Think Small

1An Under-the-Radar Rally — and It’s Just Beginning

“If I handed you a lump sum of cash right now to invest for your retirement, how would you spend it?” asks Paradigm retirement specialist Zach Scheidt.

Before you answer, hear Zach out for a moment…

“There’s a neglected area of the market chock-full of quality stocks that most investors are completely overlooking right now.”

Intriguingly, this niche is not Zach’s usual forte — blue chip dividend payers delivering steady streams of income. But the opportunity is too good to pass up…

Before we go any further, let’s briefly revisit the stock market story of the year.

As we’ve pointed out regularly, the so-called “Magnificent Seven” companies have dominated the market in 2023 — Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, Tesla.

Through the middle of this month, the S&P 500 was up 15% in 2023. But if you took out those big seven, the gain would be a much more modest 2.6%.

Which sounds extraordinary — but not really, Zach points out: “It’s common for mega-cap stocks to go through seasons of extreme popularity. Eventually, enthusiasm falls once they get so big that they can't grow quickly anymore. We're certainly at that point for many of the market's favorite large-cap stocks.”

In contrast, “small-cap stocks go through seasons of extreme neglect. Investors just aren't interested in buying these companies, regardless of the available value.”

Until now. “Small caps have staged an impressive rebound this month,” Zach tells us.

We told you how the iShares Russell 2000 ETF (IWM) bounced off a crucial support level at $161–162 at the end of October. A month later, IWM trades this morning over $177.

But don’t fret that you’ve missed out. As Zach sees it, the meat of the move is still ahead…

For one thing, “small caps are historically cheap,” Zach says.

“According to data from Bespoke Investment Group, many small-cap sectors currently have over 20% of stocks trading below book value. So if investors took these companies, sold their assets and paid off their debt, the cash would be worth more than the stock prices today.”

Granted, that’s because some of those companies are in deep trouble — perhaps even headed for bankruptcy court.

“But there could be some winners among them, and the market is simply failing to recognize their intrinsic value and future profits. Buying these stocks at fire-sale prices sets you up for strong returns when the market eventually realizes its mistake.

For another thing, “small caps help diversify your portfolio,” Zach adds.

To reiterate, “large companies have driven much of the activity on Wall Street this year. But it’s only a matter of time before investor sentiment changes. If and when these mega-cap stocks roll over, the major indexes weighted heavily toward them will fall as well.

“But if you allocate a portion of your portfolio to small-cap stocks before this happens, you’ll balance your risk and smooth out your returns.”

Zach’s bottom line: “Small caps provide a compelling opportunity in today’s market while other investors are obsessed with mega-cap tech stocks.” Amid that backdrop, IWM is looking strong going into year-end.

[Editor’s note: As you might be aware, Jim Rickards refers to Zach as “The Banker” — a nod to Zach’s hedge fund days.

Last year, Zach perfected a system in which he applied his proven hedge fund techniques in a portfolio accessible to retail investors. The results have been impressive, to say the least — as Jim explains when you follow this link.]

2Gold: Here We Go Again

With three trading days left in the month, gold is once again at a critical juncture.

On the heels of a six-month high yesterday, the spot price is up another nine bucks today to $2,023.

But we’ve been here before. A month ago at this time, gold was in serious contention to post its first monthly close over $2,000 — which would have been an enormously bullish development.

Note the words “would have.” The powers that be made certain they would not allow that to happen. (On the subject of gold manipulation, we direct you to this write-up of ours from 2019.)

Perhaps a couple of Wall Street giants are dropping clues: Analysts at Goldman Sachs say gold’s “shine is returning”... while analysts at Citi note that buying volumes of gold futures have swelled recently to five times normal levels.

For a second day running, the U.S. stock market is consolidating its November gains.

All the major U.S. stock indexes are in the green, but not by much. The S&P 500 is up a little over a tenth of a percent to 4,556. There’s still nothing standing in the way of a sprint toward the early-2022 highs near 4,800 before year-end. (More about that tomorrow from Paradigm chart hound Greg Guenthner.)

The rally in medium- and long-term Treasuries continues — with the yield on the 10-year note down to 4.36%, the lowest in over two months and a huge climb down from the 5% peak six weeks ago.

Crude is staging a meaningful rally — up over 2% to $76.42. The buzz going into the meeting of OPEC+ nations later this week is that the ministers will agree to “collective further reduction” in production levels — that’s according to Reuters, citing an anonymous OPEC+ source.

The meeting was delayed by several days amid internal backbiting. But if Reuters’ source is to be believed, it sounds as if Saudi Arabia will get its way — preventing Angola and Nigeria from upping their output levels.

3Silver: Industry Can’t Get Enough

As the silver price approaches $25 for the first time since Labor Day, industrial demand for silver is on track to set a record this year — according to new figures from the Silver Institute and Metals Focus.

All told, industry will use up a record 632 million ounces of silver this year — up 8% from last year. “Key drivers in this growth,” says the Silver Institute’s executive summary, “are being driven by a strong green economy, including investment in photovoltaics (PV), power grids and 5G networks, as well as increased use of automotive electronics and supporting infrastructure.”

With that in mind…

Mike tweet

From the South China Morning Post: “The world’s largest single-site solar power plant — a flagship project under China’s Belt and Road Initiative — has been completed in the United Arab Emirates, ahead of the UN climate change conference Cop28 in Dubai later this month.

“The two-gigawatt Al Dhafra Solar Photovoltaic Project covers 20 square kilometers (12.4 square miles) of desert outside Abu Dhabi and can power about 200,000 households, according to main contractor China National Machinery Industry Corp.”

That said, other sources of silver demand are easing off — for the moment.

Demand for silver jewelry is projected to fall 22% this year — and silverware demand, 47% — after a huge surge of demand from India last year.

Combine that with falling investment demand and total silver demand is set to fall 10% from last year’s record levels.

Meanwhile, supply is set to register a slight drop — with global silver production forecast to fall 2% from a year ago thanks in part to labor disputes at Mexican mines.

“Despite weaker demand and a slight drop in total supply, the global silver market is forecast to see another sizable physical deficit in 2023,” concludes the Silver Institute’s write-up — “marking the third consecutive year of an annual deficit.

“At 140 million ounces, this will be 45% lower than 2022’s all-time high, but this is still elevated by historical standards. Just as important, Metals Focus believes the deficit will persist in the silver market for the foreseeable future.”

That can only be bullish for the silver price — if not right away.

4Stupid Electric Grid Tricks

Fully 65 million American electricity customers are at risk of rolling blackouts thanks to the shutdown of a coal-fired power plant in Maryland.

The PJM interconnection operates the electric grid in a 13-state region stretching from New Jersey west to Illinois. And its stability is threatened by the looming shutdown of the Brandon Shores power plant — about a 40-mile drive south of Paradigm’s Baltimore-area headquarters.

Brandon Shores has enough capacity to power more than a million homes; there is no plan to replace that capacity once it’s mothballed in mid-2025. Maryland’s new governor is committed to powering the state’s grid entirely by “green” energy come 2035.

"The PJM region and the state of Maryland are facing future reliability challenges as a result of the announced retirement of the Brandon Shores units," PJM spokesman Jeff Shields tells Fox News.

"Specifically, PJM analyses showed that the deactivation of the Brandon Shores units would cause severe voltage drop and thermal violations across seven PJM zones, which could lead to widespread reliability risks in Baltimore and the immediate surrounding areas.

"Therefore, there is an urgent need to upgrade the transmission system in order to maintain reliability and the flow of power to the 65 million people we serve.”

Alas, this is not a new story — only a depressingly new development. As we’ve chronicled previously, PJM came dangerously close to implementing rolling blackouts during the Christmas Eve cold snap last year.

And as mentioned earlier this month, several other regions — basically, the eastern two-thirds of the country — are at “elevated” risk of power cuts during extreme weather this coming winter.

5Mailbag: Continuing Resolutions and Conspiracy Theories

A reader suggests I’m being too hard on the new House speaker: “Might want to defer final judgment on Mike Johnson being another ‘spendahawk.’

“On several other occasions, he has indicated otherwise. Couple of months should show his true colors.”

Dave responds: Johnson rose to the speakership on the promise of no more “continuing resolutions” — that is, the kick-the-can maneuver Congress has resorted to over the last 50 years in lieu of passing an honest-to-God budget.

What was one of the first things he did as speaker? He pushed through a continuing resolution to avoid a “partial government shutdown” this month. Instead, the can has been kicked until early next year.

If, like Charlie Brown and the football, you want to keep believing the new out-of-nowhere GOP savior is for real — well, that’s your prerogative.

But I’m used to this by now. Over a decade ago, I called out Paul Ryan as a phony and I didn’t hear the end of it from my tea-party readers.

A few years later, Ryan became House speaker and folded like a lawn chair in one standoff after another with the Obama White House… and everyone else realized he was a phony too.

One more follow-up to our JFK commemoration from a week ago today

“Thanks, Dave, for answering my question re what was ‘hazy’ — and for everything else you do.

“I read somewhere that Allen Dulles said, ‘We'll call them conspiracy theorists,’ when asked about the likelihood that many would not accept the findings of the Warren Commission. I wonder if you know if that is true.”

Dave responds: Florida State professor emeritus Lance Dehaven-Smith published a book a few years ago called Conspiracy Theory in America.

Based on documents he obtained via the Freedom of Information Act, it’s his thesis that the CIA sought to introduce the term “conspiracy theory” into popular usage — specifically to describe explanations of the JFK assassination at odds with that of the Warren Commission.

From CIA Dispatch 1035-960, issued in 1967: "The aim of this dispatch is to provide material countering and discrediting the claims of the conspiracy theorists, so as to inhibit the circulation of such claims in other countries…

“To discuss the publicity problem with liaison and friendly elite contacts (especially politicians and editors), pointing out that the Warren Commission made as thorough an investigation as humanly possible, that the charges of the critics are without serious foundation and that further speculative discussion only plays into the hands of the opposition. Point out also that parts of the conspiracy talk appear to be deliberately generated by communist propagandists. Urge them to use their influence to discourage unfounded and irresponsible speculation.”

OK, so clearly from this text the CIA was talking about an overseas influence operation — not surprising given the formal prohibition on the agency’s interference in domestic politics.

That said, “The term conspiracy theory did not exist as a phrase in everyday American conversation before 1964,” Dehaven-Smith writes.

“In 1964, the year the Warren Commission issued its report, The New York Times published five stories in which ‘conspiracy theory’ appeared.”

In light of what was previously documented about the CIA’s relationship with the Times, you can draw your own conclusions…

Best regards,

Dave Gonigam





Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets

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