Market Review: Metal Detectors and Gum Boots

Eric Fry accused us of “being too contrarian for our own good” in Friday’s edition of the Rude Awakening; we had suggested bonds might keep going up.

“On the contrary,” we’d respond. “Not contrarian enough.”

Incidentally, we received our February issue of True Wealth on Friday. Steve Sjuggerud, the editor, is one of the most devout investment contrarians we’ve ever met. He took up the debate in his letter…

“I’d rather have people squirm with contempt when they first hear my investment idea. Then I know I’m buying what’s cheap and hated,” he says. “My secret, you see, is pretty simple – so simple most people won’t believe it: I buy what nobody wants.”

Not surprisingly, Steve is bullish on bonds too. But we’re not going talk about bonds today…that’s for another time. No, today we’re going to talk about another hated asset…

“Nothing has made people squirm more in the last few years than old gold coins,” Sjuggerud observes. “At first, nobody I talked to would consider them. Even my parents and my in- laws – who buy most everything I recommend – haven’t bought coins. And yet the coins have done very well.”

Last week, we traveled to New York with Steve. We went to check out the 34th Annual New York International Numismatic Convention at the Waldorf Astoria. Steve called it the “Superbowl of coin shows.” We wanted to know if people still hated coins.

It wasn’t what we had expected…at least not your Baltimore-based editor. The week before last, we went on an unofficial tour of Baltimore’s port. We saw evidence of a huge trade deficit. At the coin convention, we expected to see evidence of a bull market in gold, silver and other hard monies.

Gold started the year off on the downside. In the first week of 2005, it fell from $437 to below $420. It’s been creeping back up ever since, and on Friday, posted a gain of $4.80 to settle at $427 for the weekend. Silver had a good week too…up over 3% to $6.81 an ounce. These two metals have both made multi-decade highs in the last twelve months, and we wanted to see if this coin show would reflect that.

It didn’t. Firstly, these weren’t your investment-grade coins, like the ones Steve has already recommended to his readers. These were ancient coins…the sort bearded men find when they slip on their gum boots and explore old Roman dwellings with metal detectors.

More importantly, we saw evidence of a bear market in the dollar. Why? Because everyone there was from Europe! I talked to a couple of coin dealers…one from London, one from Hamburg. They told me all the demand was coming from Europe right now. “It’s hard to buy the choice…historical items,” said one. “With low interest rates in Europe, and such a horrible dollar, they all come over here looking for bargains. But these aren’t investors. These are collectors with no interest in selling.”

“So how’s attendance this year?” we asked.

“Yeah, it’s pretty good actually. Not a bad year at all. In fact the last few years have all been steady. We thought eBay’s popularity might have an effect on the number of people that come to these things, but it hasn’t. We’ve actually found eBay helps support prices.”

An eBay-effect…very interesting, but so far we’d found no evidence of a bull market in unusual coins. Your editor’s next target was a collector…

We found a gentleman from Finland named Jyrki. He had a beard and judging by his rubber-soled brown lace-ups, he could have been a professor of archaeology. He’d always been fascinated with Finnish coins, he said, but the advent of the euro had re-piqued his interest. (Of its three Scandinavian neighbors, Denmark, Norway and Sweden, Finland was the only one to accept the euro. Finland’s former currency was denominated in markka.)

“Oh no, it’s a big mistake to be in coin collecting to make a profit,” he said when asked if he expected to profit from his investments. “We love the coins. That is why we come here. And the dollar’s nosedive makes it cheap for us. That’s all.”

Just as coins are cheap for our euro-friends, U.S. stocks should be too. Last week they got even cheaper. The Dow was off 165 points or 1.58% to 10,393 at the close. The index is now down 3.6% on the year. The Nasdaq’s performance is even worse. It’s off 6.5% this year…dropping 2.5% last week alone. It now trades at 2,034.

As for the dollar, last week it gained against the euro, but fell against the pound and the yen. A euro is worth $1.3044 at the time of writing, having dipped briefly below 1.30 in the latter half of the week.

And finally, in a meaningless vote for the contrarians, the bond market enjoyed a rally last week. 10-year Treasury yields fell 8 points, while 30-year yields fell 9.

As for the numismatic show, we’d gone there afraid that we might find evidence of speculation and greed. We didn’t.

We’d been worried a mass of dumb money had already washed over this tiny market and ruined any opportunity. It hadn’t.

We feel these coins are still despised, at least, as far as the average investor is concerned. Collectors like Jyrki love them, but that’s because he gets a kick out of them. Dealers trade them and get paid for their services, but other than those guys, no one else seems interested…

…except a couple of devout contrarians, that is.

Regards,

Tom Dyson
The Daily Reckoning

January 23, 2005 — Baltimore, Maryland

P.S. Sjuggerud is not just a blind contrarian, he’s one of the smartest, most prudent investors we know. And he works damn hard to produce winning pick after winning pick. In his newsletter, True Wealth, Steve will lead you directly to the cheapest, most undervalued, assets in the market…ideas that have been scorned by the general investing public.

P.P.S. Don’t confuse Steve Sjuggerud with Steve Sarnoff.

Steve Sarnoff is an options trader. Since January 1, 2004, he made 34 option recommendations…and 30 were winners. 11of them at least DOUBLED in value. In fact, since 1999, you could have accumulated slightly over $1 million with Steve’s option picks.

— Daily Reckoning Book Of The Week —

APPLIED ECONOMICS: Thinking Beyond Stage One by Thomas Sowell, 2004, hardcover

List Price: $30.00
LFB Price Only $20.25

In the author’s own words: “The focus will be on dealing in depth with particular real world problems, using economic principles to clarify why and how things have happened the way that they have. This is a book to enable the general reader, with no prior experience knowledge of economics, to understand some of the key issues of our times.”

He’s an economist, but that shouldn’t dissuade you. This one knows how to write clearly…and that makes it an enjoyable book to read.

————————

THIS WEEK in THE DAILY RECKONING

STANDING SOLO IN THE CROWD 1/21/05
By Bill Bonner

“Of course, this does not mean that every time you get a mcouple of knuckleheads together they’re going to write good music or build an atomic bomb. Get any bunch of people you want. We will bet that we will be better at guessing our PIN code – alone – than all of them put together. Nor can even a hundred of the smartest men on the planet do a better job of telling us what we want for breakfast than we can do for ourselves.”

A BANKER’S TALE 1/20/05
By Chris Mayer

“Company executives also usually took it personal. We went up to see one company in which we had lent several million dollars. We would debate a little amongst ourselves about who would ‘pull the trigger’ – that is, who would actually say the words that we no longer wanted to be a part of this deal.”

THE NEXT NEW THING 1/19/05
By Jim Rogers

“Commodities are so pervasive that, in my view, you really cannot be a successful investor in stocks, bonds, or currencies without understanding them. You must understand commodities even if you only invest in stocks and bonds. Commodities belong in every truly diversified portfolio. Investing in commodities can be a hedge against a bear market in stocks, rampant inflation, even a major downturn in the economy.”

AN ECONOMIC PLAYGROUND 1/18/05
By John Mauldin

“Foreign central bank purchases of U.S. Treasuries in order to maintain a competitive currency valuation to attract the U.S. consumer is not a sign of strength. It is a sign of desperate foreign central banks trying to maintain their economies, which are dependent upon U.S. consumers. They KNOW they are going to get hosed on their dollar holdings, but feel they have no choice.”

PENSION PAINS 1/17/05
By The Mogambo Guru

“So, as an example, if you had $100,000 in purchasing power two years ago, and now you have only $75,000 in purchasing power, thanks to the devaluation of the dollar by 25%, and you want to privatize Social Security by forcing people to put money into the stock market? Hahahaha!”