Most of the funds I purchased earlier this year (mentioned in this forum) are now up 100% from their lows. I've already largely taken profits, but there are good reasons to remain bullish over the next few months. Here are some recent comments from my favorite contrarian newsletter writter, Kaplan:
Why did so many investors buy Russian and Brazilian shares in the spring of
2008, only to dump them in the autumn? There are many reasons: the media
telling them daily to take such action; their friends making money in these
sectors and thereby creating jealousy; people wanting to be trendy and
jumping aboard any bandwagon, both in the latest clothing designs as well as
in the markets; and a thousand other equally irrational reasons.
It is hardly a surprise that corporate insiders in the same companies did
the exact opposite: they sold at their heaviest pace ever in the spring and
summer of 2008, and then bought shares of their own companies at a
multi-decade peak during the past autumn and winter.
Thus, the mightiest hunters continue to catch the weakest prey. That's how
it is in the jungle and in the financial markets, and how it always will be
in the future.
The reason that being a true contrarian is so successful is that you
maximize your chance of hunting with the lions at the very time that their
prey are most numerous and confused.
Today's second main topic is a critical mood shift in the media.
Since October 2008, the media have been full of stories about why we're
supposedly headed into a "deflationary depression". As the media repeatedly
saturated the public with this nonsense, amateurs cut back on their spending
and took money out of the stock market-thus ensuring that the real economy
would deteriorate even as the financial markets had already fully forecast
this inevitable event.
Throughout the autumn and spring, there was one story after another about
how some women were literally inviting their friends over to buy clothes out
of their closets; how even many of the wealthy were firing staff which they
had employed for years; how fashion design had changed radically and spawned
the new term "recessionista"; and so on. It was the age of the "new
frugality".
The more that the media hyped the new frugality, the more aggressively I
continued to accumulate my favorite equity funds whenever they became most
undervalued. If you look back over past centuries, whenever the public
behave with a sudden increase in frugality encouraged by the media, it has
always been an ideal time to buy stocks.
Below is a sample story of the new frugality from the past week. When
almost no one wants to look like a banker, that is when you get the best
deals on business suits--and what is far more important, you know that the
global equity rebound still has a long way to go:
http://www.nytimes.com/2009/05/14/fashi ... ef=fashion
Global equity markets have rebounded strongly if unevenly since early March
2009. Therefore, it must be the case that the media will switch their
script from frugality to excess-not in a single day or week, but gradually,
so that you hardly notice at first and then eventually you are overwhelmed
by a new "urge to splurge".
For the first time since the summer of 2008, we are finally getting the
opposite side of the story: how the new frugality is giving way to an
anticipation of increased prosperity:
http://www.telegraph.co.uk/scienceandte ... overy.html
The above kind of story still tends to be heavily outnumbered by the tale of
woe in the previous link. However, the ratio of "urge to splurge" to "new
frugality" is likely to progressively increase over the next several months,
until being frugal is eventually dismissed as being "so yesterday"-as
hopelessly out of touch with the times as being a lavish spender had been in
recent months.
This is all a natural part of how the financial markets have always behaved
during extended periods of economic stagnation. The Great Depression began
with a cultural reaction to the carefree, overly lavish 1920s. The "new
frugality" was all the rage by 1932. Everyone tried to show how they were
spending even less money than their penny-pinching neighbors.
However, just one year later, the au courant behavior was to dress "to the
nines"-in the most formal dinner jackets, while attending the most elegant
parties. While in 1932 the trendy thing was to show how you were even worse
off than your unfortunate neighbor, the next wave of Great Depression
fashion around the world was all about being as debonair, refined, and
aristocratic you could appear in the public eye-even though unemployment was
still near 25% in the U.S. and at even higher levels in many other
countries.
Those who insist that the 2009 stock market rebound is a bear-market rally
which is about to end within a few weeks-mostly the same analysts who missed
the biggest two-month rebound since the Great Depression--have badly
misunderstood the connection between the financial markets, the media, and
society. This year's stock-market recovery cannot possibly be over until
the media is telling you on a daily basis how people are spending more, how
they are acting more lavishly, how they are saying goodbye to roughing it,
and how "everyone knows" that you just don't sell clothes out of your closet
any more.
It will almost surely take at least a few more months for the media to scrap
the new frugality in favor of the even newer urge to splurge. If you keep
your eyes and ears open, you will notice that the more that the stock market
rallies, the more pronounced will become this mood shift. Cultural behavior
has always followed the financial markets, and always will. It's not
different this time.
Frequent chatter about increased prosperity, analysts' overuse of the word
"Goldilocks", absurd extremes in luxury spending, new records for subsectors
of real estate and collectibles, and similar events have always marked
important stock-market peaks. When stories of conspicuous consumption
saturate the media, they will send a useful equity sell signal in the second
half of 2009 just as they did in the second half of 2007.
We had a rapid mood shift from reckless overspending to Scrooge-like
frugality in just a few months in 2008. We are currently undergoing a
transformation which is somewhat less drastic, but equally important in its
implications for the global financial markets. Until people worldwide are
embracing the "urge to splurge", don't sell your stocks or corporate bonds
since they have an enormous part of their rally still ahead.
)