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FREE PREVIEW of the February CMV Newsletter section. (The recommended list is available only to paid subscribers.)
(The actual newsletter is better looking, due to the limitations of blog posts.)
February, 2010
H. L. Quist's Contrarian Market View Newsletter
Introduction
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 gains 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.
Market Overview
InflationCMV Maintains that price inflation is gaining momentum and is already embedded in the system, but since no one in government, Wall St. or the Fed wants the "Inflation Jeannie" to get out of her bottle, the evidence to document inflation is difficult to find. For example, the Wall St. Journal (WSJ) on January 21, 2010 on page A-1, indicated that the Producer Price Index (PPI) for finished goods, was up an incredible 4.4% in December, year over year. This followed a 1.8% rise in November. The brief article under VITALS on page A-1 refers the reader to page A-2 for details. There is no additional information on A-2 or in the entire section. A rare omission by the WSJ.
Going to the Internet to get the Bureau of Labor's report, it confirms the 4.4% figure but when "seasonally adjusted" the number is reduced to a minuscule .02%. Like the Consumer Price Index (CPI), the government number crunchers have the ability to arrive at just about any number they want. The report does disclose, however, that finished good prices were up 1.4% in December (See Food & Water).
The Saturday, January 17/18 WSJ has a feature article, Inflation Remains Tame, With a Warning Sign The article cites the CPI for December as a "tame" 0.1%. It then says, "But in an ominous sign, a separate report from the Federal Reserve showed industrial capacity shrinking as new investment fails to keep pace with depreciation." The article says that the US economy's capacity to produce goods was down 1% from a year earlier — the largest annual decline since 1967. In short, the manufacturing engine wouldn't be able to meet a rise in consumer demand. What happens in that event? Prices rise! CMV doesn't see any economists or forecasters predicting increases. In fact, the consensus seems to be the opposite — PRICE DEFLATION. CMV has dreams of Jeannie making her appearance soon.
FYI: The Jeannie in the bottle reference is taken from the 60's sitcom "I Dream of Jeannie" starring Barbara Eden and Larry Hagman who would later be the villain in "Dallas." Jeannie was pretty "hot." So is inflation.
The Economy
The Blue Chip Economic Indicators which are derived from 49 economists scattered around the US are projecting an expansion in the economy for both 2010 and 2011. They do not see a "double dip" recession as has been the concern of investors and businesses. They see a 3% GDP growth for 2010 and unemployment declining to 7.9% by the 4th Qt of 2011.
The Conference Board's index of leading indicators (LEI) jumped 1.1% in December which recorded its ninth straight month of improvement. A significant sign that the US is out of the recession. The Board also reported that the Consumer Confidence Index rose to 55.9 in January, the highest level in more than a year.
As some readers will recall CMV forecast (through its alter-ego The Myth Buster - TMB) a surprisingly strong 3rd Qt in 2009, early in the year which the Bureau of Economic Analysis finally reconciled at around a 2% growth rate of GDP. At the same time TMB forecast a robust 4th Qt and a retail boom at Christmas. The Bureau announced on January 30th that the US economy grew at a 5.7% rate in the 4th Qt — the fastest pace in four years. Fortunately, CMV and TMB were accurate though a tad conservative when most observers thought our forecast was too aggressive.
Economists are quick to modify the 5.7% number, however. They say inventory reduction reduces the number by 3.4% and if import growth is removed the GDP comes in at 1.7%. Even when the messenger brings good news, he gets killed!.
What is CMV's forecast for the First Quarter 2010? A GDP number around 3% and an increase in corporate earnings over the fourth quarter, which CMV believes will surprise on the upside.
Food & Water
"Sometime in the next few years, we're going to have very serious shortages of food everywhere in the world and prices are going through the roof." — Jim Rogers, CNBC interview
CMV brings to you issues and opportunities that are ignored by perhaps 97% of the US population. Is there anything that would financially and socially adversely impact our way of life than the shortage of food and water? And, they're inexorably intertwined.
As previously discussed in How To Profit From The Coming Inflationary Boom And, Avoid the Next Crash (PROFIT by H. L. Quist) a critical component of these necessities of life are strategically positioned in the San Joaquin Valley in California. This is 5 million acres of the most productive farm land in America and some sources say that its products feed 25% of the US population. This area consumed 6 million acre feet of water per year until last spring when Governor Arnold Schwarzenegger cut off most of the irrigation water from the Sacramento River in Northern California to the Valley. Farmers and citizens lost a lawsuit brought by eco-terrorists who preferred to preserve the Delta Smelt (a small fish no bigger than your index finger) and the Desert Harvest Mouse, both who live in the Delta, than feed people. Sacrificed were the economic lives of thousands of farm owners and their employees, not to mention the loss in value of irrigated farm land. Expect the prices of cantaloupe, cucumbers, strawberries, squash, pumpkins and a wide array of fruits and vegetables to rise significantly while the State loses millions of tax revenue and is on the verge of bankruptcy.
Another unknown element. One third of our daily diet depends on honey bee pollination (21 different foods). California is now facing "The Silence of The Bees." Massive death of mobile bee colonies from parasites and unknown disorders have severely impacted the food supply. Arizona has been exporting bees to California. One source reported that California had its worst crop year since records have been kept. To add to the mix, the citrus greening disease is entering San Diego County from Mexico and once entrenched it can kill an orchard in two years.
A four year drought and reduced snow pack in the watershed in the High Sierras is the principal culprit. The lack of snowfall has also drained the reservoirs in Utah and Arizona. Arizona officials have announced in January that Lake Powell, which feeds Lake Mead in Nevada, will no longer be making extra releases of water.
Lake Mead is down to within two feet of a severe crisis. CMV has learned that the siphons that suck the water out of the lake are positioned well above the bottom and won't draw water soon. As H L Quist reported in Profit, the gamble of buying real estate in Las Vegas isn't whether the market rebounds, the risk is the loss of their principal water supply! As this CMV is being drafted one of the largest storms in recent history has hit California and Arizona. It will help but it's not the solution to this incredible nightmare that virtually everyone has ignored.
How does the investor profit from an almost inevitable shortage of water? CMV is adding PowerShares Water Resources Portfolio (PHO) to its recommended list. The fund is based upon the Palisades Water Index which consists of ADRs and common stocks of companies that are focused on potable water. The fund is up about 70% from its March, 2009 low but up only 3% from its inception in January, 2006.
As far as food is concerned PowerShares also offers it's Dynamic Food & Beverage Portfolio (PBJ) which is based upon the Dynamic Food & Beverage Intellidex Index. Some of the fund's core holdings are familiar names like Coca Cola, General Mills, Kellogg, Heinz, McDonald's Corp, etc. Consumer staples are 80% of the fund. The fund is up 40% from the March, 2009 low but up only 0.13% from its inception in June, 2005. An investor could expect modest long-term growth from both PHO and PBJ until shortages and increased pricing occurs.
The Washington Earthquake
We all watched in horror as the film clips revealed the devastating earthquake that hit Haiti. Americans, as they always have in time of crisis, generously donated medical care, manpower, and money to help those in need. Your author had for several years supported children at a Catholic orphanage in Haiti which suddenly ceased operations without any word. Haiti's succession of corrupt dictators has continued to divert financial aid to themselves at the expense of its people. Maybe the devastation of this country will be its salvation.
A second earthquake occurred in Massachusetts on Tuesday, January 19th. The predominantly Democratic and Independent state sent a resounding rebuke to President Obama and his "progressive agenda" that will have a far-reaching social and financial impact on the US. The WSJ's front page article the day after said the "Voters Lack Confidence He (Obama) Can Cure Nation's Woes, Say He Overreached." Mitt Romney, the former governor of Massachusetts said, "Massachusetts rejected the President's policies and his arrogance." Ironically, it was the former Republican governor's universal health insurance plan for his state that resembles Obamacare, that fired up the voters. In three years, employer-sponsored premiums for health insurance in Massachusetts are the highest in the nation, while promising to lower costs! The citizens of Massachusetts rejected Ted Kennedy's legacy! How significant is that?
On a national scale, Americans (except those waiting for a re-distribution of wealth) are focused on the $447 billion omnibus spending bill and earmarks for fiscal 2009, the $787 billion stimulus bill and talk of a second tranche, $3 billion for cash for clunkers, $75 billion in mortgage assistance (HAMP) which has a modest success rate and is only "kicking the can down the road," $34 billion for child health care, $30 billion in expected auto loan bailouts and a deficit that could reach $1.5 trillion for fiscal 2010. All of those senators and congressmen and women who supported this Keynesian irresponsible spending also face a rebuke and defeat in November. A halt in spending and an end to the progressive movement should be a major plus for and growth in business and the economy. It's a must! How can the Treasury possibly pay the interest on this debt if it doesn't?
Those in the media and Obamanites who scoffed at The Tea Party efforts a few months ago can't escape the symbolism of the moment. The Boston Tea Party in 1773 marked the beginning of the end of British rule. The current Tea Parties will end the power-hungry far left Progressive's desire to take control of this country.
Real Estate Financing
Just when you think there's light at the end of the tunnel it turns out to be a train to nowhere. That's the trip that the following real estate lenders (taxpayers) find themselves.
First it was the "Christmas Eve Massacre." The US Treasury announced that day that there would be NO limit on the availability of funds for Fannie Mae (FNM) and Freddie Mac (FRE) when they had just previously announced a $400 billion ceiling. Both firms are in conservatorship and in all probability will be nationalized.
Now it's the Federal Housing Administrations (FHA) turn to come to the brink. In 2006, FHA's share of the mortgage market was only 2%. As the sub-prime market began to implode, mortgage companies and banks refinanced their junk loans with FHA guaranteed loans. Many of these borrowers made one payment then defaulted unloading risk from institutional investors to the taxpayers. Congress requires that FHA maintain a 2.00% capital reserve ratio and as of September 2009 that ratio was at .05%. And, Barney Frank wants to expand FHA's role and its loan limits! On January 21st, FHA Chief David Stevens announced a number of cosmetic changes including upping the mortgage insurance premium, lowering the maximum seller contribution and requiring a minimum credit score of 580 for those with a minimum down payment. Like FNM and FRE the hole will simply get deeper. In CMV's opinion the residential financing market (these agencies currently provide about 85% of the loans) are headed for total 100% nationalization. Within a year or so there will be no hand wringing and debate in Congress because the losses will be buried. The Department of Agriculture (appropriately the DOA) discovered this method of accounting years ago. Americans have Bill Clinton and Congress' "Modification" of the Community Reinvestment Act and Barney Frank's desire "to roll the dice" for destroying these agencies.
NOTE: Just as CMV was going to press Barney Frank, the Chairman of the House Financial Services Committee announced on January 22 that "I believe this Committee will be recommending abolishing Fannie and Freddie in their current form and come up with a whole new system of housing finance." CMV has followed the "Evil Twins" since 2002. It was the Chairman and his Committee that led the Twins to a life of crime. On a minimum basis they should be charged with parental abuse!
CMV has been asked to comment on the commercial real estate market. One subscriber, an investor in the market, forwarded an article by Dan Amoss titled "The End of Extend and Pretend." Amoss says "zombie" buildings are popping up all over the US and REIT investors believe that, "Banks will simply rollover underwater loans once they reach maturity, in the hopes that a future rebound in property values will catapult these loans back into solvency. This phenomenon is known as ‘extend and pretend'." Amoss believes that a 40% decline in the REIT index is in the future. CMV recommended the Vanguard REIT (VNQ) at $44.74/share which was up 100% from its March, 2009 low. If Amoss and others are right in their assessment, one way to hedge your holdings whether they are shares or property is to purchase the Ultra Short Real Estate Pro Shares (SRS) which will increase in value if the REIT market sells off. CMV will not include SRS in its recommendation list but felt compelled to keep its subscribers informed and offer alternatives. It's been CMV's consistent position that the solution to the entire real estate market it a formal devaluation of the US dollar. With the recent economic boom in China and their central bank raising interest rates, the pressure to re-value the Yuan and possibly decouple it from the US dollar is growing enormously. CMV has a sense that something has to break otherwise the light at the end of this tunnel will be a train.
1. Cash and Fixed Income (Preservation of Capital and Income)
As bond investors became concerned about the ability of certain European Community Nations (EU) to meet their obligations on their sovereign debt, the US bond market became (again) the safe haven. Those countries, unflatteringly referred to as the PIIGS (Portugal, Italy, Ireland, Greece & Spain) are all experiencing a decline in tax revenue with high debt loads. These events should not impact any of your holdings in JEMDX or FAX. The chief beneficiary has been PTTRX which has a total return (capital appreciation plus dividends) of 1.6% since January 1, 2010. The US Federal Reserve recently cautioned investors that interest rates will rise in the future which will adversely impact PTTRX and other US bonds and bond funds. hedges against that potential change.
2. US Equities (Moderate Growth, Stability, Seek Capital Gains)
The Dow Jones Industrial Average lost 3.46% to 10,067 in January and the NASDAQ was down 5.37% which accurately reflects the performance of DIA and QQQQ in the CMV Portfolio. As CMV indicated in the January issue, a correction of 10% to 20% wouldn't be a surprise after the dynamic up market off the March, 2009 lows. Some market analysts believe that this market move was driven by the "smart money," large institutional and individual investors, who are now taking profits. If that is the case (and CMV believes it's a valid premise), they will wait for the sell-off to run its' course and buy in at the appropriate time. Of more concern is the impact on the "January effect" as also reported in the January, 2010 issue — i.e., as January's market performs, the balance of the year follows. Historically, there's a validity to this theory but CMV believes that the fundamentals of growth, earnings, interest rates, etc. will be the principle determinant how the market performs for the balance of the year.
Ford (F) reported the first profit ($2.7 billion) in four years and the stock made a nice move. The financials ETF (XLF) suffered only a small decline despite the Obama administration's frontal attack on the banks which is crating uncertainty for all the markets. FAIRX up 3.3% for January continues to post positive gains in down markets. According to a feature story in Barrons.com (January 21st) Procter & Gamble (PG) is poised for new growth.
3. International Equities (Aggressive Growth, Seek Capital Gains)
As anticipated by CMV, those countries that exhibited explosive growth in 2009 were bound to have a correction. Brazil in particular (EWZ -13% and BRF - 15%) are case in point. IF you have shares in either Brazilian ETFs, you should wait for the correction to end and then add to your positions. CMV suggests that you hold CRESY if you bought it. It should be noted that China's Shanghi market is also down 15% from its 2009 high which was not recommended by CMV in anticipation of this correction. India (PIN) and Australia (EWA) have had small corrections also but the fundamentals have not changed.
4. Hard Assets (Aggressive Growth, Sector, Capital Gains)
This sector is highly influenced by the prospective outlook for the global economy. The perception that China, the world's largest single user of these products, may be experiencing a government induced slowdown and higher interest rates to avoid inflation is a principal factor that has led to a correction in these names. CMV remains confident that the energizing markets and economics as well as domestic needs will soon re-establish demand for these products.
5. Precious Metals (Aggressive Growth, High Volatility, High Risk)
As CMV's alter-ego (The Myth Buster) forecast three months ago, the US Dollar has rallied from about 75 on the US Dollar Index in December, 2009 to 79.47 on January 31, 2010. A move of about 7%. Virtually every economist and market analyst on the planet was betting on the demise of the dollar. TMB commented that when all the passengers move to the same side of the ship, the boat usually capsizes. It had to happen and it did. Dollar rallies, the PMG declines. Gold bullion was only off 1.3% from the December 31, 2009 basis of $1,097/oz. This move by the USD will, in CMV's opinion, reverse dramatically when the inflation Jeannie escapes from her bottle.
(Charts courtesy of www.stockcharts.com)CMV is adding two more PMG ETFs to the Portfolio. Platinum bullion (PPLT) and Palladium (PALL). Both of these ETFs were just introduced in early January, 2010. PPLT reached a high of $165/share with early high demand and profit taking resulted in a close of $150/share on January 29th. PALL had similar results running up to $47/share and closing at $41.69 on January 29th. Both of these metals are utilized in catalytic converters for automobiles. Platinum bullion is currently $1,512/oz and tracks gold also as a precious metal. Palladium, at $419/oz is a cheaper alternative for catalytic converters and usually enjoys increased demand when its sister metal becomes higher priced. Platinum is also highly used in jewelry and the above-ground supply is tightening.
George Soros, in addition to putting his money on Barack Obama, is also a major player in the stock and commodity markets. He has been particularly successful in taking a position where he can politically or financially "influence" his trade. He recently announced that "gold is in a massive bubble" and is due for a sell off. It wouldn't surprise CMV that Soros is seriously shorting gold and plans to profit from its decline. Nothing would be better for America and our markets than to have this and other trades go horribly wrong for Mr. Soros.
6. Commodities (Aggressive Growth, High Volatility, High Risk)
The appreciation of the USD affects all commodities negatively (at present) and MOO is no exception. Refer to CMV's comments prior on Food and Water. We're adding the Water Resources Portfolio (PHO) and the Dynamic Food & Beverage Portfolio (PBJ) to the CMV Recommended List. Both ETFs are long-term hold situations.
7. Real Estate (Aggressive Growth , Illiquid)
Please note CMV's comments prior on real estate financing.
8. Special Situations
The top performer for the month is GDPEF which gained 18%. The company is in the process of completing 30 additional exploratory drill holes in order to obtain a NI 43-101 Canadian government compliance report which will establish the proven reserves on a portion of the property. This report could be a key milestone in determining the value of its deposit and the stock.. Go to goldenpeaks.com.
CMV had suggested RRLMF in January. Several subscribers have asked for more information on Rare Earths. Jim Dines (The Dines Letter) is the foremost authority on the subject. He has studied the industry for 10 years and gave a BUY signal on several names on May 22, 2009, which propelled the six stocks in his index up 800%! Here is what Jim says about Rare Earth Elements (REE):
"...Rare Earths are 15 obscure elements in the lanthanoid species, plus two more elements, for a total of 17, and they have extraordinary properties: they are used for super magnets that can withstand heat for batteries of hybrid cars, so Toyota can't build a Prius without over 65 pounds of them: you couldn't use your iPhone or Blackberry without Rare Earths: and get this, people running around saying they're going to build a lot of windmills so we don't need nuclear power don't seem to realize that you cannot build 3 megawatt windmills without over 700 pounds of Rare Earths, and China controls 97% of the world's production!...Once our Pentagon totally realizes that it cannot built ‘smart bombs' or predator drones without Rare Earths, and that China controls their production, the Pentagon will likely have a military version of apoplexy and call for a crash program to develop friendly American, Canadian and Australian resources."
Who is the most likely candidate with their property in the US? Rare Element Resources (RRLMF). Dines also recommends 5 other companies. Google James Dines and get THE DINES LETTER. He's an expert on natural resources and the human condition. CMV highly recommends his newsletter.
TBT declined 6% in January due to the inflow of funds into US bonds and the rally in the USD. IF you've already taken a position in TBT, Hold. If not wait for the dollar rally to run its course. It's a matter of time when interest rates rise as the Vice-Chairman of the Fed just warned this past week.
NOTE:
The February CMV was based upon the market close as of January 29th. There was a significant market reversal to the upside on Monday, February 1st. The Institute of Supply Management (ISM) Index increased four points in December to its' highest level in four years. In addition, the Wall St. Journal reported that banks were easing borrowing requirements. The entire CMV Portfolio was up 3% in one day, which supports CMV's position that the economy is improving at a faster pace than most analysts acknowledge.
-- H. L. Quist
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