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The Contrarian Litmus Test

By Porter Stansberry
Saturday, December 9, 2006

I swear you could hear crickets chirping during my presentation at the New Orleans Investment Conference last month.

I first spoke at the New Orleans Conference in 1999. Nearly 4,000 people attended that year. Gary North was predicting the '99 conference would be the last, because, he said, Y2K would soon destroy our civilization.

He'd moved his family to a trailer park in Arkansas and, according to rumor, buried a brand new tractor inside a shipping crate in his front yard. (I showed him my ATM card... whose expiration date was "02." He didn't seem to realize the implication.)

At the time, I'd only barely launched my own small investment letter. No one had ever heard of me. But it didn't matter to the audience because I could speak intelligently about JDS Uniphase's erbium doped lasers and Lucent's latest AllWave fiber. I knew which railroad right-of-ways Level 3 was using to lay down its national fiber-optic network.

My speeches were packed. People swarmed me in the hallways. And many of my stocks went up hundreds of percent.

And yes, I certainly mistook a bull market for my own genius. Steve Sjuggerud tried, gently, to warn me about what would surely happen. But I thought the demand for bandwidth would continue to soar, solving all of the overcapacity problems.

It wasn't until the end of 2000 that I realized what was happening... and how severe the correction in stock prices would be. That was soon enough to avoid most of the carnage... but many folks didn't get out even then.

That's how I learned to be afraid of the "thundering herd." As my friend Rick Rule says about investing in the resource markets, you're either a contrarian or a victim. And right now, the contrarian move is to own housing stocks, telecom, and blue-chip stocks.

That's what I told the audience last month in New Orleans... and that's when the crickets started chirping. The room wasn't even half full during my workshop speeches.

I told the audience there's an easy, three-part litmus test in the stock market right now to judge your investing acumen and contrarian skills. "The first part of my test is housing stocks. If you've been buying housing stocks over the last month, you're a savvy and contrarian investor."

The room was completely silent. No one was interested... or they thought I was nuts. Or both.

The second part of the litmus test is blue-chip stocks. "Did you buy any of the blue chips I recommended this year?" I got a few nods this time, but not many. It was like giving a lecture on ancient Egyptian grammar at a sock hop.

The last part of my contrarian test concerns the new telecom boom. The share prices of even the most conservatively run telecom companies (such as Verizon) have been hammered, as investors have refused to return to the sector after a six-year bear market.

Contrarians, I argued, aren't buying uranium and oil anymore... they're buying housing stocks, cheap blue chips, and, most recently, telecoms. Nobody cared.

Honestly, that was fine with me. I know that means good things for my portfolio in the coming years. I passed the test.

Good investing,

Porter Stansberry

Market Notes

Two Dollar Cable

Three nonstop flights from Europe arrive daily to the Mall of America in Minnesota. The planes are loaded with holiday shoppers and strong currencies. Take the British pound, for example.

Currency traders call the pound/dollar exchange rate "cable." Cable is about to hit two dollars for the first time in my living memory. This means every British pound you have in your pocket is worth two dollars... and folks from Europe are getting fantastic deals in American stores.

For example, the New York Postreports a pair of women's designer jeans retails for £169 ($327) in the British department store Selfridges. Here in the U.S., the same pair of jeans sells for $143 (£73.80) at Bloomingdales.

This is the third attempt in the last 18 years cable has tried to reach two dollars. In late December 2004, it hit 1.95. And in 1992, right before George Soros attacked the pound and devalued it, cable hit 1.995.

But you have to go back to 1979 to find the last time cable hit two dollars. I bet it makes it this time.

-Tom Dyson

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