muses of the moment

March 14, 2009

Bear Market-short term investing

I am not big on short term investing (under a year). It’s not my forte.

However, people are wondering….I am losing money left and right in this bear market, what can I do until precious metals take off again.

Contrary to popular opinion, you can make money in a bear market. In fact it’s usually the time when the most money changes hands the fastest. Since they don’t teach financial bull market education in school, they certainly don’t teach bear market education. And most all 401K plans want you to buy mutual funds and hold.

If you are investing in any way in your future, it is important to understand business cycles (bear and bull). How to invest in each one. How to get out before the next cycle hits.

We are in a world wide bear market and there is no bottom in sight yet. Contrary to what Mr. Obama has said, there will be no recovery in the second half of 2009.

Here are a few things to research and decide if you would like to invest a small portion of your net worth. These are short term (3-6 months). The long term fundamentals still point to hyperinflation, currency collapses, and safe haven in gold and silver:

1. Western Europe does not look good at all. European banks have alot of loans to Eastern European banks. If one or many of these countries politically implode or their currency implodes, all of Europe will be in serious trouble. There are analysts that think this is unavoidable and we are only waiting for the first spark.

With this in mind, look for EAFE Index Inverse ETFs. These are exchange traded funds that run counter to the economic environment in Europe. Most of these ETFs can be purchased through your 401K or IRA, as well as a regular brokerage account. If European stocks fall 30%, your investment would rise 30%. Look to get out at the right time or your gains will be nixed. The first thing you should know before you make an investment (in any thing) is when you will get out of that investment.

2. If Europe does encounter a huge set back, the euro will fall. This will make the US Dollar rise, as it is heavily weighted in euro. So, an index fund that rises with the US Dollar would be another option. Some analysts are looking for a 15-17% rise in the dollar before a high and drop. Simply due to the fall in the euro, not a change in the fundamentals of the US Dollar. And don’t worry too much about your gold investments. In 2008, gold was trading against the USdollar, today it is clear that gold and silver are trading as if they were a currency on their own. Which they are!

3. Most are looking for a short term rally in the DOW, but a bottom of at least 5000. Could be much more. This crisis is world wide and there could be a huge over correction on downside in the markets. It’s any body’s guess how low. I personally do not recommend investing in the DOW up or down (in the short term), it’s too risky unless you are watching the ticker on daily basis. Maybe they will reinstate that uptick rule soon.

4. Gold and silver coins are still great to purchase (and hold) on dips. Right now I am staying out of or have very limited exposure to paper gold, such as a gold ETF. Coins are best, allocted funds are OK, and ETFs are a last resort.

5. The US government will have to sell a huge amount of treasury bonds to finance the alphabet soup of bailouts and stimulus. I believe in the second half of 2009 treasuries will begin falling. Prepare to purchase inverse index funds that bet against US treasury bonds. Treasury bonds will probably hit a high and bob up and down within a slide downward. This bob will be the result of real buyers moving out and the US government printing more and more money to buy their own bonds. This practice will ensure hyperinflation in the coming years.

A slight warning: the risk for brokerage houses to implode is just as high as banks to implode, perhaps higher. Depending on what percentage of your net worth you are planning on using to invest in a bear market, I would suggest two things. Invest a small portion, so if you lose it all through the brokerage house, you will not be wiped out. Invest in two or three different brokerage houses to spread out that risk. The brokerage house has your trading account money in their bank account, it is just assigned to you. It is a very different set up than a bank account with FDIC insurance. When you take profits that you are not planning on reinvesting, move that money into your regular bank account as soon as possible.

By the way, your company 401K is set up this same way, in the brokerage house account, assigned to your name. However, if 401Ks start disappearing, there will be rioting in the streets. They should be fairly safe for now. And you can’t move money out of them without a huge tax penalty.

That’s all I have for now. We will see how these things pan out in the next three to six months.

According to Martin Armstrong we are on a slight upside (until April 2009) of a continued downward slide (until June 2011) in the economic confidence model. This is the long term outlook I follow, which is different from what I presented here, a short term model.

 

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