Saturday, December 27, 2008 10 comments ++[ CLICK TO COMMENT ]++

Contrarian investment possibilities

One should never be contrarian for the sake of being contrarian! Nevertheless, I do find it helpful to list a bunch of contrarian positions and think about them. Here are some contrarian positions one can take right now. The items below may conflict with each other and should only be used as a thought exercise. I urge readers to leave any additional ideas they have in a comment.

(Positions that interest me are bolded.)

Contrarian Investments

  1. US government bonds (short)
  2. US corporate bonds (long)
  3. real estate (long)
  4. commodities (long)
  5. gold (short)
  6. US$ (short or long): Depending on one's outlook, I think one can argue that either a short or a long position would be contrarian (since the market doesn't seem to favour it strongly either way.) I would consider a bullish (long) bet to be more contrarian since I notice more people questioning the strength of the US$, particularly due to the FedRes and government spending plans.
  7. Distressed sectors, particularly homebuilders, select American and European banks, and retailers (long)
  8. Underperforming sectors, such as newspapers, forestry companies, automobile-related (long): As opposed to the aforementioned distressed sectors, these ones have been undergoing long-term declines even before the economic and credit crisis unfolded. Companies in this category may be facing secular declinines that may be the end of their industry so one needs to be really careful.
  9. large caps (long): Not a major contrarian call but large caps have been performing poorly over the last decade compared to almost all other asset types. Jeremy Grantham speculates that high quality US large caps will outperform the lower quality large caps and small caps over the next 7 years.
  10. China (long)
  11. Emerging markets, such as Brazil, India, Turkey, Eastern Europe (long)
  12. Beaten-down emerging markets, specifically Russia, Vietnam, Thailand, Iceland (long): Countries which have seen large currency devaluations, such as Russia and Iceland, are the most contrarian.

I'm sure I'm missing some but these are what came to mind now.


10 Response to Contrarian investment possibilities

December 27, 2008 at 3:02 PM

I have been short gold for ~3 months, but as part of a statistical arbitrage trade. I am equally long gold miners through GDX. The ratio of gold price to the philadelphia gold miners index (^XAU on yahoo finance) has rarely exceeded 5:1 over the past 30 years, and reached an all time high of 9:1 during the recent economic storm. I can imagine this ratio trending upward over time as gold becomes increasingly expensive to mine, but nothing like the cataclysmic shift we saw starting in September. Ratio is down to 7:1, so I think this trade still has some room to run.

December 27, 2008 at 6:35 PM

Funny that you mention that because I see very few thinking of a bearish position on gold. I have been thinking seriously of shorting gold. You are not exactly taking a purely bearish bet but your strategy does touch on a very important reason for being bearish on gold.

On top of the wide discrepancy that you cite between the gold and HUI (or XAU or GDX) ratio, gold is also very expensive relative to oil. Gold and oil do not necessarily move identically but they do trend together. This happened in the 10 years, and also in the late 70's. Either oil is severely undervalued or gold is overvalued.

I'll be watching gold and consider taking a bearish bet if gold rallies in the new year (quite often in the past, it has rallied in the 1st quarter and collapses by summer.)

I'm not sure what your view on gold alone is. Are you bullish on the gold sector (bullion and mining companies) in the long run?

December 28, 2008 at 9:52 AM

I have flattened my long gold position as the deflation them becomes more entrenched. When you look at gold's performance relative to other commodities it should be 30-40% lower. It is however a store of value and is not being treated like a consumable. Notice the collapse of Platinum relative to Gold.

I was also short TBonds through TBT and the Canadian short US Tsy ETF. This is inconsistent with deflation but was done as I thought the USTsy supply would overwhelm demand and that would push long rates higher after this massive rally. I'm really questioning this right now after watching this:,com_csis_events/task,view/id,1828/

The Koo presentation is one of the best explanations of the Japanese balance sheet recessions which the US is experiencing.

December 28, 2008 at 1:29 PM

In the long term, I am bullish on the sector because I think we (the United States) will go too far in our attempts to avoid deflation and will eventually create significant inflation. I will likely go long gold eventually, but as you and sc pointed out, going long gold bullion right now does not make a heck of a lot of sense to me. Compared to silver, platinum, oil, miners, and any number of other historical ratios, gold bullion seems relatively overvalued - but I would not be willing to pick a direction for the price. Until the market returns to semi-normal, I am sticking mostly to pairs trades and merger arbitrage.

December 28, 2008 at 2:21 PM

Great find SC... There are some interesting stuff in that presentation. I might write a post about that.

The Globe & Mail had an article about Richard Koo's views last month. He is a big believer in spending big. He thinks that's the only thing that will prevent a total collapse.

The concern about lingering mild deflation is why I'm not convinced that shorting long bonds is safe right now. One thing, though, is that the US is far better than Japan ever was. On top of having better demographics and more flexible economy, the US economy is way more diversified than Japan.

December 29, 2008 at 3:06 PM

It's nice to find another contrarian out there, I'm definately adding your rss feed to my collection.

Here's a few plays I'm looking at for early 2009:

1) Kingsway Financial (KFS Toronto/NYSE) trades at around $5 with a book value of over $15. So cheap.

2) I'm also interested in the auto sector, but instead of buying the automakers, I'm looking at both goodyear and Cooper Tire. Neither have great balance sheets, but they're not terrible either.

3. I like the call on retailers as well. Some of them are getting ridiculously cheap.


December 29, 2008 at 5:54 PM

Nelson, thanks for the suggestions. I'm not familiar with Kingsway and will take a look in the future.

If you are interested in auto, you might also want to check out auto retailers. I am tracking a user-car dealer, CarMax (NYSE: KMX). You should also check out the Japanese auto-related companies. Many of them are world-class and whacked pretty hard (but Japanese companies are not shareholder friendly.) One needs to be careful with the Yen, since the steep appreciation might be a long-term drag.

January 2, 2009 at 9:34 AM

Any suggestions on vehicles to play Iceland? Good post btw.

January 3, 2009 at 5:22 AM


I don't have any specific Iceland suggestions. I took a brief look several months ago but decided to wait before researching further. I think one may need to buy directly on their exchange or the Scandanavian exchange. I believe there are a few that trade on the Pink Sheets but I haven't looked deeply.

Iceland still doesn't seem attractive. For me, the P/Es should drop to 3 or 4 before I would consider Icelandic companies. If it doesn't hit that level then there is little reason to spend the time and risk the capital on those stocks, when other regions of the world are safer (at higher P/E valuations.) I was reading an article recently which said that companies with foreign earnings--these are the only ones that are safe right now--are not cheap by any means. Clearly everyone realizes that foreign currency is very valuable so those companies are bid up. The local ones are a disaster and it's probably too early to go there.

January 3, 2009 at 9:39 AM

Thanks for the followup. I found an old reference to an Icelandic ETF, but it is only traded through one of their three main banks.

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