The Ultimate Contrarian

According to The American Heritage Dictionary, a “contrarian” is an investor who makes decisions that contradict prevailing wisdom.

If that means looking for stocks that have been beaten down andforgotten — but are fundamentally and technically capable of asubstantial rise, than I must be a contrarian. Does it really matter if those stocks come from the oil industry, the tech sector, gold or the Internet services?

A good investment opportunity is a good investment opportunity. Period.

Yet there seems to be an assumption in the investment community that anyone who makes money in tech stocks or, worse yet, Internetstocks, isn’t really a “contrarian.” Rather, they are a part of the leftover Wall Street herd that still believes all dot-com stockswill someday rise again to $80 a share.

Contrarians: Dispelling a Myth

That’s the most ridiculous thing I’ve ever heard. And it’s time to dispel that myth.

In early March, in an essay published by The Daily Reckoning, wetook a look at E-Loan Inc., an Internet stock on the rise, as a potential investment opportunity. Talk about being a contrarian andgoing against the grain. For three years Internet stocks have been the butt of everyone’s jokes.

Yet, E-Loan Inc., an online lending company, brought in over $100million in sales last year and realized more than $10 million in net income. At the time, it was selling for 12.8 times earnings, 1.32 times sales and its revenues were up over 50% from a year ago.

It hardly resembled the dot-bombs that blew up in 1999 and 2000. And that was precisely my point back in March. E-Loan was making aprofit, had solid fundamentals and was growing its business.

But there was something else about E-Loan that caught my attention.

Over a 10-day span the stock fell 14%. As a trader, this intriguedme. Why was a stock as fundamentally sound as E-Loan falling inprice so abruptly?

To answer that question I pulled up three of my most trusted technical charts. I saw that over an eight-month span, E-Loan stockrose 94%. And after doing a little more digging, it was obvious this recent fall was nothing more than a bunch of investors taking profits.

Contrarians: Ready for a Rebound

Fundamentally, E-Loan was as solid as ever. And technically, E-Loan was oversold and ready for a rebound. This was a no-brainer. E-Loanwas almost a sure bet to rise.

If you took my advice and bought shares of E-Loan in early March, you made 40.7% profits in the past five weeks. Not a bad return for a little over a month’s time.

As an investor or a trader, you should strive to find fundamentally and technically sound stocks, like E-Loan, in beaten-up sectors ofthe market. And as a contrarian, it’s your duty to find these kinds of stocks — the ones everyone else forgets about or simply refusesto look at.

That’s exactly what your “gloomy” editors at The Daily Reckoning did when they recommended you buy gold in the late 1990s when theWall Street heard really was stampeding. With irrational exuberance sweeping the market by storm, it was only a matter of time before the bubble burst.

The U.S. Dollar Index peaked at 121.29 late in 2000 (right now it’s at 100.36) and the NASDAQ, Dow and S&P 500 were all outrageously overvalued by any historical perspective. It made perfect sense to buy gold stocks in 1999.

But only a few brave souls had the guts to buy then. Investing in gold in 1999 meant going against the crowd. It meant taking therisk of looking silly in front of your peers. It meant finding the courage to do what made sense, not what was popular. It meant youavoided serious losses in overbought stocks – and steady gains asgold rose from a $253 low to $325 where it sits today.

Contrarians: The Contrarian Mantra

Looking back, you’d be hard-pressed to find any gold stock thathasn’t at least tripled since the late ’90s. It paid to invest in gold when no one else was. And it paid to invest in E-Loan, a hatedInternet stock, five weeks ago.

Still, many investors missed out on E-Loan simply because of its title as a tech or Internet stock. Oh well. Too bad for them.

Last I checked it wasn’t against any domestic or international lawto invest in gold and tech at the same time. And it certainly doesn’t go against the contrarian mantra of finding winning stocks in neglected sectors of the market — no matter what those sectorsare. In the last three weeks, I’ve recommended several Internet stocks and junior gold miners to my readers.

Both have done well. Imagine that…

Maybe I don’t fit the mold of a typical contrarian. I use technical analysis in conjunction with fundamentals to find stocks on therise. I look to the Internet sector as easily as I do the gold sector for great investment opportunities. My picks aren’t alwayspopular among my peers.

But you know what? I could care less what people think about me aslong as we’re making money – whatever class of investor that putsme in.


James Boric,
The Daily Reckoning
April 17, 2003


We touched the raw, open nerve of the American economyyesterday…almost by accident.

We know we slip easily into negativity here at the Daily Reckoning. We fight against it like an Episcopalian fights sin or a weight-watcher fights fat…that is, we give in from time to time just so we don’t take ourselves too seriously.

And so, today, we surrender to the dark forces of pessimism. We’ve searched for the bright side of the housing boom; wejust can’t find one.

As housing prices rise…housing costs as a percentage of household budgets increases. Consumers pay more to live in thesame house. Worse, the lumpen homeowners believe they can“take out equity” from their own homes as if they were spending savings. Encouraged by Fed governors and mortgagehustlers, they go even deeper into debt, while the economy slumps and they risk losing their jobs.

The consumer economy depends upon the ability of consumers tospend money. With stocks no longer rising, and jobs disappearing (it takes the avg. white-collar job seeker 11months to find new employment)…consumers have had to rely onthe housing market. Home prices are still rising…and each rate cut has given them a way to ‘unlock’ the ‘trapped equity’in their own bedrooms and kitchens.

The latest numbers show the builders hammering up new housesat a feverish pace — new housing starts rose 8.3% in the month of March.

But new home sales are lagging behind — meaning, that the industry will soon end up with more homes than it can sell; prices will fall. Falling home prices will mean the end of thehousing boom, of course; it will also mean the end of the refinancing bubble. All of a sudden householders will go to‘unlock equity’ and find the safe empty!

Meanwhile, the core rate of inflation was flat for March — for only the 2nd time in 2 decades…and the 12th time since 1953.

Fed governors must be worried. They count on refinancings to get enough cash into the system to allow consumers to continuespending. But what can they do? Only cut rates for a 13thtime…luring householders even deeper into debt…andpostponing the inevitable day of reckoning…

Keep watching…



Mr. Fry at his post on Wall Street…

– On the eve of Passover, the angel of death did not spare the stock market. 144 Dow points perished yesterday, as the bluechip index fell to 8,257. But the Nasdaq emerged unscathed, with a gain of 4 points to 1,394. Meanwhile, gold and oil both found favor with investors, as the yellow metal added 80 cents to $326.30 an ounce and the gooey black stuff rose 16 cents to$29.45 a barrel.

– The crude oil market, apparently, did not receive a copy of the “Iraq Vanquished” script. That’s the riveting story about a superpower conquering a small rogue nation with massive oilreserves. The swift conquest sparks a sizeable drop in oil prices – according to the script – as investors come to theirsenses and realize that there are ample supplies of crude oil…

– But the oil price is ignoring its cue, and is instead acting out a surprising extemporaneous story-line in which oil pricescling stubbornly to $30 a barrel. Just maybe, oil is a bit more scarce than we thought. The Energy Department reportedthat crude inventories rose only 100,000 barrels during the week ended April 11. Total inventories now stand 15.8% belowthe year-ago level.

– “President Bush may believe that the flower of democracy will bloom across the arid deserts of the Middle East,” writes John Myers, editor of Outstanding Investments. “But we thinksuch a hopeful outcome is highly unlikely. The problem the United States faces is that while most Iraqis are glad to see Saddam removed from power, they still don’t like the idea of a ‘puppet’ American government. So right out of the gate the newgovernment is going to come under fire from Iraqis, who see their government as a dupe for American imperialists…

– “Given that America may have a more difficult time keeping the peace than waging the war, we expect the mid- to long-termtrend for oil is higher. Removing Saddam Hussein from power doesn’t change a fundamental fact: the world is drawing downits oil reserves at a record pace. And, importantly, the Middle East remains in control of the lion’s share of the world’s oil supplies. Since most of the rest of the world is rapidly depleting its domestic supplies of oil, the world has become more dependant than ever on Mid East oil. The region’spolitical instability is likely to make supply-disruptions a permanent feature of the oil market.

– “But that just means that it is more important than ever forinvestors to continue seeking out oil companies whose production carries the label, ‘Made in U.S.A.’, or at least, ‘Made in North America.’ In other words, the greater the influence of the Middle East over global oil production, the greater the imperative for investors to seek out high quality exploration and production companies with significant domesticoil and gas production.

– Yesterday, your Paris-based editors of the Daily Reckoning remarked, “American capitalism no longer rewards capitalists.Instead, they wait at the end of a long line – behind tort lawyers, tax collectors, and employees, both current and retired.”

– The comment is true as far as it goes, but my colleague inParis may have left out a few folks…namely the CEO’s mistress and his wife.

– “Former Tyco CEO Dennis Kozlowski treated his wife and his mistress as equals, stealing the same amount of money for bothof them,” the New York Post reports. “Papers filed [Tuesday]by the Manhattan District Attorney’s Office allege Kozlowski… [misappropriated] $100,000 of his company’s cash for each woman.”

– Hmmm…”theft” seems like an awfully harsh characterization.How about if we call Kozlowski’s appropriations a “recurring, non-recurring restructuring charge?”…Is that so bad?


Bill Bonner back in Paris…

*** We came, we saw, we consumed… our family trip to Romewas a great success. We bumped into history everywhere we went…and wallowed its ruins…

What did we learn? That you should avoid the Trevi Fountain and the Spanish steps; they are over-run by tourists. That you should look for restaurants with well-dressed Romans eating in them. That Italians have many more good wines than most people think. That monumental ruins make a good playground for children…

And, oh yes… Rome wasn’t built in a day……nor was it destroyed in one. The city was sacked by invading Celts in the4th century, BC. And then, in the 2nd Punic War, Hannibal crossed the Alps and defeated the Roman armies in several important battles. But Rome itself was never taken during the Punic Wars and the Republic eventually prevailed… In the 3rd war against the doughty Carthaginians, Rome had her revenge.Her legions took Carthage, put its inhabitants “to the sword”and even salted the earth so that the land itself would support no new crop of adversaries.

(This Rome might have regretted later on, when it founded a city of its own on the ruins of the Carthaginian city.)

Time and time again, through war, revolution, slave rebellion,civil war, plague, degradation, decadence, inflation, bankruptcy… Rome bounced back…and continued to build newmonuments and palaces on the remains of old ones.

But, eventually, as with all great bull markets, there was a great bear market… which saw the empire deteriorate on the inside…and give way around the edges. In 410, Alaric, king of the western Goths took Rome and pillaged the city. In 455,Genseric, king of the Vandals, took the city from the sea…and pillaged it again. And then, a quarter of a centurylater, it was the Huns turn. Odoacre was proclaimed king by German mercenaries in the service of Roma. He deposed the lastemperor, Romulus Augustus, and ended the western empire.

*** Gary North calls it “nature’s weapon of mass destruction.” He is talking about SARS, a disease which has already caused a“travel collapse” in Hong Kong…and now threatens lives andproperty throughout the world.

“On Wednesday, April 9,” Gary begins, “Wal-Mart announced a new policy: its employees are no longer allowed to visit areas that are suffering from an outbreak of SARS. The list includes Hong Kong, Singapore, China, Vietnam, and Toronto. Wal-Mart also announced a similar no-contact policy for any employee ofone of its many suppliers who has traveled in these areas in the last ten days. This new policy is referred to as temporary. This means “until SARS goes away…”

“Also on April 9, the CBS evening news show, ’48 Hours’, ran asegment of what SARS is doing to Hong Kong’s economy. An American woman who has lived in Hong Kong for a decade did akind of walking tour with the camera crew. I have never seen anything like it. Almost everyone on-screen had a medical facemask. The interviewer asked the ‘tour guide’ if she had one. She said she had two in her purse.

“They visited what the woman said was a popular restaurant. Normally, she said, there was a line to get in that stretched outside into the street. The place was deserted. It had maybe 10% of its seats filled. Then the crew was off to a local mall. It was empty. I have never seen a mall during daytime hours that was as empty as that one was.

“The effect on Hong Kong’s retail economy is devastating. Think of a retail outlet that pays the kind of rent that high-density Hong Kong store owners pay. Then think of a 50% drop in business. But the drop in traffic in the indoor businesses visited by the camera crew indicated more than a 50% drop in business.

“How long can this go on? For as long as SARS remains a threat. How long is this? Medical experts are not saying. They don’t know. The source of the SARS epidemic has not been identified yet. There is no known cure. It is killing medical personnel.”

The Daily Reckoning