3 Contrarian Investment Ideas for 2010

Before we get stuck into today’s article a quick reference back to the property mayhem of last week.

Spruiker extraordinaire Christopher Joye has written a blog for Business Spectator criticising our comments on property. You can read it here. However, in typical spruiker fashion it completely ignores our questions and instead trots out the same tired claims.

We’ve got plenty more to write on property over the next few weeks. But until then, how about they answer the simple questions we’ve put to them:

• Proof that there is a housing shortage.
• Proof that the Australian property market didn’t crash because 64% of the Australian population lives in a handful of cities.
• Proof that property prices double every 7-10 years.
• Proof that rising immigration causes house prices to rise.
• A genuine worked example of the Hedonic Index.

Property spruikers can leave answers to these questions on the Money Morning website under this article (when it’s posted) or any of the recent articles.

If the spruikers are that certain over their claims they shouldn’t have any trouble providing the evidence. Saying that, four months after we first asked, we’ve still not received an answer to point four.

Anyway, enough of the property malarkey for today. Back to our…

It’s harder to be a contrarian investor than you’d think. At first glance, you’d think being a contrarian just involves doing the opposite to everyone else.

It’s a nice idea, unfortunately it’s also a quick way to the poor house.

As any swimmer will tell you, it’s tough to swim against a rip. Rather than swim against it you should swim across it until you’re back in calmer water.

That’s almost the idea with contrarian investing. You don’t try to resist the hoards that are following the crowd, instead you calmly and carefully work your way into a position so that you’re ready to go in the opposite direction when the time is right.

Depending on the investment, the idea is to set yourself up for the turning point. So it’s not so much that you’re constantly betting against everyone else, but rather that you’re one of the leaders as the market turns.

For instance, if you had started to bet against the stock market in mid 2006 as the index fell by 10%, you may have picked up some short term gains, but in little over a year later you’d have racked up over a 30% loss.

Unless you had enough capital to keep your position open you could have missed out by the time your bet would have started to pay dividends.

That said, there is one contrarian investment where you don’t have to sit back and wait. You know the one I’m referring to – Gold.

Yes that’s right, despite what the mainstream press are telling you, gold is still a contrarian investment.

Sure, the price of gold has skyrocketed over the last year or so, and sure the price of gold could be in a mini bubble, but the fact remains that the investment buyers of gold are still in the extreme minority.

The mainstream press thinks that gold is in a price bubble because of gold parties and because of the gold merchants opening up stalls in shopping malls.

The only problem is they’ve got their bubbles in a twist. All this proves is that people are selling gold, not buying it.

And you only have to look at those stories again to see that’s what makes it a ‘buyers market.’ Because sellers are dumping valuable gold in exchange for devalued cash at well below market prices.

I would agree that gold is in a bubble if these merchants were paying market or above market prices. I would agree gold is in a bubble if these merchants were falling over themselves to pay the best rate on the market, bidding the gold price higher and higher.

But they’re not. It’s hardly a bubble when punters are selling below market price.

That’s because the fact is very few average punters know the real value of gold. They are happy to sell gold when it is at AUD$1,200 per ounce, fearful that it could fall to AUD$900 per ounce.

They then use their AUD$1,200 to buy a plasma television, or a new piece of furniture, or spend it on a holiday, all of which will have either no value or almost no value in five years time. Compared with gold which has retained its value over thousands of years and will do so for another five years and even better than that, for thousands more years.

Go to an average investment adviser and you’ll get less than average advice on gold. They’ll probably tell you not to touch it because “you can’t eat it and you can’t wear it, so it’s not worth anything.”

We love that argument from the gold bears. We simply respond with, “So I take it you’re fond of eating and wearing $50 notes are you?”

It soon has them blubbering, searching for a sensible reply.

Anyway, I’ve got no idea what the price of gold will be in six months or one year’s time. But what I do know, is that as an unleveraged ‘wealth insurance’ policy there’s little around that beats it.

The important point is not to necessarily look at gold as a method of getting rich. Although you can certainly do that if you consistently buy at the right price. The way I prefer to look at it is as a wealth protector.

Buying up small amounts at regular intervals. Swapping out of devalued paper money in exchange for an asset with real value makes a lot of sense to me. And because it’s unleveraged and because you’re using surplus funds you shouldn’t feel the pressure to sell if the price does take a dip.

Now, let’s take a look at our second contrarian investment idea for 2010. In some ways this is another wealth protector rather than a wealth generator. It’s to sell the Australian dollar.

As you can see from the AUD/USD chart below, the Australian dollar has put in a tremendous run during the past year:

And just as there was talk of the Aussie dollar reaching parity with the US dollar in 2008, so the same claims are being made now.

Will that happen? We can’t know for sure, but we can guess that if enough big FX players have enough interest in making it happen in the short term then there’s certainly a chance it could happen.

But to my mind, there’s much more profit on the downside than there is for profit on the upside.

The trouble is, if you’re selling the Australian dollar what are you going to buy? After all, a currency trade has two sides. If you’re selling out of Australian dollars you have to buy another currency.

And do you really want to put your cash into US dollars? For a start you’re not getting a yield (or not much of one anyway), so it will actually cost you to buy US dollars – simply because you’re giving up the opportunity of earning interest on Aussie dollars.

Also, there is an argument that because the US is still a dominant world economy, should the worst happen and the global economy melts down again, investors will naturally flow towards economies that are perceived as being lower risk.

Despite the mountain of debt the US is weighed down by, there is still a perception among investors that the US is a safe haven investment.

But perhaps a better option is to look at an economy that while it isn’t perfect, would seem to hold less risk than a US dollar investment – Japan.

So your second contrarian investment idea for 2010 is to sell Australian dollars and buy Japanese Yen.

When you look at the five-year chart above it goes without saying there’s plenty of risk to this idea. The Aussie dollar has gained by 50% during 2009, but it is still about another 20% from the high reached in late 2007.

The Aussie dollar could go either way against the Yen. It could in fact reach the ¥100 level from 2007.

So for this contrarian idea you’ve got two options. If you’re convinced the Aussie dollar is over-valued and that it will eventually retreat well below this level then you could tuck in now. However, if you’re using leverage then you should be prepared to take some pain if the Aussie dollar strengthens further.

Or you could take the cautious approach and look for a breakdown in the trend. As I mentioned above, being contrarian isn’t just about taking the opposite bet to everyone else.

To be a successful contrarian you need to watch your timing. So although selling the Aussie dollar and buying the Japanese Yen is a contrarian idea for 2010, as of today it’s a super high risk trade.

If you don’t have the stomach for that kind of risk then you should stay clear for now and bide your time.

The third contrarian investment idea for 2010 would be to short sell the Australian property market. Although I’ll admit this isn’t easy.

The best way would be to short sell an index or to buy put options on an index. That way you can spread your exposure across a number of stocks and property types.

An alternative to that is to pick a property related ASX stock that can be short sold. Here you’ve got two choices. Either you plump for an actual property stock or you go for the banks.

Either way you’re getting as close as you’re going to get to an exposure to the property market.

But again, this isn’t a risk free trade. We’ve seen how much effort the property industry, financial services sector and the government have put in to propping up the housing market. And we know that betting against property is not in the psyche of most Australians.

But we know the bubble can’t last, it’s just a question of when it pops, not if. But if you’re relying on our advice for timing, just remember we thought the Aussie housing market would collapse in a heap last year! But it hasn’t happened yet.

This is most definitely a punters trade. And it’s definitely one that you don’t want to be betting against the combined might of the banks and the property industry. So the timing is important here.

So rather than short selling, a less risky way but which involves a higher upfront cost is to look at longer dated put options on the banks and property stocks – such as Westfield Group [ASX: WDC].

The advantage with put options is that your downside risk is known up front. If the trade moves against you then the most you can possibly lose is the premium you’ve paid.

But the longer away the expiry date and the closer the exercise price is to the current price, the more you’ll pay for the premium.

In that case – as an example, and just remember this isn’t personal advice – you could look at taking out a long dated put option with a strike price of $10 on a stock like Westfield Group. Westfield is currently trading at $12.63 so you’d need it to fall a fair way to be assured of making any money. But as an out and out longer term punt it’s not a bad idea.

The theoretical price of the option is 31 cents per share – or $310 for one contract, but the actual price is likely to be a bit higher than that. You should check with your broker to be sure.

As I said, you shouldn’t take this as personal financial advice. But it certainly fits in with our big picture view of what could happen to the Australian market and economy over the next twelve months.

But as I mentioned above, for the Aussie dollar and property trade it’s all about timing.

Whereas for gold, it’s an investment you could make almost any day of the week without having to worry.

Anyway, that’s our three contrarian ideas for 2010. If you’ve any better ideas then just wait for this article to be posted to the Money Morning website later on this afternoon and then you can let other readers know how you’d play it as a contrarian in 2010.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 ended the trading day up by 12 points to close at 4,912.10. The Australian market has opened up higher this morning. Keep an eye out this week for the November lending finance data from the Australian Bureau of Statistics. The report is due out on Wednesday.

The Dow Jones Industrial Average finished the day higher, up by 11 points to close at 10,618.19.

The American jobless report was released on Friday morning their time. The report noted that 85,000 jobs were cut in December, but the jobless rate has remained steady at 10%. Read more from the report here.

Overnight in the UK, the FTSE was up by 7 points, closing at 5,534.24

The Nikkei hit a 15 month high on Friday. The index closed at 10,798.32, higher by 1.09%. Overall for the week the Nikkei had gained 2.4%.

Gold was up as a result of the weak jobless data coming from the US. Read more here.

The price of spot gold in Australian dollars is trading at $1,231.05 while in US Dollars it is trading at $1,138.30. The price of silver in Aussie dollars is $19.94 and in US Dollars it is $18.44.

The Aussie dollar versus the US dollar is trading at USD$0.9284, and against the Japanese Yen JPY86.02

Crude Oil was up slightly, closing at USD$82.75

For the biggest movers on the market yesterday click here…