No More Predictions But Still A Contrarian by Bill Moller

December 2009

Surprisingly, Jack has asked me on several occasions lately to submit a column for inclusion in the monthly ‘A HELPING HAND’ email letter.  I’ve told him that this letter has become so chock full of interesting info and presented in such a professional manner that my folksy literary attempts seemed out of line because they include very few informative suggestions and too many personal observations.  For instance, my frustrations as a lifelong Cub fan aren’t going to help anyone solve a financial dilemma of any kind.

Speaking of informative suggestions, I am no longer in the predicting business.  The repercussions from my long-shot prediction in my last column of a one day, 1000 point panic-buying up day in the Dow has caused me as much anguish as watching the Cub’s $17 million a year outfielder with a .240 batting average muff another fly ball (oops I wasn’t going to drop in any of my personal complaints).  Now I admit that there has been no thousand point day but a couple of my critics (friends?) seemed to think it necessary to email me at least weekly with ‘when are we getting the 1000 point up?’ Now really, how wrong was I about the turn in the market? Here are a few carefully-chosen quotes from that column: “Although it is difficult to see any good news on the horizon I believe any good news will cause a sharp up in the market----What could cause the rally that starts this turn?  It could be some over-night bullish news that causes the Dow to open 500 or so higher, but more likely it would start by the market beginning to creep higher for many sessions in a row with no good news to account for it”.  OK, no 1000 day move, but what about a 4000 point move in eight months.  I remember the lament from a Broadway Musical ‘Sue Me, Sue Me, Shoot Arrows through Me’.

Now that I have absolved myself of all guilt for my prediction and have subtly suggested that I predicted the current huge rally in the market, here are some observations from a contrarian that could possibly be of interest.  I guess I’ve been a contrarian all my life because I know my parents thought I was contrary at times and when my sons were young they often complained that our rules were contrary to what other nice parents allowed their children to do.   Being a contrarian in the world of finance can be very rewarding at times and extremely painful at times.  I would classify an investment contrarian as one who makes investment decisions that are directly opposite that of the current popular opinion of the future path of the market.  Now I don’t argue with the much circulated bromide of ‘the trend is your friend’ but if everyone is following that path the trend finally feeds on itself and the result is a bubble in an up market and a panic in a down market.  By the time the friendly trend has turned in the other direction many dollars have been lost in a bubble market and great opportunities are missed in the upturn of the panic market.

The contrarian tries to anticipate those turns and it is obviously a very difficult task. Fighting the crowd and their overwhelming surety that they are on the right track is like standing on those tracks with a speeding freight train bearing down on you.  It is impossible to pick the very top or bottom of major moves in any market (although I mentioned the Board of Trade trader ‘Top Tick Tommy’ in a previous column who according to him always got in on the bottom and out on the top).  Come to think of it, I just realized that I pulled a ‘top tick’ stunt myself in my comments above.  What I failed to mention in my self-serving review of my prediction and the end result of a 4000 point rally was that I did not make that prediction at or near the bottom of the market.  Actually the Dow broke another measly 1000 points or so after my prediction – sorry about that. 

The contrarian in me lately has been alerted to a trend that has been going on for many weeks.  The headline each week in the Wall Street Journal has been about the inflow of money into mutual funds – now in its 37^th   consecutive week.  You might think that this means that people are diving back into stocks and that explains the strength in the stock market.  But further analysis of the statistics show that most of that cash is going into bonds and for many weeks there has been an outflow from stocks.  No doubt investors, who have suffered through the gigantic bear market with their stocks, see an opportunity to lighten up on this rally and be more conservative by getting into treasury and corporate bonds.  How conservative is this strategy when most experts expect interest rates to go up when the economy recovers completely – a bad scenario for bonds? Obviously, if rates rise, the bonds purchased during this low rate period would lose values because new bonds could be purchased that pay the higher rate.  I recently had a 10 year 6% treasury note and a 5% municipal bond mature.  Being a determined contrarian I invested the money in stocks (after the 4000 point rally) rather than reinvesting in bonds.

Wait--is that a train whistle I hear--------?