What if they gave a party and no one came?

http://www.marketwatch.com/story/gold-timers-remain-skeptical-a-good-sign-2011-03-02

Do bearish sentiment indicators signal a bottom?

http://blogs.forbes.com/investor/2010/07/08/bearish-sentiment-surges/

The last time bearish sentiment was higher was March 5, 2009. This coincided with the bottom of the last bear market. However, bearish sentiment hit 57.1% on November 20, 2008 and stocks continued to fall after that date.

Though the AAII Sentiment Indicator can be viewed as a contrarian signal, I would caution against relying on any one indicator as a sign that the market is at a turning point.

A better method for determining market bottoms would be to use a combination of indicators. Though the sentiment numbers are insightful, they should be viewed as only one part of a broader market analysis.

Contrarian natural gas call

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/taking-stock/a-contrarian-makes-another-call-this-time-natural-gas/article1538686/

Disclosure: long shares of natural gas pipeline MLP's

Natural Gas and Contrarian investing

Remember when I bought natural gas a couple weeks ago--mainly because NO ONE liked that sector, even the CEO's of natural gas companies, who should be the industry's biggest cheerleaders?

Well, guess what--natural gas company shares have exploded, up over 30% in certain cases. My mutual fund purchase is up 25%, and ATN has more than doubled, a triple-digit bagger.

Logic? The world is awash with natural gas supply, due to demand destruction from a worldwide economic downturn. Natural gas prices surely must decline further, right?

Well, the reason that conventional logic doesn't work as an investment thesis is because markets are not always rational, and when they are rational, they tend to become over-extended and distorted.

But let's examine this scenario further before we declare the madness of markets. If the cost of producing natural gas is $4.00 per British thermal unit, and the market price is $3.50, companies will eventually shut down natural gas wells, in order to suspend losses with each delivery. They have done exactly that, as there are now 45% fewer wells. Shutting them down is easier than starting then up again. More on that later.

With capacity reduced, prices eventually will stabilize and rise, as demand recovers and absorbs excess inventory. As prices rise above production cost, natural gas companies will look to dig new wells to increase their profit margins. However, that's not so easy. Starting up a well takes a lot longer than shutting one down--hence a time lag before bringing capacity on-line. With supply no longer able to keep up with increasing demand, prices rise further. That's the typical supply/demand cycle, and astute, but courageous investors need to account for. Perhaps I'm not so crazy after all. The economic laws of supply and demand do work, but not always in the timeframe most investors anticipate.

As a contrarian, you want a consensus to develop--because it's usually a confirmation that the consensus is wrong when it comes to pricing reversals. It's cyclical. The rule of thumb is when there is a 60/40 ratio, follow the trend--the "trend is your friend" is an appropriate slogan. But when the consensus is overwhelming--perhaps 90/10, you better look for the exits, as the overwhelming majority is almost always wrong.

With natural gas, the selling pressure has been so intense since mid-2008, that the number of sellers has been exhausted--the market ran out of sellers. Prices had to bottom. I follow several indicators to monitor investor sentiment, but it's easier said than done. When your social instincts are to chase the latest fad, it's difficult to go against that same crowd, especially when they are well-regarded. But when it comes to predicting inflection points, it's a prerequisite for investing success.

Why I bought natural gas yesterday

Most raw material producers and mines have either gone out of business, or have shut down capacity, due to an overshoot on pricing to the low side--they were losing money with every production dollar they were spending. Mines and drills are expensive to shut down, and even more expensive to start back up--plus they take time.

In other words, due to cash concerns, these raw material producers are shutting down capacity when they should precisely be increasing capacity when prices are low. Because when the recovery occurs, there will be a time lag for them to start up production. This lag creates pricing bubbles, as too many dollars chase too few goods.

Natural gas prices bottomed out last week, so I bought into a natural gas mutual fund yesterday. If natural gas prices double by next year (winter season), this will triple or quadruple. I purchased some natural gas pipelines for the dividend income last quarter, but I just didn't have time to research individual companies in the sector, so I used an IRA account which specifically caters to no-load mutual funds.

Anyway, since natural gas prices are so low, more fleet vehicles are being converted. We'll have rallies and declines along the way, and I'm not trying to time the moves, but at these levels, I found the trade attractive. As our economy attempts to transition away from oil and coal toward renewable energy, the movement is real, but this weaning process may take years and even decades. Meanwhile, natural gas is a stopgap solution, as it is not renewable, but it is the least offensive to our environment.

But the overriding reason why I targeted natural gas last week is because natural gas CEO's were even more bearish than many investors. Think about it: these guys are supposed to be the biggest cheerleaders for their industry and their respective companies, yet they were joining the doom and gloom crowd. My contrarian antenna was triggered. So I waited for a confirmation move up and jumped in yesterday. I could be early, but if you look at the charts, I'm buying near the bottom--no one can time a bottom or top perfectly. But if you buy right, you can still capture the majority of the move.

So I really am pulling for Obama, cheering for a recovery, even if it is muted and inconsistent, as a high debt load and high taxes dampen any chance of a meaningful economic recovery. At the end of the day, we're all dead anyway.

"Rich Like Them" book review

David Merkel reviewed the book "Rich Like Them", authored by Ryan D'Agostino by summarizing the following points:

* Find opportunities that others don’t see.
* So-called luck favors those who are prepared to profit from volatility.
* Love what you do. Do what you love.
* Take risks. If you work smart and hard, those risks will be reduced.
* Be humble. Realize what you can’t do, and work on what you can do.

The author interviewed mostly business owners door-to-door in the wealthiest zip codes of America, and came up with those common elements. The first point definitely favors contrarians, and as investors, the other 4 apply.

Time to face reality

Just like when Obama won the general election and equities tanked, the Inauguration rally many expected failed to materialized. The correct interpretation is that while Main Street hopes Obama will save the day, the smart money says his stimulative policies will fail. Artificially propping up insolvent industries may be populist, but history shows it is counterproductive in a failing economy. And history always show contrarians eventually are proved correct in predicting inflection points by going against the consensus. Even though Obama is riding a huge wave of popularity, the consensus is always proven wrong. If billion dollar deficits are bad, then trillion dollar deficits are supposed to be good?

The silver lining (or more correctly, the gold and silver lining) is that my investment theses are still intact: the US Dollar is continually being debased due to profligate credit and quantitative easing--in a desperate attempt to save the economy from further decline. But in doing so, we mortgage our future, dampening growth with high taxes, lower corporate earnings, and lower purchasing power. Interest rates have nowhere to go but up from here, while hard assets such as gold and silver will be one of the few safe havens from financial and economic turmoil. Healthcare seems to be the only other recession-resistant industry. Markets don't move up or down in a straight line, so we will experience corrections against the prevailing trend, but these trends are already paying off, so any pauses will be opportunities for me to add to my already profitable positions. In other words, I don't know how gold prices will move tomorrow, but I do know 2 years from now, a debased US Dollar almost guarantees gold will move substantially higher.

Today, despite general public optimism, equities tanked again, led by distrust in financials and their ability to get their arms around their huge portfolio losses. The disturbing fact is that the economy can't grow without a healthy banking industry, with high reserve ratios and solid balance sheets. With unemployment soaring, lending ground to a halt, and loan defaults rising, banks are in a pickle to stay solvent themselves.

Meanwhile, the price of gold surged, while yields on 30-year Treasury bonds rose (hence, our short T-bond position). All trends are behaving as I predicted, even tho I was unsure of the timing, whether the big moves start tomorrow, next month, next year. One could argue that gold has been in a secular bull market since 2001, when it was trading at $257/oz, due to the aforementioned dollar debasing. In the same vein, gold has tripled in 8 years: the sad corollary is that the US Dollar has been devalued by two-thirds. Mathematically, when you create obscene distortions in financial vehicles, you will experience painful regressions to the mean--in laymen's terms, you've created a bubble that will eventually burst. This massive credit expansion and deficit spending has been especially toxic, and now the Federal government thinks extending more credit will somehow magically cause our economy to resuscitate itself.

Today was a great day for many reasons, and shows that we have evolved as a country. But financially, it also means we have sealed our fate economically, and that we should expect another decade of negative wealth and disinvestment.

Oversold

Even tho I think financials have terrible fundamentals (too much toxic debt), I flipped Citigroup today for a one-day round trip profit of 20%. Regional banks should do okay, as they didn't leverage up on sub-prime mortgage-backed securities, like the big money center banks. But the landscape has changed for partially nationalized banks like JPMorgan Chase, B of A, Citi, and Goldman Sachs. So even tho I went against my investment principles, I repeated my flip of Morgan Stanley last quarter, doubling my money on that trade. The panic selling of Citi shares created an oversold condition, so I pounced. Probably not smart, but I'd rather be lucky than good.

I also nibbled at oil at $34/barrel with the ETF DXO, which leverages crude oil moves. No one is bullish on oil, so my contrarian instincts compelled me to dive in. This is a short-term trade for me, and if oil moves to my favor, I'll take profits. If oil keeps declining, I'll again go against my principles, sitting on it for however many months or years it takes for oil to rebound--I won't put in any stop losses. Oil is still in a secular bull market, so time is on my side.

Bear Market Rally

Be careful--the equities market tanked 50%, already discounting all the bad news. It could test its lows again in the first quarter, but my long positions are doing quite well. Don't get caught up in the gloom and doom that's being reported. You should have been gloomy and doomy last year--before asset values plummeted thru the floor.

Again, employment and economic stats are retroactive--markets are forward-thinking. For instance, the government declared we were in a recession a year after the fact, when the markets clearly indicated we were already deep into one the year before. As usual, investing on what the government SAYS leads to disaster; it is more fruitful to invest on what the government DOES. And right now, they are printing our way towards inflation, due fears of deflation. The outrage is the pending inflation, dampening our savings and raising our cost of living (and killing our standard of living). Inflation is a "quiet" tax that the public ignores because it is slow and insiduous. But the Fed knows it can generally get away with it, especially if it creates jobs. So they drive us further into debt, when monetized debt was what goes us into trouble in the first place.

That's why oil and other commodities are soaring off their lows. And that's why T bond yields are bouncing off their bottom. As I mentioned last week, I shorted T bonds (I'm betting on interest rates rising), and it's paid off already. I've found a timing indicator which has proven uncanny, but my fundamental and subjective analysis has to be intact first. I won't just trade off of my technical charts, but I will use them to confirm my entry point into a trade.

Wall St. has an ongoing debate between the technicals (guys who strictly rely on reading price, volume and momentum charts) and guys who only do fundamental analysis (value guys like Buffett). I say do both. If my fundamental analysis tells me to either go long or short, I will read the charts before l pull the trigger. In general, the fundamental guys do better long-term, even if they mistime their entries. Buffett pulled the trigger too early, and hence is down 30% since his recent buys, but he can afford to wait it out 10 years.

Day traders try for incremental gains, which I find hard to achieve, because you have to repeat it many times. I swing trade, looking for reversals and big moves. I can be early too, but I am exercising more discipline and patience, waiting for my targets to hit their price points, and once they reverse their trend, I pile in. No one can capture the exact inflection points, but if you are close enough, you'll be able to catch the majority of the next big move up or down.

For instance, short term T bills are yielding 0%. I consider that situation unsustainable long-term. I don't know when or how hard rates will go up, but they will at some point. I'm not shorting them because the Fed can 100% influence short-term rates by setting the Fed funds rate.

The long end of the curve (30-year T Bonds) is a different animal. They also touched all-time highs, yielding an all-time low 2.5% recently. The Fed cannot control these rates--they are market-driven, and thus depend on market participants' forecast on inflation. When inflation goes up, long-term rates go up. Right now, the bet is that deflation will be upon us for the next dozen years, similar to the Great Depression. I say hogwash--because the Fed and Treasury are making sure that doesn't happen as they liquefy the markets with credit and tons of capital.

Once investors (mostly foreign) figure out tying up their money for 30 years at 2.5% is a poor investment, they will pour out of them en masse. Right now, everything else around them has collapsed, so they are fleeing INTO US Treasuries, but once they figure out other assets have a better chance of appreciating, they will vote with their dollars OUT of T Bonds, and into equities, commodities, and precious metals.

The bond (fixed-income) market is twice the size of equities, and dwarfs the commodities market. So any small change in asset allocation into equities and commodities has a levered effect on the latter--that's why you see such violent volatility in stocks and commodities (more so in commodities). Oil is up 30% from its lows already, while the prevailing public opinion is that filling up their tanks is still really cheap compared to last year. You ask the average person off the streets about the price of oil, and they'll tell you they're happy that gas prices are low. However, as a trader, if you were short oil, you would have been killed, due to the recent price spike and leverage.

That's why I ask people all the time what their opinions are on certain financial assets. I'll inevitably go against them. They are understandably bearish on stocks after the 50% haircut, while equities have started their bear market rally (the rally is unsustainable due to rotten earnings). As you know, and it's been documented, gold mining shares are up 100%, even as people consider golf a barbaric relic. I'm considering pulling some off the table to lock in profits, and have already purchased long-term call options to capture the next big move up later this year, in case gold stalls and consolidates, before resuming its incline.

But Treasuries are a screaming sell right now, assuming we don't go into Great Depression mode, resplendent with 25% unemployment. It could happen, but the probabilities are getting smaller with each printed dollar. Until then, the big move up is interest rates, commodities, and even some stocks (high cash, cash flow, market share monopoly, no debt, and a dividend if possible)...and the big move down is T-Bonds. Precious metals should resume their increase, but like I said, I've captured the big move, so I expect a pause.

So I've got the direction on certain assets down, but I am refining my market timing. These are understandably proprietary, because if everyone catches wind of it, it will arbitraged out, and I will have no longer have a competitive advantage. That's another reason why you want to be careful about bubbleheads on TV--they're not all idiots. If it's an economist or some "pundit", they probably really are stupid--or more accurately, smart, but wrong-way Corrigans. But if the guy has a stellar track record (ie he's a billionaire trader), and keeps a low profile, he may throw people off his tracks by design.

For instance, he may tell people he's selling wheat, hoping the wheat futures tank, all the while buying up the physical inventory at a lower price. That's one more reason why following CNBC of Fox business news is not only useless, it is potentially disastrous. Unless, of course, you use it as a confirming contrarian indicator.

Greg

What to do going forward (part 1)

There's nothing confusing about this: Dave and I just made a ton of money today. Trust me, it's just the beginning. I'm not even referring to the stock market. As I said earlier, the buyers and sellers will continue to fight each other on where the exact bottom will be. Stocks will trade inside a range, albeit it a wide range, due to high volatility. Meanwhile, contrarians like he and I will be adding to our positions geared towards inflation and financial meltdown. Savvy investors will eventually see it, then CNBC viewers, and by the time the mainstream audience catches on, gold will be testing their all-time highs.

When you print money like toilet paper, something has to give. Don't just look at the $USD/gold relationship. Look at the price of gold from a foreign currency perspective. From their standpoint, the price of gold is at an all-time high already, because the $USD is temporarily gaining strength due to the flight to quality, as sovereign funds, hedge funds, mutual funds, and private equity firms face redemptions from investors selling. More banks and financial institutions will go under as a result. Companies will go bankrupt, due to lack of liquidity and lack of access to credit. If people insist on owning shares, the only ones I would trust are Wal-Mart, McDonald's, Coca-Cola, Berkshire Hathaway, Altria, ExxonMobil. Focus on dividends, cash flow, cash position, and ability to borrow. Microsoft will be able to tap into the corporate bond market at 2%....which is better than what the US government will be able to borrow at. Think about what I just said: Microsoft will be more credit-worthy than the US government.

In light of all these federal government bailouts, and solvency issues with banks, financial institutions, insurance companies, autos, airlines, etc. has anybody even thought of whether the government itself will be solvent? They continue to print money at a rate of $1 trillion extra a quarter. That devaluates the local currency. Once people wake up to this inflationary scenario (where the US Treasury will have to borrow at 8% or above), one where the $USD deteriorates, gold and silver will skyrocket. Right now, the markets are focused on deflation. That will change--it's only a matter of time. And when you have disinvestment AND inflation, you get stagflation like we experienced in the 70's, only this time, the overshoot will be even more severe.