Mr. Sperandeo was featured in the best-selling The New Market Wizards and Super Traders, has been profiled in Barron’s, The Wall Street Journal and Stocks & Commodities, and has appeared on CNBC, CNN, Fox and other networks.

Mr. Sperandeo has authored two books detailing his philosophy: Trader Vic – Methods of a Wall Street Master and Trader Vic II – Principles of Professional Speculation. John Wiley & Sons released Mr. Sperandeo’s third book on trading in 2008. It is entitled Trader Vic on Commodities: The Unknown, Misunderstood And Too Good To Be True.”
 
 
Here is a recent video on his outlook for inflation and how one should play the possibility of hyperinflation:
 
 

 
 
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John Hussman of the Hussman Funds has a Ph.D. in economics from Stanford. He used to be a professor of economics and international finance at the University of Michigan.  Now, he’s a highly successful money manager. John tells a story about how Paul Krugman once gave a talk at Stanford about a model of economic development which caused him to leave academia and become a money manager.

“Paul drew a diagram on the board,” John said, “and as he described it, he drew a few little arrows indicating migration of businesses from one area to another. A respected economic theorist at Stanford, Mordecai Kurz (who never drew an arrow without a differential equation), immediately jumped up and shouted “You haven’t described the dynamics!!” to which Paul responded that he was indicating a general movement of economic activity toward one place to improve efficiency. Dr. Kurz pounded the table and screamed “Then erase the arrows!! ERASE THE ARROWS!!” and then stormed out of the room and slammed the door behind him. I think that was probably the exact moment that I decided to go into finance.”

In a recent interview John reiterates on how an academic look at the markets can be misleading and potentially very dangerous for the simple reason that “it doesn’t work that way in the real world.” No amount of talk, no amount of writing things on a blackboard or quoting theories from textbooks or lectures is going to be a match for reality. We are being sold one of those textbook looks at the stock market right now (The new normal) when in fact, reality looks quite different. Here are a few important observations from his most recent letter.

“On a valuation basis, the S&P 500 remains about 40% above historical norms on the basis of normalized earnings. The disparity between our valuation assessment and the putative undervaluation being touted by Wall Street analysts is so great that a few remarks are in order. First, virtually every assessment that “stocks are cheap” here is based on the ratio of the S&P 500 to year-ahead operating earnings estimates, and often comes with a comparison of the resulting “earnings yield” with the depressed 10-year Treasury yield. What’s fascinating about this is that this is the same basis on which analysts deemed stocks to be about 40% undervalued just prior to the 2007 top, following which the market plunged by more than half. There’s a great deal of analysis regarding forward operating earnings that I published in 2007, but probably the most comprehensive piece was Long Term Evidence on the Fed Model and Forward Operating P/E Ratios from August 20, 2007.”

“To properly understand the price-to-forward operating earnings ratio, you have to recognize that operating earnings exclude a whole host of charges – what some observers correctly call “recurring non-recurring” charges. These include large and often quite regular losses that the companies deem, often on the thinnest basis, to be detached from their core business – even if the losses are directly related to their core business. Items like enormous asset write offs come to mind. Moreover, the “forward” means that these are year-ahead analyst estimates, which are typically substantially higher than trailing 12-month reported earnings.”

“Think of it this way. Suppose your poodle is 40% overweight. Someone sells you a scale where every pound shown on the dial represents 1.4 pounds of actual weight. Guess what? Your poodle will step on that scale, and the dial will pleasantly report that your dog is at its ideal weight. That may be comforting if you don’t like to face reality, but the truth is, you’ve still got one sick puppy.”

When you hear analysts say that the historical average P/E ratio is about 15, you have to recognize that this is the normal P/E based on trailing 12-month earnings after subtracting all write offs and other charges. Forward operating earnings are invariably much higher, and it turns out that the comparable historical norm, as I discuss in that 2007 piece, is only about 12. If you exclude the late 1990’s bubble valuations, you get a historical norm closer to 11.5. The 1982 and 1974 market lows occurred at about 6 times estimated forward operating earnings.”

Now in addition to the Hussman “real world” historical norm PE of around 12, let’s look at bear market low PE ratios.  The last five major bear markets going back to 1920 reveals the average PE at the bottom was 6.84, a far cry from the 19.9 x earnings today and the norm of 11.5-12.

Perhaps the February bottom at 14 x earnings was an interim low and not the final bear market low. Bear markets last a long time and have many temporary bottoms, but only one final bottom. Even if we give the benefit of the doubt that earnings will rise from the current $51 to $75 but that the multiple trades at the average of the major bear market bottoms of the past (6.84) the S&P would be valued at around 500. This would be down over 50% from current levels.

Another way to look at it would be to ask what earnings are needed to validate the current 1100 S&P at various PE ratios.

We would need earnings to grow to $78 to substantiate a valuation of 1100 at the February low of 14 x earnings. Earnings close to $92 would be needed to validate the 1100 S&P level at 12 times earnings (the historical PE ratio) and a whopping $160 (a threefold expansion) to substantiate a valuation of 1100 at 6.84 x earnings (the average of the 5 major bear markets).

Considering the shape of the economy these are some very tall orders to fill.
 
 
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In light of all the confusion, I thought I would show a quick video to shed some light on the matter, and give us all a better understanding of what exactly is going on between Goldman Sachs and those that would like to see them exposed.

Have a good laugh.

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“I think you can short just about everything, somewhere between now and May we’re going to have a real rollover. Think about this progression. In October the bond market topped out. In November the Dollar bottomed. In December Gold and Silver, and the utilities average, go figure that one, topped out. In January the CRB Index of commodities topped out. The US stock market is the last domino holding up. The best trade on the board, the one I’ve been bullish on for the past six months has been the US Dollar…..” - Robert Prechter (Elliot Wave Theorist)

Robert Prechter is an American author and global market analyst, known for his financial forecasts using the Elliott wave principle. He has also authored or edited 25 books, and has quite a following for his monthly financial commentary in The Elliott Wave Theorist, which he began in 1979.

Like most of us, Bob is wrong about his forecast occasionally, in particular for consistently calling for the U.S. stock market to fall amidst major financial dislocations.

However, he properly called the October 2007 top and then called the March 9, 2009, stock market bottom in February 2009. Prechter expects equities to tumble again in 2010, in a crash similar to the one we just went through in 2008.

In any event, he is a person that it pays to keep in touch with, if for no other reason than to keep in check our own opinions.

Here are two videos. One from last October followed by his most recent thoughts at the end of March.

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Here are a few viewpoints from Larry Hite and Salem Abraham on managing risk and expecting the unexpected. You can not only be wrong, you can be totally surprised on occasion.

Larry Hite, one of the original “Market Wizards” was quoted On Michael Covel’s site as saying, “Most of the Ivy League guys I know are so used to being ‘right’ they get very uncomfortable dealing with uncertainty – when there is no right answer.

Their ego often makes them so afraid of being ‘wrong’, that they’re unable to make good bets. They are not comfortable with the idea of risk, because they don’t know how to assess it or measure it. [They have been] taught to absorb knowledge, not what to do with it.

There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future. You can also lose a good bet, but if you keep placing good bets, over time, the law of averages will be working for you.”

Below, Salem Abraham, who was also an original “Market Wizard,” talks very briefly on risk and expecting the unexpected.

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Forecasting is a very difficult thing to do, especially in such dynamic and complicated systems like the financial markets. It does seem however, that some are better than others when it comes to predicting.

Felix Zulauf is the founder of Zulauf Asset Management based in Switzerland and is well known for his appearances in Barron’s annual roundtable. Zulauf has nailed the secular bear market downturn and 2009 upturn about as well as anyone.  More importantly, he has been nearly flawless in connecting the dots in the macro picture.  From the de-leveraging cycle that led to the downturn to the government stimulus that led to the upturn – Zulauf has been remarkably prescient.

At the 2008 Barron’s Roundtable, Zulauf recommended investors purchase gold and short stocks due to concerns with the consumer.  He remained bearish throughout the year.  At the 2009 roundtable Zulauf said stocks would bottom at some point in the second quarter after making a new 2009 low.  He got aggressive and said stocks would rally after that.  His recommendations to purchase oil, gold and emerging markets were home runs.

Here are his recent comments from the 2010 roundtable:

“We are in the early stages of a deleveraging process, which is marked by a shift from maximizing profits to minimizing debt. It is a multiyear process. The U.S. consumer is in bad shape, and the U.K. consumer is even worse.”

“Central bankers themselves are somewhat afraid of what they have been doing. Politicians are worried about public-sector debt. Therefore, the authorities will try to step away slowly from their stimulation efforts, because this policy isn’t sustainable. That’s the risk for the markets.”

“The U.S. stock market has enough momentum to rise another 10% or so. But the authorities will start leaning the other way as they see signs of economic growth in the first two quarters, and possibly a jump in inflation. That could push the market down.”

“China is in a dangerous situation. Credit growth is the one factor that all the bubbles that burst had in common. Because China isn’t an open economy, the bubble there can probably keep inflating longer than it otherwise would have. But the Chinese can’t escape the laws of economics. If China’s bubble bursts, it would cause a second hit to the world economy, and that would be terrible.”

“In the past five years, the individual investor has been hit by two bear markets in stocks and a severe bear market in housing. He is just done. You see it in fund-flow statistics. Money is flowing into fixed-income investments that are perceived to be safe.”

“The euro is about 20% overvalued relative to the U.S. dollar. It could trade down to $1.25, from $1.45. You can see how the weaker members of the European Union are getting squeezed.”

“Governments and central banks will continue to support the economy. Short-term interest rates will stay low.  Bonds aren’t attractive.”

“Previously I advised buying financials and metals. Now the financials are done, perhaps for a couple of years. Bank balance sheets aren’t repaired. It’s just camouflage. Today I like emerging markets and natural resources.”

“The real danger comes from mid-2010 through 2011. This won’t be a conventional business-cycle expansion, but a bumpy road. The economy will look like a square-root sign followed by corrugated sheet iron. The good news is the potential collapse of the system has been avoided. It was an open question for a while.”

“We’ll enter another bear-market cycle. I don’t know how low it will go. In March the market made a cyclical low in valuation, but it wasn’t a secular low. When the market makes a secular low, lack of interest in equities will be high.”

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Crigger: Let’s switch gears and talk industrial metals. Do you think China will continue to drive demand into 2010?

Sperandeo: I think they will, and if I were China, I’d be selling my Treasury bonds and I’d be buying things like copper and platinum and palladium—other industrial metals, like aluminum, etc., that you need to produce. Especially with interest rates at zero. So if China gets that, then you’ll have a real bull market. Buy the stuff, not the paper.

Crigger: Recently both China and Russia have publicly called for a move away from the dollar as the world’s reserve currency. Do you think this will ever happen?

Sperandeo: I do think it will happen. It’s not easy, because with the nature of the U.S. dollar as a world currency and acting as reserves to many banks and loans, there are just not enough assets to take the place of the dollar right now. But I believe it will eventually occur.

Crigger: What takes the dollar’s place?

Sperandeo: It will be a basket. Not just one currency, but a multicurrency basket. I would guess gold would be in there for sure.

Crigger: In terms of regulation, where do you come down on the debate? Do you think position limits would be useful for the commodity markets?

Sperandeo: Well, I think indexes should be exempt for sure, because that’s how institutions get exposure. But the bottom line is: Every 30 years, you will get an attempt like the Hunts trying to corner silver, for example. But it’s very few and far between, with the regulations the way they are now. They’re very rare. The only reason a bureaucrat would want to change things is so that he could promote more of the printing and borrowing of money that commodities offset. So they’re trying to have their cake and eat it too.

Crigger: What do you think is the best strategy for investors approaching the commodities space?

Sperandeo: It’s got to be a long/short strategy. So whether it’s indexes—we have indexes that are long/short—or it’s a managed futures approach, you should take a long/short approach. With long-only, you don’t go anywhere. You just don’t make money. 

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In 1998, Jim Rogers founded the Rogers International Commodity Index. In 2007, the index and its 3 sub-indices were linked to exchange-traded notes under the banner ELEMENTS. The notes track the total return of the indices as an accessible way to invest in the index.

Rogers is an outspoken advocate of agriculture investments and, in addition to the Rogers Commodity Index, is involved with two direct, farmland investment funds – Agrifirma (based in Brazil) and Agcapita Farmland Investment Partnership (based in Canada).

Here is a recent interview from Jim on CNBC. In the video he also comments on gold, the dollar, and World Economies in general:

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In the video below, Wall Street Journal columnist Gregory Zuckerman talks about how Paulson made $6 billion as his firm made $20 billion betting against the housing market. These returns included $4 billion for Paulson personally in 2007, which Zuckerman describes as the single-most lucrative payout in history.

There are plenty of lessons that we can all learn from Zuckerman’s book The Greatest Trade Ever, to better our own decisions when trading or investing.

The main one as far as I am concerned is Have the courage of your own convictions and don’t listen to the experts.

Even though Paulson was being told he would go broke doing this by the housing “experts”, he not only put the trades on, but he kept them on and let the profits run, even when clients “begged” him to take the money and run.

It wasn’t easy though as John had trouble raising the money for his fund, and was viewed as an “outsider” in the mortgage market and didn’t reach legendary status until after the mega-profits had been booked.

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