Sept. 23, 2010, 3:58 a.m. EDT

Dines’ Rare Earth Revolution rolls on

Commentary: Newsletter editor may have made a convert

By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) — The “Original Rare Earth Bug” may have made a convert.

The Dines Letter’s Rare Earths Stocks Portfolio is one of the top performers over past 12 months by Hulbert Financial Digest count, up 38.2% through August, vs. just 5.75% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

James Dines, who is now well into his 80s, has had a long, colorful and controversial career. I named The Dines Letter (TDL) Letter of the Year, with various weaselly qualifications, for 2009, which he finished up 133%. See Jan. 1 2010 column.

Dines is the classic example of the sort of investment letter editor who infuriates financial journalists with his arrogance and ego, one reason the industry typically gets a bad press (creating a nice market niche for Mark Hulbert and myself). But TDL has had real runs of success. Currently, for example, it is up 5.79% annualized over the last 10 years vs. a (very depressing) negative 1.07% annualized loss for the total return Wilshire 5000.

And one thing everyone has to admit about Dines: he does have big ideas. His current issue is devoted to a paean of praise to himself (not unusual in itself) for being respectively “The Original Gold Bug”, “The Original Internet Bug,” and “The Original Uranium Bug”. There’s a case to be made for each.

To put it another way, Dines specializes in turn-calling rather than trend-following. It’s dangerous looking for revolutions, but the results can be spectacular -- if it works. As he says, reflecting on his internet experience in fairly accessible Dines-speak:

“WE HAD STUMBLED ONTO A BIG SECRET OF MAKING SERIOUS MONEY IN THE MARKET. Namely, getting in very early, before The Hive has awakened to something, drinking upstream from The Herd, following the Upside Breakout, and it often works spectacularly well!”

Dines announced that he had become “The Original Rare Earth Bug” (basically, obscure materials critical to emerging high-tech processes) in a powerful TDL issue, hedged about with threats to sue reporters who revealed his insights (see?) over a year ago. See May 28, 2009 column. He says his own Rare Earth Index is up nearly ten times since then.

His current issue contains a typical Dines dirge:

“Most Americans don’t even know how to spell Rare Earths yet, especially our neuron-apoptotic [I had to look it up too, it means programmed cell death] leaders. Rare Earth metals are essential in building Predator missiles, night-vision goggles, every cellphone has them, you can’t build a Prius hybrid car without Rare Earths and you need 700 pounds of neodymium to build each 3-megawatt windmill. The Dines Letter blew the whistle on the fact that China controlled around 97% of the world’s Rare Earth production, a virtual monopoly, and that a crisis was coming. Did our warning make a dent? No.”

Actually, Dines’ warning does seem to have made a dent on Mark Skousen, the almost equally egotistical editor of Forecasts & Strategies. He has just seconded one TDL recommendation, gracefully acknowledging Dines’ precedence.

Skousen writes:

“I haven’t recommended any “rare-earth” stocks because they all traded in Canada -- until now. Rare Element Resources Ltd. (CONSOLIDATED:REE) started trading on the AMEX in August, and is worth buying. Rare Element Resources is a developing play in gold and rare-earth elements at the Bear Lodge property in northeast Wyoming, but it has no revenues yet. Given the high costs associated with mining rare-earth elements, analysts estimate that REE won’t be profitable until 2015. But the net present value is positive and, last month, REE reported extremely positive results after drilling 13 holes at its Bear Lodge property, showing “robust grades” of rare-earth elements.

“This is clearly a speculation, but one worth pursuing.”