Below is a preview of the CMV (Contrarian Market View) Newsletter for December. See the end of this post for a free book offer with the purchase of a subscription to the full monthly newsletter. (Note: due to the limitations of a blog post the appearance of this preview is not as it will appear in the actual subscriber copy.)
H. L. Quist's
Contrarian Market View
H. L. Quist's
Contrarian Market View
The CMV Portfolio continues to outperform all the major indices up 30.1% YTD whereas the S&P 500 is up 6.47%. Investors who are concentrated in Sector #5 (Precious Metals) are experiencing unrealized gains of 30% to 40% YTD.
CMV believes that it should be instructive and worthwhile to review our forecasts and observations for the past eleven months in order to assess the relevance and value of this newsletter to its' subscribers. The January 2011 issue will feature CMV's forecasts for the year ahead. Here's a capsule of 2010.
This inaugural issue was primarily devoted to articulating the philosophy and methodology of the Contrarian Market View (CMV). We stated:
CMV is not a market timer, but we don't want to be 100% exposed at a major turn in the market.
In our opinion, the most effective way to deal with continuing market volatility in the future is through "Active Management." Some of the observations made by CMV eleven months ago were:
"The state of California could file bankruptcy in early 2010 absent a Fed bailout." (The bailout came in the form of $30 Billion in Build America Bonds guaranteed in part by the Federal Government.)
"The USD (US Dollar) further rallied sharply from 74 to 78 propelled by the downgrade of Greece's sovereign debt...Ultimately however, CMV expects a significant devaluation of the USD..." (The USD continued to rally as CMV reversed its' position and reached a high of 88 on the Index in June, 2010. It has returned to the 80 range at the end of November.)
CMV recommended a Contrarian purchase of Ford (F) at $10.00/sh and a stock in an unknown sector known as "rare earths" (REE) at $3.86/sh. (As of this date Ford is up 59% and REE is up 158%.)
CMV recommended the purchase of TBT, an ETF that would profit from rising bond yields and forecast that the 10 year T-Note yield could exceed 5% in 2010. (CMV reversed its position in May, 2010 to TLT. The forecast was premature and bond yields declined in mid-2010 as fear of a "double dip" grabbed the headlines.)
CMV introduced its' subscribers to the "Inflation Jeannie" whose reference was taken from the 60's sitcom "I Dream of Jeannie" starring Barbara Eden and Larry Hagman. A sudden rise in the Producer Price Index (PPI) in the preceding November, foreshadowed (in CMV's opinion) the rise in inflation and Jeannie's appearance from a dormant state in her bottle. (The threat of a "double dip" and deflation by mid-year forced Jeannie to return to the confines of her bottle only to resurface again in late 2010.)
As early as February 2010, CMV made this political forecast:
"All of those senators and congressman and women who supported this Keynesian irresponsible spending also face a rebuke and defeat in November." (Pretty good call 10 months in advance.)
"The current Tea Parties will end the power hungry far-left progressive's desire to take control of this country." (Not 100% but the spending will be significantly cut.)
"Its' been CMV's consistent position that the solution to the entire real estate market is a formal devaluation of the USD." (QE2 is a formal devaluation of the USD. CMV believes that QE2 is another short-term fix that will lead to adverse longer-term consequences but should lift real property values.)
CMV vividly disclosed why the banks were not lending to businesses using a chart from the Federal Reserve that revealed that commercial and industrial loans at all commercial banks had declined by $600 billion from 2007 to 2009. Unknown to the average investor and business person, the commercial banks were borrowing from the Fed at a minuscule rate of .25% and then loaning it back to the Fed at 1% and the Fed in turn used the money to buy US Treasury Bonds. Unknown to perhaps 99% of the US population, there weren't sufficient number of bidders to buy US debt at some of the auctions and the Fed became the secret "direct buyer" for the unsold bonds.
(The above charade has now been replaced or augmented by QE2 whereby the Fed creates the money out of thin air and buys the bonds.)
Despite a poll of newsletter writers that showed that bullish sentiment at 34.1% was the lowest since the bottom of the stock market in March, 2009, the CMV portfolio was up over 6% YTD and the commodity Sector exceeded that number. CMV alerted its' subscribers to the duplicitous motives of George Soros, who while attending the World Economic Forum in Davos, Switzerland, claimed that gold was in a bubble and it would soon burst. Bullion dropped $49 the next day and the world's most devious market manipulator added $421 million of the ETF GLD to his portfolio shortly after his announcement.
(CMV would soon name George Soros as the "Most Dangerous Man in America" before Glenn Beck exposed him.)
CMV took the Contrarian View that the economy and the stock market would continue to outperform the dire forecasters who were mouthing "double dip." CMV said:
"...[consumer] spending could surprise on the upside. Ford's sales and profits will be the industry's leader." (Barring an unforseen event, Christmas 2010 will confound the experts also.)
(CMV was overly optimistic on the growth of the GDP in the 4% range for 2010 unless the fourth quarter exceeds all projections.)
As early as April CMV highlighted the massive short position in silver held by J. P. Morgan Chase. (As reported in the November issue of CMV, two lawsuits have been filed against the bullion banks for fraud. Bart Chilton, an officer for the Commodity Futures Trading Commission (CFTC) stated publicly that he had reason to believe that fraud has been committed.)
In the summer of 2009 H. L. Quist's How To Profit From The Coming Inflationary Boom And Avoid The Next Crash was released which alerted readers (p. 23) to the House Committee on Education & Labor's study on the government's conversion of all privately held 401K and IRA retirement plans to a government retirement account (GRA) managed by the Social Security Administration. In the April issue of CMV, we informed our subscribers that the focus had evolved to requiring the GRA to purchase US Treasury debt. The warnings have now reached Code Red.
(The Obama Administrations has set its eyes on an estimated $3.6 trillion in IRA's and an additional $2.4 trillion in 401K's to save the US from bankruptcy. It is imperative that you go to the following sites and discover for yourself that the proposal to confiscate your wealth is far beyond the discussion stage. The Argentina government ‘confiscated' all private plans in 2009.)
CMV issued a Special Bulletin on May 9, 2010 in response to the European debt crisis and the "flash crash" in the US. The DOW had declined 7.4% or 771 points off its' April 26th high. CMV's recommendation based on its Risk Tolerance Model was:
CONSERVATIVE: 80% Bonds (#1 PTTRX) 20% Gold & Silver (#5)
MODERATE: 60% Bonds (#1 PTTRX) 20% Gold & Silver (#5) 20% US Equities (#2)
AGGRESSIVE: 10% Bonds (#1 PTTRX) 40% Gold & Silver (#5) 20% US Equities (#2) 10% each (#3, 4 & 6)
SPECULATIVE: 0% Bonds, 50% Gold & Silver (#5) 10% Each (#2,3,4,6, &8)
(As the second half of 2010 unfolded, Bonds (TLT and PTTRX) performed well. Precious Metals, Uranium and Rare Earths substantially out-performed all of the markets. CMV attributes its right recommendations to good luck and vision and sincerely hopes they have worked out well for you.)
CMV then issued another Special Bulletin on May 18, 2010 recommending that subscribers consider the following action:
1. Reduce exposure by 50% on all US equities except GRX, FAIRX & SHSAX.
2. Reduce exposure on all International Equities by 50%
3. Switch position from TBT (short bonds) to TLT (long bonds)
4. Sell GLD and SLV at market and replace with PHYS or SGOL.
(CMV's concern was that the PIIGS debt crisis in Euroland, the oil disaster in the gulf, inflation in China, and the Obama administration's declaration of war against Wall St. could create a contagion that would cause a sharp market decline.
The S&P 500 had already declined almost 10% since April. On May 29, 2010 CMV recommended the sale of all US Equities with the exception of FAIRX. Despite the sell-off in equities CMV made several bold recommendations:
"CMV has a sense that this group (Precious Metals) is poised for a major breakout to the upside." (Gold bullion was $1181/oz and Silver was at $18.26/oz at the time. GDXJ was at $25.74/sh. The break-out occurred. Au reached $1410/oz, Ag reached $28/oz and GDXJ topped $36/sh.
"RRLMF (which was admitted to the NYSE/AMEX and changed its' symbol to REE) is the best (rare earth) prospect in the US...The stock is down almost 20% this year. It's a BUY." (REE was at $3.11/sh as of May 1, 2010 and dropped further in June before reaching $13/sh in October.)
In the June issue, CMV raised the question Is The Pro-Growth / Inflation Trade Over? Talking heads on CNBC proclaimed that a "double dip recission" was in the offering. On June 7th, CMV issued another Special Bulletin aimed at those investors who had an AGGRESSIVE or SPECULATIVE Risk Tolerance, suggesting the use of a number of Short Positions to hedge portfolios in the event of a major market sell off.
(Fortunately the major sell-off in the equity markets never materialized and CMV recommended on October 1, 2010 that all short positions be sold at a minor loss or what should be considered as a cost of insurance.)
CMV, exhibiting its x-ray vision accurately forecast the Fed's most provocative strategy in June when we said:
"To counter the sudden trend change (double dip recession) the Fed, the US Treasury and the Keynesian-controlled Congress will resort to creating more fiat currency and deficit spending..." (Ben Bernanke announced QE2 in August.)
Concerned that the ETF trustees of gold and silver bullion did not have the actual metal on deposit to back the ETF shares, CMV recommended the sale of GLD and SLV.
(GLD showed a profit YTD of 11.35% and SLV 12.27%. The jury is still out on whether or not there's skullduggery at J. P. Morgan Chase and HSBC banks.) On November 29, 2010 an article written by Nadezm Walayat in "Market Oracle" indicated that WikiLeaks Founder Julian Assange would soon release information on several major banks that could cause financial contagion panic. Could it be JPM's silver scam? Could it be BofA/Countrywide who has committed "flagrant violations" and "unethical practices"? BofA stock as down 3% on November 30, 2010.
CMV's correct assessment of the downturn in the economy and the recommended asset reallocation proved to be profitable:
TLT produced an unrealized gain of 5.14% during the month as the 10 year yield fell from 3.25% to 2.93%.
The DOW was down 6.27% and the S&P 500 7.57% for the month and the new short positions gained as much as 5.57% for QID.
Despite the decline in the equity markets gold reached an all-time high of $1257/oz. Gold rallied despite the sharp rally in the USD to 88.50 on the Index. Gold was "bifurcating" from the USD.
CMV's report that there was a severe supply-demand imbalance in Uranium gave investors an opportunity to lock in recommended names at low prices. U3O8 was $40/lb in July. (It reached $60/lb in November.)
Anecdotal evidence that the US economy was decelerating was everywhere. US Treasury Bond yields were declining as the 10 year reached 2.89% and Fed Chairman Ben Bernanke formally announced that the Fed would purchase more US debt in the future. His comments from November, 2002 that there would never be a depression in this country because "The Fed has at its disposal a new technology called the printing press" (which your author had based his investment strategy on at that date) was about to ring true.
CMV concluded that, despite all the gloom and doom and Robert Prechter's (Elliot Wave International) forecast of the DOW declining to 1,000:
"The combination of increased consumer demand, Quantitative Easing and devaluation of the US dollar will, you guessed it, create a temporary but devastating INFLATIONARY BOOM and BUST. CMV rejects the strategy but recognizes the opportunity to profit from it.
(As the holiday season approaches the retail-experts have done a 180° turn and now forecast a robust increase of 4% to 5% in consumer spending over last year. CMV saw it coming in August.)
In anticipation of a major supply imbalance of uranium CMV recommended two microcaps in this Sector. MGAFF at $.60 and DNN at $1.50.
(As of November 30, 2010, MGAFF is up 136% and DNN 107%.)
CMV poked a little fun at pundits and forecasters who called for a major sell-off in the US equity markets during the historically dangerous months of September and October. Namely, James Miekka who dubbed his theory the HINDENBURG OMEN after the devastating crash of the German airship in 1937. (All four short positions were down modestly for the month as evidence that a crash did not occur.)
We introduced George Soros the "Most Dangerous Man In America" to it's subscribers in September which provoked a critical question:
"How do you make a living, manage your investments and plan for retirement when there are those in power who want to destroy capitalism?"
(And, CMV would add, profit from its demise.)
CMV's most prophetic statement was:
"CMV sees a relatively short period of Deflation followed by a sharp increase in the prices of hard and soft commodities..."
(Not surprisingly that's exactly what has happened. In 16 months cotton rose from $.45/lb to a high of $1.50/lb in November.)
CMV issued a dire warning for MUNY Bond investors in September:
"There's about $3 Trillion invested in MUNY BONDS with cities facing a cash crunch and huge undisclosed unfunded pension liabilities. CMV recommends a SELL on MUNYS."
(There was a mass exodus from MUNYS in November and redemptions took many mutual funds down over 10%. What was regarded as a "safe haven" became a conservative investor's nightmare that few had ever dreamed of.)
The CMV portfolio gained a robust 12% in September as our forecast proved to be accurate and it paid dividends. Sector #5 (Precious Metals) had an average unrealized gain in excess of 25% for the month. In Sector #8 (Special Situations) REE topped $9.00/sh from a low of $2.00 in July and MCP and TASXF were up over 100% YTD. SALZF which was recommended on March 1, 2010 at $.86/sh was acquired by Talison Lithium, Ltd. at a premium of 125% over the entry price.
September also marked the reappearance of the Inflation Jeannie as few saw the rapid change from a fear of Deflation to a revival of the Inflation Trade within a couple of months. CMV encouraged its subscribers to employ the new paradigm to wealth accumulation:
MACRO INVESTING WITH ACTIVE MANAGEMENT
Bond yields were rising and PTTRX topped out at a 14% unrealized gain YTD but dropped 3% in September. MUNY BONDS imploded and when the Build America Bonds (BAB) ends, many cities and states will be SOL.
CMV gave its subscribers a tutorial in Patience in October regarding #8 Special Situations:
"Three months ago 100% of the names in this sector were in negative territory. CMV didn't FLINCH one iota. When you invest in resource exploration stocks you must have knowledge, conviction and patience. If you don't possess these attributes you'll never make SERIOUS money in this sector."
CMV recommended a penny stock GRGNF on October 1, 2010 at $.22/sh. As of November 30th, the stock is up over 100%.
As a direct result of the counter revolution (the elections) CMV made this very bold forecast:
"CMV believes that there will be a sea change in public sentiment in 2011 that will reverse high unemployment and increase the nation's GDP and tax receipts."
(It didn't take long to see tangible results of this intangible. Fortified by more certainty (politically), and tired of "frugal fatigue," consumers appeared ready to spend, spend, spend at Christmas.)
CMV issued its second tutorial on QUANTIFYING RISK which was very well received and gave subscribers confidence to invest in sectors they were told were, and they perceived as, "too risky."
(As of October 31, 2010 the CMV Portfolio was up 25.23% YTD whereas the S&P 500 was a little north of 5.00%. Investors concentrated in Sectors 4, 5, and 8 had realized and unrealized gains of 30% to 50%.)
November marked another sea change in Washington as the U.S. Treasury, up against a debt ceiling of $14 trillion, a FDIC faced with a task of closing 700 banks and no funds to pay off depositors and a Federal Reserve creating trillions of funny money so the government can keep the lights on, became the "bill collector from hell". As pointed out in the November CMV.
--Fannie and Freddie and other government agencies are requiring all the banking institutions that sold them toxic mortgage debt to repurchase those loans. Estimates range from $100 to $500 billion. When this contentious issue is settled the banks will pay.
--The Justice Department has stepped up filing criminal complaints against bank officers who could be held personally and corporately liable for a wide range of misdeeds and face hefty fines and imprisonment.
--The SEC has recently raided a number of hedge funds charging them with insider trading which, if found guilty, will generate substantial fines and imprisonment.
--The IRS which has recruited 16,000 new agents in preparation of enforcing Obamacare, are aggressively stepping up tax collections while waiting for the premium "tax" to kick in.
What may turn out to be CMV's best recommendation was:
"The opportunity to profit in Microcaps in the resource and commodity sectors will be available for a limited time period going forward. CMV's position is clear and concise. Make some serious money while the opportunity exists and then get the heck out of the markets. CMV's value to you is discovering the opportunity and to advise you when the game is over."
(The only thing CMV can't forecast — how much time do we have?)
The feature article in the November 18th Wall St. Journal headlined:
INFLATION IS VIRTUALLY FLAT
"A key gauge of US inflation has fallen to its lowest level since record-keeping began in 1957, underscoring the continued weakness in the economy...When volatile food and energy are subtracted, prices were unchanged last month...clothing prices fell for the third consecutive month."
CMV believes that the American public is being deliberately spoon-fed deflationary dis-information for a specific purpose. Briefly CMV will offer a rebuttal.
As reported previously, cotton prices have soared from $.45/lb sixteen months ago to a high of $1.50/lb in November, 2010 and have backed off to the $1.25 range. Here's what's happening in the real world outside of US Bureau of Labor Statistics (BOLS):
--Shandong Zaozhuang Tianlong Knitting has raised prices on Ralph Lauren Polo t-shirts and track suits as much as 70%.
--Unitedtex sells $24 million annually in shirts and jackets to the GAP and they're increasing prices 4% to 30%.
--Ningbo Seduno Group which sells about $30 million in men and women's clothes to the US per year has increased prices by 20% since July.
Chinese clothing manufacturers are faced with a "major squeeze." US retailers are also being squeezed. At some point US consumers will feel the squeeze in the form of higher prices.
Food prices are not included in the BOLS CPI numbers. Here's what Phoenix area shoppers are faced with in a grocery market that is considered as one of the most competitive in the US:
Food Item Increase Over 2009
Turkey, 16 pounds + 7.1%
Cube Stuffing, 14 oz +29.2%
Pumpkin Pie Mix, 30 oz +18.9%
Frozen Green Peas, 1 lb +46.3%
Whole Milk, 1 gallon +21.9%
On November 23, 2010 The Federal Reserve Minutes released to the public downgraded the Fed's outlook for the US economy and indicated that it wouldn't return to its former vitality for five years or more and the jobless rate could exceed 8% for two more years. The Fed Minutes also revealed several other key points. One, they "considered" capping long-term interest rates, and two, if growth surprises to the upside next year it will not trigger any quick reversal in policy.
The dichotomy should be obvious but its' relevance shouldn't be missed. If the Fed sees anemic growth for several years, why would they need to cap long-term bond rates? The market would dictate the rates. And, if the economy surprised on the upside their plans are to invoke the "Greenspan Plan" and allow another bubble to inflate.
Here's CMV's simple interpretation of the Fed's Micro-Managed Stimulus Plan (MMSP):
1. Convince the public that there is no consumer price inflation.
2. Create asset inflation through devaluation of the USD and a perceived growth in equity and net worth (Revisit 2002-2007)
3. Cap the Fed's and Treasury's borrowing costs while paying interest on the $14 trillion existing federal debt with cheaper dollars.
4. Increase federal, state and municipal tax revenue through investor's personal and corporate asset sales (revisit .com bubble) and with increased consumer confidence and spending.
5. Support the administration's plan to "confiscate" 401K and IRA assets and/gold bullion to pay down the federal debt to a perceived manageable level.
A Positive Sign Of The Times
In mid-November a grandiose grand opening signaled (to CMV a "change" in the real estate market — at least in the Scottsdale area. Your writer attended a festive preview of Safari Drive St. Collection which is a stylish, mid-rise urban neighborhood located in the heart of Scottsdale at Camelback and Scottsdale Roads. The combination of flats, town homes, and live / work lofts ranged from 1250 sq. ft. To 1795 sq. ft. and prices ranged from $419,500 to $699,500 — decidedly reduced pricing compared to the market peak in 2007.
Hundreds of guests were given a red carpet introduction to Safari Drive with a champagne glass that was filled by a lovely young lady who was hanging upside down suspended by an unobtrusive tripod a la "Circus Solei". The symbolism of the inverted lady didn't go unnoticed to your writer — who interpreted it as a contrarian sign that the upside-down market was over. More importantly, there hasn't been an upscale open house complete with dining and music in the Valley of the Sun for almost three years.
As evidence that a new era in real estate development is upon us is exhibited by the financial structure of the deal. Four major nationally-known brand corporate names are the developers who are partnered with the FDIC who acquired the project through a take-over of a closed bank. The local builder and marketer is Geoffrey Edmunds & Associates who is bringing this project to market at precisely the right time.
Another bit of anecdotal evidence that a real estate recovery is underway is a home builder client has just purchased four lots in an upscale Scottsdale development to build four luxury spec's. His concern? "Do I have a three year time frame?" CMV confirmed that in its' opinion his timing probably couldn't be better.
CMV stated, after the temporary resolution of the Greek Tragedy, that the crisis in Euroland was far from over. Another one of the PIIGS is now bogged down in the mud — Ireland. More ominous however, is German Chancellor Angela Merkel's assertion that the Euro was in an "exceptionally serious situation" which accelerated a sell-off in the common currency. The unspoken reality is that the European Union which the globalists ballyhooed as the remedy to cure all future monetary crises is on the verge of collapse. The ultimate solution? The WoCu — a world currency which includes the US.
Un-noticed by most observers was the report on FOX News recently of the meeting between Dmitry Medvedev of Russia and China's Wen Jiabao. The two rising global powers have sealed their Shanghai Co-Operation Organization (SCO) agreement (revealed by The Myth Buster on November 14, 2010 on Gabcast). The principal purpose of this alignment of the two communist countries is to establish a new economic order and circumvent the USD in trading. The SCO represents a teutonic shift away from several centuries of European and US political and banking dominance. What's critical to CMV subscribers and investors is that gold will be the reserve basis of their new economic order. Informed reports indicate that both countries, who are major gold producers, are NOT exporting any bullion. If you remove these two countries plus a 30% to 40% reduction in production from South Africa out of the supply equation, the price of bullion must move higher. Think $2,000/oz by December 31, 2011.
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Financial Questions? Contact hlquist at djmwealth dot com
-- H. L. Quist