One of the small lessons learned by new investors is that those experts who glibly say “you can’t time the market” are usually the ones who are just not very good at it.
One proven master of market timing is San Francisco-based James Dines, editor of The Dines Letter, which has been published since the early 1960s.
Like many, Dines believes that all stock market action is a combination of fundamentals, technicals and mass psychology, with prices tending to oscillate between “mass fear” and “mass greed.” He sums up his method for stock picking with an axiom: “The trend is your friend and will continue until it actually ends.”
Dines has an impressive record of calling pivotal turns in the market. In 1989, he flashed a major sell sign on Japanese markets after recognizing that overinflated real estate would ruin their banks. He again turned bearish on the broad markets at the beginning of the Asian crisis in 1997, and in 2000 he led his subscribers out of Internet stocks and into golds and silvers.
More recently, his calls have been spot-on: On Sept. 28, 2001, during the deepest trough of the post-Sept. 11 share-price collapse, he flashed a “buy” sign, but he returned with a “sell” on the U.S. dollar about a month later, on Oct. 26 (close to its peak) and made a quick exit from the markets, except for precious metals, on Nov. 26, during a wave of mass optimism.
On Jan. 10, 2002, he flashed a “sell” sign on the S&P 500 index and then, on March 11, for the first time in his career, flashed a “run for your life” on the S&P when it peaked around 1,200 points (it closed at 819.85 points on July 22, 2002).
In his writings throughout the first half of the year, Dines cites the numerous bearish indicators weighing on the broader markets, and he marvels at the naivet of the bullish commentary in the general media, which was particularly evident during the first quarter.
“We don’t believe that ‘the economy is recovering’ — this recession will deepen,” writes Dines. “Our posture of the past two years — hiding in cash and precious metals, avoiding debt and maintaining an ultra-conservative policy — stands unchanged. Something historic has been happening since the year 2000, and it will be looked back on for centuries.”
He now believes that real estate is “the final bubble,” and that “the world’s banks are loaded with such loans, much of them at variable rates that will send mortgage payments soaring if we are right about higher interest rates ahead.”
Dines writes that, because the government has driven down short-term interest rates, consumers have been “lulled into assuming ever-higher debt levels, buying cars and homes, which looks like a housing boom, but in fact is setting buyers up for what we have been predicting would be a ‘debt-liquidating recession.'”
He writes that “American banks are going to get into deep trouble, not only from the spreading contagion of the Japanese banking system, but also from a public that will go increasingly bankrupt on their credit-card debt as their unemployment benefits run out.”
Dines believes that growing telecom pessimism indicates that we are getting close to a bottom in that sector, but there is still “little realization that the suppliers of those companies are at risk, and the public remains totally blind to the risk to their lenders.”
Dines’ proprietary “Greed-Fear Oscillator,” a net consensus of about 250 stock-market technical indicators, is currently deeply into the “buy” zone, thereby indicating an imminent summer rally. However, he cautions that those who are too busy to follow the market closely would be well-advised to “hang on to their cash and precious metals, riding out short-term consolidations, rather than venturing into a trading market.”
He writes that the “primary factor that deters us from jumping into the coming rally with both feet is the certainty of an unpredictable terrorist event that would strike without warning and send the market into a huge dive without any intervening trades. . . . We would prefer to invest right after such an event, because the subsequent one would probably take time.”
Dines adds that “there has been no change in our opinion since 1998 that the Middle East is drifting dangerously and inexorably toward an apocalyptic calamity that would be terrible in the area, but would then radiate far beyond it.”
At the macroeconomic level, Dines also describes a coming era of currency devaluations, as nations seek deliberately to undermine their currencies with low interest rates in order to give their own exporters an advantage.
This phenomenon, he writes, is the “secret key to understanding stock markets and why they might be leading the world toward a paper-currency debacle of biblical proportions.”
Dines believes that “few grasp that the United States has finally joined the ‘competing devaluations’ end game, and it is bad news for the world’s nations that have been successfully devaluing against the U.S. for years.”
While the devaluation of the U.S. dollar will at first benefit American exporters, Dines cautions that there are non-obvious dangers. For example, because its currency is pegged to the U.S. dollar, China is devaluing against the rest of Asia, which will not help America’s trade imbalance against that country.
Dines warns that China’s extremely low wages are “one of the early waves of a deflationary blast emanating from that country that will echo worldwide, with a profoundly depressing effect on earnings — another possible tributary of a major bear market in American stocks.”
Dines’ starkly negative view of the broad markets leads him to gold, which he describes as being for investors who “seek safety from increasing perils of the world, which is why it tends to move opposite to the economy, the U.S. dollar, and the rest of the stock market. That golds have soared this year speaks to the perils of these times. . . . Indeed, the very violence of gold’s rise, above previous tops, plus the very relentlessness of the rise, without significant pullbacks, might mark this as a ‘runaway bull market’ . . . a special kind of bull market, of which there are no others that are more profitable.”
Based on charts of the past eight years, he notes that gold is moving up against all currencies and that all four precious metals are finally rising together, reinforcing their bullishness.
As well, a chart of gold prices relative to the Dow Jones Industrial Average back to 1896 shows that more money is flowing into gold than the stock market for only the third time in the past 105 years.
“The Dow was decisively reversed in 2000, and the market has new leadership (i.e. gold) that has not yet been fully recognized by the herd,” writes Dines. “Gold is the only bull market driven by Mass Fear instead of Mass Greed, meaning that it has some unusual characteristics that will blindside nearly all money managers and advisors.”
Dines outlines eight reasons why gold bullion prices have risen 28%, to US$327.80 on June 9, 2002, from US$255.60 on April 2, 2001:
1. The U.S. dollar has been dropping, and gold tends to move counter-trend to it. The dollar is dropping because there are increasing doubts about America’s economic recovery. (In his book Mass Psychology, Dines declares that “gold is the hitching post of the monetary universe, so all paper currencies are declining in favour of gold . . . depending on how fast each [country] is running its printing presses.”)
2. There are big U.S. wartime budget deficits ahead, which means even more printing of paper money.
3. Investors generally flee to gold when T-bills’ yields are too low, as is happening in Japan.
4. The long depression in the gold and silver industries means that exploration expenditures have been low, and therefore new production is down — adding to the shortage created by the decline in hedging.
5. The ugly, almost-daily corporate scandals have generated a skepticism toward corporate ethics and credibility that is inducing foreigners to move some money out of U.S. stocks. This is especially true of investors from the Middle East, who also
fear having their assets frozen, as happened to Iranians in the late 1970s.
6. Canadian brokers and bankers have been pouring new, desperately needed capital into golds and silvers, which is fuelling and accelerating consolidations.
7. Real estate will prove to be the “final bubble” that will end suddenly rather than gradually.
8. The end of hedging by some companies is matching central bank selling, thereby neutralizing it.
Dines says the retreat of gold stocks in late June of this year was merely a “normal and healthy consolidation” by stocks that had “got a bit ahead of themselves.” The sign that the consolidation is over will be that increasing numbers of gold stocks will sport upside breakouts to new highs for this year. He predicts that these breakouts should happen around the time that the rest of the market ends its summer rally.
More to the point, Dines believes that the recent weakness in gold and silver stocks provides investors with a “final opportunity to load up on them before they erupt higher later this year, even while the rest of the market suffers a ‘killer wave’ of selling.”
For the moment, Dines writes, investors are seeking refuge in U.S. government bonds, and other paper currencies, but these will “inevitably crumble also, and only gold will stand erect, the cynosure of shipwrecked investors. Eventually, the price of gold could spike to undreamed-of heights as all kinds of paper currencies are thrown at it in a desperate bid to salvage whatever wealth remains.”
While Dines does advise having a variety of gold and silver stocks in different risk categories, he recommends keeping a “core position” in the following companies:
Although he does give advice on when and where to place sell-stops, Dines rarely gives price targets, since he prefers to follow trends and hold on to stocks until their upward trends have definitively reversed.
More information on Dines’ newsletter and books can be found at www.dinesletter.com
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