-- Posted Monday, 1 June 2009 | Digg This Article | | Source: GoldSeek.com
Sometimes it’s quite beneficial to review one’s past actions and results in order to make an educated guess on the future. Did you say “guess,” Mr. Grandich? Believe it or not, that’s the best anyone can do. While I appreciate the many accolades for perhaps the greatest streak of success on the “guessing” front in my 25 years in this crazy game, I’m no St. Peter. He did manage to walk on water for a brief period but even he soon realized no mere human can do so on their own. Thankfully, it’s been almost a decade now since I was last a “legend in my own mind.” Now it’s my waist that can’t get through doors versus my head.
The easy part of this commentary is the look through the rear view mirror. I, along with most other financial people, have at one time or another done all we could not to look back in hopes our clients/followers would forgive our poor driving and stick with us for a better road ahead. So please allow me to beat my chest a little (there’s not much to beat so that’s why it’s only a little).
I made the most drastic move in my entire career back in October 2007 just two days after the Dow Jones Industrial Average hit its all-time high. I stated one should sell all equities except those related to precious metals and to short the U.S. stock market. Among known friends and followers, I don’t think 2% listened. Some may have sold some shares and/or shorted the market but none took the advice to its fullest. That should come as no surprise. The human psyche just doesn’t allow most of us to be in an environment where the masses are mostly on the same wave length and suddenly you’re asked to make a 180-degree turn.
At one time in my life, I spent more time at a craps table (imagine how foolish we are to think we’re going to win on a game called craps) than I care to remember. While the casino never had to change its name to Grandich, I did learn some very interesting facts that took place during the game that could be applied to investing. The first is the vast majority of people bet on the shooter even though the odds for or against are almost the same. Why? Because people like to bet on success not failure, and the game is set up as if a bet on the shooter is a bet against the house (even though the house gladly books all bets on the shooter and against them). The euphoria from being part of a winning roll seems far greater than being among the minority who bet against the shooter and win seemingly at another player’s expense.
There are other factors that have actually helped me stay ahead in the biggest casino of them all - Wall Street - but one of them ties directly into the point I was about to make. When the stock market just made that all-time high in October 2007, the overwhelming majority of individual investors and professional advisors were on the long side. Very few placed bets on the short side (there’s another reason for that but I’ll go into more detail in my book due out this year). It was like a dice game where the shooter and the vast majority of players at the table are betting on the shooter. In all the years I “sleep walked” to a craps table (that excuse didn’t work with the wife, either), I never once saw players winning on the shooter just pick up their gains and move on, let alone switch to the other side. Again, the human psyche just doesn’t allow that. The same can be said for October 2007. The crowd was very long and the feel of the game (thanks to shills like CNBC) was being hyped to levels that this roll would keep going on and on. No matter what fundamental argument one made (including my own), the crowd was just not going to listen.
Just about all financial firms and their employees are greatly tilted to the bullish side since being bearish doesn’t sell products and services to most. Add the cottage industry that surrounds this “biggest casino in the world”-financial radio and TV stations, financial publications like Money Magazine and all sorts of people who sell products and services that are supposed to help investors win (which really only prosper in bull markets)-and the game appears to have only one path -up.
This group of people and organizations (all part of the “Don’t Worry, Be Happy Crowd”) could all be tossed off the Empire State Building and would all say the same thing all the way down - so far so good! You just won’t see them betting against the shooter so they’re never going to tell you to pick up your chips and leave (them) or switch to the other side. This is why most people and advisors only win about a third of the time and had no plan to handle the devastation that has now taken place. But just like a craps table that went cold eventually gets filled up again with new shooters, the financial advisors who failed to foresee this horrific crisis are once again peddling their wares to “shooters” who still step up to the table hoping for that one big roll.
I tell you this in hopes of you realizing you’re just not going to get lots of confirmation when you perceive a change in direction because Wall Street is indeed made up of sheep, which if you ever watch in a field, follow one another all over in different directions. The shame of it all is that those in the “happy” crowd are many times wolves dressed in sheep’s clothing. Throughout this 20-month period of near perfect calls in several markets (except junior resource stocks in 2008) and virtually all winning stock picks, I made calls and picks that seemed (and I was told) to go against the general consensus at the time. Betting against the crowd at some time is the only way to catch a new trend before the crowd does, but simply betting against the crowd isn’t any assurance of success. However, when fundamentals, technicals or a combination of both lead you to believe a change is warranted, you can’t wait for it to become evident to most because you will never beat the crowd. We must constantly stay on guard and not fall in love with our position to the point we’ve dug in our heels so far that our pride prevents you from making the switch. That’s why most professionals under-perform: they are either trapped with having to be always bullish or bearish based on the products and/or services they provide; they become so entrenched in their beliefs that they can’t bring themselves to change for fear of switching just before they’re right; or, they wonder what people will say if they do.
The few successful gamblers will all tell you that preservation of capital is the key to success. I will use craps again to explain this but almost any gambling vehicle would work in this scenario. As someone loses more and more, they tend to increase their bets in hopes of getting back what they lost. The few successful gamblers do the opposite. They wait until the game changes in their favor before increasing their bets. The same is true in investing/speculating. One tends to sell winners to average down in losers versus selling the losers for what they can get and put more on the winner.
Going back to October 2007, I envisioned the worse financial crisis since the Great Depression. I said the most prudent investing strategy was to be a live chicken versus a dead duck. If one had followed the advice, they would have been heavily in cash, short the market and long precious metals-related investments. Cash did turn out to be king; I covered the short position just under DJIA 8000 and gold held its own. I did get smacked in junior resource stocks but exposure there was advised to be no more than 10% or so of one’s portfolio. I believe 95% of all investors would be delighted if they had done this.
What made this move even more beneficial was on March 6, 2009, I literally startled friends and followers (and myself), by leaving the bear camp and calling for a big rally in stocks. Boy did we get a rally! I rode that rally all the way up to May 9th. At that point, I decided to take big profits even though I felt the DJIA could still get to 9000. A significant part of those profits came from oil stocks that I placed in the portfolio in late December and early January when oil was significantly below $40. Back then, the crowd was again all in concert about too much oil and a further decline to as low as $20 was near universal. I also took profits in foreign markets ETFs and Canadian banks. Yes, the market has inched up since then and oil has gone past my original target of $60 (but I maintain a long-term target of new all-time highs). By keeping my large exposure to precious and base metals-related investments, we’re now experiencing large double-digit and triple-digit paper profits. I think only one open recommendation is lower by a few cents.
I tell you this not to gloat (okay maybe a little) but to emphasize again that my main goal is to build and preserve capital especially in volatile times. This is my mindset as I now try to “guess” the future.
U.S. Stock Market -
Only on Wall Street where the “happy” people play could so much bullishness be present while the U.S. Dollar extends its death march. But can you blame the sheep leaders? After all, I believe they wiped out more sheep (and many wolves) in the last 20 months than the grand total of the last 20 years. In all seriousness, the widespread losses among investors, particularly those 55 years old and older, is going to have a profound effect going forward.
Bullishness has rocketed up the last two months yet the market can’t get through the highs made when I exited. One could argue this is just a breather, but my work suggests it’s a broadening top. The fact that the Dow Jones Transportation Average is under-performing is troublesome. After all, if the green shoots were turning into roses, one would expect a significant pick up in transportation stocks.
Despite my return to the bearish camp, I’ve not advised shorting this time around. Why? I think the freefall is behind us. This alone will have the “happy” people out of their foxholes and waving the sheep on. At the same time, I think all the liquidity thrown into the market can at least give some ability to get growth to either side of zero. Therefore, I expect a significant trading range is developing between the March lows and possibly as high as DJIA 10,500 (but more likely 9,000). It should be strictly a trader’s market. If I’m right about us facing even more economic, social and political problems as we get into 2010 and beyond, I do believe we can only look to the long side if and when we’re closer to the bottom of the trading range. Sideways markets are the most difficult for individual investors because the majority of them are speculators/gamblers and need the action. Having chicken feathers until further notice is okay.
Foreign Stock Markets -
Here too I’m bearish (except neutral on China) but if you absolutely need to be long equities, do so overseas versus here in the U.S.
U.S. Dollar -
Perhaps ad nauseam, I’ve said two things about the U.S. Dollar since the U.S. Dollar Index was well over 100:
As noted in my U.S. stock market comments, only on Wall Street where the “happy” people roam could a country’s currency be falling out of bed, yet the crowd sees green shoots everywhere. Has anyone asked what they’re smoking? Does anyone bother to ask why the U.S Dollar is falling so sharply? Yes, but the overriding reply is hogwash, IMHO. The claim that the risk adverse play in the dollar is being unwound is just a lame excuse. The market had the greatest rally of all time and only now the play is being unwound? Hello! The U.S. Dollar is cratering because astute foreign investors realize Broke Uncle Sam is beyond the point of no return. They know we owe so much and will not be able to pay off much more than the interest, and the dollar has to be cheapening in order to monetize the debt.
With the mainstream media finally noticing the nearly 6% decline in the dollar just this past month, we’re likely to see some correction/consolidation in the near term. But make no mistake about it, Uncle Sam is already in the morgue and funeral plans are underway.
I said my favorite currency was the Canadian dollar. I said when it was 80 that it seemed to me to be a no-brainer to get back to par, which would give a 25% return. We’re about half way there. If the U.S. wasn’t Canada’s biggest trading partner, I would put much of my own money there. But, it’s by far in the best fiscal shape of all the G-7 members. Now if they could only get a real hockey team for their most beautiful city on the Southwest coast.
Precious Metals -
Other than a rare forecast of a correction, yours truly has been very bullish on the precious metals since the spring of 2003. As good of a move as it has been since then, I truly believe we’re only on the threshold of the explosive stage. Despite a near universal dislike for gold among the “happy” people, the mainstream media, and a few perma-bears who have been so wrong for so long (yet for some unknown reason continue to be quoted), gold and silver have outshined just about everything else. The fun can really get started in gold if and when we get above $1,050 and stay there for more than a couple of weeks.
We should see some consolidation. News of IMF sales is welcomed as I believe it will be absorbed without any real damage. For years this fear has hung over gold and will finally be removed. Bring it on!
Base Metals -
While they’ve ridden the wave of “the worse is behind us economically and green shoots will turn into beautiful roses,” I’m afraid as we get closer to 2010 and the realization is we’re at best going to bounce along an economic bottom, base metals won’t be able to go much further to the upside. Because optimism still reigns, we can see higher prices but it’s too late to first begin accumulating them. Copper can see $2.50 but then could see a trading range of $1.75 to $2.50 for quite a while.
U.S. Treasuries -
My no-brainer pick for 2009 was shorting the 10-Year Note and 30-Year Bond. It’s clearly been a no-brainer so far as the interest rates on these two have risen sharply since my pick. It continues to baffle me how the vast majority of pundits can’t grasp the gravity of our situation. I would like to see just one of them explain how we can payback and service 50+ trillion dollars in debt and unfunded liabilities based on expected tax rates and need for government spending in the years ahead. Former Comptroller General David Walker demonstrated it the best a couple of years ago in an interview on 60 Minutes. He clearly showed how on our present course we will truly be broke in the not-too-distant future. That was before the several trillion that has been added to the bill in the last nine months. But don’t take his word on it. The very man who has led this debt explosion, President Obama, recently stated we’re broke. But heck what do those two folks know versus the “happy” people and the “talking heads.” Interest rates can only go higher. My target of 5% on the 10-Year by 2010 is still valid. I believe it can be 10%+ within the next 3-5 years.
There’s an old saying that you can’t please all the people all the time. How true. Despite the blessing of an amazing 20-month stretch that included getting long oil at $36 and oil stocks, I seem to have a couple of real “fans” who seemingly must be super wealthy since they send several emails a day claiming I blew it on oil recently by selling out. This is a tough racket but somebody has to do it-LOL! Yes, I sold out but remained bullish long-term on oil. I said the “Peak Oil” theory is coming true. However, as noted earlier, I wanted to lock in as many gains in order to have plenty of capital when most others don’t. The weakening dollar and seasonally bullish fundamentals have lifted oil well above $60. While the momentum can take it to $70, I can’t buy it here with my target for all of 2009 still being only$75. It’s overbought and should consolidate/correct soon.
Political and Geopolitical Concerns -
Just a couple of weeks ago, I stated geopolitical concerns could move to front and center of factors impacting the financial markets. While developments with North Korea certainly made news, the markets largely ignored it. Perhaps it’s because they feel North Korea has cried wolf too often to believe this is anything more than a ploy to get more aid.
Unfortunately, North Korea wasn’t high on my list of geopolitical concerns. Pakistan and the Middle East are. I don’t believe the “happy” crowd has even begun to understand the potential ramifications of what’s unfolding in Pakistan. No matter what the outcome of the present Pakistan military operation, the can of worms has been opened in that country. Sadly, I fully expect this situation to become one of the most pressing geopolitical factors in many years.
Meanwhile in the Middle East, Iran and Israel continue to be top of the list. The upcoming election in Iran should have a major impact on which way this explosive situation moves. With the election only weeks away, we’ll wait to see the results before assessing my present outlook.
Here at home, President Obama is officially “on the clock.” He can no longer point to the past and strictly blame previous misdeeds as the only blame for where we are economically. He has about 3-6 months to demonstrate a significant positive change for the economy or else he should become #1 on the blame game charts. But in the long run, it’s not going to matter, IMHO, as we’re only a couple of years away from the time of reckoning for the sins of several decades of excess spending and debt binging.
My Model Portfolio has been updated.
Please Note - I will be in Vancouver June 2nd through June 9th and speaking at the “World Resource Investment Conference.” I will be emcee and host some panels and workshops. I will also be doing a 90 minute Q & A at the end of the conference.
-- Posted Monday, 1 June 2009 | Digg This Article | Source: GoldSeek.com
Peter Grandich is the Managing Member of Grandich Publications, LLC (www.grandich.com).
The company publishes The Grandich Letter (first published in 1984) which covers the metals and mining industry, follows world markets and economies, and covers the Canadian markets from an American prospective.
Grandich also provides a variety of corporate finance and development services to publicly-held companies.
Peter Grandich is also the Managing Member of Trinity Financial, Sports & Entertainment Management Company, LLC (www.trinityfsem.com), a Registered Investment Advisor in the State of New Jersey. Trinity provides investment advisory services to individuals, small to mid-size businesses, professional athletes and entertainers.
Peter is a long-standing member of The New York Society of Security Analysts and The Society of Quantitative Analysts.
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