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H. L. Quist's
Contrarian Market View
Contrarian Market View
A CONTRARIAN is someone who looks at things differently than the majority of people. That definition fits H. L. Quist and CMV perfectly. In market parlance when 80 to 90% of investors are certain that the market is going to continue upward, the contrarian heads the other direction. Conversely, when the news is about as bad as it can get, the true contrarian is usually on the ground floor buying. That's what you can expect from H. L. Quist's Contrarian Market View (CMV).
CMV is not a market timer, but we don't want to be 100% exposed at a major turn in the market. In the past ten years there were two occasions to be defensive, significantly change the asset allocation, or be out of the market altogether.
March 2000 to October 2002
July 2007 to April 2009
The results, in the above case, were significant as most participants are painfully aware (Pages 68 - 75 How to Profit From The Coming Inflationary Boom and Avoid the Next Crash, by H. L. Quist). CMV anticipates that market volatility will continue in the future and our form of Active Management will serve the investor well.
In most cases, CMV anticipates that most readers will manage their own assets. In addition, most readers/investors will use CMV's specific recommendations to compliment their existing portfolios according to their own risk tolerance, time horizon and suitability. The recommendations included in this newsletter are principally aggressive and speculative in nature and should be used to offset or compliment the investor's complete portfolio. When determining what percentages should be in various asset classes, the reader/investor should list ALL of their assets such as cash in all accounts, life insurance and annuities, IRAs, 401Ks, commodity accounts, investment real estate, etc. The principal point of this exercise is that most advisors totally ignored alternative investments such as gold, oil, commodities etc. in past allocation of assets and not only failed to realize the gains these assets provided in the past 10 years, but they didn't have these assets to offset the losses in the .com bubble bust and the sub-prime market meltdown. Going forward Buy and Hold is not a prudent investment strategy.
Here is an example:
Risk Tolerance -- % Allocated to CMV
Conservative -- 10%
Moderate -- 15%
Aggressive -- 30%
Speculative -- 50%
The above is simply an example of how the reader/investor may want to use this newsletter and the recommended portfolio. Please consult with your adviser and conduct additional research on your own.
As the year 2010 begins, not since the Great Depression or World War II perhaps, is there more political, social and economic uncertainty in America. CMV will attempt to articulate the Macro Events that form the basis for making the specific (Micro) investment recommendations listed below:
The Obama Administration is ideologically committed to the theory that through central planning of the economy and creation of unprecedented amounts of new debt, the government can increase the GDP and put people back to work. As history clearly reminds us, bureaucratic intrusion into free enterprise and increased taxation, will deter the expansion of commerce and not promote more jobs. Employers, not knowing what to expect in potential health care costs, bank and equity financing and demand for their goods will, in most cases, do nothing until these initiatives become clear. The fourth quarter GDP of 2.5% could be an illusion created by the $787 billion stimulus plan that was rear-end loaded to carry over to 2010 for the mid-term elections.
The Fed and The FDIC
The Fed Funds rate is basically zero and the Fed will have to raise rates soon to avoid another speculative bubble. An unexpected 1.45% rise in the USD index on December 4, 2009 due to a questionable jobs report resulted in a sell-off of gold and commodities and a concern that equities would be adversely effected by rising interest rates. The FDIC is broke and is assessing its member banks three years deposit insurance premiums in advance which will further reduce lending and close many more banks. The USD has lost about 18% against a basket of foreign currencies in 2009. That's market devaluation. CMV expects the possibility of a Formal USD devaluation that could come at any time possibly as a result of a downgrade of US Treasury Debt by the rating agencies.
Note: Subscribe to this blog for in-depth updates on the above and other topics.
Is a monetary phenomenon. The US Treasury has to rollover $2 trillion in short-term debt in 2010 plus an additional $1.5 trillion in deficit spending. Where will the money come from at these low rates? Printing USD (monetization) is highly inflationary. An unexpected rise in food prices in the first half of 2010 could be the visible trigger for inflation that's already cooked into the system.
Notes To Portfolio
1. Cash & Fixed Income
Given existing yields on money market funds, CDs and US Bonds, CMV sees much better opportunities offshore. _________ Total Return Fund is one of the best managed US Bond funds. The total return (dividend plus capital gains) of 14% last year will be very difficult to match in an increasing interest rate environment but if anyone can do it,_________ can. Some money market funds should be held in Norwegian krone and Australian dollars which both appreciated almost 20% vs. The USD in 2009. Go to Everbank.com for more information. Investment in Municipal and high-yield junk bonds should be avoided.
2. US Equities
Is the most difficult sector to recommend because of the rumors of a formal USD devaluation and an over-bought US stock market that is losing steam. CMV has listed_________ because of it's dominance in consumer staples in both US and foreign markets. The Dow Jones Industrial Average ETF_________ is the preferred choice for large cap multi-nationals and the NASDAQ 100 ETF _________ is the best aggressive growth exposure to the large cap technology sector. The _________ Mutual Fund _________ has had exceptional performance during the past 10 years. The fund has appreciated (with dividends reinvested) almost 14% per annum since its inception in November 1999. This compares to a per annum decrease of -1.1% for the S&P 500 Index. CMV anticipates a market correction in this sector at any time. All financial ETFs are not recommended at this time.
3. International Equities
A sector, often referred to as the BRICs (Brazil, Russia, India & China) within the international equity market is enjoying almost explosive growth. CMV is at present limiting its recommendations to two countries in Latin America plus Australia and India. China will soon have to move to curtail unsustainable growth and inflation and CMV will continue to monitor conditions there. Russia is too high risk and volatile for CMV at present. Europe is struggling with non-performing debt and an appreciating EURO and therefore is a wait and see. A formal devaluation of the USD would severely impact Euro land.
4. Hard Assets
If CMV is accurate in its assessment that the US and most of the world is entering a period of competitive currency devaluation and an inflationary cycle, the recommendations listed in Sections 4, 5, 6, 7, and 8 (herein) should out-perform the other three sectors. This trend could change and deflationary forces could emerge. If that occurs CMV will reverse this position. _________ is recommended for both growth and income. _________ is the largest transportation and energy storage company in North America. The stock is up about 40% from it's March 2009 low of $41/share is currently paying a 7.5% dividend. The_________ ADR (Argentina) is a new offering and provides the investor with global exposure to agriculture, oil, timber, water and precious metals much the same as _________. _________ is the US Natural Gas Fund which has declined from about $25/share a year ago to around $9. Natural Gas is a true contrarian play. Oil specific ETF's are _________ (Service) and _________ (Production) and_________, an oil and gas producer, has been a favorite of CMV since oil was $10/BBL about 10 years ago.
5. Precious Metals Group (PMG)
The entire group is principally gold, silver, platinum and palladium. This group has been the beneficiary of explosive growth during the past 10 years due principally to the devaluation of the US dollar and the proliferation of fiat (paper) money worldwide. Gold was at a low of $256/oz 10 years ago. A year ago when the global financial crisis imploded gold (Au) fell from $1,030/oz to $700 /oz in a matter of two months reaching a low of _________ in November 2008. Since that date Au has not only made a steep V correction to its previous high, it exceeded it by 20% closing at $1,226/oz on December 3, 2009. Silver (Ag) somewhat tracks Au but is undervalued. Most investors can't handle the volatility of PMG and consider it "too risky." After the market debacle of 2008, risk should be defined and assessed in new terms which you will learn in CMV.
Of the four ETFs recommended, _________ is a proxy on gold bullion. You trade the ETF as a stock and bullion is held in trust equal in value to all the shares outstanding. The same for silver _________. _________ is the gold miner's index and provides an exposure to publically traded gold mining companies worldwide. _________ provides an exposure to junior miners or small cap and therefore is higher risk. _________ is the_________ Gold &Precious Metals Mutual Fund which, unlike the ETFs, is a fully managed fund of PMG Mining Companies. ETFs trade like a common stock and you can buy and sell anytime. _________ trades are at the Net Asset Value at the end of the trading date. The 3 year return is 12.8%, 5 year 18.5% and 10 year is 16.4%. YTD is 53.4% (10/30/09).
One very important word of Caution. Gold and Silver are treated differently by the IRS tax code. They are considered collectibles and not capital assets and therefore don't qualify for the 15% tax rate on long-term capital gains. Gold and silver bullion and coins and ETFs are taxed a maximum rate of 28%. If held for less than one year, the gain is ordinary income. You should consult your CPA or adviser on this or any tax matter.
The recent correction in December in the PMG was healthy with a rally in the USD inevitable but temporary. Au was up to a new record high in 21 of 24 trading days in the last 30 days (as of the drafting of this newsletter). In CMV's opinion the major move that will potentially propel Au to much higher prices is the prospect of inflation over the next two or three years or even longer. CMV will monitor this situation on an on-going basis. If inflation morphs into hyperinflation the possibility of a 'crack-up boom' or the end of this cycle will require that all positions in PMG be liquidated.
Some investors will and should take possession of their gold investments in kind. PMG coins and bars are highly recommended. Be absolutely certain that you deal with an experienced and reliable dealer and that you have suitable storage for these assets. And, don't divulge your acquisition to anyone except a trusted member of your family. Contact Pat Gorman at Resource Consultants, Inc. (800) 494-4149 or (480) 820-5877.
_________ is an agribusiness ETF and provides exposure to publically traded companies worldwide that derive at least 50% of their revenues from the business of agriculture. Some of the better known names in the _________ are John Deere, Monsanto, Archer-Daniels-Midland and 43 other companies. CMV will feature the anticipated rise in food and commodity prices in a future issue. Watch the prices of a cup of "java." Coffee could rise from $1.45/lb to $2.00/lb.
7. Real Estate
Is also a true contrarian play. The investor must overlook the fact that 23% of ALL residential mortgages in the US are underwater and 30% to 40% of all loans that are modified default for a second time. Defaults amongst prime borrowers exceeds sub-prime for the first time and is occurring amongst the employed as well as unemployed. Fannie Mae (FNM), Freddie Mac (FRE) and FHA are providing 80% of the residential financing at present and all three are surviving on taxpayer support. FNM is now renting homes to their borrowers rather than foreclose. A vivid case-in-point when government interferes with free enterprise.
Despite all the bad news, new home sales nationally were up 6.2% in October and resales were up 23.5% for the same month influenced significantly by the extension of the $8,000 tax credit for new home and $6,500 for resales.
So, how do you play the residential market? One, work with a seasoned, reliable realtor or syndicator experienced in foreclosures, short sales and other opportunities. For those who want to invest in the Phoenix Metropolitan market and require full hands-on management you should consider Empire Residential Opportunity Fund, LLC. This is a private offering available only to "accredited investors." Interested parties should contact Empire directly, or email CMV at email@example.com
In the commercial market, which exceeds residential in the bearish news department, Vanguard's REIT ETF is a representative play for the potential longer-term upside in this market. The stock is already up 100% from its low so it isn't a screaming buy. Total assets are near $10 billion and are diversified as follows:
Industrial -- 4.9%
Office -- 16.2%
Residential -- 17.1%
Retail -- 25.5%
Specialized -- 27.1%
Diversified -- 9.2%
8. Special Situations
These names are for aggressive investors who can afford to lose most if not all of their capital allocated to the 3 natural resource stocks in this section. _________ (_________) is a Canadian precious metals exploration company with a large prospect in Argentina (H. L. Quist owns and controls a substantial holding in this company)._________, Ltd. is a Canadian diversified investment and merchant banking company. It is invested in small cap uranium, oil and gas, precious metals, potash, lithium and rare earths as well as biotech and technology sectors. Uranium exploration is a major part of_________ holdings. _________, Ltd., (_________) is also a Canadian exploration company focused on rare elements which are used in virtually all communication devices. It is reported that China owns or controls 90% of the rare earths known in the world. _________ is also involved in gold exploration. Anyone interested in any of these special situations should go to the respective websites for full information.
_________is Proshares Ultra Short ETF which is a play on rising interest rates. As rates rise the value of the Lehman Long-Term Bond Index (20 years +) loses value and thereby a gain for the investor who is "short" the bonds. Ultra means that the security is leveraged 2x1 thereby doubling any gains or losses. As long-term bond yields rose from January, 2009 to June, 2009 this ETF rose from $36/share to $58/share, but dropped 20% when rates declined in late summer. This security is for aggressive investors only.
H. L. Quist is associated with DJM Wealth Strategies, LLC, a Registered Investment Advisor and has a branch office at 4323 East McDonald Drive, Phoenix, Arizona 85018. All inquiries should be directed to firstname.lastname@example.org
H. L. Quist's CMV Recommended List is NOT included in preview.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss.
-- H. L. Quist
P.S. You may also send me a message through the newsletter site and I or my internet assistant will get back to you. HLQuist_Contrarian_Market_Viewemail@example.com