Universal Disdain

The way to easy money in the stock market is to buy things no one else wants and to what everyone else thinks is foolish. It’s a tricky way of trading, and not everyone has the guts to do it. But if you’d like to try, here’s some professional help…

"I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up."

– Jim Rogers in Market Wizards

Sometimes it’s too easy…

Sometimes everything just lines up. If you’re open enough to listen, the profits are right there in the corner, just waiting to be picked up. I try to listen, even when the message is extremely uncomfortable and doesn’t seem to make sense…

I find that my biggest winners are often the most "uncomfortable" trades… I started in this business as a broker specializing in international stocks and bonds. My dad was kind enough to be one of my first and biggest accounts. (To this day, I don’t know if he had faith in me, even as a newbie, or if he just plain didn’t have any better place to put that money.)

Of course, I wanted my dad’s account to grow the most, with the least risk. But other client’s accounts were simply rising faster. After a year or so, I realized the problem. Being so careful not to lose any of Dad’s money, I would only share an idea with my dad once it was "comfortable." That often meant after the good, safe stock I was buying for other clients had risen steadily for weeks. In other words, we bought too late.

The lesson there was, when all the stars are fully aligned and yet I’m still uncomfortable, chances are, it’s going to be a good trade. Let me give you an example… Consider the headline of the September 2004 issue of True Wealth: "Bull Run in A Bear Market Starts Now."

Uncomfortable Trades: "When Everyone Is Bearish, There Are Only Potential Buyers."

It was a bold and uncomfortable position to take. To make it even more uncomfortable, it looked like tech stocks were the right place to be. I went for it, with the audacity to suggest that you could make 45% on my recommended tech stock in just a few months time – an insane "prediction" by any academic standard. There was no historical precedent, or proof.

But things just lined up. I had to listen. It was right, and felt wrong. Perfect!

At the time, investors were unanimously afraid to put money in stocks. There was just too darn much uncertainty, with the upcoming elections, Iraq, the economy, etc. But we had the inklings of the end of the big downward move in the Nasdaq. Everyone was bearish. It was exactly what I look for… It was a perfect time to make a low-risk speculation, because:

"When everyone is bearish, there are only potential buyers. When everyone is bullish, there are only potential sellers."

– Jason Trennert, ISI Group

Since everyone was bearish, I simply saw it as limited downside – there was nobody left to sell risky stocks. So we stepped in, as the first buyer of risk. Risk was cheap, I thought. The trade – buying my first "tech" stock – was uncomfortable. But right.

We were well rewarded. In the September issue we bought shares of BEA Systems. And now here in December, we’re up by 35%. It’s not quite the 45% that I said was possible. But it’s still a nice, safe gain in a short period of time. It is now time to sell BEA Systems. We’re sticking with our original plan, of exiting by the end of 2004. It’s time to move on… to another terribly uncomfortable trade…

Let me ask you… can you please name one asset where everyone is bearish? When you think about it, it’s easy – it’s the U.S. dollar. Everyone hates it. And now the media coverage (an excellent indicator of when the trend is at an end) has now reached an extreme.

As I write to you, I’ve got the current Fortune magazine, the Economist, and today’s USA Today newspaper at my fingertips. "The Disappearing Dollar" is the cover story of The Economist. "The Dollar in the Dumps" is on the cover of Fortune (Dec 13, 2004). And the lead story in the USA Today is "How much is that in euros?" (Dec 15, 2004). You can’t get away from it. People are fiery about it. Investment professionals are adamant – the dollar is headed straight down, without stopping. Of course:

"The most stridently held views in the investment business are often the most wrong."

– Jason Trennert, ISI Group

Uncomfortable Trades: Two Things PROVEN To Affect Currency

Everyone is bearish… so there are only potential buyers. Let us be one of the first. The absolute ideal situation is when everyone is bearish, yet the factors that will cause that investment to rise are actually in your favor. And that is what we have with the dollar right now.

In my research, I’ve found that only two things are PROVEN to affect a currency – and those two things are 1) purchasing power and 2) interest rates. Let me briefly explain… Right now, the dollar is cheap versus the euro (that’s purchasing power), and right now (since Alan Greenspan just raised short-term interest rates again to 2.25%) your money is treated better in U.S. dollars (2.25%) than in euros (2.0%). In short, the only two fundamentals that have been proven to matter over the long run favor the dollar over the euro right now.

So everyone hates the U.S. dollar. But the dollar is actually fundamentally more attractive than the euro right this moment, by the only things actually proven to matter. Perfect! Of course, nobody will believe us now. And that’s just what we want.

The only thing keeping me from jumping into the dollar with both feet is the current price trend… As I write, the euro is still strengthening versus the dollar, though its pace has slowed.

Once the trend reverses, that’s it! This trade will be the Jim Rogers trade: "money in the corner, just waiting to be picked up."

Now I understand if you are bearish on the dollar, and uncomfortable with this idea. Remember, everyone is. And I understand that the U.S. has big deficits. Remember, everyone else knows that too. That’s not new news… it’s currently baked into the price of a euro.

Here we are, we’ve got a slam-dunk coming. But with the euro still rising slowly, the price trend says we’re not quite there yet.

Remain patient, believe in your convictions, and when the time is right, just walk over to the corner and pick up that easy money…

Regards,

Steve Sjuggerud
for The Daily Reckoning

January 13, 2005

P.S. What can we do in the meantime? How can we double our money if we’re right, yet not lose any money if we’re wrong? That was the challenge I set myself in December’s issue of True Wealth…and I think I smashed the nail right on the head.

This company is cheap on an earnings basis, AND it’s in a perfect position to benefit from a rising dollar. Even better, it’s a commodity play too. I can’t tell you the name of the company here, but if you’d like to know more, check out True Wealth.

Dr. Steve Sjuggerud has worked in the investment world as a stockbroker, the vice president of a $50 million global mutual fund, an international hedge fund manager, and the director of several research departments. Today, Dr. Sjuggerud runs his own 60,000-member investment advisory service called True Wealth.

Here is the latest stunning news: Last month, the U.S. trade deficit widened to a new record – $60.3 billion. "Imports soar," says CNN.

What a disappointment. The falling dollar was supposed to reverse the trade deficit; it was supposed to rebalance the global economy. Just yesterday we printed a comment from Arthur Laffer, which appeared in the Wall Street Journal. The celebrated dreamer thought the dollar decline was over. It had done its job, he thought – setting the world’s books straight.

Alas…not quite…or not yet…or not at all!

We have been saying that Americans spend ALMOST $2 billion more per day than they earn. Now, we can save a word. Every day that goes by makes us $2 billion poorer.

Poorer? "Does not the money come back to us?" asks Arthur Laffer. Andy Kessler wants to know, "Does not it boost up the values of our houses, our bonds, and our stocks? Isn’t the whole world eager to place its money in America – because our economy is so dynamic, so free, so fetching in every way?"

We simpletons at The Daily Reckoning can only understand the situation by reducing it to its essentials: One town sells meat. Another sells bread. Trading with each other, the meat eaters in one town buy more meat than they sell bread to the other town. The meat eaters (bread makers) run a trade deficit. The meat producers run a surplus. In order to continue eating as much meat as they want, the meat eaters borrow money from the meat producers. The meat eaters mortgage their houses and bread ovens in order to continue consuming meat. Each day that goes by, the meat sellers gain a larger claim on the bread makers’ property. It seems simple enough – the meat producers get richer; the meat consumers get poorer.

But wait, what if the meat eaters’ houses go up in price? What if their shrewd central bankers lower the price of credit in order to keep them buying…and triggers a property boom? What if the free-spending ways of the meat eaters make their economy seem irresistibly dynamic? What if the meat producers can hardly wait to invest in it?

How do these additional circumstances change things? Not at all! They just make the essential nature of the transaction harder to see: one group spends more than it makes. The other takes the money and buys up productive assets. The bread makers are made no richer when foreigners buy their ovens! They are no richer when foreigners own their houses. Nor are they made richer when the nominal value of their houses goes up; the house itself still gives exactly the same service.

The bread makers may think they are getting richer. But they, like millions of Americans and a few popular economists, are hallucinating.

A Daily Reckoning reader writes:

"The next time you are in Caesar’s Palace, notice the small sign by the door. Like a pack of cigarettes, there is a warning. Gambling can be addictive; if you think you have a problem, call the number below to contact Gamblers Anonymous.

"That is the extent of the Alan Greenspan’s warning: Credit can be addictive; if you think you have a problem, quit drinking our punch."

Our reader would lay the blame on the poor bread makers. If they have mortgaged their houses to buy meat – is it not their own fault? They should have had more sense, our correspondent would say.

Well, yes.

But our tired, cynical eyes turn towards our own central banker – Alan Greenspan, the world’s most famous public servant since Pontius Pilot. Is the maestro of American casino finance completely innocent? We don’t think so. He did something that no casino would dare to do – he rigged the games to make the players think they were winning! No wonder they can’t pull themselves away from the slots. Every time they put in a quarter, out come two more. For more than two years, he has lent money at interest rates below the inflation rate. Who can blame the poor schmucks for taking it? All they had to do was to "take out" a little loan from the Bank of Ever-Rising Housing Equity…and they could buy more meat!

And weren’t the meat producers happy! It gave them more cash to buy up assets.

More news, from our team at The Rude Awakening:

————–

Tom Dyson, reporting from Baltimore…

"The speed was incredible. Ropes would lift the box from the ship. Then they’d swing it across as if it were hanging from a clothesline and lower it onto a truck. It was done in a matter of seconds. The boxes were big too…40-feet long and made of steel. When they dropped them onto the truck, the trailer would bounce and flex as its tires resisted the extra weight. As soon as the truck had pulled away, another one appeared round the corner and took its place."

————–

Bill Bonner, back in London:

*** Americans aren’t the only ones living beyond their means. Practically the entire Anglo-Saxon world has lost its head.

"Britain set for widest postwar trade gap," says a headline in today’s TIMES. The gap is, of course, negative – at nearly 4% of GDP. In America, the trade gap is closer to 6% of GDP. Not since the mid-’80s has Britain seen such figures.

In the 17th…and then, 18th centuries, Britain jumped to an early lead in industrial development because families (principally in the North West of the country) saved money – gold – over several generations. This accumulated capital gave them the wherewithal to exploit new technological innovations – such as the steam engine and mechanized looms. Trading technology, goods and capital with their cousins in the New World, the Anglo-Saxons raced ahead of the rest of the world.

Now the Anglo-Saxons race to spend money – even money they don’t have. Strangers in strange places – Asians, mostly – do the saving. "We think, they sweat," is the conceit of both Englishmen and Americans. "We spend, they save," they might add…or "We consume, they produce."

Will spending money give Anglo-Saxons the same edge in the 21st century that saving gave them in the 18th? We think we know the answer…we wait for confirmation. But if we were offering global, multi-generational advice: Sell the Anglo-Saxons; buy the Asians.

*** If the falling dollar won’t rebalance global trade, what will? A recession. A slump. A consumer pullback. That is what the bond market is signaling, we think. Mortgage applications fell in the most recent reporting period. Otherwise, we wait for confirmation…

*** Gold seems to have come to the end of its correction. It sank from over $450 in November to under $420 a week ago. Yesterday, it rose $4.20 to $426.60.

*** More from Rick Barnard, Dr. Richebächer’s managing editor, on a trip to Cannes…

"I arrived in Cannes without incident late this afternoon. Dr. Richebächer has a very large apartment in a building just across the street from the Coast. As you’d expect, the water is a perfect blue, with small green hills popping out in the distance."

"As Dr. Richebächer led me to the guest room, he said we’d save the serious economic discussions for tomorrow.

"I should have known better. Although I’ve only been in Cannes for barely seven hours now, I think I’ve learned more economics than most Americans receive in their entire lifetime.

"But I’ve also learned a lot about Cannes, Dr. Richebächer and, of course, the French way of life.

"First, Dr. Richebächer took me for a drink at a small hotel restaurant. Along the way, he pointed to where the celebrities hang out during the Cannes Film Festival. He also noted new flowerbeds along the sidewalks. And, in between, he updated me on his latest market research.

"Dr. Richebächer switches from discussing the new plants here to the gross overstatement of U.S. employment as easily as some people switch from talking about the weather to sports.

"But I was soaking everything in. After the drink, he took me along the coast for the walk back to his apartment. Again, the conversation rotated between Cannes, himself and the U.S. economy.

"Back at his apartment, Dr. Richebächer flicked between the various business news channels while I checked my e-mail. I overheard a dizzying array of languages as he went from station to station. Bloomberg in German… CNBC in English… another news channel in French. All punctuated by Dr. Richebächer telling me the updated numbers before he switched channels again.

"Dinner was at yet another restaurant. This time Dr. Richebächer drove, proudly showing off the personalized tags on his BMW. He drove me down La Croisette, the street he lives on… and also arguably the most famous street in the South of France.

"I’m proud to say that I ordered something French to eat – grilled duck with honey and rosemary. I also enjoyed a nice bottle of wine. And even though we’ll have our ‘serious’ talks tomorrow, I couldn’t resist asking a few questions.

"For instance, what effect will the massive tsunami tragedy have on the world economy? Another, what would Dr. Richebächer say to Alan Greenspan if he had the chance? And, of course, what the does a falling dollar mean to the average American?

"He gave me answers. Good ones. Unfortunately, I wasn’t expecting good answers until the ‘serious’ discussions tomorrow. So I’m afraid you’ll just have to wait.

"For now, I’m off to bed. Breakfast is at 9 tomorrow. Lunch will be at a seaside café. And Dr. Richebächer mentioned that he’d answer many of my questions on our way to Monaco…

"I can’t wait."