a player wants to go to this right, he will first fake to the left in order to get his opponent off balance.  He is then free to go to the right which is the direction he intended all along.   Sometimes it feels like the market will never drop, but my rational mind knows better.

The Bell is Ringing at the Top

I was about to shut off my computer earlier today, when I came across this gem of a news article:    http://www.msnbc.msn.com/id/42199180/ns/business-your_retirement/   As a contrarian investor, I am very happy to see this type of article featured in the media.  We have had the biggest bull market surge since the Great Depression, and this is the kind of article that one would expect to find at or near a market top, preceding a trend change.  It is just dripping with complacency and optimism, and there is not a hint that the general direction of stocks could possibly be down.  They do not ring a bell at the top, but this is pretty close.   Consider that in 2007, when the market was at an important peak, the media was full of articles about the "goldilocks" economy.  Of course, instead of goldilocks, we got the three bears.  In late 2008/early 2009, as the market was plummeting, the media was full of articles about people cutting back on their consumption and about "recessionistas".  I even remember one article urging new parents to use cloth diapers on their babies in order to save money.  Of course, we instead got the biggest bull market since the Great Depression.  Today, we have an article telling people that they "have to participate" in this market and that the constant switching of cabins on the Titanic instead of leaving the ship is "clearly is a winning strategy".   A contrarian investor knows that it is not different this time.

US Dollar Weakness? A Contrarian View..

The main theme of the markets for the past four months has been a transformation from a bull market to a severe bear market.  Starting with the QE2 announcement by the Fed in November 2010, several emerging markets (China, India, Colombia, etc.) made their peaks and have since been forming a very bearish sequence of lower highs.  Nearly all risk assets have since joined them in establishing downtrends, with the most lagging assets such as the S&P 500 having set new highs into February.  This past Friday, the US Dollar index set a new low around 75.5.  This weakness is misleading as the majority of this move is due to strength in the euro.  The currencies of commodity countries such as Australia, Brazil and Canada, which are much more important in forecasting the future direction of the market, have been forming a very bearish pattern of lower highs.  I expect this pattern to soon accelerate downward and result in lower prices for these currencies and strength in the US dollar.  The behavior of commodity country currencies is a leading indicator in the financial markets, and these bearish patterns have severly negative implications for risk assets worldwide.    I expect the markets to be very weak in the short & intermediate term.  However, it must be noted that periodic sharp upward bounces are most common in severe bear markets.  This type of contrarian behavior helps the market to ensure that the maximum number of amateur participants will always lose money.

BOJ Intervention

Stocks were up today, with the S&P 500 closing at 1,273.72 (+1.34%).  The primary trend in the markets is DOWN, but a contrarian perspective tells us there will be frequent sharp recoveries after all dips.  This servers the purpose of confusing amateur investors into buying stocks when they should be selling or selling short.  The next two years should feature a pattern of lower highs followed by lower lows.  This pattern will be a grind for all market participants (except top corporate insiders).   The real interesting news happened after hours where the Bank of Japan made a massive intervention in the forex market.  Earlier in the day, the yen had slumped to an all time low against the dollar, below 79, and this intervention sent the yen flying 3% to back over 81.  It is trading at 81.1150 as I write this.  It will be interesting to see how long an effect this intervention has on the yen.  If history is any guide, the effect will be temporary at best and then the trend will reassert itself.  The forex market is so huge that it is impossible for a single entity, even a government, to manipulate it.  The Asian markets and all risk asset futures are green right now, but it will be interesting to see how things look tomorrow morning.

Watch the VIX

The world is on edge as the Japanese nuclear crisis continues to escalate.  As a contrarian investor, the best insight into the level of fear in the markets is measured by the VIX.  In simple terms, the VIX measures the premium of put options on the S&P 500.  If the VIX is low, it means that the fear premium is low, and vice versa.  A rising VIX correlates well with lower stock prices.  Today, the VIX shot up 20.89% to close at 29.40.  It is up more than 50% in the last week.  This is a huge move and reflects the fear and uncertainty that currently persist.  The S&P 500 closed the day at 1256.88, down 1.95%.   I am monitoring this situation closely.  I am extremely bearish on almost all risk assets through the intermediate term (2+ years), but I know that the most severe bear markets are always accompanied by the most powerful short term rebounds.  This has the effect of knocking out the late comers and forcing them to cover their short positions just before the next big move down.  I am happy holding my short positions now, but as a contrarian investor, I may have to reconsider if the VIX continues to rise to the 40 level and above.

Bullish on the US Dollar

The big news in the world continues to be the disaster in Japan.  The stock market opened the day down big, but it later recovered about half its losses.  The S&P 500 lost 1.12% on the day to close at 1281.87.  From a contrarian investors point of view, the bad news in Japan is supportive of the market.  News such as this causes amateur investors to sell stocks and to sell short, and the market will always do what is necessary to cause the maximum number of people to lose money.  This could explain the intraday recovery that we experienced today.  I expect the markets to continue to be choppy and to frustrate everyone, both bulls and bears alike.  The dominant trend is down, but the market will not move in a straight line.  Lower highs will be followed by lower lows.  Amateurs will continue to "buy the dip" and will be punished accordingly.  Momentum traders and chartists will pile onto the short side near all important lows, and they will suffer accordingly as well.    Contrarian trading argues for a disciplined approach to carefully establishing positions and avoiding what the majority of market participants are doing at any one time.  An overcrowded trade can never be successful.  Currently, the crowd hates the US dollar and loves gold & silver.  A recent Market Vane survey showed that only 7% of the people were bullish on the US dollar.  Look for the US dollar to outperform both gold and silver over the next one and a half to two years.

Japan

There has been very difficult news out of Japan these last few days.  A powerful earthquake, a tsunami, and now a nuclear meltdown have torn this country apart.  This is an almost unimaginable crisis, and my thoughts and prayers are with the thousands of people who are hurting.  One of the worlds largest economies has been devastated overnight, and I am sure there will be many repercussions to come (most of which will not be good).  But the real crisis right now is with the people.  I pray that aid will arrive and that the people will find peace and comfort in their lives.

Insider Trading Activity

One of the most important concepts of contrarian investing is that you must invest like a corporate insider, and not like an amateur.  Top corporate insiders reflect the well informed minority of investors (i.e. the "smart money"), while the masses reflect the exact opposite.  Top corporate insiders sell progressively in advance of major peaks and buy progressively in advance of major bottoms.  The masses buy and sell in lump sums based on things like a tip from one's uncle or because a certain security is going up or because it was recommended by someone popular like Jim Cramer.  Top corporate insiders are not day traders - they buy or sell only when there is a compelling reason to take action.  They understand their industry the best, and they do not get emotional in their trading.  Top corporate insiders buy and sell for all the right reasons, while the masses buy and sell for all the wrong reasons.  There are many reasons why top corporate insiders will always trump amateur investors, and I will attempt to discuss those reasons in more detail in future posts. We have currently had an extremely extended rally in such well known indices as the S&P 500 and the Russell 2000.  This huge rally since September 2010 has featured a huge amount of selling by top corporate insiders relative to buying, concentrated at the important peaks.  While the masses believe that there is no longer any risk in the market because "stocks only go up" or "the Fed has my back", top corporate insiders have been selling the stock of their companies at their most aggressive pace ever.  This behavior by top corporate insiders tells us everything that we need to know about the future market direction.  The next major intermediate term move in the markets which will be DOWN with a capital "D". A daily summary of corporate insider trading activity can be obtained here: http:\\j3sg.com

First Post

This is the first post on the Contrarian Investor blog.  I have started this blog today to document my journey and use of contrarian investment tactics to achieve my financial goals.  The basic idea of contrarian investing is that the popular expectations of the majority of people in this world will almost always be proved wrong.  Hence, investing against the popular viewpoint will be very rewarding in time.

As of today, the S&P 500 is at 1304.28, and the Dow Jones Industrial Average is at 12,044.40.  The media and the masses are sure that the market will continue to rise this year and beyond.  After all, the market only has one direction and that is up!  Inflation is here today, and hyper inflation is coming tomorrow.  QE2 is here today, and that will be followed by QE3 & QE4 & .... & QE Infinity, etc.  The market has been on a roll since September 2010, and this has been the most intense two year bull market since the Great Depression.  Jim Cramer has recently proclaimed that "the sky is the limit" for this market.  Everyone I work with is long the market, and the bears have been silenced.

However, there are major storm clouds on the horizon.  Emerging markets peaked in November 2010, and the S&P 500 may have peaked on February 18, 2011 at 1344.07.  Most global risk assets appear to have begun major downtrends.  The majority of the world's population lives in a housing bubble, and history has proven that these do not end well.  I believe that the next 1.5 to 2 years will feature the largest deflationary stock market crash since the Great Depression.

I have been short stocks since September 2010, and I have been getting creamed.  But every dog will have his day.  I believe that my day is coming soon.  I am currently short the QQQQ, EEM, and SPY.  In addition, I own long dated SPY puts.