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.