Universal Disdain

Dr Steve Sjuggerud - Mon 17 Jan, 2005

"...I started in this business as a broker specialising in international stocks and bonds. My dad was kind enough to be one of my first and biggest accounts. To this day, I dont know if he had faith in me, even as a newbie, or if he just plain didnt have any better place to put that money..."

“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. Indeed, I find that my biggest winners are often the most “uncomfortable” trades.

I started in this business as a broker specialising 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 realised 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 was, that when all the stars are fully aligned and yet I’m still uncomfortable, then chances are, it’s going to be a good trade. Let me give you an example...

Consider the headline I wrote to my US subscribers back in September 2004: “Bull Run in A Bear Market Starts Now.” 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. Still, I went for it, with the audacity to suggest that my readers 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. But things just lined up. I had to listen. It was right, yet felt wrong. Perfect!

At the time, US investors were unanimously afraid to put money into 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 - as Jason Trennert of ISI Group says - “When everyone is bearish, there are only potential buyers. When everyone is bullish, there are only potential sellers.”

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 by December, we were up by 35%. It wasn’t quite the 45% I said was possible. But it was still a nice, safe gain in a short period of time, and it was time to sell BEA Systems, sticking with our original plan, of exiting by the end of 2004.

Time to move on...to another terribly uncomfortable trade. Do you have the guts for it?

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 US 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 recent issues of Fortune magazine, the Economist, plus USA Today at my fingertips. “The Disappearing Dollar” is the cover story of The Economist. “The Dollar in the Dumps” is on the cover of Fortune. And the lead story in the USA Today asks “How much is that in euros?”

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, as Jason Trennert also notes: “The most stridently held views in the investment business are often the most wrong.”

Now everyone is bearish on the greenback...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 favour. 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 - in terms of  purchasing power - and right now, since Alan Greenspan just raised short-term US interest rates again to 2.25%, investors’ money is treated better in US dollars (2.25%) than in euros (2.0%). In short, the only two fundamentals that have been proven to matter over the long run favour the dollar over the euro right now.

So what if everyone hates the US dollar? 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 that kept me from jumping into the dollar with both feet at the end of last year was the price trend. The euro was still strengthening versus the dollar, though its pace had slowed. But now the trend has paused...and once it 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 US has big deficits. Remember, everyone else knows that too. That’s not new news, however. It’s currently baked into the price of a euro.

So 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